The Future of Health Care Reform - II - PPACA Budget

The PPACA was expected to increase federal spending by $2T. However, it was also expected to reduce the budget deficit through revenues to the government. Now, that appears not to be true. 

First, looking at the provisions of PPACA, we can identify the ones that expand government. These are the ones that must be paid for. These are: 

Government Spending

• Expanded Medicaid eligibility to 133% of Federal Poverty Line
• Simplified enrollment in CHIP (Children's Health Insurance Program)
• Setting up government run health care exchanges to allow people not covered through other means to purchase health care. 
• Tax credits for individuals and families who make less than 400% of the Federal Poverty Level who buy their health care through a state exchange.
• Cost sharing subsidies for individuals and families who make less than 400% of the Federal Poverty Level who buy their health care on an exchange. 
• High risk insurance pool of $5B as a stop gap measure to insure individuals with pre-existing conditions until PPACA takes full effect.

The PPACA has one way in which it reduces government spending:

Government Spending Cuts

• Medicare payments to providers would be bundled and would be reduced

Finally, the PPACA creates multiple sources of revenue to support the increase in government spending:

Revenue to the Government

• .9% increase in Medicare tax rate and 3.8% new tax on unearned income for people making more than $200,000 / year (as individuals) or $250,000 / year (as joint filers) --> $210B
• Annual fee on health insurance providers --> $60B
• 40% tax on "cadillac" insurance policies that cost more than $10,200 for an individual and $27,500 for a family --> $32B
• Fee on manufacturers and importers of branded drugs --> $27B
• Medical device tax of 2.3% --> $20B
• When filing taxes, medical expenses can only be deducted if they exceed 10% of an individual's adjusted gross income (up 2.5% from 7.5% prior to PPACA) --> $15B
• Limit of $2,500 to Flexible Spending Accounts, which are deducted from income subject to payroll tax --> $13B
• Other sources (i.e 10% tax on individuals who utilize tanning salons) --> $14B

Impact to Federal Budget

The PPACA was not intended to raise the federal deficit. However, estimates have changed over the years on its impact to the deficit. Initially, based on a 2012 estimate from the Congressional Budget Office, PPACA was expected to reduce the deficit by $109B from 2013-2022, and $180B from 2015-2024. 

However, Senate Budget Committee (SBC) estimates from 2014 show that PPACA will increase the federal deficit by $131B, largely due to reduced revenue to the government from reduced labor. In other words, the SBC believes that by 2024 the PPACA will result in 2.5M workers leaving the work force, a reduction in hours by 1.5 - 2%, and a reduction in wages of 1%. This reduction in labor will reduce the amount of taxes (including Medicare taxes) paid to the government. 

Of course, the budget impact is highly sensitive to the impact on the job market, as that creates the tax base for the government. If labor force participation increases, so too will the taxes paid to the government, and PPACA will again show a surplus. 

The next article will examine the impact of the PPACA to the jobs market. 

Sources:

• http://www.budget.senate.gov/newsroom/budget-background/analysis-of-cbo-data-shows-that-obamacare-will-increase-deficit-over-next-decade
• http://kff.org/medicare/fact-sheet/medicare-spending-and-financing-fact-sheet/
• http://www.weeklystandard.com/cbo-projections-indicate-obamacare-will-raise-deficits-by-131-billion/article/816288
• http://www.alignamerica.com/node/62