The Fixes the Senate Bill Needs
Senate Majority Leader Mitch McConnell is struggling to find the votes to pass an updated version of the draft health-care bill he first released last week. The Congressional Budget Office (CBO) estimate of the bill did not make his job any easier. CBO projects the Senate plan would increase the number of Americans going without health insurance by 22 million in 2026.
The Senate bill, called the Better Care Reconciliation Act (BCRA), is deficient in many different ways. Republicans claim to want a market-driven health system, but the bill they are considering does very little to bring more discipline to the marketplace. Too many in the GOP confuse adjustments in how insurance premiums are regulated with bringing competitive pressures to bear on the costs of medical services. They say they want lower premiums for consumers, but their supposed solution would simply shift premium payments from one set of consumers to another. Allowing healthy people to pay lower premiums, while perhaps justified under certain circumstances, does nothing to alter the underlying costs of delivering services to patients.
BCRA is also flawed in how it would provide insurance options to low-income households. The GOP is committed to far-reaching reform of Medicaid, which is necessary, and most of the Democratic attacks on the GOP’s proposed changes to the program are overblown. Nonetheless, BCRA remains flawed because it does not provide an affordable insurance option for every poor American. The proposal pulls back on the enhanced federal match for the Medicaid expansion population, which CBO assumes will lead many states to impose stricter rules on program eligibility. BCRA does allow poor households to get a federal tax credit to purchase a private health insurance plan, but the deductibles for these plans would be too high for households with very limited discretionary resources. Consequently, CBO assumes most poor households wouldn’t use the BCRA’s credit to get insurance.
It should be noted that the Affordable Care Act (ACA) also left many poor households without a realistic option because the Supreme Court ruled that the Medicaid expansion in the law had to be optional for the states, not mandatory. Many millions of poor Americans are ineligible for Medicaid in the states that chose not to expand the Medicaid program, and they are ineligible for the premium credits under the ACA too.
McConnell is actively working with Republican Senators who are not yet committed to supporting the BCRA to get their votes. Unfortunately, the changes that are being contemplated won’t fix the fundamental problems in the bill.
Press reports indicate that Senate Republicans are considering amending current law to allow balances in Health Savings Accounts (HSAs) to pay for health insurance premiums. Employers and workers can make pre-tax contributions to HSAs when they are paired with qualified high-deductible health plans (HDHPs). The presumption is that HSA participants will have an HDHP, and the HSA can then be used to pay directly for services not covered by insurance because of the deductible. It is not clear if Republicans are considering breaking the link between HSAs and HDHPs, or if they would just allow account balances to pay for premiums. Either way, this liberalization of existing HSA rules, while not harmful, is unlikely to change much in the health system. It will simply allow even more Americans to pay for health insurance using tax-exempt income.
The other major change now in the works is the addition of a $45 billion fund to help states battle the opioid crisis. Important as that might be, a fund of this kind wouldn’t make health insurance affordable for poor Americans under the BCRA.
To improve their bill and make it more viable politically, Senate Republicans should pursue three different adjustments:
Establish a National Standard of Eligibility for Medicaid at the Federal Poverty Line and Provide Reasonable Tax Credits for Those With Incomes Above the Threshold. Some Senate Republicans are pushing to roll back the enhanced federal matching rate for the ACA’s Medicaid expansion as fast as possible. Supporters of the expansion are pushing to slow down the phase-out, which doesn’t really make sense. A year or two more in the phase-out of the enhanced match isn’t much of a change from the current BCRA. A better compromise -- one that might have a chance of enduring when political control shifts again -- would be to establish a new expectation for Medicaid eligibility at the federal poverty line (FPL) instead of at 138 percent of the FPL under the ACA. States that have not expanded Medicaid could be encouraged to bring eligibility up to this level. States that did expand Medicaid would be allowed to maintain that coverage, but with reduced federal support above the poverty line. All persons who are above the poverty line and not eligible for Medicaid would get a refundable tax credit that would allow them to buy private coverage with a deductible appropriate to their income.
Amend HSAs So They Can Be Used to Purchase Integrated Health Care. HSAs are currently built to allow persons to pay for care in a fee-for-service environment. That’s fine as far as it goes. But real cost-cutting will come when people can buy into integrated care systems that compete for customers by offering high quality care at a lower price. HSA enrollees should be allowed to use their resources to purchase access to these integrated care systems for a fixed, predetermined fee. The care provided would not be the full spectrum of services needed with a major medical event, but it could cover the typical things a person would pay for while satisfying an insurance deductible. It is crucial that these kinds of arrangements not be considered insurance so that those offering the care need not be regulated as insurance companies. Persons with HSAs and HDHPs would already be protected for catastrophic expenses with the HDHP.
Impose an Upper Limit on the Tax Preference for Employer-Paid Insurance Premiums. The Senate bill, like the House version, delays the ACA’s “Cadillac” tax until 2026 without replacing it with an alternative provision. That is a mistake. The Cadillac tax, which requires firms with expensive health plans to pay a 40 percent excise fee on premium amounts above specified thresholds, is poorly designed, but it is better than no limitation at all. The cleanest and surest way to inject more market discipline into health care would be to impose an upper limit on the tax preference for employer-sponsored care. Amounts paid by an employer above the limits would be counted as taxable income to workers, which means it would be a progressive change that would hit higher-income workers harder than lower-income workers. It would also provide an even stronger incentive for firms and their workers to accept changes in their health plan arrangements that lower costs, such as tighter networks of affiliated providers of medical services. The added revenue from this provision would help finance higher subsidies for lower income households.
Republicans in the Senate do not have the time at this point to start over and write a much better bill, but they do have enough time to make major improvements to what they are considering. The changes recommended here would strengthen the health insurance safety net and inject more cost discipline into the marketplace. This means the legislation containing these changes would, if enacted, have a better chance of surviving when the political winds inevitably change again.
James C. Capretta is a resident fellow and holds the Milton Friedman chair at the American Enterprise Institute.