One month after Goldman gave up on Trump being able to pass any major (or minor) tax package in 2017, overnight - in the aftermath of Senate GOP's deplorable failure to find the needed 51 votes to " repeal and replace" Obamacare- Goldman's Washington analyst Alec Phillips throws up his hands, and no longer believes that passage of Obamacare is possible.
In a note that looks at the current state of health legislation, titled appropriately enough "Nearing the End", Goldman summarizes that Senate Republican leaders have postponed the vote on health legislation that had been tentatively scheduled this week. A vote is possible in two weeks, but further delays are possible.
Phillips does note that there are still some arguments in favor of eventual enactment: Republicans will be under pressure to follow through on a long-standing political commitment, and the estimated deficit reduction and tax cuts in the health bill could be useful in passing tax legislation later. Fixing the existing program for the coming year will also be necessary.
However, he is skeptical and says that "these factors are likely to be outweighed by the political obstacles. Estimates of the potential increase in the uninsured population seem unlikely to improve substantially even after revisions to the bill. Public support for the effort is also weak, and intraparty divisions appear to pose too many obstacles. At this point, enactment of broad health legislation like the House passed or the Senate is contemplating seems unlikely."
That said, Goldman is not too worried about the implications of the Senate's failure, saying that "the prospects for passage should also be somewhat less important to broader financial markets than they might have been several months ago. The debate over health legislation is likely to end—either with enactment or a failed vote—by mid- to late July, allowing the rest of the budget process to proceed, eventually leading to consideration of tax legislation. In the less likely scenario that broad health legislation is enacted, there would be few near-term economic effects as most of the changes do not take effect until 2020."
Goldman's full note:
Health Legislation: Nearing the End
Markets are once again focused on the potential for a congressional vote on health legislation, this time regarding the Senate’s Better Care Reconciliation Act (BCRA). This is presumably due to the need to move beyond the health bill before tax legislation can be addressed, as discussed below, and because of the broader signal that passage of a health bill might send regarding the rest of the Trump agenda.
However, the effort to replace the Affordable Care Act (ACA) has been set back once again with the announcement that no vote will be held for at least another two weeks. At that point, there are three potential options:
- Passage: If Senate Republican leaders are able to muster a majority in favor of a health bill, the bill would move back to the House for at least one more vote. The outcome there would depend on the details of the final product, but a bill that can manage to win support of 50 of 52 politically diverse Senate Republicans would probably be able to pass the House and become law.
- Defeat: Major legislation is rarely rejected on the House or Senate floor, since congressional leaders usually know whether there is adequate support. However, it is clearly possible that this bill could end in a failed vote; if Senate Republican leaders determine that there is very little chance of ever coming up with an acceptable compromise, they might allow a vote against the bill to provide a more definitive end to the process and, possibly, as a way to pivot to a short-term bipartisan effort to stabilize the individual health insurance market for 2018.
- Delay: As of this writing, Senate Republican leaders have opted to delay the vote for at least two weeks, until the week of July 10. A delay could be interpreted as a sign that Republican leaders believe there is a chance of gaining support over the next two weeks for a modified bill. However, it might also simply signal that leaders are not quite ready to give up on the effort, even if they recognize that the odds of eventual enactment are low. Further delays cannot be ruled out, though we would be very surprised if the Senate debate continues past late July.
The situation is fluid but at this point our expectation is that the Senate will ultimately fail to pass broad health legislation similar to the House-passed bill or the recently introduced Senate legislation. While we see this as a fairly close call, our view is based on the following considerations:
- Coverage estimates: While it is certainly possible that the Congressional Budget Office (CBO) will estimate that the next iteration of the Senate proposal will increase the projected uninsured population by less than the 22 million increase it estimated would result under the most recent proposal, this seems unlikely to change substantially. Repeal of the individual mandate alone has been estimated to reduce coverage by 15 million, and the repeal of the Medicaid expansion and the cap on the future growth rate of the program would reduce coverage further.
- Public support: The Affordable Care Act (ACA) is much more popular than the pending legislation, and even among Republican voters views are mixed (Exhibit 1). One problem congressional Republicans face is that public sentiment regarding the ACA has shifted since the debate began, possibly because the public has become more aware of the coverage expansion under the ACA.
- Thin margins: Even with Vice President Pence casting the tie-breaking vote, 50 of 52 Republicans would need to support the bill. This means bridging the gap between the most conservative senators (shown at the top of Exhibit 2) and centrist Republicans (toward the bottom of Exhibit 2) and those representing swing states (to the left of Exhibit 2).
- Medicaid politics: 20 Republican senators represent states that have expanded Medicaid under the ACA. While many of them appear likely to support the bill, the proposed cuts have been difficult for some expansion-state Republicans to support, including Senators Capito, Heller, Murkowski and Portman.
Source: Federal Election Commission, Voteview, Goldman Sachs Global Investment Research
Of course, there are arguments in favor of eventual passage. These include:
Campaign commitments: After House Republican leaders postponed a long-awaited vote on their health legislation earlier this year, it had appeared that debate might turn to other issues on the agenda. However, the health effort was of such political consequence that Republican leaders ultimately returned to the issue. It is possible that congressional Republicans will continue to press the issue until health legislation is enacted, even if it takes a while longer. That said, our sense is that Senate Republican leaders like Sen. McConnell have a limited appetite for further debate on health care, as discussed below.
Fiscal benefits: The Senate health legislation has two potential benefits for the rest of the fiscal agenda. First, CBO estimates that the bill would reduce the deficit by $321 billion over the next ten years. These savings could potentially be redirected toward other legislative efforts, like tax reform. Second, the bill repeals the taxes enacted in the ACA, reducing revenues by $563 billion over ten years. By offsetting these tax cuts with the spending cuts in the health legislation, this would relieve pressure on congressional Republicans to address the repeal of ACA taxes in tax reform legislation later. That said, our expectation is that the final Senate bill, if it passed, would probably not save more than the $119bn the House bill was estimated to save. While helpful, this would not meaningfully change the outlook for tax reform.
Fixing the existing program: The Senate legislation includes $50bn over the next four years for this purpose, as well as explicit funding for cost-sharing reduction (CSR) payments (the uncertainty surrounding the Trump Administration’s willingness to continue making CSR payments had led some insurers to increase their proposed premiums for 2018). If the Senate does not approve the pending legislation or something similar, congressional Republicans may attempt to pass a more narrowly focused package to stabilize the individual insurance market which includes the subsidized plans offered through “exchanges”.
While the health debate is clearly relevant, in our view it is becoming less important to the broader agenda, for a few reasons:
- The debate on the current health bill will end soon, one way or the other: Market participants have focused on the health vote in large part because it is seen as a prerequisite to passing tax reform. The health bill is being considered under the 2017 budget cycle, through the “reconciliation” process that allows for Senate passage with a simple majority (i.e., potentially only Republican votes). Since Congress can consider only one reconciliation bill for tax and spending per budget cycle, and budget cycles cannot overlap, Congress must conclude its debate on the healthcare bill before it can formally begin considering tax reform. If the Senate passes the bill in the next few weeks, the process could then turn to the FY18 budget resolution, followed by tax reform. But it seems unlikely that the Senate will debate health legislation after July, so whether it passes or whether it fails, health legislation seems unlikely to delay tax legislation much further.
- There isn’t much signaling value left: Earlier this year, the health debate was seen as a signal of how successful the Trump Administration and congressional Republicans might be in getting other aspects of the agenda through Congress. However, at this stage, it seems fairly clear that intraparty disputes and a thin margin in the Senate have made sweeping reforms difficult. As a result, eventual Senate passage of the health legislation wouldn’t meaningfully change our expectation of what might be possible regarding tax reform, for example.
- Health legislation is unlikely to have substantial economic effects in the near-term. While the current legislative debate on health care could have important consequences for those enrolled in subsidized benefits and, to a lesser extent, enrollees in the individual market more generally, it seems unlikely to meaningfully affect the economic outlook, for two main reasons. First, most of the reduction in benefits would take place in 2020 and beyond. In 2018 and 2019, the bill would actually increase the deficit by about $30bn each year, as the value of the tax cuts starting in 2018 more than offsets the spending cuts. Second, the ACA’s disinflationary effect is unlikely to reverse as a result of this legislation. We previously estimated that two policies accounted for most of the policy-related slowdown in medical inflation over the last couple of years: the cuts to the growth rate of Medicare reimbursements and the shift of the uninsured into the Medicaid program, which pays less for a given service than most other sources of coverage. The legislation would not reverse the Medicare cuts. If legislation is enacted it might result in a gradual reversal of the coverage effect but probably only in 2020 and beyond.
Over coming days, we expect to hear more regarding potential modifications to the original Senate proposal. If progress is made during the remainder of the week, it is possible that a revised CBO estimate could be produced not long after the Senate returns from recess on July 11. A vote looks possible anytime between late in the week of July 10 and the end of July, though at this point the odds seem stacked against Senate passage.