The House GOP’s ACA replacement proposal

During each of the past eight years, the House GOP has drafted bills to replace “Obamacare”. Until now, these were essentially messaging exercises — designed to publicize shortcomings of the Affordable Care Act (ACA), rather than to implement a workable alternative. This year, things are different. Republicans find themselves with a (narrow) window in which they can enact changes. That makes the task more meaningful, but also more difficult.

The window is narrow because the Republican majority in the Senate is slim, because the Republican caucus is divided on many critical aspects of the law, and because the filibuster prevents Republicans from changing anything other than tax and spending provisions without the support of at least seven Democratic Senators.

The Medicaid expansion was the most significant element of the ACA, whether counted by its cost or the number of beneficiaries enrolled. As it depends entirely on public funds, a unified Republican party could theoretically alter any aspect of the program without Democratic support.

Medicaid was established in 1965 as a program to support the provision of healthcare to Americans who could not be expected to work for reasons of disability or family situation. It operates through a system of matching funds, whereby the Federal government provides between $1 and $3 for each $1 that states spend on covered services. Over the past couple of decades, eligibility has gradually been loosened to allow states to claim funds for the healthcare of low-income able-bodied adults, and annual spending on the program has risen steadily from $145bn in 1995 to $545bn in 2015.

By subsidizing states according to their ability to put in their own money, Medicaid now spends over twice as much per capita in the wealthiest states as it does in the poorest. Republicans, who represent most of the poorer states, have long found this inappropriate for a program that is supposed to be dedicated to supporting the poor. The current matching fund structure also requires much federal micromanagement of what states are and are not allowed to spend money on. Republicans would prefer each state to receive a fixed amount, so that they may have more flexibility to target funds at the beneficiaries and services that fill unmet needs.

The ACA required all states to expand Medicaid to provide comprehensive medical services to all low-income citizens, regardless of work history, disability, or family status. This proved controversial due to its additional cost ($65bn in 2016), its impact on work incentives, and econometric estimates that 60% of those covered by the Medicaid expansion already had health insurance. In NFIB v. Sebelius (2012) the Supreme Court ruled that Congress did not have the right to force states to expand their Medicaid programs against their will. Although the Federal government provides $9 for every $1 that states spend expanding Medicaid under the ACA, only 31 states have done so.

Politically, this divides the GOP. Many conservatives in Congress ran for election promising to repeal the expansion. They are opposed to the additional cost, believe it has done little to expand access to care, and represent states that have not received additional funds from it. Yet, many moderate Republicans represent states that have expanded Medicaid, have millions of residents that would lose health coverage if the program’s enrollment was rolled back, and could not afford to lose the extra federal subsidies.

The House GOP proposal does a remarkably good job of advancing structural reform and satisfying the concerns of fiscal conservatives without leaving individuals from expansion states suddenly uninsured. It gives states more discretion over eligibility requirements, codifies the NFIB v. Sebelius right of states to forego expansion, and enhances it to provide states more flexibility to target funds at the neediest individuals.

By grandfathering the Medicaid expansion at the level of individual eligibility, the House GOP proposal transcends the stark dichotomy between expansion and non-expansion states and prevents sudden disruption to state budgets. But it also provides a glide-path towards a system of per capita caps at an intermediate level, as individuals cycle out of the program’s eligibility through employment and cohort replacement. This is a very clever solution to a very knotty political problem, which also puts policy on a sounder course. It doesn’t completely lock future Congresses into spending specific amounts of money on the program, but allows states to better-target their funds, and begins to establish a more equitable distribution of resources across the country.

While Medicaid reform is constrained by the politics of tax-and-spend, which are inherently zero-sum and divisive, reforms to the insurance market are constrained by the need for 60 votes to overcome a Senate filibuster. Earlier this year, it appeared that Senate Majority Leader Mitch McConnell (R-KY) and Senate HELP Committee Chairman Lamar Alexander (R-TN) were looking to secure the necessary bipartisan support for a broad insurance market reform package — but Democrats have closed ranks, and Republican Senate leaders have acknowledged that this is no longer a viable option.

Although insurance market regulations form the core of Title I of the ACA, and the root of much of the dysfunction in the current marketplace, Republicans are therefore forced to accept them essentially unchanged. Rather than being able to pull the ship into a dry dock for a re-build, they must patch it up as best as they can, by amending only the tax and spending provisions. This is an exceedingly difficult task — not only because it leaves the structural flaws unmended, but because most of the existing associated spending commitments (premium and cost-sharing subsidies) are necessary to keep most of the current enrollees from jumping ship.

Republicans cannot therefore enact their preferred insurance market reforms this year. The best they can hope for is to mitigate some of its ill-effects, and to shift policy onto more favorable terrain where moderate Democrats will feel pressured to agree to more fundamental reforms in the future. That being the case, what is the merit of the proposed reforms to the individual market?

The House GOP replaces the individual mandate with continuous coverage requirements. So long as the sick are entitled to care at the same price as the healthy under post-ACA insurance regulations, it is necessary to prevent individuals from waiting to be sick before purchasing coverage. This is a modest sensible reform, which replaces a blunt and ineffective penalty with one which is compatible with a less-prescriptive attitude to the content of health insurance contracts. The proposal to replace the individual entitlement to cost-sharing subsidies with a block grant for states to target assistance at the neediest individuals (whether through reinsurance, high-risk pools, cost-sharing reductions, or the provision of in-kind benefits), similarly adds a modest degree of flexibility and has some merit given the constraints of the ACA’s insurance regulations. The ACA’s supplemental taxes on health insurance, HSAs, medical devices, and prescription drugs had no purpose other than to the help that legislation gain a favorable CBO score. The House GOP is right to seek their repeal.

However, the creation of a $2,000–4,000 across-the-board tax credit available in full for married households earning up to $150,000, establishes an enormous new entitlement that remains very-poorly designed to fill unmet needs, and likely imposes a similarly large burden on these same individuals as taxpayers later in the year. Fiscal conservatives in Congress, quite understandably, have protested the creation of a massive new spending commitment that is astoundingly open-ended.

So, what do these proposed changes amount to?

A very impressive proposal to reform Medicaid that, despite seemingly-intractable politics, begins the process of shifting the program onto a more rational footing. A number of modest tweaks to the individual and small group market for private insurance, within the framework of the ACA, that do little to fix that market’s fundamental flaws. And an unjustifiable new entitlement built upon that market’s dysfunctional status quo.

The Medicaid reforms should be cheered into law. The ACA’s mandates and taxes should be repealed and replaced with continuous coverage requirements. But the House GOP’s proposed reforms to subsidies for participants on the ACA’s exchanges should be abandoned. These should be better-targeted at the narrow pool of low-income individuals who are uninsurable on the private market — not broadened to cover the near-entirety of society. Thorough reform of the individual market may therefore best be left to another day.

Colin Powell spoke of a “Pottery Barn Rule” with respect to Iraq. If you break it, you own it. The same is true with respect to the individual market for health insurance. If the GOP lacks the Democratic support to properly fix things, it should advance proposals that it genuinely believes will remedy the situation, and force Senators to filibuster them in full view of TV cameras — so that the proper location of blame for the continued dysfunction remains clear. It should not patch together a proposal that no-one truly believes in, which accepts all the evils of ACA regulation, and builds a new tottering edifice upon them.

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