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Gaming Out the Debt Deal: Will It Hurt Obamacare?

The emerging, if still tentative, conventional wisdom about the debt ceiling agreement is that Democrats may ultimately prefer the plan’s automatic spending cuts to whatever cuts the new super-committee proposes.

As you probably know, the agreement calls for what’s basically a two-step process: A bipartisan, 12-member committee will consider ways of reducing the deficit. If the committee fails to make recommendations that would reduce the deficit by $1.5 trillion over ten years, or if makes recommendations but Congress fails to enact them, then the law calls for automatic, across-the-board cuts reducing deficits by $1.2 trillion.

Why would Democrats prefer the automatic cuts? President Obama and the Democrats largely shielded the big entitlements and programs from the poor. Media reports have suggested that Budget Director Jack Lew and National Economic Adviser Gene Sperling were particularly adamant about protecting Medicaid. The super-committee, by contrast, would surely look to these programs for cuts, perhaps substantial ones. Ideas like reducing federal funding for Medicaid or raising the eligibility age for Medicare, both of which figured into earlier negotiations between Obama and House Speaker John Boehner, are sure to get a close look.

But don’t kid yourself: The automatic cuts will still hurt, because they’d still affect plenty of important programs. And among them may be the administration’s signature legislative accomplishment, the Affordable Care Act.

The new health care law will make insurance more affordable by providing subsidies to people who buy insurance on their own. And these subsidies come in two forms. There are tax credits, which people can use to offset the cost of their premiums. And there are subsidies to defray cost-sharing: In other words, the government will help reduce people’s out-of-pocket costs. Under the debt ceiling deal, the tax credits are exempt from automatic reductions, because they are a tax credit and not a form of spending.

But, as both administration and congressional sources are confirming, the cost-sharing subsidies are not exempt. They will decline. And that’s worrisome because the subsidies were already pretty low. In fact, many of us were hoping that, over time, lawmakers would see fit to raise them rather than reduce them. I can't be sure how much the subsidies would decline, as nobody I’ve contacted seems to have run the numbers yet. And I'm not even positive how reduced subsidies would translate into reduced protection, since technically the subsidies go directly to the insurers. (I don't even want speculate about the impact until I know more. I’ll update this item when I do.)

But the point here isn't to second-guess specific trade-offs in the automatic cuts; again, I think Obama and the Democrats did a good job of protecting the most vital programs and the most vulnerable populations. Rather, it's a reminder about the overall structure of the deal. When you decide to reduce the deficit by $2.4 trillion over ten years, with little chance for including new revenue as part of the package, you’re going to end up cutting spending in some regrettable ways. No amount of last-minute negotiating was going to change that.

Update: I reworded the ending to emphasize my uncertainty about how exactly the cuts will affect individuals.