Making Sense of the Republican Healthcare Plan (Good Luck)

Obamacare is far from perfect, but the GOP plan is worse

After years of vowing to “repeal and replace” Obamacare, Republican lawmakers finally unveiled their healthcare plan, the American Healthcare Act (AHCA for short).

In terms of policy, healthcare is incredibly complex. The Affordable Care Act (Obamacare) was several thousand pages long. The AHCA bill is significantly shorter, as White House Press Secretary Sean Spicer was keen to point out.

This by no means implies the bill is easy to understand, many of its changes are highly technical. The CBO recently announced 14 million Americans would lose healthcare within a year under the plan. Both Obamacare and the AHCA seek to solve a set of problems in the healthcare industry. A problem-by-problem examination of the proposed legislation shows the several substantive changes to Obamacare.

Problem 1: How to Boost Coverage & Prevent a Death Spiral

OBAMACARE: The Individual Mandate

Before Obamacare healthcare was expensive for a variety of reasons, but one big driver of cost is the fact that lots of people didn’t buy insurance until they needed it. In general young people don’t need much health insurance coverage since generally, they are healthy. So when young people don’t buy health insurance, the only people who buy insurance are older people, who in general require much more healthcare.

One idea to drive costs down is to boost the share of young, healthy people who buy healthcare. Since these young people would be paying for healthcare, but not using lots of resources, they would help drive costs down for everyone, especially seniors who have high healthcare costs and generally low or fixed incomes.

The trick is how to get young people to purchase health insurance when many don’t feel they need it. Obamacare tried to solve this problem with the highly controversial individual mandate.

The mandate concept is actually pretty simple and originated among Conservative think tanks. It requires that everyone purchase health insurance or pay a fine. In 2016 that fine totaled 2.5% of household income or a max of $2,085. In theory this, penalty would be more effective if it was higher since a higher penalty will force more people into the marketplace.

Republicans have despised the individual mandate since its inception, even calling it unconstitutional. In 2012, the court held that the mandate was constitutional. However, the individual mandate remains highly unpopular especially with much of the public and republicans in particular.

The AHCA: Continuous Coverage

When Republicans took power and started working on a replacement for Obamacare they faced a serious dilemma regarding the individual mandate. They hate it and their base loathes it, yet it is needed to help drive costs down and keep the individual insurance market intact.

Republicans think they have devised a clever way around the individual mandate in the form of a new provision called “continuous coverage”. Instead of using a mandate to require insurance purchases, the continuous coverage provision tries to incentivize buying insurance by imposing an additional cost on people who don’t have coverage.

Under continuous coverage, all individuals are required to have health insurance either through employment or purchase. If you lose your coverage (either from no longer purchasing or change in jobs) for longer than a certain period of time, you will now have to pay a price increase for your insurance. Under the current proposal, anyone who doesn’t have coverage for longer than 63 days would be subject to a 30% increase in healthcare premiums for up to a year. The idea here is: Buy insurance or your insurance is going to cost more.

There are some serious flaws with this proposal, especially considering that most Americans get healthcare through their employer. Continuous coverage could mean changing jobs, even for a period of just over 2 months, could lead to a hike in prices.

There is also the argument that continuous coverage doesn’t really offer an incentive to buy insurance. For example, let’s take a young person named Ted. Ted is fairly healthy and just left a job to start a business or look for other employment. Sure, he could buy health insurance on his own but since he is young and healthy, this probably isn’t a top priority. The real problem is if Ted doesn’t buy within 60 days, then his incentive to buy insurance really reduces since he will now be charged 30% more on top of other costs. In essence, if your coverage does lapse you might have a strong disincentive to get back in the market.

Problem 2: Federal Tax Subsidies

Obamacare: Subsidies based on income & location

Another key provision of the Affordable Care Act is federal subsidies to help people afford healthcare. Obamacare determines the amount for these subsidies based on a complex formula that factors in a person’s income and location. Essentially, Obamacare looks at an individual’s income and their expected healthcare cost to come up with how much support a person will receive.

Obamacare uses a sliding scale pertaining to income, so people who make more money get less subsidies and people who make less get more. Also healthcare costs vary dramatically by location. Healthcare costs in a rural area such as Nebraska are much higher than in an urban area like New York. The Obamacare funding scheme takes these regional differences into account and tries to equalize the level of support each individual receives.

AHCA: Tax credits based on age

The Republican proposal would largely scrap the Obamacare funding scheme and replace it with a new structure based on tax credits. Under this system, individuals would receive a tax credit to help them cover the cost of their health insurance premium.

The tax credits would range from $2,000 to $4,000 annually. The tax credit is only available to individuals who make less than $75,000 and families that make less than 150,000. The amount of the tax credit would be determined by age, not income or location. Older people get more credit, which makes sense because they have higher healthcare costs. However, by not tying the credits to location or income is potentially problematic. Instead credits are structured by decade age brackets.

Proposed Tax Credits under AHCA

For example, under the plan a 30 year old earning $74,000 would receive the same tax credit as a 39 year old making $20,000. Additionally someone making the same amount of money in rural Alaska, would get the same tax credit as someone in New York City.

The Kaiser Family Foundation conducted a study on the differences in tax plans between the two proposals. It found that generally, “People who are older, lower-income, or live in high-premium areas (like Alaska and Arizona) receive larger tax credits under the ACA than they would under the American Health Care Act replacement.” Meaning that poor, old and rural people are likely to receive less support. In contrast, “Some people who are younger, higher-income, or live in low-premium areas (like Massachusetts, New Hampshire, and Washington) may receive larger assistance under the replacement plan.”

The map below shows the projected areas to receive more or less aid under the new plan. Areas in blue get less aid, areas in orange/red get more.

Estimated impact of tax subsidies (Kaiser Family Foundation)

Colorado is a good example of a state that would really be hurt by this plan. Much of the state’s population that lives in/around Denver and along the Front Range would receive higher tax credits than much of the rest of the state which actually stands to lose funding. The problem here is that the plan gives more aid to people in urban areas who likely have lower costs to begin with. Urban areas have more hospitals and healthcare providers and more competition that drives costs down. Under the plan, rural residents who often have higher costs, would get less support.

Change in Tax Credit in Colorado (Kaiser Family Foundation)

Simply put, Obamacare gives rural residents getting almost twice the amount of premium subsidy as urban residents. The Republican plan would eliminate that difference and give the same amount to everyone.

In general, it seems like lots of Americans, especially those who likely need subsidies would get less in federal support under the Republican plan.

One final note on the tax subsidies. The current proposal does not allow tax credits to be used for any insurance policy that covers abortion. This would effectively eliminate abortion coverage from most (if not all) plans covered with the tax subsidies.

Problem 3: What insurers can charge

Obamacare: Limits

One of the ways Obamacare helps drive down the cost of healthcare is to impose limits on what insurance companies can charge, particularly by age. Because insuring seniors is so much more expensive, insurance companies want to charge higher premiums the older a person is. Under the ACA, insurance companies can only charge their oldest customers 3x the rate of younger customers.

AHCA: Limits

The Republican plan changes these limits, allowing insurance companies to charge older customers 5x more and allow states to decide their own ratios as well. This could have a significant negative impact on seniors, some estimates show a senior’s premiums could rise from $8,500 to $10,600. And while seniors would get a larger subsidy to help cover this cost, many estimates suggest it won’t be enough to offset the difference. The potential increase is one of the reasons the American Association of Retired People (AARP) has vocally opposed the bill.

Problem 4: Medicaid

Obamacare: Expand Medicaid Coverage Dramatically

Since it was passed in 2010, Obamacare has insured nearly 20 million more people than when it was enacted. A vast chunk of that increase comes from the program’s Medicaid expansion program and the expansion of the Children’s Health Insurance Program (CHIP). Medicaid is a federal-state program that provides health insurance for low income individuals and families. In 2015, it covered nearly 70 million people.

Under the provisions of the Affordable Care Act, the federal government offered states to join a program that would offer Medicaid to more people than were previously covered. Pre-Obamacare in order to receive Medicaid you had to have specific characteristics such as a pregnancy or disability. Obamacare removed this requirement and opened up the program to anyone under 138% of the poverty line.

States could choose whether they wanted to expand the program or not, but if they did expand before 2016, 100% of the program cost was covered by the Federal Government. After 2016, the Federal Government would only over 90% of the program’s cost. 32 states and the District of Columbia opted into the the Medicaid expansion and at least 7 million people got coverage.

AHCA: End Medicaid Expansion & Move Towards the States

Some Republicans planned to eliminate the Medicaid expansion all together. However, potential political backlash caused the GOP to rethink its Medicaid plan. The solution proposed in the bill would end the Medicaid expansion in 2020. At that date, states could no longer enroll new people on the Medicaid plan. However, people who already had the plan, would be able to keep it. If someone left the plan, they would be able to come back with reduced benefits. Since the plan would have no new enrollment, it would presumably shrink as people get new plans and shift off the program.

Perhaps the bigger change is the bill’s proposal for Medicaid funding. Currently, the Federal Government covers 100% of an individuals Medicaid costs. It doesn’t matter whether you only spend $200 on an annual physical or $50,000 on open heart surgery, Medicaid will cover the costs.

The GOP proposal would change the funding structure of the program. The new system would set a per-capita amount for each person on Medicaid. This federal government would then take that amount and multiply it by the number of enrollees that live in their state. Individuals would still get full coverage but states might face trouble if lots of people went over their per-capita amount. For example if the per-capita amount is not high enough and costs start to overrun the amount allocated to the state, the state government would have to pick up the tab.

This type of funding has long be favored by conservatives like Paul Ryan who want to convert Medicaid to block grants, but it has frequently been criticized as a way to cut benefits by diverting the costs to the states which have less resources to address funding shortfalls. The key here would be to see how much of a per-capita funding amount the program would give to Medicaid and that in theory, could remain a question until 2020.

Problem 5: Paying for the Plan

Obamacare: New Taxes

Not surprisingly, paying for elements of Obamacare notably the Medicaid Expansion and the subsidies is incredibly expensive. In order to pay for these measures, Obamacare created a variety of new taxes, mostly on hospitals and insurance companies.

AHCA: Unknown, but it does cut taxes (a lot)

The bill contains a massive tax cut. The Committee for a Responsible Budget found the bill would cut at least $600 billion in taxes. This would come from repealing taxes on investments, health insurers, prescription drug companies.

Republicans charge that by cutting these taxes healthcare costs will be freed from the regulatory burden and therefore drive costs down. Democrats claim the tax cuts will benefit the rich.

The Tax Policy Center seemed to confirm these findings. In their analysis, households in the bottom 90% of income (anyone who makes less than around $250,000) would get $0 in tax relief (unless they had large amounts of investments). However, households in the top .1% of income (people who make more than $3.75 million) stand to gain a lot. On average, they would pay $165,090 less in taxes.

Problem 6: Health Savings Accounts

Health Savings Accounts (HSA’s) are getting a lot of attention right now. Speaker of the House, Paul Ryan loves them and Republicans are making them a big part of their healthcare plan.

The concept behind Health Savings Accounts is relatively straightforward. An HSA is basically a tax-free bank account that an individual can use to cover certain medical expenses (not preventive care). In some cases, employers offer contributions to HSA’s to help employees cover their costs.

As a policy solution, HSA are a decent tool for people who have enough money to set aside some for health expenses or have an employer generous enough to contribute. However, it will do next to nothing to help people who can’t afford health insurance or the expenses that aren’t covered by their insurance. Conservatives like HSA’s on the idea that it will make people more accountable for their own healthcare expenses.

Obamacare: Lower caps

Under Obamacare, individuals can put $3,400 and families can put $6,750 annually into a tax-free savings account to cover health related expenses.

AHCA: Higher Caps

The Republican proposal would raise the cap amount that people can put into a tax free HSA. The new cap would be $6,550 for individuals and $13,100 for families.

Current and proposed max HSA contributions

Policies Kept from Obamacare

The Republican plan would keep some of the most popular provisions from Obamacare.

  • Young adults could stay on their parents plan until they are 26.
  • Insurance companies cannot deny coverage for people with pre-existing conditions
  • Insurance companies are required to offer plans that cover “essential health benefits” such as preventative care

Keeping these provisions intact was bit of a no-brainer for Congressional Republicans since they are all so popular.

Final Thoughts

Healthcare legislation is usually judged by two metrics:

1) What will it cost? 2) How many people will be covered?

Obamacare was estimated to cost around $940 billion dollars over 10 years, they revised that cost estimate upwards to $1.76 trillion in 2012 through the start of 23. Depending on whether or not you count Medicaid run by states, Obamacare expanded coverage for 17–20 million people.

The recently released nonpartisan CBO report offers a mixed bag of analysis for the AHCA. Their analysis indicates the bill would reduce spending and trim the deficit but could lead to dramatic numbers of people losing insurance.

According to the CBO, the AHCA would reduce the deficit by $337 billion over 10 years. These savings mostly come in cost reductions from Medicaid and the subsidies portion of the program.

Before the CBO released its report, some private groups released estimates regarding numbers how many people would gain/lose insurance. Ratings agency S & P estimated between 6- 10 million people would lose their health insurance. Top analysts at Brookings estimate at least 15 million people will lose coverage under the Republican plan.

Data from the CBO offers an even worse picture when it comes to coverage. The CBO found 14 million people would lose insurance in 2018 and 24 million people would be without it by 2026. This would mean by 2026, 52 million people would be uninsured vs 28 million under Obamacare. Under the current plan most of the 14 million people will lose their insurance in the spring of 2018, an election year.

It is worth noting that CBO reports are not always accurate and they have been wrong before. CBO predictions are just that, predictions, not guarantees of what will happen. However, CBO projections are usually considered the best, most nonpartisan estimate we have to evaluate proposed legislation. The CBO employs more than 40 healthcare analysts who have used 15 years of data to model the proposal.

For seven years, Republicans have railed against Obamacare. Their calls to “Repeal and Replace” it have served as a major unifier among the party base. The repeal part of this equation is legislatively easy, but politically challenging. Republicans have developed a replacement plan that amounts to a mix of Obamacare and some conservative principles added. The result is an unclear and often baffling policy that could create even more confusion and complexity in the health care market.

While it is possible Republicans could alter their plans in the coming weeks or tweak the proposal, Republicans in the House are moving ahead with deliberate speed. The bill’s status looks particularly perilous in the Senate and while President Trump has endorsed the plan, its final passage still looks murky at best. Unless Republicans can come up with different proposals, they might be stuck with Obamacare for longer than they thought.

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