It’s Still Mission Impossible for the Senate GOP’s Health Plan

It’s Still Mission Impossible for the Senate GOP’s Health Plan
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Yesterday, Senate Majority Leader Mitch McConnell did the seemingly impossible and got the votes he needed to proceed to consideration of the House-passed plan for repealing and replacing the Affordable Care Act (ACA). At this point, it’s hard to tell what exactly will happen in the coming days, but there is one thing that is fairly certain: if the current Republican effort succeeds in passing a bill, the legislation will make the individual insurance market less stable than it is under current law.

The problem for Senate Republicans is that their principal policy goal is incompatible with the process they are using -- budget reconciliation -- to pass their legislation. Most Republicans in Congress are determined to eliminate the ACA’s penalties for going without insurance -- the so-called individual mandate. The House-passed bill – the American Health Care Act (AHCA) -- would eliminate the tax penalty for going without insurance immediately, as would the ACA replacement plan Sen. McConnell drafted, called the Better Care Reconciliation Act (BCRA).

It is certainly legitimate for the GOP to want to eliminate a federal requirement that all Americans must buy a government-approved insurance plan. But eliminating the mandate only makes sense if other changes are also made to insurance market rules. Under the ACA, the health status of potential consumers cannot be used by insurers when setting premiums or in establishing what is covered by a product. Any consumer is free to come into the individual insurance market during the open enrollment process each fall and buy an insurance plan at the same price charged to every other consumer of the same age.

These rules -- “community rating” of insurance premiums and “guaranteed issue” of insurance products to all potential customers -- make insurance more attractive to people who expect to use a lot of medical care and less attractive to consumers who believe they are generally healthy and won’t need to use many services. Absent other policy changes, these rules would, therefore, tend to destabilize an insurance market because the risk pool of customers would become more heavily populated with high users of medical care. Insurers would be forced to charge higher premiums to cover the high costs of such customers, which would further discourage healthy customers from buying the products.

Several states attempted to impose community-rating and guaranteed issue in their individual insurance markets in the 1990’s, including Washington, Kentucky, and Maine. The predictable end result was an insurance death spiral and withdrawal of most insurers from the marketplace.

The ACA includes two features that were not included in the state reform efforts from two decades ago and which reduce the risk of a death spiral in the current context. First, the law provides large subsidies for purchasing insurance to households with incomes between 100 percent and 400 percent of the federal poverty line (the lower bound threshold is 138 percent of the federal poverty line in states that expanded Medicaid). For households eligible for these subsidies, the ACA limits the premium they must pay annually to a fixed percentage of their income. Consequently, even if total premiums rise rapidly, these households continue to pay the same fixed percentage of their total income. The added cost is paid entirely by the federal government. The ACA market thus has a large pool of customers who are largely immune to the annual increase in overall premiums.

The second important feature of the ACA that was not included in earlier state reforms is, of course, the individual mandate. Current federal law requires households to disclose their insurance coverage status as part of their federal income tax filing and to pay a new tax for going without insurance for any of the months covered by the tax year.

Republicans in Congress understand that if they repeal the tax penalties which enforce the individual mandate, and leave the ACA’s insurance rules in place, they increase the risk that healthy consumers will leave the market, and thus exacerbate the adverse selection that is already present in the ACA market. To prevent this from happening, both the AHCA and BCRA include provisions to encourage healthy people to stay insured. In the House bill, consumers with more than a two-month break in insurance enrollment would be required to pay a one-year, 30-percent premium surcharge when they re-entered the market. In the Senate bill, consumers with a break in coverage would face a six-month waiting period for coverage for any of their pre-existing conditions.

There are two problems with these provisions. First, even if they could be enacted by Congress, they are weaker than the ACA’s individual mandate, which is already too weak to keep the markets fully stable. The tax enforcing the ACA’s individual mandate is applied every year a person remains uninsured; the longer a person goes without coverage, the greater the tax penalty they must pay. That’s not true of either the House or Senate alternatives. Under both the House and Senate bills, healthy consumers would have strong incentives stay out of the market as long as possible because they would keep the premiums they didn’t pay for insurance and their penalty for going uninsured would not increase when they eventually bought coverage again.

The second, and more important problem, with the Republican alternatives to the individual mandate, is that they cannot be enacted using budget reconciliation. Under the Senate’s Byrd Rule, reconciliation bills -- which can pass in the Senate with a simple majority instead of the usual 60 votes -- are supposed to include only provisions which affect either federal spending or revenues. Changes in federal laws that are more regulatory in nature are considered extraneous and can be stricken from the bill if a Senator objects. Waiving the objection takes 60 votes.

It is very hard to make the case that the GOP provisions in the ACA replacement bill, which are intended to encourage enrollment in private insurance, are primarily budget-related items. Their main effect is to set the terms under which consumers can buy a private insurance plan. The Byrd Rule is pretty clearly aimed at preventing these kinds of “regulatory” provisions from being enacted under expedited procedures.

It is not surprising, therefore, that the Senate parliamentarian, who is the official responsible for making these calls, has indicated the six-month waiting period in the BCRA violated the Byrd Rule. Democratic Senators are sure to move to strike it when, and if, they are ever given the chance. The House’s 30-percent premium surcharge seems certain to be viewed similarly by the parliamentarian.

It is also hard to imagine Republicans coming up with an alternative to the individual mandate that would get passed the Byrd Rule. The obvious solution is to tie the penalty to some kind of payment that gets cycled through the federal budget. That might satisfy the Byrd Rule concern but it would also look too much like the existing tax penalties of the ACA for many Republicans to support it.

The Congressional Budget Office (CBO) places great importance on the individual mandate. The agency assumes that eliminating the penalty will very quickly lead many millions of people to drop their coverage, which will then force insurers to raise their premiums more rapidly than they would if the mandate remained in place.

One does not have to fully accept CBO’s assessment of the mandate to see that eliminating it while retaining the ACA’s insurance rules is a big problem. There is no question that, if the mandate were eliminated and the other rules remained in place, healthy consumers would have a stronger incentive to stay out of the market than they do under current law.

Republicans are in a box. They have argued repeatedly that they need to pass legislation to steady the insurance marketplace, but they are proceeding with legislation that will almost certainly have the opposite effect. If a bill is eventually passed and signed into law, it probably would not cause a death spiral because Republicans in both the House and Senate have also embraced subsidies to help people buy insurance in the individual market. Those subsidies will boost insurance enrollment to a degree. But consumers will see much higher premiums in the individual insurance market than they would under current law, which is exactly the opposite of what they have been promised.

James C. Capretta is a resident fellow and holds the Milton Friedman chair at the American Enterprise Institute.

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