Trump’s Plan to Cut Federal Health Care Spending

Proposals by President Trump and other Republicans would sharply reduce spending for Medicaid, health insurance subsidies and medical research.

By Jeff Atkinson | Fall 2017 | Reform Recap

 

Stethoscope wrapped around hundred dollar bills

The plans of President Trump and congressional Republicans for reducing health care spending are a work in progress. Republicans prioritized tax cuts for people with high incomes, as well as increased spending for defense and border protection. As part of the process, they looked for areas in which to reduce spending. Social services and health care are among the areas likely to take the biggest hits.

Medicaid spending

The largest potential reduction in health care spending is from the Medicaid program, which serves low-income people. Earlier this year, the American Health Care Act (introduced in the House) and the Better Care Reconciliation Act (introduced in the Senate) would cut Medicaid.

At the time of this printing, the Congressional Budget Office estimated that the most recently introduced act (the Senate version) would cut Medicaid spending by $772 billion over the next 10 years.

The reductions in Medicaid spending would result from having fewer people enrolled in Medicaid and from changes to the funding formula for Medicaid. Currently, federal payments to states for Medicaid are open-ended. The more a state spends insuring its people, the more the federal government reimburses the states.

Under the Republican plan, states would receive fixed amounts that would not increase based on the scope of coverage provided by state Medicaid plans. The fixed amount would either be in the form of a block grant to each state or a limit on how much the federal government would pay per enrollee. Additional reductions in Medicaid spending could come from allowing states to reduce the benefits that enrollees receive.

Subsidies for health insurance

The second largest reduction in federal health care spending would come from elimination of the subsidies that have helped people purchase non-group health insurance. The subsidies were provided under the Affordable Care Act (also known as Obamacare). The Congressional Budget Office estimated that eliminating subsidies under the Senate’s Better Care Reconciliation Act would reduce federal outlays by $408 billion over 10 years.

According to the Congressional Budget Office, 9 million people received subsidies for insurance in 2017.

Instead of directly subsidizing payment of health insurance premiums, the Trump plan would give people tax credits when they purchase insurance. The Kaiser Family Foundation analyzed the impact of eliminating insurance subsidies and substituting tax credits and found that government costs would increase.

According to Kaiser, when insurance companies lose revenue from lack of federal subsidies for insurance, the insurance companies will raise premiums by an average of 19 percent. The increase in premiums will result in higher tax credits for those who purchase insurance, and, thus, reduce tax revenue to the federal government.

Kaiser estimates that added cost to the government by shifting from subsidies to tax credits would be $2.3 billion in 2018.

Cuts at NIH

President Trump’s proposed budget for 2018 cut $5.8 billion from the National Institutes of Health (NIH). That amounts to an 18 percent cut of NIH’s $31.7 billion budget. Tom Price, Secretary of the Department of Health and Human Services, said the cuts will be for “indirect” costs of research, such as payments that the department makes to universities to cover the administrative costs of running research programs.

Congress is likely to push back on the proposed sharp reductions in research spending.

Risk pools

Establishment of high-risk pools for sale of insurance is among the reforms considered by some Republicans. The pools become particularly important if the mandate for individuals to have insurance is dropped and if insurance companies are allowed more flexibility on setting rates, including basing rates on an individual’s pre-existing conditions.

In that circumstance, the cost of insurance is likely to become quite high or not be available for some individuals. A high-risk insurance pool would be a market of last resort. If the insurance pool is funded only by the insured’s premiums, people seeking insurance may technically have “access” to insurance, but they probably will not be able to afford it.

If the government subsidizes the insurance pool, insurance may be affordable, but it will cost the government more money. In this scenario, the government will have closed down some programs, only to have opened others—a strategy that may or may not save money.

Jeff Atkinson is a professor for the Illinois Judicial Conference and has taught health care law at DePaul University College of Law in Chicago.

 

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