On Friday morning, in the aftermath of Trump's surprising victory forcing the GOP Healthcare bill repealing Obamacare through the House, we noted that Goldman's DC analyst Alec Phillips responded that, somewhat paradoxically, the impact on Trump's broader economic agenda would actually be more adverse than most economist and pundits expected, stating that "the main effect of House passage is to delay the consideration of tax legislation, which looks even more likely than before to be delayed until 2018."
In a subsequent, and far more detailed note titled "Health Reform Gains Momentum as the Rest of the Agenda Slows", over the weekend Phillips has provided an extensive explanation why he believes that the passage of Trumpcare will likely adverse implications on Trump's tax policy timeline.
Here is the summary from the Goldman analyst:
- House Republicans have passed their American Health Care Act (AHCA), moving repeal of the Affordable Care Act (ACA) one step closer to reality. However, while the House vote was necessary for ACA repeal, it is far from sufficient, and the process is likely to become harder after this first step.
- House passage increases the likelihood that health legislation will be enacted this year, though it still faces several obstacles. In the meantime, uncertainty regarding insurance regulation and subsidization could lead to lower enrollment and plan participation in the existing system, which has already struggled with weaker than expected enrollment and declining plan options.
- In isolation this legislative victory is likely to be interpreted as bullish for other aspects of the agenda, including tax reform, as it demonstrates that congressional Republicans may be able to form a working majority on controversial issues after all.
- However, the revival of health legislation, which could at least take a few more months to conclude, could substantially delay consideration of the remainder of the legislative agenda. This further reduces the likelihood that Congress will enact a tax cut before year-end, in light of the additional steps that would be necessary once the health bill has been enacted.
- While we continue to believe that tax legislation is likely to be enacted in early 2018, further delays could push consideration of tax legislation too close to the upcoming midterm election, reducing the likelihood that tax legislation is enacted in the next two years.
Here is his detailed breakdown why "A Longer Health Debate Means a Later Tax Debate"
Market participants, even those with no direct exposure to the health sector, have been watching the health care debate closely for signals regarding the rest of the political—and particularly, fiscal—agenda. However, in our view House passage of the AHCA sends a decidedly mixed signal for tax reform.
All other things being equal, the fact that House Republican leaders and the White House were able to assemble a majority in the House to support the AHCA suggests that it is more likely than previously expected that congressional Republicans might also be able to form a working majority on other controversial issues like tax reform. The current version of the AHCA also repeals roughly $1 trillion of taxes enacted to fund ACA subsidies. While these taxes are not directly related to tax legislation expected later this year, repealing these taxes in separate legislation would reduce the pressure on lawmakers to repeal some of them in tax legislation. Repealing these taxes is not essential to the tax reform effort, but makes it slightly easier.
That said, the direct effect of AHCA passage in the House is to likely delay the tax debate. As we have pointed out in the past, the rest of the fiscal agenda cannot move forward until the health issue is disposed with, either by enacting health legislation or, if health legislation stalls, through a decision by congressional leaders and the White House that they will postpone further consideration of health legislation in order to move on to other aspects of the agenda. This is because Republican leaders have decided to pass the health bill and the tax bill using the “reconciliation” process, which protects legislation from filibuster in the Senate and allows it to pass with only 51 votes—i.e., potentially with only Republican votes.
However, only one tax bill and one spending bill can be passed under the reconciliation process in each budget cycle, so congressional leaders decided earlier this year that the health bill would be passed first, followed by the FY2018 budget resolution, which would include a second set of instructions to pass tax legislation under the reconciliation process. Only after the FY2018 budget resolution passes would the actual tax legislation itself be considered by the House and Senate.
Until this week, the latter had looked more likely, as the House had appeared unlikely to pass the AHCA even after modifications, and prospects in the Senate looked even dimmer. Instead, Republican leaders now appear likely to pursue health legislation for a while longer. In the Senate, Finance Committee Chairman Orrin Hatch, whose committee will oversee both the health and tax legislation, said this week that Senate Republicans would like to finish the health bill by the end of July. While this seems like a reasonable goal, this issue has tended to take up more time than expected so far, and the risk is that the remaining steps take longer as well. Moreover, with congressional recess scheduled for the month of August and a contentious debate over spending and the debt limit likely in September and/or early October, the timeline suggests that tax legislation might not see the light of day until well into Q3 if not Q4, and that enactment is unlikely before Q1 2018.
Healthcare Before Taxes
This drawn out timing raises risks to the enactment of tax legislation, in our view. Spending the time and energy that is likely to be required to pass health legislation will reduce the political momentum for a tax bill. While there is no obvious political reason that a simple tax cut could not be enacted in early 2018, further delays could push consideration of tax legislation too close to the upcoming midterm election, reducing the likelihood that tax legislation is enacted in the next two years. We continue to believe that a tax cut is more likely than not, but as the debate on health legislation drags on the risks to this outcome have become higher in our view.
Some other big picture considerations from Goldman, looking at the state of healthcare "four months later"
The House passed the American Health Care Act (AHCA) on May 4, by a 217-213 vote. The vote occurred nearly four months after the House passed the initial instructions calling for passage of ACA repeal legislation. Over that period, the legislation changed several times; the approach House Republicans were initially expected to take was to pass two pieces of legislation, the first repealing most of the ACA, with a delayed effective date, and the second replacing it with a new system of benefits. If considered separately, this would have allowed for quick passage of repeal legislation and more careful consideration of the “replacement” bill at a later date. Various Republican lawmakers resisted this strategy, and Republican leaders instead opted for a single-bill approach. While this ultimately satisfied a majority of the House, it also took four months to accomplish. The remainder of the process might take at least this long.
Among the most important changes the AHCA makes are the repeal of the ACA’s expansion of Medicaid eligibility to adults with income up to 138% of the federal poverty level (about $34,000 per year for a family of four) and the shift of tax credits based on income and average premiums to a credit adjusted solely for age. The legislation would also change regulation of the individual insurance market, by allowing greater variation in premiums by age and the potential for premium variation by health status for individuals who do not maintain continuous coverage. The various changes take effect at different points over the next few years, with different transition periods, as shown in Exhibit 1.
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As noted previously, while ACA may have passed the House, now comes the hard part: the Senate:
Although House passage keeps the ACA effort alive, it might not move it very far forward. Senate passage is apt to be harder than House passage, in our view, for political as well as procedural reasons. The main political challenge is simply that 50 of 52 Republicans will need to support the bill in the Senate, and several have already raised concerns with the House-passed legislation. Among the political challenges:
- Major changes might be needed to bring centrist and blue-state Republicans onboard: Republicans representing states that voted Democratic in the last presidential election (or were very competitive) may have reservations regarding the bill. Sen. Collins of Maine has indicated opposition to the House-passed bill, for instance, citing the structure of tax credits, insurance regulatory changes, and the effect on Medicaid (Maine has not expanded its Medicaid program under the ACA).
- Expansion-state Republicans will probably try to preserve Medicaid funding: 20 of the 52 Republicans in the Senate represent states that expanded eligibility for the Medicaid program. Four Republican senators—Sen. Gardner of Colorado, Sen. Murkowski of Alaska, Sen. Portman of Ohio, and Sen. Moore-Capito of West Virginia—have opposed an earlier version of the House legislation over its Medicaid cuts (the latest version does not change these provisions substantially). This is likely to be a critical consideration for some Republican senators whose states expanded Medicaid, as this was the primary source of coverage gains under the ACA. Projected coverage losses (Exhibit 2) have been one of the most controversial aspects of the legislation, and the publication of new estimates in the next couple of weeks may create additional political friction in the Senate.
Coverage Would Revert to Pre-ACA Levels
These political challenges might be overcome by substantial modification to the legislation, though this would risk losing support from conservative senators who have already expressed reservations about the amount of spending that would be maintained under the legislation, like Sen. Paul of Kentucky. However, even if Senate Republicans can agree in principle on how to modify the House’s bill, they also face two procedural obstacles:
- The Byrd Rule in the Senate: The AHCA is being considered under the reconciliation process, which affords it special procedural protections in the Senate, namely that it cannot be filibustered and thus requires only a simple majority to pass. With little prospect of Democratic support, this is essential to passage. However, with these privileges come costs; the Byrd rule in the Senate prohibits policy changes from inclusion in reconciliation legislation that are primarily non-budgetary in nature. In the context of the AHCA, this could pose a challenge for the changes to insurance market regulation in the House bill, including those that were central to winning support from conservative Republicans in the Freedom Caucus.
- Budgetary restrictions: The House-passed legislation was estimated to reduce the deficit by roughly $150bn over ten years before the latest round of changes were made. Congressional budget rules prohibit the Senate from changing the House-passed legislation to produce less savings. This could make reaching consensus more difficult, since several Senate Republicans will want to add back Medicaid funding or other health insurance subsidies. One solution to this would be to delay the repeal of the ACA taxes by a few years to allow for greater spending without reducing the net savings under the bill, but going too far in this direction could lose the support of conservative Republicans in the Senate and could make a compromise with the House more difficult.
Beyond the need to reach agreement in the Senate, Republican congressional leaders and the White House will also need to broker an agreement between the House and Senate on a single final version that both chambers can agree on. This is likely to prove to be the most difficult part of the process, given differences between the Freedom Caucus in the House and centrists in the Senate.
Finally, Goldman's take on "The Shape of Things to Come"
Given these political challenges, Republican leaders might consider alternative approaches to address the ACA. The seeds of a potential compromise among House and Senate Republicans are visible in some recent Republican proposals:
- State flexibility: The recent compromise in the House allows states greater flexibility in certain areas; states would be able to opt in to an alternative block-grant structure for Medicaid, which allows greater flexibility in benefit design, and to opt out of certain insurance rules under the ACA, like the prohibition on pricing premiums based on health status (the current legislation would continue to prohibit this for applicants who maintain continuous insurance coverage). State flexibility could in theory be expanded to two other areas to broaden support for the legislation: first, states could be allowed a greater role in administering the subsidies for insurance in the individual market. The Cassidy-Collins plan in the Senate, for instance, would give states a choice of maintaining the current system of tax credits or moving into a new system based on subsidized health savings accounts. Second, conservatives and many Republican governors have supported allowing states more flexibility in managing their Medicaid programs. It is conceivable that a compromise between centrist and conservative Republicans could be reached by preserving a greater share of existing subsidies for health insurance (including the expansion of the Medicaid program under the ACA) but allowing states a greater role in determining the structure of these benefits. Of course, such a compromise could be constrained by some of the procedural issues noted earlier.
- Shifting risk: A common aspect of recent Republican health proposals has been to shift financial risk for health cost growth from the federal government to individuals enrolled in federal health programs and/or to state governments that share the cost of the Medicaid program. Medicare reform efforts over the years largely followed this model, as does the AHCA. It provides a tax credit for health insurance that varies by age but grows with medical CPI plus 1pp, rather than with the increase in the average health premium as the current subsidy does. It also would shift states to a per-capita or block-grant system that would cap the federal government’s exposure to increasing costs in these areas. The final negotiations on the House healthcare bill hinged on the distribution of risk between individuals and the government, and this looks likely to continue to be modified.
- Delayed implementation: The current legislation delays repeal of the Medicaid expansion until 2020 and allows current expansion enrollees at that point to continue coverage. Centrist Republicans seem likely to push for an even longer phaseout. It also appears possible that they could seek to slow changes to the refundable tax credits for insurance in the individual market. This could actually return the debate closer to where it started, when congressional Republican leaders planned to repeal the ACA but would have delayed the effective date by several years, expecting to make additional changes in the interim.
If comprehensive legislation fails, Republicans might instead opt to target a few unpopular provisions of the ACA instead. One provision might be the mandate on individuals to enroll in health insurance or face financial penalties. Repealing this provision would have the benefit of simplicity and could probably win broad Republican support. However, it would produce much less budgetary savings than the current legislation and would still probably substantially increase the projected uninsured population. Since it would not reduce spending enough to offset the repeal of nearly the $1 trillion in ACA taxes that the current legislation repeals, this option might be contemplated as a last resort if broader legislation stalls but looks unlikely to come up in the near term.