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03/13/2017

The GOP Proposal to Repeal and Replace the Affordable Care Act (article)


Pursuant to an Executive Order issued in January, the 115th Congress has drafted legislation 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 Republican leadership in the House. The proposal was approved along party lines by the House Ways and Means Committee and the Energy and Commerce Committees on March 9. 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.

The draft legislation does not propose to repeal the ACA completely all at once. Earlier this year, Congress approved a budget resolution with instructions that the House and Senate use the budget reconciliation procedures to modify the ACA. While beyond the scope of this article, budget reconciliation procedures require that subject legislation must relate only to revenue and spending, and must not increase the federal deficit beyond a 10-year budget window. Within these parameters, the draft legislation calls for a gradual repeal of certain ACA provisions over a number of years. A full repeal of the ACA would require a super-majority of 60 votes to pass the Senate. A reconciliation measure, on the other hand, only requires a simple majority of 51 votes in the Senate.  The Republicans presently hold a 52-to-48 majority in the Senate.

Non-Tax Provisions

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.

The AHCA would repeal Medicaid coverage expansion starting in 2020, after which new enrollment under the expansion provisions would freeze. Existing enrollees who become disqualified as their income rises will not be permitted to rejoin under the prior expansion thresholds. The AHCA would also reduce the Medicare Part D retiree drug subsidy.

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;
  • Promote participation and insurance options in individual and small group markets;
  • Promote certain services - preventive, dental, vision, mental health, substance abuse; and
  • Direct provider reimbursement.

Tax Provisions

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. This provision is intended to discourage individuals from terminating coverage, or seeking it shortly before an anticipated need.
  • The employer- shared responsibility mandate that requires public and private employers employing 50 or more full-time employees and equivalents to offer adequate and affordable health coverage to their employees. Although 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 3.8 percent net investment income tax that applies to the net investment income of individuals who have modified adjusted gross income in excess of certain threshold amounts, for tax years beginning after Dec. 31, 2017.
  • The 0.9 percent additional Medicare tax that applies to employee compensation and self-employment income that exceeds certain threshold amounts, for tax years beginning after Dec. 31, 2017.

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

  • 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;
  • Modify the qualified medical expense definition to include over-the-counter medications; Reduce the tax penalty for HSA withdrawals used for non-qualified expenses from 20 percent to 10 percent; and
  • Create a special rule for certain medical expenses incurred prior to establishing an HSA.

Additionally, the income threshold for the medical expense itemized tax deduction would be returned to 7.5 percent of adjusted gross income from 10 percent under the ACA.

The AHCA would retain the Cadillac tax on high cost of employer-sponsored coverage. The Cadillac tax generally applies to employer-sponsored health insurance coverage that exceeds certain dollar amounts and was scheduled to apply generally to tax years beginning in 2020. The AHCA further delays the effective date until 2025.

Additional provisions being repealed under ACHA include the following:

  • The Small Business Tax Credit, beginning in 2020.
  • Flexible medical spending account cap (currently indexed in 2017 at $2,600), beginning in 2018;
  • Health insurance tax (provider fee) imposed on insurers, beginning in 2018;
  • The 2.3 percent medical device excise tax, beginning in 2018;
  • The 10 percent excise tax on indoor tanning services, beginning in 2018; and
  • Branded prescription drug tax, beginning in 2018.

The AHCA would also repeal the ACA premium tax credits. In its place  would be advanced, refundable tax credits 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. Credits are age-adjusted as follows:

Age of Individual

Amount of Credit

 

Under 30

 

$2,000

Between 30 and 39

$2,500

Between 40 and 49

$3,000

Between 50 and 59

$3,500

Over 60

$4,000

 

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.

The Path to Passage

Newly appointed HHS Secretary Tom Price said that the AHCA is “a work in progress”; the first step being this draft legislation. The second step involves 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 House Ways and Means and the Energy and Commerce Committees have completed their markups of the bill, the proposal now travels to the House Budget Committee, followed by a review from the Rules Committee. Once these committee reviews are completed, the AHCA would go to the House floor for a final vote. Passage of the legislation in the House would clear the way for its subsequent consideration in the Senate. If the Senate approves the legislation with changes, additional time would be required to reconcile the House and Senate versions of the legislation, which may be difficult to complete prior to the two-week April recess scheduled in Congress.

In this passage path, however, are many sources of opposition to the proposal including those from Democrats, conservative Republicans, moderate Republicans (particularly in states expanding Medicaid), lack of scoring by the Congressional Budget Office, and special interest groups.

We will keep you apprised as developments occur.  In the meantime, remember that the Affordable Care Act still remains in force. For more information concerning the prospect of the ACA’s potential repeal, please contact your local CBIZ professional.


Copyright © 2017, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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