Paul Ryan’s Secret, Illegal Plan to Bail Out Obamacare

While most of Washington remains consumed on the drama surrounding immigration negotiations, leaders in the House have quietly pursued other policy objectives. According to multiple sources on Capitol Hill, House leaders, particularly Speaker Paul Ryan (R-WI), have concocted a plan that would 1) use a budget gimmick that arguably violates the law to 2) bail out Obamacare and 3) provide taxpayer funding to plans that cover abortion.

As a certain congressman from Wisconsin said back in 2012: “With allies like that, who needs the Left?”

Budgetary Smoke and Mirrors

In a nutshell, the gimmick under consideration would have the Congressional Budget Office (CBO) raise the budgetary baseline so Congress can lower the baseline and spend the artificial “savings.” It’s a Ponzi scheme of the first order, the kind of thing Bernie Madoff would have been proud of. Here’s how it would work.

Congress would direct CBO to assume that Obamacare’s cost-sharing reductions (CSRs) would not be paid. While the Trump administration did cut those subsidies off last October, due to the lack of a constitutional appropriation for them, the budget scorekeeping conventions (discussed in detail below) indicate that CBO should still assume the subsidies would continue. However, Congress would instruct CBO to override that precedent.

CBO would then increase the spending baseline for Obamacare, because of the interactions between CSRs and the law’s insurance premium subsidies. Essentially, eliminating the former would cause spending on the latter to rise, as insurers raise premiums to reflect the lack of CSR payments. (Under the law, insurers must reduce cost-sharing for low-income individuals regardless, so they would adjust premiums upward—as they did in most states for 2018—to reflect the cost of this regulatory mandate.) Higher premiums will lead to higher federal subsidies for those premiums, at $194 billion over a decade, according to an estimate CBO released last August.

Congress would then take the “savings” from appropriating funds for CSRs—which, as explained above, consists not of legitimate deficit reduction so much as a phony gimmick derived from playing budgetary games—and spend that money on reinsurance and other corporate welfare payments to health insurers.

There you have it: A fiscal Ponzi scheme that would give health insurers their two major desires—cost-sharing reductions and reinsurance—in one big bailout. If it passes once for a two- or three-year period, you can bet your life this scheme would turn into an Obamacare perpetual bailout machine, with insurers coming back time and time again for more crony capitalist cash.

Violates Budgeting Principles

This plan not only violates the pretense that Republicans care about repealing—as opposed to bailing out—Obamacare, but it also violates budget scorekeeping principles laid out in statute. Specifically, Section 257(b)(1) of the Balanced Budget and Emergency Deficit Control Act of 1985 (the Gramm-Rudman-Hollings statute) includes the following direction when developing the budgetary baseline: “Laws providing or creating direct spending and receipts are assumed to operate in the manner specified in those laws for each year and funding for entitlement authority is assumed to be adequate to make all payments required by those laws” (emphasis mine).

Granted, the law does not include an appropriation for HHS to make those payments. That lack of appropriation prompted the House of Representatives to sue the Obama administration for exceeding its constitutional authority, and caused the Trump administration to stop the payments last fall.

But whether an appropriation actually exists is immaterial to the separate and distinct question of whether the law requires the secretary to make payments. Obamacare includes such entitlement authority over CSRs. Therefore, under the Gramm-Rudman-Hollings Act, the budget baseline should assume that those cost-sharing reductions will be paid.

In its August 2017 report on CSRs, CBO agreed. In a section regarding the budgetary treatment of the cost-sharing payments, the budget analysts noted that “the agencies have recorded the CSR payments as direct spending (that is, spending that does not require appropriation action)—a conclusion reached because the cost-sharing subsidies were viewed as a form of entitlement authority” (parentheses in original; italics mine).

All budgetary scorekeepers—both CBO and the Office of Management and Budget—have never disputed the validity of the entitlement, as opposed to the separate and distinct legal question of whether a valid appropriation exists. That entitlement language remains unchanged; therefore, the budgetary treatment of CSRs should remain unchanged—unless Republican leaders attempt to strong-arm CBO as an accomplice to their scheme for bailing out Obamacare.

Dropping Principles and Promises to Win An Election

After reading all this, some may wonder why Republican congressional leaders have taken the time to concoct such a scheme. In part because Congress (wrongly) repealed only the individual mandate as part of the tax reform bill, members worry about big premium spikes as a result of their actions, which will hit right around the time of the midterm elections this fall. Just as Senate staff talked openly last summer about how they structured their “stability funds” to yield premium reductions in November 2018, House leaders now want to “stabilize” the insurance markets this fall.

Or, to put it more cynically, they value preserving power more than they do their principles. Make no mistake, this plot would violate just about every principle conservatives hold dear. It makes no attempt to repeal Obamacare. Instead, it strengthens and entrenches it. It relies on budgetary smoke-and-mirrors to raise federal spending—a gimmick so laughable that it would destroy any credible claim Ryan could make toward fiscal responsibility and honest budgeting. It would also increase taxpayer funding of plans that cover abortion, because Democrats will never agree to this scheme if it includes robust pro-life protections in law, as doing so would effectively prohibit exchange plans from covering abortion.

Back in 2012, when former House Speaker Newt Gingrich attacked conservative proposals to reform Medicare, Ryan famously asked, “With allies like that, who needs the Left?” Six years later, given the shady nature of the Republican leadership scheme to bail out Obamacare, some may be saying the same thing about him.

This post was originally published at The Federalist.

Just the Facts on Drug Negotiation

Congressional hearings often serve as elaborate theatrical productions. Members ask pre-written questions, receive formulaic answers, and in many cases use witnesses as props to engage in rhetorical grandstanding. The grandstanding element was on full display Tuesday during the confirmation hearing for Alex Azar, the Health and Human Services Secretary-designee. Sen. Claire McCaskill (D-MO) wanted to beat up on “evil” drug companies, and she wasn’t going to let facts get in her way.

McCaskill spent two minutes attacking pharmaceutical advertisements, including a reference to “the one for erectile dysfunction where they have them in two bathtubs,” before she tackled the issue of Medicare “negotiating” prices with drug companies. At this point she demonstrated ignorance on several issues.

Second, McCaskill failed to grasp that Medicare drug plans already negotiate with pharmaceutical companies, and that the discounts they obtain have helped keep overall premiums for the prescription drug Part D plan low. It may sound radical to McCaskill, who has spent practically her entire adult life working in government, but the private sector can negotiate just like the government, and probably do so more effectively than a government entity.

Third, McCaskill refused to believe that getting the government involved in “negotiating” drug prices would not save money. When Azar explained that removing a provision prohibiting federal bureaucrats from “negotiating” prices wouldn’t save money, McCaskill called his explanation “just crazy” and “nuts.”

It isn’t nuts, it’s economics. Even though McCaskill tried to lecture Azar on economics and markets at the beginning of her questioning, her queries themselves showed very little understanding of either concept. In a negotiation, the ability to drive a hard bargain ultimately derives from the ability to seek out other options. If Medicare must cover all or most prescription drugs, such that it can’t walk away from the proverbial bargaining table, it will by definition be limited in its ability to put downward pressure on prices.

But don’t take my word for it. As Azar pointed out to McCaskill, none other than Peter Orszag, who directed the Office of Management and Budget (OMB) under President Obama — said as much in an April 2007 Congressional Budget Office letter:

By itself, giving the Secretary broad authority to negotiate drug prices would not provide the leverage necessary to generate lower prices than those obtained by PDPs and thus would have a negligible effect on Medicare drug spending. Negotiation is likely to be effective only if it is accompanied by some source of pressure on drug manufacturers to secure price concessions. The authority to establish a formulary, set prices administratively, or take other regulatory actions against firms failing to offer price reductions could give the Secretary the ability to obtain significant discounts in negotiations with drug manufacturers.

Only the ability to limit access to drugs by setting a formulary or imposing  administrative prices, i.e. “negotiating” by dictating prices to drug companies, would have any meaningful impact on pricing levels. But this truth proved inconvenient to McCaskill, who admitted she “refuse[d] to acknowledge it.”

Instead, McCaskill continued haranguing him about the evils of drug companies. She pointed out that one congressman who helped negotiate the prescription drug benefit, Rep. Billy Tauzin (R-LA), “went to run PhRMA after he finished getting it through.”

Indeed he did. And as the head of PhRMA, he bragged about the “rock-solid deal” he cut with the Obama administration to help his industry. Big Pharma’s “deal” as part of Obamacare encouraged seniors to purchase costlier brand-name drugs instead of cheaper generics, which the CBO concluded would raise Part D premiums by nearly 10 percent. And who voted for that “rock-solid deal?” None other than Claire McCaskill.

As the old saying goes: If you have the facts on your side, pound the facts. But if you don’t, pound the table.

The facts indicate that McCaskill voted for a “rock-solid deal” with Big Pharma that raised premiums on millions of seniors, which actually makes her part of the problem, not part of the solution. Of course, that also makes her willingness to grandstand at Tuesday’s hearing, and her unwillingness to face facts she now finds politically inconvenient, less “crazy” than it first seemed.

This post was originally published at The Federalist.

Democrats’ Hypocrisy on the Trump Budget

As expected, the Left had a harsh reaction to President Trump’s first budget on its release Tuesday. Bernie Sanders called the proposed Medicaid reductions “just cruel,” the head of one liberal think-tank dubbed the budget as a whole “radical,” and on and on.

But if liberals object to these “draconian cuts,” there’s one potential solution: Look in the mirror.

And exactly who might be to blame for creating that toxic environment?

Democrats Are Using The ‘Mediscare’ Playbook

Democrats have spent the past several political cycles running election campaigns straight out of the “Mediscare” playbook. In case anyone has forgotten, political ads have portrayed Republicans as literally throwing granny off a cliff.

This rhetoric about Republican attempts to “privatize” Medicare came despite several inconvenient truths:

  1. The “voucher” system Democrats attack for Medicare is based upon the same bidding system included in Obamacare;
  2. The Congressional Budget Office concluded one version of premium support would, by utilizing the forces of competition, actually save money for both seniors and the federal government; and
  3. Democrats—in Nancy Pelosi’s own words—“took half a trillion dollars out of Medicare” to pay for Obamacare.

Given the constant attacks from Democrats against entitlement reform, however, Donald Trump made the political decision during last year’s campaign to oppose any changes to Medicare or Social Security. He reiterated that decision in this week’s budget, by proposing no direct reductions either to Medicare or the Social Security retirement program. Office of Management and Budget Director Mick Mulvaney said the president told him, “I promised people on the campaign trail I would not touch their retirement and I would not touch Medicare.”

That’s an incorrect and faulty assumption, of course, as both programs rapidly spiral toward insolvency. The Medicare hospital insurance trust fund has incurred a collective $132.2 billion in deficits the past eight years. Only the double-counting created by Obamacare continues to keep the Medicare trust fund afloat. The idea that President Trump should not “touch” seniors’ retirement or health care is based on the fallacious premise that they exist beyond the coming decade; on the present trajectory, they do not, at least not in their current form.

Should Bill Gates Get Taxpayer-Funded Healthcare?

That said, the president’s reticence to “touch” Social Security and Medicare comes no doubt from Democrats’ reluctance to support any reductions in entitlement spending, even to the wealthiest Americans. When Republicans first proposed additional means testing for Medicare back in 2011, then-Rep. Henry Waxman (D-CA) opposed it, saying that “if [then-House Speaker John] Boehner wants to have the wealthy contribute more to deficit reduction, he should look to the tax code.”

In other words, liberals like Henry Waxman, and others like him, wish to defend “benefits for billionaires”—the right of people like Bill Gates and Warren Buffett to receive taxpayer-funded health and retirement benefits. Admittedly, Congress passed some additional entitlement means testing as part of a Medicare bill two years ago. But the notion that taxpayers should spend any taxpayer funds on health or retirement payments to “one-percenters” would likely strike most as absurd—yet that’s exactly what current law does.

As the old saying goes, to govern is to choose. If Democrats are so violently opposed to the supposedly “cruel” savings proposals in the president’s budget, then why don’t they put alternative entitlement reforms on the table? From eliminating Medicare and Social Security payments to the highest earners, to a premium support proposal that would save seniors money, there are potential opportunities out there—if liberals can stand to tone down the “Mediscare” demagoguery. It just might yield the reforms that our country needs, to prevent future generations from drowning in a sea of debt.

This post was originally published at The Federalist.

How to Repeal Obamacare — And What Comes Next

Secretary of Health and Human Services Tom Price’s confirmation early Friday morning marks both an end and a beginning. While his installation after a bitter nomination battle formally begins the Trump administration’s work on healthcare, Price will also seek to bring about the end of former President Barack Obama’s unpopular and unaffordable healthcare law.

Dismantling Obamacare should be a three-fold process, involving coordination among HHS, the rest of the administration, and the Republican-led Congress. The steps can occur concurrently, but all must take place to prevent people from suffering any further from Obamacare’s ill effects.

Having assumed his post, Price should use the regulatory apparatus at his disposal to bring immediate relief from Obamacare. Press reports indicate the administration has already taken steps in that regard, sending a package of insurance stabilization rules to the Office of Management and Budget for clearance prior to their release, potentially as soon as Friday afternoon.

The reports suggest the administration is considering many of the proposals to provide regulatory flexibility that I included in a report analyzing repeal last month. Specifically, the administration may reduce the length of the annual open enrollment period and require verification of individuals seeking special enrollment periods outside of open enrollment. These are two critical steps to prevent individuals from signing up for insurance after they become sick.

In many cases, the administration and Price have significant latitude to provide flexibility, but that latitude is not unlimited. Until Congress acts, Obamacare remains on the statute books. While regulators can reinterpret the law, they cannot ignore it. Already, the liberal-leaning AARP has threatened legal action over one of the new administration’s rumored regulatory changes.

These legal constraints illustrate why Congress should act, preferably sooner rather than later, in passing legislation repealing Obamacare. Congress should use as the basis for action the repeal bill it passed in the fall of 2015, which Obama vetoed early last year. That bill repealed all of the law’s tax increases, and sunset the law’s coverage expansions after a two-year period to allow for an appropriate transition.

While the 2015 legislation should represent the initial template for Obamacare’s repeal, Congress can and should go further. Legislators should also seek to repeal the law’s insurance regulations, which have raised premiums and caused millions to receive cancellation notices.

Although some assume Congress cannot repeal the regulations using budget reconciliation — the special process that allows legislation to pass with a 51-vote majority, rather than the usual 60 votes, in the Senate — that may not be accurate. The Congressional Budget Office and others have made estimates showing the significant budgetary impact of these costly regulations. Republicans should use those cost estimates, and past Senate precedent, to enact repeal of the major insurance provisions using the special budget reconciliation procedures.

While adding repeal of the insurance regulations to the 2015 measure, Congress should also ease the transition away from Obamacare by freezing enrollment in the law’s new entitlements upon enactment of the repeal bill. It makes no sense to allow millions of individuals to continue enrolling in a program Congress has just voted to end. Especially with respect to the law’s massive expansion of Medicaid to the able-bodied, freezing enrollment would allow individuals currently on Obamacare to retain their coverage, while starting a process to transition away from the law’s spending and allow individuals to transition off the rolls and into employer-based coverage.

When thinking about a post-Obamacare world, Congress and the new administration should have three priorities: lowering costs, lowering costs and lowering costs.

Americans of all political stripes view lowering health costs as their number-one priority, and it isn’t even close. While candidate Obama promised in 2008 that his health plan would lower costs by an average $2,500 per family per year, the bill he signed into law instead raised costs and premiums for millions.

The answer to the top health concern lies not in new spending and taxes to subsidize health insurance (the failed Obamacare formula) but in reducing the underlying costs of care.

Reducing costs involves equalizing the tax treatment of health insurance, limiting current tax preferences that encourage over-consumption of health insurance and health care. But this must be done in a way that does not raise tax burdens overall. Lowering costs should include incentives for wellness and promote health savings accounts, the expansion of which could reduce health expenditures by billions of dollars.

States have a big role to play in the health debate, both in lowering costs and protecting individuals with pre-existing conditions.

Congress can and should provide states with incentives to reduce insurance benefit mandates that drive up the cost of care. Congress should guarantee that individuals with pre-existing conditions have access to coverage, but give states funding, and let them decide the best route — whether through high-risk pools, or some other risk transfer mechanism — to ensure access to care. While not the panacea President Trump and others have claimed, Congress should allow individuals to shop across state lines for the coverage that best suits their needs.

These changes will not require a 2,700-page piece of legislation like Obamacare. They should not even be considered a “replacement” for Obamacare. But they would have an impact in reducing health costs, the issue Americans care most about. They would represent a new beginning after the canceled policies and premium spikes associated with Obamacare.

This post was originally published in the Washington Examiner.

An Insight Into Divisions over Administration Authority to Pay Obamacare Subsidies

A federal district judge ruled this month, in a lawsuit brought by House Republicans, that the Obama administration lacks the authority to pay cost-sharing subsidies to health insurers if Congress has not appropriated the funds. Some civil servants in the administration may agree.

The House Ways and Means Committee released a deposition Tuesday of David Fisher, former chief risk officer for the Internal Revenue Service. In it, Mr. Fisher recounts a series of events in late 2013 and early 2014 regarding the source and legality of Obamacare cost-sharing subsidies to insurers. The administration initially argued that the subsidies were subject to the budget sequester. By early 2014, however, it had shifted to the position that the cost-sharing subsidies were not subject to the sequester and could be paid under the appropriation authority for a separate program of premium subsidies created by the Affordable Care Act.

In the deposition, Mr. Fisher describes a January 2014 meeting at the Office of Management and Budget during which OMB staff showed—but did not allow IRS employees to retain—a memo ostensibly giving the federal government legal authority to combine the cost-sharing and premium subsidies. Mr. Fisher said the legal brief lacked a “single, main argument.” It was “almost a commentary on elements that, in total, would draw the conclusion that these payments out of the permanent appropriation would be appropriate.”

Mr. Fisher said he disagreed with OMB’s legal analysis and believed that there was “no clear reference” to an appropriation for the cost-sharing subsidies in the health-care law. He testified that the IRS’s chief financial officer and deputy chief financial officer shared his concerns. IRS Commissioner John Koskinen allowed employees to air those concerns soon after the OMB meeting, he said, but ultimately allowed the payments to proceed. Mr. Fisher testified that it was “a very strong consensus” of people in “fairly senior positions”—then-Attorney General Eric Holder had received a briefing, Mr. Fisher recalled—that the payments should proceed.

There is a notable point in the deposition: “There could be many other people who think this is about health care. To us,” Mr. Fisher said, referring to himself and others who shared his concerns, “this was not about health care.” The issue is abiding by appropriations law, he said, not least because the Anti-Deficiency Act provides criminal penalties for federal employees who spend funds not legally appropriated.

Democrats on the House Ways and Means Committee objected that Mr. Fisher was subpoenaed to testify, with Rep. Sander Levin calling it “another effort by the majority to try to undermine the Affordable Care Act.” Mr. Fisher, though, testified that he views the issue through a different prism.

Shortly before the federal ruling this month, both the House Ways and Means and the Energy and Commerce Committees issued subpoenas for internal documents relating to the cost-sharing subsidies. The panels have sought these documents for 15 months. The internal deliberations and potential conflicts raised by Mr. Fisher’s testimony could be part of the reason the administration has not released all those documents. It appears that there were questions about the legality of the cost-sharing subsidies within as well as outside the Obama administration.

This post was originally published at the Wall Street Journal Think Tank blog.

Four Obstacles in Selling the Benefits of Medicaid Expansion to States

Last week, the White House released a report outlining the economic benefits to states of expanding Medicaid. The report continues a line of argument the Obama administration has used in encouraging states to expand Medicaid under the Affordable Care Act, the president’s health-care law.

The administration faces several obstacles in attempting to sell this argument to reluctant states.

The first is the argument I outlined yesterday—namely, the “poverty trap” exacerbated by several elements of Obamacare. In addition to concluding that the law as a whole will reduce the size of the labor force by the equivalent of approximately 2.3 million full-time workers in 2021, the Congressional Budget Office specifically has found that “expanded Medicaid eligibility under [the law] will, on balance, reduce incentives to work.” For instance, while individuals who exceed the threshold for Medicaid eligibility will likely become eligible for subsidized premiums on insurance exchanges, they would also become subject to thousands of dollars in premium payments and cost-sharing—all because of a potentially small increase in income. CBO has found that these kinds of “cliffs” discourage work.

Second, the Obama administration has rejected requests from states to impose work or job-search requirements in conjunction with the Medicaid expansion. While the administration has claimed to offer flexibility to states when it comes to altering the Medicaid benefit, it has steadfastly refused to consider any mandatory work or job-search requirement. Given the CBO’s analysis, the administration faces a rhetorical challenge in explaining how expansion can benefit the economy yet simultaneously reduce incentives to work—particularly as it declines to give states the ability through work requirements to mitigate against those disincentives.

Additionally, the White House report solely examines the benefits of increased federal funding to states without examining the source of that funding. Most notably, the health law included more than 18 tax increases, which according to the most recent CBO estimates will raise over $1 trillion in revenue—with obvious dampening effects on state economies.

Perhaps most importantly, various economists, including Harvard’s Katherine Baicker, have dismissed the notion that health care should serve as an economic engine. While the administration claims states that expand Medicaid will grow their economies, it has made no attempt to argue that expansion represents the most economically efficient use of those dollars—that the funds could not be better used building roads, returned to citizens, or even remain in the Treasury to reduce the federal deficit. In that sense, then, the administration might do well to heed one of its own former officials—Ezekiel Emanuel, former director of the Office of Management and Budget: “Health care is about keeping people healthy or fixing them up when they get sick. It is not a jobs program.”

This post was originally published at the Wall Street Journal Think Tank blog.

Another Spending Standoff Between the White House and Congress?

As spring turns to summer, the House and Senate will work on the 12 annual appropriations bills that fund the federal government. The backdrop to this work? The president who signed the Budget Control Act into law four years ago wants to exceed the spending levels the legislation prescribed.

In a recent blog post, Office of Management and Budget Director Shaun Donovan made clear that the administration opposes the spending levels. Mr. Donovan wrote that “sequestration was never intended to take effect: rather, it was supposed to threaten such drastic cuts to both defense and non-defense funding that policymakers would be motivated to come to the table and reduce the deficit through smart, balanced reforms.” However, because the congressional “supercommittee” formed in 2011 did not reach agreement on entitlement and/or tax changes to reduce the deficit, automatic reductions were triggered on discretionary spending, with separate caps on defense and non-defense appropriations.

But in separate letters regarding the House’s first two spending bills, Mr. Donovan wrote that “the President has been clear that he is not willing to lock in sequestration going forward, nor will he accept fixes to defense without also fixing non-defense.” Largely because of these broad disagreements over spending levels, the administration issued veto threats on the first two appropriations measures.

Ironically, President Barack Obama now opposes a policy outcome—the “sequester” spending levels—that he introduced: Multiple fact checkers have confirmed that it was administration officials who proposed the sequester mechanism during debt-ceiling negotiations in the summer of 2011. These histories directly contradict the president’s statement in an October 2012 debate with Mitt Romney that “the sequester is not something that I’ve proposed. It is something that Congress has proposed.”

The administration can say that it did not propose the sequester mechanism. It can also say—with more accuracy—that sequestration was an action-forcing mechanism that was never intended to take effect. But neither argument changes the fact that the Budget Control Act remains the law of the land. The specter of Mr. Obama vetoing spending bills—potentially setting up another government shutdown this fall—because they fail to nullify an act that he signed into law could present an optics problem for his administration.

This post was originally published at the Wall Street Journal Think Tank blog.

How the Sequester Could Cost Obamacare Insurers

In a Think Tank post Thursday, I wrote about how insurers deciding to participate next year in the health exchanges established under Obamacare could be expecting funds that the federal government may not have legal authority to disburse. But that’s not the only potential pitfall for carriers: They could also end up on the hook for payment reductions caused by sequestration.

In the spring of 2013, the Obama administration submitted a report to Congress indicating that, while subsidies for health insurance premiums on the exchanges were not subject to the budget sequester, the separate program of cost-sharing subsidies—reducing deductibles and co-payments for certain low-income individuals—faced a 7.2% cut in fiscal 2014. Marilyn Tavenner, the administrator of the Centers for Medicare and Medicaid Services, confirmed this position during congressional testimony last August.

In a March report to Congress, however, the administration said that both the premium and cost-sharing subsidies were exempt from the sequester. Last month, in response to questions, Sylvia Mathews Burwell—then the head of the Office of Management and Budget, now the secretary of health and human services—told several senators that the cost-sharing and premium subsidies “will be paid out of the same account” as a way to “improve the efficiency in the administration of the subsidy payments” and that payments from that account are exempt from the budget sequester.

The problem with this? That’s not what the law says. As I pointed out last October, the premium and cost-sharing subsidies were established in two separate sections of Obamacare. The premium subsidies are codified in the Internal Revenue Code, which is administered by the Treasury Department and payable to individuals. The cost-sharing subsidies are codified in the Public Health Service Act, which is administered by the Department of Health and Human Services and payable to insurers. And while the premium subsidies are structured in a way that should exempt them from the budget sequester, the cost-sharing subsidies are not.

The administration appears to be using efficiency arguments to try to shield the cost-sharing subsidies from the sequester. But the sequester is a zero-sum proposition, so exempting the cost-sharing subsidies from sequestration means other programs would take a greater budgetary hit—and affected organizations or programs may have standing to challenge in court.

The bottom line: The nonpartisan Congressional Research Service warned in May 2013 that insurers could be on the hook to absorb the billions of dollars in sequester cuts to the cost-sharing subsidies. As with the “risk corridor” provision of Obamacare, insurers participating under the assumption that these legal questions will be easily resolved may be doing so at their own risk.

This post was originally published at the Wall Street Journal Think Tank blog.

Another “Affordable Care” Sticker Shock Looms

President Obama and supporters of his health-care law have defended it by saying that the Affordable Care Act is “the law of the land.” However, the spending reductions in the 2011 Budget Control Act—the so-called sequester—also remain “the law of the land.”

In promoting the former, the Obama administration has failed to enforce the latter. As a result, people trying to buy health insurance on the new exchanges are getting incomplete and misleading information, and they may experience more sticker shock next year.

Some have claimed that the sequester “exempts” Obamacare’s subsidies from spending reductions. That is only half true. The Budget Control Act does exempt from sequestration the premium subsidies for households with incomes up to 400% of the federal poverty level ($94,200 for a family of four) and that meet other eligibility criteria.

But other Obamacare subsidies, paid directly to insurance providers on behalf of eligible beneficiaries, are subject to the sequester—namely “cost-sharing subsidies.” These include subsidies for households with incomes below 250% of the federal poverty level ($58,875 for a family of four) to reduce copayments and deductibles. They also include subsidies to reduce out-of-pocket expenses for households with incomes up to 400% of the poverty level.

The Obama administration has acknowledged that the cost-sharing subsidies are subject to sequester reductions. A May report from the White House Office of Management and Budget estimated that the sequester would reduce the subsidies by 7.2% in fiscal year 2014. That amounts to a $286 million reduction through next September—the first nine months of Obamacare.

However, the administration hasn’t issued guidance on how it will implement the required cuts. Appearing before the House Energy and Commerce Committee on Aug. 1, Centers for Medicare & Medicaid Services Administrator Marilyn Tavenner declined repeated requests to explain how the cost-sharing subsidy reductions would be applied. She did, however, pledge that the administration would release more information before the Oct. 1 start of open enrollment in Obamacare. But that deadline came and went without more information.

Clearly, someone will be left holding the bag, and the administration doesn’t want to address who that someone will be.

There are two possible outcomes. The first is that individuals who have managed to enroll in subsidized health insurance will find they’ve been misled about their copays and deductibles. Families who currently think their plan will charge a $20 copayment for doctor visits may instead face a $25 charge when the sequester kicks in. Individuals who now believe they face maximum out-of-pocket costs of $2,000 may end up paying hundreds more.

The other alternative is that insurers may be stuck with the sequester cuts. A May 31 Congressional Research Service report, noting that Obamacare requires insurers to reduce cost-sharing for eligible individuals regardless of the sequester, concluded that “insurers presumably will still have to provide required coverage to qualifying enrollees but they will not receive the full subsidy to cover their increased costs.” In other words, the CRS, Congress’s own think tank, believes insurers may be forced to eat the costs of the sequester reductions—$286 million through September, and billions more through 2021.

Having first proposed the sequester two years ago, the Obama administration now finds itself on the horns of a self-imposed dilemma. It can tell the American people that the “good deal” President Obama promised isn’t as good as they thought—that those who spent hours and days signing up on Healthcare.gov bought coverage that will cost more than advertised. If full disclosure truly were to prevail, the administration would also admit that this classic bait and switch occurred solely due to its failure to account for its responsibilities under the Budget Control Act.

Or the administration can try to force insurers to bear the full costs of the sequester reductions—and watch them promptly drop out of the exchanges.

This is no mere “glitch” in the website, nor was it unforeseen. The administration has known for years that the cost-sharing subsidies were subject to sequester, but has failed to plan for its impact.

In her Aug. 1 appearance before the House Energy and Commerce Committee, Ms. Tavenner testifed that it is the administration’s “strong preference that the issue of sequestration go away entirely.”

But neither Ms. Tavenner nor President Obama can pick and choose which laws they wish to enforce. And the administration’s rush to implement one law, while ignoring the requirements of another, means Americans could face a rude awakening when they discover what their Obamacare coverage will cost them.

This post was originally published in The Wall Street Journal.

Budget Sequestration’s Impact on Obamacare Subsidies

A PDF of this Issue Brief is available on the Heritage Foundation website.

Many Americans could face a rude awakening when they discover that the subsidies they thought they were getting to offset their health care costs are less than what they were promised. Some claim that the Obamacare subsidies are exempt from the spending reductions established by the Budget Control Act (BCA), but that is only half right.[1]

The BCA exempts only the premium subsidies, not the cost-sharing subsidies, from upcoming cuts. Regrettably, the Obama Administration has not taken steps to inform the American people of this fact as they navigate coverage options in the government exchanges.

The Sequester’s Impact on Obamacare Subsidies

Obamacare provides two forms of subsidies:

  1. Premium subsidy. Section 1401 provides that individuals with incomes under 400 percent of the federal poverty level ($94,200 for a family of four) who do not have access to “affordable” employer-based coverage and meet other relevant criteria are eligible to receive refundable tax credits for coverage purchased in the exchanges.
  2. Cost-sharing subsidy. Section 1402 provides cost-sharing subsidies to reduce maximum out-of-pocket expenses for households with incomes below four times the federal poverty level. Other language in Section 1402 directs cost-sharing subsidies to increase the actuarial value—the average amount of expected health expenses paid by insurance—for households with incomes below 250 percent of the poverty level.

The BCA exempted the premium subsidies from sequestration—not explicitly but by definition. The sequester mechanism in the BCA was largely based on formulae developed by the Gramm–Rudman–Hollings Act of 1985, which exempts refundable tax credits under the Internal Revenue Code from any federal sequestration.[2] Because Obamacare structured the premium subsidies as refundable tax credits, they remain exempt from the BCA sequestration.

However, with regard to sequestration’s spending reductions, the cost-sharing subsidies under Section 1402 of Obamacare are distinct from the premium subsidies under Section 1401 of the law in at least two significant ways:

  1. The language authorizing Obamacare cost-sharing subsidies is included as part of the Public Health Service Act (Title 42 of the U.S. Code). The sequester exemption for refundable tax credits requires that they be “made pursuant to provisions of Title 26” of the Internal Revenue Code.[3]
  2. Obamacare specifically requires the Secretary of Health and Human Services to “make periodic and timely payments to the issuer” of the insurance policy reflecting the increased cost-sharing. The sequester exemption in Gramm–Rudman–Hollings for refundable tax credits provides that only “payments to individuals,” not to insurance companies, are exempt from sequester reductions.[4]

For these reasons, the Congressional Research Service (CRS) has concluded that the cost-sharing subsidies under Section 1402 of Obamacare “appear to be fully sequestrable” under the BCA.[5]

Administration Confirms Cuts but Has No Plan

The Administration has likewise agreed that the cost-sharing subsidies are subject to sequestration spending reductions. An Office of Management and Budget (OMB) report issued in May 2013 categorized the cost-sharing subsidies as mandatory spending subject to sequestration.[6]

The report further estimated that a 7.2 percent cut in these subsidies, as required by sequestration, would reduce spending by $286 million in fiscal year 2014—a period that covers the first nine months of Obamacare’s coverage expansions, from January through September 2014.[7]

However, the Administration has not been similarly forthcoming about how the 7.2 percent spending reductions will be applied. Centers for Medicare and Medicaid Services (CMS) Administrator Marilyn Tavenner acknowledged that CMS had not communicated to officials who are operating exchanges, both federal and state, how this sequestration will be applied to the cost-sharing subsidies. However, she pledged to do so “before open enrollment, which starts on October 1, 2013.”[8] To date, no guidance has been released by either CMS or OMB.

Limited Options

It is impossible to predict how CMS intends to implement the required sequestration reductions. In the absence of clear guidance from the Administration about the impact of sequestration, one can envision two possible scenarios.

Scenario 1: Consumers Pay. Under this scenario, the individuals eligible for cost-sharing subsidies would face higher cost-sharing. Eligible individuals would face some combination of higher co-payments, higher deductibles, higher co-insurance, or the loss of some benefits to make up for the reduced cost-sharing subsidies.

The structure and requirements of sequestration place a high emphasis on regulatory guidance from CMS. The sequestration law requires that spending reductions “shall apply to all programs, projects, and activities within a budget account.”[9] But it remains unclear how the Administration will implement this requirement. For instance, CMS could decide to reduce all eligible individuals’ cost-sharing subsidies by an equal 7.2 percent. Alternatively, the Administration could try to implement the reductions on a sliding-scale basis so that households with lower incomes face a smaller-scale reduction.

However, because the Administration has not issued any form of guidance, the cost-sharing information currently published on the exchanges does not accurately reflect the impact of sequestration on the cost-sharing subsidies.[10] Thus, for those few individuals who have actually enrolled in subsidized health insurance on exchanges, their co-payments and cost-sharing may increase next year. Accurate information cannot exist until CMS publicly states how it intends to implement the required sequestration reductions.

Scenario 2: Insurers Pay. A second possible scenario would see insurers being forced to absorb the costs of the sequester reductions in cost-sharing subsidies themselves. CRS, examining Obamacare’s statutory requirements on insurers to provide cost-sharing reductions, considered this scenario a likely outcome:

The impact of sequestration is unclear. [Obamacare] entitles certain low-income exchange enrollees to coverage with reduced cost-sharing and requires the participating insurers to provide that coverage. Sequestration does not change that requirement. Insurers presumably will still have to provide required coverage to qualifying enrollees but they will not receive the full subsidy to cover their increased costs.[11]

This scenario would see insurers absorbing $286 million in losses in the law’s first nine months alone—losses that would grow over time. Citing estimates from the Congressional Budget Office and the Joint Committee on Taxation, CRS noted that the federal government is scheduled to spend $149 billion on cost-sharing subsidies between 2014 and 2023.[12] Given that sequestration is scheduled to remain in place through 2021, the reductions in cost-sharing subsidies under current law would likely total several billion dollars at a minimum.

The scale of the numbers at issue raises questions about whether and under what circumstances insurance companies would actually continue to offer exchange coverage, knowing they would be guaranteed to incur losses if they do so.

More Than a “Glitch”

While Obamacare’s defenders are fond of claiming that “glitches” are the only thing holding back the law’s implementation, the Administration’s failure to confront the impact of BCA cuts signed into law two years ago is no mere “glitch.” Either individuals who endure an arduous process to sign up for insurance on balky exchanges will face a “bait-and-switch,” with cost-sharing levels higher than advertised, or insurers will face the prospect of billions of dollars in losses. Neither option is acceptable.

The Administration that promised to be the “most transparent and accountable” in history has neglected to inform the American people about the impact of sequestration on its prized accomplishment.

 



[1]See, for instance, Ezra Klein, “Democrats Should Surrender on Taxes,” Bloomberg, October 16, 2013, http://www.bloomberg.com/news/2013-10-16/democrats-should-surrender-on-taxes.html (accessed October 24, 2013).

[2]2 U.S. Code 905(d).

[3]Ibid.

[4]Ibid.

[5]C. Stephen Redhead, “Budget Control Act: Potential Impact of Sequestration on Health Reform Spending,” Congressional Research Service Report for Congress, May 31, 2013, Table 4, p. 22, http://www.fas.org/sgp/crs/misc/R42051.pdf (accessed October 24, 2013).

[6]Office of Management and Budget, Revised Sequestration Preview Report for Fiscal Year 2014, May 20, 2013, p. 23, http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/fy14_preview_and_joint_committee_reductions_reports_05202013.pdf, (accessed October 24, 2013).

[7]Ibid.

[8]Marilyn Tavenner, “PPACA Pulse Check,” testimony before the Committee on Energy and Commerce, U.S. House of Representatives, August 1, 2013, http://energycommerce.house.gov/hearing/ppaca-pulse-check (accessed October 24, 2013).

[9]2 U.S. Code 906(k)(2).

[10]Tavenner, “PPACA Pulse Check.”

[11]Redhead, “Budget Control Act,” p. 15.

[12]Ibid., Table 4, p. 23.