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After seven years, Republicans have finally released their health care legislation. Now their bill can be compared side-by-side with the Affordable Care Act based on how it affects enrollees’ pocketbooks — including both premiums and out-of-pocket costs for care.
The bill does not measure up well: For all but the youngest individuals, it increases both overall costs and the risk of a financially devastating event.
Republicans will argue that by cutting back insurance standards, their bill would lower premiums — because people can choose to buy less coverage than the ACA currently requires. But premiums are only one expense that enrollees have to worry about. First, the level of tax credits affects how much enrollees would actually pay for those premiums, out of pocket.
Second, the degree of insurance protection affects how much enrollees would pay in deductibles, co-pays, and other forms of cost-sharing. (“Cost-sharing” refers to how the insurance company and the enrollee split the costs of health services.)
We’re presenting an analysis here of the net financial impact of the Republican bill on premiums, after tax credits, plus cost-sharing. We estimate that the bill would increase costs for the average enrollee by $1,542, for the year, if the bill were in effect today. In 2020, the bill would increase costs for the average enrollee by $2,409.
We provide the figure for 2020 because that’s when the Republican tax credits would go into effect; we provide a figure for this year so that readers can get a sense of how the plan might affect their situation were it implemented today. Importantly, the gap between costs under the ACA and under the Republican bill would grow over time.
In general, the impact of the Republican bill would be particularly severe for older individuals, ages 55 to 64. Their costs would increase by $5,269 if the bill went into effect today and by $6,971 in 2020. Individuals with income below 250 percent of the federal poverty line would see their costs increase by $2,945 today and by $4,061 in 2020.
The bill’s key alterations to the framework created by the ACA, explained
The ACA includes three elements that affect the generosity of insurance. First, it requires insurers to cover a minimum share of costs, on average. This minimum “actuarial value” of the plans is set by law at 60 percent. Second, the act provides premium tax credits that are linked to the cost of a plan that covers 70 percent of costs, on average (the so-called silver plans). As the price of those plans rise, so does the tax credit.
Third, the ACA reduces cost-sharing levels — that is, it provides another kind of subsidy — for lower-income individuals with income from 100 percent to 250 percent of the federal poverty level. The combined effect of these elements is that, for non-group policies under the ACA, the weighted average share of costs covered by insurers is about 75 percent.
The Republican bill unveiled last night would remove these elements. It would eliminate the minimum required actuarial value; eliminate cost-sharing reductions for lower-income individuals; and provide flat tax credits by age unrelated to any plan’s cost. These tax credits are for the most part also unrelated to people’s income, but they start to phase out for individuals with income above $75,000. The combined effect of these changes is that the bill would dramatically reduce the generosity of insurance and sharply increase deductibles and other out-of-pocket costs.
The Republican bill would also relax the limit on how much insurers can charge older individuals (a practice known as “age rating”). Currently, the ACA prohibits insurers from charging older individuals premiums that are more than three times greater than premiums for younger individuals. Under the Republican bill, insurers could charge premiums for older individuals that are as much as five times greater. Therefore, obviously, premiums for older individuals would go up, those for younger individuals would go down.
Lastly, the Republican bill would eliminate the individual mandate. Instead, if individuals have a gap in coverage greater than 63 days, they would face a penalty equal to 30 percent of premiums for 12 months.
How we estimated costs
We previously published an analysis of the Republican plan using the tax credit levels prescribed in legislation sponsored by Secretary of Health and Human Services Tom Price when he was a member of Congress. For this analysis, we used the same methodology and altered parameters and assumptions as explained below.
We used the tax credit levels specified in the Republican bill: $2,000 for individuals up to age 30; $2,500 for individuals age 30 to 39; $3,000 for individuals age 40 to 49; $3,500 for individuals age 50 to 59; and $4,000 for individuals over age 60. These tax credits phase out for individuals with income above $75,000 and for those filing a joint return with income above $150,000. (In our analysis, we treated households with at least two adults as joint filers.)
As stated above, we first applied these tax credits to premiums in 2017 and then to premiums in 2020, the year the credits would take effect. To estimate premiums in 2020, we inflated premiums using National Health Expenditure (NHE) projections. For comparison with the ACA, we adjusted the ACA’s subsidy amounts using Congressional Budget Office estimates and NHE projections.
Over time, the value of the new tax credits under the Republican bill would erode significantly. That’s because they are indexed to grow with consumer inflation plus 1 percentage point, which is much slower than the rate medical costs are actually growing. Under the ACA, by contrast, tax credits grow in lockstep with premiums for “silver” plans, and costs are capped as a percentage of income.
The ACA’s tax credit structure would help protect enrollees from premium increases from 2017 to 2020; under the Republican plan, enrollees would pay a greater share of premiums each year.
Whenever tax credit levels exceed premiums, we assumed that the excess could be deposited in health savings accounts to reduce cost-sharing levels, as specified in the Republican bill.
We assume that under the Republican bill the average actuarial value would fall to 50 percent; all things considered, plans would cover only half of health care costs. That’s because the Republican bill would encourage enrollment in “catastrophic” plans with high deductibles. The insurance industry pegs the actuarial value of such catastrophic plans at 50 percent. In addition, a recent analysis by the Urban Institute estimated that about half of people, under the Republican system, could use their tax credits to buy a plan with an actuarial value of a mere 47 percent.
Our assumption of a 50 percent actuarial value is actually generous to the Republican bill. Even though the bill repeals the minimum actuarial value, it does not repeal limits on out-of-pocket costs or essential health benefits. Using the 2018 actuarial value calculator, mathematically plans could not have an actuarial value much below 58 percent with these constraints.
The plan would lead to a sicker pool of enrollees
We assume that the Republican bill’s replacement for the individual mandate would cause some degree of adverse selection. In other words, the change in incentives would likely lead disproportionately sicker individuals to enroll in coverage, driving up premiums.
Younger, healthier individuals may not be sufficiently motivated by the “continuous coverage” requirement, and modest penalty for violating it, to sign up for coverage to avoid an abstract penalty if they happen to get sick sometime in the unforeseeable future. If they do miss the open enrollment period, they would effectively be locked out of the market. Sicker individuals, on the other hand, would do absolutely everything they could to sign up and avoid a gap in coverage.
What’s more, the late enrollment penalty would be far lower than the additional premium insurers would charge to many sicker individuals if they were able to do so. So it would be a bargain for many individuals to wait until they get sick to enroll in coverage.
In the absence of the individual mandate, CBO estimates that adverse selection would increase premiums by 20 percent. We assume that the Republican bill’s replacement for the individual mandate would have at least some effect, but that it would not be as effective as the mandate. We assumed the shift to a continuous coverage model would increase premiums by 10 percent.
We found significant cost increases both for individuals and for families
Although premiums would be lower under the Republican bill, this decrease would be offset by an increase in cost-sharing. Once the differences in tax credits are accounted for, the bill would increase costs significantly. On top of this, shifting consumer spending from premiums to cost-sharing would greatly increase financial risk. (If you’re now paying 50 percent of your costs, instead of 25 percent, a big hospital bill could be devastating.)
We reported above the results for individuals. For families, the Republican bill would increase costs by $2,243 if the bill were in effect today. For families with a head of household age 55 to 64, the bill would increase costs by $7,604. For families with income below 250 percent of poverty, the bill would increase costs by $6,228.
These cost increases would explode by 2020. We estimate that the Republican bill would increase costs for families by $4,274. For families with a head of household age 55 to 64, the bill would increase costs by $10,591. For families with income below 250% percent of poverty, the bill would increase costs by $9,024.
There may be a reason why Republicans took so many years to reveal their health care plan: It is easier to attack an imperfect existing system than to improve it. Under examination, the Republican bill clearly does not compare favorably with the ACA. As many have pointed out, and as the CBO score will clearly show, the Republican bill would cause millions of people to lose their coverage — but it would also increase costs significantly for those who remain insured.
David Cutler is the Otto Eckstein Professor of Applied Economics at Harvard University. John Bertko is the chief actuary for Covered California, the state’s health insurance exchange. Topher Spiro is the vice president for health policy at the Center for American Progress. Emily Gee is a health economist at the Center for American Progress.
The Big Idea is Vox’s home for smart, often scholarly excursions into the most important issues and ideas in politics, science, and culture — typically written by outside contributors. If you have an idea for a piece, pitch us at thebigidea@vox.com.
