The irony is that the AHCA’s stubborn insistence on a flat tax credit has put its promising Medicaid reforms in jeopardy. As I noted above, the Medicaid expansion offers enrollees subsidies of about $6,000 per year. The ACA exchanges, wisely, carry that subsidy along and phase it out gradually at 400 percent of FPL. By creating a benefit cliff, the AHCA gives Medicaid expansion states a strong incentive to oppose repeal of the Medicaid expansion. If the AHCA simply used the above table to means-test its tax credit, states could walk away from the Medicaid expansion, knowing their residents would have robust options for private health insurance.
The exclusion from all taxation for employer-based health insurance is the original sin of the U.S. health care system, the reason why its costs are far higher than those of every other advanced nation. GOP health reform has long sought to reform the employer tax exclusion, in order to lower health care costs and make coverage more affordable for all.
The February 10 leaked draft contained a well-designed and significant reform of the employer tax exclusion, in which employer-based insurance plans exceeding the 90th percentile in value would have their excess costs included as taxable income. That provision was deleted in the current AHCA draft and replaced by a postponement—but not repeal—of Obamacare’s Cadillac tax.
Here, again, the problem is the interaction between the AHCA’s generous tax credit and the employer-based health insurance system. The availability of the credit to upper-income workers means that employers would have a strong incentive to drop their sponsorship of coverage. A more focused tax credit would have avoided this problem.