Katherine Hempstead of the Robert Wood Johnson Foundation and Robert Town from the University of Texas at Austin discuss the Republican plan to replace Obamacare.

Republicans in the U.S. House of Representatives on Tuesday introduced their much-awaited bill to repeal and replace the Affordable Care Act, or what is dubbed Obamacare. While experts agree that the ACA has its shortcomings that need fixing, the latest bill falls short and is unlikely to pass smoothly, they say.

The bill, called the American Health Care Act, seeks to retain coverage for people with pre-existing conditions and allow children to stay on their parents’ plans until the age of 26. Its other features include refundable tax credits to buy health insurance; Medicaid reform where states would get federal grants, and stoppage of federal funding for Planned Parenthood. The bill faces much opposition from not just Democrats but also prominent Republicans. Republican Senator Rand Paul, a physician and a vocal advocate of health care reform, called the latest bill “Obamacare Lite” in a tweet and called for dismantling of mandates, taxes and entitlements.

“When this gets a score, people are going to realize that it actually costs a lot and doesn’t really benefit that many people,” said Katherine Hempstead, a senior advisor at the Robert Wood Johnson Foundation, referring to the cost estimates prepared by the Congressional Budget Office for bills that are introduced. “There will be some bad news that will come down the road. I also don’t see a huge natural constituency for this bill except for people in Congress who are in a very weird situation trying to thread a needle.”

“The Republican bill retains much of the features of Obamacare, but it also changes who is getting what,” said Robert Town, professor of economics at the University of Texas at Austin. “In particular, it is moving the benefits from the older and sick to the younger and healthy, from the poor to the richer. It is a radical redistribution of the benefits of Obamacare.”

Hempstead and Town discussed the Republican bill and its implications on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Below are five takeaways from their discussion:

Will Vulnerable Populations Be Hit?

Town noted that early estimates put the number of people that will lose health insurance coverage from the American Health Care Act at 10 million. “The state exchanges would largely unravel, and the possibility of adverse selection is much greater under this proposal,” he said. “The subsidies are probably not going to be sufficient to keep enough people in the market to make the exchanges work.”

Hempstead said that even as the bill includes a “slight means-testing” feature, “the amount that lower-income people are going to be able to get to help pay for their health care will drop quite a bit.” If the employer mandate to provide health insurance is removed and many employers stop offering coverage, the tax credits will be used by people who would have been covered anyway, she added. “So you are going to potentially spread around the thin tax credit pretty widely to people who aren’t necessarily any better off than they would have been in the absence of it. The losers are going to lose more than the winners are going to win, maybe.”

Hempstead had issues with the proposed freezing in 2020 of Medicaid expansion to cover newly eligible people that qualify under income criteria. Federal funding, which now covers new Medicaid enrollees fully, will then be limited to per-capita caps, “which is surely going to result in less federal money for the states to take care of the [Medicaid] population,” she said. Town described the move to replace Medicaid funding with block grants in 2020 as an attempt to “kick the can down the road.” He said that by 2021 or 2022, there is “a good chance that this is going to lead to large increases in the uninsured population.”

Lowering Health Care Costs

Hempstead found no aspect in the bill that would bring down health care costs. It would bring the cost of health insurance down for some people who get tax credits, and the costs would rise considerably for some people who get fewer tax credits, she said. The essential health benefits are not being altered, she noted. “Provider prices or prescription drug prices won’t come down, either, because of the bill.”

Hempstead also pointed out that lower premiums do not necessarily reflect lower health care costs. What that usually means is allowing insurers to sell policies that have a lower actuarial value, she said. “That has to do with how insurance is financed — as in how much a beneficiary would pay out in premiums — and doesn’t have anything to do with health care costs.”

Republicans have argued that the bill’s feature to allow insurers to sell across state lines will induce more competition and bring down premiums. But Town said that while it sounds like “a great idea,” the real challenge insurers would face in new markets is to establish networks of hospitals and physicians and rehab facilities and secure attractive rates from those providers. That is a hard problem to solve, he noted, likening it to a chicken-and-egg situation where insurers need sufficient enrollment to create those networks, but they cannot have those enrollments without good networks. “That is the fundamental problem insurers face in entering any market.”

“The losers are going to lose more than the winners are going to win.” –Katherine Hempstead

Everybody wants to bring down the cost of health care “except maybe physicians and hospitals because they benefit from high cost of health care,” said Town. But lowering costs is hard to achieve because technology used in health care is expensive and providers have some bargaining leverage, he noted. “Those two things are not going to be affected by this bill.”

Different for Difference’s Sake

“In the bill, it’s not clear what problem [Republicans are] trying to solve exactly, other than to put something out there that is different than Obamacare,” said Town. He described the ACA as “carefully thought through,” where parts of it interlink and support one another. “When you start tweaking one aspect of it, like the individual mandate, other parts can start to fall apart on you, like the exchanges, and you can have an adverse-selection death spiral.”

According to Town, the Republican bill doesn’t seem to have been planned in a systematic way. “The Republicans may be stuck with a bill that will lead to massive problems, and [face] huge dis-enrollments, exchanges falling apart and people paying a lot more for coverage.”

What Could Be Fixed in the ACA?

Hempstead and Town agreed that the ACA is not perfect and that it does need remedial treatment. For one, the current ACA subsidy scale is “a little austere” for people over 400% of the federal poverty level, who don’t get any subsidies, said Hempstead. She found merit in the idea to redistribute the subsidies more evenly — not by taking money away from lower-income people, but by increasing the total amount of subsidies to cover more higher-income people.

“It is moving the benefits from the older and sick to the younger and healthy, from the poor to the richer.” –Robert Town

Town said the subsidy system under the ACA could be fixed to make it profitable for the majority of insurers to offer coverage on the exchanges, instead of just a handful today. Also, the ACA’s mandate requiring individual coverage could probably be addressed by changing the age bands and making sure that the subsidies for the healthy young are sufficient enough to prompt them to voluntarily choose a plan, he added. Hempstead wanted mechanisms to ensure that there are sufficient incentives “for people to secure insurance and stay insured, which was perhaps not easily achieved under the ACA.”

Finding an Acceptable Middle Ground

According to Town, “The fundamental problem is health care is expensive and many people cannot afford it.” He said subsidies or benefits packages would be required to make it affordable, but they would be expensive to provide. “Given that fundamental [difficulty], it is going to be a very challenging policy goal to achieve.” Further, making the new plan work would require much by way of taxes and government intervention, he added. That scenario would create tension between Republicans who in principle want lower taxes and a smaller government and those who believe that health care should be widely available.

“There is no solution that everybody will agree on, because there are a lot of values at play with the whole issue of health care,” said Hempstead. She noted that Republicans felt the ACA tilted subsidies “too much” in favor of lower-income people and left many people confronting the full impact of unsubsidized health care costs in the individual market. “But now, many would say that it pivots the other way and makes it unrealistic for many people to afford health care.”

As the bill makes its way through Congress, “there is potential for defection from both the right and the left side,” said Hempstead. On the other hand, Republicans are under enormous pressure to pass something like this, she noted. “It’s a now or never moment [for them], and I’m curious to see whether they are going to hold hands and jump, as some people describe it, and throw some of these cautions to the wind, or whether they are going to get mired in a lot of inter-party struggles.”