Yesterday, Senate Democrats passed the Inflation Reduction Act (IRA) on a party-line vote. It now heads to the House of Representatives, where it will likely pass on another party-line vote later this week.
Despite the name, the Democrats’ reconciliation bill is likely to increase inflation in the near term. In the first five years, the legislation will increase government taxes, spending, and deficits. The cumulative effect of the health care provisions in the IRA will increase government’s already sizeable control over the health sector, reduce pharmaceutical innovation, worsen Americans’ health, and promote wasteful health spending for the benefit of insurance companies and the wealthy.
Paragon’s Dr. Joel Zinberg will appear on C-SPAN’s Washington Journal this morning around 8:30am EDT to share his much-needed perspective on the legislation. He will discuss issues raised in Paragon’s recent policy brief, Reconciliation Bill — Misguided Drug Price Controls and Unwise Health Insurer Subsidies, coauthored with Drew Keyes and me. Joel will undoubtedly discuss how the drug price controls would decrease the number of innovative drugs developed, thereby diminishing Americans’ quality and length of life—a topic he recently discussed in a National Review Online op-ed.
The Obamacare subsidies are the most inflationary policy in the Act.
According to CBO, the legislation’s most inflationary part is its continuation of the expanded Obamacare subsidies through 2025. The original subsidy structure limits what households pay for a benchmark exchange plan with taxpayers picking up the rest of the cost. The expanded subsidy shifts an even greater share of the premium to the taxpayer. The subsidies will average roughly 85% of the total premium for exchange enrollees, and the bill makes the subsidies available to many wealthy households. I analyzed the expanded subsidies in depth in a 2021 Galen Institute research paper.
Short-term extensions of government spending programs keep the cost of the legislation below what will likely actually occur since there will be political pressure to continue the spending. A permanent extension of the expanded subsidies would be very expensive. This is partly because a longer extension will lead to much greater decline of employer-provided coverage as smaller employers will have strong incentives to not offer health insurance. According to CBO’s estimates, a ten-year elevated subsidy extension would cost $306 billion, offset by $67 billion in higher federal tax revenue. If more employers drop coverage than CBO projects, as I expect, then the budgetary cost of the expanded Obamacare subsidies will ratchet up.
In my recent Wall Street Journal op-ed, I argued that the best, most politically feasible off-ramp from the irresponsible and fiscally unsustainable expanded Obamacare subsidies would be to permit existing exchange enrollees to maintain the enhanced subsidy until they transition away from individual market coverage while making the enhanced subsidies unavailable for new enrollees. This policy would be more responsible than their current plans and would reduce inflation.
The deficit reduction is a paper fiction and creates a dangerous budgetary precedent.
The deficit reduction in this legislation occurs after 2026. And the deficit reduction occurs from two significant budget gimmicks: 1) repealing a Trump rule that required rebates in Medicare Part D to get passed through to patients at the pharmacy counter, and 2) enacting an only three-year extension of the expanded Obamacare subsidies discussed above.
In January 2021, the Trump administration mistakenly finalized the rebate rule, which was projected to increase Medicare Part D premiums and spending. Further delaying the rebate rule (it has already been delayed twice) or repealing it would decrease premiums and spending, making an attractive “pay-for.” But repealing or delaying the rule is simply a budget gimmick because the rule has not gone into effect and likely never will. Had CBO scored this to more accurately reflect reality, the nonpartisan agency would have faced political blowback from congressional Democrats who looked to use the rebate rule as a piggy bank. Regardless, it is harmful budget policy for Congress get credit for savings from delaying or repealing a costly administrative rule unlikely to ever go into effect.
The IRA is bad policy that expands government power and will hurt Americans if the House passes it as it is expected to. But the policy debate is never over, and Congress will modify these programs and policies in the future. Paragon is committed to evaluating how government programs, including the ones in the IRA, actually work and to developing policies that reduce Washington’s power and bureaucracy and put patients in the driver’s seat.
All the best,
Paragon Health Institute
Troubling Inflation Reduction Act