In Defense of the AHCA

We cannot keep pretending that Medicaid as we know it can continue indefinitely.

The Congressional Budget Office (CBO) issued its score of the House-passed American Health Care Act (AHCA) — the Obamacare “repeal and replace” act — reigniting the myriad criticisms. From the right, the complaints are that it took too long to get done, is just “Obamacare lite”, and didn’t result in cost reductions. From the left, the focus is on coverage; the Washington Post editorial is a typical complaint “… to 51 million non-elderly Americans lacking health-care coverage in 2026, rather than the 28 million who would go without under current law.”

It is time for a reality check.

To begin, the AHCA cuts $1 trillion in taxes, reforms the premium tax credits that subsidize the individual market, and shifts Medicaid from an open-ended federal subsidy to a budgeted amount per beneficiary in each state. Put differently, it is a significant tax cut and the reform of two major entitlement programs and it passed the House on May 7. If I had told someone that the House would cut taxes by $1 trillion and reform two entitlement programs, they would have been shocked to see that done in only four months. Criticisms that House Republicans were disorganized and slow to act seem misplaced.

It is also the opposite of Obamacare, which raised taxes, created a new entitlement program, and expanded Medicaid. How does that make the AHCA “Obamacare lite”? In the process, it also eliminates poor incentives that led the Congressional Budget Office (CBO) to conclude that the ACA harmed the labor supply. As a result, CBO estimates that repealing the ACA would increase the labor force by between 0.8 percent and 0.9 percent — an additional 2 million full-time-equivalent workers — and increase economic output by 0.7 percent on average. This is the result of eliminating the implicit tax rates on additional work and undoing the damaging delinking of work and health insurance.

More generally, the AHCA is part of a superior economic policy that focuses on reduced taxes, sustainable entitlement programs, and a lighter regulatory burden. The president and Congressional Republicans were put in charge to produce better economic performance and the AHCA is one part of policies that can do exactly that.

But suppose you don’t care that the economy is stuck in low gear, the federal budget is sailing directly into a sovereign debt crisis and that public policy is making work a theoretical concept for millions of Americans. Isn’t the AHCA bad health insurance policy?

CBO estimated that the AHCA would raise premiums (at least in the near term) and reduce insurance coverage by 23 million lives over the next 10 years. The idea that premiums will rise sharply is hardly universally shared. After all, the CBO analysis was forced to use outdated information on both premiums and enrollment in the non-group market. Thus, it did not incorporate information for the past year during which the average rise in premiums for silver plans was 25 percent. That is one reason that alternative estimates show that premiums will fall after adoption of the AHCA.

Caveats apply to the estimated impacts on coverage as well. Taken at face value, the estimates say that Obamacare is so insufferable that 8 million Americans walk away from it the moment (2018) it becomes legal to do so, and that over the succeeding 9 years the AHCA provisions raise coverage in the non-group market by 2 million.

But one probably shouldn’t take the estimates at face value. If CBO had used its updated (2017) baseline it would recognize that there are only 10 million individuals in the market in 2017; not 15 million. Bluntly, the CBO estimate includes millions of phantom individuals who supposedly lose coverage. Indeed, even in the updated baseline CBO expects a 30 percent rise in Obamacare enrollments over the next decade, a forecast completely at odds with the ongoing departure of insurers (Blue Cross Blue Shield of Kansas City being the latest) and meltdown of these markets.

A similar critique applies to the Medicaid estimates. CBO’s baseline incorporates ongoing Medicaid expansions that hardly seem a sure thing. More generally, it is unrealistic to assume that Medicaid spending will continue to grow at the current projection of 5.3 percent per year. That entitlement growth — when combined with Social Security, Medicare, and the ACA premium subsidies — leads to a debt spiral and economic calamity. Instead, it is simple fact that there will have to be Medicaid reform at some point in the not-too-distant future. So, the right comparison is between the AHCA Medicaid reforms and an alternative reform in the future. It is not between the AHCA Medicaid reforms and pretending that Medicaid as we know it can continue indefinitely.

There are no coverage estimates that will satisfy the left — the ACA proved their willingness to write taxpayer checks regardless of the consequences — but conservatives should have a realistic view of the AHCA impacts. They should also be willing to defend the consequences of allowing individuals freedom to choose. If 8 million individuals stop buying insurance and 4 million decline to participate in a free Medicaid programs simply because the individual mandate is repealed, their choice is to be respected as something that makes them better off. It is only a crisis to progressives, whose elitist vision is built on telling people how to live their lives.

Don’t get me wrong. The AHCA is not perfect; there are sensible tweaks to the insurance market subsidies and Medicaid reforms one could envision. But it is a significant step toward better economic policy, dramatic and needed reforms to entitlement spending, and a sensible approach for lower-income health insurance.

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