How the Supreme Court's Decision on Health Care Reform Could Affect the Budget

It is no secret to those following the news that the Supreme Court will soon make a decision on the constitutionality of pieces of the Affordable Care Act. There have been many discussions of the health policy implications of the decision, which are obviously very important. However, given the name of our organization, we'll discuss the budgetary implications of the possible rulings.

For starters, we will present our attempt to update CBO's last comprehensive ACA score in February 2011 for recent developments and new data. That score had the Affordable Care Act reducing deficits by $210 billion from 2012-2021. Our score accounts for a few changes: the effective repeal of the CLASS Act (a long-term care insurance program), small legislative changes to a few of the spending provisions, CBO's most recent score of the coverage provisions in March of this year, and the shifting forward of the budget window to 2013-2022.

The lack of the CLASS Act reduces receipts by about $85 billion since the program had a five-year vesting period in which it collected premiums without paying out benefits. The legislative changes are incorporated into CBO's March 2012 score of the coverage provisions, which shows those provisions' cost rising by $40 billion over ten years since the February 2011 score. Shifting the budget window forward bumps up the ACA's deficit reduction a bit since it incorporates an additional deficit reduction year, 2022.

Overall, our score has net deficit reduction of $119 billion from 2013-2022. Thus, if the Supreme Court throws out the law entirely, it will increase the deficit by that much over ten years. Again, note that this is not an official CBO score, and it also is not a comprehensive update since CBO has not published new data on the budgetary effect of non-coverage provisions.

^{Source: CBO, CRFB calculations
Note: Coverage provisions include both spending and revenue effects. Overall, the Affordable Care Act increases outlays by $969 billion and increases revenue by $1,087 billion}

Based on these numbers, we know the budgetary effect of the Court upholding the law (nothing) or repealing it entirely ($119 billion baseline deficit increase). What about the in-between scenarios?

• Individual mandate repealed: Canceling the individual mandate but leaving the rest of ACA would have at least three offsetting effects. On the one hand, it would increase deficits by reducing the revenue associated with the mandate penalties and by increasing premiums in the individual insurance market by as much as 20 percent according to CBO due to adverse selection (for more on adverse selection, see here, for example). On the other hand, CBO estimates that 16 million fewer people would get insurance and therefore be eligible for any sort of benefit program. CBO finds the net effect of this change to reduce the deficit by about $280 billion between 2012 and 2021, which is the equivalent of roughly $340 billion through 2022.
• Individual mandate and insurance regulations repealed: If the mandate is ruled unconstitutional, the Court must also decide on the question of "severability"--how much of the rest of the law goes down with it. The Obama Administration argued that if the mandate is thrown out, provisions forcing insurance companies to offer coverage regardless of health status (guaranteed issue) and limiting their ability to charge different premiums for people with different statuses (community rating) should be thrown out as well. They said that the health insurance market would function very poorly if the mandate was thrown out and these two provisions were kept. It's unclear how much this scenario would differ fiscally from the previous scenario, but it seems likely that it would "save" more than just repealing the mandate. Total coverage costs would go down further since fewer people would get coverage, and the adverse selection aspect of removing the mandate would be lessened, thus resulting in lower per-person costs compared to removing just the mandate.
• Medicaid expansion repealed: Although this is a less likely scenario, there is still a possibility that the Court could rule that the Medicaid expansion contained in the law is unconstitutional because it coerces states into the program. If the expansion is struck down, both the cost of ACA and the number of additional people covered would go down significantly. CBO's March 2012 score of the coverage provisions estimates that the expansion will cost $930 billion from 2013-2022; granted, savings from repealing it would probably differ based on interactions with other parts of the health care system. At the same time, the 17 million people who would have been covered by Medicaid would either find coverage through other sources or, more likely, become uninsured.
• Both mandate and Medicaid expansion repealed: It is also possible that both the individual mandate and the Medicaid expansion would be ruled unconstitutional, while the rest of the law stands. CBO has already stated that the repeal of the mandate itself would reduce the cost of the Medicaid expansion--by about $200 billion, according to our estimates. Thus, throwing out both the mandate and the expansion would have a deficit reduction effect that is less than the sum of their individual savings, although it is difficult to estimate precisely what that effect would be. It is clear, though, that this option would result in hundreds of billions of savings but at least 20 million fewer people gaining coverage.

In the meantime, we will have to play the waiting game to see how the Supreme Court decision will affect the health care system and the budget.