One of the most important pieces of the newly passed House health bill is a possible US$800 billion cut over 10 years to Medicaid, the federal program designed to provide insurance coverage to the poor.

That bill, entitled the American Health Care Act (AHCA), rolls back part of the expansion of Medicaid that took place under the Affordable Care Act (ACA) by limiting federal contributions toward state coverage of individuals with annual incomes above US$16,643 or families of four with annual incomes above $33,948. With the reduction in federal support, states will now have to decide if they can afford to cover adults with incomes just above the federal poverty line. In addition, the AHCA freezes federal spending per Medicaid beneficiary at its 2016 levels.

The bill’s exact financial impact on Medicaid remains uncertain, because the House passed it before the Congressional Budget Office had a chance to evaluate the numbers. The projected $800 billion cut is taken from a CBO analysis conducted on a prior version of the AHCA. That version as well as the bill passed in May give more control to states to administer Medicaid.

Republican leaders have argued the current Medicaid system is failing and in need of reform. Democrats, including former President Obama, have charged that the AHCA harms the well-being of poor and vulnerable groups.

We wholeheartedly agree – with both sides. We question the wisdom of steep cuts to an already underfunded Medicaid system. But the status quo is not working either.

So what should we do?

The AHCA underfunds an already struggling program

Medicaid, the federal-state program that provides health coverage to about 75 million poor and disabled people, fails to provide them adequate access to the quality of medical care that other Americans enjoy.

The reason is straightforward: Medicaid provides lower reimbursements to physicians than private insurance or Medicare, the federal health program for elderly and disabled Americans. The result: fewer physicians accepting Medicaid coverage and fewer choices for Medicaid beneficiaries.

Prior studies suggest that about one-third of physicians nationwide refuse to accept new patients on Medicaid, and this problem is even worse in urban areas.

Rural areas have their own problems with the program. Their residents are poorer and more likely to be on Medicaid. The prevalence of Medicaid coverage, and its stingier reimbursements, is one reason why hospitals in rural areas have closed down.

In theory, federal matching funds are designed to shore up the Medicaid budgets of poorer states. California, for instance, has a 50 percent match rate – tied for lowest in the country – while Mississippi has a 75.6 percent match rate, the highest in the country.

But in practice, federal matching funds do not go far enough. As an example, each disabled Medicaid beneficiary in Mississippi receives about half as much in benefits as their peers in Maryland. Mississippi ranks as the poorest state in the nation according to median household income (for four-person households), while Maryland ranks as the richest. To make matters worse, the AHCA proposes to reduce federal matching funds below their current, already inadequate levels.

State control of Medicaid was designed to foster experimentation and competition among states to provide efficient, high-quality care for the poor. And, the AHCA relies heavily on the logic that Medicaid will run better when states have greater financial responsibility and control.

However, rising inequality between rich and poor areas of the country has undercut this rationale. As poorer states fall farther behind, they become ever less capable of mustering the resources needed to protect the growing ranks of vulnerable children, adults and seniors among their constituents.

From this standpoint, further cuts to Medicaid – as envisioned by the AHCA – make little sense. Why make an underfunded program even more underfunded? Replacing Medicaid with an adequately funded alternative would make more sense than retaining the program and rendering it even less capable of aid to the poor.

The paradox of Medicaid expansions

The Affordable Care Act expanded Medicaid coverage to more than 20 million additional Americans by providing financial assistance and incentives to states that extended Medicaid eligibility – up to annual incomes of $16,643 for an individual or $33,948 for a family of four. But even so, it has not done enough over the long term to increase the number of health care providers willing to care for Medicaid patients.

Research suggests that higher Medicaid reimbursements would lead more physicians to accept Medicaid. And, in 2013 and 2014, the ACA increased Medicaid reimbursements, resulting in greater access to care.

Unfortunately, the ACA’s increase in reimbursements were only temporary. Payments to providers went back down to pre-2013 levels in 2015. The result has been longer wait times and greater difficulty in accessing care among Medicaid beneficiaries.

At the same time, the most compelling evidence suggests the government spends more on Medicaid than the value it provides to the poor. For every dollar the government spends on Medicaid, the poor get roughly 20 to 40 cents of value. Much of the benefits accrue to third parties such as hospitals and employers who, in the absence of Medicaid, would have provided uncompensated medical care to Medicaid’s beneficiaries.

Democrats should demand providers be paid more – but only for value

Let’s start with the Democrats. Saving Medicaid coverage may well be a worthy goal. But expanding Medicaid by expanding the number of Medicaid beneficiaries does the poor a disservice if it doesn’t provide greater access for them to doctors. Medicaid expansions should also come with higher payments to providers.

But if Medicaid pays physicians more, it should require that they deliver more value. Specifically, physicians who achieve better outcomes should be reimbursed more than those achieving worse outcomes. The institutional details of such “outcomes-based pricing” deserve their own careful discussion, but we think pay-for-performance reforms are consistent with core Democratic principles of fairness and protection of the vulnerable.

How could the Democrats pay for their desired expansions in both coverage and generosity? Getting rid of the highly regressive tax break for employer-sponsored health insurance would be a good start, especially for a party looking to level the playing field between the rich and the poor.

The tax code allows people to buy health insurance before they pay taxes. This lowers their taxable income. The value of this tax deduction increases with your tax rate – the higher your tax rate, the greater the value of reducing your taxable income. This deduction costs the government over $250 billion in tax revenue each year. Eliminating it and earmarking the revenue for Medicaid would help the poor and reduce inequality.

Republicans should encourage competition among insurers

And what about the Republicans? Expanding government-administered insurance programs does not comport with Republican values of competition and free choice. Yet, cutting government programs without providing a meaningful market-based alternative does not make sense, either.

For guidance, Republicans should look to the last major health care reform by a Republican administration: Medicare Part D, a prescription drug benefit for the elderly. Unlike the main physician and hospital care benefits in Medicare, Part D was set up as a system of government subsidies for the purchase of private prescription drug insurance.

By most measures, Part D has been a success – cost growth has been less than originally projected by the Congressional Budget Office and it lowered deaths among the elderly by 2.2 percent annually.

Republicans who oppose Medicaid should consider replacing it with a properly funded system of subsidies for private health insurance. Such a plan would take the savings from phasing out the current Medicaid system and invest it into more generous subsidies for the purchase of private health insurance. This approach would provide mainstream health care coverage to Medicaid enrollees. Integrating the poor into the middle class and above is a core Republican value, and this reform would provide an opportunity to advance that agenda.

Moving forward

The debate over the AHCA promises to intensify, as American politicians have now splintered into more than two camps. The rising number of factions makes compromise essential, as no single bloc of senators can push through legislation unaided.

We believe the best path forward starts with all sides putting their best ideas forward. This means the best ideas for government-administered health insurance on the left, and the best ideas for market-based health insurance on the right. All of these ideas should aim toward securing the health of the most vulnerable American children and families. Perhaps that is the one principle we all can agree on.

Darius Lakdawalla is the Chief Scientific Officer of Precision Health Economics (PHE), where he also serves as the Executive Director of PHE's Innovation and Value Initiative. He is an investor in PHE's parent company, Precision Medicine Group. PHE conducts research for pharmaceutical, biotechnology, medical device, and health insurance firms. The article reflects the views of its authors and not those of PHE or Precision Medicine Group.

Anup Malani consulted for Precision Health Economics in 2016 on the topic of rebates for HIV/AIDs drug purchases.

Jay Bhattacharya is a senior researcher at Acumen, LLC, which provides economic consulting services for the Center for Medicare and Medicaid Services (CMS) which administer both Medicare and Medicaid programs for the federal government. Dr. Bhattacharya has also received grant funding from the National Institute on Aging to study issues related to healthcare access for the poor and other vulnerable populations. The article reflects his own opinions, and not those of CMS, the NIH, or Acumen LLC.