November 7, 2018

What the 2018 Midterms Mean for Healthcare

by Chas Roades

THE GIST

The 2018 midterm elections ushered in a new era of divided government in Washington and will result in a shift in the politics of healthcare for at least the next two years, with regulatory reform and a debate over Medicare for All set to take center stage

THE FACTS

OUR ANALYSIS

1. The ACA is (probably) safe for the foreseeable future

Without control of both houses of Congress, there’s very little Republicans can do legislatively to dismantle the Affordable Care Act (ACA). Having invested significant time and political capital on “repeal and replace” during the last Congress, Republicans not only failed to achieve their long-promised goal of getting rid of the ACA, they also set off a national debate around protecting insurance for people with “pre-existing conditions”, which raised such significant worries among Republican candidates that many found themselves defending those provisions of the ACA during the midterm campaign. With Democrats in charge of the House, hopes for any legislative action to repeal the ACA have vanished.

With Democrats in charge of the House, hopes for any legislative action to repeal the ACA have vanished. However, there’s a remaining worry for supporters of Obamacare: the pending Texas court case challenging the constitutionality of the law

However, there’s a remaining worry for supporters of Obamacare: the pending Texas court case challenging the constitutionality of the law. If the judge in that case rules in favor of the conservative Attorneys General that brought the suit—arguing that because the 2017 tax law reduced the tax penalty associated with the “individual mandate” to zero, the mandate itself is unconstitutional and thus the ACA’s insurance market reforms are invalid—and if that ruling survives on appeal in the Supreme Court, Congress has a problem. At that point, which would probably arise in the midst of the 2020 Presidential campaign, could lawmakers strike a bipartisan deal to extend the popular protections for people with pre-existing conditions? That remains to be seen.

Meanwhile, the ACA’s expansion of Medicaid eligibility is in an even more secure position after Tuesday’s elections. With voters approving ballot initiatives to expand Medicaid in three states (Idaho, Nebraska and Utah), and gubernatorial elections in three others that will probably clear the way for expansion (in Kansas, Maine and Wisconsin), Medicaid expansion rolls on. (Recall that Virginia, where a new governor was elected last year, has also recently expanded Medicaid.) These state-level election results are at least as important as the change of House control in securing the ACA’s future. In general, the popularity of the ACA has continued to increase since its passage, with 54 percent of Americans now saying they have a favorable opinion of the law. Given Tuesday’s election results, the ACA’s survival now seems all but certain.

2. Significant restructuring of Medicare and Medicaid is off the table

With Democrats now in control of the budget-writing process, any talk of significant changes to the healthcare entitlement programs will end. Now that former Speaker of the House Paul Ryan (R-WI) has retired from Congress, Republicans have lost one of their principal champions of major entitlement reform. He spearheaded an effort to use the “repeal and replace” effort of the last Congress to enact a major transformation of the Medicaid program, shifting it to a block grant program that would have handed much more responsibility for pending control to the states. Further, Ryan was the champion of “premium support”, which would have turned Medicare into a system of federally-subsidized vouchers for seniors, with beneficiaries spending their vouchers to purchase private Medicare coverage on exchange marketplaces. Both these reforms, block-granting and premium support, were put forward in the name of deficit reduction—and were intended by Republican policy makers to pay for the nearly $1.5T of tax cuts they enacted in 2017. Both reforms now go back on the shelf as Democrats take charge of the House.

Rather than a wholesale restructuring of the Medicare program into a privatized, “voucherized” system, we are likely to see the continued shift of Medicare beneficiaries into Medicare Advantage coverage—which now accounts for a third of enrollees and is projected to reach half of all seniors within the next five years. It’s worth noting that this is a de facto form of Medicare privatization, one that has enjoyed growing bipartisan support of recent Congresses.

Block-grants for Medicaid are even less likely moving forward. Instead, states will continue to pursue budgetary strategies that shift Medicaid enrollees into managed care plans, which has been the dominant approach over the past several years. As more “red states” look to expand Medicaid as a way to secure additional Federal funding to cover low-income residents, expect increased interest in “1115 waivers” allowing for additional provisions—work requirements, drug testing, deductibles—that serve to constrain the burden of Medicaid on state budgets by creating enrollment barriers.

3. The 2020 Presidential campaign starts now, changing the politics of healthcare

No sooner had the polls closed on Tuesday than the 2020 Presidential campaign kicked into gear. By declaring repeatedly that voters should view the midterm elections as a referendum on his own performance, President Trump virtually guaranteed that successful candidates would be tied to a pro-Trump or anti-Trump agenda. And Democrats’ failure to produce an “electoral wave” that extended beyond already-drawn battle lines means that the polarization of the electorate that existed before the midterms will likely intensify moving forward. Reflecting that split, before the polls had even closed on Tuesday House Democratic leaders announced plans to exercise their oversight authority to investigate the Trump administration. Further reducing the chance for bipartisan compromise, several leading Democratic Senators have already thrown their hats into the Presidential ring for 2020. In short, Democrats and Republicans will now retreat to their respective corners, limiting opportunity for bipartisan compromise in the next two years.

For Democrats, that portends an endorsement of “Medicare for All” (M4A) which has become a rallying cry on the left, and has captured the imagination of voters. While the details of M4A are unclear, with several different approaches to universal coverage being put forward by a variety of Democratic lawmakers and policy advocates, it’s clear that Democrats have hit upon their own version of “repeal and replace”—a simple slogan that can mobilize their base. The policy details are less important, what matters is that Democrats now perceive (correctly) that the 2020 healthcare debate will happen on their “home court” (coverage expansion and security) rather than on Republican turf (fiscal discipline and deficit hawkishness).

With Medicare for All, it’s clear that Democrats have hit upon their own version of “repeal and replace”—a simple slogan that can mobilize their base

The appeal of M4A for Democrats is that it addresses an immediate concern among a growing number of voters: the burden of out-of-pocket healthcare spending on household budgets. Rather than an esoteric argument focused on “bending the cost curve”—making healthcare affordable for the Federal or state budgets—M4A allows Democrats to target the kitchen-table issues of affordability: copays, deductibles and coinsurance. (Getting covered by Medicare is an aspirational goal for voters as well, a reward waiting at the end of their working years. Promising earlier access to Medicare likely appeals to voters as a way of pulling that goal forward.) The details of how to pay for M4A are uninteresting to the average voter, it’s the vision that has appeal—especially to suburban, middle-class voters, among whom Democrats made significant inroads in the midterm election.

That puts Republicans in the position of playing defense on healthcare for the next two years. Without control of the House it will be hard for them to fight back on the basis of budgetary concerns, demonstrating that they’re the party of fiscal discipline. To be sure, they’ll highlight the notion that M4A will mean higher taxes for the average citizen. And it’s very likely we’ll see Republicans turn to a more visceral argument against M4A: that it’s a “socialist” idea too radical for the country. Indeed, the President’s Council of Economic Advisors already started to lay that argument out in the weeks preceding the midterm elections. As Republicans pursue this line of argument, casting the core Democratic proposal not just as unwise but as un-American, the possibility of any bipartisan compromise on healthcare more generally will disappear—and the politics of healthcare in the 2020 campaign will likely be even more toxic than before.

4. In the meantime, the Trump administration will turn to regulatory reforms

Although legislative action on healthcare is unlikely during the next two years, we expect the Trump administration to continue to push forward regulatory reforms aimed at reshaping the healthcare system around conservative policy principles. These administrative changes will center on three major themes:

  • Deregulation to encourage market competition. The Trump team has already signaled willingness to take a look at the Stark regulations that prevent closer economic alignment between hospitals and physicians and that it takes a favorable view of vertical consolidation. It has pulled back on regulations that prevent insurance companies from offering short-term, non-ACA compliant plans, and cleared the way for association health plans to offer lower-cost coverage to eligible consumers. Look for more of these kinds of changes, which lift restrictions on private market activity, moving forward.
  • Devolution of authority to states. In recent weeks we’ve seen increased activity from the administration aimed at allowing states to take charge of their own healthcare markets and become “laboratories of reform”, using authority granted by waivers to existing Federal laws. In new guidance on “1332 waivers”, the administration significantly widened the range of options states have to skirt ACA requirements for their insurance markets. And it has encouraged states to apply for “1115 waivers” that allow them to redefine eligibility requirements for Medicaid coverage.
  • Appeals to consumer economic concerns. Expect much of the rhetoric and regulatory action of the Trump team to be couched in terms of “consumer affordability” over the coming two years. Already we’ve seen proposals to increase price transparency around prescription drugs, by forcing drug companies to include list prices in television ads. While it’s unclear how much impact this would have on actual pricing, this reform will play well with consumers facing high out-of-pocket costs for drugs. The recent move to site-neutral payment for certain outpatient services also reflects a growing emphasis on consumer affordability, and was implemented over strenuous opposition from the provider lobby. We’ll see more of these “pocketbook-friendly” regulatory changes moving forward.

As the Trump administration draws on regulatory authority to advance its healthcare agenda, expect the Democratic-controlled House to play a much stronger oversight role in examining the legality of some of these changes. In particular, it’s likely that the administration’s greater leeway for ACA-noncompliant health plans will come under intense scrutiny from the committees of jurisdiction in the House.

5. Any real progress on healthcare in the next few years will come from the private sector, not Washington

All of this implies that very little of substance is likely to happen in Washington with respect to healthcare over the coming two years. Instead, the gridlock that comes with divided government will create some breathing room for an industry that has been subject to repeated attempts to enact broad-scale change in the wake of the ACA’s passage. This is good news—it means that the nexus of innovation and change will shift to the private sector, at least for a while.

The gridlock that comes with divided government will create some breathing room for an industry that has been subject to repeated attempts to enact broad-scale change in the wake of the ACA’s passage. This is good news—it means that the nexus of innovation and change will shift to the private sector, at least for a while

Providers, payers, technologists, and entrepreneurs can now take some comfort in the fact that for at least the next two years will see Washington’s role in driving healthcare change reduced, and opportunities to bring value-creating innovations to bear increased. Whether or not healthcare gets dragged back into the political arena as more than a campaign talking point will depend in no small measure on the industry’s ability to find its own path forward toward consumer value.

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