The Senate health care bill’s biggest fan makes the case for it

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This week, Senate Republicans could pass a health care bill that leading conservative health care expert Avik Roy would consider “the greatest policy achievement by a GOP Congress in my lifetime.”

The Senate bill keeps much of Obamacare’s private insurance reforms intact, though scales them back and provides states the opportunity to roll them back further. It also ends Obamacare’s expansion of Medicaid, which covered millions of poorer Americans, and places a federal spending cap on the entire Medicaid program for the first time.

Roy has bristled in recent days at critiques of the bill that describe its consequences as a matter of life and death, though there is certainly evidence that insurance coverage, including Medicaid, impacts mortality.

I caught up with Roy after the Senate released its plan. He has some provisions he wants to see added to the bill — like a continuous coverage requirement, which is expected to be added soon — but he is one of the legislation’s most prominent fans. He believes its changes to private insurance, the financial assistance made available, and the accompanying shift away from Medicaid, could help achieve universal health coverage through the private market.

The transcript has been edited for clarity and length.

Dylan Scott

You’ve said some very kind words about the Senate health care bill, and people should read your full explanation in Forbes. But in brief, why are you so high on this plan?

Avik Roy

You remember the criticisms I made quite vocally about the House health reform bill. In particular, the fact that the House health reform bill did not do enough for low-income individuals and people who live in areas with high health care costs, something that the bill really needed to adjust if the tax credits in the bill were going to be meaningful help for people who want to buy health insurance.

The House bill contained a schedule of tax credits that was meant as a transition for years 2018 and 2019. If you simply continue those tax credits, instead of going to the Paul Ryan flat tax credit, you get a much more robust result in terms of the amount of financial assistance that you’re directing to people who need the help: lower-income people, people in their 50s and 60s, and people in places that have high health care costs.

The reason why that’s so important is that if you have my point of view about things, I’m an advocate of market-based universal coverage, the first step to achieving market-based universal coverage is to make sure we have a robust, thriving, competitive, and affordable market for individually purchased health insurance for the most vulnerable people in our society: lower-income people, people with poor health status, people who are nearing retirement. Those are the people who the market has to work for in order for the market to work for everybody.

So getting those tax credits is extremely important to that equation. Because if you don’t have that foundation, you can’t do any of the other things to reform the health care system in a more patient-centered, consumer-driven, market-oriented direction.

So, with that as a preface, the Senate bill actually did precisely that. The Senate bill adapted the House bill and made that the schedule for the tax credits, not merely in the transitional years, but actually for the foreseeable future.

There’s been a lot of commentary on the left about how this bill allegedly erodes the safety net. It does no such thing. It replaces the Medicaid expansion under Obamacare with tax credits to buy individually purchased insurance.

It’s been puzzling to hear the really wild claims from people on the left, that hundreds of thousands of people will die because they’re on tax-credit-based insurance instead of Medicaid-based insurance. There are differences in the details, but at the end of the day, these are people who would have health insurance. And to the degree that we’ve long considered a scandal that Americans could go bankrupt because of medical bills, these people will not have that problem because their large medical bills will be covered by health insurance and very robustly subsidized health insurance. That’s a huge victory in my view that the Senate bill addresses that core problem in the House bill.

Dylan Scott

One of the things that’s striking to me is that another way to think of it is the Senate bill keeps much of Obamacare’s private insurance side intact — the infrastructure of the subsidies and the state waivers — but changes them to make them more conservative.

Why do you think the decision was made to work within the Obamacare mainframe rather than uproot it?

Avik Roy

It’s important first and foremost to understand what can be done through the Senate reconciliation process. Obamacare was passed with 60 Democratic votes. Republicans have 52 votes. They can’t write the kind of normal legislation you would write with 60 votes. Therefore, they were constrained in what they could do. You can only do things that are germane to the budget in the reconciliation process, and that means you can address spending and taxation and you can address certain provisions of the law that have a material effect on spending and taxation.

That doesn’t mean you can address everything. You also can’t touch Medicare or Social Security through the reconciliation process, insofar as Obamacare cuts Medicare by about $850 billion over 10 years to fund the coverage expansion. That’s something that, whether Republicans wanted to or not, they couldn’t change. That’s the first thing to understand, that brackets what this bill could achieve.

To the degree that there are conservatives out there who are saying that this bill does not represent full repeal of Obamacare and is therefore bad, it seems to me that they’re failing to appreciate this legislative or parliamentary constraint that you can’t repeal all of Obamacare in the reconciliation process. That was always the case and to the degree that people have not paid attention to that, they’re obviously having to now.

Dylan Scott

So the starting point for working within Obamacare is the restrictions of reconciliation.

Avik Roy

This bill repeals all of Obamacare’s tax increases. It phases out entirely Obamacare’s expansion of Medicaid. Those are two things you can do through reconciliation and those are two pretty significant things. The bill does not repeal Obamacare’s Medicare cuts, because you can’t do that through reconciliation and Republicans might not necessarily have a consensus on how they’d want to handle that, and the bill also can’t roll back a lot of the technical things that Obamacare does to change the way individually purchased health insurance can be bought or sold, because those features can’t be changed through reconciliation.

Your question was why does it keep that framework. I think, to the degree it keeps that framework, the No. 1 reason is there are certain aspects of the Obamacare framework that are not subject to the reconciliation process.

Within that constraint, how do you achieve the best policy result, the best reform from a conservative point of view? That’s what this Senate bill does. In my view, it really does almost as good a job as it could of achieving conservative reform goals within the constraint of what’s achievable through reconciliation.

Dylan Scott

On the tax credits, one thing I’m curious about is out-of-pocket costs. Because it seems to me the bill is going to push people toward higher-deductible plans because it pegs the subsidies to plans with higher out-of-pocket costs more than the subsidies are pegged to under Obamacare.

What’s the rationale for that? Are higher-deductible plans going to become the norm because of the way the subsidies are structured?

Avik Roy

Let’s back up for a second. Under the Affordable Care Act, if we start with 2013, the last pre-ACA year, and map it out through 2017, underlying premiums — meaning before you account for the value of the subsidy — the premiums have doubled on average and deductibles have also increased by a comparable amount.

The two biggest reasons for why the underlying premiums in Obamacare have increased so much are first the fact that the law has this 3-to-1 age band, where insurers are forced to charge younger people double or triple because there’s a restriction, you can only charge young people a third of what you charge old people. Which, in effect, doesn’t bring down prices for old people, but doubles or triples the price for young people. The end result is a lot of young people drop out of the market and don’t sign up.

The next thing is the actuarial value mandate. In the pre-Obamacare market, the median actuarial value of a plan people bought was about 40 to 45 percent, and the ACA increased that to 70 percent by tying the subsidies to a silver plan that has 70 percent actuarial value.

So what is actuarial value? It’s the percentage, once you’ve paid your premium, it’s the percentage of a plan that is paid for, if you have health care expenses, by the insurer versus the percentage that is paid for by the policyholder in the form of deductibles, copays, etc. So a higher actuarial value, all else being equal, means more paid out by the insurer and less paid out by the policyholder.

The thing is, all things aren’t equal. A higher actuarial value costs more money in terms of premiums. If you’re expecting the insurer to have a more generous financial payout, the insurer compensates for that by charging you a higher premium. So when Obamacare made this change, moving from 40 percent AV to 70 percent AV, there was a proportional rise in the premiums that were needed to account for that. There’s no such thing as a free lunch.

The end result of that was if you make insurance more expensive for young people through the age rating and more expensive for healthy people through actuarial value, because generally healthy people are more happy to buy catastrophic plans and it’s generally sicker people who prefer lower deductibles because there’s consuming more health care, the effect of mandating these high actuarial values is you drive healthier people out of the market.

The end result of that combination of policies is a risk pool that’s comprised much more heavily of older and sicker people. Because the risk pool is comprised of older and sicker people, the average premium is very high because the average health cost of the risk pool is very high. The end result of that, when you then reapply the 70-percent actuarial value, is that the deductibles, in terms of the absolute dollar value, is much higher. Because the underlying cost of the insurance policy is also much higher. Actuarial value is not an absolute dollar value, it’s a percentage. So if the underlying insurance cost is much higher, then the actuarial value, even if it stays the same as a percentage, will lead to higher deductibles, copays, etc.

That’s what happened the last four years under Obamacare. So the critique you’re hearing doesn’t take that into account. It says, ‘Well, if you reduce the actuarial value from 70 percent to 58 percent, people will pay deductibles.’ But that’s a static, not a dynamic analysis. What you have to do is take into account the fact that if you bring the actuarial value down and you also change the age rating rules, so younger people have more of an incentive to participate, and the tax-credit schedule is age-adjusted to encourage younger people to sign up.

That combination of policy means that the mix of people enrolled in the market will include many more younger and healthier people. The end result of that means the risk pool will be stabler and average premiums will go down. And if average premiums will go down by whatever 58 divided by 70 is minus one, then that means that the actual dollar value of the cost-sharing that people will be exposed to is lower.

If the premium goes down enough, then the deductibles — even if the actuarial value is 58 percent, rather than 70 percent — the dollar value of the deductible will be lower.

Dylan Scott

But all of this is contingent on it playing out that way, right? Because otherwise, we have pegged subsidies to a less generous plan, which, if it doesn’t work out the way that you’re describing, could lead to the default insurance being less generous than it was under Obamacare. That’s basically the bet that we’re making.

Avik Roy

What you’re describing is the pro-ACA view of the way the markets will work. What I’m describing is the pro-BCRA way of the markets work. I think the empirical evidence is much more in my favor, and all we have to do to point to is how the insurance markets have worked under Obamacare. Premiums and deductibles have skyrocketed despite having the regulations that ACA advocates believe we need to preserve.

Dylan Scott

I know you generally thought the Medicaid changes in the House bill were good and the Senate bill largely maintains them. To step back, for the people who are going to hear the debate about this bill, it does seem like the bones of the plan are: We’re keeping a lot of the infrastructure of Obamacare on the private insurance side but making it more conservative, we’re overhauling Medicaid, and we’re cutting taxes.

I think a lot of people still wonder why the last two parts of that plan are necessary. Why are the Medicaid overhaul and tax cuts necessary for shoring up what most people think of as Obamacare, which is the private insurance side?

Avik Roy

This sort of implies that the taxes aren’t associated with Obamacare. The tax hikes that Republicans are repealing in this legislation are tax hikes that were used to fund Obamacare. So if you repeal Obamacare, such that you’re spending less money, then Republicans believe you should also tax fewer things. That’s the rationale. These taxes are associated with Obamacare, and it’s a high priority of Republicans to repeal the tax hikes associated with Obamacare.

We can have a separate discussion about whether some of those tax hikes, separate from the concept of Obamacare, themselves make policy sense. That’s perhaps a longer discussion. I would simply point out that a number of the tax hikes in Obamacare have a direct inflationary effect on health care premiums.

For example, in Obamacare, there is a tax on health insurance premiums, which insurers pass down to consumers in the form of higher premiums. There’s a tax on drugs and medical devices, which whatever you might think of those industries and whether we should do more to address their high profits or high prices, the fact is those taxes are passed down to consumers in the form of higher prices.

Broadly speaking, the reason those taxes are repealed in the Senate bill is because they were part of the ACA.

Dylan Scott

You talked at the start that this bill does still end Obamacare’s Medicaid expansion and it overhauls the financing for the Medicaid program in general. You made the point earlier that one of the benefits of the Senate bill is that people who are covered by Medicaid expansion would have access to tax credits to buy private insurance.

I was just looking at some polling today about the relative popularity of the Medicaid program: 75 percent of people had a favorable view of Medicaid, two-thirds of them thought Medicaid was working well in their states.

So why cut Medicaid and funnel people more toward private insurance, given that a lot of people seem to think Medicaid is working fine right now?

Avik Roy

I think polls like that are flawed. There are a lot of people who confuse Medicaid and Medicare, and I’m not persuaded that the respondents to that survey understood what exactly they were opining on.

At the end of the day, my critique of Medicaid is based on the policy outcomes, that it’s not doing a good job of providing access to high-quality care. Outside of political circles, if one looks at the academic literature on this and if one talks to physicians who are on the front lines, this is not controversial. Everybody knows that access to physicians is far poorer in the Medicaid program than it is for other programs, especially private insurance. So offering these individuals to buy private insurance, that alone has an important effect on health outcomes for this population.

But on top of that, one important policy achievement of putting everyone in the same system is that you don’t have the churn between the programs. Right now, you have a situation where a person whose income is near the poverty line, their incomes goes up and down, they’re on Medicaid one month, they’re on the exchanges another month.

That constant having to reenroll and disenroll from different insurance plans with different provider networks and different primary care physicians means there’s a lot of discontinuity in the care that those individuals receive. Putting them in one system, where their incomes go up or down, so maybe the amount of financial assistance they get changes, but the existing insurance policy and the care that they receive, having that stay constant, is very important to improving the quality of care.

Dylan Scott

I do think this is interesting if one assumes one of the cardinal rules of American health care right now is that people just don’t like paying for health care very much. I’ve always assumed that part of Medicaid’s popularity is that, from a cost-sharing perspective, it is very generous to the end users.

So I’ll be interested, if we move that population to a program where there are premiums and deductibles, how the people on it will feel about it.

Avik Roy

One thing that’s remarkable about the Congressional Budget Office’s score of the House bill is the CBO believes that there are 5 million people who will voluntarily choose not to enroll in Medicaid if the individual mandate is repealed. So normally when we talk about the individual mandate, we just talk about it in the context of the individual market for health insurance.

What’s underappreciated is actually, according to the CBO, is that of the 23 million who will quote-unquote lose coverage under the House bill relative to Obamacare in 2026, about 18 million of them are solely due to the fact that the individual mandate will be repealed. In other words, 18 million fewer people will have health insurance because they choose not to sign up in the absence of a fine. Of those 18 million people, 5 million are in the Medicaid group.

The CBO believes, despite the fact that Medicaid is free to the end user effectively, there are 5 million people who will refuse to sign up, who will drop out of the program, because there’s no fine prodding them to enroll in Medicaid. Which I find highly implausible, but if CBO is right, that’s an indictment of what people actually think is the value of the program.

If Medicaid is so important, so life-changing, why is that so many people either have to be fined to sign up for it, or even if it’s handed to them, don’t take it? That is something I think the policy debate has not adequately.

Dylan Scott

I think there’s a lot of evidence that a lot of people on Medicaid are happy with it, but I know we could litigate this to death.

You mentioned CBO, and I don’t want to rehash all the CBO methodology from our last interview, but what are you expecting from their analysis of this bill?

Avik Roy

I honestly don’t expect it to be much different, precisely because the individual mandate is such a driver of the CBO’s thought processes, the CBO’s model. I think actually the CBO score of the Senate bill will highlight the inadequacies of the CBO model.

Because here you have a situation where the Senate has dramatically changed, relative to the House bill, the mechanisms of financial assistance through tax credits in their bill, much more heavily directed toward lower-income individuals, sick individuals, elderly individuals, near-elderly individuals.

And yet, I would expect the CBO score to be not that different in terms of coverage, spending, etc., compared to the House bill. Because the CBO’s view is that the fact that you’re not forcing people to buy insurance through the individual mandate means people won’t sign up.

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