American Health Care Act: Shifting the Structure of Health Care

Last week, the Congressional Budget Office (CBO) released their cost estimates for the American Health Care Act. The piece of legislature is looking to be passed in the House of Representatives but is struggling to obtain the support to pass it. Speaker Paul Ryan recently said that his bill would need to change to secure the votes it needs to pass. The CBO report has done its part to affect the bill’s popularity and proven it deserves some review.

The federal budget deficit continues to be one of the divisive issues in the two-party system with Republicans and Democrats blaming the opposition for its death of financial accountability. When the CBO mentions that the bill will reduce federal deficits by $337 billion, ears perk up. In a ten-year period, estimates predict that $1.2 trillion of spending would be erased with most that reduction coming from $880 billion in federal outlays for Medicaid. Much of the opposition to the bill comes at this point where the program that supports those who have the most trouble obtaining health care threatens to be gutted.

The legislature seeks to give the states more power over their own spending forcing the populations of each individual state to be subject to the local political environment. The bill does this by switching to a lump-sum allocation plan. Liberal opposition to this change claims that this will hurt Medicaid members in conservative states which predict that governments in these states will be stingy with these funds. The CBO sees a 17 percent drop in Medicaid enrollment compared to the 2026 estimate for the current law. The lower enrollment will be responsible for the majority of the spending declines with cuts to the federal matching rates being the second largest factor affecting spending.

The new legislature will also cut out the individual mandate penalty as it was one of the contentious points of the bill. The CBO notes that the revenue lost from removing the individual mandate will exceed the savings from lower enrollment. The removal of the individual mandate would result in an interesting exchange of government revenues for higher disposable income. The idea is that consumers are more efficient with their money because the government is disassociated from their preferences, but the logic is not flawless. In reality, the average consumer underestimates his need for insurance and is often overconfidence with how healthy he is or how likely things are to happen to him. Nevertheless, the reductions in Medicaid spending show that the Republican party still believes that the private sector is better off making financial decisions.

Second to the Medicaid cuts, reductions of $673 billion in healthcare subsidies including tax credit for premium assistant and cost-sharing will be implemented. Not only are the cost structures being revised, but the timing of the payment is being pushed back to tax season. The CBO finds that, for households with income exceeding the 150 percent of the federal poverty line, younger people would pay less towards their premiums than older people. For that reason, the CBO sees younger than older individuals enrolling into the new program.  The new legislature looks to capitalize on the wealth of the older generation to allow the new health care law to be cheaper than the last.

The chart above shows CBO estimates under the current and new laws for a 21-year old, 40-year old, and a 64-year old. Based on net premium paid for individuals at 175 percent of the poverty line, the current law has the same rate across ages, but the new law would have the 64-year old premium over 5 times higher than the younger individuals. The age trend, again, holds for individuals with higher annual income (450 percent of the poverty line). Overall, estimates for premiums have increased significantly for older individuals to finance lower premiums for the younger population.

The strategy of leveraging the premiums of the older population to finance lower premiums for the younger population is most likely supported by the fact that individuals over 55 have, on average, higher net wealth than the younger. Moving money out of Medicaid and into support for the non-group insurance market is another indirect way of pushing the burden of the cost of healthcare on the older generation who have the highest enrollment in the program.

Besides these major changes, the plan includes a few other notables. Planned Parenthood funding would be more or less cut completely. The actuarial values of the plans would be allowed to be reduced permitting insurers to cover less of the costs that are required under the current law. The establishment of the Patient and State Stability Fund would help disruptions in the stability of the market.

Voting on the plan will continue through the first half of the year, but currently, there is enough opposition to keep it from being passed. A macroeconomic analysis was not provided by the CBO as more analysis was needed, but it seems clear that the higher premiums would cause a drag on consumption especially in the oldest demographics.


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