Why the Emerging Bill to Repeal the Affordable Care Act Will Fail

by Topher Spiro and Harry Stein –

Last week, the House majority released an outline for repealing the Affordable Care Act, or ACA. Although the document provides no new details, it does provide enough information to evaluate the adequacy of financing, the likely policies needed to pay for new tax credits for health insurance, the likely effects on tax credit levels, and the political hurdles to such an approach. This analysis is based exclusively on numbers from the nonpartisan Congressional Budget Office, or CBO.

Although the congressional majority will claim that the emerging repeal bill represents a simultaneous replacement of the ACA, the math does not add up. Using CBO estimates, the Center for American Progress calculates that the repeal bill will cut the Medicaid expansion by $277 billion over 10 years. To finance new tax credits for health insurance, the repeal bill will likely cut Medicaid—including funding for nursing homes for the middle class—by an additional $370 billion over 10 years.

Even with these massive cuts, the repeal bill will still fall $171 billion short of the funding needed to fully replace the ACA’s exchange subsidies—a shortfall of 26 percent. The average subsidy per recipient could fall from $6,314 under the ACA to $2,703 under the repeal bill—a drop of 57 percent.

To reduce this disparity in subsidy levels, the repeal bill will likely need to increase taxes on tens of millions of workers in the middle class. It would do so while immediately cutting taxes for the wealthy by more than $346 billion over 10 years—giving millionaires an average tax cut of more than $50,000 in 2017 alone. But even with this harsh financing, because the repeal bill will extend tax credits to higher-income individuals, subsidy levels would still be 42 percent lower than under the ACA.

Because the repeal bill will have deep Medicaid cuts and much lower tax credits, it will not come anywhere close to providing comparable coverage to a similar number of people. The repeal bill will shift costs to consumers and cause millions of people to lose their health care coverage. Seven years after the passage of the ACA, it will soon become painfully clear that the congressional majority still has no viable plan to replace the law.

An $800 billion financing hole

The starting point for the emerging repeal bill is the reconciliation repeal bill from 2015. Although a full repeal of the ACA would increase budget deficits, this repeal bill eliminated the ACA’s coverage expansion while leaving its Medicare savings in place. As a result, the CBO estimated that this repeal bill would have reduced the deficit by $317.5 billion from 2016 to 2025. This savings grows to $516 billion when macroeconomic effects are included in a dynamic score. Although dynamic scoring makes cost estimates more unreliable and biases the budget process, our analysis uses the dynamic score because that is the estimate that Congress is likely to use.

The Committee for a Responsible Federal Budget updated the CBO estimate for the 2017–2026 budget window. If Congress passed a similar bill now, it would save $600 billion from 2017 to 2026 using dynamic scoring. This $600 billion is the amount of savings that would be available to spend on subsidies to replace the ACA’s coverage expansion.

Assuming that repeal of the ACA’s coverage expansion is delayed by the same period as under the 2015 repeal bill, the new repeal bill will need to replace subsidies that would have been spent under the ACA from 2020 to 2026. The CBO has estimated that subsidies over this period will total $1.42 trillion: $663 billion for health insurance exchanges and $755 billion for Medicaid expansion.

The $600 billion in available funding will fall $818 billion short of the $1.42 trillion in funding that will be needed to fully replace the ACA’s coverage expansion—a funding shortfall of 58 percent.

Tax cuts for the wealthy

This massive shortfall occurs because the repeal bill will immediately repeal all taxes under the ACA that help finance its coverage expansion. Although the outline released last week does not specifically itemize all taxes, it does mention “relief from all the Obamacare tax increases.” What’s more, recent statements from the House Freedom Caucus and Senate Finance Committee Chairman Orrin Hatch (R-UT) make clear that the repeal bill will immediately repeal all taxes.

This includes an immediate tax cut for the wealthy of more than $346 billion over 10 years. This gigantic tax cut will consist of repeal of the ACA’s:*

  • 0.9 percent Medicare payroll tax on high earners
  • 3.8 percent tax on net investment income

The nonpartisan Tax Policy Center estimates that millionaires will receive more than half of the total tax benefits from ACA repeal. Millionaires will receive an average tax cut of $50,130 in 2017, and multimillionaires—those who earn the top 0.1 percent of income, or income greater than $3.7 million—will receive an average tax cut of $197,340 right away.

Repealing Medicaid expansion

The outline released last week specifies that the repeal bill will repeal the ACA’s Medicaid expansion. Under the Medicaid expansion, the federal government finances 90 percent of total Medicaid spending, with states contributing the rest. Under the repeal bill, the federal government will only provide its regular share of total Medicaid spending—which varies by state but has averaged 57 percent historically.

Using CBO estimates of federal spending for the ACA’s Medicaid expansion from 2020 to 2026, CAP estimated federal spending under the repeal bill for this population. The CBO’s estimates of federal spending for the ACA’s Medicaid expansion represent 90 percent of total Medicaid expansion spending. Federal spending under the repeal bill will be approximately 57 percent of this total Medicaid expansion spending. CAP estimated that federal spending for the Medicaid expansion will fall by $277 billion from 2020 to 2026.

The impact of this cut will be devastating. States will be forced to roll back their Medicaid expansions entirely, to cut enrollment, or to cut benefits—with millions of people losing their coverage in the process.

Even though this cut is severe, a substantial financing hole will remain. From 2020 to 2026, total funding for subsidies will fall by $277 billion, from $1.42 trillion to $1.14 trillion. But the $600 billion in available funding will still fall $541 billion short of this $1.14 trillion in funding.

Cutting Medicaid by even more

As expected, the outline released last week includes a cap on Medicaid funding per person; states would also have the option of choosing a block grant instead. Although the outline did not specify how this per-capita cap would be set, it will likely need to be set in a way that saves money to help cover the remaining shortfall. Typically, proposals to impose a per-capita cap save money by having the cap grow more slowly than health care costs over time.

The CBO has estimated that one version of a per-capita cap would save $370 billion through 2026. This is a significant cut on top of the significant cut to Medicaid discussed above. Given the concerns of Republican governors, it is difficult to imagine enough support for a cut of this magnitude—let alone for a version of a per-capita cap that would cut even more.

When this $370 billion in Medicaid savings is added to the $600 billion in available funding, a total of $970 billion would be available to finance subsidies. Of that amount, $478 billion would go toward remaining funding for the Medicaid expansion population, assuming states are able to maintain Medicaid expansion eligibility—leaving $492 billion for exchange subsidies. This would still fall $171 billion short of the $663 billion in funding that will be needed to fully replace the ACA’s exchange subsidies—a shortfall of 26 percent.

This shortfall would reduce the average subsidy per recipient substantially. What’s more, the much smaller pie would be spread over a much larger number of potential recipients. This is because the repeal bill’s new tax credits will be flat, without regard for income, and available to individuals who purchase coverage outside the exchanges. The CBO projects that 15 million individuals will receive subsidies under the ACA, whereas 26 million individuals will have coverage in the nongroup market.

As a result of the funding shortfall and an extension of tax credits to higher-income individuals, the average subsidy per recipient could fall from $6,314 under the ACA to $2,703 under the repeal bill—a drop of 57 percent. If the repeal bill sets its tax credit at this amount, it will shift costs to consumers substantially and cause millions of people to lose their coverage.

Taxing worker health benefits

To soften this blow, the congressional majority will need to resort to increasing taxes on worker health benefits. Although the outline released last week is silent on this issue, news reports indicate that this is among the “pay-fors” being considered.

Under this scenario, the repeal bill would replace the ACA’s so-called Cadillac tax on high-cost plans with a cap on the tax benefit for worker health benefits. Workers enrolled in employer-sponsored coverage with premiums above the cap would pay taxes on their health benefits.

A cap set at the 75th percentile of premiums would likely save $274 billion through 2026, which includes the revenue that the Cadillac tax would have raised as well as the CBO’s estimate of this new policy. A similar version of this cap would be needed to fully replace spending for the ACA’s exchange subsidies. But even then, as a result of diffusion among a much greater number of recipients, average subsidy levels would fall from $6,314 under the ACA to $3,643 under the repeal bill—a drop of 42 percent.

Relative to a current policy baseline in which the Cadillac tax is delayed indefinitely, this policy would increase taxes for 25 percent of the 152 million workers with employer-based coverage, or 38 million workers. The CBO also estimates that this policy by itself would throw 2 million workers off of their employer coverage.

Why the repeal bill will fail

It’s not hard to see why the toxic combination of massive cuts to Medicaid, tax increases on the middle class, and much lower tax credits will likely lead a majority of the House and/or Senate to oppose the repeal bill. The repeal bill will fail because the simple math is incontrovertible. As Sen. Susan Collins (R-ME) put it: “If you defund the ACA, where do the funds come from for the replacement?”

Conservative health policy expert Avik Roy has warned against the emerging repeal strategy. By repealing all of the ACA’s taxes, Roy fears that the congressional majority “will create a trap of their own devising” because the strategy “virtually guarantees that a Republican replacement won’t be competitive with the ACA on coverage.” In fact, the CBO analysis of the repeal bill will clearly bear this out.

This trap is a particular problem with respect to the Medicaid expansion. As the foregoing analysis demonstrates, the math virtually dictates repeal of the Medicaid expansion—and even then, the financing comes up far short. Yet many Republicans are on the record in support of preserving the Medicaid expansion:

  • When asked if she wanted to keep the Medicaid expansion, Sen. Shelley Moore Capito (R-WV) said matter of factly: “Yeah absolutely. … I want to keep those people in the system, covered in some way. … That’s something I’m looking over watchfully. It’s very important to me.”
  • Dean Heller (R-NV) voted for an amendment to the budget resolution to block legislation that would eliminate or reduce federal funding to states under the Medicaid expansion.
  • Susan Collins voted for an amendment to the budget resolution to block legislation that would result in a reduction in eligibility or benefits for individuals under Medicaid.
  • When asked about ending the Medicaid expansion in two years, Sen. Bill Cassidy (R-LA) said, “You would not be able to fulfill President Trump’s pledge.”
  • Rob Portman (R-OH) has said that he supports the Medicaid expansion, and the governor of his state, John Kasich (R), has said that repealing the Medicaid expansion would be a “very, very bad idea, because we cannot turn our back on the most vulnerable.”
  • Lisa Murkowski (R-AK) promised that she would vote against repeal of the Medicaid expansion.

These are only the senators who are speaking publicly on the record. Only three defections would be needed to blow up the House repeal bill.

Conclusion

The repeal bill will transfer money from low-income and middle-class Americans to millionaires. Because the math dictates massive cuts to Medicaid and much lower tax credits, millions of people will lose their coverage or have their coverage downgraded. The American people do not support this approach, and neither will a congressional majority.

Reprinted with permission from The Center for American Progress