Health Care Financing and How It Could Change under a President Trump

Health Care Financing and How It Could Change under a President Trump


The federal government is the largest source of financing for the American health system through Medicare, Medicaid, tax expenditures, and now the Affordable Care Act. This could change under the Trump Administration, and it is vitally important to understand those changes that are being considered.

The ACA (Affordable Care Act) is financed half through increased taxes and half through reductions in federal spending on Medicare and Medicaid.

Medicare is financed by a payroll tax shared equally by employers and employees. The ACA added a tax of high unearned incomes (e.g. hedge fund managers) to this tax and added a small surcharge on high-income wage earners. A goal of the Trump Administration is to repeal both taxes. It is unclear whether they intend to reverse the reductions in the rate of growth in Medicare spending as well. These program reductions primarily impacted hospitals, nursing homes and health plans and had built in incentives for improving patients’ health outcomes. The Ryan plan is to repeal the taxes and retain the program reductions.

Employment based coverage is paid by employers and employees with a 30% tax expenditure subsidy from the federal government (i.e. pre-tax purchasing). The size of this tax expenditure rivals Medicare. This tax expenditure is very regressive – i.e. the higher the average wages of the employees the greater the tax subsidy. The ACA included a Cadillac benefits tax on the highest cost health plans. The Ryan plan includes an amended and as yet unclear version of the Cadillac benefits tax. The Trump Administration does not yet have a position. Some Republican health policy experts would like to shift the tax expenditures for employment-based coverage into individual coverage for workers.

Medicaid (Medi-Cal in California) is financed by the federal government with a state match. The state match varies by eligibility group, service and by a state’s income relative to all other states. The ACA expanded Medicaid coverage to individuals and families with incomes up to 138% of FPL. The federal government paid for a 100% match for three years for the expansion population, slowly declining to a 90/10 match by 2020. Family planning also has a 90/10 match. The Trump administration and many Congressional Republicans would like to repeal the coverage expansion and the match and turn the remainder of the program into a block grant to state governments. Over 3.5 million Californians are part of the expansion population and well over 12 million Californians receive their basic coverage through Medicaid. CHIP is a component of Medicaid for moderate-income children; the federal match was increased under the ACA from 2/1 to 88/12. The positions of the Trump Administration and Congressional Republicans on CHIP and the enhanced match are unknown.

Individual coverage is partially subsidized by federal individual refundable tax credits through Covered California (about 1.5 million individuals of whom at least 85% receive tax credits) and partially subsidized by federal tax deductibility for self-employed individuals. The tax credits are highly progressive and are age adjusted, then declining to $0 as an individual’s income increases to 400% of the federal poverty level, and tax deductibility for the self employed is highly regressive with the tax benefits increasing as an individual’s income tax bracket increases. The Trump administration proposes to eliminate the federal individual tax credits and to expand tax deductibility to an individual purchasing individual coverage – i.e. switch from highly progressive to highly regressive. Some Congressional Republicans have proposed a flat tax credit (e,g. $2500) for anyone purchasing individual coverage; some suggest the amount should be age adjusted to reflect the increasing premiums as an individual ages.

Care to the uninsured is partially subsidized by the federal government through the DSH program for some hospitals with a high share of low income patients and through the FQHC program for some community clinics. FQHC funds were augmented under the ACA and DSH funds were scheduled to be reduced to reflect the declining numbers of the uninsured. The FQHC and DSH funds are scheduled for reductions in 2017. The Trump Administration and the Congressional Republicans have not yet stated any positions on DSH and FQHC funding.

California stands to lose about $20 billion under these proposals and its important progress in leading the nation in reducing its high rate of uninsured would be reversed.

You might want to communicate your views quickly to your Congressional representative and to the incoming Trump Administration.

Prepared by: Lucien Wulsin

Dated: 1/9/17








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