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Republicans Are Right: Obamacare Is Redistribution

But here's how it really works

David McNew/Getty Images News/Getty Images

Republicans and their allies are making a lot of different arguments about what Obamacare is doing to America. It’s hiking premiums! It’s making people lose their doctors! It’s destroying Medicare! But if you listen closely, you’ll discern a common theme—a message aimed squarely at the middle class: Obamacare is taking away your money or health insurance, and giving it to somebody else. "If you think about it, it's $250 billion a year in Medicaid expansion, in the subsidy structure, that's basically being paid for by people on Medicare, through Medicare cuts, and a lot of tax increases," James Capretta, a former Bush Administration official now at the Ethics & Public Policy Center, said on Fox News Sunday. "It is a massive, massive income redistribution."

It’s not a novel argument. This is how Republicans have been attacking Democrats at least since the late 1960s, with varying results. For Ronald Reagan, it was a winner. For Mitt Romney, it wasn't. Maybe it will resonate this time and maybe it won't. Honestly, I have no idea. But since we're having this debate, it would be good to clarify who's getting money from the law—and who's providing it. Republicans aren't wrong when they say Obamacare amounts to redistribution. But they seem to have a distorted view of how that redistribution works.

About two-thirds of the law’s spending, a little over $1 trillion in the next decade, will be in the form of tax credits for people buying insurance on the new exchanges. About one third, or about $640 billion, finances the expansion of Medicaid. There's no simple and reliable way to break down exactly how much money goes to people at different income levels. (I've tried!) And it's certainly fair to say that a majority of people getting money from Obamacare are in the lower half of the income scale. But that includes an awful lot of people that qualify as "working class" or "middle class." Remember that the credits are available to people making up to 400 percent of the poverty line, or about $46,000 a year for an individual and $94,000 for a family of four—well above the nation's median income.

So that's the money going out of the federal Treasury thanks to Obamacare. And the money coming in? Here's a list of major sources of revenues and program cuts, based on Congressional Budget Office reports and put together with help from Paul van de Water at the Center on Budget and Policy Priorities:

Cuts to Medicare providers, much of it in the form of a “productivity adjustment” that will result in hospitals receiving lower reimbursements … $415 billion

Higher taxes on the wealthy, via a higher Medicare payroll tax on individuals with incomes above $200,000 and families with incomes above $250,000 … $318 billion

Fees on the health care industry, including fees on drug and device makers … $165 billion

Penalties, from individuals who could get affordable insurance but don’t, and from medium- and large- employers who don’t fulfill the requirement to offer coverage … $161 billion

Reduced payments to private health insurers offering coverage to seniors through the Medicare Advantage program … $156 billion

The “Cadillac tax,” which starting in 2016 will reduce the existing tax break for the most expensive health plans … $111 billion

The pie chart above will give you a sense of how these pieces fit together. (Yes, "other" is a big category.) And one obvious takeaway is that the majority of funding in the law is money paid by—or given up by—either the wealthy or parts of the health care industry. It’s higher taxes on families making more than $250,000 a year, or new fees for the device industry, or cuts for health insurers serving Medicare patients. The exceptions are two of the smaller categories of spending, the penalties and the Cadillac tax. Some of that burden will fall on middle class people. But only some.

Conservatives would argue that higher taxes or lower reimbursements to the health care industry eventually get passed along to consumers and beneficiaries, particularly in the Medicare program. And that’s probably true to a point. Some insurers in Medicare Advantage, for example, have said they are offering narrower provider networks next year because they won’t be getting as much money from the government.

But the whole idea of the Affordable Care Act is that the industry can make up for lower payments with higher volume (because more people will have insurance) and by pushing harder for new efficiencies. The drug and hospital industries supported the law on that very basis. Now there's evidence such a transformation is happening—that the health care industry in general, and hospitals in particular, are re-engineering themselves so that they can do more with less—although experts disagree about how real or long-lasting the effect will be. 

As for the cuts to Medicare Advantage insurers, those have been long overdue for their own sake. A series of private and public assessments, including studies by the Congressional Budget Office and General Accounting Office, suggested the government had been overpaying insurers by large margins. In other words, it had become a form of corporate welfare. Meanwhile, the surest sign of problems with Medicare Advantage would be large numbers of plans leaving the program altogether. That has happened in the past, but it’s not happening now. As Marsha Gold, senior fellow at Mathematica Policy Research, testified recently before a House subcommittee, "The [Medicare Advantage] program is strong. Rising enrollment and widespread plan availability are expected to continue into 2014 despite concerns that cutbacks in payments to plans would discourage them from participating or make them less attractive to potential enrollees."

Serious people can disagree over how many of these cuts insurers and providers will ultimately absorb—and how many they will pass on to consumers and beneficiaries in one way or another. (Politifact had a nice item on this last week.) In that sense, serious people can disagree over the extent to which Obamacare really is income redistribution. But one thing to remember is that, fundamentally, health care reform has always been about a vulnerability that the poor and the middle class share. In the old days, before Obamacare, just about anybody could end up without health insurance, which meant just about anybody could end up ruined because of medical bills. The simplest way to describe Obamacare is as a transfer from the lucky to the unlucky. And when it comes to health, you don't have to be poor to be unlucky. 

Update: Pie chart revised for substantive and visual clarity.