Rebuilding Healthcare

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By William G. (Bill) Stuart

Director of Strategy and Compliance

November 23, 2016

What do this month’s national election results mean for healthcare in 2017 and beyond?

We’ll have some solid answers soon enough. Healthcare is likely to be on the agenda for early action when the 115th Congress convenes in early January and President-elect Trump is inaugurated later that month.

To level-set the conversation, keep in mind two important points. First, no matter the results of the elections, key elements in the Affordable Care Act (ACA) were failing and would have to be near the top of the political agenda in early 2017. The biggest failure is the collapse of states’ individual (nongroup) medical insurance markets due to design elements of the ACA. These were not issues that could work themselves out over time within the context of the ACA as written and interpreted.

Second, it’s highly unlikely that Congress will repeal the ACA without a replacement plan in place. Millions of newly covered individuals would suddenly lose access to insurance or premium subsidies. That’s very unlikely to happen, as it would be political suicide for the new Republican government.

Election impact

Let’s review what happened earlier this month. The White House switched parties, from Democrat President Obama to Republican President-elect Trump. Since no law is passed without the president’s signature, this change is important. The current Congress, controlled by Republicans, passed a bill earlier this year repealing the ACA. President Obama, a Democrat who points to the ACA as his signature domestic policy, vetoed that legislation, as Republicans knew that he would, and it didn’t become law.

Republicans maintained control of both houses of Congress. In the Senate, their lead shrunk from 55 seats to probably 52 of 100. We say probably because voters in Louisiana, a state with different voting laws from the rest of the nation, will elect a senator in early December. Republican John Kennedy, who garnered the most votes in the Nov. 8 nonpartisan primary, is expected to win the seat in the Dec. 10 general election.

With a majority, the Republicans choose all committee chairs and have a majority on each committee. Committee chairs and the majority leader decide the legislative agenda – which bills are brought to the floor and which never see the light of day.

What Republicans lack is a filibuster-proof majority. Under Senate rules, 41 senators can block any legislation, effectively killing it. One benefit of the filibuster is that it ensures that a bill has some bipartisan support (unless one party controls 60 seats). Back in 2010, the election of Republican Scott Brown to replace the late Sen. Edward Kennedy, a Democrat, gave the Republicans a 41st vote to filibuster the Affordable Care Act. Senate Democrats acted quickly before Brown was seated and approved a healthcare bill that had already been passed by the Democrat-controlled House of Representatives.

Senate Democrats didn’t like some provisions of the bill, but they were confident that they could make changes later. President Obama then signed the bill into law. Democrats couldn’t pass any subsequent legislation amending the ACA before Republicans gained control of the House and Senate in the 2010 mid-term elections.

Republicans retained control of the House of Representatives as well. The House has no filibuster rules, so a simple majority prevails. Again, Republicans control the chairmanships and the legislative agenda. Republicans can pass any bill that they want with only their party’s support.

The appetite to repeal or amend the ACA

Democrats must defend 25 seats (23 party members and two independents who typically vote with Democrats). A number of those defending their seats are a group of nine who either (1) represent states that voted for Mr. Trump for president or (2) weren’t in Congress to vote on the ACA in 2010 or (3) both. They’ve seen the beating that their party took in two post-ACA mid-term elections (2010 and 2014) and may conclude that their reelection hinges on delivering a better coverage solution to their constituents. They should be eager to craft a better bill.

The Democrats’ new leader in the upper chamber is Sen. Chuck Schumer of New York, who is a pragmatist and a dealer. His particular interests include tax reform and health care – two topics that will be at the top of President-elect Trump’s agenda.

I have met with his key healthcare advisor, who understands the issues and realizes the value that Health FSAs, HRAs and HSAs bring to employees and employers. While some of his colleagues prefer a government-driven solution to a consumer-centric model, Schumer and his staff understand the value of designing a new system that meets consumers’ needs and evolving preferences.

Repeal and replace? Amend?

The ACA has become entwined within the federal government, individual insurance markets in 50 states and every medical insurer. It’s very unlikely that Congress and the president will repeal the ACA as their first step toward reform. The result would be market chaos that would impact patients, providers, insurers and government officials.

What’s more likely is that Congress and the president will begin to dismantle elements of the law by having Mr. Trump rescind some regulations written by the Obama administration, and Congress defund some of the more controversial (and possibly illegal) funding of the ACA. Congress can defund portions of the law by majority vote, with no Senate filibuster permitted. By the way, these changes will deny insurers billions of dollars that they were expecting but weren’t budgeted.

Having made these changes, members of Congress then likely will sit down and hammer out a new structure for healthcare reform that incorporates some elements of the ACA and replaces or phases out others. Any remaining pieces of the ACA will stand unless separate companion legislation specifically eliminates them.

Individual markets established and designed by the ACA have been a failure in most states, reflected in the average 25% increase in 2017 premiums. Premiums have skyrocketed because a disproportionate number of older and sicker individuals have signed up for coverage and younger and healthier Americans haven’t. The plans offered are more expensive, are more restrictive (many fewer plans with an out-of-network option), offer far smaller provider networks and require much higher cost-sharing than plans offered in these markets pre-ACA.

With the defeat of Secretary Clinton, we can be sure that some of her solutions won’t be part of the final bill, particularly:

  • Public option: She sought to set up a federal government program that would compete directly with Anthem, Cigna, Aetna, UnitedHealthcare, Blue Cross and Blue Shield, Harvard Pilgrim, Tufts and other private insurers. This plan would have to be heavily subsidized to achieve her goal of two levels of affordability (lower premiums and lower out-of-pocket costs for patients).
  • Early Medicare: Secretary Clinton wanted to allow early retirees to have access to Medicare beginning as early as age 55. They’d have to pay a premium for this coverage, but that premium would be subsidized by federal taxpayers.
  • Costsharing subsidies: The ACA allows the federal government to reduce poor individuals’ out-of-pocket costs by paying a portion (often a very large portion) of their deductibles, coinsurance and copays directly to insurers. While the ACA legislation allows this transfer, Congress has never appropriated money to fund the program. When President Obama released payments to insurers, Republicans in Congress took the president to court to stop payments that weren’t authorized by Congress.

Secretary Clinton’s defeat is particularly heartening to those who believe that the ACA itself, as well as the subsequent fixes that she advanced, put the country on the path toward a single-payer system in which the federal government assumed control over the financing and structure of healthcare delivery.

 Possible elements in a new bill

While President Obama criticized Republicans for having no alternative to the ACA, congressional Republicans and think tanks have advanced a number of free-market alternatives to the current law. Between comprehensive healthcare and tax reform in the early months of the  new congressional term, we expect to see the following elements at a minimum:

Cadillac tax: Likely to be killed. Very few politicians approve of this excise tax on high-cost medical coverage – not only premiums, but also employee voluntary salary reductions to fund Health FSAs and HRAs. The tax has been delayed three times by politicians loath to see it implemented on their watches.

Medical device tax: Likely to be killed after multiple delays. Even politicians who don’t turn their backs on additional tax revenue – like Sens. Warren and Markey of Massachusetts – realize that this tax hinders innovation and harms patients by assessing a levy on gross sales.

Minimal essential coverage: Federally mandated minimum benefits may be altered so that insurers can design products that individuals want to purchase and can afford. Today, in the individual market, childless couples must buy coverage that includes pediatric services, while priests must purchase plans with a variety of birth control services covered in full.

Premium ratios: Men in their 60s incur, on average, about six times the dollar volume of claims as 25-year-old men. The ACA requires that the ratio between the highest premium (charged to older individuals) be no more than three times the lowest premium. As a result, young people don’t purchase insurance in the individual market because they’re subsidizing older individuals under this arrangement. These markets attract too many older, sicker individuals and not enough younger ones. Without relaxing or abolishing this artificial ratio, lawmakers can’t stabilize individual markets.

Tax deduction for medical premiums: Under current law, employers can deduct the cost of employer-sponsored medical insurance as a compensation expense. Some Republican proposals eliminate the employer deduction and replace it with a tax credit for individuals. This change, they believe, will put employer-sponsored and individual insurance on a level playing field. Currently, employees receive tax advantages that individuals buying insurance in the individual market don’t enjoy. Critics of this approach believe that this shift will destroy the incentive for employers to provide group insurance and that employees’ buying insurance in the individual rather than group market will increase administrative costs.

Premium credits: Many of the Republican proposals replace advance premium tax credits (the subsidy that individuals with incomes below 400% of the federal poverty level receive to offset the cost of medical insurance premiums) with tax credits.

Medicaid: Republican proposals give states far more latitude in redesigning the Medicaid program within the state. Medicaid is a joint federal-state program designed to serve primarily poorer individuals. The current program is heavily financed by the federal government, which imposes rules that typically don’t take into consideration unique factors in different states.

Impact on accounts

Here are some features that we expect to see in the new bill. The House has passed the Hatch-Paulsen bill (summary here)  that includes these provisions already:

  • Participants can reimburse tax-free all over-the-counter drugs and medicine through Health FSAs and HSAs.
  • Individuals who meet all other HSA eligibility requirements and enroll in Medicare Part A can continue to contribute to their HSAs.
  • Individuals can purchase medical insurance through tax-free HSA distributions. Under current law, distributions to pay premiums are tax-free only in specific circumstances.
  • Employers have the option to allow employees to roll over unused Health FSA or HRA funds into an HSA, which would seed the accounts and eliminate HSA eligibility issues when the reimbursement and medical plans don’t have the same end date.
  • HSA owners can go back to their date of HSA eligibility to reimburse eligible expenses tax-free. Today, they can go back only to the date that the HSA is established under the applicable state trust law, which in many cases is the date of the initial deposit.

In addition, US Rep. Dr. Charles Boustany (R-LA) championed a bill, passed unanimously by the House, to allow small employers to use HRAs to give employees a tax-free stipend that they can apply to individual coverage purchased in a public exchange. Small employers don’t have to provide employer-based insurance, and many lack the resources (both financial and administrative) to offer coverage to their employees. This legislation allows employers to help employees with the cost of insurance. We expect to see this feature incorporated into the new health care law.

 The bottom line

The ACA replacement bill will be a bipartisan bill, unlike its predecessor. Both Republicans and Democrats will be invested in the future success of the bill, and we can expect cooperation as future Congresses tweak the bill to make healthcare work better. The bill will include more free-market solutions – more consumer choice, more insurer flexibility to create and sell plans that consumers want to buy, more innovation with the elimination of many arbitrary one-size-fits-all dictates from Washington DC and less regulatory interference in the important interaction between patients and providers.

No one – not Republican or Democrat, statist or free-marketer – will receive everything that she wants. In the end, though, with open deliberations involving both major political parties, we’ll likely end up with a bill that has broader political support than the partisan ACA and fewer rules restricting innovation, flexibility and quality.

What we’re reading (about healthcare reform)

Republicans in the House of Representatives unveiled their approach to reform, A Better Way, in June. Read about it here.

To learn more about the use of HRAs to offset small business employees’ premiums for coverage in the individual market, read the text of HR 5447 here and articles about the bill here and here.

Another Louisiana physician in congress, Sen. Bill Cassidy, has introduced a comprehensive reform measure with the rather presumptuous nickname The World’s Greatest Health Care Bill Ever. You can judge for yourself by reading the text of the bill here or the Health Affairs article about the legislation here.

For a look at comprehensive reform by a group of scholars, read this article published in Health Affairs.

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