President Barack Obama has signed into law the largest expansion in federal entitlement spending in half a century. At more than 2,500 pages and 500,000 words long, this year's health care legislation will fundamentally change the nation's health care industry.¹ It also will result in large increases in federal spending and taxation.

The health legislation was passed as the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act, which together are referred to here as the 2010 Health Act. Using complex parliamentary maneuvers, Democrats narrowly passed the two bills, even though polls showed that the legislation was very unpopular with the public.

The 2010 Health Act mandates that every American purchase a government-designed insurance package, and it vastly increases federal micromanagement of health care markets. Insurance coverage will be extended to millions more Americans as government subsidies are expanded. The costs of the health system will be shifted between groups, but not reduced. Rising government spending and taxes will move this country closer to a European-style welfare state.

This report provides a detailed review of the 2010 Health Act. It discusses how the Act:

• Represents an assault on individual liberty by mandating that individuals obtain health insurance;
• Imposes costly insurance regulations that will likely have negative unintended consequences;
• Creates a range of new and expanded subsidies;
• Creates state health "exchanges" despite serious problems with Massachusetts' exchange;
• Reverses some of the recent progress toward consumer-directed health care;
• Interferes with how doctors practice medicine;
• Sets the stage for government rationing of health care;
• Increases a range of taxes on millions of individuals and businesses;
• Increases federal spending more than $2.7 trillion over the first full 10 years;
• Expands federal government debt over the long term;
• Increases health insurance premiums for some groups of people; and
• Creates many distortions in health care markets and the economy.

The 2010 health care legislation should be repealed as an unaffordable expansion in an already bankrupt federal system of health care subsidies. Medicare and Medicaid already have vast unfunded obligations. The 2010 Health Act takes a large leap toward socialized medicine that will be permanently damaging to citizens and the economy unless repealed.

Mandates

The 2010 Health Act includes a legal requirement that every American obtain health insurance coverage that meets the government's definition of "minimum essential coverage." Those who don't receive such coverage through government programs, their employer, or some other group are required to purchase individual coverage on their own.

This individual mandate is an unprecedented assault on individual liberty. In 1993, when the Clinton administration health plan was under consideration, the Congressional Budget Office noted, "a mandate requiring all individuals to purchase health insurance would be an unprecedented federal action. The government has never required people to buy any good or service as a condition of lawful residence in the United States."² The individual mandate is being challenged as unconstitutional.  Even before the Act passed, the Congressional Research Service could not reach a conclusion as to a mandate's constitutionality.³

Under the bill, those who fail to obtain insurance would be subject to a tax penalty. That penalty would be quite mild at first, but ramps up quickly after that. The minimum penalty on an uninsured family of four will be $2,085. Individuals will be exempt from the penalties under certain circumstances. According to CBO, roughly 4 million Americans will be hit by penalties in 2016, with the penalties averaging slightly more than $1,000.⁴

Simply having insurance is not necessarily enough to satisfy the mandate. To qualify, insurance has to meet government-defined standards. For example, in order to qualify, plans would be required to cover: ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance abuse treatment, prescription drugs, rehabilitative services, laboratory services, preventative services, wellness services, chronic disease management, pediatric services, and dental and vision care for children.

Individuals who currently have insurance are grandfathered, meaning they will not have to change their current insurance to meet the new standards. But making changes to one's current plan would require that individuals bring their plan into compliance with the full range of federal mandates. The changes needed to meet the threshold to end grandfathered status will be determined by the secretary of the Department of Health and Human Services. The grandfathering of current plans may be short-lived. Insurers will not be able to continue enrolling new customers in the noncomplying plans. Over time, noncomplying plans will simply fade away.

The mandate is costly and violates individual liberty, but it may be weak enough that it is cheaper for many individuals to pay the penalty than to purchase insurance. As a result, it may fall far short of its proponents' goal of bringing young and healthy individuals, who frequently forego insurance, into the insurance pool. The CBO estimates that the penalties from individuals failing to comply with the mandate will generate $17 billion between 2014 and 2019.⁵ And those remaining uninsured after implementation are likely to be younger and healthier as a group than today's uninsured.⁶

The experience of the Massachusetts individual mandate illustrated this result.⁷ Evidence suggests that Massachusetts residents are "gaming" the system—purchasing insurance when they know they need health care, then dropping it when they no longer need it.⁸ The penalties under the Massachusetts mandate are stronger than those under the 2010 Health Act, suggesting that similar behavior will occur under the federal law.⁹

The 2010 Health Act also contains an employer mandate. Beginning in 2014, if a company with 50 or more full-time employees does not provide health insurance, the company must pay a tax penalty of $2,000 for every person they employ full time (minus 30 workers). Thus, a company employing 100 full-time workers would be assessed a penalty of $2,000 x 70 workers. CBO estimates that those penalties will cost businesses $52 billion between 2014 and 2019.¹⁰

Even offering benefits will not necessarily exempt companies from penalties. Companies that offer coverage, but have employees that still qualify for a subsidy because the employee's contribution is deemed unaffordable (that is, it exceeds eight percent of an employee's income), will still have to pay a penalty of the lesser of $3,000 for every employee receiving a subsidy or $2,000 for every full-time worker. As many as one-third of employers could face penalties for failing to meet the affordable insurance requirement.¹¹

Such a mandate is simply a disguised tax on employment. The amount of compensation that a worker receives is a function of his or her productivity. Mandating an increase in the cost of a worker by adding a payroll tax does not increase that worker's productivity. Employers will therefore offset the added cost by raising prices, reducing wages, reducing benefits, cutting hiring, shifting workers from full-time to part-time, or outsourcing.

Insurance Regulations

Since the McCarran-Fergusson Act of 1945, health insurance has been primarily regulated at the state level. But the 2010 Health Act imposes a host of regulations that will change the way health insurance operates. Some of these changes may be initially popular, but many will have unintended consequences.

The 2010 Health Act bans insurers from denying coverage because of preexisting conditions. Insurers will be prohibited from making any underwriting decisions based on health status, mental or physical medical conditions, claims experience, medical history, genetic information, disability, other evidence of insurability, or other factors to be determined later by the secretary of HHS. The bill requires insurers to "accept every employer and individual … that applies for such coverage."¹² Insurers are also forbidden from canceling insurance if a policyholder becomes sick.

There will be limits on the ability of insurers to vary premiums on the basis of an individual's health.  That is, insurers must charge the same premium for someone who is sick as for someone who is in perfect health. Insurers may consider age in setting premiums, but premiums cannot be more than three times higher for their oldest customers than their youngest. Smokers may also be charged up to 50 percent more than nonsmokers. The only other factors that insurers may consider in setting premiums are geographic location and whether the policy is for an individual or family.

While these changes may make health insurance more available for some people, they will increase premiums for younger and healthier individuals. A RAND Corporation study found that premiums for the young would rise about 17 percent as a result of the bill. Other studies suggest that the increase could be much higher.¹³ For example, a study by the actuarial firm Millman, Inc., concluded that premiums for young men could increase by 10 to 30 percent.¹⁴ The Council for Affordable Health Insurance suggests that premiums for some individuals could increase by 75 to 95 percent in certain states.¹⁵  

Note that the ban on discriminating against people with preexisting conditions may not be as effective as proponents believe. Insurance companies have a variety of mechanisms for evading such restrictions. They could focus their advertising on young, healthy people; they could locate their offices on the top floors of buildings with no elevators; they could provide free health club memberships; or they could fail to include any oncologists in their networks.

The health bill also bans "rescissions," which occur when insurers drop coverage for individuals who become sick. Under existing practices, insurers sometimes retroactively review an individual's initial insurance application and cancel the policy if the application was found to be inaccurate. Because insurers would undertake such a review only when individuals submitted large claims, and the grounds for rescission often appeared to be for very minor discrepancies, the practice has been widely condemned. Under the legislation, insurers can only cancel coverage in cases of fraud or intentional misrepresentation of material fact. This provision may have little practical impact because there are fewer than 5,000 rescissions per year.¹⁶

Another new regulation would prohibit insurers from imposing lifetime limits on benefit payouts.  This provision may also have less impact than most people believe. Roughly 40 percent of insured Americans already have policies with no lifetime caps. For those policies that do have lifetime caps, the cap is usually between $2.5 million and $5 million, with some running as high as $8 million, which are amounts that few people ever reach.¹⁷ Removing lifetime caps will most likely increase the cost of reinsuring policies, leading ultimately to higher premiums, although the increase may be modest.¹⁸

There are also limits placed on deductibles. Employer plans may not have an annual deductible higher than $2,000. Family policies are limited to deductibles of $4,000 or less. There is an exception, however, for individuals under the age of 30, who will be allowed to purchase a catastrophic policy with a deductible of $4,000 for an individual and $8,000 for a family. 

Finally, the bill allows parents to keep their dependent children on their policies until the age of 27. While this is a popular provision, it comes with a price tag. HHS estimates that every dependent child added to a policy will increase annual premiums by $3,380.¹⁹

New Subsidies

The 2010 Health Act creates a range of new and expanded subsidies to help people buy private insurance and to cover more people under existing programs.

1. Medicaid

Starting in 2011, states are required to expand their Medicaid programs to cover all U.S. citizens with incomes below 133 percent of the poverty level. Previously, only pregnant women and children under age 6 were covered to 133 percent of the poverty level. Children aged 6–18 were required to be covered up to 100 percent of the poverty level, although 18 states covered children from families with higher incomes. Most other moderate-income children are covered through the Children's Health Insurance Program (CHIP). 

The bill will thus extend Medicaid coverage to parents in low-income families and to childless adults. One concern with this is that low-income, childless, adult men are a high-risk, high-cost health care population. That means that costs for the expansion may run higher than expected, a problem that may be exacerbated by adverse selection within that population. 

Tennessee's experience shows how expensive such an expansion can be. In 1994, the state expanded Medicaid to uninsured citizens who weren't able to get health insurance through their employers or existing government programs and to citizens who were uninsurable because of pre-existing conditions. Over the next 10 years, Medicaid costs in the other 49 states rose by 71 percent, but in Tennessee they increased by 149 percent. Despite this massive increase in spending, health outcomes did not improve. The state's Democratic governor Phil Bredesen called the program "a disaster."²⁰ The 2010 Health Act will likely lead to similar problems of exploding costs.

2. Subsidies for Private Insurance

Individuals with incomes too high to qualify for Medicaid, but with incomes below 400 percent of the poverty level, will be eligible for subsidies to purchase private health insurance. These subsidies, which will be provided in the form of two refundable tax credits, are expected to total more than $449 billion between 2014—when individuals are first eligible for the payments—and 2020.²¹  

The first credit is a "premium tax credit," which is calculated on a sliding scale according to income.²² Individuals with incomes between 133 and 200 percent of the poverty level will receive a credit covering the cost of premiums up to four percent of their income, while those earning 300 to 400 percent of the poverty level will receive a credit for costs in excess of 9.5 percent of their income. 

The second credit is a "cost-sharing credit," which provides a subsidy for a portion of out-of-pocket costs, such as deductibles and co-payments. Those subsidies are also provided on a sliding income-based scale. Those with incomes below 150 percent of the poverty level will receive a credit that effectively reduces their maximum out-of-pocket costs to six percent of a plan's actuarial value. Those with incomes between 250 and 400 percent of the poverty level would, after receiving the credit, have maximum out-of-pocket costs of no more than 30 percent of a plan's actuarial value. 

As with other low-income tax credits, the phase-out of these credits creates a penalty equivalent to a high marginal tax rate as wages increase. Some workers who increase their wages could actually see their after-tax income decline as the subsidies are reduced. This effect can create a "poverty trap" for some low-wage workers.²³

3. Small-Business Subsidies

Beginning next year, businesses with fewer than 25 employees and average wages below $50,000 will be eligible for a tax credit to help offset the cost of providing insurance. To be eligible, employers must provide health insurance to all full-time workers and pay at least 50 percent of the cost of that coverage. The actual amount of the credit depends on the size of the employer and the average worker salary. Between 2011 and 2014, when the exchanges begin operation, employers with 10 or fewer workers and an average wage below $25,000 per year would be eligible for a credit equal to 35 percent of the employer's contribution. For a typical family policy, the credit would be around $2,000. The credit gradually phases out as the size of the company and average wages increase. 

After 2014, businesses with 10 or fewer employees and average wages below $25,000 that purchase their insurance through an exchange will be eligible for a credit of up to 50 percent of the employer's contribution toward a worker's insurance. Again, the credit is phased out as the size of the company and average wages increase. The credit can only be claimed for two years.

4. Prescription Drug Subsidies

The 2010 Health Act increases Medicare prescription drug subsidies. A Medicare recipient enrolled in the standard drug plan currently pays a deductible of $250. Above the deductible, Medicare pays 75 percent of costs between $250 and $2,250 in drug spending, with the patient paying the other 25 percent. The patient then encounters a "doughnut hole." For drug costs above $2,250 but below $3,600 in out-of-pocket spending, the patient must pay 100 percent of the costs. After that, the prescription drug plan kicks in again and pays 95 percent of costs above $3,600.

The Act closes the donut hole. Later this year, seniors enrolled in the program who have drug costs in excess of $2,250 will receive a $250 check as a rebate of their drug costs. Starting in 2011, a gradual reduction in the amount that seniors pay out-of-pocket within the donut hole begins, reducing the amount from 100 percent to 25 percent by 2020. Part of the cost of filling the donut hole will be paid by pharmaceutical companies, which will be required to provide a 50 percent discount on brand name drugs. The cost to drug companies of this provision has been estimated at about $43 billion.²⁴ The remaining 25 percent reduction in out-of-pocket costs will come from federal subsidies. For generic drugs, the entire out-of-pocket cost reduction will be through subsidies.

5. Long-Term Care Subsidies

The 2010 Health Act creates a new long-term care program, the Community Living Assistance and Support Act (CLASS Act). The program is supposed to help seniors and the disabled pay for long-term care services such as in-home caretakers and adult day services. 

The CLASS Act is supposed to be self-financed. Workers are automatically enrolled in the program, but have the right to opt-out. Participants will pay a monthly premium that has not yet been determined, but the CBO estimates that it will be roughly $123 per month for the average worker.²⁵ Other estimates suggest that the premiums could be $180 to $240 per month.²⁶ Workers must contribute to the program for at least five years before they become eligible for benefits. 

The benefits to be provided under the program remain to be determined, but will not be "less than an average of $50 daily adjusted for inflation."²⁷ Some estimates suggest that benefits will average $75 per day, or slightly more than $27,000 per year.²⁸ Benefits will be paid directly to individuals, not to service providers, based on the degree of an individual's impairment. 

During the bill's first five years it will collect premiums, but not pay benefits. As a result, over the first 10 years, the CLASS Act will collect more in premiums than it pays out in benefits, which was convenient for proponents because congressional budget estimates only cover the first 10 years. The premiums will accrue in a Trust Fund, similar to the on-paper Social Security and Medicare Trust Funds. The premium payments going into the Trust Fund will reduce the federal deficit over the first 10 years by roughly $70 billion, but after that, the CLASS Act will begin to pay out more benefits than it raises in revenue.²⁹

The CBO warned, "We have grave concerns that the real effect [of the CLASS Act] would be to create a new federal entitlement program with large, long-term spending increases that far exceed revenues."³⁰ Senate Budget committee chairman Kent Conrad (D-ND), who eventually voted for the bill, called it "a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of."³¹ He's right. This new entitlement program should be repealed along with the rest of the 2010 Health Act.

Health Exchanges

The 2010 Health Act will fundamentally reorder insurance markets with the creation of "exchanges" in each state. Exchanges will be portals through which consumers shop for insurance. Insurance will still be provided by private insurance companies. The exchanges would function as a clearinghouse, a sort of wholesaler or middleman, matching customers with providers and products. Exchanges will also allow individuals and workers in small companies to take advantage of economies of scale in administration and risk pooling, which are currently enjoyed by large employers. Larger risk pools should theoretically reduce premiums, as should the ability of exchanges to "use market share to bargain down the prices of services."³²

However, one should be skeptical of claims that exchanges reduce premiums. In Massachusetts, supporters of the "connector" claimed that it would reduce premiums for individual insurance policies by 25 to 40 percent.³³ Instead, premiums for these policies have been rising.³⁴

Beginning in 2014, one or more exchanges in each state are to be set up and largely operated according to rules developed by each state. States have the option of joining other states in regional exchanges. If a state refuses to create an exchange, the federal government is empowered to set up an exchange within that state. States are given discretion over how the exchanges would operate, but some of the federal requirements are significant. 

Exchanges may be either a governmental agency or a private nonprofit entity. States have the option of either maintaining separate insurance pools for individual and small group markets or combining them into a single pool. The pools would also include individual or small group policies sold outside the exchange. Existing plans could not be included in those pools, however. 

Initially, only businesses with fewer than 50 employees, uninsured individuals, and the self-employed may purchase insurance through the exchanges. Members of Congress and senior congressional staff are required to purchase their insurance through the exchanges. Beginning in 2017, states have the option of opening the exchanges to large employers. 

Insurance plans offered for sale in the exchanges will be grouped into four categories based on actuarial value: Bronze, the lowest-cost plans, will provide 60 percent of the actuarial value of a standard plan, as defined by the secretary of HHS; Silver will provide 70 percent of the actuarial value; Gold will provide 80 percent of the actuarial value; and Platinum will provide 90 percent of the actuarial value. In addition, exchanges may offer a special catastrophic plan to individuals who are under age 30 or who have incomes low enough to exempt them from the individual mandate. Plans offered through the exchanges must meet the federal requirements for minimum benefits. The states may continue to impose additional mandates. 

The CBO estimates that premiums for Bronze plans would probably average between $4,500 and $5,000 for an individual and between $12,000 and $12,500 for a family.³⁵ The more inclusive policies would have correspondingly higher premiums. For all categories of plans, out-of-pocket expenses will be limited according to the incomes of the purchasers. Those with lower incomes will have lower limits for out-of-pocket expenses in the plans.

In addition to these state insurance plans, the legislation authorizes the federal Office of Personnel Management to contract with private insurers to ensure that each state exchange offers at least two multistate insurance plans. These plans are supposed to resemble the Federal Employee Health Benefit Plan, but will operate separately from the FEHBP and will have a separate risk pool. The multistate plans must meet the licensing and regulatory requirements of each state in which they are offered. At least one plan must not include abortion coverage, and one must be offered by a nonprofit insurer. The legislation also provides start-up funds for states to establish health insurance cooperatives that may participate in the state's exchange.

Health Savings Accounts

The 2010 Health Act reverses some of the recent progress toward consumer-directed health care through high-deductible insurance and Health Savings Accounts (HSAs). These innovations help consumers control health costs while improving quality by creating incentives for people to make informed purchasing decisions.  

Unfortunately, President Obama and most Democrats are hostile to consumer-directed health care, and they put restrictions on it in the 2010 Health Act. Currently, about 10 million Americans have an HSA.³⁶ Nothing in the bill directly prohibits them, but the bill adds several new restrictions. The tax penalty for HSA withdrawals that are not used for qualified medical expenses will be doubled from 10 percent to 20 percent. Also, the definition of "qualified medical expense" has been made more restrictive. Among other things, over-the-counter medications will no longer be considered a "qualified medical expense."³⁷

Of greater concern is the potential impact of the law on high-deductible insurance plans. Current law requires than an HSA be accompanied by such a policy. However, many of the insurance regulations discussed above may make high-deductible plans nonviable. For example, the lowest permissible actuarial value for an insurance plan (the Bronze plan) would be 60 percent. It is unclear whether a plan's actuarial value would include employer or individual contributions made to the individual's HSA. That decision is left to the discretion of the secretary of HHS. Whether or not HSA contributions are included can make as much as a 10–20 percent difference. If the contributions are not included, many, if not most, high-deductible plans will not qualify. The fate of HSAs is therefore dependent on a regulatory ruling by the secretary of HHS in an administration hostile to HSAs. 

The 80 percent minimum medical loss ratio required of insurance plans could also prove problematic for HSAs. Again, how this provision will work in practice will depend on rules to be developed by the secretary of HHS. But, the legislation makes no distinction between traditional and high-deductible insurance plans. Few, if any, current high-deductible policies meet this requirement. 

In addition, it is unclear whether high deductible plans will be able to meet the law's requirement that insurance plans provide first dollar coverage for all "preventive services."³⁸ Currently, most high-deductible plans do cover preventive services as defined by the IRS. However, under the 2010 Health Act, preventive services will be defined by the U.S. Preventative Services Task Force and, once again, the secretary of HHS. If the new definition of preventive services is more expansive than the IRS definition, as seems likely, most current high-deductible plans will once again be out of compliance.

Finally, insurers must make certain that their high-deductible plans are designed to comply with the bill's limits on out-of-pocket expenses. In theory, a high-deductible plan designed to work with HSAs could meet all the new requirements. But a plan designed to those specifications would offer few, if any, advantages over traditional insurance and may not be competitive in today's markets. As a result, insurers may stop offering high-deductible policies.³⁹And since the rules for HSAs require that they be accompanied by a high-deductible plan, the result would be to end HSAs.

The bill also includes new limits on Flexible Spending Accounts (FSAs), which are used by as many as 30 million Americans.⁴⁰ The maximum tax-exempt contribution to an FSA will be cut from $5,000 annually to $2,500. The new definition of "qualified medical expense" will also be applied to FSAs, meaning that FSAs could not be used to pay for over-the-counter medications.

Medicare Cuts

The health care bill anticipates a net reduction in Medicare spending of $416 billion over 10 years.⁴¹ Total cuts would be about $459 billion, but the bill increases spending under the Medicare Part D prescription drug program by about $43 billion, so the net savings are lower.⁴²

The key word here is "anticipates" because several of the cuts are speculative at best. For example, the bill anticipates a 23 percent reduction in Medicare fee-for-service reimbursements to providers, yielding $196 billion in savings.⁴³ But Medicare has been supposed to make reductions to those payments since 2003, and each year Congress has voted to defer the cuts.

Medicare spending should be cut, but the 2010 Health Act cuts it in an inefficient way. Most of the cuts come from Medicare Advantage, which covers about one-fifth of Medicare recipients.⁴⁴ Currently, Medicare Advantage programs receive payments that average 14 percent more than traditional fee-for-service Medicare, but the program also offers greater benefits.⁴⁵ The 2010 Health Act imposes a new competitive bidding model on Medicare Advantage that will effectively end the 14 percent overpayment. In response, many insurers are expected to stop participating in the program, while others will increase premiums. Analysis of similar proposals in the past has suggested that 1.5 million to 3 million seniors could be forced out of their current insurance plan and back into traditional Medicare.⁴⁶

The CBO predicts that such cuts "could lead many plans to limit the benefits they offer, raise their premiums, or withdraw from the program."⁴⁷ Particularly hard hit would be minorities and seniors living in underserved areas. For example, nearly 40 percent of African-American and 54 percent of Latino seniors participate in Medicare Advantage, in part because lower-income seniors see it as a low-cost alternative to Medigap insurance for benefits not included under traditional Medicare.⁴⁸

The 2010 Health Act would apply a new "productivity adjustment" to reimbursements to hospitals, ambulatory service centers, skilled nursing facilities, hospice centers, clinical laboratories, and other providers, resulting in an estimated savings of $156 billion over 10 years.⁴⁹ There would also be $3 billion in cutbacks in reimbursement for services that the government believes are overused, such as diagnostic screening and imaging services. And the "utilization assumption" used to determine Medicare reimbursement rates for high-cost imaging equipment will be increased from 50 to 75 percent. This change is expected to reduce total imaging expenditures by as much as $2.3 billion over 10 years.⁵⁰ Other Medicare cuts include freezing reimbursement rates for home health care and inpatient rehabilitative services, and $1 billion in cuts to physician-owned hospitals. 

For the first time, the secretary of HHS will be permitted to use comparative-effectiveness research in making reimbursement decisions. The use of this research has been extremely controversial. On the one hand, many health care experts believe that much of U.S. health care spending is wasteful or unnecessary.⁵¹ Medicare spending varies wildly from region to region, without any evidence that the variation is reflected in the health of patients or procedural outcomes.⁵² A case could certainly be made that taxpayers should not have to subsidize health care that has not proven effective, nor can Medicare and Medicaid pay for every possible treatment regardless of its cost-effectiveness.

On the other hand, the use of such research in determining what procedures would be reimbursed could fundamentally alter the way medicine is practiced and could interpose government bureaucracies in determining how patients are treated. Moreover, it is unclear whether this research can provide a truly effective basis for determining reimbursement policy. It could be argued that Medicare is particularly unsuited for such a policy.⁵³

The use of comparative-effectiveness research for Medicare could set the stage for its extension to private medical practice. National health care systems in other countries use comparative-effectiveness research as the basis for rationing.⁵⁴ Some of President Obama's health care advisers, such as former Sen. Tom Daschle, have recommended that it be used here.⁵⁵ And, the president has named as the new director of the Center for Medicare and Medicaid Services Dr. Donald Berwick, who is an outspoken admirer of the British National Health Service and its National Institute for Clinical Effectiveness, which makes such cost-effectiveness decisions.⁵⁶

However, Medicare is facing unfunded liabilities of $50 to $100 trillion depending on the accounting measure used, making future benefit cuts inevitable. But Medicare cuts can be made in ways that improve program efficiency, such as by increasing patient deductibles. The 2010 Health Act cuts Medicare in politically expedient ways, not ways that allow for greater consumer-directed health care.

One possibly good way the 2010 Health Act may cut Medicare is by establishing an Independent Medical Advisory Committee (IMAC), which could recommend changes to the procedures that Medicare will cover, and the criteria to determine when those services would be covered, provided its recommendations "improve the quality of care" or "improve the efficiency of the Medicare program's operation."⁵⁷ Starting in 2013, if Medicare spending is projected to grow faster than the combined average rate of general inflation and medical inflation (averaged over five years), IMAC must submit recommendations bringing spending back in line with that target. Beginning in 2018, the annual spending target becomes the rate of GDP growth plus one percent. Once IMAC makes its recommendations, Congress would have 30 days to vote to overrule them. If Congress does not act, the secretary of HHS would have the authority to implement the recommendations. 

Unfortunately, IMAC is prohibited from making any recommendations that would "ration care," increase revenues, or change benefits, eligibility, or Medicare beneficiary cost-sharing (including Medicare premiums).⁵⁸ This leaves IMAC with few options beyond reductions in provider payments. Hospitals and hospices would be exempt from any cuts until 2020. Clinical laboratories would be exempt until 2015. Thus, most of the cuts would fall on physicians. With Medicare already under-reimbursing providers, further cuts would drive physicians from the program and increase cost-shifting to private insurance. As a consequence, IMAC may end up as neutered as previous attempts to impose fiscal discipline on government health programs.⁵⁹

In considering any of the cuts discussed above, there are three things to keep in mind. First, cuts in Medicare are both necessary and inevitable, but the 2010 Act makes cuts in the wrong ways. Particular cuts have differing effects on the quality and availability of care. Under the cuts in the 2010 Health Act, Medicare's chief actuary estimated that as many as 15 percent of U.S. hospitals could close.⁶⁰

Second, savings from the legislation's cuts will not be used to deal with Medicare's massive budget shortfalls, but rather to finance the new spending under the bill.

Third, many cuts may never actually occur. Medicare's actuary warned that the proposed cuts "may be unrealistic."⁶¹ And, the CBO cautions that, "it is unclear whether such a reduction in the growth rate of spending could be achieved, and if so, whether it would be accomplished through greater efficiencies in the delivery of health care or through reductions in access to care or the quality of care."⁶²

Congress has voted to cut Medicare spending at least 11 times since 1980.⁶³ Most cuts were modest reductions in payments to certain types of providers, reductions in "disproportionate share" payments to hospitals, or small increases in cost-sharing by seniors. In some circumstances, Congress has been able to actually trim the program.

On the other hand, Medicare is still facing an enormous long-term funding gap, and Congress hasn't taken substantial steps to deal with it. Some of the most significant cuts that have been proposed have later been reduced or repealed. For instance, as part of the Balanced Budget Act of 1997, Congress established the "sustainable growth rate" (SGR), designed to hold annual increases in Medicare reimbursements to a manageable growth rate. But in recent years, Congress has suspended these provider cuts that have been required by the SGR.

Since the 2010 Health Act does nothing to reform Medicare's unsustainable basic structure, Congress will be caught between two unpalatable choices. If it makes the cuts called for in the bill, it risks, according to the CBO, "reductions in access to care or the quality of care."⁶⁴ But if it fails to make those cuts, then the legislation will have added a huge new cost to an already exploding debt. That is a recipe for legislative paralysis.

Higher Taxes

The 2010 Health Act imposes $669 billion in new or increased taxes over the first 10 years, with the annual cost rising to $134 billion by 2019.⁶⁵ These taxes include:

• Health Insurance Taxes. A 40 percent excise tax will be imposed on employer-provided insurance plans with an actuarial value in excess of $10,200 for an individual or $27,500 for families. Since the tax is indexed to general inflation, not faster rising medical inflation, the tax will hit more and more workers over time.

• Payroll Taxes. The Medicare payroll tax will be increased from 2.9 percent to 3.8 percent for individuals with incomes over $200,000 and couples with income over $250,000. In some states, the tax hike would mean that some households will face marginal tax rates in excess of 50 percent when including state taxes. 

• Investment Taxes. The 3.8 percent Medicare tax will be applied to capital gains, interest income, and dividend income if an individual's gross income exceeds $200,000 or a couple's income exceeds $250,000. The tax would include capital gains from the sale of real estate, including homes.

• Income Taxes. The threshold at which taxpayers can deduct medical expenses on their individual income taxes will be raised from the current 7.5 percent of adjusted gross income to 10 percent. 

• Prescription Drug Taxes. The Act will levy a new tax on brand-name prescription drugs. Rather than imposing a specific tax rate, the bill identifies a specific amount of revenue to be raised, ranging from $2.5 billion in 2011 to $4.2 billion in 2018, before leveling off at $2.8 billion thereafter, and assigns a portion of that amount to drug manufacturers according to a formula based on the company's aggregate revenue from branded prescription drugs. The tax will likely be passed along to consumers through higher prices. 

• Medical Device Taxes. A 2.9 percent federal sales tax is imposed on medical devices, which includes everything from CT scanners to surgical scissors. The secretary of HHS has the authority to waive this tax for items that are "sold at retail for use by the general public."⁶⁶ However, almost everything used by doctors, hospitals, or clinics would be taxed. The tax would also fall on laboratory tests. The government's chief actuary has concluded that this tax "would generally be passed through to health consumers."⁶⁷ One study estimates that the pass-through could cost the typical family of four with job-based coverage an additional $1,000 a year in higher premiums.⁶⁸

• Insurance Market Share Taxes. The Act imposes a tax on health insurers based on their market share. The total assessment will begin at $8 billion and rise to $14.3 billion by 2018. Thereafter the total assessment will increase by the same percentage as premium growth the previous year. The tax will be allocated to companies based on both the total premiums collected by an insurer and the insurer's administrative costs. However, some insurers in Michigan and Nebraska received a special exemption. This tax is also expected to be passed through to consumers in higher premiums.

• Tanning Bed Taxes. The Act imposes a five percent tax on tanning salons. While tanning may be seen as a luxury or frivolous expenditure, it is actually a recommended treatment for Psoriasis and certain other medical conditions. The bill makes no distinction between tanning for medical or cosmetic reasons.

• Compliance Costs. The Act requires that businesses must provide a 1099 tax form to every vendor with whom they do more than $600 worth of business in a year. Businesses already have to file 1099s for outlays on certain items like consultants. But the new rule will mean that the nation's small and large businesses will have to issue hundreds of millions, perhaps billions, of additional 1099s ever year. At the same time, businesses will have to collect 1099s from all their customers and integrate them in their financial systems. Businesses will be required to collect all the requisite information from everyone they do business with to file the form. This is an enormous new recordkeeping burden for millions of American businesses and poses a range of privacy threats.

Higher Spending

Throughout the health care debate, President Obama emphasized the need to control rising health care spending:

We've got to control costs, both for families and businesses, but also for our government. Everybody out there who talks about deficits has to acknowledge that the single biggest driver of our deficits is health care spending. We cannot deal with our deficits and debt long term unless we get a handle on that. So that has to be part of a package.⁶⁹

The president is right, but the 2010 Health Act does little if anything to restrain the growth in costs.  According to Richard Foster, the government's chief health care actuary, the bill will actually increase U.S. health care spending by $311 billion over the first 10 years.⁷⁰

The primary focus of the bill was to expand insurance coverage. It's obvious that giving more people access to more insurance and mandating that insurance cover more services will result in more spending, not less. If utilization increases substantially as result of the coverage expansions in the Act, spending could skyrocket.

The failure to restrain costs will mean that the burden of the 2010 Health Act will be higher than promised. The CBO scored the Act as costing $928 billion over the first 10 years.⁷¹ However, that number does not tell the whole story, since the CBO does not provide a formal budget analysis beyond the first 10 years. Since program costs will be on an upward trajectory, the CBO expects the costs of the program to continue to grow rapidly after 2019 as well. 

Most of the spending under this bill doesn't take effect until 2014. So the "10-year" cost projection includes only six years of the bill. CBO says that the annual cost will be $206 billion by 2019 and will continue to rise. Thus, if we look at the bill over the first 10 years that the programs are actually in existence, 2014 to 2024, it will actually cost about $2 trillion.

CBO officially scored the bill as reducing the budget deficit by $138 billion over 10 years. That's a small promised saving, representing only a fraction of the federal budget deficit for the single year 2010. Even that promised saving is achieved through the use of yet another budget gimmick. 

The bill anticipates a 23 percent reduction in Medicare fee-for-service reimbursement payments to providers, yielding $196 billion in savings.⁷² Those cuts were part of a Medicare reimbursement reduction first called for in 2003 as part of changes to the sustainable growth rate required by the Balanced Budget Act of 1997. However, the cuts have never actually been implemented. Current law would reduce payment rates by 21 percent beginning in January 2011, and by an average of two percent each year thereafter through the end of the decade. This is the baseline that the CBO used to project the bill's future costs. However, few experts believe that those cuts will actually occur. And Democrats have introduced a separate bill, the Medicare Physicians Payment Reform Act of 2009 (H.R. 3961) that would effectively repeal the cuts. According to the CBO, the 10-year budget effect of repealing those cuts would be $259 billion.⁷³ However, other sources, including the Obama administration, have suggested the budget effect could be as high as $371 billion.⁷⁴

In a letter to Congressman Paul Ryan (R-WI), the CBO confirms that if the costs of repealing the payment reductions, known as the "doc-fix," as reflected in H.R. 3961, were to be included in the cost of health care reform, the bill would increase budget deficits by $59 billion over the first 10 years.⁷⁵

Another problem with claims that the 2010 Health Act will reduce the deficits is that the initial estimates didn't include discretionary costs associated with the program's implementation.  These costs will be subject to annual appropriations and the actions of future congresses. More recently, the CBO suggested that these costs could add as much as $105 billion to the 10-year cost of the bill.⁷⁶

All in all, adding the cost of the doc-fix and discretionary costs to the bill brings the total cost over 10 years of actual operation to over $2.7 trillion, and adds $352 billion to the national debt.⁷⁷

Finally, much of the bill's cost is shifted off the federal books onto businesses, individuals, and state governments through mandates and regulations. These costs are the equivalent of tax increases, but aren't included in the bill's official estimates. When the CBO scored President Bill Clinton's health care plan in 1994, these sorts of costs were included, and they accounted for as much as 60 percent of the bill's total cost.⁷⁸ Despite repeated requests, the CBO did not produce a similar analysis for the 2010 Health Act. However, if a similar ratio of mandate and regulation costs to official budget costs were applied to the 2010 Health Act, the real cost would be around $7 trillion.⁷⁹

It is also important to note that initial cost estimates for new programs are often wildly optimistic. When Medicare was instituted in 1965, it was estimated that Part A would cost $9 billion by 1990. It ended up costing $67 billion that year.⁸⁰ In 1987, Medicaid's special hospitals subsidy was projected to cost $100 million annually by 1992; it actually cost $11 billion that year, or more than 100 times as much. In 1988, when Medicare's home-care benefit was established, the projected cost was $4 billion in 1993, but the actual cost that year was $10 billion. The upshot is that the actual costs of health care legislation are often much higher than promised when originally passed.

With the 2010 Health Act, increased insurance coverage could lead to increased utilization and higher subsidy costs. If companies choose to drop their current insurance and dump employees onto subsidized coverage or Medicaid, it could substantially increase the program's costs. One estimate cited by Fortune notes that "if 50 percent of people covered by company plans get dumped, federal health care costs will rise by $160 billion in 2016, in addition to the $93 billion in subsidies already forecast by the CBO."⁸¹

This is all taking place at a time when the government is facing an unprecedented budgetary crisis. The U.S. budget deficit hit $1.4 trillion in 2009, and the government is expected to add $9 trillion to the national debt over the next 10 years.⁸² Without major budget reforms, government spending is expected to rise from its traditional 20 percent or so of our economy to more than 40 percent by 2050.⁸³ That would be catastrophic for the economy and for American living standards.

The 2010 Health Act makes already dire projections even worse. If not repealed, the health care bill will push total government spending toward 50 percent of GDP by 2050. Americans simply can't afford the 2010 Health Act, let alone all the federal health costs that were already on the books. Federal health programs need to be dramatically scaled back, not expanded.

Higher Insurance Premiums

During the 2008 presidential campaign, then-candidate Obama promised that his health care plan would reduce premiums by up to $2,500 per year.⁸⁴ That promise has long since been abandoned.  However, without putting a dollar amount to it, the president continues to promise that his health care reform will reduce insurance costs.⁸⁵ While that may be true for those people receiving subsidies or who are currently in poor health, millions of others will likely end up paying higher premiums. 

Today, the average insurance plan in the individual market costs $2,985 for individuals and $6,328 for families.⁸⁶ In the employer-based market, premiums average $4,825 for individuals and $13,375 for families. The CBO estimates that if reform had not passed, premiums in the individual market would have risen to $5,200 for individuals and $13,100 for families by 2016. The cost of employer-provided insurance would rise to $7,800 for individuals and $20,300 for families.⁸⁸

The 2010 Health Act will do little, if anything, to change these increases. Businesses with more than 100 employees may see the largest benefit, but the benefit will be minimal. The CBO estimates that larger businesses will see a premium increase between just zero and three percent less than would otherwise occur, while smaller businesses will see a premium increase between just zero and one percent less than would otherwise occur.⁸⁹

But the millions of Americans who purchase insurance on their own through the nongroup market will actually be worse off as a result of the Act. According to the CBO, their premiums will increase 10–13 percent faster than if it had not passed. That is, an individual premium would increase from $2,985 today to $5,800, compared to $5,500 if the bill had not passed. A family policy will increase from today's $6,328 to $15,200. If the bill hadn't passed, it would only have increased to $13,100.⁹⁰  Thus, this bill will cost a family buying its own health insurance an additional $2,100 per year in higher premiums.

For low- and some middle-income Americans, any increase in premiums will be offset by government subsidies. But for many other Americans, premiums will likely rise, which is not at all what the president promised.

Conclusions

Proponents of the 2010 Health Act have made many grand promises about improving the nation's health care system while cutting costs and reducing the budget deficit. But the legislation is a grand failure on nearly every front.

The legislation comes closest to success on the issue of expanding the number of Americans with insurance. Millions more Americans will receive coverage under the bill. This mostly results from an expansion of government subsidies, with nearly half of the newly insured in Medicaid. Despite the bill's huge new subsidy costs, at least 21 million Americans will still be uninsured by 2019. The bill therefore represents an improvement over the status quo on this measure, but a modest one.

The Act makes some insurance changes that will prohibit some of the industry's more unpopular practices. However, those changes will come at the price of increased insurance costs, especially for younger and healthier individuals, and reduced consumer choice.

The Act represents a major failure when it comes to controlling costs. While we were promised that health care reform will "bend the cost curve down," this bill will increase U.S. health care spending.⁹¹ The failure to cut costs means that the bill will add to the already crushing burden of government spending, taxes, and debt. Accurately measured, the 2010 Act will cost more than $2.7 trillion over its first 10 years of full operation, while adding more than $352 billion to the national debt. In addition, the legislation adds more than $4.3 trillion in costs on businesses, individuals, and state governments. 

Millions of families will face higher taxes under the Act, and many will face rising insurance premiums. Most American workers and businesses will see little or no change in their rising insurance costs, but millions of others, including younger and healthier workers, and those who buy insurance on their own through the nongroup market, will actually see their premiums go up faster as a result of this legislation. 

The trajectory of U.S. health care spending even before this bill was passed was unsustainable. The bill makes it worse, while also raising the chance of federal health care rationing down the road. With a few minor exceptions governing Medicare reimbursements, the bill would not directly ration care or allow the government to dictate how doctors practice medicine. However, by setting in place a structure of increased utilization and rising costs, the bill makes government rationing far more likely in the future. That seems to be how the similar universal health care bill passed in Massachusetts is playing out.

The 2010 Health Act will increase tax and regulatory burdens on businesses, thus likely reducing economic growth and job creation. While some businesses may respond to the bill's employer mandate by choosing to pay the penalty and dumping their workers into public programs, many others will be forced to offset increased costs by reducing wages, benefits, or employment. 

The legislation imposes $669 billion in new or increased taxes over the first decade, the vast majority of which will fall on businesses.⁹² Many of those taxes, such as those on hospitals, insurers, and medical devices, will ultimately be passed along to consumers. Other taxes, in particular new taxes on investment income, are likely to reduce economic and job growth. Businesses will also face huge new administrative and recordkeeping requirements under this legislation that will also reduce their ability to hire, expand, or increase worker wages.

The public was repeatedly promised: "If you like your health care plan, you'll be able to keep your health care plan, period. No one will take it away, no matter what."⁹³ But millions of Americans will not be able to keep their current coverage. Seniors with Medicare Advantage and workers with health savings accounts are the most likely to be forced out of their current plans. Also, many businesses may choose to drop their current coverage and put their workers on either Medicaid or the new government-run exchanges. The CBO's estimate of 10–12 million workers being dropped from their current employer coverage is probably conservative.  

The Act's individual mandate also poses a threat to people being able to keep their current coverage.  While the final bill grandfathered current plans, individuals will be forced to change coverage to a plan that meets government requirements if they make any changes to their current coverage. And, by forbidding noncompliant plans from enrolling any new customers, the bill makes those plans unviable over the long term. As a result, Americans whose current insurance does not meet government requirements may ultimately not have the choice to keep that plan.

The debate over the 2010 Health Act is far from over. Numerous lawsuits have been filed challenging provisions of the bill, especially the individual mandate.⁹⁴ Elections this fall are likely to see candidates campaigning in favor of repealing all or parts of the legislation.⁹⁵ And while such institutional barriers as the filibuster and presidential veto will make full repeal difficult, there will also likely be efforts by future congresses to delay, defund, or alter many aspects of the bill.