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What's Next For Obamacare Repeal: A Primer From Goldman And Citi

As reported earlier, after yesterday's surprising Senate GOP "victory", when it found the bare minimum number of votes to open debate on Republican Healthcare legislation, Republicans suffered an immediate defeat just hours later when the Senate voted soundly against (with 9 Republicans joining Democrats) a "Repeal and Replace" of Obamacare. Shortly, the Senate is expected to vote on a clean Repeal bill (it was originally scheduled for noon but was pushed back to 3:30pm) which, however, is also not expected to have the 51 votes necessary to be approved. There is still some hope that a scaled-down "skinny" bill will find the needed support, earlier in the day the Freedom Caucus said they are against a fully pared down bill, which suggests that there will likely be no progress on either repealing (and replacing) Obamacare nor passage of a Republican alternative.

So what happens next?

To answer that question, overnight Goldman's Alec Phillips released a report on the Health Care Debate, which it summarizes is "Hanging by a Thread." Here is what the current state of affairs is according to Goldman:

  • Surprisingly, Senate Republicans have prevailed in a procedural vote on health legislation, setting up a debate on changes to the House-passed bill and a vote on a final Senate proposal later this week.
  • The odds of an overhaul of the ACA remain low, in our view. There is a somewhat greater probability that the individual and employer insurance mandates could be repealed, though we believe the status quo is more likely to be maintained here, as well.
  • If the Senate manages to pass a health bill this week, the effort to reach a House-Senate compromise could overlap with the debt limit and spending authority deadlines at the end of September, further complicating both sets of issues.

And here are some key Q&As excerpted from the latest Goldman note:

Q: What happens next?

The Senate health care bill is being considered under the “budget reconciliation” process, which has special rules for debate. Specifically, debate is limited to 20 hours, not counting amendments, so no filibuster is possible. The Senate is likely to debate several amendments to the House bill, including those offered by Republican leaders and by individual senators. However, we note that congressional budget rules could prevent any amendments that reduce the budgetary savings in the bill to below the $133 billion in net savings CBO estimates the House bill would achieve. Once all amendments have been considered, the Senate will vote on the final bill, potentially late on July 27 or July 28.

Q: Now that debate has started, does this mean the Senate is likely to pass a health bill?

The outcome is unpredictable but in our view the effort looks more likely to fail. The two Republican senators who voted against the opening procedural vote seem unlikely to support whatever the final legislation is that emerges from this week’s debate. This would mean that all remaining Republican senators would need to support the final product. While this is clearly possible, it is not at all clear that there is any single approach that can win 50 votes at this point.

Q: What changes will the Senate vote on?

The Senate has already voted down its first amendment to the House bill. This would have replaced the House bill with the Senate Republican-authored Better Care Reconciliation Act (BCRA). The Senate looks likely to vote on several additional proposals over the coming days, including but not limited to:

  • Full repeal of the ACA coverage and tax provisions after a two-year delay, similar to what Congress passed and President Obama vetoed in 2015;
  • A proposal to provide states with greater flexibility to use Medicaid funds to provide coverage in the insurance exchanges; and
  • A so-called “skinny repeal” proposal that would strike only the individual and employer mandates and potentially the medical device tax.

The House-passed bill, known as the “American Health Care Act” (AHCA), could also be subject to a vote if none of the other amendments pass. We expect that in addition to the items listed above, senators will offer other amendments and that some of these will also come up for a vote, though few are likely to pass. Ultimately, the approach with the greatest chance of success appears to be repeal of the mandates while leaving most other aspects of the ACA in place. At this point, few other approaches appear likely to find sufficient Republicans support.

Q: What does all of this mean for ACA repeal?

Our base case remains that Congress will fail to enact a meaningful reduction in the subsidies or taxes established under the ACA. We believe there is little chance that an overhaul such as the AHCA or BCRA will become law, in light of concerns among centrist Republicans regarding repeal of the Medicaid expansion and subsidies under the ACA, and the unpopularity of the replacement proposals, even among Republicans.

Q: What about a so-called “skinny repeal”?

While the “skinny repeal” might face less resistance than the broader approaches, we are nevertheless somewhat skeptical it could become law. At earlier stages in the health care debate this year, we highlighted an approach targeting a few unpopular provisions like the individual mandate, rather than the entire ACA, as a possibility, albeit one that would only be considered as a last resort. In theory, such an approach would allow Republicans to claim that they had repealed an important aspect of the law without reducing insurance subsidies. Also, because the CBO has estimated that repealing the individual mandate would reduce the deficit by more than $400bn over ten years, it would easily satisfy the budgetary savings target, and some of the excess savings could be used to address problems created by the mandate repeal.

However, even the “skinny repeal” faces obstacles. First, like the broader repeal effort, it has been estimated to increase the number of uninsured. CBO estimates that the number of uninsured individuals would increase by 15 million individuals if the individual mandate is repealed; the effect of repealing the employer mandate is unclear but is likely to be small compared to the individual mandate. This is likely to be less politically controversial than estimates of the AHCA or BCRA, which would have increased the number of uninsured by 22 to 23 million people by 2026 according to CBO. However, repealing the individual mandate would reduce enrollment of younger and healthier individuals, thereby increasing average premiums for those who remain insured. CBO estimates premiums would increase by 20% as a result of adverse selection, though the actual cost to enrollees would likely rise by less, since ACA subsidies are tied to premiums and would also rise.

Q: What would this mean for other issues relevant to financial markets?

If the Senate approves health legislation this week, it would add further uncertainty to the upcoming debt limit and spending deadlines at the end of September. Congress must extend spending authority before the end of the fiscal year on September 30, and we expect that the debt limit will need to be raised at almost exactly the same time. In light of likely opposition to both efforts from some conservative Republicans and the need for 60 votes in the Senate for both matters, we have expected that both bills would pass with a combination of Republican and Democratic votes. If the debate over health care spills over into September as well, this could further complicate an already difficult set of fiscal deadlines, potentially raising the probability of a federal government shutdown and raising the risk that Congress cuts it extremely close in raising the debt limit.

We have expected incremental developments on tax reform over the next several weeks, but have not expected a formal proposal to be released until after the fiscal deadlines just noted are resolved in late September or early October. If the Senate manages to pass healthcare legislation, this would add to the list of reasons not to expect a detailed tax reform proposal until October or later.

* * *

Separately, according to Citi's Dana Peterson, with the door opened for new ideas on the AHCA, there are three possible alternatives that Republican Senators might pursue.

  • Repeal Now, Replace Later – This is an old idea that would repeal Obamacare, but set the effective date several years into the future.
  • Bipartisan Obamacare Fix – Republicans would shift gears to retaining the main tenants of Obamacare, but work with Democrats.
  • Think Outside of the Box – Republicans may write new legislation or amend the House AHCA to shift control over public health care to state governments.

And while Citi notes that given the limited path forward for the AHCA itself, repeal now, replace later is the most likely of several alternatives for Obamacare overhaul near-term, however it does note that the Senate is looking for Alternatives in case all current options fail.

Here's Citi with what the path ahead looks like:

Republicans are now considering alternative options for Obamacare overhaul over the course of this week as it debates the House passed AHCA bill.

 

Repeal Now, Replace Later – This is an old idea that would repeal Obamacare, but set the effective date several years into the future. During this time, legislators would work to craft text to replace the bill. Republicans attempted a simple repeal two years ago, and also considered it again this January. The plan was disregarded in favor of proceeding with the AHCA that would repeal and replace substantial aspects of Obamacare. Currently, the idea is back en vogue: Obamacare repeal would be legislated now, but the law’s effective date would be post-dated for 2019, after the 2018 midterm elections. McConnell is leaning towards this option with the support of House Republicans, who passed a repeal-only bill this year.

 

 

 

Bipartisan Obamacare Fix – Republicans would shift gears to retaining the main tenants of Obamacare, but work with Democrats to stabilize the health exchange markets, guarantee insurance payments for care for the poor, and fix other troubled elements of the existing framework. This week, both Democrats and Republicans will be allowed to propose amendments to the Obamacare overhaul process. A bipartisan solution is gaining traction among Republicans (e.g. McCain; McConnell, himself, has floated this idea) and Democrats (Schumer).

 

Think Outside of the Box – Republicans may write new text or amend the House bill shifting control over public health care to state governments. Senators Graham (R-SC) and Bill Cassidy (R-LA) propose converting some revenue generated by Obamacare tax provisions and redirecting Medicaid funding into block grants that would be delivered to the States to finance affordable health care options. This would be a similar regime to the Welfare Reform Act of 1996. Unless amended to the House AHCA bill that was passed, this new legislation would not be executed via reconciliation, and would require 60 “yes” senate votes to avoid filibuster and ensure passage. Key Graham-Cassidy proposals:

  • Insurance mandates for individuals and employers repealed.
  • Requirement to cover pre-existing conditions retained.
  • Tax on medical devices repealed. Tax on high earners retained.
  • Federal Medicaid funding to the states would continue to grow, adjusted for inflation. More flexibility for the states in spending Medicaid money.
  • Federal money for health care distributed as tax credits, subsidies, health savings account premiums and other ways as the states dictate.

 

Of the possible options, repeal now, and replace later is the most likely in our view. Importantly, this scenario would be consistent with our longstanding expectation that repealing and replacing Obamacare would not be possible ahead of the 2018 midterm elections. While Republicans were swept into office partly on promises to gut the Obama era legislation and replace it with a cheaper and more flexible alternative, voters have since soured on the existing strategy that would leave many of them vulnerable to losing access to health care obtained under Obamacare. Indeed, 60 percent of persons that have benefited from Obamacare live in states that voted overwhelmingly for Republicans in the 2016 elections.

 

As Republicans explore other options, the death of repeal/replace would not occur without collateral damage to GOP aims for comprehensive tax reform. Republicans chose to address Obamacare repeal and replace ahead of tax reform for two reasons: (1) belief that it would be a simple task; and (2) because repeal and replace would help with the scoring of tax reform. Obamacare repeal and replace would both lower future outlays and the expected revenue base, both of which are useful for paying for proposed tax cuts under the Byrd Rule. The Byrd Rule prohibits changes in tax and mandatory spending laws that would increase federal budget deficits beyond the window (e.g. 10 years) specified by the reconciliation instructions. The AHCA facilitates tax reform in the following manner:

  • Outlays – If we consider the latest CBO scoring of the AHCA, repeal and replace would have reduced Medicaid outlays by $756 billion over the next decade. This is a sizable amount of savings that could be credited to offsets to tax cuts.
  • Revenues – Repealing many of the Obamacare taxes suggested by the most recent Senate AHCA revisions would have lowered the base of expected revenues by $210 billion over ten years. If the base of future revenues is lower, then Republicans would have to find fewer offsets (e.g. revenue generators elsewhere) to pay for proposed tax cuts to avoid violating the Byrd rule.

Citi's Concluding Thoughts: "The failure of the Senate to salvage the House passed AHCA bill so far, means that other potentially more difficult avenues for improving Obamacare will have to be taken. These options will probably be lengthier, require bipartisanship (i.e. Republicans risking 2018 votes from the base by reaching across the aisle to Democrats), and a tougher slog towards comprehensive tax reform, in our view"