United Way’s ask of President Trump, House Speaker Paul Ryan (R-WI) and his Congressional colleagues is that any changes to our healthcare laws must improve on existing healthcare coverage, protect Medicaid from harmful structural changes and leave intact all consumer protections for all Americans. It may sound like a tall order, but it can be done, and that is the task for Speaker Ryan, President Trump and other Congressional leaders who have vowed to replace the Affordable Care Act with something better.

With that in mind, let’s look at the GOP’s proposed new health insurance law, the “American Health Care Act” (AHCA), sponsored by House Speaker Paul Ryan and championed by President Trump.

There are the three key questions:
  1. Would the AHCA increase costs - premiums, co-pays and deductibles - for consumers?
  2. Would the AHCA insure as many or more people than are covered now under the Affordable Care Act (ACA)?
  3. Would the new federal plan increase federal, state and local deficits?

Millions Will Lose Insurance

The AHCA almost certainly will lead to loss of coverage for millions of Americans. The Congressional Budget Office (CBO) estimates 24 million Americans would lose their coverage, while the Trump White House’s own internal estimate is even higher, at 26 million. sick kid

Prior to the passage of the Affordable Care Act (ACA), 50 million Americans, mostly adults between 18-64 years of age who didn’t insurance through their employer. (California’s successful implementation of the ACA, including its Medicaid expansion to low income adults, has overall increased health coverage to 5 million people, reducing the state uninsured rate from 17.2 percent prior to the ACA to 7.4 percent.)

Loss of insurance will be concentrated in two groups – those who can no longer afford to buy or be induced to buy private insurance through the exchanges, and poor people pushed off the rolls by proposed deep cuts to Medicaid.

Shrinking the private insurance pool: The AHCA preserves the same basic structure as the ACA – (the “three-legged stool” we described in our first post in this series. The AHCA, like the ACA,:

1) requires insurers to charge similar rates across an entire community (“community rating”) and barring them from excluding people because of pre-existing conditions;
(2) requires people to purchase insurance, even though they might otherwise choose not to do so (the individual mandate), and
(3) provides subsidies for lower and moderate income people so they can afford to meet the mandate.

Yet even preserving the ACA’s basic structure, the AHCA is projected to result in millions of people losing health insurance, which means, losing access to health care. Much of the damage here comes from two sources – a much less effective subsidy to enable people to buy insurance, and a deeply flawed mechanism for incentivizing the “young-and-healthies” to buy health insurance.

Recall that there is a feedback loop between how many people buy into the insurance pool and premiums and co-pay costs. This is because insurance pools need a good mix of healthy people and sick people – the greater the proportion of sick people in an insurance pool, the higher the premiums an insurance company must charge across all consumers in the pool to cover their costs, but as those costs rise, there is an increasing incentive for healthy people who feel confident they won’t need insurance (the “young-and-healthies”), to forego purchasing insurance (“adverse selection”).

The ACA used a carrot and a stick to get people into insurance - subsidies for premiums, penalties for going uninsured. The AHCA's versions will be much less effective - and much less fair.

Subsidies buy less: The AHCA keeps the first leg of the stool – no exclusion for pre-existing conditions – but makes the second and third legs of the stool much more rickety. The AHCA sharply reduces the subsidies to low and moderate income people by converting the ACA subsidy which varies by a consumer’s income to a flat amount that varies not by income, but by age. (Note that in both cases, current law under ACA and the proposed AHCA, the subsidies are tax credits.) This leads to absurd results, such as a person who earns $75,000 getting exactly the same credit as someone the same age who earns $25,000. Further, because the tax credit is not tied to income, the buying power for consumers shrinks dramatically; to take an example offered by CBO (see table 4 at p. 37 here), a 64-year old earning $26,500 would pay $1700 under current law, after they receive sliding rate tax credits, but under the AHCA, they would pay $14,600, more than half their income. (In effect, the AHCA's effect is a large tax increase for many low- and moderate-income people.) The AHCA's tax credits make coverage much less affordable for lower income people of every age, which makes insurance much less affordable for them and may lead them to have to drop coverage.

CBO AHCA report table 4 subsidy values 2

Penalty changes lead to perverse incentives: The AHCA, like the ACA, uses a financial penalty to induce people to purchase insurance when they otherwise might not. In that regard, the inducements are the same, whether they are called a mandate or not. The AHCA’s incentive, however, is likely to be much less effective. It imposes a 30% penalty premium on people who come back to the insurance market after dropping out for more than 60 days. This payment is made to the private insurer, rather than paid on the consumer’s tax return. Under the ACA, the penalty for not purchasing insurance applied every year, but the AHCA penalty could allow someone to go without insurance for several years, then purchase insurance when they get sick and pay only a 30% penalty premium for one year, which could be much less than they would have paid to keep continuous coverage.  This likely will encourage more young and healthy people to forego insurance.

The cumulative effect of the reduced subsidies and the weakened inducement are very likely to destabilize the insurance markets, which may cause significant distress well beyond the 24 million people who lose their insurance. The AHCA continues to require insurers not to exclude people for pre-existing conditions, but as fewer healthy people can afford insurance or are influenced by the penalty, then the balance between healthy and sick people are in the pool gets worse, which means more losses for insurers, which leads to rising premiums for everyone, which leads even more people who feel healthy to take the risk of dropping off insurance, which reinforces the cycle that can become a “death spiral.”

Children and Elderly in the Crosshairs: Medicaid Cuts

The AHCA would cut $880 billion from Medicaid in the first ten years alone, while also dismantling Medicaid’s 50-year guarantee of affordable, comprehensive health coverage to people eligible for Medicaid (“Medi-Cal” in California).

Medicaid is the primary source of insurance for low-income children. Almost 60 percent of all children in California are covered by Medi-Cal. Because children constitute the largest group of Medicaid enrollees, any changes to Medicaid disproportionately affect them. Health coverage for children is a smart investment. Insured children are more likely than uninsured children to be academically successful, graduate from high school, and attend college. Children with Medi-Cal health coverage grow up to be healthier as adults, earn higher wages, and pay more in taxes, all of which are benefit all of us.

Medicaid is also the primary source of support for long-term care for disabled and elderly people, something virtually every family must confront at some point.

The AHCA’s cuts to Medicaid will come from shifting costs to state governments. The AHCA eliminates the federal match for state expenditures on Medicaid and replacing it with a flat per capita cap or block grant, and also eliminating federal support for people covered under the expansion of Medicaid eligibility to adults earning below 138% of the Federal Poverty Level (the Medicaid expansion). 

Under current law, the federal government matches state spending on Medicaid at varying rates, providing 50% or 75% of every dollar spent on Medicaid. Under current law, as the number of people eligible for Medicaid grows, or as some people increase earnings and move off the rolls and others come on, states can count on the federal match to help pay the costs of coverage for Medicaid enrollees. The AHCA proposes to end that guaranteed match, which means as the number of people needing Medicaid coverage and services grows (think of the opioid crisis, for example), the state will bear all the cost burden of growth in costs beyond the baseline set by the AHCA. This will be devastating for low-income children. The AHCA would renege on our longstanding promise of comprehensive coverage so children can grow up healthy. States will have cost incentives to eliminate crucial benefits and lowering income eligibility, leaving health care for low-income children in the hands of politicians, not pediatricians.

In addition, the AHCA effectively eliminates the Medicaid expansion. Under that provision of the ACA, eligibility for Medicaid was extended to childless adults earning below 138% of the Federal Poverty Level, and the federal government paid all the costs of the newly enrolled at first, declining to 90% of the newly enrolled in 2020. The AHCA freezes enrollment under the expansion and provides that people covered under the expansion who fall off the rolls for two months or more will lose their coverage, and cannot be reinsured at the same federal matching rate. This is important because less than half of people eligible under the expansion stay on Medicaid continuously. For example, imagine two working parents of a family of four earning $30,000, they would be eligible for Medicaid because 138% of FPL is $34,000. If their earnings increase to $35,000 for a time, they become ineligible, but if their earnings fall back to $30,000 and they become eligible again, the 90% federal match is no longer available. The state would need to pay for their coverage within the limits of the fixed amount provided by the AHCA, so the marginal costs of adding those parents back on the rolls effectively is entirely on the state. Think about the incentives there for whether states keep or expand coverage in Medicaid.

Two Steps Backward

The AHCA maintains the same basic structure as the ACA, yet it is likely to do a much worse job in terms of stabilizing the private insurance market and providing coverage to people who don’t have health insurance from their employer. The AHCA is likely to result in over 24 million people losing coverage, increasing the total number of uninsured Americans to 52 million by 2026, more than the 49.9 million uninsured before the implementation of the ACA. With the exception of upper income people who would receive a large tax cut, the AHCA doesn’t seem destined to make anyone happy – certainly not the insurers who will face greater risk, the state governments and the hospital and health systems that may go deeply in the red, the middle-income people who will have far less subsidy to pay for insurance premiums, and the millions of people of all ages and incomes who will lose insurance.

This is not a partisan point, it is just sound policy analysis. Viewed from this angle, though, it seems clear that repeal of the ACA and replacement of it with the AHCA is not a policy issue, but a political one. The ACA is not perfect, but its opponents had over 7 years to come up with a better plan, and the AHCA is not an improvement. President Trump, Speaker Ryan and everyone else would be better served by taking more time to get it right.