HEALTH INSURANCEThe Big Problem (and Benefit) of the GOP’s Health Care PlanShawn TullyMar 15, 2017
The House Republicans are selling an entirely new health care deal to America.
Here's the pitch: To rescue federal finances from looming disaster, we're asking you to shoulder the risks, and use a lot more of your income, to pay for rising health care costs in America. Whatcha think?
The eagerly-awaited CBO analysis of the new measure, released on March 13, generated headlines focusing mostly on how many Americans will lose health coverage, and how repealing Obamacare could cut the deficit. But all Americans, whether you may lose your coverage or not, should closely study the mechanics of the plan: It puts consumers on the firing line precisely where Obamacare removed those uncertainties. Put simply, the house plan, entitled American Health Care ACT (AHCA), essentially caps what the government will pay to aid families and poor people, and what it will spend in total, regardless of how fast medical costs increase. Consumers will pay the difference.
The plan may indeed create what the Republicans envision, a regime in which Americans buy coverage mainly for catastrophic illnesses, and pay for everything routine from their own pockets. And that's not a bad thing. The market-based solution should hammer prices, and solve what really matters—the overall surge in health costs that no government can afford in the long-run, and end a system where big subsidies that discourage shopping and encourage over-consumption, are the driver, not the solution.
That is one way to achieve "affordability."
The competing view holds that only rich, income-based credits that fully protect consumers from the relentless rise in medical expenses can prevent busting family budgets. "The AHCA takes the opposite approach, so that old and poor people will drop their coverage," says Matthew Fiedler, an economist at the Bookings Institution. "The Republicans are saying that the federal government doesn't have the responsibility to make healthcare affordable."
The Republican manifesto would mean a revolutionary U-turn for U.S. healthcare. And in many ways, it's highly responsible. The bill's main objective—capping future government spending on healthcare at rates that won't gobble up a bigger and bigger share of national income, as well as leaving more resources for investment and entrepreneurship—is exactly what government needs to do. Removing the threat that could shackle the economy with ruinous deficits and debt is essential.
But to work, the bill needs to make make health insurance far cheaper. It's not clear that will happen, in part because the Republicans may not secure enough of the market-based agenda they advocate. For example, the AHCA keeps Obamacare's requirements that insurers offer a minimum "standard benefits package." That an expensive proposition. And it's not necessarily the type of insurance consumers would chose on their own. Why is it still in? Because Republicans can't dump it through reconciliation, the process the new health care law will have to go to, even if what they really want to be able to offer Americans the ability to buy plans that are less elaborate, but also a lot less costly.
Let's start with the headlines—the CBO's projections on the budget and the uninsured. Then examine two crucial pillars of the plan: the new tax credit that detaches your payments from income, while helping the young and penalizing the elderly; and the radical reductions in spending on the Obamacare's main engine for spreading coverage, Medicaid.
The budget numbers look good.
To pass the AHCA in the Senate, the Republicans need to deploy "reconciliation," an expedited budget process that requires just 50 votes, instead of the 60 needed to prevent a filibuster. But reconciliation comes with stringent requirements. The bill cannot increase total deficits in the years beyond the CBO's 10-year budget window, over and above the forecasts under current law. In a January budget resolution, the House Republicans added a restriction of their own: A pledge that the AHCA would create savings, albeit small ones, over the 2017-2026 period.
According to the CBO, the AHCA easily meets both tests. It produces a total of $337 billion in lower deficits in the coming ten-year window, and would not significantly increase shortfalls "in any of the four consecutive ten-year periods beginning in 2027," according to the CBO.
Granted, the AHCA deploys a major gimmick to get there. It suspends the so-called "Cadillac tax" on high-cost plans included under Obamacare for several years, but counts the revenues from this probably never-to-be-enacted levy for future periods. "Without the Cadillac tax, it's unlikely the Republicans could have met the test in the second decade," says Fiedler.
The AHCA sacrifices $900 billion in future revenues by eliminating all other Obamacare taxes, including special levies on high-earners and annual fees on insurers. But the big number is the $1.2 trillion reduction in spending. We'll get to the Medicaid reductions shortly, but a figure that epitomizes what's at the heart of the plan is the fall in spending on tax credits for purchasing insurance. The ACA was expected to direct $673 billion to those subsidies over the next decade. The AHCA will hand enrollees about half that amount, or $361 billion.
The ballooning ranks of the uninsured.
The forecast for the uninsured looks as dire as the budget numbers appear reassuring. The CBO reckons that by 2027, 52 million Americans will go without coverage under the ACHA, 24 million more than if the ACA remains in place. The Democrats are seizing on the forecast as proof that the AHCA will simply drive millions more Americans to emergency rooms and do nothing to lower overall costs. Republicans dismiss the uninsured estimate as just another of the CBO's bogus predictions.
According to the CBO, three main factors account for the almost-doubling of the uninsured. First, roughly seven million fewer people, on net, would enroll in employer-based plans by 2027. That's mainly because the AHCA eliminates the Obamacare penalties for individuals who fail to buy coverage and companies that decline to provide it. Many folks will simply choose to go without insurance because they're no longer fined for doing so, and companies with large numbers of young employees are likely to drop all coverage, since the AHCA is far more generous with the 20 to 40 crowd than the ACA. Why keep paying for your employees coverage if they can get as good a deal under the AHCA?
Second, around 2 million fewer people would receive coverage through the subsidized "non-group," or individual market—the focus of both Obamacare and the AHCA. Many of the newly uninsured would be the elderly, for whom benefits are especially slim. Third, fourteen million fewer Americans would enroll in Medicaid, the program that insures around half of the well over 20 million Americans who gained coverage through Obamacare.
The Medicaid cuts are drastic.
The AHCA would halt the gigantic expansion of Medicaid as a haven for the poor and uninsured. The ACA opened Medicaid—the program jointly funded by the federal government and the states—to a new legion of the uninsured by lifting the income limit for eligibility by around one-third, to 138% of the federal poverty level, or $27,800 for a family of three. In addition, the ACA reimburses the states for 90% of the additional costs of the new enrollees. Thirty-one states have signed on, and the CBO projects that if Obamacare were to remain intact, many more would join by 2027, raising the ranks of Americans newly-insured under Medicaid by tens of millions.
Starting in 2020, the AHCA would allow the higher income limit to continue. But it would also lower the payments for the newly insured from 90% to the normal level of around 57%. It would base all future Medicaid grants on a fixed formula of per-capita payments tied to annual inflation in medical costs. Fiedler says that's not sufficient. Post AHCA, Medicaid grant will take in to account only the costs of specific services, not the overall costs families or individuals have to pay. What's more, it's not adjusted by states, where costs can vary. "The formula gets it very wrong," says Fiedler.
Nonetheless, those cuts explain why an estimated 14 million fewer Americans will be covered by Medicaid in 2027. But the reform is a huge cost-saver. It lowers projected Medicaid spending by $880 billion or 25% over the 10-year window, the biggest source of savings in the AHCA.
The AHCA piles the risk on consumers.
But there's a downside.
Obamacare provided a sliding scale of subsidies. Enrollees in the state exchanges had a choice of three policies ranging from basic to rich levels of coverage, all of which had premiums dependant on costs in different geographies. Folks then paid a percentage of the "benchmark," or medium-priced policy in their area based on two factors, their age and their income. The plan was heavily weighted towards aiding the poor and the elderly. For example, it allowed insurers to charge people in their 60s only 3 times as much for the same coverage as those in their 20s, and supplied credits for the seniors that were as much as four times as big as those for the young.
The ACA credits had one overriding feature: They limited what enrollees pay from their own pockets. Even if premiums jumped 15%, and they frequently did, a family's actual payments might stay the same, because they were obliged to pay a fixed percentage of their income, no matter what the full cost of their plan or how fast it rose. If their incomes didn't increase, neither did their out-of-pocket costs. Hence, Americans were insulated from galloping inflation in healthcare.
Today, it's fast-growing ACA subsidies that fund the growing gap between the basically frozen out-of-pocket payments, and the full cost of the premiums.
The AHCA would totally upend that system. Its subsidy scale is based exclusively on age, with one small nod to income. The credits phase out gradually for an individual at incomes over $75,000, and for couples making $150,000 or more. Under Obamacare, the total subsidies rose with the rapidly-rising costs of insuring those millions of Americans. Under the AHCA, the payments for each enrollee increases on a fixed formula of inflation plus one point. Hence, if premiums rise a lot more than the 3.4% a year the CBO expects that number to reach in 2027, it's Americans, not the government, who'll have to pay the difference.
The result is reduced benefits for the old and poor. The AHCA allows insurers to charge the elderly five times the rates for the young, and provides credits that are just two times as big for seniors. In 2026, under Obamacare, a 64-year-old who earns $26,500 a year and faces a typical premium of $15,500 would pay just $1,700. The AHCA would require a payment of $14,500, almost nine times as much, and not one some making $26,500 is likely to be able to afford.
By contrast, the AHCA is far more generous with middle and upper-middle-income folks. The danger is that those Americans already have insurance, and are unlikely to dump it. It's the elderly who cost the most, and for whom coverage is most essential. Yet they're the ones most vulnerable to losing coverage under the AHCA.
Overall, the AHCA's focus on budget discipline and creating a real consumer market for health care are laudable. But the increased burden on those who need insurance, and are most likely to drop it, are the plan's weakness. That's the sword the Democrats will carry into the looming battle over the future of one-fifth of America's economy.