Note: I first wrote this post when Republicans had released talking points, but not a bill. Recently, House Republicans released a draft bill, which they are marking up in two committees. I have now updated this post to reflect one change from the talking points: tax credits will be based on age AND income, not just age, likely because of criticism received upon releasing the initial memo. I will also briefly outline the provisions of the bill.
Congressional Republicans are currently marking up a bill to repeal and replace the Affordable Care Act (ACA), otherwise known as Obamacare.
The American Health Care Act proposes to REPEAL:
-The employer “pay-or-play” mandate that requires large employers to either offer health insurance or pay a penalty
-Subsidies for cost-sharing (deductibles, copayments, and coinsurance) in the health insurance exchanges
It will REPLACE:
-The individual mandate to purchase health insurance with an optional 30% surcharge on monthly premiums (for up to one year) for individuals whose coverage lapses for two months or more, in the individual and small group markets
-Income-based premium subsidies in the health insurance exchanges with age- and income-based premium subsidies. Subsidies cannot be used to purchase plans that cover “elective” abortion – abortions that are not for cases of rape or incest or to save the life of the mother, and can be used outside of the exchanges for plans that are not ACA-compliant.
-Premium age bands limited to a 3-fold difference between the highest and lowest premiums (i.e., the premiums for the oldest individuals cannot be more than 3 times those of the premiums for the youngest individuals) with age bands limited to a 5-fold difference between the highest and lowest premiums
-Federal Planned Parenthood funding (except for abortions) with a one-year freeze on funding altogether
It will CHANGE (provisions not part of the ACA):
-Medicaid will no longer receive federal matching funds for every dollar of state spending, but rather receive a “block grant,” a per capita amount based on 2016 Medicaid spending.
-Federal funding for “high-risk pools” to relieve insurers of the burden of high-cost enrollees. $100 billion over 10 years.
-The contribution limits to health savings accounts. In 2017, individuals may contribute up to $3,400 for an individual and $6,750 for a family. In 2018, the plan proposes to raise this contribution limit to $6,550 for an individual and $13,100 for a family. The contribution limit is raised every year to keep up with inflation, but this increase surpasses inflation by quite a bit.
It will KEEP:
-Requirement that non-grandfathered plans cover pre-existing conditions and essential health benefits, and prohibition on annual limits for essential benefits.
-Prohibition on lifetime benefits for essential health benefits for all plans.
-For plans with dependent coverage, this coverage must be offered until age 26.
-“Cadillac” tax of 40% on insurers and employers for plans whose premiums exceed a threshold amount for that year
I will be discussing the new provisions in a series of posts: 1) tax credits; 2) Medicaid block grants; 3) high risk pools; 4) health savings accounts.
Republicans propose to replace existing premium subsidies with their own. Under the ACA, households earning between 100% and 400% of the federal poverty level (in 2017, $12,060 for an individual and $24,600 for a family of 4 in every state except Alaska and Hawaii) may use subsidies to purchase a health insurance plan in the exchange. Further, subsidies increase as income decreases. Under the Republican plan, however, subsidies are based on income and age, and recipients are not restricted to the exchanges. The subsidy is $2,000 for individuals aged 20-29, and increases $500 for every ten-year age bracket up to $4,000 for those aged 60 and older. Credits phase out for individuals earning over $75,000 and joint filers earning over $150,000. Subsidies under the Republican plan could also be used to purchase COBRA (continuing coverage through an employer). Any remaining funds not used to purchase a plan may be deposited into an HSA. In both the ACA and the Republican plan, subsidies are offered as tax credits that are advanceable (households may receive them before they file taxes) and refundable (even households that don’t pay taxes may receive them).
As with any policy, there are pros and cons to the Republican tax credit proposal. While the objective of the ACA is universal health insurance coverage, the objective of the Republican plan is choice and autonomy, and to some extent, policymakers must trade off these objectives. Indeed, consumers have limited choices of plans and benefit structures in the exchanges, where plans are limited to four standardized “precious metal” tiers of coverage – bronze, silver, gold, and platinum. But the ACA requires consumers to purchase plans on the exchanges for several reasons: 1) insurers require sufficient numbers of healthy enrollees in order to remain in business; 2) standardizing plan benefits limits adverse selection (sicker enrollees unexpectedly choosing more generous plans, such that the premium for those plans cannot cover their cost, which can lead to the derailment of the individual market); and 3) exchange plans are required to offer consumer protections, while those outside of the exchanges may be grandfathered, and thus exempt from some of these protections.
Grandfathered plans are plans that were in existence before March 23, 2010, and have not undergone substantial changes in benefits since then.* These plans need not comply with many of the ACA protections, including guaranteed issue of a policy to anyone who applies, coverage of pre-existing conditions, community rating of premiums (premiums that do not vary with health status), or coverage of essential health benefits. Here is more information on what grandfathered plans need and need not cover (table on pp. 16-17).* Grandfathered plans may be less expensive because they offer fewer benefits to healthier enrollees, not because they offer superior coverage.
Similarly, tying subsidies to age rather than to income is aligned with Republicans’ objectives of choice and autonomy, rather than universal coverage. Affordability is the number one reason that people are uninsured (and was before the ACA as well). As such, in crafting their legislation, Democrats increased subsidies as income declined. Republicans worry that this structure disincentivizes earning, and literature in the subfield of labor economics supports this view. (The literature generally shows that when these disincentives are removed, individuals are more likely to work). Under the Republican plan, then, low-income households would need to earn an additional amount – the amount they are being subsidized – in order to do as well as they are under the ACA (plus some extra, as we will talk about, since Republicans propose to tax premiums).
In general, income increases as age increases, so the subsidy proposed by Republicans is regressive. Increasing the subsidy with age encourages the aged to sign up for insurance, but this group is already well covered; the uninsured are disproportionately under 35, and it is this younger group that insurers so desperately need to stay afloat.
The Republican tax credit proposal differs in another respect from the ACA. Subsidies cannot be used to pay for plans that cover “elective” abortions (abortions for pregnancies that are not caused by rape or incest or that are not necessary to save the mother’s life). Under the ACA, states decide whether plans may pay for abortions. While plans in 23 states have banned or restricted coverage, plans in 28 states offer coverage.
The ACA is funded in large part by the individual and employer mandates (see Table 2), and it is not clear how the Republicans will fund a plan without these mechanisms, or how much their plan costs. The Congressional Budget Office (CBO) will release a “score” on March 13, an estimate of its costs and revenues over a 10-year time frame, but the House committees intend to mark up the bill and vote on it before seeing the CBO score.
*It is difficult to estimate how many plans are grandfathered, because each state determines eligibility for grandfathered status, and not all states report the breakdown of plans in the individual market. But it is safe to estimate that the proportion of the market is small, but non-trivial; for example, in both Texas and New Hampshire, grandfathered plans constitute 10% of the individual market by total enrollment. An increase in demand for these plans would not affect their grandfathered status, though a change in their benefit structure could.