On December 7, Congress passed the 824-page 21st Century Cures Act and sent it on to the president for his promised signature. The Cures Act will undoubtedly bring about major changes in our health care system. But, other than raiding the Affordable Care Act’s prevention fund one more time and reducing ACA funding for the territories, it leaves the Affordable Care Act largely untouched. Title XVIII of the Act, however, makes one significant change — it creates a new vehicle for financing health coverage, the small employer health reimbursement arrangement.

A health reimbursement arrangement (HRA) allows employers to fund medical care expenses for their employees on a pre-tax basis. HRAs are not formally recognized in the Tax Code, but were rather created by IRS guidance. An HRA must be funded solely by employer contributions and can only be used to reimburse an employee for the medical care expenses (as defined by the IRS) of the employee or dependents up to a maximum dollar amount. Any unused portion of the maximum dollar amount may be carried forward to subsequent years. If certain rules are followed, neither employer contributions to nor employee reimbursements from a HRA are subject to income tax.

Although HRAs are not explicitly mentioned in the ACA, the Internal Revenue Service (IRS) has concluded that they are tax exempt as a form of group health plan and must therefore comply with ACA group health plan requirements, including the ACA’s preventive services coverage mandate and prohibition on annual limits. Thus, an employer cannot use a HRA simply to pay premiums for coverage of employees and their dependents in the individual market.

Title XVIII of the Cures Act creates an exception to this interpretation for small employers — employers that have fewer than 50 full-time equivalent employees and therefore are not subject to the large employer mandates. These employers may pay or reimburse employees through HRAs for premiums for health insurance that qualifie as minimum essential coverage. The HRA must be solely funded by the employer without employee contributions, the payments cannot exceed $4,950 per year ($10,000 for family coverage), and contributions must be provided on the same terms to all eligible employees (although payments may vary insofar as premiums vary based on age or the number of family members).

The maximum contribution amounts will prorated for part-year employees and adjusted for inflation in the future. Employees may be excluded as ineligible if they are under age 25, employed for fewer than 90 days, part-time or seasonal employees, subject to a collective bargaining agreement that covers health benefits, or certain non-resident aliens. HRAs meeting these requirements are defined to not be group health plans but will still benefit from the group health plan tax exemption.

Individuals who receive small-employer HRA contributions are not eligible for premium tax credits if the monthly premium for self-only coverage for the second-lowest cost silver (70 percent actuarial value) plan in their “relevant individual insurance market” is less than one half of 9.5 percent of the employee’s household income minus the HRA premium contribution. If coverage is not affordable under this formula, the employee may qualify for a premium tax credit but it will be reduced by the amount of the HRA contribution.

Employers must provide their eligible employees notice at least 90 days before the beginning of a year for which they offer a small-employer HRA that it is available and that employees must have minimum essential coverage to receive HRA premium contributions tax free. The employer must state in the notice that employees should inform the marketplace of the availability of the funding if they apply for marketplace coverage. Employers are also required to report the amount of the benefit on their employees’ W-2s. Most of the provisions of the law become effective as of any plan years following the end of 2016.

Employer organizations have been lobbying for this legislation for some time. Concerns have been expressed regarding it, however. Over half of employers with fewer than 50 employees currently offer health coverage, and fewer small employers might offer coverage, or small employers might offer less generous coverage, once HRAs can be offered to pay for individual market coverage instead. There is also a concern that small employers with older or sicker employees might disproportionately move them to the individual market, further destabilizing those markets. For now, however, Congress has resolved these arguments in favor of allowing small employers to use HRAs to purchase insurance for their employees.

Modeling Repeal Of The Entire ACA And The Individual Mandate

On December 8, the Congressional Budget Office and Joint Committee on Taxation released a lengthy report, Options for Reducing the Deficit, 2017 to 2029. The report contains an entire chapter on health care options, emphasizing the prominence of health care in federal spending. The chapter analyzes 18 options for reducing spending, including proposals involving not just our three biggest health spending programs—Medicare, Medicaid, and employer-sponsored coverage tax subsidies—but also the Federal Employees Health Benefits Program, Tricare, the Veterans Administration, and the Affordable Care Act’s premium tax credits.

One option the report addresses is repealing the Affordable Care Act’s insurance coverage provisions, including the Medicaid expansions, insurance coverage reforms, premium tax credits and cost-sharing reduction payments, Basic Health Program, employer and individual mandates, and the excise tax on high-cost (Cadillac) health plans.

The report concludes that repeal of all of these provisions would result in reduction of mandatory federal outlays of $1.733 trillion over the 2017 to 2026 period and a reduction in revenues of $498 billion, resulting in a net reduction in the deficit of $1.236 trillion. The savings would come primarily from a $950 billion reduction in Medicaid and CHIP spending and a $794 billion reduction in expenditures for the marketplace subsidies and the Basic Health Program.

The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) conclude that repeal would increase the number of uninsured Americans from 28 to 51 million, an increase of 23 million between now and 2026. By 2026 it would decrease the number covered in the individual market by 14 million and through Medicaid by 19 million, but would increase the number with employee coverage by 10 million because individual coverage choices would be narrower and some employers would have reduced costs because of the repeal of the employer mandate. Loss of coverage would primarily affect low-income Americans and Americans with health needs.

Repeal would reduce individual insurance premiums for healthy people because of reduced benefits and higher cost sharing, but also because less healthy people would be denied coverage or charged substantially higher premiums. The CBO also projects that the total hours worked and gross domestic product would rise because people would remain in the workforce to keep or obtain health coverage and because people would not lose Medicaid or marketplace coverage by increasing their income.

The CBO and JCT separately analyzed the repeal of the individual mandate. Repeal would by 2026 reduce the number of people with individual coverage by 6 million, the number of people with employer coverage by 2 million, and the number of people on Medicaid by 7 million, increasing the total number of uninsured by 15 million. Repealing the mandate would reduce federal expenditures by $416 billion from 2017 to 2026, primarily through reductions in Medicaid expenditures and increases in taxable income as employers cut coverage and individuals dropped marketplace subsidies. The report projects that premiums in the individual market would increase by 20 percent because of adverse selection; that is, the remaining purchasers would be less healthy than those who dropped coverage.

Fewer Problems Paying Medical Bills

Even as talk of ACA repeal has dominated the news, the National Center for Health Statistics released another survey apparently demonstrating the ACA’s effects. The National Health Interview Survey, 2011-2016, released on November 30, showed that the percentage of persons under age 65 in families having problems paying medical bills dropped from 21.3 percent (56.5 million) in 2011 to 16.3 percent (43.8 million) in 2016. The percentage experiencing medical bill problems fell for all categories of persons measured in the survey — males and females; children and adults; the uninsured and people with private or public insurance; the poor, near-poor, and not poor; and Hispanics, non-Hispanic blacks, Non-Hispanic whites, and Non-Hispanic Asians.

The survey report did not attempt to attribute causation for the change, and some of the change was no doubt do to the economic recovery. But the drop in bill problems was particularly pronounced between 2013 and 2015 as the ACA financial assistance programs went into effect, suggesting that much of the change was due to the ACA. Across the board, further changes between 2015 and 2016 were not significant.

Health Insurance Provider Fee Proposed Changes

The health insurance provider fee imposed by section 9010 of the ACA is an annual tax imposed on insurers that provide health insurance coverage in the United States. It is intensely unpopular with insurers and was suspended for 2017 in the 2016 appropriations bill. The vetoed 2015 Republican reconciliation legislation would have repealed it altogether, and it is likely a prime target for repeal in the next administration.

On December 8, however, the IRS proposed two changes in its current 9010 regulations. The first would require health insurers with annual net premium revenues in excess of $25 million to file their 9010 reports electronically after December 31, 2017. The other would provide for adjustments to taxable premium calculations to take account of risk adjustment contributions or receipts and retrospectively rated contracts (under which premiums are adjusted retrospectively for experience), and for other adjustments as provided by IRS guidance with respect to fees due on or after September 30, 2018. We will see whether these rules are ever finalized and put into effect.