The Corner

Health Care in the Spending Deal

If it’s December, it must be time for a massive, one-time, all-or-nothing annual spending bill. That’s just what has become of Congress’s core function over the past decade. This year’s version includes a 2,009 page omnibus appropriations bill and a 233 page tax bill mostly extending various “temporary” tax preferences and other provisions. Both were released around 1a.m. last night and will be voted on at the end of the week—no doubt giving members plenty of time to study all the fine details. 

I’m making my way through the two bills today (aren’t Wednesdays just the worst?) but thought I’d highlight one key area that’s taken up in some interesting and potentially important ways: health care. With apologies for the length and wonkiness of what follows below the fold, a few thoughts on what’s in the omnibus bill on health care and what it might tell us. 

Republicans have majorities in both houses, so this bill reflects their priorities on the whole. But on health care, I think it’s actually most interesting for what it suggests about the Democrats—some meaningful number of whose votes are after all necessary for passage. I read the omnibus bill as reflecting a meaningful change of attitude among the Democrats about Obamacare. They’re no longer offering themselves up as a sacrifice to protect every last bit of the law, as they have done at enormous political cost for the last five years. Now, they’re spending their capital to protect key constituencies (and therefore themselves), even at the cost of allowing the structure of Obamacare to become even more incoherent and unsustainable. 

Most Democrats certainly don’t think Obamacare has been a failure. But they are increasingly coming to see that, even given their goals, it has been at least a dud. Its effects on coverage look likely to be much smaller than anticipated (the administration’s projection that fewer than a million Americans will be added to the exchange system this year is surely intentional low-balling, but the ultimate number is nonetheless likely to be much lower than the original administration projections of well over 10 million additional enrollees this coming year). Its effects on health-care costs look likely to be counterproductive, and its effects on the economics of private insurance coverage have of course been so as well. It has not changed people’s basic sense of the state of our health-care system. It has not itself become more popular with time. And key elements of it, most notably the exchange system, are looking dangerously unstable. The Democrats have spent immense political capital—effectively costing themselves both houses of Congress—to protect the law from significant changes on the premise that with time all of this would take care of itself. But that is looking less plausible, and they do seem to be done dying on hills for every last bit of the law. 

They’re thinking past Obamacare, like the Republicans are. Of course, Democrats have a different vision of what comes after Obamacare. Hillary Clinton has started articulating that vision here and there: It’s a move in the direction of the original Hillarycare from 1993, which would add on to elements of Obamacare stricter price controls and more federal micromanagement of the provision of care. (Scott Gottlieb considered what this might look like in National Affairs this summer.) But Obamacare was only enacted because the Democrats enjoyed an unusual (and, thanks to Obamacare, brief) period of consolidated control of the elected branches in the administration’s first two years. If Hillary Clinton is elected, she is very unlikely to enjoy the same, and so her particular plans don’t really matter all that much since they’d have no chance of getting through a Republican House or Senate. The beginnings of a change in the Democrats’ overall attitude toward Obamacare, if that is indeed what we’re seeing now, would matter, though. 

As I see it, this latest omnibus spending bill offers evidence of both parties setting the stage for the next health-care debate, and the Democrats acknowledging that such a debate won’t exactly start from Obamacare as we know it as an established premise. There are, in effect, three and a half health-care elements in the bill: a delay of the Cadillac tax, the continued neutralization of the risk-corridor provision (now combined with some offsetting tax relief for insurers), and a delay of the medical device tax. 

The latter, the medical device tax repeal, is just familiar cronyism. Providing benefits or relief to corporate America is the one thing congressional Republicans and Democrats agree about now, so there has long been a broad coalition in Congress to eliminate the tax on medical-device manufacturers, which was one of the ways Obamacare was supposed to be paid for. I think it’s a mistake to do this in a free-standing way, rather than as part of a broader repeal and replacement of the law, but it’s one of those inevitable mistakes. Republicans have made this a two-year suspension of the tax, rather than a full repeal, to make the sure the potential of its return is there to influence these manufacturers to favor a broader repeal if there’s a Republican-led health-care debate in 2017 (and, of course, to lower the cost of this bill as scored by CBO). But there’s nothing particularly novel or notable about the willingness of many Democrats to support this. 

The Cadillac Tax provision is more complicated. That tax (a 40 percent tax on employer-provided insurance coverage above a certain threshold of cost) was not set to take effect until 2018 anyway. Its purpose, in large part, was to change the coverage choices of employers—driving them toward less generous health insurance but (presumably, or hopefully) therefore proportionally higher taxable salaries for their workers. It is a very oddly designed tax (in part because President Obama said in the 2008 campaign that he would not tax employer-provided health coverage, so doing it anyway required some contortions), and is particularly unpopular with both large employers and unions, since it would affect them the most. But particularly through its secondary effects, it is also a very important element of the revenue score that Obamacare got from the Joint Committee on Taxation—it’s a crucial pay-for. And in the out-years, it is an important factor in the kinds of coverage effects that CBO scored—particularly its projections for the relative sizes of the employer and exchange coverage populations, and in its expectations about premium costs. 

The Obama administration has been willing to take some real heat from its union allies to protect the tax, and the president remains opposed to eliminating it. In my view, as with the much smaller Medical Device Tax, it would be a mistake for Republicans to eliminate that tax outside the context of a broader repeal and replacement of Obamacare. Both substantively and politically, that would make it harder to advance an alternative. But what’s in this bill is not exactly a repeal. It’s a two-year delay in the implementation of the Cadillac tax. That’s a little smarter, if still not great. As with the Medical Device Tax, a two-year delay means that in terms of political pressure we would be back to roughly where we are now in late 2017, except this time the relevant constituencies will have a much better sense of how much they hate these taxes. That basically means that the Cadillac Tax won’t ever be coming back, but it also means that keeping it from coming back will require some legislative action two years from now, creating pressure for a major health-care debate in the first year of the next president’s term. 

If that next president is a Republican, the debate will presumably be about a real alternative approach. This two-year delay in the Cadillac Tax would complicate that debate some, since most Republican alternatives involve capping the value of the tax exclusion for employer-provided coverage in order to equalize the tax treatment of health insurance. But that it is a two-year delay and not a repeal of the tax means that such a cap would still be more attractive in relative terms to some of the people who most dislike the Cadillac Tax. It also probably makes it easier to score a Republican alternative as deficit reducing and so to move it through reconciliation (because this two-year delay reduces Obamacare-originating revenue in what would be years 1 and 2 of a Republican alternative, when whatever Republicans do with the employer exclusion probably wouldn’t quite start yet). This is especially true if the Republican alternative looks like the incremental capping of the employer exclusion that Marco Rubio has outlined (and that Speaker Paul Ryan has also supported in the past). 

If that next president is a Democrat, the debate would look quite different, of course. But the Cadillac Tax is nonetheless very unlikely to return, which means that some real changes to Obamacare will be required. If those are discussed as the exchange system is in a further state of dysfunction and if (unlike Obamacare) they have to be worked out with congressional Republicans, they will not be the sorts of changes that Democrats daydream about. 

It still seems to me that on the whole it’s a mistake to put off the Cadillac Tax without a bigger repeal and replace process, but given that this was the Democrats’ major health-care demand in this process (a key indication that they are looking past Obamacare), the two-year delay makes modest sense. It makes it more likely that the next health-care debate will be about how to move away from Obamacare. 

The final major health-care provision in the bill makes that even more likely. The omnibus bill contains a provision, identical to one in last year’s bill, which requires that risk-corridor payments in the Obamacare exchanges be budget neutral. 

The risk-corridor program requires insurers in the Obamacare exchanges to pay the federal government if their revenues on exchange plans exceed their spending on those plans by a certain percentage and entitles them to be paid by the federal government if the opposite happens and they experience losses beyond a certain percentage. Until the last few months, the Obama administration had always asserted that the balance of these payments would be neutral, so that there would be no cost to taxpayers in managing this risk. But because the rules governing the exchange system are economically irrational, insurers in that system are actually likely to suffer significant losses, and an open-ended taxpayer commitment to bail out such losses would cost billions. Last year’s provision basically called the Democrats’ bluff—requiring the risk-corridors to be budget-neutral. Because losses turned out to vastly exceed profits in the exchanges in their first year, insurers were left with only about 12 percent of the funds they expected to get from the risk corridors, contributing to the collapse of many of the co-op plans that depend on the exchanges for their basic viability, and leading some major insurers to contemplate leaving the system. 

The Democrats made a mistake in allowing the provision into the bill last year. They seemed genuinely to believe that they were making a symbolic concession, while some key Republican committee staffers managing the negotiations knew exactly what they wanted and why. Now that it is in, the Democrats have made the case for removing it—offering a series of implausible defenses of the program from the charge that it constitutes an unlimited taxpayer exposure to cover private insurer losses. But what happened in this new omnibus suggests that the Democrats have decided they need to make a case on behalf of the insurers, not on behalf of Obamacare’s exchange system. 

Simply put, the bill contains a kind of trade: The risk-corridors are still required to be budget neutral, so that the Obamacare exchange system, which evidently cannot function without massive infusions of taxpayer bailouts, will continue to stumble. But at the same time, the insurers are granted one year of relief, in 2017, from another Obamacare tax: an excise tax levied on all insurance plans, not just exchange plans. The year of relief will net insurers as a whole a lot of money—they were expected to pay about $14 billion through that tax in 2017. That could well be more than insurers in the exchanges take in losses over the entire life of the 3-year risk-corridor program. But because the gains from the one-year suspension of the excise tax are spread across all insurers and all plans, rather than just exchange plans, the deal will help some insurers balance off some losses (while just netting money for others) but will not make the exchange system any more attractive to insurers relative to the rest of their business. This is the clearest instance of the Democrats choosing a key constituency over Obamacare. In this case, they are choosing to help the insurers without helping the exchanges. But they are doing much the same in choosing the unions over the Cadillac Tax, and in helping medical-device makers at the expense of Obamacare’s ongoing budget score. 

The omnibus bill is a compromise measure. There’s nothing lovely about it. And its health-care provisions, each of which advances a partial repeal of some small portion of Obamacare outside of the context of an overall repeal and replacement, are not what Republicans should be doing in an ideal world. But in this far from ideal world, the sum of these health-care compromises suggests that the Democrats are gradually coming to terms with the need to leave Obamacare behind, defend what they can, and focus again on their political needs. 

All of that makes a conservative health-care reform that would not only repeal Obamacare but take us well to the right of the system that preceded Obamacare easier to imagine. But it will still require the concerted will and work of Republican politicians, and the election of one such politician to the White House—and needless to say neither of those is by any means assured. Much work remains. 

Yuval Levin is the director of social, cultural, and constitutional studies at the American Enterprise Institute and the editor of National Affairs.

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