Beneath the Surface

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The Congressional Budget Office has “scored” the proposed American Health Care Act for its impact on insurance coverage, insurance premiums, and the federal budget. The results are not surprising to those most familiar with its provisions, although the reductions in insurance coverage may be even a little worse than expected. The analysis puts the Republican leadership in a difficult position. President Trump has called for a plan that increases coverage and lowers costs, while conservative House Republicans want a bill that offers even less assistance to the uninsured than this one does. The proposed plan doesn’t satisfy the demands from either side among Republicans, let alone generate any support among Democrats.

Here is a summary of the CBO’s conclusions about the proposed AHCA. See my previous post for a description of the bill itself.

Effects on insurance coverage

The CBO projects that the number of uninsured Americans would gradually rise relative to the number of uninsured if the current law were to continue. By 2026, 52 million would be uninsured instead of 28 million, a difference of 24 million. That would wipe out the gains attributable to the Affordable Care Act and take the country back to roughly where it was before it was passed. Only the most extreme conservatives would call that making America great again. It is certainly not what Trump led people to expect.

The biggest part of the 24 million difference is due to a 14 million projected decline in Medicaid enrollment, “as states that expanded eligibility for Medicaid discontinued doing so, as states projected to expand Medicaid in the future chose not to do so, and as the cap on per-enrollee spending took effect.” Those changes would result from the double impact of the bill on Medicaid. It phases out the expansion of Medicaid eligibility to include people with incomes up to 138% of the poverty level, and it caps federal payments to the states in such a way as to produce a projected shortfall relative to rising health care costs.

In the short run, enrollment in the “nongroup market” (people covered neither by their employer nor by Medicaid) would also decline dramatically. Some people would drop out because they were no longer required to buy insurance and didn’t feel they needed it. Others would leave the market when they lost their Obamacare subsidies and found that the tax credits in the new law didn’t cover enough of their premiums.

In later years, after 2020, the CBO projects that fewer employers would offer health plans to their workers, since their mandate to do so is also repealed. Many workers would then seek coverage in the nongroup market, which would then have something of a comeback.

The upshot of these changes is that by 2026, Medicaid coverage drops by an estimated 14 million, employment-based coverage by 7 million, and nongroup coverage by 2 million.

The loss of coverage would be especially great for low-income Americans, because of the cutbacks in Medicaid. In addition, the tax credits in the new law are not adjusted for income, as the Obamacare subsidies are. Federal benefits would fall short of premium costs for more families. Since the tax credits ignore geographic variations in costs, people in high-cost (especially rural) areas would also find insurance less affordable. And finally, many older people (but not old enough for Medicare) would also lose coverage. Although tax credits range from $2,000 to $4,000 by age, that difference wouldn’t be enough to cover the higher premiums that insurers could now charge.

Effects on premiums

The CBO analysis projects that premiums would rise for older people and fall for younger people. While the ACA allowed only a 3-to-1 ratio between the two, the AHCA allows a 5-to-1 ratio.

The effect of the law on average premiums is more complex. In the short run (before 2020), average premiums should rise because of the repeal of the individual mandate. Young, healthy people are most likely to drop out of the market. That would force insurers to increase premiums on the older, less healthy people who remain, since insurers are still required to cover people who are already sick. The CBO projects a rise of 15-20% for average premiums in the nongroup market.

After 2020, average premiums should come back down again for several reasons:

• The age-mix of people insured in the nongroup market should change, as premiums rise for older people and fall for younger people. More older people would then leave the market, and younger people would come in.
• The law sets up a Patient and State Stability Fund with money that states can use to compensate insurers for covering high-cost patients.
• Insurers can offer cheaper plans because what the plans cover is not as tightly regulated. They still have to cover ten essential benefits, but they no longer have to cover 60% of the costs of care. They could offer a small maternity benefit, for example, that leaves mothers with most of the actual bill.

One unfortunate side effect of that last provision is that people will find it harder to shop for insurance. Insurers will no longer have to offer standard plans covering 60%, 70%, 80% or 90% of costs, and they will no longer have to offer them through federal or state exchanges. Insurers can offer all sorts of things, in all sorts of ways, including plans with very skimpy benefits. Let the buyer beware! (Although offering insurance across state lines is not part of this bill, the Republican plan to add that in later legislation could make this worse, by allowing insurers to offer plans that do not meet the normal standards of the states in which they are sold.)

The CBO’s conclusion: “By 2026, average premiums for single policyholders in the nongroup market under the legislation would be roughly 10 percent lower than under current law.” Two reasons for that reduction aren’t very great though: pushing older people out of the market and offering policies with fewer benefits.

The CBO expects the insurance market to be relatively stable. It does not expect a “death spiral,” that is, an unsustainable spiral of premiums. That would happen if the pool of people buying insurance became, on the average, sicker, leading insurers to raise premiums, which in turn encouraged more of the healthy people to drop their coverage–a vicious cycle. The CBO says that passage of the AHCA should not produce such a cycle, but leaving the current law alone shouldn’t either.

Effects on the federal budget

The CBO projects that “enacting the legislation would reduce federal deficits by $337 billion over the 2017-2026 period. The government would lose $883 billion in revenue, but that would be more than offset by over $1.2 trillion in spending cuts.

The biggest revenue losses would result from repealing the many taxes used to fund Obamacare, especially the surtaxes on high-income taxpayers and the tax penalties for failing to carry insurance. The law also sacrifices tax revenue by offering tax credits to help offset the cost of premiums.

The biggest spending cuts are in Medicaid, followed by elimination of Obamacare’s subsidies for buying insurance in the nongroup market. The CBO notes that the government saves money because the average tax credit people get under the new law is only about 50 percent of the average subsidy people get under the current law.

The law also includes $9 billion in savings from eliminating the Prevention and Public Health Fund, which “awards grants…to public and private entities to carry out prevention, wellness, and public health activities.” The CBO didn’t try to estimate any offsetting costs to the country. But if an ounce of prevention is worth a pound of cure, then $9 billion in prevention might be worth $144 billion, making this an exercise in fake economy!

Although the new law could reduce the federal deficit, I would be surprised if Republicans actually use it that way. My hunch is that if the legislation passes, they will use the savings to justify further tax cuts. The large spending cuts in the law are surely no accident, but are consistent with the larger Republican agenda of reducing taxes on the wealthy while reducing benefits for the needy.

Effects on reproductive health services

The AHCA would withhold funds from nonprofit reproductive health service providers that provide abortions. This is aimed at Planned Parenthood, although only a small portion of its income–and none of its federal income–goes to fund abortions. The CBO projects several consequences: more unplanned pregnancies, thousands of additional births, higher maternity costs for Medicaid, and loss of access to health care for poor women in areas without other providers serving low-income populations. Projecting abortion rates was not part of the CBOs mandate, but other research indicates that they would more likely rise than fall along with the rise in unplanned pregnancies.

Speaking of births, this legislation is the first legislative offspring of the strange marriage between Donald Trump and the Republican Party. In order to get elected, Trump needed to make some appealing promises to people who normally vote Democratic. Those included replacing Obamacare with something greater. But he also needed the support of the Republican base, which is more conservative than the country as a whole. The Republican leadership thought they could pull it all together and produce legislation that conservatives would vote for, the President would sign, and the public would accept. The fact that whatever coalition elected Trump is coming unglued so early in his administration is not good news for Republicans.

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The Republican leaders of Congress have presented a plan to “repeal and replace” the Affordable Care Act, popularly known as Obamacare. Perhaps the title of the new act–the American Health Care Act (AHCA)–is telling. It replaces the word “affordable” with the more ambiguous word “American”. Maybe that will appeal to people who don’t mind if the new plan makes health care less affordable, as long as it doesn’t make it (horrors!) more Canadian, say, or Scandinavian.

President Trump has repeatedly promised that his replacement for Obamacare would be an improvement. It would offer “insurance for everybody” that would be “less expensive and much better.” We may reasonably ask if the coverage will be at least as good, and if the cost will be at least as affordable. Specifically, we may ask how the replacement would impact the people that the original act was most intended to help. They were primarily people with low incomes who were neither poor enough for Medicaid nor old enough for Medicare, but had trouble buying health insurance on their own.

Keeping the benefits

Although the most conservative Republicans would be happy with a simple repeal of the ACA, many of its provisions have become too popular to eliminate without serious political repercussions. Insurers must cover pre-existing conditions and offer policies to healthy and sick people at the same price. Policies must cover ten essential benefits, such as maternity care, rehabilitation services, and preventive health services without copayments. Policies cannot put an annual or lifetime cap on benefits. Dependents can remain on their parents’ policies until age 26. All of these benefits would remain in the AHCA.

Limiting the funding

Providing these benefits to a larger proportion of the population is costly. The Affordable Care Act increased the federal government’s contribution to health insurance financing by imposing new taxes, providing new subsidies to purchase private health insurance, and expanding Medicaid. It also increased the flow of premium payments to private insurers by requiring large employers to offer group plans to their employees, and requiring individuals without group coverage to buy their own plans or pay a tax penalty. The new taxes and mandates have been less popular aspects of Obamacare, but they are an integral part of its funding solution. The insurance companies had to offer more, but they got more customers to bear the cost.

In general, the Republican alternative tries to keep a lot of the benefits while eliminating a lot of the mechanisms for paying for them. It threatens the flow of premiums to private insurers by abolishing both the employer and individual mandates to buy insurance. That makes it easier for healthy people to go without insurance, knowing that they can always sign up later, even if they’ve developed a pre-existing condition in the meantime. (The bill does include an incentive to remain covered once a person is insured; if you let your coverage lapse, your insurer can raise your rates by 30%.) As I discussed in an earlier post, insurers cannot keep premiums under control if they only insure sick people. Already premiums have been rising because healthy people have been slow to purchase insurance, despite the tax penalty. With the penalty abolished altogether, this problem can only get worse. Although the Congressional Budget Office has not yet evaluated the bill, it has already estimated that eliminating the insurance mandate would raise premiums 20 to 25 percent.

Funding for the Affordable Care Act relied heavily on a tax surcharge on individuals making over $200,000 a year. The American Health Care Act eliminates it. Other taxes to be ended include the penalty taxes on businesses and individuals who fail to obtain insurance, the surtax on insurance executives with incomes over $500,000, and taxes on drug companies and makers of medical devices. The so-called “Cadillac tax” on especially costly insurance plans provided by employers is suspended at least through 2024.  The AHCA also reduces tax revenues by offering the new tax credits and deductions described below, many of which go to people with higher incomes than those the ACA was designed to help.

Cutting the subsidies

With the federal government having less tax revenue to work with, it isn’t surprising that it cannot do as much to subsidize health insurance for low-income Americans. The Obamacare subsidies were based on need, taking into account age, income and the cost of care in the recipient’s locale. (Premiums are typically higher in rural areas with fewer hospitals and insurers.) Low-income people could get help with deductibles and copayments as well as with insurance premiums. The AHCA replaces these subsidies with age-based tax credits in the range of $2,000-4,000 per person, with a family cap of $14,000. These are “refundable” credits, meaning that you get the credit you qualify for even if your federal tax bill is less than the credit. (Otherwise it wouldn’t be much help in buying insurance.) The credits phase out for people with higher incomes (over $75,000 for individuals and $150,000 for couples), but otherwise they are not adjusted for income.

Analysts have found that you are most likely to be hurt by these changes if you are a older person with a low income living in a rural area. For low-income people, the credits are generally too small to compensate for the loss of Obamacare subsidies. For older people, although the tax credits are adjusted for age, they aren’t adjusted enough to offset the high cost of policies for older people. In fact, the replacement law would make the cost disparity worse by allowing insurers to charge older people up to five times as much as younger people. (The previous disparity allowed was three times as much.) Many people will be squeezed between higher premiums and lower benefits, leaving them with thousands of dollars more in costs.

Those who gain from the changes are primarily people who earn too much to qualify for ACA subsidies, but would get an AHCA tax credit whether they need it or not to afford insurance. The highest earners don’t get the tax credits, but they do get the elimination of the ACA’s surtax on high incomes.

High-income people get an additional gift in the expansion of Health Savings Accounts (HSAs). These are tax-sheltered savings plans for people who can afford to take more responsibility for their health-care expenses. To qualify, you have to buy a health insurance policy with a high deductible. Then you save for your future out-of-pocket expenses through contributions to your HSA. The contributions are tax-deductible, and the withdrawals are also tax-free as long as they go to health care. This works best for high-income folks, since they are the ones who can afford to contribute the most, and they also get the biggest deduction by being in a higher tax bracket. A family in the 35% bracket who can save $5,000 gets a $1,750 tax break, while a family in the 15% bracket who can only save $1,000 gets a $150 tax break. The Republican plan helpfully raises the contribution limits from $3,400 to $6,550 for individuals and from $6,750 to $13,100 for couples, creating an even bigger tax break for those who can pay to play.

Cutting back Medicaid

About half of the 22 million people who have obtained health insurance as a result of the ACA have done so through the expansion of Medicaid. Even more would have done so, but only 30 states chose to participate in the expansion after the Supreme Court ruled that participation could not be mandatory. The expansion opened Medicaid to Americans earning up to 138% of the federal poverty level, which meant up to $16,643 for individuals and $33,948 for a family of four.

The proposed AHCA would halt that expansion in 2020. Those already enrolled could be grandfathered in, if states allowed that, but only if they remained continuously eligible. Anyone whose income rose above the threshold, even for one year, could no longer qualify, unless their income later fell all the way down below the original poverty level. The aim would be to reverse the expansion over the next few years.

In addition, the new law would change the way Medicaid works. Instead of simply covering whatever medical services a recipient receives, it would pay a fixed allotment per recipient to the state. The state would decide how to spend it on health services for the poor. But the state would be on the hook if health care costs rose faster than the allotment, or if a natural disaster or other local health problem put unexpected strains on the system. States would have more “flexibility,” but at the likely cost of reduced funding. Some Republican senators are worried that this change may ultimately shift billions of dollars in costs from the federal government to their states.

The bill would also eliminate Medicaid reimbursements to Planned Parenthood, so poor women would have to look elsewhere for services.

An American bill?

I suppose I would be naïve to suggest that a so-called “American” bill should reflect what a majority of Americans want. A Monmouth poll released this week found only 39% of Americans favoring either repealing and replacing the ACD, or repealing and not replacing it. 58% favored either keeping it as it is, or keeping it and working to improve it.

In general, the “repeal and replace” plan offered by the Republican leadership offers fewer benefits for low-income people, while providing more tax breaks for higher-income people. It may be another step in the perennial Republican effort to lower taxes, but it appears to be a step backward in making health care more affordable. Estimates of how many people would lose their insurance coverage under the plan vary widely, from a few million to as many as 15 million, about two-thirds of the number who gained coverage under Obamacare.

A close examination of policy proposals like this may help dispel the illusion that the Republican Party under Donald Trump has been miraculously transformed into a champion of the working class. And since he has endorsed the plan, it also casts doubt on the idea that his populism places him at odds with his party, at least as far as domestic policy is concerned. Right now, Trump and the Republicans seem to want many of the same things, whether they’re what the people want or not.