Fiscal Risks of House Republicans' Health Plan

Policy Memo
Tuesday, March 14, 2017

The Congressional Budget Office (CBO) analysis of the American Health Care Act (AHCA) estimates that relative to current law the House Republican health care plan will decrease spending by $1,219.1 billion and decrease revenue by $882.8 billion, leading to a total deficit reduction of $336.5 over the 10-year budget window from 2017 to 2026.

While it is important to consider the projected loss of health insurance for 24 million people, this post will look at the numerous fiscal risks of the legislation.

The biggest of these risks is also the AHCA’s biggest omission: the absence of any provisions to control overall health care costs, and not just federal payments for those costs.

Although the AHCA reduces federal spending on health care, it doesn’t necessarily reduce the “cost curve” of long-term health care inflation. Ultimately that is a problem because if health care inflation isn’t controlled, long-term health care spending growth will continue to drive up the cost of Medicare, make the Medicaid savings assumed in the legislation more difficult to achieve, and decrease the relative value of the tax credits meant to help people find affordable health care insurance in the non-group market.

The AHCA potentially makes long-term cost control more difficult by delaying implementation of a tax on high-cost insurance plans, the “Cadillac Tax.” An alternative approach that would have capped the value of tax preferences for employer-provided health insurance was apparently considered but not included in the final version of the legislation.

During the passage of the Affordable Care Act, the CBO estimated the Cadillac Tax to be the most effective cost-control mechanism in the legislation. While it was initially scheduled to go into effect in 2018, it has been delayed until 2020 and the AHCA would delay it further to 2025 -- bringing even more into question whether it will ever be implemented and whether the assumed savings will ever materialize.

Without the tax, current health care cost-control efforts are almost entirely within the purview of the Health & Human Services Secretary Tom Price. There are numerous experiments, pilot projects and payment reforms being undertaken by the agency, and a continuation and expansion of those will be even more essential. It is not clear at this point whether Secretary Price is committed to going forward with these innovations.

Additionally, the vast majority of the AHCA’s federal spending reductions, $880 billion, come from a reduction in state matching funds for Medicaid. The chosen method, a per capita cap that grows with medical inflation, would limit federal costs and encourage states to provide services more efficiently. However, the fiscal risk of the legislation is that the magnitude and rapidity of the Medicaid reductions will prove unrealistic. Budgetary pressure on state governments and economic pressure faced by hospitals and other providers could grow so large from the reductions that they put political pressure on Congress to delay the reductions or lessen their severity.

The other federal spending reductions come from a decrease in the value of subsidies/tax credits to purchase insurance. The fiscal risk with this reduction is similar to the problem with the Medicaid cuts -- that the subsidies might prove inadequate for individuals who do not qualify for Medicaid, leading to political pressure to increase them.

Such pressure is not hypothetical in this case given that some of the primary arguments made against the Affordable Care Act have focused on the cost of insurance and high cost-sharing and deductibles. The CBO estimates that deductibles and cost-sharing will ultimately be higher under the AHCA and that a substantial portion of insurance recipients will face higher premiums and lower subsidies.

An even greater risk is that the subsidies prove so inadequate that insurance markets collapse and require even greater federal spending infusions. While the AHCA infuses markets with a stabilization fund that the CBO projects will keep markets functioning, that fund expires in 2026, the final year of the budget window.

Ultimately, cutting federal spending poses difficult choices. However, this legislation also cuts $592 billion in taxes not directly related to insurance coverage. When balancing fiscal risks it is important to keep in mind that the tax cuts are much more certain to be implemented, since they take effect immediately, while the spending cuts are phased in over time and are more politically uncertain. Moreover, a portion of the tax cut ($117 billion over 10 years) reverses a Medicare payroll tax increase on upper-income workers that had been projected to improve the program’s troubled long-term finances.

As the legislative process moves forward, lawmakers should assess the realistic trade-offs of costs, access to care and the quality of care. Legislation that moves too quickly without such a thorough consideration risks public frustration, uncertainty for providers, gyrating insurance premiums and repeated overhauls with each new Congress and each new president.