By: Janus Capital Group
Harvest Exchange
March 22, 2017

Repeal and Replace: Positive for Insurers, Less Pressure on the Industry than Feared

The promise to repeal and replace Obamacare moved forward with this month’s introduction of a health care bill. The details of the American Health Care Act were not overly surprising, in part because of leaks and in part because of a narrower focus than many had feared. Compared to the market turmoil about proposed regulation that we saw during the political season, markets took the actual legislation in stride.

The plan mostly impacts the Medicaid and individual markets. Important areas such as drug pricing, the commercial market and Medicare Advantage are not addressed. While not perfect, we think it accomplishes the promise of repealing Obamacare without disrupting the existing markets. It returns control of the Medicaid and individual markets to the states with an approach that gives insurers more flexibility and has a better chance to succeed. While far from certain, Senate approval could come after some concessions to conservative Republican senators who oppose it.

Overall, the proposal is positive for the health insurance sector but mixed longer term for acute care hospitals and providers. Insurers benefit from lower fees, penalties for gaps in coverage and eventually an ability to offer a wider range of plans. Companies with exposure to the Medicare Advantage market look better because that growth area remains untouched.

The legislation would repeal several important pieces of Obamacare. Individuals no longer have to buy coverage and small businesses need not offer it, although individuals pay a 30% penalty if they buy insurance after a gap in coverage. It also removes all special taxes on the industry, federal funding for Medicaid expansion and subsidies for the individual market. Existing programs stay in place until 2020 to maintain stability of the 14 million participating under an expanded Medicaid and the 12 million who signed up in the individual market.

One risk to insurers is that there is not much in the bill to support the exchanges in 2018 and 2019. The number of participants buying insurance through exchanges will decline, and the risk pool will likely get worse before it improves. The combination of the individual market uncertainty and reduced Medicaid funding is why acute care hospitals could do worse.

Insurers benefit from the delay until 2025 of the so-called Cadillac Tax, which could have slowed the growth of premiums. Similarly, the proposal to cap the tax deductibility of employer-sponsored insurance was removed from the draft. Health Savings Accounts limits were doubled, which will continue driving adoption of high deductible plans and presumably control utilization of medical services.