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By failing to account for regional cost differences, the GOP health care plan hurts red states

Fishing boats in Alaska.
Health care in Alaska is especially expensive.

David McNew/Getty Images

A much-criticized feature of the House Republican health care bill is that its premium subsidies are not tailored by income. A 62-year-old who earns $22,000 gets the same $4,000 tax credit as one who earns $75,000 — a sharp departure from the Affordable Care Act’s income-based approach.

Less noticed but potentially just as controversial is that the proposed tax credit is not “geographically adjusted.” It provides the same subsidy to someone in Kentucky as to someone in Alaska — even though Alaska’s premiums are more than twice as high. This is also a departure from the ACA’s tax credit, which is geographically adjusted — its value is tied to a local benchmark premium. The Congressional Budget Office (CBO) makes just passing note of the shift in its score of the bill.

A curious side effect of this decision is that it tends to punish residents of red states. It would also hurt residents of rural areas within states, which voted heavily for President Trump and tend to have higher insurance premiums.

How much does geographic adjustment matter? The Center on Budget and Policy Priorities estimates that the House bill would reduce the average tax credit in 2020 — relative to the one provided by the ACA — by 78 percent in Alaska, 65 percent in North Carolina, 59 percent in West Virginia, and 55 percent in Arizona. However, other states would see far smaller cuts: Assistance would fall by just 17 percent in Kentucky and 1 percent in Indiana, for instance.

What has Congress done in the past?

These observations invite a broader question: Does Congress normally adjust health care subsidies for local prices? Put differently: Does the House bill give Alaska a raw deal, or the usual deal?

A review of existing subsidies provides a clear answer: The House bill offers residents of high-cost states an unprecedented raw deal. Federal health benefits consistently provide more assistance in high-cost areas. This holds true across tax subsidies, including the exclusion for employer-sponsored coverage, and for social welfare programs such as Medicare and Medicaid. The adjustment is accomplished through a variety of means: by applying a payment multiplier calculated to reflect local prices; by basing the subsidy on a local benchmark price; or by tying the subsidy to actual spending on health coverage or services, which in turn reflects local prices.

  • Medicare: Medicare encompasses several major health insurance programs for the elderly and disabled. Each of them geographically adjusts its payments. Payments under the traditional (fee-for-service) Medicare program are adjusted for local “input” costs as part of the reimbursement calculation: The higher the local costs, the higher the reimbursement for a given service. For example, reimbursements for the labor costs of hospital stays are adjusted by a geographic “wage index” that reflects local labor costs. In 2017 hospitals in Alaska have a wage index of either roughly 1.42 (meaning payments are increased by about 42 percent) or 1.93 (meaning payments are increased by about 93 percent). Medicare Advantage links its subsidy for purchasing private insurance to the average spending under traditional Medicare in the enrollee’s county or region. And Medicare Part D’s subsidy for private prescription drug coverage is based in part on the prices of plans offered in the region.
  • Medicaid and CHIP: Medicaid and CHIP are health insurance programs for low-income people jointly run and funded by the federal government and the states. The states set the reimbursement rates, and the federal government chips in a fixed share of the spending. Thus, states with higher local prices can set higher reimbursement rates and receive a commensurate increase in federal support. (Admittedly, some states do not set reimbursement rates at adequate levels to reflect local prices and so do not receive as much federal support as they should.) This plays out in places like Alaska, which among the 39 states that use has both the highest health insurance premiums and the highest per capita Medicaid spending.
  • Tax exclusion for employer-sponsored coverage and similar carve-outs: Taxable income generally includes any compensation received for services. But several tax provisions allow compensation in the form of health coverage to be left out of income. By far the largest of these is the unlimited exclusion from income of employer-sponsored health coverage. Self-employed people get a similar benefit in the form of a tax deduction for the cost of their health insurance, and several other tax measures allow individuals to pay for health care services on a pre-tax basis, including health savings accounts (HSAs), flexible spending arrangements (FSAs), and the tax deduction for medical and dental expenses. In each case, the tax benefit is based on the amount of health care spending, so people who face higher care prices generally receive a larger subsidy.
  • Health coverage tax credit. Predating the ACA, federal law provides a tax credit for individuals who are displaced by trade agreements or whose pension fund becomes insolvent. The credit is worth 72.5 percent of the cost of health insurance, with no cap on the premium. Accordingly, people with higher insurance premiums receive a larger tax benefit.

These policies run the gamut of federal health care programs, but they all have one thing in common: Congress designed them to provide more assistance to people facing higher health care costs — including because of geographical variation. The ACA’s tax credit follows this approach, but the House bill’s tax credit does not. It would be the first major federal health care subsidy that isn’t geographically adjusted.

The Republican approach would, perversely, hurt their own constituents

What makes this unprecedented approach even more surprising is who is hurt by it. Replacing a geographically adjusted subsidy with one that is the same nationwide is a form of redistribution, and redistribution comes with winners and losers. The Center on Budget and Policy Priorities examined the states that use and found that the 13 states with the largest average tax credit losses under the House bill are Alabama, Alaska, Arizona, Louisiana, Montana, Nebraska, North Carolina, Oklahoma, South Carolina, South Dakota, Tennessee, West Virginia, and Wyoming. Every one of those states voted for Donald Trump in 2016. Republicans also tend to be better represented in rural areas — which often have higher health insurance premiums than urban areas, and so benefit from geographic adjustment.

This redistribution on the subsidy side is compounded by the House bill’s substantial tax cuts for the wealthiest Americans, which a Bloomberg analysis finds are tilted toward the high-income coastal areas that voted for Hillary Clinton.

The approach to geographic adjustment echoes the controversy over age adjustment. Under the House bill, a 62-year-old can be charged five times the premium of a 25-year-old but gets just twice the premium subsidy. This is another sharp departure from the ACA, which limits price increases based on age to 3 to 1 and provides age-adjusted tax credits to make up the difference. As with geographic adjustment, this change from the ACA would hurt Trump voters, who were disproportionately older.

Adding a geographic adjustment to the bill at this point would open a Pandora’s box

How will this geographic quandary play out in the weeks ahead? Breaking decades of precedent to hurt their own overs voters seems like a difficult place for Republicans to be. A natural reaction would be for them to change their bill to add geographic adjustment. So far, House leadership has resisted changes as it has sped the bill furiously along. But there’s word that a manager’s amendment may be coming with changes to appeal to more Republicans. Over the weekend House Speaker Paul Ryan opened the door to increasing the subsidy for seniors and the poor. Could geographic adjustment be included too?

Unfortunately for Republicans, adding a workable geographic adjustment provision is not a simple proposition. There are many flavors (see above) and many details to work out, each affecting winners and losers. Opening the Pandora’s box of geographic adjustment risks yet another fight within the Republican caucus — on top of their other disagreements.

Yet Republicans may find the political costs of leaving this issue untouched to be too high. How will Republicans explain that a key consequence of their health care overhaul is a sharp and unprecedented redistribution of health care funding away from their own voters?

Jason A. Levitis is a senior fellow at the Solomon Center for Health Law and Policy at Yale Law School. He led ACA implementation at the Treasury Department during the Obama administration.

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