March 18, 2017

Getting the GOP Health Plan (More) Right

Mark J. Warshawsky

Former Senior Research Fellow

As Speaker Ryan has stated many times, there may not be another chance to repeal and replace the Affordable Care Act. So it’s important to get this right.

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The House Republican bill to repeal and replace the Affordable Care Act, known as the “American Health Care Act” (AHCA), does many things right, a few things wrong, and misses some other things altogether. The Congressional Budget Office (CBO) estimates, among other things, that the AHCA would significantly reduce government budget deficits over the years. This provides room to make needed changes so the final legislation will be more broadly beneficial than either Obamacare or the current bill.

First, the things the AHCA does right. It repeals most of the Affordable Care Act — that massive expansion of federal government control over vast resources, with higher taxes and the creation of new government agencies and programs. Despite its scope, the Affordable Care Act failed to achieve its main goal: the reduction of the rate of growth in health spending, which is now eating up almost a fifth of the economy.

The Affordable Care Act also destabilized the market for individual health insurance. And it did manage to increase insurance coverage, mainly through an expansion of Medicaid. (Though it’s a matter of considerable debate precisely how many more people gained coverage and whether this has actually improved their health is). 

But the Affordable Care Act did not benefit the majority of Americans.

The AHCA also boldly and appropriately redesigns the financing of the entire Medicaid program. As a result, states would have greater incentives to apply rational and efficient policies to target health and long-term care benefits where they can do the most good in the fairest manner. The AHCA also wisely addresses the current dysfunctionality in the individual health-insurance market by allowing for more freedom in insurance product design and pricing.

But some policies in the AHCA fall short. Replacing the Affordable Care Act's subsidies for the purchase of health insurance with widely available refundable tax credits creates a new entitlement program. While some level of federal government support is appropriate for the poor and the elderly, the AHCA’s tax credits would extend to upper-middle income households. This is costly and disruptive to the currently well-functioning group health insurance market, unnecessarily reducing insurance coverage. 

Instead, the size of the tax credits should be increased for the poor and elderly and eliminated for the well-to-do. This would likely increase, on net, the number of insured people. Similarly, some of the AHCA’s cuts in Medicaid funding could be dialed back, given the extra room in the CBO score.

Though appropriately repealing the Affordable Care Act's individual and employer mandates, the AHCA ineffectively replaces it with a small one-year premium penalty for those who do not have continuous coverage. While some such measures are needed to ensure the stability of the individual health insurance market, the AHCA’s replacement mechanism is widely agreed to be too small.

Therefore, it will subject the individual market to gaming and adverse selection — the tendency for those with expensive health-care treatments to sign up for insurance upon getting their diagnosis and for those who are healthy to avoid buying insurance.

Mechanisms that exist in other government programs should be employed instead. These include lifetime or extended-time premium penalties and significant time-outs (six months, for example) from obtaining coverage. 

The AHCA is also missing some important opportunities for further reform. There is strong evidence that a significant portion of health care is wasteful and ineffective, reducing wage growth and increasing inequality.

Economists across the ideological spectrum have long advised that a cap on the exclusion of employer-provided health insurance premiums from taxable income would be an effective way to discourage wasteful health care spending. 

The AHCA keeps, but postpones, the “Cadillac” tax penalty on expensive employer health insurance found in the Affordable Care Act. This tax is poorly designed, with numerous exceptions and upward adjustments that undermine its ultimate effectiveness and fairness. The next version of the AHCA bill should drop the Cadillac tax and replace it with a high cap on the exclusion of health insurance premiums — perhaps one that is modestly adjusted for the age and gender of the employers’ workforces.

Finally, the AHCA misses the opportunity to make significant Medicaid reforms in the area of long-term care. Medicaid is the primary payer of long-term care, but demographic trends combined with the current porousness of the eligibility rules are rapidly increasing the costs of the program.

The AHCA does cut back on the allowance for the extra exclusion of high-value houses in certain states, but it keeps the current base exclusion of over $500,000.

While some recognition of the variation in the cost of housing across the states is appropriate, the base level should be substantially reduced to the median value of a home — about $100,000. Similarly, the current unfair variability across states in the exclusion of retirement assets should be eliminated, so that all retirement assets are included in the countable asset test for Medicaid eligibility — no more millionaires on Medicaid! 

As Speaker Ryan has stated many times, there may not be another chance to repeal and replace the Affordable Care Act. So it’s important to get this right.