Health Care Will Be Back, So the AHCA’s Surcharge Needs to be Fixed
The failure to move forward with the American Health Care Act (AHCA) in the House of Representatives seems likely to postpone legislative activity on repeal and replacement of the Affordable Care Act (ACA) for some period of time. Still, it is premature to assume health care legislation won’t be brought up again this year; there is too much instability in the individual insurance market under the ACA to expect the problem to resolve itself without a significant policy intervention.
Instead of walking away from the issue, Republican leaders should look again at the AHCA and correct the flaws that made it difficult to pass in the first place. The plan should also be adjusted with an eye toward attracting some level of bipartisan support.
One glaring problem with the GOP-drafted plan was that it did not fix the primary problem that its authors said is plaguing the ACA. President Donald Trump and House Speaker Paul Ryan have argued repeatedly that the AHCA was needed to rescue the country from the collapsing markets of the Affordable Care Act. But the AHCA, which has many good features in it, would have made the individual insurance market even less stable than under the ACA.
It is undeniable that the individual insurance market under Obamacare is suffering from adverse selection. The ACA made the products in that market much more attractive to consumers with elevated health risks by requiring insurers to charge uniform premiums to all enrollees of the same age and gender. It then tried to force healthier consumers to buy plans in that market with the individual mandate, enforced with a new tax. But the tax penalty for going uninsured is, for many people, much less than the premium they would owe if they bought an ACA-compliant insurance plan. Consequently, in many states, the risk pool in the individual market is skewed toward consumers who use a lot of medical services, which is why the insurance industry has collectively suffered billions of dollars in losses since the new rules went into effect in 2014. This is also why premiums, on average, have been rising rapidly over the past two years.
But instead of fixing this problem with a better approach, the AHCA would make the situation somewhat worse. The legislation leaves in place the basic insurance rules of the ACA which prevent insurers from taking into account a customer’s health status when designing coverage and setting premiums, even as it eliminates immediately the tax penalty associated with the individual mandate.
As a replacement for the individual mandate, the AHCA as written would have imposed a new, one-year 30 percent surcharge on premiums for customers who have experienced more than a two-month break in their insurance enrollment over the previous year. The idea was to encourage consumers to stay continuously enrolled in coverage to avoid paying this add-on to their regular premium.
The AHCA’s surcharge is, for many people, even weaker than the individual mandate. A major flaw is that the surcharge is not adjusted to correspond to the length of the spell without insurance. A healthy person who drops insurance coverage would have every incentive to stay out of the insurance market as long as they possibly could, because the penalty only applies when they re-enter the market, and even then it would last only one year.
The Congressional Budget Office (CBO) has stated that it does not foresee a full-scale meltdown of the insurance market under either the ACA or the AHCA. That’s because the agency believes the subsidies for enrolling in coverage are sufficient under current law and under the proposal to keep enough healthy people in the market to prevent an insurance death spiral.
But the CBO does project that if the AHCA were enacted it would lead to a substantial short-term exodus out of the individual market because the proposed surcharge is weaker than the ACA’s mandate. In 2018, the CBO expects there will be 6 million fewer enrollees in insurance offered in the individual market, and the average premium for plans that are sold in that market would be 15 to 20 percent higher in 2018 and 2019 under the new proposal compared to current law. By 2026, the agency expects enrollment in the individual market to be just 3 million less than under the ACA, as other proposed changes would offset the effects of the weaker mandate.
In addition to these problems, the AHCA surcharge provision might have been vulnerable in the Senate for violating the rule prohibiting provisions with only incidental budgetary effects from being included in a “budget reconciliation bill” like the AHCA. An important consideration is that the surcharge, unlike the ACA’s individual mandate tax, is paid to private insurance plans, not the federal government.
These problems with the AHCA’s surcharge should be corrected in whatever plan is pulled together to address the problems in the ACA.
The GOP is adamantly opposed to requiring Americans to purchase insurance plans that they do not want. But the market for health insurance will not work if it first removes health status as a consideration in setting premiums and coverage and then allows consumers to move rather freely in and out of the market with minimal penalty and no consideration of pre-existing conditions.
The country has reached a consensus that people who have elevated risks but have always paid their premiums and stayed insured should not be penalized for their health status with higher premiums. That being the case, there must be appropriate financial incentives for everyone who wants to enjoy this social protection to stay insured. Someone can choose to go uninsured under the AHCA; they are not required to buy health insurance. But they shouldn’t be able to do so and retain the bill’s protection against future risk rating, because that will just provide a stronger incentive to exit the market and push costs onto other insurance enrollees.
The solution is to create a structure where a person who drops coverage is forced, when he returns to the market, to pay the price for that decision in a clear and reasonable manner. For instance, if a person went without insurance for two years, saving $3,000 in premiums per year, then he must pay a surcharge that, over time, approximates the amount of the foregone premium payments. The surcharge should be set at a reasonable level (but perhaps somewhat higher than the 30 percent amount in the current AHCA), and it must remain in place as long as necessary to ensure consumers are not able to reduce their overall premium burden by substantial amounts by going uninsured. It may be necessary for some consumers to face the surcharge amount spread over a number of years to ensure that the annual payment is reasonable for their income. It also may be necessary to require consumers with breaks in coverage to pay higher costs for their pre-existing conditions for some period of time.
The best way to enforce the surcharge should be a reduction in any future tax credits payable to the person (the AHCA would make available age-adjusted, refundable tax credits to offset the cost of insurance premiums to all households without access to employer coverage or public insurance). Instead of the full tax credit, those who had previously been uninsured would get a reduced amount reflecting the subtraction of the surcharge. In other words, the penalty would be lower subsidies, rather than higher taxes.
In addition, the surcharge should be tied to financing the state-directed high-risk subsidy payments authorized and funded in the AHCA’s Patient Safety and Stability Fund (PSSF). Connecting the surcharge to financing the PSSF makes sense because it would reinforce the primary purpose of the fund, which is to ensure consumers with elevated health risks can get affordable coverage. An appropriate surcharge can incent people to stay insured, and thus balance high-risk enrollees, and it can provide needed funds when separate high-risk payments are needed to ease the burden on traditional premium payments. Tying the surcharge to the PSSF in this way should also protect it from a procedural challenge in the Senate. The surcharge would be used to partially finance the federal funds made available to the states under the PSSF.
Opponents of the Affordable Care Act are right that the individual insurance market is not performing as well as it should under current law. But the American Health Care Act would not have fixed that problem, which is one reason it failed to gain traction. Health care will probably get pushed back onto the national agenda again at some point because the ACA’s problems are not going away. When that time comes, the AHCA’s authors should be ready with an amended plan that actually fixes the problems they say it is intended to address.