Health+Benefits the Jan/Feb 2017 issue


Can access and affordability triumph in repeal and replace?
By Scott Sinder Posted on January 30, 2017

One of the biggest changes at hand is spelled ACA (for Affordable Care Act)—also known as Obamacare. The debate focuses on repeal and replace—and what, exactly, that means.

How can you repeal it when doing so could possibly leave tens of millions of Americans—those with pre-existing conditions and those who can’t afford coverage without government subsidies—without any health insurance at all?

And how can you replace it with something when no alternative has been offered?

Right now, only one thing is certain. Two key figures will play a major role in whatever happens: President Donald Trump and House Speaker Paul Ryan, R-Wis. Together, they will transform Obamacare into their own image—TRyancare, if you will.

And so the work begins.

Two overarching concerns will guide the debate. How can we best expand choice while at the same time controlling or reducing costs? These two guideposts are, of course, not always in harmony.

Where We Stand

Since the law was enacted in 2010, House Republicans have passed more than five dozen bills repealing the law in whole or in part. The most recent attempt, via a 2015 reconciliation bill, made it all the way to President Obama’s desk, where it was promptly vetoed.

President Donald Trump ran in part on a promise to repeal and replace the law. Now Republicans, who control the House, Senate and White House for the first time since 1930, must grapple with the core question of the moment: replace it with what? 

Trump outlined a five-point healthcare reform plan as part of his “Make America Great Again” campaign platform. In it, he called for:

  • Repealing (some of) the ACA
  • Expanding health savings accounts
  • Increasing medical provider transparency
  • Allowing interstate sales of health insurance
  • Replacing the current Medicaid program with block grants to the states.

Rep. Tom Price, R-Ga., a physician and chairman of the House Budget Committee (and presumptive nominee to be secretary of the Department of Health and Human Services), has his own plan. His proposal calls for repealing the ACA, expanding HSAs, allowing interstate sales of health insurance and fundamentally revising the Medicaid program.  The heart of the proposal, though, is replacing the ACA exchange subsidies with tax credits of $2,000 for an individual and up to $5,000 for a family to purchase health insurance.

Sen. Orrin Hatch, R-Utah, chairman of the Senate Finance Committee, which also will have a significant voice in the replace debate, has his own plan. It would repeal much of the ACA, expand HSAs, create a sliding scale of tax credits (based on both age and income) for those without access to employer-provided coverage and those who work for smaller employers, and impose cost-based caps on the income tax exclusion for employer-provided health insurance.

Speaker Ryan, a self-proclaimed policy wonk (and at some level the House’s chief public policy development officer), has offered a more far-reaching plan as part of his “A Better Way” package of proposed reforms. His plan dovetails with the Trump, Hatch and Price proposals but is anchored on capping the income tax exclusion for employer-provided health insurance premiums.

The Employer Tax Exclusion

2014 Federal Tax Break

  •  $164.2 billion for employer health insurance tax exclusion
  •  $163 billion for pension payment exclusions
  •  $100 billion for the home mortgage interest deduction
  •  $71 billion for special capital gains tax treatment
  • $51.6 billion for charitable contribution deductions

From the commercial insurance broker’s point of view, the most important question is what happens to the tax treatment for employer-provided coverage.

The federal government is starved for cash. There is no end in sight for deficit spending. One of the primary focal points of the new administration and Congress will be tax reform, and they will need to find funds to offset every new tax break they approve for some special interest. They also need to find funds to pay for the income tax credits many Republicans would like to use to replace the ACA exchange subsidies. 

Employer-paid health insurance premiums are excluded from employee income for tax purposes, making the so-called “employer exclusion” the largest tax expenditure in the federal budget and thus the biggest congressional target.

The Joint Committee on Taxation says the total value, when including employer-paid healthcare, health insurance premiums and long-term care insurance, was more than $320 billion in 2016.

Famed bank robber Will Sutton is reported to have said, when asked why he robbed banks, “Because that’s where the money is.” While Sutton contended he never said any such thing, members of Congress are not so circumspect. They are looking lustfully at the employee tax break.

Republicans have looked at caps on tax breaks of various types for insurance premiums. One plan would impose a 10% excise tax on all pre-tax benefits given to higher earners. Other plans propose replacing the employer exclusion with a universal tax credit made available regardless of whether coverage is purchased through the individual or group market.

Employer-paid health insurance premiums are excluded from employee income for tax purposes, making the so-called “employer exclusion” the largest tax expenditure in the federal budget and, thus, the biggest congressional target.

There are also proposals (including Senator Hatch’s) to cap the exclusion at a percentage of average employer plan costs nationwide. The Urban Institute in 2013 estimated capping the tax exclusion at the 75th percentile of the value of employer plans would increase tax income to the federal government by $102 billion by 2023. That means the median middle-class taxpayer would then pay $914 more per year in taxes.

Some proponents say employers would offset the tax increase on the employee with higher wages. Yet the American Health Policy Institute has been unable to find a single study that draws this conclusion.

Speaker Ryan proposes capping the exclusion at $12,000 for individuals and $30,000 for families, and Price has suggested caps of $8,000 for individuals and $20,000 for families. Given the strategic roles of the bills’ champions, this approach will receive serious consideration.

Ryan says any cap needs to be set at a level that minimizes disruption and should be adjustable to address geographic differences in healthcare costs. He also is amenable to omitting health savings and investment accounts from affecting capped premiums.

One thing that does not appear to be on the table—despite concerns to the contrary—is an employer’s ability to deduct benefits it pays on behalf of its employees as a normal business expense.

President Obama has called health insurance delivery through employers a “historic accident.” The same day he made that comment, Sen. Ted Cruz, R-Texas, called employer-provided benefits a “historic anomaly.” Anomaly or not, it is now a well-embedded reality. The American Health Policy Institute recently noted 177 million Americans receive health insurance through their employers. Of that number, 88% said the benefits are extremely or very important to them—“far more than any other workplace benefit.” It also noted 79% of workers would prefer new or additional benefits to a pay increase. “More U.S. workers say they worry about having their benefits reduced (30%) than worry about having their wages cut (20%), being laid off (19%), having their hours cut back (17%), or their company moving their job overseas (8%),” the institute said.

Struggling Exchanges

Arizona   145%

Alabama   70%

Oklahoma   67%

Minnesota   55%

Pennsylvania   51%

Tennessee   49%

Illinois   48%

Kansas   46%

South Dakota   45%

North Carolina  40%

Nationwide Average

HHS projection 16%

Other projections 30%

We were going to have some sort of healthcare reform reset discussion in Washington regardless of the presidential election outcome. Many believe that, in their current condition, the exchanges are not financially sustainable.

Absent reform, the future was not promising.

The one bright spot here is that the ACA’s Medicaid expansion and health insurance exchanges for individuals have succeeded at expanding coverage and reducing the number of uninsured Americans. And research shows that having health insurance does contribute to better health and increased access to care.

The Department of Health & Human Services, which is responsible for overseeing the exchanges, reports as of early 2016 the ACA has enabled 20 million Americans to gain access to coverage. That includes 17.7 million non-Medicare eligible adults and 2.3 million young adults (ages 19-25). The uninsured rate has declined from more than 20% pre-ACA to about 11% now, according to the Center on Budget and Policy Priorities.

Coverage gains cut across all racial groups. Uninsured Hispanics dropped to 30.5% from 41.8%; African-Americans dropped to 10.6% from 22.4%; and White/Non-Hispanic dropped to 7.0% from 14.3%.

The current coverage gap is most pronounced, as might be expected, in states that did not expand their Medicaid programs. There is as much as a five percentage point difference in rates of coverage between states that expanded their programs and those that did not.

Despite those gains, the exchanges overall are suffering. The ACA gave seed money to 23 co-ops—private, nonprofit, member-governed health insurance companies selling policies on their states’ exchanges. Of those, 17 have failed. In 2016, 85% of exchange enrollees had a choice of three or more insurers. Today, only 57% do. Five states offer only a single insurer option (Alabama, Alaska, Oklahoma, South Carolina and Wyoming).

The Kaiser Family Foundation found that due to increased subsidies there will be no material increase in 2017 after-tax premiums in the individual market. That doesn’t mean, however, that premiums aren’t rising. Increases for the second-lowest-cost silver plan (the most widely purchased option) range from essentially zero in Massachusetts and New Hampshire to 145% in Arizona. Some 33 states are looking at double-digit increases.

Accepting Repeal

Americans, by and large, want government to focus on healthcare. Three quarters of Americans want President Trump to make healthcare a priority, according to PricewaterhouseCoopers. What they want, however, is not quite so clear. Kaiser found 46% of Americans have an unfavorable view of the ACA, while 40% view it favorably. A May Gallup poll found 58% favor replacing it with a federally funded universal healthcare program providing health insurance for all Americans. Perhaps as a sign of Americans’ confusion and misunderstanding of the issue, the same poll found 48% favor keeping the ACA as is.

Despite the public’s mixed feelings on what should happen to the ACA, most, if not all, Republicans in the House and the Senate, as well as President Trump, appear committed to repealing a wide swath of it.

Candidate Trump stumped for immediate and complete repeal. President-elect Trump hesitated. The House appears to be coalescing around an immediate repeal strategy with intent to build in a two- or three-year transition period to allow for time to create replacement provisions. Several prominent senators, including Lamar Alexander, R-Tenn., who chairs the Senate committee with primary jurisdiction over much of the ACA, are arguing the repeal and the replacement need to be done simultaneously to avoid both political and marketplace disruption.

Ironically, it is likely more Senate Democrat support could be mustered if repeal and replace were separated because all of the Senate Democrats who originally voted for the ACA have stated publicly they will not vote for repeal. Voting for a replacement after the repeal, though, would not be inconsistent, and Democrats from Trump-won states will be looking for things to support to bolster their reelection prospects. It is highly likely a reconciliation repeal bill gets enacted very early in 2017 with a protracted replacement debate to follow.

What would that bill look like? We can get a good idea from the 2015 reconciliation bill, by all reports the base text for any 2017 repeal efforts. The 2015 redux bill would repeal the individual premium assistance subsidies and the small-business tax credits. It also would immediately repeal:

  • Individual mandate penalties
  • Employer mandate penalties
  • Cadillac tax provisions
  • Annual fee on importers and manufacturers of branded prescription drugs
  • Annual fee on healthcare providers covering U.S. health risks
  • Medical device tax
  • Medicare surtax on high-income tax payers ($200,000 for individuals/$250,000 for families)
  • 3.8% investment tax on high-income tax payers
  • Health insurance carrier remuneration tax on any annual compensation to an individual exceeding $500,000
  • Prohibition on using health savings account/flexible savings account and other health account funds to purchase over-the-counter medications
  • Tanning bed excise tax (my personal favorite).

Because Congress would use the reconciliation process to make changes to the ACA, Senate Democrats cannot filibuster and stop a vote, as only a simple majority of 51 is required under reconciliation. Republicans can count on 52 votes. Under the Congressional Budget Act, which creates and controls the reconciliation process, for legislation to qualify for reconciliation it must have a budgetary impact and any increase to the federal deficit must be offset by revenue raisers in the same bill.

Two fundamental repeal debates are taking place at the moment. First, what else, if anything, should be included in repeal? Although there is some dissent within the Republican ranks, the emerging consensus appears to be that repeal should not include popular market reforms, including the plan design requirements. 

The Council will advocate for the repeal of two provisions not included in the 2015 reconciliation effort:

  • Mandate-related reporting requirements. These widely derided administrative burdens were designed to make the mandate penalty regimes enforceable. Without the penalties, they appear to serve little purpose and instead create an expensive compliance burden for employers and an administrative burden for the Internal Revenue Service. If these requirements are not included in the reconciliation package, the new administration can issue an executive order dictating the obligations not be enforced. The Council will urge it to do so if need be.
  • Medical loss ratio provisions. These provisions capped administrative expenses and profits that a health insurance provider could realize—15% in the large-group market and 20% in the individual and small-group markets. To the extent an insurer exceeds these caps, the overage must be refunded to the employer or to the plan participants. The MLR has a direct budget impact since it affects tax collections (every dollar an insurer refunds will not be taxed as income). The MLR also creates a perverse disincentive for an insurer to reduce medical costs since the higher the costs, the greater the administrative expenses the insurer can incur and, thus, greater profits.

Replace With What?

What exactly will replacement look like? Republicans appear committed to retaining the ACA market reforms they originally proposed in the 1990s. These include prohibiting pre-existing condition exclusions, guaranteed issue of policies to all applicants (take all comers) and community rating in the individual and small-group markets.

Republicans understand health insurer concerns that they will be subject to even more adverse selection risk than they have seen to date in the absence of an individual purchase mandate requirement. To solve this, Congress needs to make the individual market attractive (or punitive) enough and affordable enough for individuals to actually buy coverage even when they do not immediately need it—and still ensure the market remains economically viable.

Embedded within those dilemmas are a few unavoidable realities. First, the employer-provided marketplace is working. If you put pressure on that space by limiting or eliminating preferential tax treatment for employers, you could magnify current failings exponentially by putting even more pressure on the individual markets.

Almost none of the ACA reform regime has addressed cost control. At the end of the day, the greatest threat to the current system is its inability to control escalating costs. If the individual market ultimately fails, the subsequent replacement efforts might lead to a complete displacement of employer-provided coverage. 

So what are our options?

Expanding Consumer Choice

Although the ACA did little to address healthcare costs, employers are heavily incented to do so because healthcare costs account for 5% to 10% of their compensation expenses and 2% to 5% of their total expenses.

One of the ways they have addressed this is through consumer-directed plans. The percentage of employers offering a consumer-directed health plan tripled from 4% to 13% from 2007 to 2010 and jumped to 29% for 2017.

The one bright spot here is that the ACA’s Medicaid expansion and health insurance exchanges for individuals have succeeded at expanding coverage and reducing the number of uninsured Americans.

More than half of all large employers (200+ employees) offer a high-deductible health plan option, and more than 84% of very large employers (1,000+ employees) offer an HDHP option. And 35% of very large employers offer only consumer-directed health plan options to their employees.

Both Ryan and Trump have focused heavily on expanding provider transparency to better enable all market participants to evaluate their options, including consumers through Republican-favored, consumer-directed health plan options. Ryan has also proposed including protections for self-insurance mechanisms, with provisions eliminating states’ ability to regulate terms and conditions of stop-loss coverage for self-insured plans.

Many Republicans are focused on attempting to get greater leverage from health savings accounts, which are a featured cornerstone of their support for consumer-directed healthcare models. It is likely any reconciliation bill would eliminate the ACA limitations on using HSA and flexible savings account funds for the purchase of over-the-counter drugs. It is also likely a reconciliation bill will restore the pre-ACA $5,000 cap on FSA contributions (eliminating the current $2,500 cap).

Beyond that, Ryan has proposed four other HSA fixes that would be eligible for inclusion in a replacement bill:

  1. Allowing spousal catch-up payments to increase HSA contributions
  2. Allowing qualified medical expenses incurred before HSA qualified coverage has begun to be reimbursed from an HSA account as long as that account is established within 60 days of incurring that expense
  3. Increasing the maximum annual HSA contribution that any high-deductible health plan participant can make to equal the total combined allowed annual deductible and out-of-pocket expense limitation
  4.  Increasing HSA availability for underserved populations, such as those who use the military’s Tricare coverage or the Indian Health Service.

Democrats generally do not favor HSAs. They’re viewed as only appealing to (and effectively only available to) the wealthy. The focus by very large employers on consumer-directed health plan platforms belies this view to some extent. Softening the HDHP requirements through the adoption of the following two sets of additional revisions also should increase the blue-collar appeal of these platforms:

  • Exempt employer on-site medical clinics, telemedicine and maintenance prescription drug protocols from the otherwise applicable HDHP deductible requirements
  • Eliminate the ban on Medicare-eligible HDHP plan participants from contributing to HSAs.

The recently passed CURES Act also included a provision allowing employees at small businesses (fewer than 50 full-time workers) to use their health reimbursement accounts to purchase coverage in the individual market on a pre-tax basis. This would utilize the “employer exclusion” provided the small employer:

  • Does not offer its own group plan
  • Makes the HRA offer available to all eligible employees on the same terms
  • Is the sole contributor to the HRA
  • Caps its contributions at $4,950 for individuals and $10,000 for families.

There may be some desire to expand this privilege to larger employers, which would restore an option they had pre-ACA.

Expanding wellness programs is high on many lists. The ACA initiative with the biggest potential to bend the cost curve was the expansion of the tools an employer can employ to incentivize participation. The law differentiates between participatory programs and health-contingent programs. Participatory programs are generally available without regard to health status, and any reward available is not tied to meeting a health-related goal. Health-contingent programs require participants to satisfy a health-related goal to obtain a reward.

For the latter, an employer can incentivize participation by offering up to 30% of the overall premium value (which includes both the employer and the employee contributions) and up to 50% for tobacco-cessation programs.

Rep. Price has proposed allowing the premium differential to be 50% between those who participate in a plan’s wellness offerings and those who don’t.

Participatory programs satisfy the Woody Allen maxim that 90% of life is just showing up. All you have to do is show up to qualify for them. The classic example is a Health Risk Assessment, which often is combined with biometric screening. Because anyone who wants to should be able to participate in a health risk assessment-type program, there are no restrictions from the Treasury, Labor Department or HHS on the magnitude of the incentive an employer can offer.

The Equal Employment Opportunity Commission, however, has finalized rules that attempt to impose restrictions pursuant to its rulemaking authority under the Americans with Disabilities Act and the Genetic Information Nondiscrimination Act. In some cases, the EEOC wellness regime appears to directly conflict with and undermine the federal wellness program regime. The Ryan plan would resolve this by exempting HHS/Labor/Treasury regulated wellness programs from EEOC scrutiny.

There also may be support for broad medical malpractice reform and cost-of-care caps or legislation on the use of reference pricing mechanisms. Trump’s selection of Price to be his HHS secretary, however, likely will mean the administration will oppose efforts to directly legislate any provider cost controls.

The one other change that is vital to employers is ensuring the ACA “nondiscrimination” requirement is limited to ensuring eligible employer plan participants have access to all of the plan options—with terms at least as good as their most highly paid colleagues. 

Obama Treasury officials believe the nondiscrimination rule should be written much more broadly so it would be violated if lesser-paid employees do not participate in each plan option at levels on par with their more highly paid colleagues. As a practical matter, this would require an employer to offer just a single plan option, because that is the only way to ensure compliance. This obviously would be at odds with one of the governing tenets: expanding consumer choice.

Accessibility and Affordability

The initial twin ACA accessibility and affordability objectives remain touchstones for any replacement vehicle. Maintaining guaranteed issue and prohibiting pre-existing condition exclusions while eliminating the individual mandate obligation to purchase coverage triggers concerns that individuals will buy coverage only when they need it and that only those who need it will buy it. Fears that declining competition will raise prices and limit choice exacerbate those concerns.

A number of proposals have been circulated in an effort to address this. There is growing realization that premium support is essential for those now eligible for exchange subsidies. The subsidies are likely to be traded in for some sort of tax credit. There also is discussion of tying receipt of those credits to private exchanges either in lieu of, or in addition to, the public exchanges.

Regardless of how and when repeal becomes effective…any final replacement solution almost definitely will require mustering the votes of at least eight Senate Democrats to hit the magic 60.

Expanding the community rating age bands to allow at least five rating levels also is high on the replacement reform list to make the pricing more actuarially sound. It also would reduce the pricing barrier to younger individuals buying coverage. 

Several Republican reform proposals would create high-risk pools through a public-private partnership (using Medicare pricing) to reduce the financial burden on the system and on the high-risk individuals. The idea is that it would put more downward pricing pressure on the larger pool of healthier consumers.

To directly address the adverse selection issue, Republicans are considering imposing conditions on the ability to qualify for the guaranteed issue/no pre-existing condition exclusion. Ryan would require an individual to be continuously enrolled in a qualifying plan to be eligible going forward for coverage from any plan without regard to a pre-existing condition—as was the case pre-ACA.

Interstate Sales

Several Republican proposals recycle old ideas designed to allow individuals to create (or be placed into) underwriting groups outside of the employer plan context. The most prevalent would allow interstate sales of health insurance. Conceptually, the idea is relatively straightforward: an insurance carrier could offer any plan it offers in its “home” state to consumers outside its borders without restriction. In practice, however, the proposals raise a host of issues:

  • How will a consumer’s home state regulator be able to exercise any real jurisdiction over a non-admitted carrier selling health insurance in that state?
  • How will an agent or broker assisting with that placement be able to navigate the surplus lines laws in a context where those laws were never meant to be applicable?
  • Won’t big carriers with national provider networks have huge advantages over smaller regional players, thereby undermining the increasing competition objective of the proposal?

The primary advantage of an interstate sales approach likely is that it effectively allows state mandate requirements to be overridden because a carrier could domicile in the friendliest state (i.e., the state with the fewest mandates) and then be able to offer a streamlined plan with more favorable pricing in every other state. 

What Is Essential?

A recent Washington Post op-ed extolled the virtues of the ACA and its assurance that all Americans have access to “essential care.” Since enactment of the ACA, however, individual and small-group plans have been required to cover much more than just essential care—which was never the original intent.

The ACA required HHS to establish a national benchmark plan to incorporate all of the requisite essential health benefit elements. The national benchmark was expected to offer a streamlined and economical basic plan on every exchange. If a state’s mandates exceeded the benchmark, the state could have continued to impose them as long as it paid any subsidies associated with the extra premiums resulting from them.

The state mandate subsidy obligation was expected to lead to widespread elimination of thousands of state mandates. But that never happened because HHS decided instead to delay the benchmark plan indefinitely. In the interim, it directed each state to develop its own benchmark plan, which generally could be based on the most widely sold plan in the state.

HHS also unilaterally decreed all mandates in place prior to the ACA’s enactment could be included in a state’s benchmark plan without exposing the state to the mandate subsidy financial obligations. So none of the expected mandate reform happened. 

This resulted in critical consequences:

  1.  “Basic” exchange (and all individual/small group) policies are much more expensive than they should be.
  2.  The federal subsidy obligations are much higher than they should be (because the federal government is subsidizing all of the state mandates).
  3.  It is much more complicated than it should be for small businesses to insure employees in multiple states.

A replacement regime could be grounded to some extent on the revitalization of the national benchmark plan idea. Rather than trying to do this circuitously through interstate sales, the law could simply dictate a plan based on the national benchmark plan that could be sold in any state without restriction. And guaranteed purchase rights for a previously uninsured consumer could be limited to only the basic benchmark plan (and only during open enrollment periods).

There are a number of different ways these options and ancillary benefits could be configured. Starting with a simpler plan offering the same basic option throughout the country could be a springboard for resolving both the affordability and accessibility conundrums in one fell swoop.

If repeal is the enigma, replacement is the riddle. At the moment, there are many different plans that could follow many different paths. New ideas and suggestions continue to sprout like weeds. All eyes have been on the

Republican leaders as they attempt to sort through the options and plot a unified course.

Regardless of how and when repeal becomes effective (and repeal of significant swaths of the ACA appears inevitable at this juncture), any final replacement solution almost definitely will require mustering the votes of at least eight Senate Democrats to hit the magic 60. The key to solving the riddle ultimately may lie in their hands.

Scott Sinder Chief Legal Officer, The Council; Partner, Steptoe Read More

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