Are the Affordable Care Act's days numbered? According to the campaign talk of President-elect Donald Trump, it's just a matter of time before Obamacare, as the ACA is more commonly known, is repealed and replaced.
Obamacare's issues in a nutshell
The reason Obamacare has become such a target in recent months is the rampant premium inflation associated with the program. Obamacare was designed to be transparent and encourage competition among insurers, but it has suffered a couple of possibly fatal flaws along the way.
For instance, the Shared Responsibility Payment, or SRP, really isn't working as planned. The SRP is the penalty consumers pay come tax time for not purchasing health insurance as required by Obamacare's individual mandate. In 2016, the SRP is the greater of $695 or 2.5% of your modified adjusted gross income (MAGI). The Kaiser Family Foundation (KFF) has estimated that the average SRP in 2016 should be $969. While $969 is far from pocket change, it's also a far cry from the average cost of a bronze level plan. In 2015, per KFF, the average national bronze plan cost nearly $2,500 a year, and it's gone up notably since then. As long as the SRP and a low-cost bronze plan are miles apart in terms of cost, then critically needed younger and healthier adults who don't visit the doctor often -- and are often profitable for insurers -- aren't likely to enroll.
The risk corridor has also been a disappointing failure for Obamacare. The risk corridor is a type of risk-pooling fund that took the excess profits of some ACA insurers and redistributed them to money-losing insurers that had priced their premiums too low. The problem is that not enough insurers were profitable, leading to just $362 million being paid out of the $2.87 billion requested. About three-quarters of Obamacare's approved low-cost healthcare cooperatives have shuttered their doors over the past year, and a number of national insurers have greatly reduced their coverage for the upcoming year.
The result of these two failures is rapidly rising premium inflation. In the upcoming year, the second-lowest cost silver plan (known more commonly as the "benchmark plan") is slated to rise 25% nationally, which is a major dent to the affordability of Obamacare.
Trump's seven-point solution
The solution for President-elect Trump is his seven-point healthcare plan. Trump's healthcare plan has been covered in greater detail previously, but here are some of the general ideas of what he would like to see happen.
- Repeal Obamacare
- Allow consumers to purchase health insurance across state lines
- Full premium tax deductions
- Promote Health Savings Accounts
- Require insurers to be transparent on pricing
- Block grant Medicaid to the states
- Remove barriers to entry for overseas drug providers
In many respects, Trump's healthcare proposal offers some intriguing ideas. For example, block-granting Medicaid to the states should help save money and allow Medicaid dollars to stretch farther. The federal government is never going to have as good a bead on where Medicaid dollars should be spent as the states and counties do, so block-granting could make a lot of sense.
Furthermore, giving Americans the opportunity to purchase health insurance across state lines could be a boon for rural Americans stuck paying exceptionally high premiums. Consumers who live in sparsely populated areas of the country with minimal medical care or specialty care access are a liability for health insurers, so they tend to charge these consumers higher premiums. Trump's healthcare proposal could help lower premium costs for rural Americans.
Trump's healthcare plan could be a disaster for America's healthcare system
However, Trump's healthcare plan could also be devastating to America's healthcare system. Here's how it could set the healthcare system back.
Perhaps the biggest issue with Trumpcare is that there's nothing stated in his plan about how he'd deal with the roughly 21 million people currently receiving federal assistance via Obamacare's Advanced Premium Tax Credit, cost-sharing reductions, or Medicaid expansion. It's possible that these estimated 21 million people could lose their health coverage if Trump's healthcare plan becomes law. That's terrible news for insurers like Anthem (NYSE:ANTM), which specifically angled their business to court Medicaid expansion enrollees, and hospitals like HCA Holdings (NYSE:HCA), which have benefited from setting aside less money for doubtful revenue collection thanks to lower uninsured rates. If uninsured rates rise, uncollected revenue is likely to rise for hospitals, too.
Another issue with Trumpcare is that it could mean a considerably larger onus of costs passed on to consumers who receive their health insurance through the workplace. Trumpcare could create one large healthcare domino effect. If Obamacare is repealed and millions of Americans lose their health insurance, hospitals could be on the line for covering the medical care of uninsured folks should they need it. In response, hospitals could charge insurers more to cover their rising doubtful account provisions. Insurers could respond by charging employers more to counteract the higher expenses they face from hospitals. And finally, employers could pass along these expenses to their employees via higher deductible plans that require the employees to pay more out of pocket.
Trumpcare also tends to cater to wealthier individuals with its full premium tax deductions. Because the rich can afford more all-encompassing health plans, they receive a seemingly larger tax break than lower-income consumers who may only be able to afford plans with minimal coverage. What's more, even full tax deductions may not be enough incentive for lower-income Americans to enroll.
Trump's proposal to allow Americans to purchase prescription drugs overseas also does little to address the underlying causes of why prescription drug prices are soaring, such as long patent exclusivity periods. While it's possible that consumers could find better deals in Canada, massive reforms would be needed at the Food and Drug Administration for this plan to make sense.
Ultimately, Trumpcare could spike the uninsured rate, have little effect on drug price inflation, and lead to costlier insurance due to the aforementioned healthcare domino effect.
Understandably, we should also take into account that nothing is set in stone at this point. Trump still need to get his proposals passed through Congress before they'd become law, and it's possible that a Republican-led Congress may not see eye-to-eye with Trump. Nonetheless, if Trumpcare is passed in its current form, it could be a disaster for America's healthcare system.