GOP’s Obamacare Replacement Will Make Coverage Unaffordable For Millions — Otherwise, It’s Great

by Avik Roy

paul-ryan-obamacare-repeal-bill-will-be-out-in-a-few-weeks.jpgThat’s not an ironic headline. Leading House Republicans have included a number of transformative and consequential reforms in their American Health Care Act, the full text of which was published Monday evening. But those reforms are overshadowed by the bill’s stubborn desire to make health insurance unaffordable for millions of Americans, and trap millions more in poverty. Can such a bill garner the near-universal Republican support it will need to pass Congress?

The good: Medicaid reform

The strongest part of the American Health Care Act, by far, is its overhaul of Medicaid, the developed world’s worst insurance program. In 2013, a landmark study published in the New England Journal of Medicine found that people on Medicaid had no better outcomes than those with no insurance at all.

That’s because the program’s dysfunctional 1965 design makes it impossible for states to manage their Medicaid budgets without ratcheting down what they pay doctors to care for Medicaid enrollees. That, in turn, has led many doctors to stop accepting Medicaid patients, such that Medicaid enrollees don’t get the care they need.

The AHCA takes important steps to strengthen the Medicaid program, by converting its funding into a per-capita allotment that would give states the flexibility they need to modernize the program. It’s an idea that was first proposed by Bill Clinton in 1995 as an alternative to block grants, and one that could give Medicaid enrollees the access to physicians and specialists that they struggle to have today.

Relative to the leaked AHCA draft from February 10, the new bill makes an important tweak to its Medicaid reforms. It improves the transition away from Obamacare’s Medicaid expansion, by preserving the 90 percent federal match rate past 2020 for people who had signed up for the expansion prior to that year. That helps expansion states cover those individuals without significant disruptions in funding.

The bad: Obamacare exchange replacement

Unfortunately, the AHCA’s efforts at replacing Obamacare’s health insurance exchanges are problematic. A key limitation is that Republicans have decided to repeal and replace Obamacare on a party-line vote using the Senate’s reconciliation process. But reconciliation can only repeal Obamacare’s taxes and spending; it can’t replace most of the law’s premium-hiking insurance regulations.

The AHCA does make an effort to repeal Obamacare’s two costliest regulations: its requirement that plans charge similar premiums to the young and the old (age-based community rating); and its requirement that plans contain generous financial payouts (high actuarial value). So far, so good.

But the plan, due to the reconciliation process, appears to leave the vast majority of Obamacare’s regulations in place. The February 10 leaked draft contained language that would have returned control of essential health benefits to the states. That language appears to have been deleted.

Worse still, the bill contains an arbitrary “continuous coverage” provision, in which those who sign up for coverage outside of the normal open enrollment period would pay a 30 percent surcharge to the normal insurance premium. This surcharge is an arbitrary price control. While 30 percent represents an approximate average of the additional health risk of late enrollees, the 30 percent provision incentivizes those who face much higher costs to sign up, forcing insurers to cover them at a loss. This seems like a recipe for adverse selection death spirals.

The critical mistake of the AHCA is its insistence on flat, non-means-tested tax credits. The flat credit will price many poor and vulnerable people out of the health insurance market.

As I wrote last month, the AHCA creates a steep benefit cliff between those on Medicaid (subsidizing approximately $6,000 per patient per year), and those just above the poverty line who will get tax credits of about $3,000. People just below poverty will be strongly disincentivized to make more money, effectively trapping them in poverty.

Unlike in the February 10 leaked draft, in which the tax credits were available to everyone regardless of income, the AHCA begins to phase them out for those earning $75,000 a year, or $150,000 for joint filers. For every $1,000 in earnings above those thresholds, the value of the credit phases down by $100. Hence, for a single 40-something, the credit would phase out at $105,000 in income.

Amazingly, these thresholds are far more generous than Obamacare’s. Obamacare’s tax credits phase out at 400 percent of the Federal Poverty Level, or $48,240 in 2017. The AHCA’s tax credits would phase out somewhere above 850 percent of FPL.

As I note in Transcending Obamacare, the means-tested tax credit should actually go in the other direction, phasing out somewhere around 300 percent of FPL. According to the Congressional Budget Office, the vast majority of people making more than 300 percent of FPL have access to employer-sponsored coverage and don’t need an individual-market tax credit.

The AHCA's transitional schedule of means-tested tax credits.
The AHCA’s transitional schedule of means-tested tax credits.
 

The terrible: Sabotaging Medicaid and employer health reform

What’s so wasteful about all this is that the AHCA buries a much better idea within its own text. The bill contains a transitional schedule of means-tested, age-adjusted tax credits that would actually improve the individual health insurance market in combination with the bill’s regulatory reforms. The AHCA would be dramatically improved by junking the flat tax credit I described in the previous section of this article, and instead preserving the means-tested schedule in the above table.

The irony is that the AHCA’s stubborn insistence on a flat tax credit has put its promising Medicaid reforms in jeopardy. As I noted above, the Medicaid expansion offers enrollees subsidies of about $6,000 per year. The ACA exchanges, wisely, carry that subsidy along and phase it out gradually at 400 percent of FPL. By creating a benefit cliff, the AHCA gives Medicaid expansion states a strong incentive to oppose repeal of the Medicaid expansion. If the AHCA simply used the above table to means-test its tax credit, states could walk away from the Medicaid expansion, knowing their residents would have robust options for private health insurance.

The exclusion from all taxation for employer-based health insurance is the original sin of the U.S. healthcare system, the reason why its costs are far higher than those of every other advanced nation. GOP health reform has long sought to reform the employer tax exclusion, in order to lower health care costs and make coverage more affordable for all.

The February 10 leaked draft contained a well-designed and significant reform of the employer tax exclusion, in which employer-based insurance plans exceeding the 90th percentile in value would have their excess costs included as taxable income. That provision was deleted in the current AHCA draft and replaced by a postponement—but not repeal—of Obamacare’s Cadillac tax.

Here, again, the problem is the interaction between the AHCA’s generous tax credit and the employer-based health insurance system. The availability of the credit to upper-income workers means that employers would have a strong incentive to drop their sponsorship of coverage. A more focused tax credit would have avoided this problem.

Plowing ahead without the CBO

The American Health Care Act repeals nearly all of Obamacare’s taxes, save the postponement of the Cadillac tax. But Obamacare’s tax hikes comprised about 60 percent of its funding for the law’s coverage expansion. So the $2 trillion question is: does the AHCA explode the deficit, or is it relying on steep Medicaid cuts to keep the deficit in line? We won’t know until the CBO scores the bill.

But, remarkably, House GOP leadership plans to move forward with marking up the bill on Wednesday without even having the CBO score available. It’s not clear why they’re proceeding without a score, but it means that members of the House Energy & Commerce and Ways & Means Committees will not have the information they need to make informed decisions about how best to revise the bill.

The CBO is likely to score the AHCA as covering around 20 million fewer Americans than Obamacare. There are flaws in the way the CBO models health reform legislation, but the AHCA itself contains enough flaws that there can be little doubt that the plan will price millions out of the health insurance market.

Expanding subsidies for high earners, and cutting health coverage off from the working poor: it sounds like a left-wing caricature of mustache-twirling, top-hatted Republican fat cats. But not today.

UPDATE: Hugh Hewitt hosted Rep. Kevin Brady (R., Tex.), Chairman of the House Ways & Means Committee, on his radio show; Brady responded to a number of the points raised above (emphasis added):

HH: Let’s begin with the first question. Why is there no CBO score?

KB: They’re just taking their time to get it right. We’re making some big changes. One, we have two big principles here we’re going for after the repeal of the mandates, the penalties, the subsidies, two big principles. One, return state control of health care, secondly, restore the free market. The CBO is having trouble getting their heads around the states, not Washington, controlling health care and actually giving people in each state a wide range of plans to choose from rather than the three levels that Washington and Obamacare has dictated in the past. So there’s a good reason they don’t have a score, yet, and that’s because we’re giving freedom to people they haven’t had before.

HH: Can you actually have an effective markup and ask members to vote without a CBO score in either Energy and Commerce or Ways and Means?

KB: We certainly can, and here’s why. We know what the general numbers are heading into this, mainly because we’ve had this better way proposal out since last summer. And so as we put that together, we put the general numbers together working with CBO, so we started from 90% knowledge of where we needed to be. We made some changes here over the last week after listening to Republican members that wanted to make sure that the tax credits that helps small businesspeople like it helps big businesspeople today, was it had an income limit on it. We made those changes and a few others. And so yeah, I think, I absolutely know we can. It’s the right thing to do.

HH: All right, now Chairman Brady, probably the most influential conservative analyst of health care is Avik Roy. His headline this morning is House GOP’s Obamacare Replacement Will Make Coverage Unaffordable For Millions. Otherwise, It’s Great. How do you react to that?

KB: (laughing) Well, look, we know the Obamacare experiment failed. It directed from Washington expensive health care with expensive subsidies and directed not from what patients need, but from what Washington wants. We know that failed. We’re trying something different – affordable health care with affordable tax credits directed by patients and families, you know, plans that they need and can use. And I’m convinced, frankly, that we are giving everyone who doesn’t get health care at work and doesn’t give the government an opportunity to buy a plan that’s right for them and their family that can go with them from job to job, state to state, home to start a business or raise a family even into retirement that freedom and that choice not only lowers the cost of health care, it makes it actually usable for families. So I disagree with that whole premise.

HH: All right, I want to go through the three major objections of Avik. I actually kind of like your bill, because I was always a fan of Nixon’s negative income tax, and this is an iteration of that applied to the health care markets. But here are Avik’s big three. Number one, the February 10th draft contained language that would have returned control of essential health benefits to the states? That language appears to be deleted. Is that in fact correct? Are you retaining the Obamacare regulations on essential benefits?

KB: No, but we have to go about it two different ways because of reconciliation. The rules of the Senate, we can’t repeal it completely, and so Secretary Price at Health and Human Services can begin that process. We’ll have to finish it with a statutory change as well. But there’s no question at the end of the day states will decide which plans have which coverage. It will be innovative approaches, so the essential benefits, one size fits all, will not be retained in the long haul.

HH: An aside, Mr. Chairman, if you guys, if Secretary Price puts out a comprehensive essential benefits regulation and finalizes it, and then the House and the Senate using simple majorities under the Congressional Review Act rejects it, that ends it. I just want to point that out. There’s a second simple majority pathway out there called the Congressional Review Act. Anyway, part number two…

KB: Well, we’re in the majority, so we expect to be adding and working with Tom Price as our partner in this.

HH: Avik’s second problem is with the 30% surcharge to a normal insurance premium when continuous coverage is interrupted. He argues that this represents an extraordinary recipe for adverse selection death spirals. What do you think?

KB: I think just the opposite. Look, we’re leaving the Obamacare world of mandates, enforced into plans which by the way, the American public rejected. We’re opting instead for personal responsibility. People don’t have to choose any of these plans. They can go uncovered their whole life if they choose to do that. Just be aware that unlike someone who wants to keep coverage, chooses a plan, helps pay for it and participates in it, when that person who has continuous coverage gets that very costly illness or sickness, they’ll be covered at the same rate they always were. But if you chose to not have coverage, your health care, as you would imagine, will be more expensive. I don’t know how you confuse personal responsibility and choice with the Obamacare mandates.

My concern on the 30 percent surcharge is that there are going to be plenty of people who game the system when their health costs are greater than 30 percent of the normal premium. Let’s say you decide not to buy insurance, then you have a heart attack and then buy health insurance. Your health care consumption is going to be way higher than 30 percent above normal. So the AHCA effectively mandates insurers to sell you coverage at a loss.

HH: Let’s go to the one, though, that I’m not persuaded on. The critical mistake, writes Avik this morning, of the AHCA, is its insistence on flat, non-mean tested tax credit. The flat credit will price many poor and vulnerable people out of the health insurance market. People just below the poverty line will be strongly dis-incentivized to make more money, effectively trapping them into poverty. Actually, Mr. Chairman, I don’t know how you argue with this. This is just simple economics. If you don’t means test it, people are going to be incentivized to stay home. Incentives matter.

KB: Sure. Well, they’re working off the old draft. So the law that was introduced, the bill that was introduced yesterday has an income limit. It begins to phase out at $75,000 a person, $150,000 for a couple for joint filers. Also, I would disagree with this as well. The credit is immediately available for those working their way off of Medicaid. In fact, we worked very closely with Republican governors. They wanted a seamless transition, because you know, big government’s argument is, the question is how many people can you get on Medicaid. For conservatives and Republicans, it is how many people can work themselves out of Medicaid, and to do that, you need that seamless tax credit available. And the states will now have a pool that they can use to either help those with very high medical costs, or exactly those people he’s describing that are working off Medicaid. States can actually, like in Wisconsin, where Governor Walker made a really brilliant approach on not doing expansion of Medicaid, yet covered people while working this Medicaid affordably. We give states the funding to help those people in exactly that situation. So I would say the new draft is a much better version of that. It works very well for conservative principles.

Chairman Brady is right that the means testing on the high-earner end is progress compared with previous drafts. But there remain two problems with the way the tax credits are structured: (1) there’s a huge benefit cliff as someone moves from below the poverty level (Medicaid subsidy of $6,000 a year) to above the poverty level (GOP tax credit of $3,000 a year, at median age); (2) the credit still over-subsidizes high earners; it should phase down to zero around 300 to 317 percent of the Federal Poverty Level.

The full transcript and audio of the Hewitt-Brady conversation is here, and worth your time.

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