Business Ideas I: Juggler, Never Let A Message Drop

Over the years I have kept a running spreadsheet of business ideas – my current business, HiddenLevers, was once a denizen of the same spreadsheet. But ideas have expiration dates [1], and my idea list has grown while my available time has shrunk. Over the next few months I will be sharing my ideas – I’d love to hear feedback and to inspire others to take the next step or gain inspiration. To provide structure, for each idea I’ll share my thoughts on what I thought the MVP might be, and a scoring of the idea using my own 10 point scale. Here goes!

Idea: Juggler – Never Let a Message Drop

Juggler would watch your firm’s emails, LinkedIn, and other messaging platforms to ensure that every inbound request is tracked and gets a response. The challenge today is that inbound business communication arrives across channels, and often comes in to many different personnel at your firm. Using AI, Juggler would determine which messages actually require response, and monitor these across all firm users, alerting managing when prospects and clients are awaiting response.

There are a ton of AI-based email solutions and also support email solutions from firms like Zendesk – but none of these seem to focus on this specific use case – firm-wide monitoring and taking a global look at all communications to a particular client.

MVP:

The MVP is simple – do the machine learning work to simply determine whether a particular email requires response. Emails asking questions clearly come to mind – but taking a true machine-learning approach, can we approach 99% accuracy here? This can then be married to a simple UI showing individuals (not messages) requiring attention – this sort of dashboard data could ideally then be integrated into Salesforce or other CRM platforms.

Scoring (0-10 scale): 6 points

1. Is it Transformative? 1 point

This is a fairly standard use of machine learning in 2018 – but the accuracy level required to make this viable is not. Also, many businesses still don’t take real advantage of CRM systems, and this idea automates some of the key value concepts from CRM for a small business (ie don’t let any leads slip through the cracks – I’m looking at you, contractors).

2. Revenue Market Size or Eyeballs: 1 point

This is a broad market – virtually every business could use this capability, so volume pricing of even a few dollars a month in a SaaS solution could scale quickly. Presuming that this capability is worth $5/user/month – the US market alone is greater than a billion per year.

3. In a Growing Market? 1 point

While email utilization is stable, multi-channel communication is growing – think chat, social media, VOIP (phone) – in theory the same approach could be applied to all of these.

4. Difficulty, Barriers to Entry, and Competition: 1 point

It may prove difficult to achieve the level of accuracy with machine-learning to inspire user confidence. If businesses suspect that even a few important messages might be slipping through, they will lose confidence and not use the product. Ideally the system ought to learn based on each user and firm’s data – posing a bit more complexity.

5. Riding Hype or a Trend? 2 points

AI and machine-learning are arguably THE trend of the moment, and while arguable overhyped – the Juggler idea definitely is riding this trend.

 

[1] James Watt’s steam engine was an excellent invention, and applying it to pumping water out of mines an excellent business idea – for the 1770s. The concept of hailing a car via smartphone was likewise a great idea – in 2009. It’s also possible to be too early – Yahoo Briefcase shutdown the same year DropBox was founded (although the latter was also a vastly superior implementation).

 

P.S. Investors out there, feel free to reach out if any ideas in this series are of interest – while my core business continues to grow rapidly, I’m open to discussions on how to seed fund and launch against many of these ideas.

The Great GOP Stimulus

The 2018 Trump stimulus exceeds the Obama-era stimulus package in size – will it pay off at the top of the economic cycle?

In 2010, when Barack Obama pushed for a stimulus package to help boost the American economy, it was decided by many in the GOP as wasteful spending. While there are more productive (infrastructure) and less productive (tax rebates) ways to stimulate the economy, any form of spending (or tax cut) is a form of economic stimulus – this is a point agreed by both economists and businessmen like Warren Buffet. In fact, any form of budget deficit is a form of stimulus, as the government borrows (or prints) money that it doesn’t have to spend it into the economy.

The past year has seen the GOP enact not one but two stimulus measures – first a budget which ended Obama-era budget caps and boosted spending by roughly $150B per year, and second the tax cut which reduces taxes by another $150B per year. Taken together these measures are adding roughly $300B per year in stimulus to the US economy, potentially adding 1.5% to GDP for each of the next few years. Adding this stimulus to a core GDP growth rate of 2-2.5% might thus make 4% possible in the near term, with the bill due much later. The total federal (non-central bank) stimulus under President Trump’s first will hit at least $1.2 Trillion, exceeding President Obama’s 2010 stimulus package by $350 Billion [1], but this time at the top of the economic cycle!

What does this tell us? A few key takeaways emerge:
  • While most economists agree that it’s better to do fiscal stimulus when the economy is at or near recession, democracies don’t work this way, and there’s little correlation between economic need and actual governance.
  • When either party has complete control of government, they take the opportunity to spend on favored initiatives – in Trump’s case the DoD received most of the benefit, while in Obama’s case a variety of energy efficiency, infrastructure, and other initiatives were funded.
  • Budget deficits haven’t been a major issue over the last decade, but the tax cuts in particular will layer on top of Social Security and healthcare spending trends to drive debt-to-gdp well past 100% [2].
  • The best stabilizers in the US economy (unemployment insurance) are effectively automated – extending this sort of stabilizer to infrastructure spending (spending more on transportation funding etc as unemployment rises) would not just help buffer downturns – it would also get taxpayers a better deal.

Time will tell whether the GOP’s late-cycle spending will extend the business cycle substantially, but in the long run US policy will improve if more of these decisions are put on auto-pilot, removing the uncertainty of the political winds and the desire to spend at the least opportune times.

 

[1] The Obama administration stimulus plan cost around $850B in the end, including only the 2010 Stimulus measure and its implementation. Extension of Bush-era tax cuts and similar are not counted here, as these were extensions of existing measures, rather than new tax cuts or new spending as in the Trump administration’s recent moves.

[2] Many charts and news reports on the debt refer only to the publicly-held portion of the US debt, but when debts to the Social Security trust fund are included as in this data from the Federal Reserve, the US debt-to-gdp ratio already exceeds 100%.

The Hidden Factor Lowering the Homicide Rate

Improvements in gunshot trauma care have lowered the homicide rate substantially, even as the gunshot injury rate remained constant

A few years ago I read an article about the war in Afghanistan, and improvements made to battlefield treatment of gunshot wounds. Improvements in treatment at battlefield hospitals there led to a substantial decline in death rates relative to prior conflicts. Fast forward to the present, and many of these techniques have made their way to hospitals throughout the country, greatly improving gunshot trauma care. The rash of mass shootings in recent years has actually resulted in less deaths than would be expected – this New York Times article describes in detail improvements in gunshot trauma care. This led me to a larger question – have improvements in trauma care lowered the death rate from gunshot wounds? If so, this could be lowering the US homicide rate by rendering gunshots less effective in killing victims.

I then looked at CDC injury and fatality data – how much have gunshot injuries risen in the US in recent decades, and how has the rise in deaths compared? If there were no change in healthcare quality, one would expect the ratio of gunshot injuries to deaths to remain constant – barring any major societal change in how or why gunshot injuries were occurring. The primary change in the nature of gunshot deaths over the last few decades has been the rise in suicides, which would raise the ratio of deaths to injuries. Improving care for gunshot wounds would reduce the ratio of deaths to injuries, as more injured patients would survive their wounds. [1]

While gunshot injuries rose 85% between 2001 and 2016, fatal gunshot wounds rose only 31%! On a per-capita basis, gunshot injuries have risen much faster than population growth, while gun-related fatalities have remained constant. This finding has a few implications: [2]

  • Progress in healthcare makes it seem like violence in the US has dropped more than it actually has – Americans are being injured by firearms at a higher rate than in 2000, but they simply die less often. Either perpetrators’ marksmanship has declined rapidly, or we have some great surgical advances to thank. 
  • US healthcare has in fact made substantial progress in reducing the death rate associated with firearms, as the survival rate for severe abdominal gunshot wounds has risen from 15% to 77%.
  • While the decline in violent crime from its peak in the early 90’s is real, it has been augmented by improvements in healthcare. With suicide now accounting for two-thirds of firearm deaths, further gains through healthcare will be hard to attain.

 

[1] If the rate of suicide by firearm rose relative to homicide by firearm (as appears to be the case in recent decades), we would actually expect the number of deaths to rise relative to the number of injuries – because most suicide attempts by gun are successful. Despite this trend, we see injuries rising faster than deaths – meaning ER docs and trauma surgeons are making a real difference!

[2] The raw statistics can be looked up on the CDC’s (primitive) website for the years 2001 and 2016: Fatal firearm injuries were 38,658 in 2016 (11.96 per 100,000) and 29,573 in 2001 (10.38 per 100,000), for an increase of 31% over the period. Non-fatal firearm injuries were 116,414 in 2016 (36.03 per 100,000) and 63,012 in 2001 (22.11 per 100,000), for an increase of 85% over the period.

A Better Estate Tax Reform

Replacing the estate tax with fair (no step-up) capital gains taxation at death could raise revenue for tax reform, and get rid of complex tax avoidance schemes

Among the many changes proposed among the Trump and GOP tax plans is the end of the estate tax – long a cherished Republican goal. Today’s Republicans decry the estate tax as a form of double taxation, while proponents (including Republican President Teddy Roosevelt) view it as a means to prevent an aristocracy formed through inter-generational wealth transfer.

What’s overlooked in the estate tax debate is that there’s a simple solution at hand, if we just look north, to Canada. This may be surprising to many Americans, but in the early 1970s Canada repealed its estate tax, replacing it with a simple application of capital gains taxes.

Canada applies its capital gains tax to an estate by assuming that the assets have been sold on the date of the owner’s death. Instead of taxing an estate in a special way, a consistent application of the existing capital gains tax serves to eliminate loopholes (in particular by eliminating step-up basis) and raise revenue while also substantially lowering the top rate of tax on estates. If transfers of ownership are treated as taxable for capital gains purposes, this eliminates the use of trusts and step-up basis as a multi-generational tax avoidance scheme, since tax would be paid on any change of ownership, including when assets are transferred into the trust.

Instead of exempting substantially all estates (as with current law), a capital gains tax-based approach could simply apply current capital gains brackets. The top rate of 23.8% would represent a reduction of over 50% from current rates. This change could generate substantial revenue to enable other aspects of tax reform – in the year 2000, when the estate tax exemption was $1.3M for a couple, it generated $25B per year in revenue (after substantial exclusions, credits, and deductions). With the economy today 90% larger than in 2000, it’s likely that a similar tax would generate nearly $50B today. Elimination of step-up basis could double this figure by adding another $50B – and $100B per year would pay for a huge chunk of current Republican plans on business tax reform, without penalizing most individuals.

Unfortunately, Republicans are fixated on ending the “death” tax and ramming through their current plan, while Democrats are interested in keeping top estate tax rates in place – when a broader capital-gains based approach would be fairer and would generate more revenue. Hardly the last time a good moderate approach is left to die in our polarized political climate!

The Only Gun Control That Would Have Helped in Vegas

In the wake of major mass shootings like that in Las Vegas, gun control supporters have brought attention back to a wide range of gun control measures. Universal background checks, assault weapons bans, and numerous other measures are floated, and end up going nowhere given the heated opposition of gun rights supporters.

But while many of these measures would help with day-to-day gun violence (which, along with suicide, is responsible for 99% of all gun deaths) – none of them would have helped in Las Vegas. What might have helped?

A high capacity magazine ban, banning magazines with a capacity over 10 rounds, would have reduced casualties in Las Vegas by over half, and perhaps by as much as 90%.

After the Sandy Hook shooting, I analyzed every mass shooting in the US between 1980 and 2012 – and in each case I reviewed what forms of gun control, if any, might help. One finding stood out – the majority of mass shooters commit suicide, and they tend to commit suicide after running out of bullets and being forced to reload.

The Las Vegas shooter committed suicide as well. If mass shooters commit suicide as a result of the brief thoughts or impulses that occur during the reload cycle, then how many lives would have been saved by forcing the shooter to reload 10 times more often? In studying previous mass shootings, it turned out that a high capacity magazine ban could have saved over 50% of all lives lost.

Many Americans have absolutely no interest in gun control – Bill O’Reilly recently posted that “This is the price of freedom.” But for those with an interest in improving upon the status quo, there’s a lesson here: rather than wasting energy on a wide range of proposals, those interested in curtailing mass shootings should focus on EFFECTIVE measures, not feel-good measures. A high capacity magazine ban is unlikely to pass anytime soon – but placing the focus on a single effective policy instead of broad, sweeping measures helps set the stage for eventual success.

 

Cue the rebuttals:

There are millions of high capacity magazines in the US already! A ban would stop further sales, and since magazines are cheap a buyback could reduce the volume available while driving up the price of those remaining (making them harder to obtain)

Bad guys don’t follow the law! – Ending the public sale of new magazines will rapidly diminish their availability to the black market. Magazines are simple, but need to be machined precisely or they will tend to cause jams.

Shooters will just reload more often! – Analysis of over 60 mass shootings shows that the vast majority of shooters commit suicide after reloading a handful of times. Limiting the amount of damage possible per reload cycle thus reduces the overall damage.

You’re depriving individuals of their 2nd Amendment rights – No less a figure than Antonin Scalia held that the 2nd Amendment is subject to limits and regulations. Bump stocks aside, fully automatic weapons have been banned for individual ownership since 1934 (as a result of misuse of Tommy guns by Al Capone and other mobsters). The question has never been about unfettered access to arms – in this case suitcase nukes would be an arm that one could bear. The question has always been one of striking the appropriate balance between gun rights and the dangers they introduce in society.

100-Year Flood, 500-Year Flood: Real Risk Probabilities

When the Army Corp of Engineers and NFIP came up with the 100-Year Flood and 500-Year Flood designations, it’s almost as though they wanted to confuse the public. With Hurricane Harvey, much has been written on the meaning of the terms 100-year flood (it means a 1% chance of flooding in a single year), and the term 500-year flood (a 0.2% chance of flooding in a single year). While these basic definitions are correct, they don’t really help homeowners, whose question is: what’s the chance that my house will flood while I own it?

In the case of the 100-year flood zone, this means that the chance of flooding is at least 1% in a single year. But what if you plan to own your home for 30 years? In this case, you have a 99% of NOT flooding each year, but you’ve got to NOT flood for all 30 years. The probability of NOT flooding over 2 years is 0.99 * 0.99, and thus the probability of not flooding over 30 years is 0.99^30, or 74%. This means that the home has a 26% of flooding over the 30 years in question.

Of course, that doesn’t take into account the change in probabilities resulting from a combination of climate change and reckless development in most American cities. According to Kenneth Trenbeth, a scientist at the National Center for Atmospheric Research, “What used to be a 500-year event has become a 50- or 100-year event.” With this in mind, we can lay out the following table of homeowners’ flood risks:

Flood Probability Over 10 Years Flood Probability Over 30 Years
100-year flood zone  10% 26%
100-year flood zone, climate-change adjusted (to 10-year flood) 65% 96%
500-year flood zone 2% 6%
500-year flood zone, climate-change adjusted (to 50-year flood) 18% 45%

The flood risks over 30 years likely exceed many homeowners’ assumptions even before accounting for climate change – the climate-change adjusted risks make flooding within flood zones a virtual certainty! Homeowners in these areas are well advised to buy flood insurance, which is an incredible value as it is priced by the government below fair value. Homeowners not in, but simply near the 100-year floodplain, should realize that THEY are now likely in the true 100-year flood risk area, while their neighbors in the floodplain are likely at much greater risk.

Think that the probabilities can’t possibly have shifted that much? Consider that parts of Houston have had 3 500-year flood events since 2001 – Harvey, the 2016 Tax Day Flood, and Hurricane Allison. The chance of having one such “500-year” flood in 16 years is around 3.2%, but three such events? It’s less than 0.15% if these are really 500 year floods! [1] The reality is that 500-year floods are likely more than 10 times more common than the old statistics indicate, and homeowners should plan accordingly.

 

[1] The chance of 3 or more 500 year floods is equal to 100% minus the chance of 0, 1, or 2 such floods. The chance of 0 floods is 96.85%, and the chance of exactly 1 flood is roughly 3%, leaving less than 0.15% for the other potential outcomes (which drop off very rapidly because of the 0.2% chance happening multiple times).

Tax Reform: What are the Options?

While Washington DC may be currently preoccupied with Russia investigations, the GOP appears determined to try its hand at tax reform at some point this year. The broad outlines of GOP tax plans have been discussed here and elsewhere, but rather than focus on just one approach, what are the real options for tax reform today?

Government Funding:
65% Labor Taxes, 15% Borrowing, 12% Capital Taxes, 8% Other

While most breakdowns of government funding look at taxes paid by income group, we can look more broadly at revenue from labor, borrowing, business, and other:

  • $2.51 Trillion: Labor (2016 personal income + all payroll taxes, less capital gains)
  • $0.59 Trillion: Government Borrowing
  • $0.45 Trillion: Capital (corporate income taxes + capital gains taxes)
  • $0.31 Trillion: Federal Reserve income + excise tax + customs + estate + other

It’s clear from the above that working men and women (and not business) carry the weight of the government on their back. With all the concerns around automation taking jobs, it’s surprising that few analysts note how biased the tax code is against good old-fashioned labor! If we want workers to have a shot against software and robots, perhaps step one is to take the anvil off their backs.

Balancing the Tax Code: Tax Reform Options

There are many goals in tax reform, with simplification and decreasing distortions in the economy (thereby encouraging growth) usually cited as key goals. Let’s add balancing the tax code between labor, capital, consumption, and other activities to this list – in an ideal system no one participant in the economy should shoulder the whole burden. The typical ideas like eliminating deductions and lowering rates have been proposed and covered many times. Here instead is a short list of some of the more novel tax reform ideas we might entertain, along with the revenue that each might generate:

National Sales Tax:
Potential Revenue: $600 Billion at a 5% tax rate

Proponents of a national sales tax, like the organization FairTax, point to the idea of using a 25% sales tax to eliminate all other federal taxation. But most states also levy sales taxes, bringing the total sales tax burden above 33% in many locales under this plan. In order to reach these lofty levels, the sales tax would have to apply to all services (e.g. doctor’s appointments, salon visits, etc) in addition to traditional retail sales.

Value-Added Tax: A direct tax on economic activity
Potential Revenue: $900 Billion at a 5% tax rate

According to KPMG Research, over 140 countries use a VAT in some form today, and the United States is among the only developed nations without a VAT.

The VAT has built-in defenses against tax evasion relative to similar sales taxes, leading to greater potential revenue at a given rate. Critics grouse that the VAT is “too efficient” and leads to growth in the size of government as taxation becomes more efficient.

Wealth Tax: Property taxes on all assets
Potential Revenue: $500 Billion at a 0.5% rate

A broad wealth tax is similar to a property tax, but is levied across all assets instead of just real estate. The total net worth of individuals and corporations in the US is nearly $100 trillion, so that even very low rates could generate substantial revenue. Capital is mobile, however, so a successful approach would likely involve lowering or eliminating capital gains taxes to prevent capital flight.

Transaction Taxes: Wall Street Financial Transaction Tax
Potential Revenue: $100B per year at 0.1%

As income inequality has soared in the United States, the idea of taxing financial transactions has garnered attention. Care must be taken as even very small transaction taxes might result in capital flight to other markets. As with a wealth tax, a transaction tax might be possible if capital gains taxation was lowered to incentivize capital to stay in US markets. A 10 basis point transaction tax might raise close to $200B per year, but would likely have to be offset with a capital gains reduction, so that the tax might only net half that amount.

The gross receipts tax is another form of transaction tax, levied on all revenue generated by all businesses. Since total business revenue in the US is likely in the $40 Trillion range, a 0.25% transaction tax might lead to roughly $100 Billion in annual revenue. Texas, Washington, and Ohio all levy this form of tax.

Pollution Taxes: Carbon Tax, other emissions taxes

Potential Revenue: $120B per year

Pigovian taxes, which seek to tax activities that cause economic externalities, are theoretically quite attractive as they both raise revenue and decrease externalities like pollution. A tax on carbon could help achieve this – a carbon tax of $20/ton might raise  $120B billion in revenue while lowering long term emissions trends.

 

With so many options, which to choose?

Reviewing the options above, it’s clear that only a handful (the VAT, national sales tax, and wealth tax) generate enough revenue to help rebalance the tax code away from its current Labor tax orientation. Of these, the VAT and national sales tax are both forms of consumption tax – and the VAT provides superior audit trails while also being easy to implement.

Combining a 5% VAT with a 0.5% wealth tax would produce around $1.4 Trillion in revenue, enabling a halving of both taxes on labor and traditional taxes on capital. The new balance of revenue might look like this:

  • $1.31 Trillion: Labor (~50% reduction in income and payroll taxes)
  • $0.90 Trillion: Consumption Tax (new 5% Value-Added Tax)
  • $0.75 Trillion: Capital (new wealth tax,  ~50% reduction in corporate income taxes + ~50% reduction in capital gains taxes)
  • $0.59 Trillion: Government Borrowing
  • $0.31 Trillion: Federal Reserve income + excise tax + customs + estate + other

There you have it – the tax code rebalanced to encourage and reward work, while spreading the burden across consumption and capital. It’s important to note that a small wealth tax combined with a capital gains cut rewards risk and productive deployment of capital. Holding a savings account at 1% interest becomes much less appealing, while deploying capital in the form of equity becomes more appealing with capital gains taxation at 10%.

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.