AHCA Update: Let Red States Secede from Universal Healthcare

The House is likely to vote today on an updated version of the AHCA (the GOP’s Obamacare replacement) today. I’ve written previously about the bill, and noted that for a GOP-introduced bill, it was originally quite moderate – it embraced the notion of universal healthcare.

The latest AHCA update is considerably more conservative, as it effectively allows states to eliminate most of the ACA’s universality. By bringing back medical underwriting, states will be able to roll the clock back to 2013 (pre-ACA exchanges), when individuals with pre-existing conditions generally could not obtain health insurance.

But several forces combine to make it highly unlikely that pre-existing conditions coverage will disappear from any American state:

  • Once the bill makes it to the Senate, it will likely have to be made considerably more moderate, as the GOP can only lose two GOP Senate votes, and a number of Senators have expressed reservations about the latest changes.
  • The bill will still have to pass through reconciliation between House and Senate, and might die in that process, or might emerge more moderate in that process. It appears unlikely that it will pass through Congress as currently written, or in more conservative form.
  • Even if the bill does become law as written, the 31 states that expanded Medicaid are unlikely to seek to remove pre-existing conditions coverage. Within the 19 remaining states, it’s unclear that state officials are willing to take the blame for rescinding that coverage.

At this point, assuming the bill does make it through the House, it’s the Senate modifications and reconciliation process that will determine whether the final product is worthwhile. If the Senate is able to preserve universality, while strengthening tax credits for older age groups, a credible final product may emerge.

AHCA: Insured to Rise by 7M by 2026 – CBO Misses Power of Free Plans

The CBO generally performs careful, in depth analyses – but their approach is susceptible to inaccuracy when policy proposals differ sharply from existing norms. The CBO projects that over 24m individuals will lose insurance coverage as a result of the AHCA, as older individuals and Medicaid recipients lose insurance faster than younger individuals gain it. This projection misses the power of free plans, however. The table below shows how much different age groups might pay for coverage under the AHCA, with prices based on 2017 ACA exchange prices for states with low (Oregon), medium (Ohio), and high (Nebraska) insurance costs [1]. As the table shows, the AHCA tax credits can provide catastrophic coverage to the majority of Americans below age 45.

Monthly Cost after AHCA Tax Credit
(Plan cost as found on healthcare.gov, cheapest available plan)
State Age 20 Age 30 Age 40 Age 50 Age 60 Family Ages 40,10,8 Family Ages 30,30,5,3
Oregon (Low Cost State, Zip 97035 Used) Free ($112) Free ($208) Free ($234) $35 ($327) $160 ($493) Free
($466)
Free
($648)
Ohio (Medium Cost State, Zip 43004 Used) Free ($121) $12 ($216) Free ($244) $49 ($341) $186 ($519) Free
($487)
Free
($677)
Nebraska (High Cost State, Zip 68010 Used) Free ($131) $66 ($274) $59 ($309) $139 ($431) $323 ($656) $33 ($616) $105 ($855)

Using the information compiled above, we can estimate the change in uninsured rates for each of the groups in the chart below. For age groups below 40, the uninsured rate is projected to drop close to the same level as that of children below 19, since these groups will have access to free plans paid for by tax credits (and insurance companies will market these subsidized free plans mercilessly). For age groups above 45, the uninsured rate will rise, though not quite to pre-ACA levels, when no support was provided.

Projected Uninsured Rate Under AHCAThe CBO estimates that 14 million Americans will lose Medicaid coverage, and that 9 million more will lose either individual or employer-based coverage.

Using population estimates for 2026, I calculate that the number of insured Americans aged 19-34 rises by 7 million, aged 35-44 rises by roughly 2 million, and aged 45-64 drops by roughly 2 million [2]. While it’s important to note that these plans will be much less generous than ACA-subsidized plans, the total number of insured actually rises by around 7 million under these estimates. The GOP will have installed universal, nearly-free catastrophic plans as the future of American health care – if the AHCA passes, as Mssrs. Trump and Ryan continue their struggle to get it through Congress.

P.S. If you are interested to find out more about how the AHCA might impact you or your clients’ investments, my company HiddenLevers has modeled that in our TrumpCare scenarios. Have a look through one of our free demo accounts.

 

[1] The 2017 ACA prices are a reasonable guide as the Trump administration plans to relax the essential benefits associated with plans, and to widen the max price differential between plans for young and old. The risk pool under the AHCA will also likely be healthier, as young, healthy Americans will be drawn into free AHCA plans – because they are free.

[2] Roughly 23% of the population is aged 19-34, and a 9% point drop in uninsured rate for this group in 2026, translates to a rise of 7m more insured Americans. A similar calculation for the 35-44 group yields another 2m insured Americans, while the 2.5% rise in uninsured among older Americans yields a loss of insurance for 2 million. The CBO appears not to contemplate that many of those losing Medicaid will receive tax credits sufficient to provide them with free catastrophic plans, as shown in the table above. This mitigates the Medicaid cuts to some extent.

[3] The original chart above can be found here at the CommonWealth Fund.

TrumpCare (AHCA) – Welcome to Universal Catastrophic Health Insurance

The AHCA would move the USA toward universal catastrophic healthcare coverage, by enabling insurance companies to sign up individuals to $0 monthly premium plans with high deductibles and limited coverage.

While healthcare analysts have been in overdrive commenting on the new GOP health plan, it appears that some key points have been lost in the noise. Whether on Medicaid, total enrollment, or tax credits, it seems that many analysts fail to understand the large-scale implications of the bill. As written, the AHCA has the potential to be transformative – it would retain the goal of universal coverage, while shifting tax credits toward universal high deductible insurance. If fully implemented, the AHCA could actually lead to gains in coverage – but the US healthcare market would be transformed by a move toward high deductible catastrophic coverage.

AHCA Key Changes:

  • Covered Benefits: The AHCA does not change the essential benefits list, but Secretary Price is interested in reducing essential benefits to lower costs.
  • Tax Credits: Tax credits will be less generous, but will cover more of the population, potentially leading to a shift toward catastrophic plans.
  • Medicaid: The Medicaid expansion ends after 2019, but tax credits will be available to all lower and middle-income Americans.
  • Employer Coverage: AHCA creates a strong incentive for employers to drop coverage, since most American workers will receive tax credits.
  • Universality: AHCA provides tax credits to virtually all Americans without other coverage, cementing the goal of universal health care in the USA.
Detailed Findings:

Covered Benefits:
With the exception of abortion coverage, the AHCA does not change the essential benefits under the ACA. HHS Secretary Tom Price has indicated that he will reduce regulations that increase costs – he can do this by limiting the definition of essential benefits.

Tom Price has indicated on multiple occasions that HHS will seek to reduce regulations on health insurance markets, and recently both he and President Trump indicated that these changes would be part of “phase 2 & 3” of their healthcare overhaul. In the past Secretary Price has indicated that he will seek to specifically limit the essential benefits requirement while at HHS.

The AHCA is particularly punitive towards abortion, barring the use of tax credits for any plan that covers abortion services (page 72 of bill pdf).

Tax Credits:
The AHCA offers up to $14k in tax credits per family, at 2k-4k per person depending on age (pages 90-92 of pdf). It also enables insurance companies to claim tax credits on behalf of enrollees, enabling them to offer cheap or free plans to the public.

Much has been written on winners and losers with the proposed tax credit changes. Analysts both left and right fear many will lose insurance. But look at page 106 of the bill: “Not later than January 1, 2020, the Secretary … shall establish a program … for making payments to providers of eligible health insurance on behalf of tax payers eligible for the credit under section 36C.”

Consider what this means – insurance companies will be paid between $2000 and $14,000 per year for each enrollment. In a similar situation in the for-profit university industry, tuition essentially matched federal loan programs, creating a no-money-down product for students. With the AHCA, insurers will be strongly incentivized by the market to offer $0 premium plans in order to maximize their signups of younger individuals in particular.

With the change of young-old ratio to 5:1 (page 66), and Tom Price’s expected reduction of essential benefits, new catastrophic plans will likely flood the market, providing a no cost option for many. See Appendix I for specific examples using 2017 exchange pricing.

Medicaid:
The AHCA ends the Medicaid expansion in 2019, but states may have some incentivize to jump in now, because the future funding they receive is based on the number of enrollees at the end of 2019. Beginning in 2020 the Medicaid expansion will be repealed, and only those enrolled under pre-ACA rules (with stricter income and asset tests) can be newly enrolled into Medicaid.

The AHCA does close a gap caused in non-Medicaid expansion states, where many workers make too much to qualify for traditional Medicaid, but too little to qualify for ACA subsidies. These individuals will qualify for the new AHCA tax credits.

Employer Coverage:
The AHCA removes penalties for not providing insurance (page 84 of bill pdf), and could encourage employers to drop coverage as it provides tax credits to a much larger range of working age Americans.

Per the Kaiser Foundation, the average employer contribution to individual employee healthcare is around $4800, with the employee contributing around $1200. At a 25% federal tax rate, this leads to a tax deduction value of $1500, versus a tax credit of $3000 for the median-age American worker. For family coverage, a tax deduction value (25% tax bracket) of roughly $4500 compares to a tax credit of $9000 for a family of four with adults in their 30s. In both cases, both the employer and employee would benefit if the employer dropped coverage, raised wages, and let the employee take advantage of the tax credit.

Appendix II presents a fully worked example for a family of four making $100k per year, and shows that the family would likely benefit under AHCA changes.

Universality:

The AHCA offers tax credits to all Americans without employer-based healthcare (except those with higher incomes), and as a result the AHCA accepts the ACA’s premise of universal health insurance.

The only Americans excluded from the new AHCA tax credits are those already receiving healthcare from a government program (Medicare, Medicaid, VA, etc) or from employer-based coverage (page 97 of bill pdf).

The GOP has produced a plan that implicitly accepts that universal healthcare is here to stay. The end game (relative to the ACA) will look very different, however, with large swaths of the population covered by high-deductible catastrophic plans.

Appendix I: Are $0 premiums for catastrophic plans really possible?

Is $2000 ($166/month) sufficient to offer a “free” plan to a young adult, or $10,000 ($833/month) sufficient to offer a “free” plan to a family of 4?

Using Healthcare.gov, in the Atlanta area the current cheapest plan for age 21 is exactly 1/3 of the $597 charged to a 64 year old, as a result of the ACA 3:1 limit on costs for older Americans. A bronze plan for age 20 is only $126/month in Atlanta, since the 3:1 limit doesn’t apply below age 21 (even in New York City, individual catastrophic plans are available from around $165/month). Since the AHCA raises the ratio limit to 5:1, this shows how $0 plans will fit within the $2000 tax credit.

How about for a family of four ages 31, 31, 4, and 2? This priced out at $713/month in Atlanta, below the $10k AHCA annual tax credit. Since the AHCA allows excess tax credits to be placed into an HSA, the family could bank around $1500 per year toward future medical expenses while paying $0 in premiums. In New York City, the family premium would be around $1050/month, leaving the family bearing around $200/month in premiums – but this is before accounting for the impact of the new 5:1 ratio and curtailment of essential benefits, which would likely bring net costs to $0 even in NYC.

What about older Americans? A $4000 ($333/month) tax credit will not cover a single 64 year-old’s $600/month premium in Atlanta. If HHS substantially reduces essential benefits, that may close the gap, but with a corresponding loss of benefits. Pre-Medicare age older Americans are clearly the biggest losers under the AHCA reform. But if the AHCA is able to substantially increase enrollment by the young and healthy due to $0 premiums, this may enable more affordable plans further up the age spectrum.

Appendix II: Why Employers May Drop Coverage – A Specific Example

Let’s consider again a family of four, ages 31, 31, 4, and 2. Using Kaiser numbers, on average the family and their employer spent a total around $18,000 on health insurance premiums, with the employer contributing roughly $13,000 of that amount. In the 25% tax bracket, the family is receiving $4500 in value from the existing tax deduction. In total, the family is spending about $500 out of pocket on health insurance when employer assistance and tax deductions are considered.

What if the employer were to drop coverage, enabling the family to receive a $9k AHCA tax credit, and to raise the employee’s salary by $13,000 instead? The employee would receive $9750 in new after-tax income (considering only a 25% federal rate) plus $9000 in tax credits, or $18,750 total. Assuming similar premiums, the family would then spend $18,000 on health insurance, leaving $750 unspent. In total the family might come out $1250 ahead versus the existing system, and the employer would be able to offload the risk and expense of managing benefits.

The GOP Civil War on Taxes

Republicans love tax cuts, and both President Trump and Speaker Ryan have set their sights on lowering both personal and corporate income tax rates. But some Republicans also like controlling the budget deficit, while others favor defense spending or immigration control. How can the GOP cut tax rates, raise defense spending and immigration enforcement, and control the budget deficit? Here’s the heart of the problem: the federal government gets roughly $1.4T from income taxes, $440B from corporate income taxes and capital gains, $1.1T from payroll taxes, and smaller amounts from other sources [1]. The tax plan under consideration will substantially cut the first two sources, without raising the other categories. How can such a tax plan be implemented without blowing up the budget deficit?

The evolving Trump-Ryan plan bridges this gap by introducing a new category: a border adjustment tax on imports. If all 2.7T in US imports were taxed at 20%, this could raise over $500B per year, providing a source for big tax cuts (though still not enough to pay for the tax cuts proposed). But there’s a problem with this idea – will 50 Republican senators vote for it?

The National Retail Federation has come out strongly against the plan, as have the Koch brothers, whose companies participate heavily in international trade. The Kochs are focusing their battle charge in 15 states where they may be able to sway Senate votes. Meanwhile, with retail giant WalMart strongly opposed, will the senators from Wal-Mart… err Arkansas be on board?

Hence we have a GOP civil war, pitting major exporters like Boeing, Oracle, and GE against retailers and other importers, and pitting nationalist Republicans versus traditional free-trade Republicans.

Trump and Ryan can only spare two votes in the Senate – will they be able to keep everyone on board? While the plan could stimulate US growth through tax cuts and favoring US production, it may also trigger a trade war that nullifies much of its benefit. There’s also the essential nature of the import tax – it is effectively introducing a new US consumption tax for the first time. Consumption taxes have been on the GOP radar for some time, as they tend to shift tax burdens down the income scale, and to reduce taxes on the wealthy. But is Trump’s base ready to pay an extra 40 cents at the pump every day, when many of them won’t see a huge tax cut [2]? Let the Republican tax civil war begin.

[1] The CBO provides a detailed breakdown of revenues here. I have combined corporate taxes and capital gains into one category, as both are taxes on capital.

[2] Roughly 50% of oil is still imported into the US, so a border adjustment tax could disproportionately increase oil prices.

Election 2016 Review: Democrats Score an Own-Goal, Part II

2017 has rolled around, and with Mr. Trump entering the White House, I’d like to close the book on the 2016 election with a review of the certified election results. Shortly after the election, my analysis concluded that Clinton lost the election – Trump performed like a generic Republican, while Clinton underperformed John Kerry (2004) on the way to defeat. With all the votes in and Clinton showing a 3 million vote popular vote lead, is this analysis still valid?

  • Donald Trump received 62,979,636 votes, 27.2% of the 231,556,622 voting eligible people in the United States. This represents a drop of 1.1% in total vote share, relative to Mitt Romney, roughly in line with the recent decline trend seen for GOP candidates (Bush 2004 was the strongest GOP candidate in recent history).
  • Hillary Clinton received 65,844,610 votes, 28.4% of the 231,556,622 voting eligible people in the United States. This represents a drop of 2.2% in total vote share relative to Obama 2012, and was the worst performance by a Democratic candidate since Al Gore in 2000.
  • Given the narrowness of Trump’s victory in the upper Midwest, Clinton could be right that external forces like James Comey  or Wikileaks/Putin did her in. But she (or another Democratic candidate) could have overcome that had they turned out young and minority voters. Clinton didn’t need to perform at Obama-like levels – but she couldn’t hold on to the sliver she needed to win.

So in the final analysis, I still blame Democrats and the Clinton team in particular for this loss far more than I credit Donald Trump. According to the data, he performed in line with a typical GOP candidate, while Clinton greatly under-performed the last three Democratic campaigns. Other analysts concur, and have added depth by identifying exactly how many votes Dems left at home in the upper Midwest. The lesson for 2017 and beyond: Democrats – focus on turning out your base, instead of appealing to voters unlikely to vote for you in the first place.

Election 2016: Democrats Score an Own-Goal

Donald Trump won the 2016 presidential election, but he didn’t win the election. Hillary Clinton scored an own-goal – she turned out the lowest share of voters of any Democrat since 1996, and was bested (in vote share) by numerous losing Democrats of the past. See fine candidates of the past like Kerry, John, and Gore, Al. Contrary to much current analysis, Donald Trump didn’t really expand his base – he performed about as well as a generic Republican, while Clinton under-performed badly. The CNN chart below shows candidates’ share of eligible voters since 1996 [1]:

https://i1.wp.com/i.cdn.turner.com/cnn/.e/interactive/html5-video-media/2016/11/10/turnout_full_scale_all_voters_v2update.png

  • GOP vote share peaked in 2004 and has been bleeding down steadily, losing about 1.7% in total vote share per election since 2004 [2]. Trump actually under-performed this downtrend, as he dropped 2% (from 28.3 to 26.3) versus the average drop of 1.7% per cycle for Republicans. The GOP seems to turn their base voters out steadily, but this base forms a shrinking percentage of the electorate as the US becomes more diverse.
  • Democratic vote share has been more volatile, reaching a peak in 2008 and bleeding down after. But Clinton didn’t need to match Obama’s 2008 or 2012 performance to win – matching John Kerry or even Al Gore would have been sufficient! John Kerry’s performance, at 30% of eligible voters, would have crushed Trump, while even Al Gore’s 27.4% would have provided the small margin needed in the Midwest to win the election. In a low turnout election, Clinton bled off roughly 4% points of vote share, while Trump bled off only 2% points, leading to his narrow electoral college win.
  • Neither 3rd party votes [3] nor Trump’s numbers explain Clinton’s collapse – Clinton and the Democratic party have only themselves to blame for frittering away more than 100% of Obama’s net gains! Democrats tend to win when they increase overall turnout, and the data show clearly that turnout collapsed in the 2016 election.
  • Had Hillary Clinton managed to turn out any of the urban vote in the Midwest, or gotten millennials excited, she’d have been fine. She did neither, and in absolute terms had the worst performance for a Democrat since her husband, ironically (who won handily in 1996 in a low turnout election).

In short, I blame Democrats and the Clinton team in particular for this loss far more than I credit Donald Trump. According to the data, he likely performed just below a more typical GOP candidate, while Clinton greatly under-performed the last four Democratic campaigns.

Silver Linings For Democrats:

  • Arizona is rapidly trending blue – more rapidly than expected. Obama lost Arizona by around 213,000 votes in 2012, while Clinton lost by only 85,000 votes in 2016. This aligns with a 2014 study on demographic change, putting it right on track to lean blue in 2020.
  • Winning just Arizona’s and Florida’s (whose demographics are also shifting) 40 electoral votes replaces all the rust-belt states Clinton lost, creating a 272 electoral vote win.
  • Who voted in 2008 that didn’t turn out in 2016? Young people and minorities. Democrats win when turnout is high. Turnout is high when the most progressive parts of the Democratic base are excited. Therefore, Democrats’ direction should be clear – there is no one left in the center, and it’s time to move forward with the progessive wing of the party.
  • Had Democrats won in 2016, winning again (four in a row) would have proven even more impossible given the tick-tock nature of the Presidency in the US. Since FDR, one party has won three straight presidential contests only once, in 1988 – and none have won four straight.

[1] Votes are still being counted, and the final tally will likely show Clinton’s vote share edge close to 27%, still below Al Gore’s 2000 performance.

[2] Per the chart above, McCain lost 2.4% points from Bush 2004, and Romney lost another 0.8% points from McCain. Trump lost roughly 2% points from Romney – leading to an average decline rate of just over 1.7% per election cycle. Mr. Trump lost more than this amount, leading to the conclusion that he might have under-performed relative to an “average” GOP candidate.

[3] Above, we see that in 2016 voter turnout was around 55.4%, with 52.8% captured by the two mainstream parties. If all 2.6% lost to third parties came from Clinton voters (and it almost certainly dd not), that still implies that she under-performed Obama 2012 and Kerry 2004 by around a percentage point – and this assumption is far too generous to Clinton.

Why Today is not Brexit USA

Update: Well I get to eat crow on this one! While demographic shifts did aid Clinton, it looks like she may win the popular vote but lose the electoral college, as Al Gore did in 2000. But while I (and many) were surprised by this result, at HiddenLevers we made sure to prepare our audience for the possibilites by looking at the election through the lens of risk parity. Whatever you were hoping for in Election 2016, it helps to be prepared for all the contingencies! Watch our pre-election webinar and scenario forecasts here.

Original Post Below:

It’s become fashionable in the media to compare today’s election to Brexit, and to forecast that the result may play out similarly. Markets and the mainstream will be shocked when the silent majority rises up and defies the global elites! But is this analogy really apt for the US? What’s surprising is the lack of demographic comparisons – the simple fact is that the US looks nothing like the UK, and voter demographics matter even more in an election like 2016.

The UK’s population was 87% white at the 2011 census, and its voting population is whiter and older since many minorities are relatively recent immigrants. The US, by way of contrast, is 61% white, with the voting population estimated to be roughly 69% white in the 2016 election. A 26 percentage point difference between the US and UK mean that the two are worlds apart – the Brexit comparison simply falls down in this light. Mr. Trump may be losing minorities by as many as 50 percentage points, helping to explain the early voting results in places like Nevada. Demographics pose another challenge for Mr. Trump – his voters are on average already more likely than minority voters to turn out, and so the surge he may have whipped up could hurt him as much as it helps him.

While a Clinton victory today isn’t guaranteed, those making simplistic comparisons to Brexit are ignoring the world of difference between the population voting today, and the population in the UK that voted back in June.