Supreme Court ruling could boost the cost of health-care reform, ex-CBO chief argues

Did the Supreme Court just make the Affordable Care Act much less affordable?

The calculations are complex, and the nonpartisan Congressional Budget Office has said it will need some time to review the situation. But an early back-of-the-envelope analysis by a former CBO director suggests that Thursday’s ruling could sharply raise the cost of President Obama’s signature legislative achievement.

Douglas Holtz-Eakin now serves as president of the conservative American Action Forum, which filed several amicus briefs in support of overturning the health-care law. Holtz-Eakin, who advised 2008 Republican presidential candidate John McCain before he lost to Obama, is no friend of the administration.

Still, he asks a relevant question: Given the terms of the ruling, what’s the worst-case scenario for the federal budget? His answer: around $50 billion a year.

“There’s real money at stake here,” Holtz-Eakin said.

How does it work? The Affordable Care Act seeks to cover the uninsured in two ways: It requires states to expand Medicaid to cover those earning less than 133 percent of the federal poverty level, with the federal government initially picking up the full tab (though federal funding would later fall to cover just 90 percent of the cost of expansion). It also creates new subsidies to help people at slightly higher income levels afford private insurance on new insurance exchanges.

Under the court ruling, the federal government may not punish states that refuse to expand Medicaid eligibility. Holtz-Eakin argues that this legal development gives states a huge financial incentive to opt out of the Medicaid expansion and encourage residents earning 100 percent to 133 percent of the poverty level to seek the more expensive subsidies for private insurance, which are funded entirely by the federal government.

“Suppose that every state takes advantage of this opportunity, and that every individual who is either on Medicaid or would be eligible for the expansion actually moves to the exchanges. The federal government would save as much as $130 billion in Medicaid in 2014, but it would be on the hook for $230 billion in new insurance subsidies,” Holtz-Eakin writes. “The net bottom line: a $100 billion annual expansion in federal costs.”

Of course, not all states would forego the expansion, Holtz-Eakin says, and far fewer than 100 percent of those eligible are likely to seek the subsidies. “Accordingly, the net cost will be lower than the full $100 billion,” he says.

But given the incentives for state officials, he says, it seems safe to say that the ruling will inevitably make the law more expensive, perhaps by as much as $500 billion or so over the first 10 years.

Liberal analysts disagree.

They argue that the impact of the court ruling is likely to be small and could actually lower the cost of the health-care act. Individuals earning less than 100 percent of the poverty level are not eligible for the subsidies, and might not be covered by Medicaid, either, if states opt out of the Medicaid expansion. Under that scenario, millions of people could find themselves without access to coverage – and the federal government would not have to pay a dime for them.

Holtz-Eakin said he thinks the number of people under 100 percent of the poverty level likely to lose coverage is small compared with the group between 100 percent and 133 percent who would suddenly be eligible for the more expensive subsidies. But he’s still trying to figure that out.

“If we find out the under-100 percent are enough of the population that they’re driving these costs, then I’ll have to rethink these calculations,” he said. “But I don’t think they are.”

Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.
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