On Friday, House Speaker Paul Ryan bowed to the inevitable. Lacking the necessary votes to pass, the American Health Care Act, he postponed proceedings on the bill. Like a lot of people, we thought Ryan and Trump would prevail. Initially we believed in that outcome because the bill contained what would be the biggest domestic policy victory for Republicans since the 1986 tax act: reform of Medicaid. Later – meaning Thursday night – we thought it would pass, if only by a narrow margin, because the consequences of failure were so great and an enormous amount of political capital was on the line.
In the end we just didn’t count on how strident the majority of the Freedom Caucus would be and how angry the moderate rank and file would get that a couple of dozen members from the party’s extreme right edge were holding the rest of the body hostage.
Enough of the mea culpa.
On Friday, $HCA, $THC and others shot up on the news that the AHCA was not going to pass the House of Representatives. The bull case apparently rests on the belief that Medicaid will not be reformed and the 19 states that have not expanded Medicaid will do so. Somewhere in there is also probably the hope that the CBO and others are correct and the individual market has stabilized.
Unless there is a dramatic change of heart in the Trump administration, we think this optimism is misplaced at the moment. We do not believe that the Trump Administration will sabotage the ACA, the paranoia of former Obama administration officials notwithstanding. We cannot, however, overlook the fact that the ACA gives the HHS Secretary enormous power to implement the law as he sees appropriate.
Back to those consequences I naively thought would save the AHCA.:
The Individual Market. The talking point for Democrats is that the individual market is stabilized, the implication being that any deterioration would be the result of sabotage by the Trump Administration. They support their argument with the CBO’s report on the AHCA which said:
“In CBO and JCT’s assessment, however, the nongroup market would probably be stable in most areas under either [the ACA] or the [AHCA].”
The problem with the talking point is that “stable” is not a great business case. For most insurers – for profit and not for profit – the individual market accounts for just a tiny part of their medical membership. Nationally, only 7 percent of Americans are insured through the individual market, according to Mark Farrah and Associates. MOH is an exception. They report that 13 percent of their members are insured in the non-group market.
While the individual market represents a small part of all insured, participation is an outsized hassle. The increased politicizing of private health insurance since the passage of the ACA neutralized critical risk management tools like risk corridors and reinsurance. The Obama administration, in their drive to an uninsured rate below 10 percent (and a difficult CBO score were anyone try to repeal the ACA), provided lax oversight of the individual mandate and special enrollment periods, making risk assessment more difficult especially with insurers who had little experience with sick, low income individuals.
In an unstable and uncertain market environment, insurers must adhere to a long approval process. Under the Obama administration, the schedule required insurers to design and price plans in March for an open enrollment in November. While the Trump administration has relaxed the schedule somewhat, insurers must still design and price plans well in advance of what they do in the large group and ASA market.
Finally, the disposition of House v. Price will weigh heavily on insurers. As things stand now, the court has ruled that Congress must appropriate cost-sharing subsidies paid to insurers - something it has not done. The case was appealed by the Obama administration but the Trump administration put it on ice while he sought legislative relief. As we understand it the Trump administration continues to make these payments. Whether or not that can continue adds another element of uncertainty.
With proceedings on the AHCA postponed indefinitely and the party in charge of the government hostile to the law, uncertainty for insurers is now worse than it has ever been. Trump, who recall met with AET, CI, HUM, ATHM, UNH, Blue Cross and Blue Shield and Kaiser at the end of February, believes insurer participation will continue to erode and the ACA will “explode.”
Post AHCA, for insurers the juice may just not worth the squeeze for 2018. We should know more by June 22 when QHP submissions are due.
Medicaid. The AHCA represented the single biggest federal reform effort since the 1986 tax act. So much so that through the debate we often felt that Paul Ryan was looking past repeal of the ACA toward his long sought effort to flatten the expenditure growth curve for Medicaid.
The conventional wisdom is that states will now expand Medicaid post AHCA. Recall that the 31 states that have expanded have done so under a Section 1115 waiver which must be approved by the CMS. The Secretary and the CMS Administrator, Seema Verma, recently sent a letter to the Governors assuring them that the Section 1115 waiver process would get easier and encouraging them to make use of Section 1332 waivers which permits a sort of state-based ACA DIY.
Section 1332 permits waiver of the regulatory demands of individual health insurance market like essential health benefits, annual limits on cost-sharing, actuarial value, establishment and operation of exchanges and federal cost-sharing subsidies. When combined with the voluntary nature of Medicaid expansion, the new flexibility for Section 1115 waivers and failure of the AHCA, states are now in a position to significantly restructure their Medicaid programs and respond to the potential crisis in the individual market to which Trump alluded.
The question for states post AHCA is should they expend the effort to expand their Medicaid eligibility or look past that opportunity to a restructuring of their individual market combined with a Section 1115 waiver to reform their Medicaid program? It will all come down to state politics, of course.
As a practical matter, state legislatures are winding down their 2017 sessions. While special sessions are always a possibility, we think the federal politics will remain uncertain enough that a straight up ACA Medicaid expansion may not be worth the hassle this year. What happens in 2018 will depend largely on how flexible CMS actually proves to be.
So, we would not count on a rapid increase in Medicaid expansion states. When and if it does happen, we expect it to be on terms more akin to Paul Ryan’s vision of the program than Barack Obama’s.
Notwithstanding Friday’s events or maybe because of it, we believe significant resistance remains in the deep red states to a simple Medicaid expansion The failure of the AHCA prolongs the politicization of health care, it doesn’t end it.
The talking point of “we going to do what Congress couldn’t and repeal the ACA (through Section 1332)” probably has a nice ring to it if you are thinking about running against Freedom Caucus members, Rep. Mark Meadows or Rep. Justin Amash.
Drug Pricing. In the aftermath of the AHCA, Donald Trump has indicated that he would like to work with Democrats to address what he sees as the inevitable implosion of the ACA. Reading between the lines, that means he has no plans to work with the Freedom Caucus, on health care, anyway. The place on which he is most likely to find common cause with Democrats and a health care issue in which he has some interest is drug pricing.
We sincerely doubt Trump will go as far as proposing that Medicare be permitted to negotiate drug prices. That probably won’t get though even a moderate Republican Congress. But we would expect movement on a few fronts:
- Increased transparency of prices and payments to middle men in the supply chain
- Reforms to the generic drug approval process
- Permitted importation of drugs
- Allowing Medicaid programs greater flexibility to select drugs for their formulary
PhaRMA has done an outstanding job of separating drug companies seriously engaged in the business of researching, developing and manufacturing pharmaceuticals from those exploiting the regulatory system for generics and off-patent drugs. For that reason, we anticipate any change to drug pricing policy to have limited or no impact on major PhaRMA members like JNJ, Roche, et al.
Health Care Industry Taxes. Baked into nearly everyone’s expectations is that the Medical Device Tax, the Cadillac Tax and others will be repealed. There is broad bipartisan support to do so. The thinking of some members is that these taxes could be repealed through tax reform which President Trump now says is a priority.
However, the failure of the AHCA, which paired repeal of the taxes with a reduction in spending in the Medicaid and ACA exchanges, means offsets will need to be developed elsewhere. On the Sunday talk shows, Freedom Caucus chairman Mark Meadows said that offsets would not necessarily be needed for tax reform but we doubt the rest of his conference is even listening to him right now. Moderate and conservative members of both parties are going to be loath to vote for anything that increases the deficit.
More broadly, tax reform gets tougher with the failure of the AHCA. Paul Ryan and others had been counting on the reduced CBO baseline from repeal of the more expensive provisions in the ACA to justify tax reform. The failure’s collateral damage to the reputation of House Republican leadership also means more ambitious parts of tax reform like the Border Adjustment Tax may get left behind in favor of a simpler agenda that lowers individual and corporate tax rates.
Medicare. Due to claims by Sen. Chuck Schumer that Republicans were threatening Medicare as part of the ACA repeal effort, we had concluded that the program would be legislatively off limits. Republicans would take their win in Medicaid and save Medicare for another day.
Now, we are not so sure.
Medicare could once again emerge as the piggy bank for tax reform and infrastructure spending.
Future Health Care Legislation. The demise of the AHCA does not end the demand for reform, especially from Republican Governors who favored the block grant provisions. Nor does it end concerns about Medicaid enrollment growth and eligibility. It certainly does nothing to encourage participation in the individual health insurance markets by enrollees or insurers.
Whatever does happen will have to be relatively benign and bipartisan, assuming Congress does not come around to some agreement in the next several months, but there are a lot of possibilities. In addition to the aforementioned drug pricing policy debate, other ideas floating around include:
- Repealing provisions of the McCarran Ferguson Act that protected the insurance markets from certain anti-competitive restrictions.
- Enhanced eligibility controls in Medicaid
- Medicare post-acute reform which was well underway during the Obama administration.
- Changes to the regulatory demands on the individual market, assuming the outcome Trump predicts.
In the midst of all the excitement of the AHCA’s painful and brief life, we will remind you of something we repeat as often as we can: do not underestimate the power of the administrative state to promote the policies and goals of the executive. The Obama administration unabashedly showed what that means with its implementation of the ACA. The Trump administration, with but three tools – Section 1332 of the ACA, Section 1115 of the Social Security Act and the CMMI - can wield an lot of influence over health care policy with nary a call to Paul Ryan or Mitch McConnell. We expect Trump is going to like that.
Call with questions. We are open 24/7/365 just like the government, only nicer and more interesting.
Emily Evans
Managing Director
Health Policy
@HedgeyeEEvans
