Abacus: Obamacare v. Trumpcare, and Relevant Economic Analysis

Although the proposed GOP Healthcare bill, the American Health Care Act (ACHA), has been pretty much shattered by the Senate, I find it important to examine the micro and macro economic effects surrounding the Republican’s plan to repeal and replace the previous President’s Affordable Care Act (ACA).

The GOP’s theory behind the ACHA is to replace the “one-size-fits-all” healthcare plan that Obamacare apparently provides with a plan based upon “patient centered healthcare.” This means, very generally, less expensive health care plans for Americans (on average), no more insurance mandate, no more employer mandate, which overall is to provide more flexibility for citizens. As the house Republicans put it on their ACHA website:

“Obamacare was based on a one-size-fits-all approach that put bureaucrats in Washington in charge of your health care. The law led to higher costs, fewer choices, and less access to the care people need. 

The AHCA will deliver the control and choice individuals and families need to access health care that’s right for them. And provide the freedom and flexibility states, job creators, and health care providers need to deliver quality, affordable health care options.”

By throwing out Obamacare’s taxes, subsidies, mandates, and costs, the Government can now let the free market provide the necessary individual choices that will lead to affordable and more personalized plans for the Nation.

How is this done? To start, let’s examine the main issues and theory the ACA addressed –

According to the Bill’s website, the ACA had three “primary” goals: 1) “Make affordable health insurance available to more people,” 2) Expand the Medicaid program, and 3) “Support innovative medical care delivery methods designed to lower the costs of health care generally.” Big initiatives were made to accomplish these goals: the ACA eliminated insurer’s ability to deny healthcare to those with pre-existing conditions, it attempted to offer similar and competitive policies to people of the same age and location. It also created an insurance mandate for both companies and individuals (i.e., if you didn’t get insurance, you paid a tax fine), bumped up Medicaid funding, implemented taxes and subsidies to budget for primary goal 1), and it created online state healthcare exchanges and marketplaces to competitively buy and sell insurance. Overall, it tried to increase the number of insured Americans.

Unfortunately, the ACA didn’t exactly go according to plan. Premiums and deductibles have skyrocketed since the Bill was implemented. Insurers kept on leaving the online state marketplaces, leaving Americans with fewer and fewer options (and therefore less competition among plans). The insurance mandate penalties imposed were far too weak, and therefore many companies and individuals threw them aside. The Medicaid expansion was a huge cost burden on states, and the new taxes and subsidies were too hard and complex to manage, both resulting in increasing the budget deficit (and therefore the Nation’s Debt burden).

The combination of problems like the high premium increases, the tax and penalty costs, a loss of individual healthcare choice, and the increasing Government deficit has made the bill clearly economically unstable in the long run. What do the Republicans have in store to solve these glaring issues?

The most prominent proposal in the ACHA is the huge cuts to Medicaid, As in over $800 billion in cuts over the next decade. Current Federal and State shared Medicaid expansion would be replaced with a “fixed per capita cap or a block grant” granted to each state, increasing every year by a percentage tied to the inflation rate. It also essentially would end State’s rights to enroll new people in Medicaid expansion.

In terms of pre-existing conditions, states would be allowed to decide on the conditions they require their insurers to cover. What this also implies is that states can pull back any pre-existing condition protections the ACA initially implemented. Insurers still cannot charge sick people more, however, they will be allowed to charge elderly people up to five times more than younger people.

On women’s health, insurers still cannot charge more based on gender. One of the more noted proposals in the ACHA is the defunding of Planned Parenthood, whose Federal subsidies account for close to half of their overall revenue. Also, insurers will have the choice to drop maternity and contraceptive benefits from their plans.

The ACHA includes broad tax cuts across the border, but the largest tax cuts are for the wealthiest Americans. Furthermore, insurance companies will see large cuts in taxes, and those companies who make medical devices will also see large cuts. The ACHA replaces the ACA’s low-income and high-cost subsidies with a tax credit that is adjusted for age. The credit increases as you age, as you can see below:

Source- The Atlantic

Source- The Atlantic

However, the Senate version of the bill does include what’s known as the “Patient and State Stability Fund.” This creates “high risk pools” of funds to help manage more expensive healthcare customers, or as The Energy and Commerce Committee writes on their website: “This fund provides states $100 billion over 10 years to promote innovative solutions to lower costs and increase access to health care for their unique patient populations.” This proposal probably won’t offset the large number of people affected by the subsidy cuts, but certainly is a helpful initiative.

Overall, what this bill means is less costs but more uninsured. The bill slashes Medicaid costs by approximately a quarter, but results in 14 million less people covered by 2026. The bill essentially rewards healthy people with lower costs, but premiums will increase substantially for elderly and lower-income Americans. According to the CBO, retracting the employer insurance mandate will result in less employer coverage, and protections of pre-existing conditions are now left up to the state. The overall average cost of healthcare to Americans will drop by maybe 10%, but the new bill doesn’t help the old and sick.

A major positive for fiscally conservative political followers is the major cuts in costs the ACHA provides. Initially, the Bill reduces the Government budget deficit by $119 billion, and by over $300 billion in the next decade. The bulk of the savings coming from cuts in Medicaid. All in all, over $300 billion in Federal savings comes with a trade-off of more than 20 million Americans being left uninsured by the repeal and replace movement.

It also turns out that the repeal and replace movement may also involve deeper ripples in the overall economy. The initial elimination of Obamacare taxes and subsidies could bestow upon us a short-term economic bump, with The Atlantic reporting that this may create over 800 thousand jobs between 2018 and 2020. However, anyone can easily put together that Healthcare Expenditures usually are equivalent to Creation of Healthcare Jobs, and that the industry will probably have to shrink in the face of both cutting healthcare costs, and the lost reimbursement revenues of over 20 million newly uninsured Americans.

Therefore, “things get dicier after 2020,” the report goes on. The CBO estimates that, over the length of the Federal healthcare spending cuts, the health sector could be forced into shedding up to a million jobs. Furthermore, “AHCA would slash total jobs by about a million, total state gross domestic products by $93 billion, and total business output by $148 billion by 2026.”

These are not trivial numbers, for some analysts they indicate the potential to spark an economic downturn. “In New York alone, the Commonwealth Fund report indicates the state gross domestic product would decrease by $10.5 billion by 2026 over current projections, and total business output by $16 billion. And similar losses would come across every state in every sector.” Healthcare sector jobs are good paying jobs, too, and would be big layoffs in a time when wage growth is still falling behind job growth.

Both the ACA and the ACHA have substantial weak points, but that only points to the immense difficulty of healthcare economics. The healthcare sector is a very common victim of the economics of information, and specifically adverse selection. It’s hard for insurers to be fair and profitable because low-risk consumers buy health plans that don’t reflect the average risk, and therefore benefit from opportunistic behavior. The result of this is that healthcare premiums will be decided by high-risk individuals, who have the incentive to buy plans that provide them with high-risk coverage. These make healthcare very expensive, for both the consumer and the firm. This also can lead to market failure since low-risk individuals wouldn’t (reasonably) purchase a plan whose prices are this high, and many high-risk individuals couldn’t afford such a plan.

In economic theory, the best way to eliminate adverse selection and opportunistic behavior in this sector is single-payer healthcare. This, especially (and even specifically sometimes) to Americans, is an unpopular idea, because universal healthcare implies both higher taxes and is inherently socialist. But, when you consider the math, it’s the only economically stable solution.

Consider a firm that offers a single-payer healthcare plan. The insurance company will charge an average per-consumer price that reflects both the high-risk individual and the low-risk individual. By charging this amount, the insurance company makes long-run profits, and is able to continue to operate and cover the employees of the firm. From the consumer side, while healthy and low-risk individuals will probably pay more than reflects their risk, everyone is equally covered and premiums for high-risk individuals don’t get out of hand. This eliminates healthcare sector market failure that arises out of asymmetric information, and can work on a scale as large as the United States Government, if we ever decided to let it.