The Cost of the American Health Care Act

A sneak preview of the numbers we will see released this week

By K. Joseph Semanick
Updated 7:35 PM ET, Sun March 12, 2017

Tax cuts in green, Medicaid cuts in red

For the past week, reporters and politicians alike have claimed that we don’t know the costs of the American Health Care Act (AHCA). Perhaps it is unawareness or a lack of research, but all the changes trying to be enacted in this bill have already been priced by the Congressional Budget Office (CBO).

In the coming days, the CBO will release updated figures on costs, savings and the consequences this bill would have on the number of uninsured individuals. However, the bill has already been passed through two committees, so it is time to look at the hard numbers of this plan sooner rather than later.

The legislation is composed of three major components: tax cuts, cuts to Medicaid, changes to the private insurance market. Unless otherwise noted, all budget assumptions are aggregated through 2026, as the CBO reports only extend out ten years. In many instances the CBO also calculated secondary consequences of the changes as it affects the success of commerce and businesses.

Medicaid Cuts

The AHCA will lower overall federal expenditures on health care. And we will soon hear the significant savings from the proposed law. But nearly all savings will come at the expense of low-income individuals that rely on Medicaid and the state governments that support Medicaid.

Over $1.3 trillion in savings will be realized by cuts to the Medicaid program. Since none of these cuts will come from improved care or efficiencies, it can also be viewed as eliminating $1.3 trillion in health care for low-income individuals.

Even these savings are short-sighted. By removing health care for a large swath of the population, the country will allow chronic illnesses such as diabetes to fester. For every dollar saved in the next ten years, how many dollars will need to be expended for those that grew sicker without coverage under Medicaid.

Tax Cuts

Reports are correct — the AHCA is simply a Trojan horse for tax cuts to businesses and the wealthy. There is $880 billion in tax cuts, like a wolf dressed in sheep clothing. The largest tax cut will be seen in the Repeal of the Net Investment Income Tax, representing a $230 billion tax cut for those earning at least $250,000 a year. To be clear, this is a passive income tax being cut. The tax cut doesn’t reward hard workers, but rather it is a cut for income that is generated simply by already being wealthy.

The remaining tax cuts are mostly divided among businesses and health care providers. As we discuss ways to keep big ticket hospital items more reasonably cost, the medical device industry will see a repeal of the 2.3% tax on their devices. Similarly, as plans desperately try to steer consumers to use generic drugs, the tax on brand-name prescription drugs will be repealed.

And for years, the individual mandate was explained as a costly unfair tax to middle-income earners. But in reality the $41 billion tax cut might just have been another deflection so that businesses could enjoy $178 billion tax cut for not providing health insurance coverage to their employees.

Reducing Health Insurance Premium

Paul Ryan, the president and a majority of Republicans have stated that a replacement plan will reduce the cost of health and skyrocketing premiums. But the repeal of the mandates above will incentivize health people to leave their health insurance plans, so that premiums will soar as only sick people will remain (known as a death spiral).

As already stated, cuts to Medicaid and the repeal of the Tanning tax and the delay to the Excise tax will yield an even greater increase to health care premiums in the future. We have estimated changes to the subsidies at a savings of $100 billion. This assumed 20 million direct purchase private insurance plans receiving an average subsidy of $3,000. Similar to the Medicaid cuts, the reduction in subsidies will reduce care for older low-income and middle-income individuals, eventually raising the cost of future Medicare expenditures.

As explained in the bill, an introduction of the Patient and State Stability Fund will cost $100 billion and is the only part of the bill that addresses the cost of health care, with many of the payments going directly to health insurance companies. It remains unknown if this will have the desired effect of lowering premiums.

Moreover, the $100 billion cost comes directly from the savings seen by slashing funding to the CDC Prevention Fund and the repeal of cost-sharing subsidies. The Prevention Fund is responsible for stopping communicable diseases before they lead to costly epidemics. The cost-sharing subsidies are yet another obstacle for low-income individuals to receive care. As provided by the ACA, cost-sharing subsidies provide assistance with deductibles and copays, so to ensure that sick people can afford to use their health insurance. Because having health insurance does no good, if going to the doctor is still unaffordable.

Summary

The American Health Care Act will provide $880 billion in tax cuts mostly to businesses and high-income individuals. To pay for those tax cuts, the bill will both cut and transfer cost to the States in the amount of a $1.3 trillion Medicaid cut. Few changes will actually take place to the private insurance market, but the reduction in subsidies will be $100 billion less in federal expenditures. The total estimated savings from this plan will be between $500 and $600 billion dollars, or $60 billion a year.

Such minor savings and severe reductions in care for low-income individuals has both fiscally conservatives on the right and socially conscious liberals on the left unhappy with the American Health Care Act.

Sources
[1] https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/costestimate/hr3762followingenactmentofconsolidatedappropsactof2016.pdf
[2] https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/52142-budgetoptions.pdf
[3] https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51385-HealthInsuranceBaseline_OneCol.pdf
[4] https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/costestimate/hr4725.pdf
[5] https://www.jct.gov/publications.html?func=startdown&id=4988
[6]https://www.census.gov/content/dam/Census/library/publications/2016/demo/p60-257.pdf

(a) Effective as of the passing of the bill
(b) Effective 10/1/2017, but considers only lottery winnings after 12/31/2019
(c) Effective 180 days after the passing of the bill

* savings and costs are assumed to offset
** savings or costs not assumed to exceed $1 Billion
*** savings unknown