It’s finally here. Confounding claims by Democrats that Republicans have no plan to replace the Affordable Care Act (ACA), House Republicans released the American Health Care Act (AHCA). The proposal would immediately repeal the ACA’s widely unpopular individual and employer mandates and penalties but preserve its universally popular protections for people with preexisting conditions, the ban on lifetime coverage caps, and coverage for children up to age 26 on their parents’ insurance. The AHCA also repeals a slew of taxes in 2018. But the heart of the AHCA consists of two proposals: replacing the Obamacare subsidies for buying insurance with refundable tax credits based on age and income, and transitioning Medicaid from today’s open-ended, federal matching-payment entitlement to a federal per-person (per-capita) payment to states, coupled with greater state flexibility to run the program.
Democrats and some public-health groups claim that the AHCA will force millions to pay more for less care and push millions off coverage altogether. Are they right? Some coverage losses are possible, but they will likely be smaller than the Congressional Budget Office (CBO) will predict and would not occur for several years. Moreover, losses could be ameliorated with a few adjustments to the legislation.
The CBO credits the individual mandate with expanding insurance coverage by encouraging people to enroll in Obamacare’s health-care exchanges, Medicaid, and employer-sponsored insurance. But a plethora of mandate exceptions and weak penalties for failing to purchase insurance have undermined the mandate’s impact. One of the ACA’s chief architects, economist Jonathan Gruber, found that the mandate had no significant effect on ACA coverage gains in 2014.The CBO has consistently overestimated the number of people who would enter the ACA marketplaces and underestimated the number of people who would evade the mandate. The IRS reported that in 2016, 11 million people received exemptions from the mandate and 5.6 million paid the penalty rather than purchase insurance—far more than the CBO estimate.
Three months ago, the CBO predicted that repealing the individual mandate would lead to 15 million people losing insurance coverage: 2 million fewer with employer-based coverage, 6 million fewer in the individual market, and 7 million fewer with Medicaid coverage. These projections are suspect. Most of the 20 million in coverage gains from the ACA are attributed to increased Medicaid enrollment, and most of these Medicaid gains represent enrollment of people who were already eligible for the program before the ACA’s Medicaid expansion. Even if the mandate motivated them to sign up for Medicaid, repealing it should not prompt these people, who are now enjoying health insurance at no cost, to drop coverage. The CBO also seems to suggest that virtually all of those who newly enrolled in the individual market will drop out if the mandate is repealed. This is not plausible.
Nevertheless, the AHCA’s replacement for the individual mandate—a 30 percent premium penalty for people enrolling in insurance who have not maintained continuous coverage—will be ineffectual. The penalty will be imposed only for a year, meaning that individuals who wait until they become ill to enroll will effectively pay about three and a half months’ worth of extra premiums. This is an invitation to abuse. The penalty for failing to maintain continuous coverage should be strengthened—imposing it for three years would be far more effective.
The transition from ACA subsidies to AHCA tax credits looks potentially problematic but fixable. ACA premium tax-credit subsidies are available to individuals with incomes up to 400 percent of the Federal Poverty Level (FPL) but only for insurance plans on the ACA exchanges. The ACA cost-sharing subsidy is even more restrictive: it’s only available for people with incomes below 250 percent of FPL for Silver-level exchange plans. Both ACA subsidies are unavailable to the 40 percent of individual-market participants who purchase insurance off the exchanges.
The AHCA will continue both ACA subsidies until 2020. In fact, the AHCA will expand individual-market purchasers’ options by making the ACA tax-credit subsidy available off the exchanges and for all kinds of insurance, including catastrophic coverage. In 2020, the ACA subsidies would be replaced with AHCA refundable tax credits for low- and middle-income people earning $75,000 or less who do not receive insurance through work or government programs. The credits will be based on age, ranging from $2,000 for people under 30 up to $4,000 for people over 59, with family credits capped at $14,000. The credit phases out by $100 for every $1,000 in income above $75,000, meaning that the credit disappears for a 29-year-old earning $95,000 and for a 60-year-old earning $115,000. These credits will be available to a broader income range of people than the ACA subsidies.
Critics correctly claim that the tax credits will be smaller than the ACA subsidies, making insurance less affordable for poor people. The tax credits may suffice for many people—eHealthInsurance reports that the average individual-market premium in 2016 was $3,852—but the shortfall will be high for older, poorer patients. This will be exacerbated by the AHCA provision, effective in 2020, changing the ACA’s 3:1 limit on premium adjustment between older and younger patients back to the pre-ACA norm of 5:1. While this will make insurance cheaper for the younger people that the ACA has failed to attract, premiums will rise for older people. House Republicans should consider making the tax credits more generous—particularly for older patients whose premiums will rise under the AHCA—and lowering the income threshold at which credits start tapering off (say, to $50,000 or $60,000) so that benefits will be concentrated among the less well-off.
The AHCA maintains funding for Obamacare’s Medicaid expansion until 2020, at which point the program would transition to a system of block grants to states, based on historical per-capita payments for each state’s Medicaid population. Some compromise will have to be found below covered income levels in the 31 states that expanded Medicaid (138 percent of FPL) under the ACA and above the levels in the 19 non-expansion states (100 percent of FPL). Going forward, the annual payment increases will likely fall behind the annual increases in medical costs. This will lower funding for Medicaid and decrease enrollment unless states, with their increased flexibility in administering the program, can find ways to deliver care more efficiently. Whether states will succeed in doing so remains to be seen, but many states have already utilized Medicaid waivers to implement innovative strategies for lowering costs and improving care. And Democrats have not proposed any alternatives for reigning in Medicaid’s runaway costs.
The bottom line: the AHCA is a good first step. It could be improved by strengthening the penalty for failing to maintain continuous coverage and making the tax credits more generous while lowering the income-eligibility requirement. House Republicans should also restore an important provision from their earlier, pre-AHCA plans—an upper limit on the tax preference for employer-provided health insurance. Half of Americans get health insurance through their jobs. Employer-paid premiums are tax-exempt for employees and tax-deductible for employers. Limiting that exemption would encourage employers to offer more cost-effective plans and raise significant revenue. But the AHCA dropped this provision, retained the ACA’s inferior “Cadillac Tax”—a 40 percent excise tax on employer plans above a high cost threshold—and undermined any hope of cost discipline in employment-based coverage by extending the start date to 2025. Restoring the upper-exemption limit to replace the Cadillac Tax, implementing it in the next few years, and making the other changes outlined above could turn the American Health Care Act into a viable alternative to Obamacare.
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