Republicans’ Plan To Redirect Obamacare Subsidies Takes Shape

U.S. House Speaker Mike Johnson, a Republican from Louisiana, says that during the current federal government shutdown that has been driven in part by Democrats’ insistence that Affordable Care Act tax credits be extended, Republicans are working on a healthcare plan. Photographer: Daniel Heuer/Bloomberg

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Republicans now speak of having a plan, not just President Trump’s “concepts of a plan.” In a bid to end the historically long federal government shutdown, Republicans are pitching a proposal to send money that would be appropriated by Congress directly to households rather than by way of a one-year extension of enhanced Affordable Care Act subsidies.

As outlined by Senator Cassidy (R-LA), the money granted ACA enrollees could be deposited by them into flexible-spending accounts rather than having the funds disbursed to insurance companies which then manage people’s healthcare benefits.

On 60 Minutes, President Trump said Obamacare is “bad healthcare at far too high a price.” He summarized the Republican proposal as redirecting money intended for insurance companies operating on the ACA exchanges to being “sent directly to people.” The president provided no details of how this would work.

But from comments made by Senators Cassidy, Johnson (R-WI) and Scott (R-FL), it appears they’re favoring expansion of an already-existing system of health savings accounts. Frequently touted in conservative circles as a “consumer-driven” alternative to traditional health insurance, HSAs emerged in the 1990s—first called medical savings accounts—in which individuals with high-deductible health plans could set aside money tax-free for medical expenses. Contributions to the accounts are tax-deductible. And earnings from savings are tax-free, in addition to withdrawals for qualified medical expenses being tax-exempt. These include a wide range of out-of-pocket costs, such as for prescription drugs and dental care.

The accounts have formally been known as HSAs since passage of the Medicare Prescription Drug, Improvement, and Modernization Act in 2003. By the end of 2022, there were over 35 million HSAs.

HSAs have been especially helpful for wealthier individuals in higher marginal tax brackets. By contrast, these accounts provide little help for people with lower incomes, particularly those who already struggle to afford healthcare, leaving them with nothing to spare for HSAs. Medical debt is a major problem for tens of millions of low- and middle-income Americans, owing partly to large healthcare bills incurred as a result of expensive care for chronic conditions.

Moreover, for most of these folks, tax benefits are minimal, given that they’re in much lower tax brackets.

During the presidential campaign last year, Vice President Vance described “deregulating the insurance market,” specifically the one governing the ACA exchanges. In an effort to reduce the high costs to the government of the program as well as the premiums paid for by ACA enrollees, Vance spoke of separating people who are healthy and those who have health conditions into different risk pools with distinct plans. The former could enroll in relatively inexpensive high-deductible plans and put away money into HSAs. Those with (chronic) health conditions could sign up for more expensive, comprehensive plans.

A problem with this set of ideas is that it rolls back protections for people with pre-existing conditions by driving up their costs considerably. Premiums could rise to levels that are out of reach. In turn, this would mean more people who are uninsured, yet who have the greatest need for insurance.

But perhaps more importantly, the notion of differentiating markets by risk elides a fundamental objective of (social) insurance, which is to pool risks across the population. This implies at least some degree of cross-subsidy; from healthy to sick, young to old and wealthy to poor. We observe this in all insurance markets, but it is especially pronounced in those connected to public programs.

Here, having insurance helps to manage the financial risks from unexpected events such as illness. By transferring these risks to insurers, enrollees can protect themselves from some ordinary medical expenses, but also potentially catastrophic financial losses.

Public insurance programs such as Medicare and Medicaid, and the ACA sector, arose in part because there was either no market or just a very limited one for vulnerable persons who needed coverage. In each instance, the federal government provided an insurance guarantee.

The ACA has not brought down healthcare costs. And, similar to the commercial, employer-sponsored market, premiums have risen substantially over the years. But a blinkered analysis of the ACA strictly from a cost perspective ignores benefits that extend beyond the subsidies under discussion in Congress.

Signed into law in 2010, the ACA expanded insurance access to the Medicaid program, barred insurers from denying coverage or hiking premiums for people with pre-existing conditions, mandated inclusion of a wide range of essential services, eliminated annual and lifetime maximums, required that all health plans offering dependent coverage allow young adults to stay on their parent’s plan until they reach the age of 26, and created federal and state exchanges for health insurers to offer coverage to people not enrolled in Medicare or Medicaid and without employer-based insurance.

Every wealthy, industrialized country has its own variation of a social compact on healthcare that at a minimum extends to society’s most vulnerable, which include the elderly, disabled and poor. Countries in Europe—independent of whether they have a single- or multi-payer system—often invoke a solidarity principle, in which the healthier and wealthier take on some of the financial risk of those who are worse off.

Conversely, ensuring population-wide healthcare access isn’t ingrained in the United States.

Yet, in certain sectors of the healthcare system, including the ACA, there are elements of a solidarity principle at play. If implemented, a Republican plan that is taking shape, in which Obamacare subsidies would be redirected to individuals who can use them for HSAs, could erode the foundation of the Affordable Care Act.