Impact on the Deficit of Much-Higher Outlays for Health Insurance Exchange Subsidies

Guest post Ken Perez, vice president of healthcare policy, Omnicell.

Ken Perez
Ken Perez

Soon after passage of the Affordable Care Act (ACA), the Congressional Budget Office, the Obama Administration and private research firms, such as Health Policy Alternatives, concluded that the health reform law would generate budget surpluses over the 10-year period of 2010-2019 of $124 billion to as much as $150 billion.

However, according to the CBO’s report, “The Budget and Economic Outlook: 2016 to 2026,” released in January of this year, the divergence between past rhetoric and current reality has widened, at least in terms of the coverage expansion initiative of health insurance exchange subsidies.

According to an April 22, 2010, memorandum from Richard S. Foster, chief actuary for the Centers for Medicare and Medicaid Services (CMS), the ACA’s health insurance exchange subsidies were projected to total $153 billion from 2014-2019. However, arguably because of the higher-risk pool of individuals participating in the exchanges, the recent CBO report projects $347 billion in federal outlays for health insurance exchange subsidies for 2014-2019, leading to a deficit just for the subsidies of $194 billion for that period, outweighing the previously projected budget surplus.

Even worse, the higher health insurance exchange subsidies aid a significantly smaller exchange enrollment population, down about 40 percent from 21 million to 13 million individuals for 2016, per the CBO. Moreover, the CBO projects exchange enrollment to peak at 16 million in the next decade, a third less than the 24 million it predicted in March 2015.

Furthermore, the budgetary impact of higher-than-expected exchange subsidies from 2014 through 2026—when one compares a linear extrapolation of the aforementioned CMS chief actuary’s projection with the CBO report—will be a cumulative budget deficit of $500 to $600 billion.

A little-known fact is that the ACA is partially paid for by fees or taxes on pharmaceutical companies and commercial health insurers. Per the health reform law, the latter paid annual fees of $8 billion in 2014 and $11.3 billion in 2015 as well as in 2016. On Feb. 29, CMS disclosed, per the year-end omnibus budget bill passed by Congress in December 2015, that the federal government will suspend the ACA’s tax on commercial health insurers for 2017, which was slated to be $13.9 billion. That tax suspension obviously will also add to the deficit.

In return for the tax break, commercial health insurers are expected to keep a lid on premium increases for the ACA’s exchange plans, employer-based coverage and Medicare Advantage plans, but the moratorium may have also been instituted to help make up for sizable losses incurred by health insurers on their ACA plans in 2014 and 2015, and as forecast for 2016.

One has to wonder whether Congress will need to forego future taxes on health insurers indefinitely to prevent premium hikes, which would of course worsen the deficit.

All these financial realities lead one to conclude that the ACA exchanges are smaller-than-expected, higher-risk pools for sick individuals who cannot get coverage elsewhere, so they are unable to function as a normal, broad-based market for health insurance, which calls into question their sustainability.

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