The GOP's Obamacare overhaul contains $300 billion in deficit savings - but it comes at a huge cost to Medicaid

The Congressional Budget Office announced Monday that the American Health Care Act, the GOP leadership's plan to repeal and replace the Affordable Care Act, would shrink the federal budget deficit by more than $330 billion over the next decade.

The deficit shrinkage would come, according to the report, from massive spending cuts to Medicaid, the government-run health program that provides insurance primarily to pregnant women, single mothers, people with disabilities, and seniors with low incomes.

Roughly $880 billion would be cut from federal Medicaid spending over the next decade under the proposed legislation, according to the CBO report.

The spending cut is primarily due to the rollback of the expansion of Medicaid established under Obamacare. Eligibility for Medicaid was expanded under the law to include any adult living under 138% of the federal poverty level - an income of $27,821 for a family of three in 2016. Thirty-two states and the District of Columbia have chosen to participate, leading to more than 11 million new people nationwide gaining coverage.

The CBO estimated that changes to eligibility under the AHCA would most likely result in a loss of 14 million people from the Medicaid rolls by 2026. And while that accounts for a significant portion of the budget savings, the AHCA is hiding a much more "fundamental" change in how Medicaid operates, according to Harvard Medical School professor Richard Frank

"It's no longer an open-ended matching program," Frank told Business Insider. "[The AHCA] fundamentally changes the kind of contract that exists between the states and the federal government."

Since its establishment in 1965, Medicaid has been an open-ended entitlement program. Anyone who meets the eligibility requirements has a right to enroll and, if costs go up due to new expensive treatments or increasing healthcare needs, states receive more federal money. While states fund a big portion of their individual Medicaid programs, the federal government matches up to a certain percentage, with bigger matches for poorer states.

The AHCA would change the federal Medicaid funding to a per-capita spending cap, meaning that the federal government would send states a fixed amount of money per Medicaid enrollee, regardless of whether that covers needs or care. That amount would grow yearly by the medical care component of the consumer price index starting in 2020 - somewhere between 2% and 5%, depending on the year.

Frank said using medical CPI as a benchmark for Medicaid would become a problem for states, because it doesn't take into account changes to population or unexpected crises.

One of the most obvious pitfalls would come with the aging of the Baby Boomer generation, Frank said.

By 2050, the population aged 65 and over will have grown to 83.7 million, nearly double the 43.1 million in 2012, according to a 2014 US Census Bureau report, with big increases in the number of people over the age of 85 as well.

Under the AHCA, the cost to cover Medicaid recipients in those categories is determined by their 2016 spending patterns and then grown by medical CPI. The problem, according to Frank, is that healthcare costs for elderly people will grow at a far higher rate than medical CPI.

In addition, the per-capita system divides Medicaid recipients into different categories like elderly people or disabled to determine the size of payments.

However, those categories are broad. For instance, 65 year olds are in the same category as 85 year olds, even though healthcare costs go up substantially as people age. Frank estimated that the AHCA plan would lead to a 9% shortfall in the coming decades, or about $10 billion per year that states will have to make up for.

"Even under the best-case scenario for the per-capita cap, you are going to fall behind That assumes there are no new drugs or treatments. Together, that's problematic," Frank said. "The states are going to take a big hit here."

Current CBO projections say that Medicaid spending under the per-capita system will be about 25% less than it would be under the ACA by 2026.

The choice for states

In order to stay above water, states would either have to spend more money on their Medicaid program - a daunting proposition for poorer states like West Virginia, which has one-third of its population on Medicaid - or cut costs.

Because Medicaid is already one of the lowest cost providers of healthcare, states will either cut benefits, which would affect the quality of coverage, or cut who is eligible for the program, which could hurt people with disabilities, older people, or people suffering from substance abuse, depending on what each state decides.

One of the first things to go could be substance use and mental health treatment, Frank said.

Another provision of the AHCA removes Obamacare's Essential Health Benefits, which require all health plans to include certain services, from some Medicaid plans. Before the ACA's implementation, mental-health and substance-use treatment tended to be "sparsely covered" by Medicaid providers, he said.

With the US in the midst of a drug overdose crisis, that could be devastating. About 1.29 million people in the US are receiving treatment for substance-use disorders or mental illnesses thanks to the Medicaid expansion, according to research conducted by Frank and New York University dean Sherry Glied.

Without the Medicaid expansion, the vast majority of those people would either fall into the "treatment gap" - unable to receive substance-use treatment because of a lack of insurance or public funds - or be forced to wait months or years to get into a publicly funded treatment program.

Even if state Medicaid programs don't cut substance use treatment coverage, the per-capita proposal would likely be devastating for the opioid epidemic.

Drug overdose deaths have grown around 10-15% for the last several years and Medicaid has paid for more than 50% of substance use treatment services in some states, according to official statistics. Increases in the rate of access to treatment by Medicaid recipients has increased over the last several years by between 20-25%, according to Frank.

Those numbers far outpace a growth in spending fixed to medical CPI.

If the AHCA does become law, Ohio, Pennsylvania, and West Virginia, among other states suffering the brunt of the opioid crisis, would be ill-suited to handle the loss in funds, government officials and treatment experts say. And that's to say nothing of states like Florida, which will suffer from a disproportionately aging population.

The AHCA Medicaid plan isn't likely to be popular with the public. When presented with Republican proposals to limit Medicaid spending or keeping the program the same, 65% of Americans said they would want the program to stay the same, according to a tracking poll released late last month by the Kaiser Family Foundation.