Paying for Obamacare

We passed it. We're finding out what's in it. And now we have to pay for it.



From the earliest days of Barack Obama's presidency, much of the debate about the Patient Protection and Affordable Care Act—the health care law known as Obamacare—has revolved around questions of cost.

Would the law reduce the cost of typical family health insurance premiums? Would it reduce the federal budget deficit? Would it slow the unsustainable growth of national health spending? The law's backers initially insisted that it would do all three, and over time took to arguing that its positive effects were already visible. But as the law settles into place, the pretense that the Affordable Care Act actually makes health care more affordable is increasingly difficult to sustain.

For most people, affordability is about one thing: health insurance premiums. President Obama's campaign-trail promise that the law would reduce average family premiums by about $2,500 has obviously not come true, but Obamacare's backers say it is a success on this front anyway. That's because average premiums have come in lower than the Congressional Budget Office projected.

That may be comforting to liberal wonks, but it's doubtful that most people's first—or last—instinct when looking at new health insurance rates is to compare them to the CBO's old scores. A November 2013 analysis of individual market rates under the law by Avik Roy of Forbes and the Manhattan Institute suggests that the majority of states have seen premium hikes under the law. Insurance industry sources have already warned that in many states, rates next year will be far higher still. A Morgan Stanley survey this month of health insurance brokers finds double-digit increases in both the small group and individual markets, with some states seeing outsized spikes. The report says that the "increases are largely due to changes under [Obamacare]."

Lower than expected rates may be partially a temporary benefit of the start-up process, with insurers posting artificially low premiums in order to gain customers up front, especially in heavily populated states. If so, then premium spikes will eventually have to follow; pocketbook-friendly below-cost rates won't be sustainable in the long run.

The law's system of health insurance subsidies will offset some of the increase. But given how common cost concerns already seem to be amongst those choosing to remain uninsured, it seems unlikely that they will fully insulate lower-income individuals from higher premium costs. 

The $2 trillion worth of public spending the law calls for will inevitably have an impact on federal finances as well. The law's supporters have long argued that its deficit impact would be positive, pointing to a CBO score that calculates a net deficit reduction once all the law's new taxes and spending cuts are factored in. But several of those revenue mechanisms have already proven troublesome: the CLASS (Community Living Assistance Services and Supports) Act, a long-term care program that was to be the source of a significant portion of the law's officially scored deficit reduction, was shut down when it was revealed that it would not be self-sustaining, as required by law. Medicare Advantage cuts intended to offset the law's spending have not gone into effect.

Even ignoring the loss of these offsets, the law's deficit effects were never as positive as the law's backers claimed. As Charles Blahous, a Mercatus Center scholar and one of Medicare's public trustees, has repeatedly argued, the CBO's score was an artifact of the budget office's scoring conventions. Obamacare, he says, "unambiguously adds to federal deficits in that it authorizes more additional spending than it generates in additional tax revenues."

Finally, there is the issue of total national health spending. This is less a matter of what Obamacare is doing as what it is not doing: The law was pitched as a cost-control system designed to hold the growth of health care spending in check through a series of innovative health care delivery reforms. And for the last few years, liberals have argued that this is exactly what it has done. Health spending growth has flattened since 2009, and Obamacare's backers, as well as Obama himself, have been keen to credit the health law for at least some of the effect.

But now there are signs that health spending may be growing again. At the end of last year, just as Obamacare's coverage expansion was coming online, health care cost growth began to grow once more—growth that has continued into this year, and now represents the fastest pace in seven years. Health spending data from the federal Bureau of Economic Analysis shows recent spending levels to be growing the fastest since 2004.

This merely points in the direction of what more sober analysts already suspected: that the slowdown in spending was a temporary lull caused largely by the recession in combination with preexisting changes in how employers are financing care. Spending growth had been slowing for almost a decade before Obamacare passed. Much evidence suggested that Obamacare's various delivery system reforms would not be effective on a large scale.

Now that Obamacare's coverage expansion has begun providing the means for more people to access health services, and the worst effects of the recession are winding down, people will begin to spend more on health care once again. 

Because so much of the federal budget is tied up in health care spending, a return to growth would have disastrous effects on the country's future fiscal health. This would have been true without Obamacare, of course; future federal health spending commitments were unsustainable before the law and remain so now. But with the health law in place, layered on top of the already byzantine old system, meaningful reforms will be even more difficult to achieve. Obamacare has not only added to the nation's already unaffordable health care tab, it has further narrowed the ways in which we might pay for it. Now that we've passed it, we not only have to figure out what's in it, we have to figure out how to pay for it, too.