The Bill to ‘Repeal and Replace’ Obamacare May Break the Individual Health Insurance Market

08th Mar 2017

Congressional Republicans have unveiled their bill to ‘repeal and replace’ Obamacare.  The bill includes provisions that would adversely affect older Americans and place financial strains on states and hospitals, and may even break the individual health insurance market.  On the plus side, it appears to have little political support, so may be ‘dead on arrival.’

Along with my fellow health policy geeks, I watched with a combination of humor and horror when, last week, President Trump said “Nobody knew health care could be so complicated”.  Well, no, that’s not true.  Actually, all of us who have been paying attention to the topic knew exactly how complicated it could be.

The Republican bill to ‘repeal and replace’ Obamacare, known as the American Health Care Act (AHCA), was made public on Monday evening this week.  As a self-respecting health care consultant with a blog, I am compelled to address it.  I do not feel the need to summarize the bill since that has already been done adequately by most of the major news outlets that care to cover such things, including the New York Times, Washington Post, Politico, and Vox, among many others.  Nor do I feel inclined to gauge the relative merits of the AHCA and Obamacare by their page counts, which appears to be the only argument being made so far by the Trump administration in favor of this new bill.

Although it may be ‘dead on arrival’ based on objections from conservative Republicans since it does not actually repeal the ACA, but largely maintains the structure and makes some internal adjustments, or due to objections from AARP, I expect that something like this bill is likely to be one of the main points of discussion regarding revisions to Obamacare under this administration.  Therefore, and nonetheless, I will focus on three aspects of the new proposal that I feel have been overlooked and/or underemphasized – 1) that the shift to age-based rather than income-based subsidies will adversely impact older Americans; 2) that the repeal of taxes will lead to reduction in federal Medicaid spending, pushing the burden onto state and local governments, and the safety net; and 3) that the proposed repeal of the individual mandate and shift in the subsidy approach will lead to adverse selection against the individual market.

Decrease in Affordability for Older Americans

The first structural issue in the AHCA that I will discuss is the mismatch in costs and subsidies for the age brackets.  The Affordable Care Act (ACA; “Obamacare”) prohibited rate-setting based on health status, but did allow for some rate variation based on age, permitting health insurance companies to charge their oldest applicants no more than 3 times the premium charged to their youngest applicants (i.e., ratio of premium for youngest to premium for oldest of 1:3).  The AHCA changes the permitted ratio to 1:5, meaning that the premiums offered to the youngest applicants are likely to go down and the premiums offered to oldest applicants are likely to go up.  At the same time, the AHCA changes the premium subsidy structure from one based on income as directed by the ACA, to one based on age.  Notably, however, the range in subsidy is from $2,000 per year for a younger person, up to $4,000 per year for an older person.  In other words, a health insurance company offering coverage through the new individual marketplace will be able to charge its oldest members 5 times the amount it charges its youngest members, but the government-funded subsidy for the oldest members is only twice what it is for the youngest members.

The American Association of Retired Persons (AARP) commissioned a study recently that examined this sort of policy change and determined that the premium charged to the oldest Americans would rise by over $3,000 per year if the permitted range of premiums offered by age for the individual marketplace were to shift from a 1:3 ratio to a 1:5 ratio.  As such, the AHCA’s premium subsidy of $4,000 per year barely offsets the increase in premiums implicit in the ratio shift for the oldest potential members, leaving little room for it to increase affordability.  As such, this combination of program features appears likely to significantly decrease affordability for older Americans.

Medicaid Impact

The second structural issue that I’ll discuss is the likely decrease in federal Medicaid spending due to decreased federal revenue.  Despite the rhetoric and some public perception, the ACA was projected to decrease the budget deficit.  While it spent new money, it also decreased spending in other areas and increased revenues through new taxes, some directly related to the health care industry, others less so.  The AHCA repeals many of the ACA taxes, cuts, and expenditures, and establishes its own new expenditures, but does not establish any new taxes.  As such, if the AHCA is to be fiscally neutral with respect to the ACA, it will need to include new cuts.  One of the only potential sources of cuts at the necessary scale within the bill is from the Medicaid reforms also included within AHCA.

The AHCA includes a significant transformation in the way that the federal government funds the Medicaid program from a traditional entitlement to a program with a per-capita funding cap.  Although the details are relatively slim at this point, it can reasonably be inferred that one of the primary purposes of such a shift is to reduce federal outlays.  As such, if the “unfunded” expenditures in the AHCA are to be balanced by cuts to other programs, and Medicaid is one of the only potential targets of such cuts in the bill, then the net impact will be a shift of costs to state and local governments and taxpayers, and to the safety net, including hospital uncompensated care (which gets redistributed throughout the health care system anyhow).

Adverse Selection

The third structural issue in the AHCA that I’ll discuss is the possibility that the changes to the individual health insurance market regulations and subsidies may interact to create significant adverse selection against the market.  The major factors influencing the decision of an individual to purchase health insurance on the non-group (individual) market are income, price, and health status.  Higher income individuals are more likely to purchase non-group health insurance than lower income individuals.  All individuals are more likely to purchase non-group health insurance when the price is lower.  Perhaps most importantly with respect to the stability of the market, individuals with higher expected health care costs are more likely to purchase health insurance.

Individuals have reasonably accurate expectations as to their future health care costs.  Individuals who know that they have chronic conditions or have reason to believe that they will need health services will be more willing to pay higher prices for health insurance.  It is this dynamic that leads to the possibility of adverse selection.  Given the high cost of health care, health insurance markets only work when plenty of low-cost people are enrolled and paying premiums.

These two dynamics – that people who expect to have higher costs are willing to pay more for health insurance, and that health insurance markets only work when plenty of low-cost individuals are in them – are what led to the market reforms of Obamacare.  Prior to the ACA, states generally permitted health insurance companies operating in their non-group markets to price their products and make offer decisions based on health status.  This meant that generally only relatively younger and healthy individuals were offered health insurance by the market.  States that had tried to prohibit rate-setting or issuance decisions in their individual markets based on age or the presence or pre-existing conditions generally saw their individual health insurance markets implode, with rampant adverse selection against the market leading to a “death spiral” (i.e., only sicker, more costly individuals purchase insurance, leading to higher premiums, leading to only the highest cost individuals continuing to purchase, etc. until nobody can afford the coverage, the pool gets too small, and the carriers leave the market).

The policy choices included in the AHCA seem likely to result in much more adverse selection against the non-group market than is occurring under the ACA.  Keeping in mind that the key to avoiding adverse selection is having plenty of healthy people in the market, the removal of the individual mandate and the shift to age-based rather than income-based subsidies is likely to result in fewer healthy individuals participating in the market.  At the low end of the age scale, the subsidies of $2,000 per year may effectively offset the full cost of insurance for the youngest enrollees, but this population has generally shown a disinterest in the health insurance market and may be under-motivated to enroll at any price, absent a penalty.

At the high end of the age scale, as was previously discussed, the premium subsidy is only marginally greater than the anticipated increase in premiums due to the increase in the age-related premium ratio.  Thus, one would expect that, moving up the age range, health status will increasingly drive enrollment decisions, leading to adverse selection against the market.  The ultimate consequence of this adverse selection could be the withdrawal of all carriers from the non-group market.


The AHCA proposes shifting subsidies in the individual health insurance market from an income basis to an age basis.  At the same time, it proposes increasing the allowable range of premiums charged by health insurance carriers based on age.  These policies will combine to decrease the affordability for older Americans.  In addition, if the AHCA is to be budget-neutral with respect to the ACA, it appears likely that cuts will be required in state Medicaid funding.  Furthermore, with the decoupling of subsidies from income, it appears likely that the non-group market will become subject to adverse selection, and could even fail.  It seems like everyone has found something to dislike in the bill, but beyond the partisan bickering and debates over policy alternatives, it appears likely that this bill, if enacted, would adversely affect older Americans, put financial strain on states and hospitals, and possibly even break the individual health insurance market.

This article originally appeared on  Stephen Palmer, PhD is the Founder and Principal of Waterloo Research and Consulting, an Austin-based consulting firm that helps organizations navigate the intersections of health care, technology, and government.  Dr. Palmer can be reached at