HRB 127 - The GOP Proposal to Repeal and Replace the Affordable Care Act

Released March 10, 2017 I Download as a PDF

As follow-up to President Trump’s Executive Order in January (see CBIZ Health Reform Bulletin 126), the 115^th Congress has begun the process of trying to modify the Affordable Care Act (ACA).  On March 6, 2017, a two-part reconciliation bill, known collectively as the “American Health Care Act” (AHCA), was introduced by the Republican leadership.  The proposal was passed through the Ways and Means Committee and the Energy and Commerce Committees today.  And by the time you are reading this, it is likely that additional action has been taken.  Speaker Paul Ryan has indicated that it is his intent to make every effort to move this legislation as quickly as possible.  The reality is that this may, or may not, happen.

Following is a brief summary of certain aspects of the AHCA, with particular focus on the potential impact on employer-sponsored health care.  Before getting into specifics of the proposal, it may be helpful to understand that a full repeal of the ACA would require a super majority of 60 votes to get through the Senate.  A reconciliation measure, on the other hand, only requires a simple majority of 51 votes in the Senate but is only available for revenue and budgetary provisions.  For this reason, the AHCA leaves most of the ACA’s provisions in place. 

The AHCA would retain certain ACA insurance market reforms such as:

• Coverage of:
  • Preexisting conditions;
  • Adult children up to age 26;
  • 10 essential health benefit categories; and
  • Preventive benefits with no cost sharing.

• No cap on lifetime and annual limits.
• Guaranteed availability and renewability of coverage.
• Out-of-pocket expenditure caps.
• Prohibition of discrimination based on health status, race, nationality, disability, age, or sex
• Cadillac tax on high cost of employer-sponsored coverage.  While this provision is currently delayed until 2020, the AHCA further delays the effective date until 2025.
• The income threshold for the medical expense tax deduction would be returned to 7.5% of income from 10% under the ACA.

The AHCA intends to expand Health Savings Accounts (HSA) beginning in 2018 in the following ways:

• Would increase the annual tax-free contribution limit to equal the limit on out-of-pocket cost sharing under qualified high deductible health plans.  Thus, the basic limit would be $6,550 in the case of self-only coverage and $13,100 in the case of family coverage beginning in 2018 (subject to indexing);
• Both spouses could make catch up contributions to the same HSA;
• Would modify qualified medical expense definition to include over-the-counter medications; 
• Would reduce tax penalty for HSA withdrawals used for non-qualified expenses from 20 percent to 10 percent; and
• Would create a special rule for certain medical expenses incurred prior to establishing an HSA. 

The AHCA would repeal certain ACA provisions including:

• The individual mandate which requires individuals to maintain minimum health coverage or pay a tax.  While the AHCA retains the actual provision of the law, the amount of the penalty is reduced to zero in the proposal and would be made retroactive to those impacted by the penalty in 2016.
  
  Instead of the individual mandate, under AHCA, beginning in open enrollment for benefit year 2019, there would be a 12-month look-back period to determine if an individual experienced a lapse in continuous health coverage of 63 days or longer.  If the gap in coverage exceeds 63 days, then the individual would be assessed a flat 30 percent late-enrollment surcharge on top of the base premium. This late-enrollment surcharge would be the same across all markets, regardless of health status. 

• The employer shared responsibility mandate that requires public and private employers employing 50 or more full-time employees to offer adequate and affordable health coverage to their employees.  While the AHCA retains the provision of the law, the potential penalties pursuant to IRC Section 4980H(a), the “no coverage” excise tax, and Section 4980H(b), the “inadequate or unaffordable” excise tax, is reduced to zero.  If this provision is preserved in the final law, it would be made retroactive to those impacted by the penalty in 2016.  As for the required Form 1094/1095 reporting by employers and insurers, the AHCA appears to retain this reporting and disclosure obligation. 
• The Small Business Tax Credit, beginning in 2020. 

Additional repeals include the following, which would become effective in 2018:

• Flexible medical spending account cap (currently indexed in 2017 at $2,600);
• Health insurance tax imposed on insurers;
• Reduction of Medicare Part D retiree drug subsidy;
• Medicare tax imposed on high earners – the unearned income and 0.9 percent tax surcharge;
• Medical device excise tax;
• Branded prescription drug tax;
• As mentioned above in the HSA section and as applicable to other reimbursement arrangements, the tax favored status of over-the-counter medications would be returned; and
• The 3.8% net investment tax on individuals, estates, and trusts with income above certain levels.

The AHCA would also repeal the ACA premium tax credits.  The AHCA would replace this with an advanced, refundable tax credit for the purchase of state-approved, major medical health insurance and unsubsidized COBRA coverage for U. S. citizens who do not have access to employer or government-sponsored coverage, or who are otherwise exempt.  The credits are age-adjusted as follows:

The credits are capped at $14,000, and are available to individuals whose income is less than $75,000 per year ($150,000 joint filers). The credit phases out by $100 for every $1,000 in income higher than those thresholds.

Additional AHCA Provisions

• The proposal calls for a change in permissible age variations in health insurance premium rates.  Currently, the law limits the cost of the most generous plan for older individuals to three times the cost of the least generous plan for younger individuals. The AHCA would loosen the ratio to five-to-one and allows states to set their own ratio. 

• The AHCA would create a “Patient and State Stability Fund” to provide:
• Financial assistance to high-risk individuals and those with high utilization rates;
• Reinsurance incentives to stabilize individual market premium;
• Promotion of participation and insurance options in individual and small group markets;
• Promotion of preventive, dental, vision, mental health and substance abuse services; and
• Direct provider reimbursement.

• The Path to Passage The newly-appointed HHS Secretary Tom Price states that the AHCA is “a work in progress”; the first step being this legislation.  The second step would be a review of all ACA-related regulations and pronouncements, followed by the third step of additional legislation.   According to Speaker Paul Ryan, now that the Ways and Means and the Energy and Commerce Committees have completed their markups of the bill, the proposal now travels to the Budget Committee, followed by a review from the Rules Committee.  Once these committee reviews are accomplished, the AHCA would go to the floor for a final vote.  It would then go to the Senate for consideration.   In this passage path, however, are many sources of contention against the proposal including:

• Democrats;
• Conservative Republicans;
• Moderate Republicans, particularly in states expanding Medicaid;
• Lack of scoring by the Congressional Budget Office; and
• Interest groups such as the American Association of Retired Persons (AARP), the American Medical Association (AMA), and the American Hospital Association (AHA), among others.   We will keep you apprised as developments occur.  In the interim, remember that the Affordable Care Act still remains in force.    About the Author: Karen R. McLeese is Vice President of Employee Benefit Regulatory Affairs for CBIZ Benefits & Insurance Services, Inc., a division of CBIZ, Inc. She serves as in-house counsel, with particular emphasis on monitoring and interpreting state and federal employee benefits law. Ms. McLeese is based in the CBIZ Kansas City office. The information contained herein is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations. The information contained herein is provided as general guidance and may be affected by changes in law or regulation. The information contained herein is not intended to replace or substitute for accounting or other professional advice. Attorneys or tax advisors must be consulted for assistance in specific situations. This information is provided as-is, with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.