Affordable Care Act / Debt / Medicaid Expansion

The Affordable Care Act Aims High for Fiscal Irresponsibility

In budgetary terms, the Affordable Care Act (ACA) is anything but affordable. Though well-intentioned, it expands a poorly designed program and adds significant spending during a time of slow economic growth. This attempt to improve and expand health coverage to uninsured Americans is unduly expensive. In an already strained fiscal climate where the federal budget has reached historic highs, the ACA’s solutions to bettering our nation’s healthcare system cost more than they are worth.

The majority of federal spending added by the ACA comes from expanded Medicaid eligibility and subsidies provided to qualifying enrollees in the new healthcare exchanges. These costs fall under the category of mandatory spending, which according to the CBO accounted for $2 trillion dollars and 58.8 percent of total federal spending in FY2013. The bulk of mandatory spending lies in payments on Social Security income benefits, Medicare, and Medicaid. Ten-year budget projections already anticipate a balloon in mandatory spending that is largely due to the aging of baby boomers and a continuing rise of healthcare costs. Mandatory spending is estimated to total $3.7 trillion in FY2024 alone and will only be exacerbated by the major health coverage provisions in the ACA.

In its effort to expand healthcare coverage to the uninsured, the ACA expands Medicaid eligibility and provides subsidies for qualifying enrollees in the new healthcare exchanges. Under the ACA, the federal government will pay for the full cost of expansion in states that have elected to expand their Medicaid programs, causing a sharp increase in costs of about 9 percent per year from 2013 to 2018. Growth is then expected to return to its historic rate of 6 percent annually while federal funding for expansion tapers off. The exchange subsidies add an entirely new category of spending and will push federal healthcare outlays even higher. Net costs start out slowly at $15 billion in 2014 but rise to $137 billion in 2024, costing over $1 trillion in total from 2014 to 2024.

As a share of mandatory spending, Medicaid and the exchange subsidies will rise from 14.8 percent of mandatory spending in 2015 to 19 percent of mandatory spending in 2024. Against the CBO baseline, Medicaid and exchange subsidies will rise as a share of GDP from 2 percent in 2015 to 2.7 percent in 2024. While increasing costs are not necessarily cause for alarm, relative to a projected average 2.2 percent in real GDP growth these should be cause for concern.

The deficiencies of Medicaid are already well expounded. The Oregon Health Insurance Experiment has found that “expanding Medicaid coverage increased emergency-department use,” and many Medicaid enrollees actually experienced worse health outcomes than those without insurance. Many doctors limit their number of Medicaid patients, and a study in Health Affairs found that nearly one-third of doctors do not accept Medicaid at all. While more individuals may be covered by Medicaid due to the ACA expansion, doctors accepting new Medicaid patients will be in short supply and enrollment does not promise better health.

Additionally, while the ACA seeks to provide affordable healthcare to everyone, indicators say that it will perform poorly on this goal as well. With enrollment extended to April 15 the number of previously uninsured enrollees is still to be determined, but results so far are lackluster. A recently released RAND study indicates that of the 3.9 million who signed up under the exchanges, only 36 percent or 1.4 million were previously uninsured. The proportion of newly insured could rise rapidly depending on the final numbers released after April 15, but by and large the exchanges have not drawn large numbers of this target demographic.

At the day’s end, Medicaid expansion and the exchange subsidies translate to several billion dollars paid for programs that promise a disappointingly low performance, and the ACA continues to push federal spending in one direction: higher and higher. Meanwhile, reform to the budget’s current trajectory look slim for the immediate future. Smaller provisions such as the recently passed temporary doc fix—which avoids crude cuts to Medicare reimbursements but also raises long term spending projections—will cause ripples in the budgetary waters but will do little to move toward long term fiscal sustainability.

Overhaul of the unwieldy U.S. tax code could put the nation one step closer to fiscal reform, but lawmakers cannot dodge the issue of entitlement reform forever. Effective budget reform must seek fiscal sustainability for Medicare, Medicaid, Social Security, and now health subsidies. However lawmakers reduce military and other discretionary spending, there will never be enough to compensate for the rising costs of mandatory spending. House Budget Chairman Paul Ryan has put out one proposal for reform that would address the wildly expanding costs of Medicare, Medicaid, and Social Security, though it is grossly unpopular. Were bipartisanship a la Dave Camp possible for budget reform, strides could be made to manage entitlement spending and even reduce the national debt. Unfortunately, consensus on the need to decrease spending is not as prevalent as is the need for comprehensive tax reform. For now, spending on federal entitlement programs will continue to rise, raising the national debt with it.

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