Higher Costs or Less Coverage? ObamaCare's $500 Billion Dilemma

Should the official price tag for last year's health care law have been almost $500 billion higher? A working paper released by the National Bureau of Economic Research this week suggests that either the cost may either be much higher than expected—or the law's vaunted coverage expansion will be much smaller.

ObamaCare sets up new health insurance exchanges, but under the law, not everyone has access to the exchanges and their middle-class insurance subsidies: Those who can get insurance from their employers are prohibited from buying subsidized insurance on the exchanges—unless, that is, their employer's insurance is deemed "unaffordable," which is currently defined as equal to more than 9.5 percent of the employee's income. Otherwise, however, employees with access to insurance through their jobs are barred from the exchanges—and the generous health insurance subsidies they facilitate.

So the fewer people who have access to the exchange and its subsidies, the less the law costs. But as the NBER paper by Cornell's Richard Burkhauser and Sean Lyons and Indiana University's Kosali Simon points out, differing understandings of the affordability requirement's fine print could dramatically affect the number of people who have access to the exchange subsidies, and thus have major fiscal consequences down the road.

When the Congressional Budget Office delivered the official price tag for the law, they took the Joint Committee on Taxation's narrow early guidance on how to understand the affordability requirement: As Avik Roy points out at Forbes, when the House took its final vote on the health care law, the CBO relied on JCT guidance that assumed that a relatively small number of people would have their employer's insurance deemed unaffordable:

JCT defined "unaffordable" coverage as a self-only policy for an individual worker, in which the premiums exceeded 9.5 percent of household income. Because the average cost of an individual-only plan is about one-third that of a family plan, this tweak makes it three times as hard for an employer-sponsored plan to be deemed as "unaffordable."

Problem is, the JCT's guidance at the time of the vote seems to have been in error. The month following the vote, analysts at JCT put out a correction updating the affordability standard to one that would likely result in far more employer plans being officially categorized as unaffordable. 

What's that correction worth to taxpayers? According to the NBER paper's estimates, the strictest possible affordability standard—the one that deemed the most insurer plans unaffordable and thus allowed the highest number of people onto the exchanges—would add about $48 billion a year to the cost of the law, or nearly $500 billion over the course of the usual decade-long scoring window. Even under the most generous assumptions about the law's cost estimates (which aren't very realistic to begin with), that would devour all of the roughly $140 billion in supposed deficit reduction the law was officially scored to achieve.

Now, it's not a given that we'll end up with those higher costs. As others have noted, the authors of the report aren't quite offering predictions about what will happen. Instead, they're estimating the potential range of costs, from most expensive to least, depending on how the law is implemented. So it's possible that we'll end up toward the lower end of the range, depending on how Health and Human Services Secretary Kathleen Sebelius chooses to proceed.

But landing at the cheaper end of the cost spectrum could undermine other promises made by the law's defenders—namely the coverage expansion figures. As Roy writes:

If the JCT interpretation is correct, then millions of people who thought they were gaining coverage under the law—spouses and dependents of employed Americans—won't. If the JCT is wrong, the CBO's estimates of PPACA's exchange costs are way too low. Increasing the law's costs will upset conservatives, but decreasing the law's coverage expansions will upset progressives…Says Burkhauser, "This is the dilemma. If the HHS Secretary decides that they really did mean single coverage, then you're going to have several million [people who aren't going to get coverage under the law].  The family's [breadwinner] is given affordable coverage, but the families can't get onto the exchange rolls."

I can't wait to see what Sebelius does with this one.