Why the GOP's ObamaCare replacement plan is woefully underpowered

The Republicans' ObamaCare replacement is finally coming into focus.

We already knew the broad strokes of their plan. But a few days ago, Politico leaked a draft of the GOP's legislation that puts hard numbers to their ideas.

Their overall strategy is to simplify ObamaCare's byzantine subsidy system and ease the financial burden Medicaid places on state governments. The catch, of course, is President Trump, who promised in January to provide "insurance for everybody" with comparable benefits to ObamaCare.

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And on that key point, the GOP's new draft legislation would fall catastrophically short.

For example, right now, about 10 million Americans receive tax credits on the exchanges to offset the costs of health insurance. Those tax credits are calculated using each person's household income, the premiums in their state, and other factors. The advantage of this approach is it's very precisely targeted. The disadvantage is it's a massive headache for everyone involved. This kind of targeting also creates political problems because voters who don't receive aid tend to resent the beneficiaries, eroding support for the program.

The Republican alternative is a flat tax credit that's the same for everybody who needs to purchase health insurance on the individual markets. It only adjusts for age. So if you're under 30 and purchase health care, you get a $2,000 annual tax credit. (Presumably fully refundable, which is important.) That slowly scales up to $4,000 for anyone over 60.

Vox's Sarah Cliff actually ran the idea of treating everyone the same way by some Trump voters in a focus group, and they all loved it. But here's the catch: If you're going to give everyone a tax credit worth the same amount, you can't design the credit for the average recipient. You have to design it for the worst-case scenarios. Otherwise the credit will leave the poorest, sickest, and most vulnerable Americans in the lurch. That's going to make total spending on the subsidies much more expensive.

Let's turn to Kaiser's ObamaCare subsidy calculator for examples.

First, it's important to note that every state is different: Some expanded Medicaid and some didn't, and some are seeing higher premiums than others. So let's go with South Carolina. It's relatively large, it didn't expand Medicaid — so poorer people need subsidies — and it's seeing pretty high premiums. Some of America's worst-case scenarios can be found there.

Take a South Carolinian in her late 20s with an income of $16,000 (a little more than minimum wage). ObamaCare would give her $3,616 a year. Or take a South Carolinian in her early 60s who earns the same salary: She'd get $10,388 per year under ObamaCare. Yet under the GOP's replacement plan, these two individuals would get far less: $2,000 and $4,000, respectively.

This alone suggests the GOP's replacement plan will be woefully underpowered.

Now, we don't know yet exactly how underpowered it will be. But ObamaCare will spend $35 billion on tax credit subsidies in 2017. And some educated guesswork by the Center for American Progress suggests the GOP's replacement plan would only spend 74 percent as much — roughly $26 billion.

Yet the above analysis suggests that to provide commensurate coverage to the Americans who need it most, the GOP's subsidies would need to double across all age ranges. That would make for a $52 billion budget.

On top of that, because premiums are so expensive and ObamaCare's subsidies are so stringently targeted, millions of people simply aren't bothering to buy insurance. How many millions? At least 16 million, but probably over 20 million. Since ObamaCare subsidizes 10 million people, that would dramatically swell the ranks of those who would qualify for the Republicans' tax credits. By a stroke, they'd have to double or triple the budget again. Now they're at $104 billion to $156 billion in 2017.

Maybe the GOP could cut the budget down by lessening the regulatory burden on insurers and shrinking the list of essential benefits. That would lower premiums and thus lower the number of subsidies needed. But how much would this realistically shrink the budget? Ten percent? Twenty percent? And those reductions in government spending would come at the price of less generous coverage and thus less health care for Americans.

Obviously, these are all extremely crude back of the envelope calculations. But the basic logic is clear: Even under very generous assumptions, the GOP's plan falls grossly short.

The same problem crops up elsewhere.

Republicans don't like ObamaCare's individual mandate. But without it, how do you cover everyone with pre-existing conditions? The GOP's proposal includes high-risk pools, and their plan allocates $100 billion over 10 years to fund them. But Charles Gaba ran the numbers, and found that the GOP plan would need to spend $250 billion to $500 billion over 10 years to match ObamaCare there. That's $25 billion to $50 billion annually.

Then there's Medicaid. In 2015, the program cost $545 billion, almost two-third of which the federal government covered. Republicans aren't wrong that this still places a very heavy burden on state budgets. But their proposal to turn Medicaid into a one-way cash would actually lower the federal contribution significantly, placing more burden on the states.

The GOP wants a much simpler and more user-friendly subsidy system. They also want to untangle the awkward way Medicaid yokes together state and federal budgets. Those are both laudable goals.

But the GOP's ObamaCare replacement plan never delivers. Instead it just uses its admirable goals as intellectual cover for spending targets that fall short by hundreds of billions of dollars a year. If it goes through, the poor and the sick will be much worse off than before.

So much for "insurance for everybody."