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The American Health Care Act: the Republicans’ bill to replace Obamacare, explained

The American Health Care Act — Republicans’ proposal to repeal and replace Obamacare — is headed for a vote in the House of Representatives on Thursday. Despite years of Republican promises to repeal and replace Obamacare, though, the bill’s ability to pass is in serious doubt.

The bill, according to an estimate from the nonpartisan Congressional Budget Office, would cause 24 million more people to be uninsured by 2026. It will offer a modest benefit to younger, wealthier people at the expense of older and poorer ones. It will drive down premiums, but only because insurance will become so unaffordable for older Americans that many of them will drop out of the marketplace altogether.

Speaker of the House Paul Ryan, the bill’s architect, finds himself torn between two factions of Republicans. One is the Freedom Caucus, the hardcore conservatives who believe merely changing Obamacare rather than outright eliminating it is insufficient. The other is what Vox’s Andrew Prokop dubbed the “coverage caucus” — Republicans who think the coverage losses under AHCA are unacceptable. Any changes that appease the coverage caucus will upset the Freedom Caucus even more, and vice versa.

If the bill does pass, it will immediately face extraordinary challenges in the Senate, where Republicans of all stripes are also skeptical. But should it manage to make it through Congress, it would have far-reaching consequences for the health care of millions of Americans. If it does not, the failure will make clear that after seven years of voting to repeal Obamacare, the GOP doesn’t have a fully thought-out plan to replace it.

What the American Health Care Act would do

The American Health Care Act would get rid of much of Obamacare’s architecture for expanding coverage, while keeping many of the popular, broadly applicable positions that most Americans with employer-based health insurance associate with the law.

  • Some of Obamacare’s signature features would be gone immediately, such as the tax on people who don’t purchase health care, known as the “individual mandate.” Other protections, including the ban on discriminating people with pre-existing conditions and the provision that allows young adults to stay on their parents’ plan through age 26, would survive.
  • The Medicaid expansion would be phased out. Before the Affordable Care Act, it was difficult or impossible in many states for low-income adults without children to get coverage through Medicaid. The Affordable Care Act expanded the program to cover adults making up to 133 percent of the federal poverty line ($15,800 for one person, or $32,319 for a family of four), a change that helped drive down the rates of uninsured people in the US. Under the AHCA, the coverage expansion would stay in place until the end of 2019, but no newly eligible people could be added to Medicaid rolls after that. Because people on Medicaid often cycle in and out of the program as their employment situation and incomes change, that would lead to a drop in Medicaid coverage.
  • The bill would also cut Medicaid in other ways. It changes how the federal government would reimburse states for Medicaid expenses, and introduces the option of states turning the money into a “block grant,” a lump sum rather than a per-person payment for each Medicaid patient, which would cut the program still further. The block grant would ease limitations on states’ ability to kick people off, charge premiums, and cut benefits for children. States, whether or not they take a block grant, could also add a work requirement for non-disabled adults, further limiting access to the program.
  • The bill would cut taxes for the wealthy. Obamacare included tax increases that hit wealthy Americans hardest in order to pay for its coverage expansion. The AHCA would get rid of those taxes — tax cuts that add up to $883 billion, the majority of them benefiting the wealthy, according to the Congressional Budget Office. Obamacare was one of the biggest redistributions of wealth from the rich to the poor; the AHCA would reverse that.
  • People buying insurance on their own would get tax credits based on their age rather than their income. Obamacare’s tax credits were based primarily on income (as well as on location, because insurance premiums vary regionally). The AHCA would base tax credits primarily on age, increasing them as recipients get older, and phase them out for individuals making more than $75,000 or families making more than $150,000.
  • All in all, the replacement plan benefits people who are healthy and high-income, and disadvantages those who are sicker and lower-income. The replacement plan would make several changes to what health insurers can charge enrollees who purchase insurance on the individual market, as well as changing what benefits their plans must cover. In aggregate, these changes could be advantageous to younger and healthier enrollees who want skimpier (and cheaper) benefit packages. But they could be costly for older and sicker Obamacare enrollees, who rely on the law’s current requirements.

AHCA would end Medicaid expansion in 2020

One of the main ways that Obamacare increased insurance coverage was by expanding the Medicaid program to cover millions more low-income Americans. Prior to the health law, the entitlement was restricted to specific groups of low-income Americans (pregnant women, for example, and the blind and disabled).

Obamacare opened the program up to anyone below 138 percent of the poverty line (about $15,000 for an individual) in the 31 states that opted to participate.

Initial GOP plans would have ended this coverage expansion outright — but in a big reversal, the replacement bill will allow Medicaid expansion to continue through January 1, 2020. States will be able to continue to enroll people in the program. States that haven’t expanded yet but are considering the option could join the Medicaid expansion, and enroll people over the same time period as well.

In 2020, enrollment in the Medicaid expansion will “freeze” and states with no longer be able to sign new enrollees up for the program. Legislators expect that enrollment would slowly decline, as enrollees’ incomes change and they shift off the program.

There are significant changes to Medicaid in the American Health Care Act outside of the expansion, too. This bill would convert Medicaid to a “per capita cap” system, where states would get a lump sum from the federal government for each enrollee. Or states would have the opportunity of a block grant — a sum of money untethered from the number of people involved.

This is different from current Medicaid funding. Right now, the federal government has an open-ended commitment to paying all of a Medicaid enrollee’s bills, regardless of how high they go. The per capita cap would amount to an $880 billion cut to Medicaid, as Vox’s Dylan Matthews explains. A block grant would go further, and also weaken coverage protections for children and parents.

States could also add a work requirement to Medicaid for the first time, a provision sought by the conservative Republican Study Committee but that even some conservatives groups and experts oppose. Research has found that work requirements on welfare doesn’t do much to increase the share of recipients working in the long term.

The AHCA bans discrimination against those with preexisting conditions — but charges more to people who have a break in coverage

AHCA keeps many of the popular health insurance reforms from Obamacare. This includes a ban on annual and lifetime limits, allowing kids to stay on their parents’ plans until they’re 26, and requiring insurance plans to offer coverage to all patients regardless of how sick they are. But AHCA, unlike Obamacare, does not mandate that all Americans be covered by health insurance or pay a fee.

Instead, it has a different way of penalizing people who decide to remain uninsured: requiring those who don’t maintain “continuous coverage” to pay a hefty fine when they want to reenter the insurance market.

This continuous coverage policy has shown up a lot in Republican replacement plans. It was part of Speaker Ryan’s A Better Way proposal and Rep. Tom Price’s Empowering Patients First Act.

Here’s how it works: If a worker goes straight from insurance at work to her own policy, her insurer has to charge her a standard rate — it can’t take the cost of her condition into account.

But if she had a lapse in coverage longer than 63 days — perhaps she couldn’t afford a new plan between jobs — and went to the individual market later, insurers could charge her a 30 percent premium surcharge. She would need to pay that higher premium for a full year before returning to the standard rate.

A Congressional aide clarified that this surcharge would be the same for both healthy and sick people; insurers could not use it to turn away people they expect to have significantly higher medical costs.

This might end up having unintended consequences, because only the people who really need insurance — and who have high medical costs — may want to pay the surcharge. Healthy people might be more comfortable staying out of the individual market for longer, perhaps until they get a job that offers coverage. That could drive up premiums for everybody, and some experts fear that it will lead to a “death spiral.” If not enough healthy people buy insurance, it’s no longer a good business for insurers, and the market collapses.

The AHCA would let insurers charge older enrollees more

Obamacare currently restricts how much insurers can charge their oldest enrollees in the individual market. It says that insurers can only charge the oldest enrollee three times as much as the youngest, which pushes down premiums for those in their 50s and 60s. This used to be a group that faced prohibitively steep premiums on the individual market.

The AHCA would get rid of that regulation, allowing insurers to charge their oldest enrollees up to five times as much as their youngest ones. This change “increases the overall number of people with coverage, but older people end up falling out of the market as premiums rise,” says Christine Eibner, an economist with the RAND Corporation who has modeled similar changes to Obamacare’s age-rating provisions.

Eibner estimates that this particular policy would lower premiums for a 24-year-old from $2,800 to $2,100. But premiums for a 64-year-old would rise from $8,500 to $10,600.

And while young people might have cheaper premiums and an easier ability to enroll, older Americans could struggle to purchase coverage in this market, where their costs would rise. These are people who tend to have more urgent health care needs and could be in a worse position without health care than a young adult might be.

This worries some Obamacare supporters, who say the goal of insurance reform isn’t just to expand coverage — it’s to expand coverage for people who really need health care.

“If you replace a 60-year-old with a 20-year-old, that doesn’t change the number of people covered, but it changes the value of the coverage and of the program,” says Jonathan Gruber, the MIT economist who helped the White House model the economic effects of Obamacare.

The CBO estimated that This has been one of the least popular provisions of the bill.

The AHCA provides tax credits for the individual market that would benefit high-income Americans

The Republican replacement, like Obamacare, envisions that Americans will use tax credits to purchase individual health insurance. But the structure of the tax credits is very different.

Obamacare’s tax credits are based on income, with those who earn less getting more help. Under Obamacare, people who earn less than 200 percent of the poverty line (about $24,120 for an individual or $49,200 for a family of four) get the most generous help. They would get enough money so that a midlevel plan would cost no more than 6.4 percent of their income. People who earn more than 400 percent of the poverty line ($48,240 for an individual or $98,400 for a family of four) get nothing at all. There is no cap on what they have to pay for insurance.

The Republican plans would be based mostly on age and a bit on income. Everyone who earns less than $75,000 (or $150,000 for a couple filing jointly) would get the same amount of help. Those above the income threshold would have the help slowly phased out in 10 percent increments. The tax credits would be doled out this way:

  • $2,000 for those under 30
  • $2,500 for those between 30 and 40
  • $3,000 for those between 40 and 50
  • $3,500 for those between 50 and 60
  • $4,000 for those over 60

On the surface, the tax credits for the oldest Americans seem the most generous. People in their 60s, for example, get twice as much help as those in their 20s.

But under the Republican plan, insurers would be allowed to charge the oldest Americans five times as much as the youngest Americans. Their financial help would not scale nearly as much as their premiums would.

“You’re both jacking up the prices and giving people less of a subsidy, which is a damaging combination,” says David Certner, legislative policy director for the AARP, which lobbies on behalf of Americans over 55.

This new tax credit structure could also hurt to many low-income Americans, whose subsidies would fall substantially. The Kaiser Family Foundation estimates that these new tax credits would be anywhere between 31 and 82 percent lower for a 60-year-old who earns $20,000, depending on where that 60-year-old lives.

Higher-earning Americans, however, could see their benefits increase significantly. People who earned $48,280 or more under Obamacare got no help — but now anyone under the $75,000 threshold gets the biggest tax credit.

The bill also has other changes meant to win over conservative Republicans

After the initial bill was introduced, House Republicans introduced a slew of changes meant to address criticisms, particularly that the bill hurt the elderly. The result was a change to the way medical expenses are deducted that the Senate could use to create more generous tax credits. But just how those tax credits would work are left up to someone else to figure out. The way things are going, the bill might not make it that far.

The “manager’s amendment,” changes to the original bill, also included other adjustments that would not substantially alter its infrastructure:

  • A change in the tax deductibility of medical expenses that the Senate could harness to boost tax credits for older Americans, to the tune of an estimated $85 billion
  • More flexibility for states to add work requirements to Medicaid
  • More flexibility for states to take their Medicaid funding as a lump-sum block grant rather than a per-person check
  • Accelerating the repeal of Obamacare’s tax increases by one year
  • Restricting people from rolling unused tax credit money into health savings accounts (apparently to ease concerns of anti-abortion groups)
  • Changing Medicaid reimbursement procedures in a way that advantages county governments over state governments (for idiosyncratic reasons, Republicans from New York are high on this provision)
  • Changing Medicaid reimbursement rates for the elderly and disabled
  • States that haven’t accepted Obamacare’s Medicaid expansion will no longer have the opportunity to do so.

These changes were meant to win over critical Republicans. But they don’t seem to have succeeded. They’ve done nothing to alter the core tension between a group of Republicans that believes Obamacare must be destroyed outright, and another that believes that huge losses in insurance coverage are unacceptable.