Depending on whom you ask, the Affordable Care Act (ACA) is either a major victory for improving the health outcomes of struggling Americans, or a costly, audacious affront to personal freedom. The one thing on which everyone agrees? It’s complicated.

On March 6, 2017, Republicans in the House of Representatives introduced their replacement for the ACA, the American Health Care Act (AHCA). Reaction to the bill has been decidedly mixed, with both liberals and conservatives unsettled about its impact on the future of healthcare in the United States.

Craig Garthwaite, a professor of strategy and codirector of the health enterprise management program at the Kellogg School, has extensively researched and followed the effects of U.S. healthcare policy on hospitals, insurers, governments, and individuals. He agreed to sit down with Insight to offer his take on the House's original AHCA proposal vs. the ACA.

Shifting Subsidies from Income to Age

Rather than adjusting breadth or depth of health coverage, Republicans have instead chosen to narrowly tackle its cost to the federal government, says Garthwaite. “It seems like that's all they're focused on right now.”

Under the ACA, low- and middle-income buyers have access to subsidized insurance. Those with incomes between 100 and 400 percent of the federal poverty line can receive tax credits if they buy coverage through ACA exchanges. Under the proposed AHCA plan, tax credits would no longer depend on a person’s income, but only on their age—providing older individuals, who typically need more healthcare, a higher tax subsidy to purchase healthcare than younger people receive. The only way in which income will be considered is that the credits will phase out for individuals earning above $75,000, or $150,000 for a married couple.

The proposal reflects some conservatives’ complaints that basing tax credits on income is unfair. “It has that flavor of, ‘Why should just low-income people have access to this?’” says Garthwaite. This feeling is particularly acute among families earning just above 400 percent of the poverty line, or about $65,000 for a married couple, who often feel that they are not wealthy but who are left out of many government-assistance programs.

Pegging subsidies to age would increase the number of people who qualify for those subsidies, which presents a new problem. “That subsidy, in order to give it to nearly everyone, has to be relatively parsimonious,” says Garthwaite. Also, the new plan would no longer guarantee low-income citizens a cap on the percentage of their income going toward health insurance, which would likely leave many of them unable to stay insured. This problem would be particularly acute for relatively low-income older Americans and those living in areas of the country where insurance is particularly expensive.

“They're basically telling their citizens, ‘You're going to have to spend a lot more on health insurance if we pass this plan.’”

This change could be a hard sell for Republican senators from rural states, where healthcare tends to be significantly more expensive, and where residents therefore rely more heavily on the low-income subsidies.

“They're basically telling their citizens, ‘You're going to have to spend a lot more on health insurance if we pass this plan.’”

Rethinking Penalties

Among Republicans’ greatest sources of contention with the ACA has been the “individual mandate,” which requires that that every citizen have health insurance or pay a penalty.

But the individual mandate serves a valuable function in the insurance marketplace by incentivizing younger, healthier people who may otherwise forego buying insurance on the exchanges, thus balancing the risk pool. If the only people in the pool are sick, insuring them gets very pricy, very quickly—a phenomenon economists refer to as a death spiral.

The proposed AHCA would replace the individual mandate with continuous coverage provisions, which Garthwaite says is intended to achieve the same effect as the individual mandate, with some exceptions. Under these provisions, a person pays no penalty for going without insurance. But, if they are uninsured for more than two months and they choose to buy insurance, they will be penalized an additional 30 percent of their premium for the first year they are enrolled.

“Hospitals are sort of the last defense for the ACA right now. They are the ones who have the political muscle to try and save it, and the real financial incentive to do so.”

“What the [AHCA] structures instead is, ‘Fine, you can choose not to be insured,’” Garthwaite says. “’But if you choose to want to take advantage of this later, you pay your penalty then.’”

One worry about this feature is that the people who are most likely to gamble on not buying insurance in the face of a continuous coverage penalty are those who are healthy today and expect to be healthy in the future. “These are the very people that we need the proverbial stick of the mandate to beat into the insurance market,” says Garthwaite.

Under the provisions, more citizens will likely opt out of health insurance. But Garthwaite cautions lawmakers from attributing their departure solely to personal choice or healthy people’s willingness to accept risk.

Rather, if subsidies are reduced at the same time the individual mandate is replaced with continuous coverage provisions, he predicts that citizens who want insurance may no longer be able to afford it. “If you don't provide people enough of a subsidy to buy into individual insurance, then maybe they won't buy it because they've got to buy things like food or housing instead,” says Garthwaite.

The AHCA bill also does little to address what Garthwaite calls “artificial constraints” that weaken demand for insurance from the exchanges. For example, the ACA has a so-called “Cadillac tax,” scheduled to roll out in 2020, which taxes the most expensive employer-provided insurance plans as a way to level the playing field between the exchanges and other insurance options.

“Right now if you get insurance from your employer, you don't pay taxes on it; but if you go into the exchanges, you do,” says Garthwaite. “That stacks the deck in favor of the employer.” The AHCA would delay that tax until 2025, which would not relieve those artificial constraints.

Uncompensated Care Under the ACA vs. the ACHA

Since the passing of the Emergency Medical Treatment and Labor Act in 1985, hospitals have been prevented from refusing people emergency care, regardless of their insurance status. This law effectively turned hospitals into “insurers of last resort.” While there were some minimal provisions to reimburse hospitals for low-income patients who otherwise could not afford treatment, in previous research, Garthwaite found that each uninsured person costs local hospitals an average of $900 per year. Another study found that there was a decrease in uncompensated cared at hospitals in Medicaid expansion states versus nonexpansion states.

As the number of uninsured people dropped during the ACA, the burden on hospitals lessened. Garthwaite sees the continuous coverage provision as shifting the cost burden from the government back onto the hospitals—a move that he expects hospitals will fight tooth and nail.

“Hospitals are sort of the last defense for the ACA right now,” he says. “They are the ones who have the political muscle to try and save it, and the real financial incentive to do so.”

Block-Granting Medicaid Dollars to the States

The new Republican bill aims to reduce waste in Medicaid by providing block grants to states. Rather than administering Medicaid at the federal level, the AHCA would give each state a capped dollar value for each Medicaid enrollee annually.

Garthwaite explains that this change reforms the program without anyone immediately losing coverage, and in theory, allows for improved efficiency. “I'm sympathetic, broadly, to the idea here that the insurance program in California and the insurance program in Mississippi probably should be very different. This is the reason that we have historically allowed waivers from federal Medicaid rules that states can use to experiment with novel delivery methods,” he says.

However, he believes that state governors have reason for concern: The current bill does not have a mechanism to increase per-capita caps when healthcare costs increase—and scheduled inflationary increases likely would not be able to fully respond to medical inflation or economic shifts that increase a state’s Medicaid costs. For example, states seeing an increase in the share of the Medicaid population that are disabled will lose out because, on average, disabled Medicaid recipients are more expensive to cover.

“At the end of the year, if they don’t have enough monies, then they've got to cut from something, or issue debt, or do other budgetary tricks to get their budget to balance,” says Garthwaite. “That’s something the federal government doesn't have to worry about.”

Regardless of the criticisms that the AHCA has met from a variety of sources, GOP lawmakers are moving swiftly to pass the legislation. Some lawmakers have stated a desire to have the entire legislation passed before the April congressional recess.

“There seems to be a belief that this legislation must be passed right away because the ACA is failing,” Garthwaite says. “This couldn’t be further from the truth. My work shows that the marketplaces are functioning like we would expect from a complicated, newly formed market.  Rushing to replace this existing framework—that currently provides insurance to over ten million individuals—can cause real harm. The AHCA as currently written will likely result in more than 10 million people losing insurance, with those losses concentrated among the poor and the sick.”