The Future of the Affordable Care Act Week 7: The American Health Care Act
On March 6, 2017, after years of promising, GOP lawmakers in the House of Representatives introduced the "American Health Care Act" (AHCA), the first concrete legislative proposal detailing the initial provisions designed to repeal and replace the Affordable Care Act. The bill is a joint effort of the House Energy and Commerce and Ways and Means Committees, and it closely hews to the “Better Way” proposal previously outlined by House Speaker Paul Ryan (which we discussed here.)
The bill currently is the subject of widespread media scrutiny and intense criticism, not only from Democrats, but from Republicans who argue that the bill either goes too far or not far enough. Assuming a bill ultimately passes and is signed into law, it almost certainly will contain significant changes—for example, relating to the timing of the repeal of Medicaid expansion. Nonetheless, we believe the broad contours of any final legislation are likely in place and thus we offer this analysis of the major provisions.
The AHCA consists of two titles, one prepared by the Energy and Commerce Committee, the other by the Committee on Ways and Means (a consolidated version of the two bills prepared by the staff of the Energy & Commerce committee is available here).
- Title I: Energy and Commerce Committee
AHCA Title I, among other things, repeals the ACA’s Medicaid expansion and otherwise reforms Medicaid; calls for the establishment of state high risk pools; repeals the ACA’s cost-sharing subsidies; adopts “continuous coverage” rules intended to replace the ACA’s individual mandate; and increases the permitted age variation in health insurance premium rates (i.e., the ratio of the premiums charged to older individuals vs. younger individuals) to 5:1 from 3:1.
- Title II: Ways and Means Committee
AHCA Title II repeals the bulk of the ACA’s tax provisions, provides a replacement for the ACA’s premium subsidies, and reforms the rules governing Health Savings Accounts, among others.
Together, these provisions offer a clear outline of the Republican designs and priorities vis-à-vis the regulation of health care and health care financing, which include a strong bias in favor of marker-based solutions, and a marked aversion to most (but not all) Government intervention in the health care markets.
Importantly, the bill uses the reconciliation process to repeal and replace the ACA. The reconciliation process is subject to strict procedural restrictions, reconciliation permits only the repeal of those provisions of the ACA that directly impact federal spending as determined by the Senate parliamentarian. Created by the Congressional Budget Act of 1974, reconciliation provides for expedited consideration of certain tax, spending, and debt limit legislation. Because reconciliation bills aren’t subject to filibuster in the Senate, they can pass that body with a simple 51-vote majority.
Owing to the constraints imposed by the reconciliation rules, much of the ACA will remain in place should the AHCA be enacted into law. GOP leaders and the president have announced that the ACHA is the first step in a three-step process and that changes in the ACA that cannot be accomplished through reconciliation will be made via rule-making and other executive action—and through legislation taken up under “regular order.” The latter would require 60 votes to overcome any filibuster and thus Republicans would have to attract at least eight Democrats to their position.
Title II of the bill (Ways and Means) repeals the following ACA provisions:
- Recapture of excess advance payments of premium tax credits
The ACA generally requires individuals to contribute toward premium payments based on household income. The balance of the premium is paid by a government-funded premium tax credit. If an individual’s household income increases during the tax year, the individual may receive an overpayment of the premium tax credit premium to which he or she is otherwise entitled. The ACA includes a special rule that limits the repayment obligation in this case. The bill repeals this special rule for tax years 2018 and 2019. (Elsewhere the bill repeals the ACA premium tax credit outright beginning in 2020.) The provision requires any individual who was overpaid in premium tax credits to repay the entire excess amount, regardless of income.
- Modification to the Premium Tax Credit
The ACA coined the term, and established rules governing, “qualified health plans.” Essentially, coverage under a qualified plan provided low- or moderate income individuals with access to premium assistance in the form of premium tax credits and cost-sharing subsidies. (Premium tax credits help individuals purchase coverage; cost-sharing subsidies make coverage easier to afford by lowering out-of-pocket costs.) Qualified health plans were limited under the ACA to policies sold on an exchange or marketplace that include a prescribed list of ten “essential health benefits” and that fit within four “metallic” tiers (bronze, silver, gold and platinum) based on their relative generosity or actuarial value.
While the AHCA eliminates cost-sharing subsidies altogether, and has its own rules concerning premium tax credits (which are explained below), it retains the qualified health plan concept. But starting in 2020, qualified health plans are no longer required to fit squarely into the four metallic levels. Instead, plans with actuarial values that fall anywhere along a smooth curve starting at 60 percent actuarial value would still be qualified health plans. Additionally, plans that provide “catastrophic-only” coverage (i.e., with an actuarial value of less than 60 percent) as well as qualified plans not offered through an ACA exchange of marketplace would also qualify under the AHCA. The provision prohibits premium tax credits from being used to purchase plans that offer elective abortion coverage, however.
Nothing in either bill makes changes to the ACA rules requiring that health insurance sold in the individual or small group markets to provide the ten “essential health benefits.” Moreover, the ACA limits on cost sharing also remain in place. But if an individual is eligible for employer coverage (of any kind other than excepted benefits and unsubsidized COBRA) he or she cannot qualify for a premium tax subsidy. (See the discussion of refundable tax credits in the “Replace” section below)
- Small business tax credit
The ACA’s small business tax credit is repealed beginning in 2020. Between 2018 and 2020, the small business tax credit generally is not available with respect to a qualified health plan that provides coverage for elective abortions.
- The individual mandate
The ACA generally requires most individuals to purchase health insurance or pay a penalty. Commencing in 2016, the ACHA (retroactively) reduces the penalty to zero for failure to maintain minimum essential coverage, effectively repealing the individual mandate. Individuals who paid the tax for 2016 would be able to file for a refund.
- The employer mandate
The ACA requires Applicable Large Employers (i.e., employers with 50 or more full-time and full-time equivalent employees during the previous calendar year) to offer group health insurance or face the prospect of an excise tax penalty. Also, commencing in 2016, the provision reduces the penalty to zero for failure to provide coverage.
- The “Cadillac” tax
The ACA imposed a 40 percent excise tax on high cost employer-sponsored health coverage (a/k/a the “Cadillac tax), the enforcement of which has been deferred until 2020. The ACHA changes the effective date of the tax such that it will not apply until 2025.
- The tax on over-the-counter medications
The ACA excluded over-the counter medications from the definition of “qualified medical expenses” for purposes of health Flexible Spending Accounts (FSAs), health savings accounts (HSAs), Archer medical savings accounts, and health reimbursement accounts (HRAs). The ACHA repeals this exclusion beginning in 2018.
- The increase in taxes on distributions from Heath Savings Accounts
Distributions from (HSAs and Archer MSAs that are used for qualified medical expenses are excludible from gross income. Distributions that are not used for qualified medical expenses are includible in income and are generally subject to an additional tax. The ACA increased the percentage of the tax on distributions that are not used for qualified medical expenses to 20 percent. The AHCA lowers the rate to pre-ACA percentages—i.e., 15 percent for Archer MSAs and 10 percent for HSAs—commencing in 2018.
- Limitation on contributions to health Flexible Spending Account (FSA)
The ACA capped employee elective deferrals to health FSAs at $2,500, indexed for cost-of-living adjustments. The AHCA repeals this limitation beginning in 2018.
- The medical device tax
The ACA imposed a 2.3 percent excise tax on the sale of certain medical devices. The ACHA repeals this provision beginning in 2018.
- Medicare Part D Subsidies
Before the ACA, employers who offered sufficient prescription drug coverage to their employees qualified for a retiree drug subsidy. The ACA eliminated an employer’s ability to take a tax deduction on the value of this subsidy. The ACHA restores this deduction commencing in 2018.
- The medical expense deduction
The medical-expense for taxpayers who itemize their deductions may be claimed only for expenses that exceed a certain percentage of the taxpayer’s adjustment gross income (AGI). The ACA generally increased the AGI percentage threshold from 7.5 percent to 10 percent, but the increase to 10 percent was delayed for taxpayer or spouses age 65 and older. The ACHA restores the pre-ACA rules beginning in 2018. It also extends the relief for taxpayers 65 and older beginning in 2017.
- Other ACA taxes
The ACHA also repeals the following other taxes, in each case beginning in 2018:
° The Medicare Hospital Insurance (HI) surtax based on income at a rate equal to 0.9 percent of an employee’s wages or a self-employed individual’s self-employment income.
° The 10 percent sales tax on indoor tanning services.
° The net investment tax (3.8 percent to certain net investment income of individuals, estates, and trusts with income above certain amounts).
° The ACA limitation on the exclusion for remuneration in excess of $500,000 paid to an officer, director, or employee of a health insurance issuer.
° The annual fee on certain brand pharmaceutical manufacturers.
° The annual fee on certain health insurers.
- Certain ACA provisions retained
Owing to the limitations imposed by the reconciliation process, many ACA provisions remain unaffected under the AHCA. These include dependent coverage to age 26; the bar on waiting periods exceeding 90 days; the bar on annual and lifetime dollar limits on essential health benefits; coverage of preventive services without cost-sharing (although the regulatory interpretation of “preventive services” as including contraceptive coverage is likely to be changed); limits on employee cost-sharing; and independent external review of denied claims, among others.
As noted, the Committees’ ability to craft substantive changes to the ACA is limited by the reconciliation process. There are, however, a handful of new features in the AHCA including:
- State high risk pools
Beginning in 2018, Title I of the bill (Energy and Commerce) re-enables state high risk pools, which the bill refers to as the “Patient and State Stability Fund.” The purpose of the fund is to stabilize the health insurance markets. Coverage is limited to individuals without access to employer-sponsored group health plan coverage. The fund could be used for a number of purposes including premium assistance for individuals with high health care costs who are covered in the individual or small group markets. Alternatively, states are free to participate in a federal default reinsurance program.
- Refundable tax credits
Title II of the bill (Ways and Means) proposes to add to the Internal Revenue Code a new section, 36C, which establishes a refundable tax credit for state-approved major medical health insurance and unsubsidized COBRA coverage. The credit, which would come online in 2020, is equal to the lesser of: (i) the sum of the “applicable monthly credit amounts,” or (ii) the amount paid by the taxpayer for “eligible health insurance” for the taxpayer and qualifying family members. The monthly credit amount with respect to any individual for any “eligible coverage month” during any tax year would be one twelfth of:
(A) $2,000 for an individual who has not attained age 30 as of the beginning of the tax year;
(B) $2,500 for an individual age 30 - 39;
(C) $3,000 for an individual age 40 - 49;
(D) $3,500 for an individual age 50 - 59; and
(E) $4,000 for an individual age 60 and older.
The credit is reduced by 10 percent of the excess of the taxpayer’s modified adjusted gross income over $75,000 (double that for a joint return). These amounts are indexed for inflation.
The refundable tax credit is subject to a $14,000 aggregate annual dollar limitation with respect to the taxpayer and the taxpayer’s qualifying family members. In addition, monthly credit amounts are considered only with respect to the five oldest qualifying individuals of the family. Married couples must file jointly to receive a credit, and no credit would be allowed with respect to any individual who is a dependent of another taxpayer for a tax year beginning in the calendar year in which such individual’s tax year begins.
- No tax credit for employees offered employer health plan
Importantly, a month in which an individual is covered by eligible health insurance and is not eligible for “other specified coverage,” such as coverage under an employer group health plan or under certain governmental programs, like Medicare and Medicaid, is not an eligible coverage month. Put another way, the mere offer of employer coverage could prevent an employee from qualifying for a premium tax credit. This approach differs from current law, under which an employee is barred from receiving premium tax credits only if the employer’s offer of coverage rises to the level of minimum value, i.e., a major-medical plan. In contrast, any offer of medical coverage, including current minimum essential coverage (MEC) plans covering preventive and wellness services only, would disqualify the employee from receiving an AHCA premium tax credit. The only exception is a plan “substantially all of the coverage of which is of excepted benefits” (e.g., stand-alone vision and dental coverage, certain EAPs, hospital and fixed indemnity arrangements, and supplemental plans). An employer’s offer of excepted benefits, in the absence of other health coverage, would not disqualify the employee from eligibility for tax credits.
There are also a series of special rules coordinating the Code Section 36C refundable tax credit with the medical expense deduction, and calculating the credit where the taxpayer (or family member) is covered under a qualifying health reimbursement account (HRA), i.e., an HRA that is a “qualified small employer health reimbursement arrangement” under the 21st Century Cures Act.
- Employer Reporting
The bill also makes prospective changes in the employer information reporting requirements relating to the Code Section 36C health insurance coverage credit. Instead of requiring employers to furnish separate forms to employees and to the IRS, the bill will require employers to simply check a box on an employee’s Form W-2, indicating whether or not the employee was “offered” an employer-sponsored plan. The bill does not repeal the current employer reporting requirements because reconciliation rules don’t allow for full repeal of those requirements and because the reports still will be needed to help verify eligibility under the current tax credit system until the AHCA tax credits becomes effective in 2020.
- The excess health insurance coverage credit
Referred to as the “excess health insurance coverage credit,” the AHCA provides a mechanism under which “excess” credit amounts (generally, the amount, if any, by which the Code Sec. 36C credit amount exceeds the amount paid for coverage) can, at the taxpayer's request, be contributed to a designated Health Savings Account (HSA) of the taxpayer. But no payment would be allowed under this provision in the case of a taxpayer with “seriously delinquent tax debt.
- Expansion of Health Savings Accounts
Beginning in 2018, Title II (Ways and Means) of the bill increases the basic limit on aggregate Health Savings Account contributions for a year to equal the maximum of the sum of the annual deductible and out-of-pocket expenses permitted under a high deductible health plan—$6,550 for self-only coverage and $13,100 for family coverage. Both spouses would be able to make catch-up contributions to HSAs. The proposal also adds a rule under which, if an HSA is established within 60 days of the date that certain medical expenses are incurred, it will be treated as having been in place for purposes of determining whether the expense is a “qualifying medical expense.”
- Continuous coverage requirement
Title I of the bill includes a continuous coverage requirement that takes the place of the individual mandate. Under a “continuous coverage” requirement, neither a carrier nor a plan can penalize a newly enrolled individual (e.g., by excluding a pre-existing condition or hiking premiums for a person with a known medical condition) unless the individual has been previously covered without a break of more than a specified period.
The group insurance markets have been subject to continuous coverage rules since 1996, with the enactment of the Health Insurance Portability and Accountability Act (HIPAA) portability provisions. Under HIPAA, a group health plan may not impose a pre-existing condition limitation or exclusion if the person has had “creditable coverage” for at least 12 months provided that the person had no more than 63 days with no coverage during that period. (Creditable coverage for this purpose includes most health coverage, such as a group health plan, HMO, individual health insurance policy, Medicaid, or Medicare.) If the coverage was for less than 12 months, the pre-existing exclusion period may be reduced by the number of months of prior creditable coverage.
Following HIPAA’s lead, the AHCA adopts a 12-month continuous coverage requirement that would go into effect in 2019. If the applicant has a lapse in coverage of more than 63 days, the plan or carrier is free to impose a flat 30 percent late-enrollment surcharge.