January 6 Update: HHS Preexisting Condition Report

One of the most popular provisions of the ACA has been its requirement that insurers cover people with preexisting conditions, which is supported by almost 70 percent of Americans.   Even President-elect Trump has expressed support for this requirement.  A particularly challenging problem for ACA replacement plans, therefore, is what form of protection, if any, should be offered to people with preexisting conditions.

On January 5, 2017, the HHS Assistant Secretary for Planning and Evaluation released an issue brief analyzing how many Americans actually have preexisting conditions and how these Americans have been affected by the ACA. The report employs both a narrow definition of preexisting conditions based on the eligibility criteria used by pre-ACA high-risk pools and a broader definition similar to that used by insurers for underwriting purposes prior to the ACA.

The report concludes that 23 percent of Americans (61 million) have preexisting conditions using the narrow definition, 51 percent (133 million) using the broader definition. These numbers are similar to those reported in a recent Kaiser Family Foundation analysis. Common medical conditions included in the broader definition include arthritis, asthma, high cholesterol, hypertension, obesity, alcohol and substance use disorders, depression, and Alzheimer’s. For example, 46 million Americans have hypertension and 45 million some form of behavioral health disorder.

Older people are particularly at risk, with 49 to 84 percent having some type of preexisting condition. Non-Hispanic Whites are the ethnic group most at risk for having a preexisting condition (28 to 56 percent) and people with incomes above 400 percent of the federal poverty level are the most at-risk income group (25 to 56 percent).

Prior to the ACA, federal law offered some protection from preexisting condition exclusions for people with employer coverage as long as they maintained continuous coverage, and some states offered additional protection. The ACA’s ban on preexisting condition exclusions and health status underwriting, however, had a particularly dramatic effect. Between 2010 and the end of 2014, the percentage of Americans with preexisting conditions who were uninsured dropped from 13.8 to 10.7 percent, a drop of 22 percent and 3.6 million individuals. The gain came entirely from increased coverage through Medicaid and through the individual insurance market. Although 2015 and 2016 data are not yet available, there is every reason to believe that coverage for people with preexisting conditions has expanded further.

The report has particular relevance for two of the most common proposals for addressing preexisting condition coverage. One of these is that the continuous coverage requirements of pre-ACA law be expanded to cover all markets. The report notes that about 23 percent of Americans with a preexisting condition (31 million people) experienced at least a one-month gap in coverage in 2014, and nearly one third (44 million) had at least a one-month gap of coverage during the two-year 2013 to 2014 period. About 93 percent of those ever uninsured have had a gap in coverage of at least two months and 87 percent a gap of three or more months. Clearly maintaining continuous coverage for people with preexisting conditions is not easy.

A second proposal is for states to offer high-risk pool coverage to uninsured individuals with preexisting conditions. The large number of people identified by the report shows that covering uninsured individuals with preexisting conditions would be costly, and that states would need substantial assistance from the federal government for high-risk pool coverage to avoid problems of inadequate and unaffordable coverage characteristic of pre-ACA high-risk pool experience.

Original Post

The 115th Congress convened on January 3 and as already reported one of their first orders of business was to begin the process of repealing parts of the Affordable Care Act (ACA) through the budget reconciliation process. A big question left unanswered, however, is what would replace the ACA?

On January 4, 2017, the House Republican Study Committee, a caucus of conservative Republican House members, introduced the American Health Care Reform Act (AHCRA), their replacement proposal.

This is only one of several Republican replacement proposals. It is similar to proposals made by the Study Committee in 2013 and 2015, which have been analyzed elsewhere. I will, therefore, only describe it in brief.

The proposal would:

Repeal the ACA entirely, effective January 1, 2018

This would not just repeal the ACA’s Title I insurance reforms and affordability provisions and the Title II Medicaid expansions and improvements, but would also repeal provisions closing the Medicare doughnut hole and expanding Medicare coverage and titles dealing with health care quality, prevention of chronic disease, fraud and abuse, scholarships and grants to expand the medical workforce, and approval of generic biologics. It would further repeal the ACA’s taxes, including taxes on people making more than $200,000 a year amounting to $346 billion over 10 years.

Replace the ACA’s means-tested premium tax credits and the current tax exclusion for employer-sponsored coverage

The proposal would instead institute an above-the-line standard income and payroll tax deduction for people who have “qualified health plans” of $7,500 for individuals or $20,500 for families. The tax credits would apparently not be adjusted for income, age, geography, or health status and would only be adjusted annually for growth in the consumer price index, not for increases in the cost of health care or coverage. “Qualified health plans” would only need to cover inpatient and outpatient hospital care, emergency care, and physicians’ services and “meaningfully limit individual economic exposure to extraordinary medical expenses.”

As part of equalizing the playing field for those purchasing insurance on their own and through employers, AHCRA would allow employees to exclude from taxation only the value of employer-sponsored coverage up to the above amounts, replacing the current tax exclusions for employer-sponsored coverage.

Expand access to and tax-subsidized contributions and expenditures for health savings accounts

The proposal would allow individuals to use tax-subsidized HSAs to pay for health insurance premiums and up to $1,000 a year in exercise equipment and fitness club membership fees.

The proposal would also:

  • Increase the incentives that employers could offer employees for participation or penalties they could impose for non-participation in a wellness program to 50 percent of the value of benefits of employer coverage;
  • Authorize (but not appropriate) $25 billion over 10 years for state high-risk pools for people who will be unable to obtain affordable insurance once health status underwriting is reinstated, and cap premiums in the high-risk pools at 200 percent of standard premiums;
  • Allow people with preexisting conditions to move from employer to individual market coverage (or vice versa) as long as they maintain continuous coverage, without having to exhaust COBRA coverage. No limit is imposed on the premiums that insurers could charge individuals with preexisting conditions;
  • Allow the sale of insurance across state lines subject to certain consumer and fraud and abuse protections;
  • Permit small businesses to purchase coverage through association health plans;
  • Provide additional health care options for category-1 veterans and Medal of Honor recipients;
  • Amend the McCarran-Ferguson Act to provide that federal antitrust laws apply to health insurance;
  • Increase transparency for Medicare claims and payment data and provide funding to the states to provide information on insurance plans;
  • Block the federal government from denying coverage for health services based on lack of effectiveness;
  • Make it harder for patients claiming to be injured by medical negligence to sue their doctors; and,
  • Provide that health plans do not have to cover abortion services and that federal programs do not cover abortions except in cases of rape, incest, or when the life of the mother is jeopardized.

Most of these proposals have been discussed here already. I add only a comment as to one feature of the AHCRA not found in most other proposals — the use of deduction rather than a tax credit or exclusion to help individuals purchase health care.

Tax Deductions Versus Tax Credits

The ACA offers lower- and moderate-income Americans means-tested tax credits which are also effectively adjusted for variation in costs based on age or geography, since the credits are keyed to the actual cost of the second-lowest cost-silver plan that will cover a particular individual or family. The ACA also offers reductions in cost-sharing such as deductibles and coinsurance to lower-income individuals and families.

The current employer-sponsored coverage tax exclusion is not means tested; indeed, it is worth more in dollar value to higher-income enrollees because it reduces their taxes to a greater extent. But the exclusion is tied to the actual cost of coverage, and thus its value varies based the age and geographic location of covered employees. Moreover, non-discrimination requirements tend to ensure relatively generous coverage for lower-income employees, although it is not always affordable.

The value of the proposed deduction in the AHCRA would be inversely related to income, as all deductions are. A millionaire in the 39.6 percent tax bracket would receive almost $3,000 in income tax reductions for purchasing individual coverage and over $8,000 for purchasing family coverage. An individual in the 15 percent bracket would receive a maximum of $1,125 in tax reduction for an individual or $3,075 for a family. An individual without earned income would get no help at all. All individuals who had income subject to payroll tax would additionally receive a reduction in their payroll taxes (The payroll tax reductions would presumably reduce the funding of the Medicare and Social Security trust funds.)

Most individuals with low incomes would not be able to afford coverage with this level of assistance. Moreover, low-income individuals would not have the capital to pay premiums for health insurance until they realized the deduction at tax filing time. Finally, they would get no help with cost sharing unless they had enough money to save through an HSA.

One analysis of a similar proposal by President-elect Trump found that it would increase the number of the uninsured by 15.6 million, mainly through loss of coverage by lower-income individuals, although it would increase the number of higher-income insureds by 2.7 million. Of course, lower-income individuals with health problems would be doubly disadvantaged by the AHCRA as they would have to pay higher premiums for high-risk pool coverage as well. In sum, the AHCRA would flip the redistributional effects of the ACA, moving resources away from the sick and poor to the healthy and wealthy.

Potential Effects On Employer Coverage

It could also undermine employer coverage, which covers the majority of Americans. The caps imposed on tax deductions in the AHCRA are well below those currently imposed by the ACA’s yet-to-be-implemented high-cost health plan (Cadillac plan) tax. Employers with older or less healthy employees, or who are located in high-cost areas of the country, may well conclude that the deduction is not generous enough to make health coverage feasible and drop coverage. This would leave employees to the individual market, where they in turn would not be able to afford coverage.

On the other hand, because the AHCRA tax exclusion limits are lower than the Cadillac tax thresholds, they could prove more effective at reducing the growth in premium costs.

Other Republican replacement plans offer tax credits rather than deductions, which in some proposals are adjusted for age and even for income. Tax credits have very different distributional consequences than deductions. It will be up to Congress and the Trump administration which course to pursue.

New Marketplace Enrollment Snapshot

In other news, HHS released an enrollment snapshot on January 4 covering the first eight weeks of the 2017 open enrollment period. As of December 31, 2016, 8,762,355 consumers had selected plans through Healthcare.gov, including 2,205,244 new consumers and 6,557,111 renewing consumers. Florida and Texas continued to have the highest enrollments, with over 1.6 and 1.1 million enrollees respectively. The totals now includes 2.2 million individuals who were automatically reenrolled in coverage as well as 4.4 million active re-enrollees, but do not yet include state marketplace enrollees. Enrollments are still running ahead of last year. Americans have not given up on the ACA, even though their leaders apparently have.