Since Barack Obama’s Affordable Care Act (ACA) passed in 2009, Congressional Republicans have railed against what they see as the law’s high costs and insufficient choices—passing one protest bill after another in an attempt to repeal and replace it with something “better.” Last night, House Republicans released their alternative proposal to what they decried as a total failure.
Given the amount of time and resources at Republicans’ disposal, their proposal is underwhelming. Rather than attempting to reshape the nation’s health insurance market, President Donald Trump and the GOP’s proposed American Health Care Act (AHCA) simply takes the existing structure of the ACA and, at every juncture, makes changes that would decrease the number of Americans with health insurance.
To be sure, Obamacare is controversial. As a health care economist, I have been critical of the ways that the law works against its own goal of creating a stable non-group market by propping up the employer insurance market and allowing healthy young adults to remain on their parents’ plans. As a registered Republican, I have long argued that we could modify the law by ending the employer mandate and equalizing the tax treatment between the employer and non-employer market. Such changes would align better with the dynamics of the markets that my party has long held up as the first and best solutions to health care sector problems. Yet the AHCA falls short of those objectives because it refuses to acknowledge the reality of the health markets it faces.
The insurance market under the original ACA is very much like a three-legged stool; if each leg is not sufficiently strong, the entire system falls apart—in this case depriving millions of low-income Americans of access to health insurance.
The first leg of the stool—a ban on insurance companies’ consideration of preexisting conditions when selling insurance in the non-group market—is without a doubt the most popular. Under the ACA, insurers must sell policies to everyone regardless of their health status. When their preexisting conditions no longer exclude them from coverage, many more people with those conditions enroll, and become part of the insurance market. These individuals are more expensive to cover (they have more visits to doctors and hospitals, and frequently require more expensive treatments). To pay for their medical expenses, insurers must raise premiums on everyone.
The problem is that because of the higher premiums, many relatively healthy people without preexisting conditions no longer view insurance as a good deal and choose to leave the insurance market. The result is an insurance risk pool with higher average medical expenses per enrollee, which requires another premium increase. This in turn drives out another set of healthy enrollees and the process continues in what economists call a “death spiral.”
To avoid the death spiral, the second leg of the ACA stool requires that everyone (regardless of health status) purchase insurance or pay a fine. As a result, healthy people won’t leave the insurance market when premiums rise, resulting in a much more stable risk pool. The problem is that buying insurance is often too expensive for low-income families. To address this, the ACA’s third leg provides subsidies for low-income individuals to purchase coverage. For exceptionally poor families—such as a family of four making around $30,000 a year or less—insurance is completely subsidized through Medicaid. The subsidy provided decreases for families making more money, ending with no subsidy for a family earning more than about $95,000 a year.
With these three “legs” in place, the ACA resulted in as many as 20 million people receiving insurance. In contrast, the AHCA replacement keeps one leg—covering people with preexisting conditions—and either greatly weakens or eliminates the two others—the individual mandate and subsidies. This sets the stage for a death spiral in the non-group market.
The AHCA repeals the individual mandate, a critical feature that keeps healthy individuals in the non-group insurance market. The AHCA replaces this mandate with a “continuous coverage” provision requiring individuals to either be continually covered by some form of health insurance or pay a 30% higher premium if or when they eventually purchase insurance in the non-group market.
The AHCA then radically alters the structure of the subsidies in the third leg. It replaces the existing income-based subsidies with a series of subsidies available to anyone earning less than $75,000 (and families earning less than $150,000) based essentially only on a person’s age. The AHCA proposes a subsidy of as low as $2,000 for those under 30 and $4,000 for those over 60, regardless of the premium or income.
To place these numbers in context, under the ACA, a 60-year-old earning $40,000 in Mobile, Ala. currently receives a subsidy of about $10,000 a year. A similar 60-year-old in Reno, Nev. receives about $5,900. Under the AHCA, each person would receive $4,000 from the government at most. Not only is this far less generous than the ACA subsidy, but the AHCA subsidy does not account for meaningful regional variations in the cost of insurance. The bill also effectively ends the Medicaid expansion program of the ACA, leaving the least fortunate in society with little to no coverage.
The goal of the mandate and the subsidies in the ACA is to entice healthy individuals into the non-group marketplaces. The continuous coverage penalty in the GOP bill, however, doesn’t kick in until they ultimately need coverage. Thus, healthy people could be encouraged to remain without insurance until they really need coverage (i.e. when they are sick)—the exact opposite of how a stable insurance market works.
We ultimately don’t have any estimates of the effect of the AHCA. Despite having seven years to work on the legislation, Republicans prepared the bill in secret; it was not pressure-tested and has not been scored by the Congressional Budget Office.
Beyond the obvious political reasons, the GOP is pushing for a quick replacement under the belief that the ACA is failing and the insurance market is crumbling. This view is at best incomplete and at worse a deliberate deceit. As I co-wrote in a recent New England Journal of Medicine article, the marketplaces are actually working relatively well. Insurance firms with the skills necessary to succeed are earning profits, and those firms best matched to another market are exiting. This is to be expected in a competitive market.
The AHCA does the opposite of what it needs to do: Pull more people into the non-group market. This legislation will roll back the historic progress of the ACA in moving the share of the American population without insurance under 10% for the first time in the modern era.
Craig Garthwaite is an associate professor at the Kellogg School of Management at Northwestern University and co-director of Kellogg’s Health Enterprise Management Program.
