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According to an amicus brief filed with the Supreme Court by several free market policy organizations, including the Galen Institute and the Pacific Research Institute, losses associated with underpayments from the mandate’s Medicaid expansion could total between $10 billion and $12.5 billion each year. The brief estimates that the 16 million individuals covered as a result of the mandate would otherwise have used just $9.5 billion in uncompensated care, meaning that under the law the total losses would increase by as much as $3 billion annually. It is possible, in other words, that the law will exacerbate the very problem its advocates say it is designed to fix.
State Budget Havoc
The law’s Medicaid expansion is also likely to wreak havoc with state budgets. Medicaid currently is the biggest single state budget item. In many states, the program has been expanded greatly over the years thanks largely to the incentives provided by federal matching funds: For every dollar a state spends on Medicaid, the federal government contributes more than a dollar (the exact amounts vary by state, but overall the federal government has funded about 57 percent of the program’s cost). Until recently, states have had some freedom to determine eligibility requirements within their borders. But under ObamaCare, all participating states will be required to offer Medicaid to most anyone whose income falls under 138 percent of the federal poverty line—a substantial increase in eligibility for many.
At first, the federal government will pick up 100 percent of the cost of covering the newly eligible. But by the end of the decade, states will be required to pay 10 percent of that cost. That may not sound like much, but in Texas alone Medicaid expenditures from the general fund are projected to rise by nearly $10 billion total between now and 2020. States such as Florida, California, and New York are also likely to see increases in the billions. And this comes in the midst of a nationwide fiscal crunch in which Medicaid is already straining many state budgets.
Yet the alternative is even less appealing. If states drop out of the program, they lose every penny of the federal money that comes with it. Given the proportion of state budgets devoted to Medicaid, that’s not a viable option. As the American Action Forum, a conservative policy organization led by former CBO director Douglas Holtz-Eakin, notes in an amicus brief, “The States are in no realistic position to fill the enormous gap that the loss of federal Medicaid funding would leave.” According to the brief, Medicaid spending is equal to more than one-third of all state taxes collected nationwide, and without federal funds state budget expenditures would rise by 22.5 percent, an impossible burden.
Tear It All Down
The administration’s justification for its fallback position in the event that the individual mandate is overturned also relies on a weak policy argument. Because the law lacks a severability clause—a provision saying that the remainder of the law should be upheld if one part is ruled unconstitutional—the Court must determine how much of the law, if any, to leave in place should the mandate fall. If the Court chooses to strike down the mandate, Verrilli argued in March, it should also strike down two of the law’s key insurance regulations but otherwise leave the law intact.
Those two regulations, known as guaranteed issue and community rating, regulate how insurers treat people with pre-existing conditions, requiring them to take all comers and forbidding them to set prices based on health history. States that have experimented with those two regulations have seen their individual insurance markets deteriorate: With no requirement to buy insurance and regulations guaranteeing that insurers cannot set prices based on pre-existing conditions, individuals understandably wait to purchase insurance until they need expensive medical care. This tendency raises premiums, which causes more relatively healthy people to go without insurance, and so on. A mandate avoids this “death spiral” by forcing everyone to maintain coverage, thus preventing them from waiting until they get sick to enroll.
Hence the Obama administration argues that guaranteed issue and community rating must go if the mandate is overturned, while the rest of the law should be upheld. But the insurance regulations are crucial to the law’s state-run health insurance exchanges, which are supposed to let people choose among various government-approved plans. (The primary point of the exchanges is to offer a selection of regulated, affordable insurance to all comers regardless of preexisting conditions, which would be hard to do without the two key insurance regulations.) The exchanges, in turn, complement the Medicaid expansion, sending people who meet the income test to the government-run program. The law was passed not as a collection of programs and provisions but as an interlocking whole, with the mandate at the center.
This is not after-the-fact conjecture. It is the administration’s stated position. Arguing the case before a federal judge in a lower court, the administration repeatedly insisted that the mandate was “essential” to the overall regulatory scheme. Defending the law before the Supreme Court, Verrilli said “Congress, after long study and careful deliberation, and viewing the experiences of the States and the way they tried to handle this problem, adopted a package of reforms.” It was a package based on dubious policy arguments and incomplete information, a package that may well exacerbate the very problems it claims to solve, but a package nonetheless. And if it was passed as a package, shouldn’t it also be struck down as one? To do otherwise would be require the justices to unilaterally rewrite a highly complex piece of legislation—and thus to play at being the policy wonks that, thank goodness, they aren’t.
Peter Suderman is a senior editor at reason.