“This bill was written in a tortured way to make sure the CBO [Congressional Budget Office] did not score the mandate as taxes. If CBO scored the mandate as taxes, the bill dies.”

— MIT economist Jonathan Gruber, captured on videotape

What did Gruber mean when he uttered this words in a now-infamous video that has inflamed hostility to the Affordable Care Act?

This is a bit of a wonky subject, but we think it is worth explaining, because commentators on both the right and the left have jumped to the wrong conclusion. They assumed Gruber was discussing the fact that the administration had not described penalties for failing to get insurance as “taxes,” even though the Supreme Court later said Obamacare was constitutional because the individual mandate was indeed a tax.

But that’s not correct.

The Facts

First, from the CBO’s perspective, the mandate penalty — called in the law a “shared responsibility payment” — was always deemed to be “revenue.” It did not matter what marketing label it received from politicians; the mandate was considered an involuntary payment, and thus would be considered government revenue. (An example of a voluntary payment is deciding to pay a fee to visit a national park. Those fees are considered an offset of government expenses, as opposed to revenues.)

So if the CBO wasn’t tricked by political nomenclature, what was Gruber talking about?

He was talking about something that mostly only health-care wonks understood at the time — that Bill Clinton’s effort to pass universal health insurance in the early 1990s floundered after CBO ruled that state-sponsored health alliances, the mechanism created by Clinton for purchasing health insurance, “would operate primarily as agents of the federal government.”

CBO’s ruling in 1994 could have been dismissed as just about accounting and semantics, but the political impact was huge. In effect, CBO said that, under Clinton’s proposal, the entire health-insurance system would become an arm of the U.S. government. CBO’s decision all but sealed the fate of Clinton’s plan.

Thus, as Obama’s law was being drafted in 2009, lawmakers and administration officials were keen to avoid the same trap. In a report issued in May of that year, CBO laid out a possible path to maneuver around the problem.

In the report, CBO explained why a government mandate might require treating private payments as part of the federal budget — when “a private entity is acting as an agent of the federal government in carrying out a federal program under the government’s direction.” (An example given was lifetime health benefits for coal miners.) But it also said that a mandate by itself would not necessarily require inclusion in the budget. In the case of health care, a “largely private-sector system” would not get treated that way, especially if it met certain tests, such as:

  • Is the consumer likely to be able to choose among a number of insurance plans with differing degrees of comprehensiveness?
  • If there are plans with different levels of coverage, will they cover a broad enough range to offer consumers a meaningful choice?
  • Is the consumer likely to be able to choose among several different insurance companies competing on price?

“At its root, the key consideration is whether the proposal would be making health insurance an essentially governmental program, tightly controlled by the federal government with little choice available to those who offer and buy health insurance — or whether the system would provide significant flexibility in terms of the types, prices, and number of private-sector sellers of insurance available to people,” CBO said.

Thus as long as health insurance remained largely private, CBO said it would not include premiums paid directly to insurers or premiums paid as part of employer-provided insurance as part of the federal budget. But individual mandate penalty payments would be treated as revenue no matter what system was constructed.

Later, in a December 2009 memo, CBO said that the legislation that had emerged had met its test of not being a government-controlled system:

“The PPACA [Patient Protection and Affordable Care Act] would make numerous changes to the market for health insurance, including requiring all individuals to purchase health insurance, subsidizing coverage for some individuals, and establishing standards for benefit packages. Taken together, those changes would significantly increase the federal government’s role in that market. Nevertheless, CBO concluded that there would remain sufficient flexibility for providers of insurance and sufficient choice for purchasers of insurance that the insurance market as a whole should be considered part of the private sector. Therefore, except for certain transactions that explicitly involve the government, CBO would treat the cash flows associated with the health insurance system (for example, premium and benefit payments) as nongovernmental.”

The Bottom Line

We realize this is a complex topic, and it would be so much easier to assume that Gruber was discussing the political fiction that the mandate penalty was not a tax. But in context, it’s clear that Gruber was not talking about that. If all health-insurance premiums had been deemed a “tax,” then of course the bill would have died, just as Clinton’s bill did.

Instead, only the mandate penalty was deemed a tax — and that’s why the law survived a Supreme Court challenge.


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