House begins consideration of legislation to repeal and replace key provisions of the Affordable Care Act

The House Ways and Means Committee and the House Energy and Commerce Committee today (Wednesday, March 8, 2017) are scheduled to begin marking up the American Health Care Act (AHCA), which would repeal and replace certain provisions of the Affordable Care Act (ACA). House Ways and Means Committee Chairman Kevin Brady (R-TX) and House Energy and Commerce Committee Chairman Greg Walden (R-OR) released the draft legislation late Monday, March 6, 2017.

The House Ways and Means Committee has jurisdiction over tax provisions in the legislation, while the House Energy and Commerce Committee has jurisdiction over provisions related to Medicaid.

In general, the draft legislation would maintain the ACA’s tax credits and states’ option to expand Medicaid in their current forms through December 31, 2019. Under the AHCA, new tax credits and Medicaid funding formulas would take effect beginning January 1, 2020.

The draft legislation in its current form would not make changes to the individual tax exclusion for employer-sponsored coverage, or certain ACA health insurance market reforms, including allowing adult children up to age 26 to stay on a parent’s health coverage and a prohibition on denying coverage or rate setting based on an individual’s pre-existing health conditions.

The legislative process ahead

Following the mark up in the two House committees of jurisdiction, the bill would have to clear the House Budget Committee and the House Rules Committee before being brought before the full House for consideration. If approved by the full House, the bill would then go to the Senate for consideration.

Congressional Republicans are using the budget reconciliation process to move the AHCA to make it possible for the Senate to consider and pass the bill with a simple majority of 51 votes, rather than 60 votes generally needed to bring legislation up for a vote under Senate rules. As a result, the provisions of the legislation must meet strict criteria as to whether the individual provisions are specifically related to the federal budget deficit, taxes or the federal debt limit. The Senate parliamentarian would review any challenges to specific provisions in the legislation and rule on whether the provision could be included in the reconciliation bill or would have to be removed.

Once reconciliation legislation is cleared by the Senate parliamentarian, the Senate could take up the bill. If there were no amendments to the House bill, the Senate could pass it with at least 51 votes and send the bill directly to President Trump’s desk. If there were amendments to the bill in the Senate, the Senate could approve the bill with at least 51 votes, and it would go back to the House for a final up or down vote.

Congressional Republicans’ goal is to send legislation to President Trump for signature into law before adjourning for spring recess on April 7, 2017.

The Congressional Budget Office (CBO) has not yet released their analysis of the legislation’s effects on the federal budget and health coverage and costs.

Key legislative provisions

More detail of select key provisions of the draft legislation are provided below.

Individual and employer mandates

Under the ACA, individuals who do not maintain health coverage are subject to tax penalties. Similarly, employers with at least 50 full-time equivalent employees face tax penalties if they do not offer coverage that meets certain standards for affordability and minimum value to full-time employees and their dependents.

The AHCA in effect would nullify both of those ACA requirements by setting the tax penalty to $0 for months after December 31, 2015. (Note: tax penalties under the ACA’s individual and employer mandates are calculated on a per month basis.)

Tax credits to help purchase insurance coverage

The ACA provides for advanceable, refundable tax credits to individuals who do not have access to employer-sponsored coverage that meets certain standards for affordability and minimum value. Individuals with incomes between 100% and 400% of the federal poverty level (FPL) ($12,060 to $48,240 for an individual in 20171)are eligible for tax credits if they do not have access to other coverage.

The amount of the tax credit under the ACA is based on an individual’s income and the monthly premium for the second-lowest cost silver plan available on the ACA Exchange in the individual’s local area. The tax credit is designed so that individuals’ contributions to health insurance premiums would not exceed certain percentages of their income, adjusted upward on a sliding scale as individuals’ income increased from 2.04% of income for individuals with incomes at 100% of FPL to 9.69% of income for individuals with incomes at 400% of FPL.2 The average ACA tax credit for eligible enrollees was $291 per month in 2016 ($3,492 annualized).3

In addition, the ACA provided for cost-sharing reduction subsidies to help individuals with annual incomes that do not exceed 250% of the federal poverty level ($30,150 in 20174) with out-of-pocket costs. In 2016, 57.3% of Exchange enrollees qualified for cost-sharing reduction subsidies.5

The AHCA would provide tax credits and cost-sharing reduction subsidies in their current form under the ACA through December 31, 2019.

Effective January 1, 2020, the AHCA would replace the ACA’s tax credits with advanceable, refundable tax credits that are primarily based on age, but adjusted for income. Tax credits under the AHCA would be available as follows:

  • $2,000: Individuals under age 30
  • $2,500: Individuals ages 30 to 39
  • $3,000: Individuals ages 40 to 49
  • $3,500: Individuals ages 50 to 59
  • $4,000: Individuals ages 60 and older

The credits would be additive for families, capped at $14,000 annually.

For individuals whose income exceeds $75,000 annually ($150,000 for joint filers), the tax credits would be reduced by $100 for each $1,000 in additional income. For 2017, $75,000 is approximately 620% of the federal poverty level for an individual.6

The tax credits would be indexed to grow annually by the consumer price index plus 1%.

The AHCA would repeal the ACA’s cost sharing subsidies in their entirety.

Medicaid eligibility

Following the 2012 US Supreme Court decision in National Federation of Independent Business vs. Sebelius, the ACA provided states the option of expanding Medicaid eligibility to individuals with incomes up to 138% of the federal poverty level ($16,643 in 2017).7The federal government paid 100% of costs for the expanded Medicaid population for 2014 through 2016, gradually decreasing to 90% of costs for the expansion population by 2020.

To date, 31 states and the District of Columbia have expanded Medicaid under the ACA.

Under the AHCA, states could not expand Medicaid eligibility after December 31, 2019. Similarly, the enhanced federal contribution rate would apply only to expenditures for enrollees who were newly enrolled in Medicaid as of December 31, 2019, and did not have a break in eligibility for more than one month after that date. States could continue to enroll newly eligible individuals after December 31, 2019, but the traditional federal contribution rate for the state would apply.

In addition to ending the option for states to expand Medicaid, the AHCA would limit the federal contribution to state Medicaid programs on a per capita basis beginning January 1, 2020. Key factors related to the per capita cap for federal contributions to state Medicaid programs include:

  • Base year for calculation of cap: Under the AHCA, fiscal year (FY) 2016 would be the base year to set targeted spending for each Medicaid enrollee category for FY 2019 and subsequent years.
  • Eligibility categories subject to the cap: The AHCA would apply separate caps to each enrollee category, i.e., elderly; blind and disabled; children; non-expansion adults; and expansion adults.
  • Inflation adjustment: Each state’s targeted spending amount would increase by the percentage increase in the medical component of the consumer price index.
  • Adjustments to Medicaid funding: Beginning in FY 2020, the AHCA would provide for states to receive reductions to their Medicaid funding for the following fiscal year if the state’s Medicaid spending exceeded its specified targeted amount.
  • Benefit flexibility: Under the AHCA, state Medicaid programs after December 31, 2019, would not have to cover the same essential health benefits that plans offered on the ACA Exchanges are required to cover.

Medicaid payments to disproportionate share hospitals (DSH)

The ACA, and subsequent laws, reduced Medicaid payments to disproportionate share hospitals by set amounts. As a result, the current schedule and amounts for the Medicaid DSH reductions are as follows:

  • $2 billion in FY 2018
  • $3 billion in FY 2019
  • $4 billion in FY 2020
  • $5 billion in FY 2021
  • $6 billion in FY 2022
  • $7 billion in FY 2023
  • $8 billion in FYs 2024 and 20258

Under the AHCA, states that have not expanded Medicaid would have their share of Medicaid DSH cuts repealed for 2018, while expansion states’ share of Medicaid DSH cuts would be repealed in 2020.

Patient and State Stability Fund

The AHCA would create the Patient and State Stability Fund with a goal of lowering individual costs and stabilizing health insurance markets beginning January 1, 2018. States could access the new fund to help provide:

  • State high-risk pools for individuals who do not have access to employer-sponsored coverage
  • Incentives for entities to enter into arrangements with the states to help stabilize premiums in the individual market
  • Premium assistance to individuals with high health care costs who are covered in the individual or small group markets
  • Promote participation in the individual and small group market to increase insurance options in states
  • Promote access to preventive services, dental care, and vision care, as well as mental health and treatment for substance use disorders
  • Payments to health care providers for provision of services specified by the Centers for Medicare & Medicaid Services (CMS) Administrator
  • Assistance reducing out-of-pocket costs

States that do not choose to use the funds for any of the previously listed activities can participate in a federal default reinsurance program run by CMS. The reinsurance program would apply to claims that exceed $50,000 but do not exceed $350,000; the reinsurance program would cover 75% of such claims.

The AHCA would appropriate $15 billion annually for 2018 and 2019, and $10 billion for 2020 through 2026. A state match formula would be phased in beginning in 2020 at a different schedule based on whether states use the funds for their own programs or use the federal default reinsurance program administered through CMS.

In addition, the AHCA would provide $10 billion over five years to non-expansion states for safety net funding to adjust payments to Medicaid providers. The AHCA also would permit health insurers to charge a flat 30% late-enrollment surcharge on top of their base premium for individuals who went longer than 63 days without continuous health coverage. The provision would apply beginning in the open enrollment period for the 2019 benefit year.

AHCA would repeal the ACA’s provision limiting insurers’ abilities to vary premiums by age, i.e., that premiums for older individuals could not exceed premiums for younger individuals by more than a factor of three. AHCA would permit insurers to set premiums five times as high for older individuals as for younger individuals, resulting in a 5:1 ratio for permissible age variation in health insurance premiums.

Health care industry taxes and fees

The ACA imposed new fees on health insurers and branded prescription drug makers, as well as a new excise tax on medical devices.

The ACA applies an annual fee on health insurers as follows:

  • $8 billion for calendar year 2014
  • $11.3 billion for 2015 and 2016
  • $13.9 billion for calendar year 2017
  • $14.3 billion for 2018, with the annual fee indexed to the rate of premium growth for subsequent years9

Congress in 2015 enacted a moratoria on the health insurer fee for 2017.

For manufacturers or importers of branded prescription drugs, the ACA imposed an annual fee on all covered entities of $4 billion for calendar year 2017, $4.1 billion for calendar year 2018, and $2.8 billion for calendar year 2019 and subsequent years. Each covered entity’s share of the annual fee is apportioned based on the relative market share for the previous year.10

Effective for sales after December 31, 2012, the ACA applied a new excise tax of 2.3% of the sale price of medical devices. Congress in 2015 enacted a moratoria on the tax for sales from January 1, 2016, through December 31, 2017.11

The AHCA would repeal each of these taxes effective December 31, 2017.

Under the ACA, an excise tax of 40% would be applied to high cost employer-sponsored coverage (the Cadillac tax). The excise tax would apply to the amount by which the value of employer-sponsored health benefits exceed certain limits set in the law (initially $10,200 for self-only coverage and $27,500 for all other coverage). Congress in 2015 delayed the effective date of the excise tax from tax years beginning after December 31, 2017, to tax years beginning after December 31, 2019.

The AHCA would further delay the effective date of the Cadillac tax to tax years beginning after December 31, 2024.

Personal income tax provisions

The ACA imposed an additional hospital insurance tax of 0.9% on income exceeding $200,000 annually ($250,000 for joint filers). In addition, the ACA imposed a tax of 3.8% on net investment income exceeding certain thresholds. For a joint return or surviving spouse, the threshold is $250,000. A threshold of $125,000 applies to a married individual filing jointly, and a threshold of $200,000 applies in all other cases.

The AHCA would repeal both of these taxes effective December 31, 2017.

Among other changes to health savings accounts (HSAs), the AHCA would raise the contribution limits for HSAs to align with the ACA’s statutory limits on deductibles and maximum-out-of-pocket limits. In addition, the AHCA would repeal the ACA’s reductions to contributions limits for flexible spending accounts (FSAs) and the limitation on using FSA funds for over-the-counter medications.

Authors:

Anne Phelps
Principal | Deloitte Advisory
US Health Care Regulatory Leader
Deloitte & Touche LLP
Latest conversations from Anne Phelps on Twitter

Daniel Esquibel
Senior Manager | Deloitte Advisory
Deloitte & Touche LLP

1Annual Update of the HHS Poverty Guidelines, Department of Health and Human Services, January 31, 2017.
2Description of Budget Reconciliation Legislative Recommendations Relating to Repeal of Certain Consumer Taxes (JCX-10-17/, Joint Committee on Taxation, March 7, 2017.
3March 31, 2016 Effectuated Enrollment Snapshot, Centers for Medicare and Medicaid Services, June 30, 2016.
4Annual Update of the HHS Poverty Guidelines, Department of Health and Human Services, January 31, 2017.
5March 31, 2016 Effectuated Enrollment Snapshot, Centers for Medicare and Medicaid Services, June 30, 2016.
6Annual Update of the HHS Poverty Guidelines, Department of Health and Human Services, January 31, 2017.
7Ibid.
8Disproportionate Share Hospital Payments, Medicaid and CHIP Payment Advisory Commission, accessed March 7, 2017. https://www.macpac.gov/subtopic/disproportionate-share-hospital-payments/
9Description of Budget Reconciliation Legislative Recommendations Relating to Repeal of Certain Consumer Taxes (JCX-10-17/, Joint Committee on Taxation, March 7, 2017.
10Ibid.
11Ibid.

 

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