March 20, 2017

The ACA, AHCA and the CBO

by Hal Gershowitz

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Of Thee I Sing Heading AuthorsSo, America is getting a close-up look at the sausage-making spectacle we know as the U.S. bi-cameral legislative process. But at least we’re getting to see the spectacle this time around as the Republican-controlled Congress wrestles with the American Health Care Act (AHCA). This, of course is the attempted repeal and replacement of President Obama’s so-called Affordable Care Act (ACA).  The reader will recall the ACA was (is) the Act that Speaker (at the time) Pelosi proclaimed we could see AFTER congress passed it.  And pass it the Democrats did.

So, what have we finally learned about the ACA (aka ObamaCare). Well, for one thing the ACA is a seriously deteriorating, preexisting condition. It really is.  The only question is whether the intervention by Speaker Paul Ryan will produce a better healthcare alternative for the American people. We have our doubts, but continuing the ObamaCare course the nation is currently on really would constitute a type of governing malpractice.  We’ll hasten to stipulate that abrogating healthcare coverage for up to twenty-four million Americans, as the CBO projects will happen under the AHCA, would be an even worse case of governing malpractice. We’ll get to the CBO a bit further down in this essay.

When all is said and done, under the ACA, premium costs that were supposed to dramatically decrease by 2012 have, instead, dramatically increased as have deductibles. People who were assured they would be able to keep their doctors quickly learned they couldn’t necessarily do that as promised (no matter how much they liked him or her), nor could they necessarily keep the healthcare plan with which they were quite satisfied.

Worse, much worse, the Faustian bargain the insurance industry made with the Obama Administration is turning out to be what all Faustian bargains turn out to be—a disaster. The Obama Administration promised the insurance industry tens of millions of new customers. The problem is the government delivered a large preponderance of older, sicker, higher-cost customers and fewer younger, healthier customers whose low demand for service was supposed to invigorate insurance company income statements.

We’re sure there are many very bright people in the insurance business. We’re just not sure where they were when their industry signed on to supporting the ACA. The critical flaw in the ACA is that it created an actuarial breech of titanic proportions through which flooded a tide of red ink. If no one could be turned down or charged more because of illness including very nasty pre-existing conditions, why (one might ask) would young, healthy men and women or families pay for insurance before they got sick and needed it?

Not surprisingly, many health insurance companies got clobbered. Industry giant, Humana, seeing a flood of red ink flowing their way decided to withdraw entirely from its participation in the law. Aetna, also quickly began withdrawing from exchanges as has UnitedHealth and Humana.

And, speaking of insurance industry giants, there is the case of Anthem Inc. which announced just before the election last November, that it may join other major U.S. health insurers in largely pulling out of Obamacare markets by next year if its financial results under the program don’t improve.

Anthem’s retreat from the Affordable Care Act means that almost all the major American health insurers have substantially pulled back from the law. Hundreds of U.S. counties now must rely on only one insurer left in the marketplace.

Time will tell whether the AHCA (Trump/Ryan replacement bill) turns out to be the improvement President Trump has promised. There is much more that we don’t know than we do know because most of what eventually would become the AHCA hasn’t been drafted yet.

Most of what will be the final legislation has yet to be drafted because the current focus is on an initial phase that deals with aspects affecting the existing budget and subject to the arcane reconciliation process which only requires a simple majority to pass in the Senate which, presumably, the Republicans can muster. All of the nuts and bolts of the AHCA will follow the reconciliation phase and will, therefore, require a super majority of sixty votes in the Senate. That will involve a lot of arm twisting or as President Trump declared, “It’s a big, fat, beautiful negotiation. Hopefully we’ll come up with something that’s going to be really terrific.” Well, let’s hope.

Most of the details of what will be the final AHCA are unknown and largely unwritten at this time. Here’s what we do know.

The individual mandate in the ACA that requires individuals who can afford to buy insurance to do so or pay a penalty is eliminated in the AHCA and replaced with a “continuous coverage incentive” that would impose a 30 percent penalty for people who do not buy insurance until they are sick.

The employer mandate, as of this time, would be repealed.

Under the AHCA premium subsidies would be based on age rather than income.  Tax credits of $2,000 would be available in full to individuals under thirty earning less than $75,000 and households earnings less than $150,000.  The tax credit would be increased to $4,000 for people over sixty.

The ACA enabled states to expand Medicaid coverage by raising the eligibility cutoff to 138% of the federal poverty level. The AHCA would let states keep Medicaid expansion and allow states that expanded Medicaid to continue getting federal funding as they would have under the ACA until 2020. Federal funding under the AHCA for people who became newly eligible starting in 2020 or who left the program and came back would be reduced.

The AHCA would just about double the amount individuals or families could put into tax-free health savings accounts.

It seems to us that most of the other essential elements of the ACA are maintained in the AHCA.

Enter the CBO.

CBO (Congressional Budget Office) is a truly non-partisan agency responsible for estimating the budgetary impact of legislation. Some of its projections are pretty objective such as dollar inflows and outflows. Some are far more subjective such as estimating how people will behave given certain economic circumstances.

The Democrats and most of the press have made much of the recent CBO scoring of the AHCA. They’ve largely ignored the substantial objective projections of reductions in the federal deficit of nearly $340 billion over the next decade and the $1.2 trillion reduction in federal spending during the same period. Instead they have focused, almost deliriously, on the subjective projections of how people will behave, or more succinctly, how many will choose to buy insurance or not buy insurance in a more competitive marketplace which will be a key element of the final AHCA.

The CBO is projecting that 24 million fewer people will be covered by 2026. CBO projects the reductions in insurance coverage would result from changes in Medicaid enrollment, believing some states will discontinue their expansion of eligibility, and that some states that would have expanded eligibility in the future would choose not to continue, and per-enrollee spending in the program would be capped.

We suggest a bit more caution is warranted here regarding these subjective projections of individual and family participation in the AHCA. This is the same CBO that estimated that 21 million people would enroll in the ACA exchanges in 2016. Actually, closer to 10 million people enrolled. CBO estimates that 18 to19 million people will be enrolled in the ACA exchanges, but, in fact, enrollment is currently declining.

Our concern with the AHCA, at least with what we know of it, is that President Trump and Speaker Ryan are counting on very substantial reductions in premiums stemming from vastly increased competition as barriers that keep insurance companies from competing on a national basis are eliminated. Premium reductions must come, primarily, from lower reimbursements that insurance companies negotiate with hospitals and physicians for service. At some point, the insurance companies will have wrung just about everything they can out of hospitals and physicians. We’re not sure just how much room there is for further reductions and, thus, future premium savings through competition. These are costs that insurance companies can only mitigate so much. Health insurance premiums may not be as influenced by market-driven forces as the Administration thinks.

The Administration might want to temper its expressions of certainty regarding the social benefits of Adam Smith’s invisible hand theory of the social benefits of individual actions seeking what is in the individual’s best interest. On the other hand, the resist-at-any-cost faction should think more than twice about embracing a failing government healthcare program.

The opposition, even former President Obama, now acknowledges that the ACA needs to be fixed. They have, however, been no more forthcoming than the Republicans had been on how they would fix it.

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2 responses to “The ACA, AHCA and the CBO”

  1. Susan duman says:

    You should be published in The Economist or The Wall Street Journal. You discuss the complexities in a pretty non biased way.
    I hope your list of subscribers includes some WONKS

  2. Larry Fox says:

    I’m a wonk for sure. We have years of mutually assured denial as R’s insisted on repeal – not fixing – and D’s blindly claimed that all was well.

    CBO is not expected to be right; they are expected to be righter than others. This is an activity we should all embrace.

    All policy analysis comes down to “compared to.” It should be easy to be better than Obamacare, but better is far from just economics. Can a policy be better if it covers many (many!) fewer people we all agree are needy?

    When people define values in terms of first principles: free markets vs social welfare, it is a sure sign they have no useful facts with which to make their point.

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