The Democrats in the House are currently proposing legislation modifying the Affordable Care Act (ACA). This post summarizes and evaluates the new bill in Congress.
The Affordable Care Act (ACA) created state health insurance exchanges to facilitate the purchase of private health insurance by working-age people and their families without offers of affordable health insurance from their employer. The Republicans have attempted and continue to attempt to repeal the Affordable Care Act. The Democrats are considering a wide variety of health insurance reform plans some of which depend on improving state exchanges.
The state exchange marketplaces currently provide health insurance to around 8 million people, a small number compared to the 160 million people covered by employer-based insurance. The relatively small size of state exchange marketplaces partially stems from the eligibility rules and incentives written in the ACA. The size of the two markets also is impacted by the generous tax treatment of expenditures for health insurance by employers.
The Trump Administration and the 2018/2018 Congress made several changes to the ACA, which reduced demand for state exchange health insurance. Congressional Democrats are now proposing a bill, The Protecting Pre-existing Conditions and Making Health Care More Affordable Care Act of 2019, which makes small incremental changes to ACA rules and reverse some but not all recent Trump Administration changes to the ACA.
Go here for the bill:
Go here for a useful article on this bill.
Go here for a useful summary.
This paper provides an evaluation of the proposed bill modifying the ACA.
The analysis presented here shows that the proposed legislation makes some incremental improvements, which would strengthen state exchange marketplaces. However, even after the enactment of the new rules employer based health insurance would remain more affordable and probably more comprehensive than state exchange insurance for most of the working-age population. The new rules proposed in this act would still result in ACA state exchanges being a fringe marketplace to the larger employer-based health insurance market.
Summary of the Protecting Pre-existing Conditions and Making
Health Care More Affordable Care Act of 2019
House Democrats have introduced legislation to improve the Affordable Care Act. The main features of the ACA reforms offered by the Democrats are as follows:
· An expansion of tax credits used to subsidize the purchase of health insurance on state exchanges,
· Modification of the definition of “affordable” health care in the rule governing access to tax credits on state exchanges,
· Provide funds for reinsurance for high cost claims,
· Curtail Trump Administration waivers on essential health benefits,
· Reverse the Trump Administration executive order on short term health plans,
· Reverse Trump Administration rules promoting Association Health Plans,
· Several policies expanding ACA enrollment outreach and efforts by the Trump Administration to stifle ACA enrollment.
Issue One: Evaluating the impact of the expansion of the tax credit:
The new bill makes the premium tax credit more generous by capping the percent of income a household would be required to pay for premiums on state exchange policy at 8.5 percent rather than the current level of 9.86 percent.
The new bill also provides for an expansion of the tax credit to households with income greater than 400 percent federal poverty line (FPL) is a step in the correct direction.
The current law does not provide any premium tax subsidy for people in households with income over 400 percent FPL. Around 41 percent of households in the United States have income above this level and are ineligible for any premium tax credit.
The expanded subsidy could in theory attract some higher income households to state exchanges. This expanded subsidy should increase political support for ACA state exchange marketplaces. However, the number of higher income people affected by this change is likely to be small because most higher income people even after all the changes in this bill most high-income households will get better offers of health insurance from their employer than what is available on state exchanges.
The current elimination of the premium tax credit for people in households with income at 400 percent of the FPL leaves many household with a large unanticipated tax bill. The premium tax credit is claimed at the beginning of the year when annual income is difficult to anticipate. The allowable premium tax is based on actual end of year income. Households who earn more than they anticipate and earn more than 400 percent FPL must refund the premium tax credit to the IRS. The expansion of the tax credit could reduce (and depending on how it is structured) eliminate the subsidy cliff where some households owe money to the IRS because they miscalculated their income.
Issue Two: Evaluating changes in the definition of “affordable” in the rule governing eligibility for the premium tax credit.
The affordability rule applied to the premium tax credit is arcane.
Current ACA rules allow taxpayers to claim the premium tax credit if employer-based health insurance is not “affordable.” However, the affordability test is based on the cost of an individual health plan even if the household is larger than one individual.
This interpretation of the ACA was made by the IRS during the Obama Administration because of the exact wording of the statute even though the ACA required the taxpayer provide health insurance to everyone in the household. The IRS ruling is inconsistent with the clear intent of the individual mandate, which involves covering all people in the household.
This change in the definition of premium affordability used to determine eligibility for the premium tax credit will have a different economic impact for small versus large firms because only large firms are subject to the ACA employer mandate. The ACA employer mandate imposes a fine on large firms with more than 50 full time equivalent employees where the fine is based on the number of workers claiming the premium tax credit. Large firms in response to the new definition of affordability would have an incentive to change their insurance policies to assure their ESI offer is affordable under the new law. This might be accomplished by increasing their subsidy of the workers share of the premium payment or by decreasing premiums perhaps by increasing out-of-pocket expenses.
The new affordability definition for employer based insurance increases the number of people eligible for premium tax credits on state exchanges. However, some people who are newly eligible for the tax credit due to the change in the definition of eligibility might still prefer their employer’s health insurance offer to state exchange insurance. This would happen if the “unaffordable” employer offer was better than the state exchange insurance.
People often change jobs during the course of the year. A person with state exchange insurance who gets a new job with an offer of affordable health insurance would still under this proposed bill lose eligibility for the premium tax credit.
Currently, around 8 million people have state exchange health insurance compared to around 160 million with employer-based coverage. I have not seen an analysis of the impact of the expansion in premium tax credits and the new affordability definition on the size of these markets. The discussion presented here suggests the impact of this bill may be small. It would be a fun exercise to merge databases and get an estimate of this impact.
The original definition of affordability based on the IRS interpretation always troubled me. I hope it is replaced with a more rational definition.
Issue Three: Discussing an Omitted Issue the Elimination of the Individual Mandate.
The ACA includes a provision requiring most taxpayers in the United States have continuous health insurance or pay a fine to the IRS. One of the most notable “achievements” of the Trump Administration was the repeal of the individual mandate. The individual mandate was considered vital by many health care economists because it forced people to purchase health insurance prior to becoming sick and helped stabilize health insurance premiums. The individual mandate was unpopular and strongly opposed by conservatives and libertarians who considered it an assault on freedom.
The issue of the repeal of the individual mandate is not addressed in this bill. The omission of a remedy for this problem is most likely due to political considerations.
There are other less politically abrasive ways to facilitate continuous health insurance coverage, which could substitute for the repealed mandate. The existence of a tax credit for the purchase of health insurance and/or a tax credit for contributions to health savings accounts, contingent on continuous health coverage would also increase the size of the insurance pool.
Issue Four: Evaluating a Reinsurance Program
The ACA modification bill includes a provision for reinsurance payments to insurance companies for high-risk and high-cost health care cases. Reinsurance payments are generally structured as payments from the government to private insurers or as transfers among insurers. Direct payments from the government to insurance companies are often attacked as corporate welfare. The Republican Congress has refused to fund risk corridor payments approved as part of the ACA. Litigation on these risk corridor payments has moved to the Supreme Court.
Another more politically attractive way to reduce risks associated with high health care costs would have the government make direct payments to patients who need high-cost care. The government could pay part of the cost of an endocrinologist to reduce expenses associated with chronic diabetes. The government could also pay part of the share of cancer treatments, which often occur out of network. Direct government payments to patients for high cost services that are often out of network could lower the cost of health insurance on narrow network plans and reduce lost revenue from the premium tax credit, which is linked to the cost of premiums.
These direct payments, like reinsurance payments, reduce risk for the insurer and reduce out-of-pocket costs for the patient. Payments for some treatments of a particular disease could reduce the incentive for insurance companies to cherry pick and design plans that would discourage enrollment by individuals with certain diseases.
Issue Five: Trump Executive Orders Undermining ACA State Exchanges
The Trump Administration has issued three executive orders — (1) state waivers for essential benefit coverage in health insurance policies, (2) the creation of short term health plans with substantial coverage gaps, and (3) the creation of Association Health Plans — which undermine the ACA.
Waivers of Essential Health Benefits:
The waivers for insurance covering essential health benefits lowers premiums for some healthy people but worsens the risk pool and increases prices for people seeking health insurance with essential health benefits. Health plans with waivers for essential benefits can lead to coverage gaps for routine procedures and conditions. Narrow network HMOs are a better way to obtain lower premiums than plans that curtail essential health benefits. Again, one way to motivate growth of narrow-network health plans is to provide a government subsidy for limited out-of-network benefits when such services are needed.
Short Term Health Plans:
The primary advantage of short term health plans is their lower premiums. However, coverage is often inadequate with many common procedures not covered. The policies also do not cover pre-existing conditions even though critics of the ACA have acknowledged a need to maintain protections for people with pre-existing conditions. This article does a good job in documenting problems with short term health plans.
Article on Problems with Shot Term Health Plans
The Democratic bill simply repeals short term health plans.
An alternative approach would allow private short term private health insurance in partnership with Medicaid. The private plan would cover people with pre-existing conditions and cover all essential health benefits up to a $50,000 expenditure limit. This approach would authorize automatic Medicaid enrollment once the $50,000 limit was breached. This new approach essentially converts Medicaid into a reinsurance program. This proposal for a private insurance/Medicaid partnership was outlined in a 2008 paper.
Medicaid Spend Down Rules and a Health Care Reform Proposal
The private health insurance/Medicaid partnership approach would be combined with repeal of existing inadequate short term health plans.
Association Health Plans:
The proposed Association Health Plans would allow small businesses to purchase their health plans from an industry group that creates an Association. Association health plans have been tried in the past and have resulted in a lot of fraud and insolvency.
Commonwealth Fund Article on Insurance Scams:
Commonwealth Fund Article on Muti-employer Plan insolvency
These Trump Administration executive orders by undermining ACA state exchanges assure that employers must play a larger role in providing health insurance to their employees. The Republican party backed by conservative economists was at one point interested in replacing employer sponsored health insurance with market places where workers could directly purchase private health insurance policies. In 2008, Senator John McCain offered a plan where employer tax preferences associated with the provision of insurance were replaced with an individual tax credit for private insurance purchases.
The Republican party no longer appears interested in reducing the role of employer in the provision of health insurance to the public.
Issue Six: The Cost of Annual Re-enrollment
The ACA requires people to reenroll each year. By contrast, people with employer-based insurance remain enrolled until they change jobs.
The annual reenrollment requirement results in state exchanges having large reenrollment costs. This bill seeks more funds for annual reenrollment efforts.
A more effective approach would involve changes to ACA rules that would allow for permanent enrollment. One impediment to permanent enrollment in ACA policies involves the loss of premium tax credits for people once they obtain an offer of affordable employer based health insurance. A second issue leading to annual reenrollment is the fact that premium payments by the individual change with annual income.
Further alterations in the premium tax credit and rules governing eligibility for the credit might be needed to facilitate permanent enrollment in ACA state exchange health plans.
The concept of state exchange market places for health insurance policies was originally a Republican idea. The Trump Administration is vigorously undermining state health exchanges created by the ACA. Many of the plans offered by the Administration including Associated Health Plans and Health Reimbursement Accounts will result in small businesses playing a larger role in the provision of health insurance to their employees. This creates costs both in terms of time and money for small business owners.
The proposal analyzed here takes some good steps in reversing these Trump Administration policies and includes some other provisions strengthening the ACA. However, even after enactment of these proposals, state exchange marketplaces will represent a small fraction of the market for health insurance. Even after enactment of these proposals, many people will remain ineligible for premium tax credits on state exchanges and the tax advantages associated with employer based insurance will remain substantially better than tax advantages associated with state exchange insurance.
Not all Democrats are in favor of saving and strengthening ACA state exchanges. Both Medicare for all and Medicare for America (a version of Medicare for all with an opt-out provision) would eliminate state exchanges and the need for this bill. This bill and further expansions of state exchanges would be essential if the Democrats chose to add a public option to state exchanges because the public option would decrease the already relatively low demand for private insurance on state exchanges.
Authors Note: David Bernstein retired from the U.S. Treasury in 2012 and became a freelance writer and consultant. He is the author of “Defying Magnets: Centrist Policies in a Polarized World,” https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized/dp/179668015X