Republican Senators Richard Burr, Tom Coburn, and Orrin Hatch recently released a blueprint for repealing and replacing Obamacare, called the Patient Choice, Affordability, Responsibility, and Empowerment Act, or the Patient CARE Act (PCA). The plan is getting significant attention from supporters and critics alike (including the editorial page of the New York Times) because both sides recognize that it is a serious effort to address the problems in U.S. health care in a manner that is strikingly different from Obamacare. The debate over the merits (or perceived drawbacks) of the PCA proposal was given further impetus by an assessment of its coverage and cost implications from the Center for Health and Economy (H&E), a new think tank headed by former Congressional Budget Office Director Doug Holtz-Eakin (and with a board including several other academics, including Uwe Reinhardt of Princeton University) and devoted to providing independent analytical assessments of major public policy initiatives.
In this short post, we describe the major provisions of the PCA, as we understand them from the descriptive material and conversations with the authors’ staffs. We also offer our views on how to think about the budgetary and coverage implications of the PCA proposal in the context of the estimates produced by H&E.
Major Provisions of the Patient CARE Act (PCA)
Repeal of Obamacare. The starting point for the PCA is repeal of Obamacare in its entirety, with the exception of the law’s Medicare provisions. We do not take the retention of the Medicare provisions from Obamacare as an endorsement of them by the authors. That would be inconsistent with the public record. For instance, Senator Coburn has proposed sweeping reforms of Medicare that differ substantially from the Obamacare Medicare provisions. The retention of the Obamacare Medicare provisions would seem instead to be an acknowledgement that it will be difficult enough politically to enact a sensible reform of the insurance market for the under age-65 population without also having to pass in the same legislation a comprehensive reform of Medicare. A reworking of Medicare is badly needed, of course, but it can be addressed on a separate legislative track from an Obamacare replacement plan.
By repealing Obamacare rather than trying to fix that law, the PCA presents a clear alternative with all of the key elements of a market-based health reform. In any event, Obamacare is too lengthy and interconnected to address coherently through a series of one-off amendments. Having cleared the slate, the authors of the PCA provide an internally consistent reform that avoids the heavy emphasis on mandates and federal regulatory control that permeates Obamacare.
Continuous Coverage Protection and Other Insurance Rules. The PCA would address the question of pre-existing health conditions in a very different manner from Obamacare. Persons who stayed continuously insured would be allowed to move between insurance coverage platforms without their health status factoring into the premiums they must pay for coverage. The 1996 Health Insurance Portability and Accountability Act (HIPAA) smoothed the transition between employer group plans for Americans with pre-existing conditions, and included provisions aimed at easing the transition between group coverage and state-regulated individual market plans. But the provisions addressing group-to-individual market transitions left large gaps through which many people can, and do, still fall.
The PCA would fill in those gaps and require state-regulated insurance plans to offer coverage to the continuously insured, and to guarantee its renewal. The continuous coverage requirement does not need to be burdensome. It can be satisfied through the purchase of low-cost catastrophic coverage as well as more comprehensive insurance plans.
After enactment, there would be a one-time open enrollment period during which persons who had not been previously insured could opt into coverage without facing higher premiums based on their health conditions. States would be allowed to authorize risk rating of premiums for those who do not maintain continuous coverage following that initial enrollment period.
In general, the PCA does not include federal benefit mandates. Benefit regulation would be left to the states. However, the PCA would establish a presumption that insurers will allow dependents under age 26 to enroll in their parents’ coverage, though states could override this rule with their own regulations. The PCA would also establish a ban on lifetime limits on coverage, but states could choose to write alternative regulations on that issue as well. Finally, the PCA would establish an upper limit on age rating of 5:1, meaning that insurers could charge their oldest enrollees no more than five times the premiums assessed on the youngest enrollees. Again, however, states could choose to establish their own age-rating limitations that differ from the general federal rule.
Broadening Insurance Coverage Enrollment. The PCA would establish income-tested refundable tax credits for persons with incomes up to 300 percent of the federal poverty limit (FPL) who either work for small employers (defined 100 or fewer workers) or who do not have access at all to employer-sponsored insurance. The maximum credit amounts would be available for persons with incomes below 200 percent of the federal poverty line (FPL). The credits would be phased down for those with higher incomes, and individuals with incomes above 300 percent of FPL would not be eligible for the tax credit. The credits would also be adjusted by three age categories (18 to 34, 35 to 49, and 50 to 64) and individual versus family insurance coverage, with higher subsidies for older persons and for those with families. The credits could be used to enroll in health insurance sponsored by a small employer or to purchase coverage offered in the individual insurance market.
States would also be allowed to establish a default insurance option. Persons who are eligible for a tax credit for insurance but fail to choose an insurance plan could be enrolled in a default plan offered by private insurers. These plans would establish premiums equal to the credit amounts (by adjusting deductibles) so that the individuals would not owe additional premiums for the coverage.
The combination of continuous coverage protection, refundable tax credits for lower and moderate income households, and the default insurance option should dramatically expand insurance coverage in the United States.
Cost Discipline in Employer-Sponsored Insurance. The PCA does not seek to disrupt or alter the employer-sponsored insurance market. Firms would be allowed to sponsor health insurance plans for their employees without new benefit requirements or burdensome federal regulations, and, as a general rule, the payment of premiums by employers for their workers would continue to be treated as tax-free compensation to the workers. The retention of this large tax preference should ensure the continuation of most employer-sponsored plans without change.
The PCA does seek to ensure additional cost discipline in job-based insurance by placing an upper limit, at a relatively high level, on the tax preference for employer-paid premiums. This limit would replace Obamacare’s “Cadillac” tax, which imposes a 40 percent excise tax on the value of health plans exceeding $10,200 for individual coverage and $27,500 for family coverage. Although levied on insurers, the Cadillac tax would be paid by the individuals and families through higher insurance premiums.
For purposes of creating a cost estimate the PCA proposal, the H&E analysis of the plan assumed that the upper limit would be placed at roughly 65 percent of high cost coverage. (See Note 1) In 2013 terms, that would mean a cap of about $5,400 for individual coverage and $11,250 for family coverage. These upper limit levels would then be indexed to the Consumer Price Index (CPI) plus one percentage point in every subsequent year. Premiums payments by an employer above the upper limit levels would count as taxable income to the worker, both for income and payroll tax purposes.
Scores of economic analyses over the years have shown that the presence of open-ended tax preference for employer-paid premiums is a primary reason for excessive cost inflation in the health system. By placing an upper limit on this tax preference, the Senators sponsoring the PCA seek to inject much more cost discipline into the system while retaining extensive job-based insurance coverage. Employers and their workers who today have the most expensive insurance arrangements are likely to respond to the new incentives of an upper limit by adjusting their plans to lower their premiums.
Medicaid Reform. The PCA would restructure Medicaid in a number of important ways. First, Medicaid participants would be allowed to opt for the federal tax credit in lieu of enrolling in Medicaid insurance. Further, the states would be given flexible funding – called health grants — to design and run a health insurance program for the non-elderly, non-disable participants in the program. One approach the PCA authors clearly envision the states could take would be to use this flexible funding to supplement the federal tax credits. This would allow the Medicaid participants to use the combined resources to purchase the coverage that best suits their needs.
In the first year, health grants would be set based on historical spending for the covered acute-care population. In future years, the grants would grow by CPI plus one percentage point and by changes in the low income population in the state. Long-term care services and supports would be funded in a separate, fixed grant to the states, but the acute-care insurance needs of the elderly and disabled would continue to be addressed by the current Medicaid program structure, including current federal-state matching rates and rules.
In addition to these reforms, the authorization for testing Health Opportunity Accounts within Medicaid, originally enacted in 2005, would be extended.
Other Provisions. Beyond the core reforms to insurance regulations, the tax treatment of health insurance, and Medicaid, the PCA would also make a few additional changes to other elements of the health system.
The PCA would seek to reduce the costs of defensive medicine by examining creative options for avoiding costly lawsuits. A heavy emphasis would be placed on incentivizing states to experiment and pursue promising reforms, such as administrative tribunals, health courts, and pre-negotiated injury compensation systems.
The PCA would also leverage existing programs to push those provider medical services to be more transparent and clear about pricing for consumers.
Finally, Health Savings Accounts (HSAs) would be promoted by removing the restrictions on them enacted in Obamacare and by removing current law barriers that keep certain excluded population out of HSAs. In addition, the PCA would allow more flexible use of HSA funds and more spousal coordination within an HSA.
Estimating the PCA
The Center for Health and Economy used a microsimulation model to estimate the coverage and cost implications of the PCA. The H&E estimates that the PCA would reduce the ranks of the uninsured to a level that is comparable to what will occur under Obamacare. By 2023, there would be approximately 1 percent more insured Americans under the PCA than under Obamacare, according to the H&E, with many more people enrolled in the individual insurance market and a comparable reduction in the Medicaid population.
Further, the H&E estimates that this coverage expansion would occur with far less federal spending than Obamacare. According to the H&E, the PCA would reduce the federal deficit by nearly $1.5 trillion over the next decade, largely by imposing an upper limit on the tax preference for employer-provided coverage. That provision would generate substantial new revenue — $226 billion in 2023 alone. (See Note 2)
Controversy has arisen over the meaning of those estimates. Critics argue that the proposal creates a big tax hike for millions of American households by capping the tax preference for employer-paid health premiums. That is based on a misinterpretation of both the proposal and the H&E analysis.
First, the cap on the tax preference is not as restrictive as some believe. The summary of the PCA gives the impression that workers would be taxed on their employers’ contributions to health insurance premiums that exceed 65 percent of the average plan’s cost. As later clarified, the actual policy limits the tax preference to 65 percent of the cost of a more expensive high-option insurance plan. That means most employer plans would fall well below the cap, with a smaller percentage of workers enrolled in plans that would exceed the capped amount.
Second, the H&E analysis does not include the effects of other tax reductions included in the PCA. The H&E budget impact table shows an increase in tax revenue of $1.057 trillion with a corresponding reduction in the federal budget deficit (labeled “net budget effect”) of $1.473 trillion. Those estimates overstate both the tax increase and the deficit reduction that would result from considering all provisions in the PCA.
Unlike a typical cost estimate from the Congressional Budget Office (CBO), the H&E exercise focused on only the parts of the PCA that affect health insurance choices for persons under age 65. That includes replacing the Obamacare exchange structure (along with its subsidies and taxes) and the Medicaid provisions with the PCA reforms. It did not estimate the budget impact of the full proposal, which would repeal the entirety of the Obamacare tax hikes, including the Medicare payroll tax increases, and the taxes on devices, drugs, and insurers. None of these tax cuts were factored into the H&E budgetary tables.
We can approximate the net budget impact of the PCA using CBO’s most recent complete budget estimate of Obamacare. Repealing the Medicare payroll tax hike and the taxes on devices, drugs, and insurers would reduce revenue by $533 billion over the period 2014 to 2022. Extending the tax cut by one additional year would bring the tax cut for these provisions to about $613 billion.
When this tax cut is factored into the H&E assessment, the net tax increase and overall reduction in the federal deficit are reduced substantially. On balance, taxes increase by about $444 billion and deficits decline by $860 billion over the next decade.
But even these estimates overstate the intended tax consequences of the PCA. It is clear from discussions with the offices of the Senators who wrote the PCA proposal that they will adjust the proposed upper limit on tax–preferred employer premium payments as necessary to ensure the overall proposal is tax-neutral. Based on the H&E model, we believe there is substantial room, even after considering the additional tax cuts, to raise the upper limit to levels well above 65 percent of high-cost coverage and achieve the goals of the PCA authors.
There is, of course, a trade-off between cost discipline and political resistance in setting the upper limit on the tax preference. The lower the limit, the more effective it would be in encouraging cost-saving adjustments in health coverage, but also the more likely it would be to encounter significant political opposition. That is why it might be desirable to set a goal of achieving revenue neutrality over a longer period (such as ten years) rather than on a year-by-year basis. Such an approach would allow for easing in the upper limit at a relatively high level in the initial years, and then allowing it to become more constraining in future years by raising it with an index that lags behind health care cost inflation.
A revenue-neutral PCA proposal (using Obamacare as a current law baseline) would still substantially reduce the federal budget deficit because the Medicaid reforms and the medical malpractice reforms included in the PCA proposal are projected in the H&E analysis to reduce spending, relative to Obamacare, by nearly $240 billion over the period 2017 to 2023.
The introduction and analysis of the Patient CARE Act proposal is an important development in the health reform debate. The proposal provides a very clear alternative to Obamacare. It is a decentralized, less regulatory and more consumer-driven model than Obamacare, and the H&E analysis clearly shows it has the potential to cover millions of Americans with insurance at far less cost than Obamacare. That is likely to be an appealing selling point to millions of people who remain uneasy about what was passed in 2010. The introduction of the PCA as a credible alternative plan might also mean that the next round of health reform legislation, probably unavoidable at some point given Obamacare’s shortcomings and continued political turbulence over the issue, will be far less one-sided than the last round.
Note 1. The PCA blueprint described the upper limit on the tax preference as being set at 65 percent of an average plan. In subsequent conversations, it was made clear that the intent was to describe how the tax limitation was estimated in the H&E analysis. The H&E analysis used 65 percent of a typical, higher cost insurance plan.
Note 2. The tax revenue that would be collected as a result of placing a limit on the tax preference for employer-provided coverage is reported by the H&E in a table labeled “Spending Projections Under the CARE Act.” That table shows gross spending and revenue flows resulting from the enrollment-related provisions of the PCA without netting out the budget impact of repealing Obamacare.