The Better Care Reconciliation Act: Economic and Employment Consequences for States

Abstract

• Issue: A draft Better Care Reconciliation Act (BCRA) has been introduced in the U.S. Senate as an alternative to the American Health Care Act (AHCA), which was passed by the House of Representatives on May 4, 2017. The Congressional Budget Office estimates the BCRA would raise the number of uninsured by 22 million by 2026.
• Goal: To determine the consequences of the draft BCRA on employment and economic activity in every state. This report updates an earlier analysis of the effects of the AHCA.
• Methods: We compute changes in federal spending and revenue from 2018 to 2026 for each state and use the PI+ model to project the effects on states’ employment and economies.
• Findings and Conclusions: While the draft BCRA and the AHCA would have similar effects on the number of uninsured Americans, the BCRA would lead to significantly larger job losses and deeper reductions in states’ economies by 2026. A brief spurt in employment would add 753,000 more jobs in 2018, but employment would then deteriorate sharply. By 2026, 1.45 million fewer jobs would exist, compared to levels under the current law. Every state except Hawaii would have fewer jobs and a weaker economy. Employment in health care would be especially hard hit with 919,000 fewer health jobs, but other employment sectors lose jobs too. Gross state products would be $162 billion lower in 2026. States that expanded Medicaid would be especially hard hit.

The CBO reported this version of the BCRA would increase the number of uninsured Americans under age 65 by 15 million in fiscal year 2018, eventually reaching 22 million more uninsured by 2026.⁴ In contrast, the CBO estimated the AHCA would increase the number of uninsured by 23 million by 2026.⁵ The Urban Institute estimates that the BCRA would lead to 25 million more uninsured people by 2022.⁶

This report examines the potential economic effects of the draft BCRA from calendar years 2018 to 2026, including:

• employment levels, measured as changes in the number of jobs created or lost due to policy changes
• state economic growth, as measured by changes in gross state products in current dollars, adjusted for inflation; this is an aggregate measure of state economies, analogous to the gross domestic product at the national level
• state business output, as measured by changes in business receipts in current dollars at production, wholesale, and retail levels, encompassing multiple levels of business activity.

Our estimates are based on changes in federal funding gained or lost to states, consumers, and businesses. The BCRA significantly reduces federal funding for Medicaid. It lowers federal match funding for the District of Columbia and 31 states that expanded Medicaid, encouraging them to discontinue their expansions. It gives states an option to either adopt per capita allotments for Medicaid or fixed block grants. Either option lowers federal Medicaid expenditures. The BCRA sets the inflation index for Medicaid per capita caps based on the consumer price index for medical care (plus 1 percent for the elderly and disabled), but reduces it to the overall consumer price index in 2025. According to the CBO, the BCRA results in a 26 percent reduction in federal Medicaid funding in 2026, deepening to a 35 percent reduction by 2036.⁷ Eliminating the tax penalty for individuals without health insurance reduces incentives to purchase insurance, raising the number of uninsured people. Restructuring premium tax credits, revising the insurance benchmark, and widening age-related differences in premiums would shrink nongroup insurance coverage and reduce federal spending for health insurance subsidies. New waiver policies would let states reduce essential health benefits and could result in lower insurance coverage.⁸ The BCRA is designed so that tax cuts take effect sooner than reductions in health insurance subsidies. Thus, state employment and economies could grow at first, but shrink in later years as the coverage reductions deepen.

How Federal Health Funding Stimulates Job Creation and State Economies

Federal health funds are used to purchase health care. Then, fiscal effects ripple out through the rest of the economy, creating employment and other economic growth. This phenomenon is called the multiplier effect. Health funds directly pay hospitals, doctors’ offices, and other providers; this is the direct effect of federal funding. These facilities use revenue to pay their employees and buy goods and services, such as rent or equipment; this is the indirect effect of the initial spending. In addition, there are induced effects that occur as health care employees or other businesses (and eventually their workers) use their income to purchase consumer goods like housing, transportation, or food, producing sales for a diverse range of businesses. Similarly, when federal taxes are reduced, consumers or businesses retain income and can purchase goods and services, invest, or save. Due to interstate commerce, each type of effect can flow across state lines.

Both government spending increases and tax reductions can stimulate job creation and economic growth. The relative effects depend on how the funds are used. Government spending or transfers, like health insurance subsidies, typically have stronger multiplier effects in stimulating consumption and economic growth than do tax cuts. Tax cuts usually aid people with high incomes who shift much of their gains into savings, stimulating less economic activity.^9,10,11 A recent analysis found that most of the BCRA tax cuts go to the top one-fifth of households.¹²

This report estimates how the BCRA will change federal funds gained or lost from 2018 to 2026 for all 50 states and the District of Columbia. We allocate federal funding changes, based on CBO estimates, for each state. We then analyze how federal funding changes ripple through state economies, using the PI+ economic model, developed by Regional Economic Models, Inc.¹³ (See Appendix B. Study Methods.)

Findings

Overall Effects of the Better Care Reconciliation Act

As illustrated in Exhibits 2 and 3, most of the BCRA’s tax repeals begin almost at once, while coverage-related spending reductions phase in. The tax reductions initially raise the federal deficit by more than $50 billion in 2018 and 2019. In 2018, the number of jobs would rise by 753,000 and state economies would grow. However, health sector employment begins to fall immediately in 2018, with a loss of 30,000 jobs. (All economic and employment estimates in this report are compared to a baseline that corresponds to levels that would occur if current law did not change.)

By 2020, the reduction in federal funding for coverage exceeds the level of tax cuts and there would be 13,000 fewer jobs. Economic losses deepen in subsequent years.

By 2026, 1.45 million fewer people would have jobs. Gross state products would drop by $162 billion and business output would be $265 billion lower, while 919,000 jobs would be lost in health care. More than half a million jobs (534,000) are lost in other sectors, including construction and real estate, finance, retail trade, and public employment. These downward trends would continue after 2026. These losses are substantially worse than the estimated effects of the AHCA.¹⁴

Looking at Coverage-Related and Tax Repeal Policies

To better understand how the BCRA affects state economies and employment, Exhibit 4 looks at the two major components of the BCRA separately. The coverage-related policies generally lower federal spending, particularly due to cuts to Medicaid and premium tax credits. Some policies partially offset those large cuts, such as the State Stability and Innovation Fund. The tax repeal policies (Sections 108 through 123)—that is, those repealing the Medicare-related taxes, Cadillac tax, Health Savings Account-related tax, or medical device tax—predominantly help people with high incomes or selected businesses.

Implemented alone, the coverage-related policies would lead to steep job losses over time, with 2.3 million fewer jobs by 2026, driven principally by deep Medicaid cuts (Exhibit 4). Alternatively, the tax repeal policies on their own would be associated with higher employment and state economic growth. They would add 730,000 jobs in 2018 and an additional 861,000 jobs in 2026. When combined together, tax repeal and coverage-related changes lead to economic and employment growth at first, but then to large losses.

The detailed employment results show how these two components of the BCRA affect different economic sectors. Coverage and spending-related policies are directly related to funding for health services (e.g., Medicaid, premium tax credits, and high-risk pools). The reductions directly affect the health sector—hospitals, doctors’ offices, or pharmacies—but then flow out to other sectors. Thus, almost half of jobs lost due to coverage policies are in the health sector while the rest are in other sectors. Tax changes affect consumption broadly, so effects are spread over most job sectors.

State-Level Effects of the BCRA

Consequences differ from state to state. We illustrate with data for 10 states: Alaska, Florida, Kentucky, Maine, Michigan, Nevada, New York, Ohio, Pennsylvania, and West Virginia. Exhibit 5 shows the effects of the BCRA in 2018 and 2026. Complete results for all 50 states and the District of Columbia are available in Appendices A1–A4. In this analysis, states that expanded Medicaid tend to experience deeper and faster economic declines, although substantial losses occur even among nonexpansion states.

• Nine of the 10 states (Alaska, Florida, Kentucky, Maine, Nevada, New York, Ohio, Pennsylvania, and West Virginia) begin with positive economic and employment effects in 2018, but are worse off by 2026. Outcomes typically turn negative by 2022.
• Michigan is worse off in 2018 and continues to decline through 2026. We assume Michigan will terminate its Medicaid expansion quickly because of a state law that automatically cancels the expansion if the federal matching rate changes.¹⁵ Six other states (Arkansas, Illinois, Indiana, New Hampshire, New Mexico, and Washington) have similar legislation and experience losses sooner than other states.
• Most job losses are in health care. In seven states (Florida, Kentucky, Maine, Michigan, Ohio, Pennsylvania and West Virginia), health care job losses begin in 2018, but all 10 states have large reductions in health employment by 2026. Looking at the U.S. overall, losses in health care jobs begin by 2019 in most states (Appendix A2).
• States that expanded Medicaid tend to have deeper and faster losses. Having earned more federal funds under the ACA, they lose more when Medicaid matching rates are cut. In addition to cutting funds to states that expanded health insurance for low-income Medicaid populations, the bill also increases funding to states that did not expand Medicaid. Nonetheless, states that did not expand Medicaid, like Florida and Maine, experience job and economic losses after a few years. In fact, Florida has the sixth highest level of job loss in the nation by 2026.
• Other factors that affect the size of economic and employment effects include:
  • the extent to which states gained coverage in the ACA health insurance marketplaces; states with higher marketplace enrollment tend to lose more
  • age structure; older people will find insurance less affordable
  • state population size; the population size of states magnifies their losses or gains
  • other factors that affect tax distribution, like number of residents with investment income or high incomes or whether medical device or pharmaceutical manufacturers are located in the state.

Every state except Hawaii experiences job and economic losses by 2026. The 10 states with the largest job losses by 2026 are: New York (132,000), California (117,000), Pennsylvania (110,000), Ohio (99,000), Michigan (86,000), Florida (78,000), Illinois (71,000), New Jersey (60,000), Massachusetts (54,000) and Indiana (39,000) (Appendix A1).

Conclusions

The Senate bill to repeal and replace the Affordable Care Act would greatly reduce the number of people with insurance coverage, effectively reversing gains made since the ACA’s enactment. The BCRA would initially create more employment and economic growth, driven by increasing the federal deficit in 2018 and 2019, but the effects turn negative as coverage reductions deepen. Job losses and lower economic growth would begin in 2020 and continue to deepen. By 2026, 1.45 million jobs would disappear, gross state products would be $162 billion lower, and business output could fall by $265 billion.

Although the estimated effects of the BCRA on insurance coverage are similar to the effects of the AHCA, the economic consequences for states are much harsher. There are three principal reasons. First, although the BCRA delays the phase-down of federal matching for the Medicaid expansions, by 2026 it has deeper Medicaid reductions than the AHCA. These reductions would be decidedly harsher in the second decade of implementation. Second, the changes in premium tax credits result in deeper federal expenditure cuts. This is because the BCRA provides tax assistance to almost as many people as the AHCA, but the value of assistance is much lower because the actuarial value benchmark is lowered, especially for older Americans. As a result, the insurance coverage will offer less protection from high deductibles and cost-sharing. This results in fewer people enrolling and smaller tax credits for those who do enroll since the premiums are lower for this value coverage. Finally, the BCRA reduces the threshold of the medical care deduction from 10 percent to 7.5 percent, while the AHCA reduced it to 5.8 percent.

Health care has been one of the principal areas of job growth in recent years.¹⁶ Under the BCRA, the sector would lose jobs immediately—30,000 in 2018. By 2026, there would be 919,000 fewer health sector jobs, equivalent to about one out of every 22 health jobs. This would be a major reversal from current trends. While our analysis shows other employment sectors grow initially, by 2026 more than half a million jobs are lost in other sectors of the economy, too.

It may be useful to look at these findings in a macroeconomic context. The U.S. unemployment rate for May 2017 was 4.3 percent, the lowest in 16 years and about half as high as during the recent recession. When unemployment is low, additional job growth creates a tighter labor market, and businesses often have greater difficulties filling job vacancies. In turn, this can accelerate inflation.

It is likely that the business cycle will eventually slow down again in the future. In that event, the BCRA could accentuate job loss and economic contraction. Combined with major increases in the number of uninsured, this could contribute to a period of economic and medical hardship in the U.S. The BCRA could distort both the highs and lows of the business cycle. From a national policy perspective, it may be more useful to develop countercyclical policies that strengthen employment and the economy during times of contraction.

The combination of more uninsured and more unemployed people will increase the demand for social assistance, but weaker state economies and federal reductions in Medicaid spending will make it more difficult for states to respond to those needs. States will confront painful choices between raising taxes or slashing services.

This analysis has many limitations. We do not know whether or when the AHCA, the BCRA, or an alternative will be enacted into law. There have been discussions that the draft BCRA will be modified to add $45 billion in funding to address the opioid crisis. Other changes may be made as well. Since there are no available details, we have not been able to analyze those changes. However, modest changes are unlikely to markedly change the overall results.

These projections, like others, are fraught with uncertainty. Economic, technical, or policy changes could alter results. In particular, the BCRA grants substantial discretion to states in terms of Medicaid expansions, waivers of federal regulations, and use of new funds like the State Stability and Innovation Fund. While this analysis is aligned with the CBO’s national estimates, we developed state-level projections, introducing further uncertainty. Our approach conservatively spreads changes across states and may underestimate the highs and lows for individual states.