The AHCA would move the USA toward universal catastrophic healthcare coverage, by enabling insurance companies to sign up individuals to $0 monthly premium plans with high deductibles and limited coverage.
While healthcare analysts have been in overdrive commenting on the new GOP health plan, it appears that some key points have been lost in the noise. Whether on Medicaid, total enrollment, or Tax Credits, it seems that many analysts fail to understand the large-scale implications of the bill. As written, the AHCA has the potential to be transformative – it would retain the goal of universal coverage, while shifting tax credits toward universal high deductible insurance. If fully implemented, the AHCA could actually lead to gains in coverage – but the US healthcare market would be transformed by a move toward high deductible catastrophic coverage.
Read the AHCA bill here.
AHCA Key Changes:
- Covered Benefits: The AHCA does not change the essential benefits list, but Secretary Price is interested in reducing essential benefits to lower costs.
- Tax Credits: Tax credits will be less generous, but will cover more of the population, potentially leading to a shift toward catastrophic plans.
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Medicaid: The Medicaid expansion ends after 2019, but tax credits will be available to all lower and middle-income Americans.
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Employer Coverage: AHCA creates a strong incentive for employers to drop coverage, since most American workers will receive tax credits.
- Universality: AHCA provides tax credits to virtually all Americans without other coverage, cementing the goal of universal health care in the USA.
Detailed Findings:
Covered Benefits:
With the exception of abortion coverage, the AHCA does not change the essential benefits under the ACA. HHS Secretary Tom Price has indicated that he will reduce regulations that increase costs – he can do this by limiting the definition of essential benefits.
Tom Price has indicated on multiple occasions that HHS will seek to reduce regulations on health insurance markets, and recently both he and President Trump indicated that these changes would be part of “phase 2 & 3” of their healthcare overhaul. In the past Secretary Price has indicated that he will seek to specifically limit the essential benefits requirement while at HHS.
The AHCA is particularly punitive towards abortion, barring the use of tax credits for any plan that covers abortion services (page 72 of bill pdf).
Tax Credits:
The AHCA offers up to $14k in tax credits per family, at 2k-4k per person depending on age (pages 90-92 of pdf). It also enables insurance companies to claim tax credits on behalf of enrollees, enabling them to offer cheap or free plans to the public.
Much has been written on winners and losers with the proposed tax credit changes. Analysts both left and right fear many will lose insurance. But look at page 106 of the bill: “Not later than January 1, 2020, the Secretary … shall establish a program … for making payments to providers of eligible health insurance on behalf of tax payers eligible for the credit under section 36C.”
Consider what this means – insurance companies will be paid between $2000 and $14,000 per year for each enrollment. In a similar situation in the for-profit university industry, tuition essentially matched federal loan programs, creating a no-money-down product for students. With the AHCA, insurers will be strongly incentivized by the market to offer $0 premium plans in order to maximize their signups of younger individuals in particular.
With the change of young-old ratio to 5:1 (page 66), and Tom Price’s expected reduction of essential benefits, new catastrophic plans will likely flood the market, providing a no cost option for many. See Appendix I for specific examples using 2017 exchange pricing.
Medicaid:
The AHCA ends the Medicaid expansion in 2019, but states may have some incentivize to jump in now, because the future funding they receive is based on the number of enrollees at the end of 2019. Beginning in 2020 the Medicaid expansion will be repealed, and only those enrolled under pre-ACA rules (with stricter income and asset tests) can be newly enrolled into Medicaid.
The AHCA does close a gap caused in non-Medicaid expansion states, where many workers make too much to qualify for traditional Medicaid, but too little to qualify for ACA subsidies. These individuals will qualify for the new AHCA tax credits.
Employer Coverage:
The AHCA removes penalties for not providing insurance (page 84 of bill pdf), and could encourage employers to drop coverage as it provides tax credits to a much larger range of working age Americans.
Per the Kaiser Foundation, the average employer contribution to individual employee healthcare is around $4800, with the employee contributing around $1200. At a 25% federal tax rate, this leads to a tax deduction value of $1500, versus a tax credit of $3000 for the median-age American worker. For family coverage, a tax deduction value (25% tax bracket) of roughly $4500 compares to a tax credit of $9000 for a family of four with adults in their 30s. In both cases, both the employer and employee would benefit if the employer dropped coverage, raised wages, and let the employee take advantage of the tax credit.
Appendix II presents a fully worked example for a family of four making $100k per year, and shows that the family would likely benefit under AHCA changes.
Universality:
The AHCA offers tax credits to all Americans without employer-based healthcare (except those with higher incomes), and as a result the AHCA accepts the ACA’s premise of universal health insurance.
The only Americans excluded from the new AHCA tax credits are those already receiving healthcare from a government program (Medicare, Medicaid, VA, etc) or from employer-based coverage (page 97 of bill pdf).
The GOP has produced a plan that implicitly accepts that universal healthcare is here to stay. The end game (relative to the ACA) will look very different, however, with large swaths of the population covered by high-deductible catastrophic plans.
Appendix I: Are $0 premiums for catastrophic plans really possible?
Is $2000 ($166/month) sufficient to offer a “free” plan to a young adult, or $10,000 ($833/month) sufficient to offer a “free” plan to a family of 4?
Using Healthcare.gov, in the Atlanta area the current cheapest plan for age 21 is exactly 1/3 of the $597 charged to a 64 year old, as a result of the ACA 3:1 limit on costs for older Americans. A bronze plan for age 20 is only $126/month in Atlanta, since the 3:1 limit doesn’t apply below age 21 (even in New York City, individual catastrophic plans are available from around $165/month). Since the AHCA raises the ratio limit to 5:1, this shows how $0 plans will fit within the $2000 tax credit.
How about for a family of four ages 31, 31, 4, and 2? This priced out at $713/month in Atlanta, below the $10k AHCA annual tax credit. Since the AHCA allows excess tax credits to be placed into an HSA, the family could bank around $1500 per year toward future medical expenses while paying $0 in premiums. In New York City, the family premium would be around $1050/month, leaving the family bearing around $200/month in premiums – but this is before accounting for the impact of the new 5:1 ratio and curtailment of essential benefits, which would likely bring net costs to $0 even in NYC.
What about older Americans? A $4000 ($333/month) tax credit will not cover a single 64 year-old’s $600/month premium in Atlanta. If HHS substantially reduces essential benefits, that may close the gap, but with a corresponding loss of benefits. Pre-Medicare age older Americans are clearly the biggest losers under the AHCA reform. But if the AHCA is able to substantially increase enrollment by the young and healthy due to $0 premiums, this may enable more affordable plans further up the age spectrum.
Appendix II: Why Employers May Drop Coverage – A Specific Example
Let’s consider again a family of four, ages 31, 31, 4, and 2. Using Kaiser numbers, on average the family and their employer spent a total around $18,000 on health insurance premiums, with the employer contributing roughly $13,000 of that amount. In the 25% tax bracket, the family is receiving $4500 in value from the existing tax deduction. In total, the family is spending about $500 out of pocket on health insurance when employer assistance and tax deductions are considered.
What if the employer were to drop coverage, enabling the family to receive a $9k AHCA tax credit, and to raise the employee’s salary by $13,000 instead? The employee would receive $9750 in new after-tax income (considering only a 25% federal rate) plus $9000 in tax credits, or $18,750 total. Assuming similar premiums, the family would then spend $18,000 on health insurance, leaving $750 unspent. In total the family might come out $1250 ahead versus the existing system, and the employer would be able to offload the risk and expense of managing benefits.
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