American Health Care Act – Decoding the CBO Report

Upon release of the much-anticipated Congressional Budget Office (CBO) report on the fiscal and human impact of the GOP led American Health Care Act (AHCA), headlines almost uniformly read “24M people will lose coverage under the GOP repeal and replace bill.” In this post I will attempt to explain what’s behind this important CBO number, other important facts and who the winners and losers are.

Breaking down the number

If current legislation, the Affordable Care Act (ACA) remains in place, the CBO projects 28M uninsured Americans (11.4%) by 2026; that number is projected to increase to 52M (18.6%) under the AHCA. So how did the CBO arrive at the 24M projected increase?

14M fewer people will be enrolled in Medicaid by 2026. Beginning in 2020, the GOP plan will shift control of Medicaid to the states and will limit federal contributions on a per capita basis.

• S&P estimates are lower with 4-6M fewer Medicaid recipients by 2024.

10M fewer insured through individual markets and employers.

• Free will.
  • According to NPR, much of the initial increase in the uninsured will be a direct result of individuals choosing not to buy insurance due to repeal of the individual mandate. In 2016, the penalty for forgoing insurance was the higher of 2.5% of income or $695.
• Reduced affordability for older Americans.
  • Coverage will become less affordable for older Americans due to changes in allowable rating methodologies. Under the ACA, insurers are only allowed a 3-to-1 ratio in premiums for the oldest Americans compared to the youngest. The AHCA will allow a 5-to-1 ratio.
• Some employers will stop offering coverage.
  • Due to the repeal of the employer mandate, some employers with low-skilled labor will choose to discontinue coverage as the premiums have grown to be a disproportionate percentage of payroll.

How are employers and employees impacted?

Employers and their employees will experience very little impact from the proposed bill. Employers should have more flexibility in plan design and less administrative burden, but pricing should not be impacted by the proposed legislation.

Who are the winners?

• Many benefit from reduced insurance costs in individual markets.
  • After an initial cost spike in individual markets due to some healthy individuals choosing to forgo coverage, those same markets are projected to decrease 10% by 2026 compared to ACA projections. This is in part due to young healthy applicants to the risk pools based on the new rating methodologies.
• People who prefer catastrophic or stripped-down coverage.
  • Catastrophic plans will again be available for healthy or well capitalized individuals who prefer less coverage and less costly plans. While the ACA does not allow subsidies for these plans, the AHCA will allow eligible individuals selecting catastrophic plans to receive a subsidy.
• Younger people will pay less for coverage.
  • According to S&P Global Market Intelligence, allowing insurers to charge oldest customers five times as much as the youngest will result in about 20% savings for someone in their early 20’s.
• Residents of states where insurance is less expensive.
  • Tax credits will be based on age but not location. The same tax credit goes a lot further in states where insurance premiums are cheaper.
• Deficits to fall.
  • The deficit will be reduced by $34 billion per year over the next 10 years. Due to time constraints, the CBO used a static score that doesn’t consider economic lift or other anticipated benefits positively impacting the deficit.
• Individuals earning more than $200,000 or married couples earning more than $250,000.
  • The AHCA eliminates the ACA 3.8% investment tax and the 0.9% payroll tax.
• Individuals who want to go without coverage.
  • People will be free to make this choice without a penalty unless of course they incur unexpected health costs. If their health takes a turn for the worse, they can sign up for coverage with a 30% surcharge.

Who are the losers?

• Medicaid beneficiaries after 2019.
  • Effective 2020, the federal government would, for the first time, limit contributions on a per capita basis. If costs exceed the contributions, it will be up to the states to provide skimpier coverage, reduce their Medicaid rolls or contribute state funds to cover the short fall. The new Patient and State Stability Fund, beginning in 2018, is meant to help states offset premium costs, but will this and the new subsidy program be enough to help those who need it most?
• Older Americans in the individual markets.
  • S&P predicts the average premium for a 64 year old is expected to rise 30% while the maximum tax credit will be limited to $4,000. This will make care unaffordable for many older Americans.
• Residents in states where insurance is more expensive.
  • Tax credits will be based on age but not location. The same tax credit won’t go as far in states where insurance premiums are more expensive.
• Hospitals will treat more uninsured patients resulting in reduced margins and cost-shifting to insured patients. The additional funds set aside for these facilities as part of this bill may not be enough to offset the additional cost.

Who Knows?

• Individual Markets.
  • The CBO report is optimistic about the impact of AHCA on individual markets. Today, in many areas, these markets are imploding.  Allowing people with a 63 day or greater lapse to secure new coverage for a mere 30% surcharge in premium could have unknown and significant impact to individual markets.  Even with the current mandate and penalty, people still come in and out of the risk pools as their needs change which is in part why these markets are suffering and rates spiraling to new heights.
  • If the CBO is right, the new rating methods will bring young healthier lives into the risk pools to more than offset the expected adverse risk selection caused by people only securing coverage only when they need it.

• If the CBO is wrong, this problem will continue to worsen.

What’s disappointing?

No one seems to be tackling the underlying problems; they weren’t addressed under President Obama and they aren’t yet the focus of President Trump. Health care costs continue to soar and improved health outcomes are not correlated to expense. Our system still suffers from a lack of financial alignment with the primary objective we should have in health care: to improve health and avoid adverse clinical events. To make matters worse, there is no price transparency and it’s very difficult for consumers to make informed health care decisions based on price and quality. Consumers are too isolated from the actual expense of health care services. Unfortunately, this problem will persist until we start focusing on better care coordination, better care integration and start paying for health outcomes instead of volume of health services.

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