Paying for an ACA replacement becomes near impossible if the law’s tax increases are repealed

Editor's note:

This analysis is part of The Leonard D. Schaeffer Initiative for Innovation in Health Policy, which is a partnership between the Center for Health Policy at Brookings and the USC Schaeffer Center for Health Policy & Economics. The Initiative aims to inform the national health care debate with rigorous, evidence-based analysis leading to practical recommendations using the collaborative strengths of USC and Brookings.

Repealing the Affordable Care Act (ACA) before a replacement plan can be enacted – even if the repeal is delayed – poses many extraordinary dangers. The Center for Health Policy published a detailed examination of these dangers last week, emphasizing that repealing the ACA before replacing it would cause significant disruption in the individual health insurance market and risk imploding the market altogether if no replacement emerges – all but ensuring that millions of Americans who purchase their own insurance (many of whom had insurance pre-ACA) will become uninsured.

But the effect on the individual marketplace isn’t the only consequence of repealing before replacing. Less discussed are the additional challenges created by the tax cuts that would be enacted if Congress models its ACA repeal on the legislation that was passed (but vetoed) early last year through the budget reconciliation process—a process that seems increasingly likely. These tax cuts would make it much more difficult to achieve a sustainable replacement plan that provides meaningful coverage without increasing deficits.

Tax cuts will accelerate the exhaustion of Medicare’s Trust Fund

Specifically, the reconciliation repeal bill from earlier this year eliminated $680 billion (over ten years) of taxes on high-income households and the health care industry (e.g., insurers, device manufactures, and drug companies). In addition to increasing deficits, by rescinding the 0.9% Hospital Insurance Trust Fund payroll tax on wages above $200,000, these tax cuts would also accelerate the exhaustion of Medicare’s Part A Trust Fund by four years, from 2028 to 2024.[1]


Not enough money left for replacement after repealing the ACA’s taxes

Supposing the same repeal and delay bill is put forward, but with the repeal now set to take effect on January 1, 2019, it would net roughly $500 billion in deficit reduction over the ten-year budget window. Lawmakers would likely create an “ACA replacement fund” with the bill’s deficit reduction – a sort of piggybank that they could subsequently tap into to pay for a replacement plan. It’s unclear how well this approach adheres to Congressional rules, but it is similar to how the “Medicare Improvement Fund” or “SGR Transition Fund” banked savings from one bill to help pay for increased Medicare spending in the form of “doc fixes” down the line.

But while savings on the spending side can likely be banked, the revenue lost from the ACA’s tax increases would no longer be available to finance a plan to replace the lost coverage expansions.  Consequently, only about 40 percent of the $1.24 trillion cost of the ACA’s coverage expansion from 2019-2026 would be available.[2]

These estimates incorporate the updated Congressional Budget Office (CBO) projections of the savings from repealing the ACA’s coverage expansions, which have increased since the January 2016 score of the reconciliation repeal bill, and the adjusted timing of a bill that moves early next year.

However, there are a number of ways that Republicans in Congress might generate additional funding for a replacement plan. First, given recent budget scoring changes, lawmakers will likely count the roughly $200 billion of additional dynamic savings that ACA repeal produces (that is, CBO estimates that ACA repeal would slightly increase economic growth, and in turn revenues). With a replacement plan that covers enough people, it seems likely that they would also reduce disproportionate share hospital (DSH) payments, which help hospitals with disproportionately uninsured and low-income patients, back down to where they are scheduled under the ACA (the reconciliation repeal bill eliminates the ACA’s DSH reductions), saving $45 billion over ten years. Most replacement plans also include some cap on the tax exclusion for employer-provided health insurance to replace the ACA’s similar Cadillac tax, but given the politics of doing so and the high levels of the caps so far suggested, this provision is unlikely to raise much more than $100 billion over ten years.

Altogether, then, this relatively aggressive course of action could generate roughly $850 billion to fund an ACA replacement plan, still only two-thirds as much funding for coverage expansion as under the ACA. Going further may require either pursuing Medicare savings beyond those in the ACA that were undertaken to pay for the coverage expansion or accepting that a replacement of similar magnitude to the ACA would add to the debt.

Reconciliation repeal bill already increases long-term deficits

While the reconciliation ACA repeal and delay bill reduces deficits by roughly $500 billion in the first decade, it would actually begin adding to deficits around 2035 and be scored by CBO as increasing debt over the long run. This result occurs because the revenue lost from the bill’s tax cuts grows significantly faster than the savings from eliminating the ACA’s coverage provisions, although this is primarily due to one provision, the Cadillac tax on high-cost employer-provided health insurance plans. Revenue from the Cadillac tax grows very rapidly over time because its threshold grows with general inflation, or the Consumer Price Index, which grows substantially more slowly than employer health care costs. This is also one factor behind the low popularity of the Cadillac tax.


If the goal is truly to replace the Affordable Care Act and still cover a similar number of people, as President-Elect Donald Trump and some Republican Congressional leaders have indicated, lawmakers should not repeal the ACA tax increases until a replacement plan is enacted. Repealing all the ACA’s taxes as part of repeal and delay only makes a true replacement harder.

[1] Supposing that the budget savings in the reconciliation ACA repeal bill are saved to help pay for replacement rather than transferred into the HI Trust Fund, as the 2016 bill does.

[2] The $1.24 trillion figure excludes the savings from the Cadillac tax, which the Congressional Budget Office includes in its estimates of the costs of the ACA’s coverage expansions, since that tax is eliminated in the reconciliation repeal bill.