The Senate Needs to Fix, Not Abandon, the AHCA

Now that the House of Representatives passed a revised version of the American Health Care Act (AHCA) to replace the Affordable Care Act (ACA) the ball is in the Senate’s court.  Despite calls to start from scratch, the Senate would be well advised to work off the structure of the AHCA.

The first reason is time. Considering the 48 Democratic Senators’ unified and implacable opposition to repealing and replacing the ACA, Republicans’ only option during the next two years is a reconciliation bill that only requires a simple majority in the Senate. Republicans are trying to pass the AHCA through reconciliation under a FY2017 budget resolution. That means Congress cannot pass a FY 2018 budget resolution setting up tax reform and other priorities until they pass the AHCA, otherwise they lose the opportunity to use reconciliation for repeal and replace this year. 

The second reason is that the AHCA provides a solid foundation that could be improved with some tweaks. It repeals the ACA’s unpopular individual and employer mandates and penalties but preserves its well-liked protections for people with pre-existing conditions, the ban on lifetime coverage caps, coverage for children up to age 26 on their parents’ insurance and coverage of essential health benefits. Critics have erroneously claimed that an AHCA provision allowing states to apply for waivers to apply health status rating (underwriting) to set premiums or determine their own benefits package will undermine protections for pre-existing conditions and lead to millions of coverage losses.  However, it is unlikely many states would seek waivers and using health status would only apply to people who fail to maintain continuous coverage. A bigger problem is that reconciliation bills can only be used for budgetary matters (the “Byrd Rule”). Since the waivers do not affect spending or revenues the Senate will likely excise them from the legislation.

Here’s how the Senate can improve the AHCA:

1. Increase Tax Credits - The AHCA replaces the ACA’s income based subsidies for people earning less than 400 percent ($48,240) of the Federal Poverty Level (FPL) with refundable tax credits based on age. ACA subsidies are only available for buying insurance on ACA exchanges. Yet 42 percent of individual-market participants purchase insurance off the exchanges. Even more may become ineligible for subsidies as insurers flee the exchange market leaving many areas with one or no exchange plans. AHCA credits, in contrast, can be used to buy insurance anywhere.

Credits range from $2,000 for people under 30 to $4,000 for people over 59. The credit phases out by $100 for every $1,000 in income above $75,000, disappearing at $95,000 for a 29 year-old and at $115,000 for a 60 year-old.

The tax credits may suffice for many people - eHealthInsurance reports that the average individual-market premium in 2016 was $3,852 - but insurance will be less affordable for older, poorer patients. This will be exacerbated by the AHCA provision, effective in 2020, changing the ACA’s 3-to-1 limit on premium adjustment between older and younger patients back to the pre-ACA norm of 5-to-1. While this will make insurance cheaper for the younger people the ACA failed to attract, premiums will rise for older people. The Senate should make the tax credits more generous, particularly for older patients, and could finance it by lowering the income threshold at which credits start tapering off (say, $60,000, roughly 500 percent of FPL).

2. Give State’s more Medicaid Flexibility - The AHCA transitions Medicaid from today’s open-ended, federal matching-payment entitlement to a federal per-person (per-capita) payment to states, coupled with greater state flexibility to run the program in 2020.  It is the first viable attempt to curb the growth of a major entitlement in a long time. The problem is how to deal with potential coverage losses. 31 states and the District of Columbia expanded Medicaid eligibility to everyone up to 138 percent of FPL motivated by the ACA’s promises of complete federal expansion funding. The AHCA ends that enhanced funding for expansion enrollees who join after 2019. With attrition of earlier enrollees states will be left with an expansion population that does not receive enhanced federal support. States will have to commit their own funds or abandon expansion resulting in increased numbers of uninsured. The Senate can alleviate Medicaid coverage losses by giving states flexibility to continue expansion at lower, more affordable levels than the ACA’s 138 percent FPL. States that could not afford continued coverage up to 138 percent FPL might be able to afford a lower level like 110 percent.

3. Strengthen Penalties for Failing to Maintain Insurance - The AHCA replaces the ACA’s individual mandate and associated tax penalty with a one-year, 30 percent premium surcharge for people who have not maintained continuous coverage (have a coverage gap of 63 days or more in the preceding year).  This is too lenient to deter abuse and may violate the Byrd rule since a premium surcharge paid to insurers will not affect the budget. Moreover, it stays the same regardless of how long the person went without coverage. The premium surcharge should be increased, linked to the time the person went uncovered and tied to a decrease in available tax credits so that it can survive a Byrd Rule challenge. 

4. Restore Limits on Tax Preferences for Employer-provided Insurance - Half of Americans get health insurance through their jobs. Employer-paid premiums are tax-exempt for employees and tax-deductible for employers. This tax preference costs the federal government over $250 billion a year in foregone revenues. Limiting it would encourage employers to offer more cost-effective plans and raise significant revenue. The ACA imposed a 40 percent “Cadillac” tax on employer plans with premiums above specified thresholds ($10,200 for individuals, $27,500 for families). The AHCA undermined this brake on the growth of employment-based premiums by delaying implementation of the tax from 2020 until 2026. The Senate should replace the Cadillac tax with an upper limit on the amount of employer-paid premium that is exempt from taxation. This would be more progressive than the Cadillac tax since higher paid workers are subject to higher marginal tax rates and would pay more tax on premiums that exceed the limit than lower income workers. Starting it in 2019 or 2020 would encourage cost discipline in the biggest part of the insurance market and generate revenue needed to implement the AHCA.

The Senate need not reinvent the wheel. Over the next few weeks, Republican Senators need to carefully consider how to fix the AHCA so that it will pass the Senate and ultimately be acceptable to House Republicans. If they fail, the country will suffer as ACA markets continue to deteriorate and Republicans will suffer at the 2018 ballot boxes.

Joel Zinberg, M.D., J.D., F.A.C.S., a visiting scholar at the American Enterprise Institute, is a practicing surgeon at Mount Sinai Hospital and an associate clinical professor of surgery at the Icahn School of Medicine.