Healthcare Reform

Contemplating the Potential Impact of the AHCA

March 21, 2017 2:52 pm

Not surprisingly, the American Health Care Act (AHCA)has dominated discussions among the healthcare policy set in Washington, D.C., lately. So can there really be any topic for this column other than the House’s effort to “repeal and replace” the Affordable Care Act (ACA)?

The effort does not lack for drama. The Congressional Budget Office (CBO) recently scored the AHCA as reducing the federal deficit by $337 billion over 10 years, but at the cost of 24 million insured people losing coverage. Congressional Republicans appear to be split over the AHCA—some not relishing the thought of defending coverage losses in their home districts, and others believing the AHCA does not go far enough in reversing the ACA’s expansion of the Medicaid program. We may see them join in an uneasy coalition with Democrats to force changes to the bill. “Repeal and replace”—or at least the current AHCA version—seems to be teetering on the edge.

Nonetheless, conventional wisdom suggests that some version of the AHCA will pass—the “repeal and replace” promise was made too often during the 2016 campaign for the Trump administration or Republican majority to turn back now. So assuming that some version of the current AHCA is enacted into law, the question for providers is, How will it affect the payment bottom line?

It Was All About Coverage

To answer that question, we must first recall the ACA’s promise to providers. Providers, particularly hospitals, helped pay for the ACA. The subsidies to low-income individuals to support their participation in the insurance marketplaces costs the federal government money, as does funding to match state expenditures for medical assistance to cover low-income childless adults under a Medicaid expansion. As part of the ACA pay-for, hospitals paid under prospective payment systems are expected to do with less from the federal government.

For example, the ACA enacted a series of “productivity adjustments” that cut hospital payments rates from previous levels, to be implemented by the Centers for Medicare & Medicaid Services (CMS). And further Medicare cuts target federal dollars previously directed at uncompensated care. Under the AHCA, Medicare disproportionate share hospital (DSH) payments were cut by 75 percent and replaced by a system that would provide hospitals with so-called uncompensated care (UCC) payments, with payment amounts declining as the numbers of uninsured dropped due to the creation of the ACA insurance exchanges. The idea, of course, is that the federal government’s need to subsidize hospital care for the uninsured diminishes as more people obtain affordable coverage. Indeed, since the UCC payment program began in FY14, the aggregate pool of funds available for UCC payments has fallen dramatically, from $9 billion to $5.9 billion by 2017. Thus, the ACA’s promise for providers is to fund a system of health insurance reform that will pay off in dividends as the percentage of their patients with insurance continues to grow.

It’s Still All About Coverage

In essence, the ACA relies upon three main mechanisms to expand insurance coverage:

  • The expansion of Medicaid to childless adults
  • The subsidies for low-income individuals
  • The individual and employer mandates, which require individuals to maintain and employers to provide health plans with minimum essential coverage

The AHCA would repeal the ACA’s low-income subsidy provisions and replace them with tax credits for individuals with incomes up to $75,000 annually, with the amount of tax credit increasing by age. The AHCA also would repeal the employer and individual mandates, which are seen as necessary to ensure insurance pools include younger, healthier individuals. The AHCA attempts to achieve the same result with a “continuous coverage” provision that would allow insurers to apply a 30 percent surcharge on premiums for individuals with coverage lapses of 63 days or more.

The AHCA’s more radical provisions, however, involve sweeping changes to the Medicaid program, repealing the ACA’s Medicaid provisions and essentially transforming the program. Currently, Medicaid is jointly funded by the federal government and states to provide medical assistance to certain groups deemed to require it (e.g., the blind, disabled, and aged; pregnant women; children; and—optionally for states —childless adults). In exchange for matching federal funds, states agree to comply with the CMS-interpreted requirements of the federal Medicaid statute, although states have an option to seek waivers of these requirements.

The AHCA would change much of this structure, proposing to:

  • Repeal Medicaid expansion—removing states’ option to cover childless adults above 133 percent of the federal poverty level by end of 2019
  • Limit the application of enhanced federal match rates for Medicaid-expansion states to individuals enrolled as of Dec. 31, 2019, whose service has not lapsed for more than one month
  • Reduce the Medicaid eligibility period from three months to one month
  • Provide $2 billion annually from 2018 to 2022 for states that did not expand Medicaid under the ACA
  • Require expansion states to redetermine individual Medicaid eligibility every six months
  • Create a federal Medicaid per capita cap starting in FY20, with spending targets to be set for enrollee categories based on FY16 spending and reduced funding each year for states that exceed their targets (exempting Medicaid DSH payments from this cap)

The CBO estimates that these changes would reduce Medicaid enrollment by 14 million people by 2026, thereby potentially increasing the numbers of people for whom hospitals need to provide UCC by that amount.

Verma and Price Signal Enhanced Medicaid Flexibility

Even if the AHCA does not become law, providers should expect the Medicaid program to be operated differently under the Trump Administration, with a potentially profound effect on hospital payment. Seema Verma, the current CMS Administrator, and Tom Price, the current HHS Secretary, communicated with state governors by letter their view that expanding Medicaid to non-disabled, working-age adults without dependent children falls outside of Medicaid’s core, historical mission, which they say is to provide a safety net to ensure certain Americans facing challenging health circumstances can receive life-saving medical care.

Price and Verma have outlined the following proposed Medicaid reforms:

  • Fast-tracking approval of certain waiver and demonstration project extensions
  • Using section 1115 authority to approve innovations that combine employment, training, and other “independence” requirements with Medicaid coverage
  • Encouraging states to align Medicaid’s design and benefit structure with common features of commercial health insurance, such as premium requirements, emergency department copayments designed to encourage the use of primary care providers, and limited presumptive eligibility and retroactive coverage


From a hospital’s perspective, the ACA led to reductions in government payment in the form of productivity rate cuts and cuts in Medicare DSH payments, but with the promise of increased commercial coverage in return. The declining UCC funding pools between FY14 and FY17 provide evidence that commercial coverage has grown, offsetting some of the need for federal UCC programs.

The AHCA, in comparison, does not eliminate the productivity adjustments or revise Medicare DSH payment to pre-ACA standards. The bill’s underlying policies suggest that current levels of privately held insurance can be maintained or improved by eliminating, among other things, the individual and employer mandates and low-income subsidies and replacing them with tax credits to encourage individuals to maintain uninterrupted insurance coverage, while rolling back the ACA’s Medicaid expansion and capping Medicaid funding levels at 2016 levels. The CBO projects these changes would substantially increase the numbers of the uninsured, as noted previously, with hospitals ultimately incurring the cost of for paying for their care—even as the ACA’s hospital “pay-fors” remain in place.

Meanwhile, the AHCA, and the flexibility that the Trump administration intends to bring to the Medicaid program, will likely lead to additional, perhaps unintended, payment cuts for hospitals. First, consider that Medicare DSH payments are based, in part, upon the percentage of Medicaid-eligible inpatients a DSH hospital serves. As the number of Medicaid enrollees falls, so will the hospital’s DSH percentage, reducing DSH payment for some DSH hospitals and causing some to lose DSH eligibility. What’s more, many safety-net providers with DSH percentages over 11.75 percent also are 340B-program-covered entities receiving discounts on outpatient drugs and could fall out of the 340B program, losing millions of dollars in 340B savings.

Consider, too, that, under the ACA, UCC payments are distributed from an aggregate pool of funds calculated by CMS using factors set forth in statute. The first factor requires CMS to estimate what the Medicare program would pay in the aggregate in DSH payments if the ACA changes to the DSH program had not occurred. Because DSH payments are determined by the number of Medicaid-eligible inpatients a hospital serves, as that number falls with the AHCA’s Medicaid reform measures, so will the estimate for aggregate DSH payments—and ultimately, so will the aggregate UCC pool.

Third, Verma and Price have invited states to experiment with Medicaid waiver in unprecedented ways. Sen. Ron Wyden (D-Ore.) and Rep. Frank Pallone (D-N.J.), the ranking members of the Senate Finance and the House Energy and Commerce Committees, respectively, believe this measure would discourage Medicaid enrollment, thereby amplifying the Medicare DSH and UCC effects discussed above. And although current Medicare policy allows hospitals to include individuals “eligible for medical assistance” under an 1115 waiver to be counted in the DSH calculation, there is no guarantee that CMS will allow hospitals to count patient days associated with such individuals in all circumstances.


Hospital associations have generally come out against the AHCA, and the reasons are straightforward: An overall loss in insurance coverage hurts the bottom lines of hospitals that ultimately pay for the cost of uncompensated care. Worse yet, the payment cuts that hospitals have experienced to pay for the ACA appear to be destined to stay in place. But the full impact of the AHCA cannot be known until we see fully the interrelationship between Medicaid reform and the Medicare payment programs, like DSH and UCC, that partially subsidize the costs that hospitals incur for uncompensated care.


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