March 9, 2017

Instructions Received: The Repeal and Replace Agenda Begins

Jacob D. Beaver, Rich Meade

The Ways and Means and Energy and Commerce Committee reported their budget reconciliation instructions to the Budget Committee on Thursday, March 9th as part of the Republican efforts to “repeal and replace” the Affordable Care Act (ACA). There may yet be modifications made to the legislation as the score from the Congressional Budget Office (CBO) is not yet available and the Budget Committee must make certain the legislation hits the budgetary goals of the reconciliation instructions ($1 billion in deficit reduction over ten years).

The Ways and Means Committee included in its instructions repeal of all the taxes imposed by the ACA with one slight exception starting in tax year 2018: the so-called “Cadillac Tax” on generous employer sponsored health plans. In the legislation, this was repealed starting in 2020 but will be reinstated in 2026.

The ACA subsidized the purchase of “qualified health plans” on the health care exchanges with a refundable tax credit for Silver plans purchased through the exchanges. To be considered a qualified health plan under the ACA, the plans had to offer all the benefits included in the essential health benefits package as enumerated by a regulation promulgated by the Department of Health and Human Services (HHS) in 2013. The reconciliation bill repeals that tax credit starting in 2020.

In its place, however, the bill creates a refundable tax credit that is graduated by the age of the taxpayer for health insurance, so long as the individual is not offered insurance by their employer or a government program. The new tax credit is means-tested by reducing it 10 percent if your modified adjusted gross income is below $75,000 for an individual and $150,000 for a family. Modified adjusted gross income is calculated by deducting from gross income things such as IRA contributions and student loan interest, among others. Those income levels are adjusted for inflation for future years.

The Ways and Means Committee language also expands the use of Health Savings Accounts (HSAs). The prohibition on using HSAs for over-the-counter medications is lifted. The tax on distributions from HSAs for non-medical use is lowered from 20 to 10 percent and from 20 to 15 percent for Archer HSAs starting in CY 2017 revised to CY 2018. Maximum contributions to HSAs are increased from $2250 to $4500 for individuals and from $4500 to $10000 for families. It also allows both spouses to make catch-up contributions to the same HSAs and allows medical expenses to be covered by an HSA if the account is opened within 60 days.

The Ways and Means Committee instructions will also repeal both the individual mandate and the employer mandate. Thus, the issue with the definition of a full-time position is no longer an issue for employers. The Energy and Commerce Committee language includes a provision requiring health insurance companies to impose a 30 percent increase in premiums if an individual allows for a lapse in insurance coverage of greater than 63 days.

Energy and Commerce’s instructions also suspend the Medicaid expansion after 2020 and turns the Medicaid program into a per capita cap program whereby states will have more flexibility to administer their program but less overall funding than the status quo. The cap is determined by using 2016 spending as the baseline and inflating it to current years with the consumer price index for all urban consumers. Our own internal estimates suggest Medicaid spending will be decreased by around $175 billion over a ten-year period.

However, the bill does offer some relief for states in the form of eliminating the cuts to the Medicaid Disproportionate Share Hospital (DSH) payment reductions starting in fiscal year (FY) 2018 for non-expansion states and FY 2020 for expansion states.  There is also $10 billion in safety net funding for non-expansion states for CY 2018-2022.

Energy and Commerce also creates a new State Innovation Grants and Stability program to allow states to: provide financial assistance for high-risk individuals; stabilize individual and small group markets; lower the cost of insurance in the individual and small group markets; create incentives to purchase insurance; promote access to preventive health and dental services; and provide assistance for out-of-pocket costs. The program will be administered by the Centers for Medicare and Medicaid Services (CMS). Funding begins January 1, 2018 and runs through December 31, 2026. The program is funded with $90 billion over the next eight years.

The Budget Committee will meet next week to combine the two committees’ work products. If the CBO score indicates either committee did not meet their reconciliation instructions, the Budget Committee can amend the bill so that it does meet the instructions. Floor consideration in both the House and Senate is less certain as GOP leadership is working through concerns both conservative and moderate Republicans have with the direction of the Obamacare repeal and replace efforts. There is also a looming Medicaid funding fight with some senators from expansion states seeking to preserve their full expansion programs.

The budget reconciliation bill is considered the first phase of the Republican “Repeal and Replace” agenda.  The second phase of the “Repeal and Replace” agenda is for Congress to pass an association health care plan bill that would allow for the sale of insurance across state lines.  This bill will be considered under regular order, not the expedited budget reconciliation process so it will require 60 votes in the Senate to pass.

The third phase of the “Repeal and Replace” agenda is for Congress to pass medical malpractice reforms and measures aimed at reducing pharmaceutical costs.  The President met with Reps. Elijah Cummings (D-MD) and Peter Welch (D-VT), promising that he would pursue allowing HHS to negotiate drug prices with pharmaceutical companies in the Medicare Part D program, essentially handing HHS the ability to set drug prices within the program. Republicans in Congress have historically strongly opposed negotiated pricing in Medicare Part D, but plenty has changed since this issue last came up in Congress.