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Repeal, Replace, Repair, Rename? Here Is The Latest On Obamacare, And Why It’s Bad For Stocks

Wednesday, February 22, 2017 16:56
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Headline: Bitcoin & Blockchain Searches Exceed Trump! Blockchain Stocks Are Next!

During his campaign, Trump vowed to America’s middle class that he would get rid of (since then the phrase has been amended to “repeal and replace” for various reasons) Obamacare as soon as he got into office. Well, Trump is out of his 30 day honeymoon, and the confusion and chaos over the future of Obamacare has never been greater, to a large extent due to growing pushback he has been getting in Congress.

Below is an update of the latest developments and progress, or lack thereof, regarding the repeal and replace, or perhaps repair and rename, of Obamacare.

In a nutshell, Congressional Republicans hope to pass legislation by April to repeal and at least partially replace the health insurance coverage expansion under the Affordable Care Act. However, none of the several approaches that have been floated appear able to win a majority in the Senate.

One base case, pitched by Goldman Sachs, is that Congress will enact ACA legislation in Q2 that modifies the tax credits under the law for health insurance coverage and increases state flexibility under Medicaid.

However, this process is likely to take longer than expected, which is likely to delay the upcoming debate over tax reform; this in turn will have adverse consequences for the market, which has already largely priced in substantial passage of Trump’s tax reforms even if no details are known yet. More importantly, as Goldman writes in an overnight note, the difficulty the Republican majority is having addressing a key political priority suggests that lawmakers might ultimately need to scale back their ambitions in other areas as well, such as tax reform.

Here are the details on why Trump may have suddenly found himself trapped on next steps when it comes to both Obamacare, and tax reform, courtesy of Goldman’s Alec Phillips:

The outcome of congressional Republican plans to repeal and replace the Affordable Care Act (ACA) is as hard to predict as any legislative issue we can recall. For the last several years, congressional Republicans have sought to repeal the law, and now have the potential to do so. However, despite holding a majority in both chambers of Congress, Republicans appear to lack a majority for any particular option currently under consideration. The disagreement relates to substance—whether to continue the expansion of subsidies under the ACA but in different form or to substantially reduce subsidized benefits to the pre-ACA level—and process—whether to repeal first and enact a replacement program later, or to do both in the same legislation.

The original Republican strategy was to address the law in two phases. The first phase was to repeal most of the fiscal provisions via the reconciliation process, which allows passage in the Senate with only 51 votes, and therefore potentially only with Republican support. These provisions would take effect with a delay, preserving the status quo for perhaps two years. In the second phase, Congress would enact a replacement program to provide some continuation of the coverage provided under the ACA, with the details to be determined during the two-year transition period.

This two-stage approach would theoretically have two advantages over addressing the issue in one piece of legislation.

  • First, it would have allowed congressional Republicans and President Trump to quickly follow through on a key campaign priority, without spending much of the first year of the new term, when political momentum is greatest, sorting out the details of any replacement.
  • Second, it would have allowed repeal to pass via the reconciliation process with only 51 votes—presumably only Republican votes—but the replacement to pass under regular order with 60 votes. This would allow for changes to insurance market regulation and other non-fiscal policies that cannot be addressed via the budget reconciliation process.

Some centrist Republicans, particularly in the Senate, have signaled support for a substantial continuation of expanded benefits and have called for at least some elements of the replacement program to be included in the repeal legislation. By contrast, some conservative lawmakers support repeal of the law with limited replacement of the current subsidies. Republican leaders have taken a position that is in between these approaches.

Exhibit 1 contrasts the current program with three proposals: the legislation that Congress passed and President Obama vetoed in 2015; legislation introduced by Republican Sens. Cassidy (R-LA), Collins (R-ME), Isakson (GA), and Moore-Capito (WV), and the approach that House Republican leaders outlined on February 16.

Exhibit 1: Many proposals but little agreement

Source: DHHS, Congressional Budget Office, House Ways and Means Committee, Office of Sen. Collins

The outcome of this debate is hard to predict, but certain changes appear more likely than others:

  • Coverage mandates are likely to disappear. The mandates on individuals to obtain health insurance and on employers to provide it look very likely to be repealed. Most Republican proposals would repeal them, and the Internal Revenue Service (IRS) has already announced that they will not enforce the penalties as a result of President Trump’s recent executive order.
  • Tax hikes and tax credits are likely to change, but timing and details remain unclear. There is general agreement among congressional Republicans that most if not all of the new taxes used to fund part of the cost of the coverage expansion should be repealed. However, it is unclear whether these taxes will be repealed retroactively for 2017 or prospectively. It is also possible that at least one of the taxes—the so-called Cadillac tax—might be modified rather than repealed entirely; instead of imposing a 40% excise tax on high-cost employer-sponsored health insurance plans starting in 2020, Republican leaders appear to be contemplating capping the exclusion for employer-sponsored benefits instead. This would have a similar effect to current law, which should reduce the offer of high-cost plans to employees and increase their taxable wages instead, but changes in how the tax is applied could affect the incidence of the tax and the amount of tax revenue it generates.
  • Changing the Medicaid expansion is likely to be the hardest to pass, but “repeal” may not be able to pass without addressing the issue. 20 Republican senators represent states that have expanded Medicaid eligibility, and many of them support allowing “expansion states” to continue to receive 90% of the cost of covering the new population, as the ACA calls for. However, 32 Republican senators represent states that did not expand, and many of them object to the spending increase. Ultimately, the way out of this political impasse may be to provide states additional flexibility to use federal Medicaid funds, with a gradual equalization in funding for expansion and non-expansion states.
  • Regulatory changes and Medicare reimbursement cuts are off the table in the near term, we believe. For entirely different reasons, two areas of the ACA are likely to remain unchanged in the near term, at least as far as Congress is concerned. First, the cuts to Medicare reimbursement that were used to offset part of the cost of coverage expansion look very likely to be maintained, with neither party seemingly interested in repealing them. Regulatory changes, such as the 3:1 limitation on variation in premiums based on factors like age, are unlikely to change as a result of near-term legislative efforts, since they are politically popular and, more importantly, probably cannot be addressed via the reconciliation process because they do not directly affect federal spending or revenues.

For the health care sector, the current political debate reinforces the view that most of the current health subsidies are likely to be maintained regardless of the specific changes that Congress agrees upon. As noted above, it seems likely that Medicaid subsidies will be largely maintained over the near term and, while tax credits for private insurance plans will be modified, we would be surprised if the overall amount of subsidy spending declines considerably. In fact, it is possible that overall ACA-related spending could increase slightly, if Congress tries to increase support among non-expansion states by temporarily increasing their subsidies to the level that expansion states receive. It is also worth noting that if congressional Republicans pass ACA repeal legislation along party lines, some other policy changes that might be the subject of congressional horse-trading would be less likely, such as initiatives to control pharmaceutical prices, would be less likely since bipartisan support would not be needed.

More broadly, the difficulty congressional Republicans are having in addressing the ACA raises two important issues for the rest of the agenda, and fiscal policy in particular. First, the longer this debate takes to resolve, the less capacity congressional Republicans will have to address other issues such as tax reform or infrastructure. Not only will lawmakers need to set priorities in order to focus political attention, but the same committees responsible for much of the ACA legislation—the House Ways and Means Committee and the Senate Finance Committee—are also responsible for tax reform and potentially infrastructure if financed through the tax code.

Here is the part where traders should tune in:

Delays in addressing health legislation are also likely to set back tax reform procedurally. The ACA repeal/replace bill is being addressed as part of the FY2017 budget resolution, which would have normally passed last year but which Congress passed several weeks ago in order to create a procedural pathway for passage of ACA repeal legislation via the budget reconciliation process, which allows it to pass with only 51 votes in the Senate. Once the ACA legislation is enacted, congressional Republicans hope to pass the FY2018 budget resolution, which will lay out tax and spending plans for the coming ten years and provide a second set of reconciliation instructions, this time for tax reform. Since Congress follows whatever budget resolution has passed most recently, passing the FY2018 resolution before the ACA bill has passed would remove the procedural protections from the repeal/replace bill, subjecting it to a 60 vote threshold in the Senate.

Congressional leaders hope to pass ACA repeal/replace legislation by April, which would allow them to stay nearly on track with the usual timing of the annual budget resolution—that process usually starts in March and ends in April or May—and would allow them to try to provide some clarity to health insurers ahead of May when they need to indicate their intent to provide benefits in the health exchanges in 2018. Passage in April could also increase the support for additional funding or other changes to stabilize the health exchanges for 2018; the most likely vehicle for such changes is the upcoming appropriations legislation, which needs to pass by April 28 to avoid a government shutdown.

If ACA legislation does not pass by April or so, congressional leaders have several other options. One option is simply to delay the FY2018 budget resolution until the ACA repeal bill has passed, whenever that occurs. This is the simplest strategy, but resolving differences among Republicans could take several more months. An alternative would be to use the current reconciliation instructions to pass tax reform, and the FY2018 instructions to address the ACA, flipping the sequencing of the current approach. However, for technical reasons it would be difficult to use the current reconciliation instructions to pass tax reform, in our view, so congressional leaders might consider this only as a last resort. Another third possibility would be to roll ACA repeal/replace together with tax reform creating one bill that could be passed via the FY2018 reconciliation process. While this is procedurally possible, the complexity of combined ACA and tax reform legislation would reduce the probability of substantial changes in either area, in our view.

* * *

Beyond the issues of timing and process, the current situation highlights the difficulty that congressional Republicans are likely to encounter in trying to make significant structural reforms on a party-line basis. If legislation addressing a longstanding political priority like Obamacare repeal is having difficulty attracting 51 votes in the Senate, it suggests Republican leaders will need to scale back their ambitions on other issues too, including tax reform. Ultimately, we continue to expect an expansion of the deficit of around 1% of GDP, with nearly all of this coming in the form of tax cuts. However, as we noted recently, the current debate suggests that tax legislation might not be finalized until late 2017 or early 2018. Along with the potential for a phased-in tax cut, this would likely spread the growth effects between 2018 and 2019.



Source: http://silveristhenew.com/2017/02/22/repeal-replace-repair-rename-here-is-the-latest-on-obamacare-and-why-its-bad-for-stocks/

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