AHCA Reduces Federal Spending on Private Health Insurance by....4%

[originally posted May 30]  The Republican bill rejiggers subsidies for the individual market but barely reduces them on net. Almost all the real cuts are in Medicaid     

Hours before House Republicans introduced the American Health Care Act, their ACA partial repeal/replace bill, on March 6, former CMS director Andy Slavitt tweeted:

When #ACA replacement bill is out, don't get distracted by exchanges.

The big issue is dramatic cuts in Medicaid to pay for huge tax cuts.

— Andy Slavitt (@ASlavitt) March 6, 2017

That remains true. In fact, it's truer than has been fully recognized.

The basic math of the AHCA, according to the Congressional Budget Office (CBO), is a $992 billion* reduction in federal revenue over ten years, offset by a $1.1 trillion reduction in spending on health insurance benefits. Most of that spending cut is in Medicaid, reduced by $834 billion over ten years, according to the updated CBO analysis released on May 24.

The rest of the spending reduction ostensibly comes from cuts in subsidies to private insurance. But that reduction is largely illusory -- - because two of the major tax cuts included in the AHCA subsidize privately purchased health insurance and medical care.

Remixing, but barely reducing, individual market subsidies

Here's the math. The AHCA replaces the ACA's income-adjusted tax credits and cost sharing reduction subsidies for private insurance with skimpier tax credits that vary only according to age (up to a high income threshold, above which they phase out gradually). The ten-year projected difference in spending is $290 billion -- $665 billion for the ACA subsidies vs. $375 billion for the AHCA's.

Reduce that difference by $117 billion for AHCA funds projected to be spent on Patient and State Stability Fund Grants-- that is, federal grants to states for programs to shore up their individual markets for health insurance, mainly through various forms of reinsurance. Those programs are designed to reduce the cost of insurance. For some reason, CBO counts this spending as a revenue reduction. Considered as spending, it reduces the apparent ten-year spending gap on private insurance subsidies to $173 billion -- still substantial.

Included in AHCA revenue reductions, moreover, are two tax breaks designed to subsidize individuals' purchase of health insurance and healthcare. The first is a reduction in the spending threshold above which individuals can deduct medical expenses from their taxable income. The ACA raised this threshold from 7.5% of income to 10%. The AHCA as originally introduced repealed this hike. An amendment added on March 22 further reduced the threshold to 5.8% -- a change that would cost the Treasury an additional $90 billion, according to CBO.  The total cost of this tax cut over ten years is now estimated at $126 billion. To that, add another $19 billion to raise the contribution threshold to tax-sheltered Health Savings Accounts, a tax gift for the mostly wealthy that's beloved of Republican legislators.

Add together all these subsidies to buyers of private insurance (or in some cases the uninsured, who can use the medical expense deduction) -- the AHCA premium subsidies, stability fund, and tax breaks to individuals -- and the tab is $637 billion over ten years. That compares to $665 billion that would be spent on ACA marketplace subsidies under current law, according to CBO estimates.

The AHCA thus cuts spending on subsidies benefiting those who buy their own insurance (or self-insure) by....4%.  Rand Paul, please take note: the bill barely reduces subsidization of the individual market at all.

It does, however, radically shift that spending toward wealthier enrollees in the individual market -- by cutting the tie between income and subsidy, and by repealing the Cost Sharing Reduction subsidies that make actual healthcare, as opposed to just health insurance, affordable to some 7 million current lower income enrollees.

In fairness, the medical expense deduction does help

While the repeal of the ACA taxes on wealthy households is obviously a straight giveaway to the wealthy, the medical expense benefit is more evenly distributed. In 2012, the last year before the ACA raised the threshold over which expenses could be deducted (from 7.5% to 10% of income), 52% of the 10.2 million tax filers who took the deduction had household incomes under $50,000 per year. The dollar value of their deducted income trailed only slightly, at 48% of the total. (By 2014, the number of households taking this deduction had dropped to 8.6 million, 49% of them with incomes under $50,000.) This $126 billion ten-year tax expenditure does in fact help middle and low income people -- though, like all straight deductions, it's more valuable to those who pay higher income tax rates.  The HSA deduction is more regressive: in 2012, 62% of those who took the deduction had incomes over $75,000.**

The medical expense deduction probably would loom larger under the AHCA because more people will spend a large percentage of their income on medical care. Repeal of the ACA's Cost Sharing Reduction subsidies, which reduce deductibles, co-pays and out-of-pocket maximums for some 7 million enrollees in the ACA marketplace, will see to that. So will repeal of the Medicaid expansion.You don't have to pay income tax to benefit from the deduction -- it can add to refunds generated by “refundable” tax credits such as the Child Tax Credit or the Earned Income Tax Credit (EITC).

The ten year cost of these four tax breaks in CBO's estimate is somewhat misleading, as the Medicare tax repeal was delayed until 2023 to make the budget numbers work. In 2026 alone, the combined cost to the treasury of these four breaks is projected at $63.7 billion  As those amounts are likely to rise every year, the net cost of these individual tax breaks for the next ten years (2027-36)  would likely approach $1 trillion.

A smokescreen for cutting Medicaid

On net, the AHCA does harm the roughly 6% of the population that relies on the individual market for health insurance for their coverage. CBO estimates that under the AHCA 3 million fewer people will be enrolled in privately purchased health insurance in 2026 than under current law. The coverage obtained will be less comprehensive on average than under the ACA; purchasers will be wealthier, younger and healthier on average; and hundreds of thousands of older prospective buyers who desperately need coverage will be shut out of the market.   All the Republican huffing and puffing to remake the ACA marketplace will yield worse outcomes while saving a negligible amount of money.

Nonetheless, this damage pales in comparison to what the AHCA does to Medicaid -- first by repealing the federal funding that makes the ACA's expansion of Medicaid eligibility viable for states, and secondly by imposing "per-capita caps" on the federal government's contribution to each state's Medicaid bill. That is, the federal contribution will increase each year according to a fixed formula that according to CBO's estimates will trail the increase in the cost of care by .7%, eroding the federal government's commitment over time and leading to inevitable cuts in benefits, eligibility and administrative oversight. CBO estimates that the AHCA will reduce Medicaid enrollment by 14 million over ten years -- and the per capita caps, if maintained, will continue to do damage to the program in perpetuity.

Angst about Republican rejiggering of the individual market sucks up all the oxygen in the national discussion. And their proposed changes, once again, are likely to do real damage. But the core of the bill remains as Slavitt nailed it: an evisceration of Medicaid enacted to pay for enormous tax cuts to the wealthy and healthcare corporations.

Update: David Anderson points out to me that the HSA deduction is taken largely by people with employer-sponsored plans. That may be true to a lesser extent of the medical expense deduction as well.

Update 2: I don't mean to minimize the harm the AHCA would do to the individual market. Today Linda Blumberg of the Urban Institute forecasts that the bill's restructuring of ACA premiums would put "tremendous pressure" on all states to use MacArthur Amendment waivers to opt out of the ban on medical underwriting and the ACA's Essential Health Benefits. That's because skimpy premiums will render insurance unaffordable to many and thus create pressure to lower premiums for "most" people. The argument is structurally similar to Matt Fiedler's forecast, adopted by CBO, that in states that allow medical underwriting, healthy people will choose to be medically underwritten and thus undermine the parallel guaranteed issue market. My point is that the AHCA will disfigure the individual market while still managing to shower almost as much federal money on it as the ACA does.

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* If the $117 billion for the Patient and State Stability Fund is counted as spending rather than revenue, that takes the total ten-year spending reduction down to just short of $1 trillion and reduces the revenue reduction total to $874 billion. Hence the total deficit reduction estimate of $119 billion. The $874 billion revenue reduction total combines CBO estimates for revenue loss stemming from repeal of ACA taxes and fees ($664 billion) plus repeal of the individual and employer mandates ($210 billion). See page 3 of the CBO report. I don't know why the stability fund spending is counted as a revenue reduction rather than as spending.

**Yearly IRS estimates of the number of filers for each deduction at different income levels, as well as estimated dollar amounts for the spending claimed, can be found here.