How the Senate Can Write a Better Health Care Bill
The biggest political news coming out of the House’s passage of the American Health Care Act (AHCA) is that most members of the Freedom Caucus voted for it. This is legislation that extends age-adjusted, refundable tax credits to all Americans without access to employer coverage, much of which will count as new spending in the federal budget. The bill also largely retains the Affordable Care Act’s (ACA) insurance regulations in the individual insurance market, despite what is being said in the press. There was a time when Freedom Caucus members would never have voted for such legislation. It seems the blowback on the caucus following the failure to pass the bill in March had a major effect on their outlook.
Much has been made of the MacArthur-Meadows amendment allowing states to opt out of the community-rating rules of the ACA. Some conservatives seem to think this amendment completely changes how the bill will work in practice. It won’t. For starters, the odds of this provision surviving in the Senate are low. The provision almost certainly violates the Byrd Rule -- the requirement in the Senate that provisions of reconciliation bills, such as the AHCA, must be budget-related in order to be protected from a Senate filibuster -- because it is aimed at state regulation of insurance and does not directly alter federal spending or revenue provisions. There probably aren’t 51 votes in the Senate for the MacArthur-Meadows amendment, much less 60.
Even if this amendment did survive in the Senate, it is actually very limited in its scope. States could only request a waiver of the ACA’s insurance rules for persons who do not maintain continuous coverage. The use of health status would still be barred in setting premiums for people who stay insured. So long as persons with expensive health conditions maintain enrollment in coverage, insurers couldn’t charge them more than anyone else of the same age.
Moreover, it’s hard to see many states requesting these waivers. The politics on pre-existing conditions is no different around the country than it is Washington. A direct reversion back to health underwriting, even with restrictions, in the insurance market wouldn’t have passed in the House, and it probably won’t pass in most state legislatures either.
The AHCA’s most important provisions remain the same from the version of the bill that was introduced in March: its repeal of the tax penalties tied to the individual and employer mandates; the very substantial restructuring of the Medicaid program; the replacement of the ACA’s tax credits with new, fixed credits tied to the age of the insurance enrollee; the premium surcharge imposed on consumers with breaks in coverage; and the elimination of most of the ACA’s tax increases.
The Congressional Budget Office’s (CBO) assessment of the bill was that it would cut spending by about $1.1 trillion over ten years, cut taxes by about $1.0 trillion over the same period, for net deficit reduction of $150 billion. The estimated savings is now likely to be somewhat lower due to the last minute spending included in the bill to secure the final votes.
In addition, CBO found that the bill would lead to a large increase in persons going without health insurance in the short-term and medium-term. By 2018, the number of uninsured would jump by 18 million people, and by 2026 there would be 24 million more people without health insurance. This is the main reason the AHCA is viewed with extreme skepticism by many Americans.
House Speaker Paul Ryan and President Trump have repeatedly made the argument that the AHCA is needed to rescue the country from the collapse of the ACA. But the CBO estimate shows that, instead of stabilizing the market, the AHCA is more likely to make it even more unstable, in large part because the bill would get rid of the ACA’s individual mandate and replace it with a weaker provision.
Senate Republicans now have the opportunity to write a better plan for American health care. The overall goal should be to develop legislation that provides comparable levels of insurance enrollment to the ACA, with less federal control, spending, and taxation. That is possible with the right policies.
The following are some of the most important changes the Senate GOP should make to the House bill:
Strike a Medicaid Compromise. Under the ACA, 31 states expanded Medicaid eligibility to 138 percent of the federal poverty line, while 19 states declined to expand their programs. The AHCA rolls back the enhanced federal funds that provided a strong incentive for the expansion. The projected increase in the uninsured under the AHCA is largely a function of the rollback of the Medicaid expansion funding. Senate Republicans should accept that Medicaid will serve as the nation’s safety-net insurance program and establish an income level below which all states would be expected to provide eligibility to their citizens. It is not necessary to provide coverage all of the way up to the ACA’s level; something around 100 or 110 percent of the federal poverty line would seem to be a reasonable compromise among the expansion and non-expansion states. The Senate should tie this compromise to converting the federal contribution into per-person payments to the states, as proposed in the House version of the legislation.
Provide More Generous Subsidization of Lower-Income Households. The AHCA repeals the ACA’s income-tested premium credits and replaces them with age-adjusted credits. For middle-class households, the AHCA’s credits are more generous, but for lower-income households, the credits would be much lower than current law. This is another important reason CBO believes the proposal would lead to a large increase in the uninsured. Senate Republicans should increase the generosity of the credits for those with incomes above Medicaid eligibility but below about 250 percent of the federal poverty line.
Fix the AHCA’s Premium Surcharge. The AHCA repeals the tax penalty associated with the individual mandate and replaces it with a one-year, 30-percent premium surcharge for consumers who have more than a two-month break in their insurance enrollment. The AHCA surcharge is too weak to work. A healthy consumer who is already out of the market has no incentive to sign up for coverage because the penalty they will face is the same regardless of how long they stay out of coverage. Moreover, because the surcharge is paid to insurance plans instead of the government, it is likely to run afoul of the Byrd Rule in the Senate. Republicans should replace it with a tougher penalty that can survive the Byrd Rule. One approach would be to require payment of the surcharge for the same length of time a person was out of the market. In addition, while the surcharge would be paid to insurers, insurers could then be required to forward all surcharge collections to the federal government to offset the cost of the Patient Safety and Stability Fund (PSSF) of the AHCA (the PSSF is a fund is aimed at reducing the premium pressure associated with high-cost cases). Tying the surcharge to the PSSF should help the provision survive the Byrd Rule.
Embrace Auto-Enrollment. There are still large numbers of Americans who are uninsured despite being eligible for assistance under the ACA. The same would be true if the House-passed AHCA became law. The solution is to build an automatic system of enrollment into health insurance for people who are eligible for a tax credit but who fail to use it to buy coverage. The best approach would be to require insurance plans to offer coverage with premiums set to equal the value of the age-based credits in the AHCA (before any income adjustments). Tax credit-eligible consumers could be placed into these plans and it would not require them to pay any premium themselves. It would be high-deductible coverage, but it would protect the people enrolled in them from major medical expenses. A provision of this kind would help the AHCA achieve much higher levels of insurance enrollment.
Limit the Tax Preference for Employer-Paid Premiums. Striking a compromise on Medicaid and providing more generous tax credits for lower-income households will increase the cost of a Senate bill compared to the House version. Part of that added cost could be financed with a sensible upper limit on the tax preference for employer-paid premiums. The ACA imposed a 40 percent excise tax -- the so-called “Cadillac tax” -- on employer plans with premiums above certain thresholds. The tax is the same regardless of the income of the worker. The AHCA would repeal this tax for years after 2019 but before 2026. A better approach would be to replace the Cadillac tax with an upper limit on the amount of employer-paid premiums that can be excluded from a worker’s taxable income. This kind of limitation would encourage greater cost discipline in job-based insurance and would be more progressive than the Cadillac tax because higher paid workers face higher marginal tax rates and thus would pay more for any premiums included in their taxable compensation than lower income workers.
Provide More Flexible Use of HSAs. Republicans want to encourage greater consumer-control in health care in part by expanding the use of Health Savings Accounts (HSAs). But HSAs need to be fixed to allow consumers to make better use of them. Right now, HSAs can only be used to purchase care and services on a fee-for-service basis; account holders cannot use their money to buy organized care from integrated health plans. The law needs to be changed to allow HSA funds to purchase packages of medical care services for transparent and fixed monthly fees. These fees would not be insurance premium payments; the HSA account holders would already own a high-deductible insurance plan. Rather, these fees would give the HSA account holders access to competing versions of pre-packaged access to routine and non-catastrophic medical care. Allowing HSAs to be used in this manner would encourage more direct and strong price competition among providers of medical services.
The House’s version of the AHCA has the right structure. It reforms Medicaid; it provides refundable tax credits for households without access to employer coverage or public insurance; and it tries to provide an incentive for continuous enrollment in insurance. But the bill is badly flawed because it gets many of the details of reform wrong.
Senate Republicans now have the opportunity to write a better plan, one that will be more viable politically because it will enjoy broader support among voters. It will be a difficult challenge to write such a plan, but it can be done.
James C. Capretta is a resident fellow and holds the Milton Friedman chair at the American Enterprise Institute.