Committee for a Responsible Federal Budget

What the Supreme Court Decision Means for the Budget

Jun 28, 2012 | Health Care

Today, the Supreme Court announced its ruling on the constitutionality of the 2010 healthcare law, the Patient Protection and Affordable Care Act (PPACA). In a 5-4 decision, the Court upheld the individual mandate in the law as within Congress’s power of taxation. Under the law, individuals who do not purchase health insurance will be required to pay a tax - a penalty of the greater of $95 or one percent of income in 2014, $325 or two percent of income in 2015, and $695 or 2.5 percent of income in 2016 and beyond. Individuals will lawfully have the ability to choose to forgo health insurance and end up paying higher taxes, or buy health insurance and pay lower taxes. One interesting thing to note, the law states no criminal action or liens can be imposed on individuals who do not pay the tax. 

The Court also ruled that Congress did in fact act constitutionally in offering states funds to expand Medicaid up to 133 percent of the federal poverty level, but it ruled that the government does not have ability to take away all Medicaid funding for states that refuse to participate in the expansion. This means states can choose to continue their Medicaid programs as they currently stand, without losing their entire ability to draw down federal Medicaid dollars for previously eligible beneficiaries. They would only lose funds for the newly covered population.

The budget impact of this decision will depend on what states choose to do. This could lower the costs to the federal government if fewer states participate. The outcome is uncertain right now. According to a CBO post this morning, they are "in the process of reviewing the Supreme Court’s decision related to the Affordable Care Act to assess the effect on CBO’s projections of federal spending and revenue under current law. We expect that this assessment will probably take some time."

However, the law included a few noteworthy incentives for states to participate in the Medicaid expansion. Under the law, the federal government will pay 100 percent for newly eligible individuals in Medicaid under the expansion for the first three years (2014-2016). Federal support will phase down slightly over the following several years, so that it will pay between 90 percent and 95 percent of costs. After 2020, the federal government will pay 90 percent of the costs of covering these individuals. According to CBO, the federal government will pick up $931 billion of the cost of the Medicaid expansion, while states will pay roughly $73 billion, or 7 percent, from the time the expansion begins in 2014 through 2022. CBO also predicts 16 million to 17 million additional individuals will be enrolled in Medicaid and CHIP due to this provision.

With today’s ruling, it is now time to focus on the next health care battle: how to tame federal health care spending. PPACA’s deficit reducing provisions, which were unaffected by the decision, were good first steps toward beginning to address rising costs, but they do not come close to controlling the dual challenges of rising health care cost growth and an aging population.    

Yesterday, we laid out a number of ideas that could help tackle the rising cost of providing health care in the United States. Many of these proposals have been around for years; however, it is imperative that Congress act now to pass further health care cost controls and reforms to other areas of the budget as we approach year's end. At the end of this year, the fiscal cliff – which includes a $123 billion Medicare sequester and a scheduled 27 percent payment reduction for providers, in addition to significant and abrupt spending cuts in other areas and tax rate increases – is forcing the hand of policymakers to finally act in order to stave off future fiscal turmoil. Reforming health care spending must be an integral part to a long term budget deal, but across the board cuts and reductions that lay ahead do not holistically address bending the cost curve and creating a more efficient delivery system. Our paper highlighted ways to go further than just ways to reduce spending on providing health care (which we dubbed “savers") and looked at "curve benders" that slow the growth of health care costs and "fundamental reforms" to the way health care is administered and financed. These deficit reducing options are places where lawmakers can go beyond what PPACA and earlier reforms have done.

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Source: CBO, CRFB 

We've argued before that there needs to be a permanent deficit reduction deal this year and not another temporary patch causing further delay and greater uncertainty in the market. As Aetna CEO Mark Bertolini aptly pointed out, regardless of the Court's ruling, we need to move forward with policies that bend the health care cost curve if we are truly committed to putting our debt on a downward path. The Court battle may be over, but the work of providing better and more affordable health care is far from finished.