Why Is the Budget Deal All Bad for Obamacare?

Dec 28, 2015 | Health, Politics


While the cable networks wrapped up their most recent Republican debate coverage, House Speaker Paul Ryan released the details on legislation that would keep the lights on in the federal government through 2016. The late-night release of what is supposed to be the first major legislative accomplishment under the newly minted speaker may have been motivated by an unexpectedly steep price tag: $680 billion.

One of the surprising focal points of the spending bill was the Affordable Care Act. The proposal makes four key changes to the existing law:

  1. It delays the “Cadillac Tax”, a 40 percent tax on the most expensive health insurance plans provided by employers, until 2020.
  2. It pauses the tax for not purchasing health insurance as required by the ACA’s individual mandate until the end of 2017.
  3. It pauses a tax on medical device manufacturers until the end of 2016.
  4. It prevents Congress from using general funds to provide payments to health insurers who took on higher numbers of unhealthy customers in the ACA’s Marketplaces (a hit to a program known as risk corridors).

These changes led Politico to label the ACA as the number one loser from the budget deal. Vox reporter Sarah Kliff didn’t go that far, but she did note that the changes make the ACA much more expensive for the federal government and open it to possible attacks from fiscal conservatives.   

But is the alarm over increased spending generally and the changes to Obamacare specifically justified? 

The budget deficit is already very low

Federal data show that the budget deficit (the difference between tax revenue and government spending in a single fiscal year) will drop to 2.5 percent of GDP in 2015. The White House praised the numbers, and the spending deal shows that even conservative legislators feel they have some room for more red ink (likely because it includes substantial tax cuts).

Fiscal hawks strongly disagreed with this assessment. The head of one of Washington’s prominent fiscal watchdogs tweeted:

While fiscal responsibility is generally a good virtue, it isn’t clear that the government is no longer capable of taking on more debt. In fact, deficit spending may help the economy.

The Federal Reserve just increased interest rates. Time for fiscal policy to step up.

One reason that deficit spending might actually help the economy is that the Federal Reserve just increased interest rates. Since the start of the financial crisis, the nation’s central bank has held interest rates at zero to help stimulate economic growth. Now that the unemployment level has fallen to 5 percent, the nation’s central bankers felt that the economy was strong enough to withstand the Fed taking their foot off the gas. This week, the Fed announced that an increase in interest rates was needed to combat the potential for rising inflation, a process that occurs somewhat naturally when the economy is strengthening.

But one byproduct of increased interest rates is slower economic growth. Raising interest rates makes it more expensive to borrow money. Individuals would likely respond by borrowing less to finance large purchases like homes and cars. Businesses will also respond by borrowing less to finance new projects and growth. And while the unemployment rate has dropped, some still see weaknesses in the labor market that would have been helped by keeping interest rates at zero.

But the adjustment of interest rates (and other actions by the central bank that make up monetary policy) is just one of two tools that can be used to stimulate the economy. The other is fiscal policy, and it can come in the form of decreases in taxes or increases in government spending. The budget deal does just that by extending tax cuts and pausing tax increases, particularly the increases slated to occur as prescribed by the Affordable Care Act.  

The changes to Obamacare delay unpopular parts of the law, but popular parts are left intact

Since the 2014 midterm elections, President Obama has faced a Congress fully in the control of Republicans. Many of these Republicans campaigned on repealing (and sometimes replacing) the ACA. The overthrow of former House Speaker John Boehner came in part because of little movement on conservative priorities like an ACA repeal. A new speaker amenable to the most conservative members of the House may have seen the first budget clash as an opportunity to pursue conservative goals.

But that isn’t what happened. Instead, the changes to the ACA actually placate groups that had some reasons to oppose the law but others to support it.

Principal among these is labor unions which lobbied heavily against the Cadillac Tax. They opposed the tax because one of the long-time perks of union membership has been lavish benefit plans, including expensive health insurance. The tax on high-priced health plans limited the compensation that unions could extract from employers. But members of labor unions are mostly Democrats, and removing the Cadillac Tax eliminates the one barrier members likely have to supporting the signature legislative achievement of the sitting Democratic president.

Another group with split loyalties is the medical device industry. Expanded coverage under the ACA allows more patients to access the devices and products manufactured and sold by the industry. That, in part, was enough of a rationale to ask the industry to pay a higher tax on their products. With the delay (and possible eventual repeal) of the medical device tax, the industry can now accept the new business without the added taxes.

Given the important role interest group politics play in Congressional policymaking, limiting the objections of key groups clears the path for broader political support for the ACA.

All this occurs while no harm is done to the existing mechanisms for providing health insurance coverage under Obamacare. Both Medicaid expansion and the health insurance marketplaces are still functioning, despite conservative objections. And funding for both of these is protected within general revenue.

Lessening the political pressure on Obamacare may even result in coverage gains through Medicaid expansion in conservative states previously reluctant to embrace the ACA.

It’s not all roses either

To be clear, there are parts of the deal that aren’t great for the ACA. The delay of the health insurance tax pauses the most direct policy tool the law has for encouraging people to sign up for health insurance. The delay may limit the number of healthier people who find insurance to be worth its cost and lower the overall health status of those who do purchase insurance.

This problem could be exacerbated by the provisions on risk corridors. Funding from the risk corridor program is meant to shield health insurance companies from the risks of insuring a new customer group by compensating them for higher than expected costs. Limits in the program have already led to the closures of many health insurance co-ops and could push out a major health insurer from the marketplace next year.

But given that Obama faces a Republican Congress made up of emboldened conservatives, a package of tax decreases, concessions to interest groups, and deficit spending may actually mean a mixed outcome for the ACA. In this environment, a mixed bag might be a win.