The future of the American Health Care Act (AHCA), the GOP-drafted plan to repeal and replace the Affordable Care Act (ACA), is unclear after the bill was pulled before the House of Representatives could vote on it. But the debate over the ACA and proposals to replace several of its key provisions is unlikely to remain off the national agenda permanently. The individual insurance market under the ACA’s rules is performing poorly in several states around the country, and the situation is unlikely to improve on its own without policy intervention.

It remains valuable, therefore, to understand what would happen if AHCA in fact became law, and what could be done to improve it or a new reform proposal. The best place to start is with the cost estimate of the plan produced by the Congressional Budget Office (CBO).

Trump administration officials, some members of Congress, and assorted commentators have criticized CBO for this estimate, arguing that it is a fundamentally inaccurate assessment of what would occur if AHCA passed. This criticism is misplaced. While some of CBO’s assumptions are indeed questionable, there is little doubt that the agency’s bottom line assessment is basically correct: The bill, as currently structured, would trigger a rise in premiums in the short-run, a sharp increase in the number of people without insurance over the next two years, and then also a steady increase in the number of uninsured Americans over the following eight years.

Instead of trying to discredit this finding, the authors of the legislation would be better off fixing the bill. CBO’s estimate provides a roadmap for what needs to be done to improve the chances the bill will produce the results its authors intend.

AHCA

The American Health Care Act attempts to meet the political imperative of repealing the ACA while retaining important provisions needed to maintain a functioning non-group insurance market and instituting additional reforms. The plan makes significant Medicaid reforms by eliminating the federal government’s enhanced matching rate for the ACA-authorized expansion population and replacing the current matching grant formula with caps on federal spending tracked to per capita enrollment. AHCA replaces the ACA’s income-adjusted premium credits with age-adjusted credits that would be phased out for upper income households and provides a $100 billion fund over 10 years to help stabilize the individual insurance market by subsidizing high-cost enrollees. It also repeals most of the tax increases used to partially fund the ACA’s new spending.

The AHCA eliminates the tax penalties associated with both the individual and employer mandates of the ACA, but it retains most of the insurance rules of the ACA, including the requirement of community-rated premiums (with age adjustments); it also retains the requirement that insurers provide coverage, and make it renewable, to all potential customers, regardless of their health status.

Changing the ACA’s insurance rules in a coherent and systematic manner in AHCA was difficult because the proposal’s sponsors were trying to pass the measure using the budget reconciliation process. A budget reconciliation bill can pass the Senate with a simple majority of 51 votes rather than the usual 60 votes often needed for other legislation. Thus, AHCA might be able to pass in the Senate, which Republicans currently control with 52 seats, without the support of any Democrats.

But budget reconciliation’s rules restrict what can be included in the legislation to matters directly affecting federal spending or revenue. Changes to the rules governing the provision of private health insurance were unlikely to survive a challenge by opponents of the proposal. However, linking the provision of new credits to the re-written insurance rules might have increased the chances such rules could survive a challenge in the Senate.

AHCA is thus an awkward proposal. It effectively eliminates the individual mandate while leaving in place the ACA’s rules prohibiting the use of health status in setting premiums or determining what is covered by insurance. The authors of the measure propose “continuous coverage protection” as a substitute for the individual mandate. Under that provision, insurers would charge a one-year, 30 percent surcharge on premiums to anyone who has experienced more than a two-month break in their insurance coverage.

This penalty is far too weak to work. A young, healthy consumer experiencing a break in coverage has a strong incentive to stay uninsured as long as possible, because the penalty he faces when he reenters the market is the same regardless of how long the spell without insurance lasts. Each year that goes by without paying insurance premiums is savings to him that he keeps. As long as he stays healthy, the savings over time can be substantial even if he pays occasional medical bills out of pocket. Once he decides to purchase health insurance, the consumer will be required to pay a 30 percent surcharge on his premium for one year. After that, the consumer will once again pay without penalty the same community rate as everyone else of the same age and gender.

Arguably, the AHCA’s surcharge provision is even weaker than the ACA’s individual mandate provision. AHCA also substitutes less generous age-based credits for the income-adjusted subsidies of the ACA for lower-income households, and repeals enhanced funding to the states for the Medicaid expansion population. As a result, younger and healthier consumers would have less of an incentive to buy coverage. There would also be more people facing high health costs seeking individual coverage who previously were covered by Medicaid.

That is a recipe for even more adverse selection, driving up premiums for those who remain insured through the individual market. As a result, AHCA would require these households to pay more both for insurance and for accessing medical care than they would have under the ACA.

Even a cursory reading of AHCA would conclude that the bill would not correct the adverse selection problems now plaguing the ACA but would make them marginally worse. Moreover, the proposal’s more modest assistance for insurance enrollment for low-income households would lead to an increase in the number of people in those households who would go without insurance.

CBO’s Assessment

Not surprisingly, CBO’s analysis of the AHCA (as changed by last-minute amendments adopted by the House Rules Committee) confirms that a commonsense reading of what would occur under the proposal is right. The following were the key findings in the agency’s cost estimate:

  • Deficit Reduction. CBO estimated that the bill would reduce spending by $1.1 trillion over the coming decade and taxes by $1.0 billion over the same period, producing net deficit reduction of $150 billion. The reduced spending is concentrated in the proposal’s substantial reform of the Medicaid program.
  • Coverage. CBO expects AHCA to trigger an immediate jump of 4 million uninsured people in 2017, due to repeal of the tax penalty associated with the individual mandate. In 2018, the agency projects an additional 14 million would go without insurance, and by 2026 the number would be 24 million people.
  • Premiums. CBO projects AHCA would lead to a 15 to 20 percent rise in premiums for insurance sold in the individual market over the period 2018 and 2019, relative to the premiums that would occur under the ACA. By 2026, however, premiums under the AHCA would be lower, due mainly to relaxation of rules requiring minimum actuarial values and changes in the profile of the risk pool.
  • The Stability of the Market. Despite many predictions to the contrary, CBO projects that the individual insurance market under the ACA, as well as under AHCA, would be viable, in that the customer base would be sufficient to prevent a death spiral. The main reason for this finding is that the subsidies under current law, and also under the proposal, would be sufficient to encourage enough consumer demand among healthy individuals to keep premiums in check.

While it seems indisputable that CBO’s basic findings are directionally correct, there are some assumptions in their assessment that seem unlikely to be accurate:

  • Medicaid Expansion. To assess AHCA, CBO used its March 2016 baseline instead of an updated baseline for 2017 that is not yet ready. Under the old baseline, CBO assumed that some additional states would adopt the Medicaid expansion in the coming years. CBO estimated that 5 million more people would be enrolled in Medicaid by 2026 as additional states expanded the program under the ACA. In the current political environment it is highly unlikely that more states would expand Medicaid even with no change in law. As a result, CBO’s estimate makes AHCA look like it is taking away insurance coverage from 5 million people who do not have it today under Medicaid but who CBO thinks will have it in the future if the ACA is not repealed.
  • Exchange Enrollment. CBO’s March 2016 baseline assumed there would be 18 million people getting insurance through the ACA’s exchanges in 2018. That is very unlikely given that enrollment in 2017 is 12 million, down slightly from the 12.7 million people enrolled in 2016. The exchanges have experienced mediocre enrollment growth since they began in 2014, and the CBO baseline has been slow in adjusting to that poor performance. Again, the inflated number in the exchanges is likely making AHCA’s effect on coverage appear worse than it would be in reality.

Needed Adjustments

CBO’s analysis of the AHCA is extremely concerning. Although one might dispute the specific numbers, the estimate demonstrates that AHCA as currently designed would lead to substantial loss of insurance coverage, particularly among lower-income families. Rather than criticizing the agency for delivering bad news, policymakers should examine the analysis to identify provisions that should be modified in order to produce a more sustainable reform — and to get a better assessment from CBO.

If AHCA is revisited by Congress, it should be amended substantially to incorporate needed changes aimed primarily at giving families greater access to more affordable health insurance while providing more help to those who most need it.

Higher Financial Penalties for Failure to Maintain Coverage

The one-year, 30 percent surcharge added to premiums for those who are not continuously covered is too weak to discourage individuals from waiting until they expect to have substantial medical bills to enroll in insurance. AHCA’s replacement of the individual mandate with the continuous coverage requirement is a major reason CBO assumes large numbers of healthy people will drop out of insurance. However, the ACA’s mandate also imposes a penalty for those who fail to maintain coverage which is too weak to bring younger, healthier persons into exchange plans. Moreover, that mandate is politically unsustainable.

The AHCA approach is an attempt to replace governmental force with personal responsibility. Under AHCA, no one is required to have insurance, but there are financial consequences for choosing to remain uninsured. However, rather than an arbitrary fixed surcharge, the penalty should be commensurate with the added costs imposed on the health system when such people decide not to buy insurance. For example, the penalty could include a premium surcharge that increases with time out of the market, and a waiting period could be imposed before benefits are paid. Such an approach would eliminate the perverse incentive of a fixed penalty that encourages individuals to remain uninsured, avoiding premium payments, for as long as possible.

The ‘No-Premium’ Health Insurance Option and Automatic Enrollment

Another factor reducing CBO’s estimate of the AHCA’s take-up of insurance is some people’s unwillingness to pay a premium that is larger than the value of their credit. A comprehensive revision of AHCA could broaden the types of plans offered by insurers to include at least one plan available with a premium exactly equal to the credit. Such a plan would provide protection against catastrophic losses without requiring first-dollar coverage for routine expenses. To further improve insurance take-up, AHCA should allow states to automatically enroll uninsured individuals into “no-premium” plans, with an option to change plans or opt out entirely.

Such a change would be controversial. CBO has stated that insurance provides financial protection against high-cost, low-probability events, but noted that such policies must also meet specific requirements established in the law. The ACA requires that health plans cover 10 essential health benefits, be equal to the scope of benefits provided under a typical employer plan, and meet actuarial value standards. Future legislation would clarify how “no-premium” plans would satisfy federal and state insurance requirements.

A Compromise On Medicaid Eligibility Within A Reformed Program

CBO estimates that the Medicaid expansion allowed by the ACA has resulted in 50 percent of the eligible population enrolling in the program. AHCA could be revised to strike a compromise between the expansion and non-expansion states that would increase overall Medicaid coverage and provide fairer funding for state Medicaid programs.

A new uniform national income standard could be set at a level that would free up resources to provide stronger federal support for all state Medicaid programs. Non-expansion states would not be required to expand their Medicaid eligibility to the new standard, but they would receive additional funding through a block grant. Expansion states would likely phase down their programs to the new income standard. In addition, states would be given more control over the program, allowing them to operate Medicaid in ways that promote individual responsibility and ease the transition to private health coverage.

Additional Support For Low-Income Households Above Medicaid Eligibility

The sizeable reduction in non-group insurance coverage estimated by CBO is due in large part to the AHCA’s shift from an income-related premium subsidy to one that varies only by the age of the enrollee. Subsidies ranging from $2,000 to $4,000 per person are not sufficient to make non-group insurance affordable for many with low incomes. AHCA should be revised to provide additional support for these families.

AHCA already includes a $100 billion Patient and State Stability Fund that helps finance the extraordinary costs of high-risk individuals buying non-group insurance; this fund would help reduce average premiums for everyone in that market. In addition, a new fund could be established that supplements premium tax credits for persons below a specific income threshold.

Looking Forward

The failure to pass the AHCA in the early weeks of the Trump administration does not mark the end of the GOP-led effort to reform health financing. New efforts may be made to roll back the ACA substantially and to replace its key provisions with a different framework. Whenever such efforts are initiated, Republicans need to publicly embrace changes to the AHCA that would produce better results than the plan that was pulled back from the House vote. The GOP now has time to pursue a much more deliberate approach to developing such a plan, and to carefully consider various alternative policy options.

CBO can be an indispensable source of help in this process. The agency regularly works with the key committees and leadership offices to provide objective, preliminary assessments of draft plans before they are released for public consumption. Instead of condemning or ignoring CBO, congressional leaders would be well-advised to take full advantage of the agency’s analytic expertise to make the needed adjustments to the AHCA plan. That will ensure all sides are better prepared for serious debate when health policy again moves back onto center stage.