Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Most headlines about the Senate Republican effort to repeal and replace Obamacare have focused on the bill's fundamental reshaping of Medicaid. As I've written, that could be bad for hospitals and insurers. But that's just the start of how this bill could impact these industries.

It's Complicated
The relationship between health care stocks and GOP reform legislation has been difficult to predict
Source: Bloomberg

The near-term prospects for the Senate's Better Care Reconciliation Act (BCRA) took a hit on Monday when the Congressional Budget Office predicted it would leave 22 million more Americans uninsured than current law. But there is still a good chance it could pass.

One of the most important changes in the BCRA relative to both the Affordable Care Act and the House-passed American Health Care Act is in its support of low-income Americans.

Under the ACA, people with incomes ranging from 100 percent to 400 percent of the federal poverty level get tax credits to help them buy insurance, based on their income, age, and geography. About 81 percent of the people who buy insurance on ACA exchanges use these credits. The lowest-income members of this group also get subsidies that reduce out-of-pocket health costs. 

The AHCA has less-generous tax credits tied only to age. The BCRA, meanwhile, keeps the basic ACA structure, which makes it seem friendlier to patients and to health-care providers. But a closer look reveals warts. 

In 2020, the income range for tax credits shifts down to 0 to 350 percent of the poverty level. That may help low-income people in states that didn't take the ACA's Medicaid expansion. That's arguably a positive for hospitals and insurers. 

But other aspects of BCRA erase that benefit. Cost-sharing subsidies will end in 2019. And tax credits will be far less generous.

The ACA gives out credits based on the cost of a fairly comprehensive insurance plan, in which enrollees only pay about 30 percent of health costs through deductibles and other cost-sharing. Under the ACA, subsidies reduce those costs further.

The BCRA, in contrast, bases its credits on a stingier plan, in which enrollees may pay for as much as 42 percent of their own costs. Deductibles on the sort of plan the ACA helps people afford are around $3,600. They may be in the range of $6,000 for the plans the BCRA encourages.  

This is one reason why the CBO expects that "despite being eligible for premium tax credits, few low-income people would purchase any plan." Lower premiums don't mean much to someone who makes less than $20,000 a year and faces a $6,000 deductible. 

In other words, reducing the ACA's tax-credit threshold from 100 percent of poverty to 0 percent won't do much to increase the customer base for hospitals and insurers. The CBO estimates that in certain high-cost areas (think Alaska) insurance coverage simply won't be available.

These tax credits are a de facto replacement for Medicaid, as the BCRA cuts federal Medicaid funding by $772 billion through 2026, and even more after that. Both insurers and hospitals will suffer from Medicaid's decline, and the Senate's attempted remedy will do little to help them make up for those losses.

The CBO expects the Senate bill would result in billions less being spent on tax credits relative to the House bill and the ACA, in part due to low expected uptake. 

Cutting Down
The CBO estimates that the Senate's bill will spend much less than the House's to prop up the insurance market relative to the ACA
Source: CBO

The ACA expects 7 to 9 million people will lose insurance coverage in the individual market as a result of cutting tax credits and ending the ACA's mandate that people buy insurance. And people that actually do use the tax credits may be discouraged from seeking health care.

That's because -- on top of high deductibles -- states will be able to end the requirement that insurance companies cover such things as mental health. People will either have to pay much more for insurance or pay for such care out of their own pocket. Either option will discourage some from seeking care.

A combination of declining insurance coverage, the BCRA's funding cuts for preventative care, and patients' inability to pay high deductibles may also lead to hospitals facing substantially higher uncompensated care costs.  

The insurance plans encouraged by the BCRA will be attractive mainly to sick people, given their high deductibles and the structure of tax credits. That means insurers may face a deteriorating risk pool despite the law's efforts to the contrary.

A provision added to the BCRA on Monday that prevents people from buying insurance on the exchanges for six months if they don't maintain continuous coverage may not actually encourage healthy people stay enrolled or substantially improve the risk pool, according to the CBO.

If hospitals and insurers are hoping for the BCRA to fail, then they should remember how close to death the House version once seemed. By being less generous, the Senate bill will cut the federal budget deficit by $200 billion more than the House version, according to the CBO. That gives Senate Majority Leader Mitch McConnell a very large slush fund with which to convince holdouts to vote yes. 

Slush Fund
Lower spending on helping low income Americans afford insurance gives Mitch McConnell financial wiggle room to cut deals with other Senators
Source: CBO

Hospitals and insurers can't ignore this threat.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net