When Donald Trump was elected president last November, it became inevitable that Congress would move aggressively to roll back elements of the Affordable Care Act (ACA) and replace them with different provisions. Trump ran hard against the ACA, as did many elected members of the House and Senate. It is not surprising, therefore, that the new administration and congressional leaders have decided to make a rollback and replacement of the ACA their first legislative priority.

In the immediate aftermath of the election, congressional leaders had settled on a “repeal and delay” strategy to deliver on their campaign commitments. They wanted to repeal major elements of the ACA with an effective date delayed several years, on the understanding that Congress would use the time before the repeal went fully into effect to assemble separate replacement legislation, perhaps in two or three distinct bills.

The repeal and delay strategy, however, was set aside in January because it would have destabilized insurance coverage for millions of people without giving them enough assurance of how they would get coverage once the ACA went away. Moreover, it has been apparent for some time that many in Congress are more enthusiastic about voting for repeal than they are about voting for a practical replacement plan. Separating the two votes would have made it near impossible to corral the votes needed to pass a GOP-drafted reform framework.

With repeal and delay no longer an option, congressional leaders are now trying to pass repeal and replacement of the ACA in one bill. That is a major step in the right direction because it is forcing House and Senate members to grapple with the inevitable trade-offs associated with complex health policy decisions.

The American Health Care Act Is The Right Framework

The repeal and replace plan—dubbed the American Health Care Act (AHCA)—is structurally sound. It has the major components needed for effective reform of current health care arrangements. The problem is that the plan falls short on several crucial details, details that can and should be changed before the bill clears Congress and goes to the president to become law.

The AHCA starts from the same place as the ACA, which accepts employer-sponsored coverage as the base of our health insurance system. Most Americans under the age of 65 get their insurance from employers. For political and policy reasons, it has not been possible to make major changes to these arrangements. Consequently, the AHCA, like the ACA, focuses on trying to provide good insurance options for people who do not have access to employer-based coverage.

A major reason for the dominance of job-based health care is the generous tax break conferred on employer-paid premiums. Those payments are excluded from the taxable compensation of workers, effectively giving the average family a 30 percent discount on the cost of their health insurance. Until the major provisions of the ACA went into effect in 2014, individuals buying insurance on their own did not get comparable assistance.

GOP leaders have taken a major step toward a practical replacement plan for the ACA by making available refundable tax credits to households buying insurance outside of employer coverage. President Trump endorsed this concept of credits in his recent speech to Congress. These credits are critical to assembling a workable plan because they are the only way to provide sufficient assistance to lower-income households to make insurance affordable. A tax deduction for premiums, which is preferred by some lawmakers, provides little direct assistance to households with little income tax liability.

The AHCA also includes an important and necessary reform of the Medicaid program by moving away from the traditional federal matching system for financing the program. Under the matching system, the federal government pays between 50 and 75 percent of every dollar spent by a state on Medicaid. Using federal matching payments to cover Medicaid costs has encouraged steady program cost growth and undermined the incentive for cost control at the state level.

Beginning in 2020, the federal government would make fixed per-person payments to the states based on historical spending patterns. States would get new flexibility to manage the program with less federal interference, and the federal government would have greater certainty and control over its Medicaid expenditures. This is not a small matter in a federal budget that is quickly becoming overwhelmed by growing entitlement expenditures.

The AHCA does not unwind the many insurance rules of the ACA, in part because it would not be possible to do so in a budget reconciliation bill. Non-budgetary provisions can be removed from a reconciliation bill with 41 votes in the Senate, which would very likely happen under the AHCA given unified Democratic opposition to it. However, the penalty for failing to have health insurance under the ACA’s individual mandate is repealed by the AHCA.

As an alternative that gives individuals an incentive to maintain health coverage, the AHCA gives insurers the flexibility to impose a 30 percent surcharge on customers who experienced a lapse in coverage and were attempting to re-enter the market. While inadequate, it is clear enough what the authors of the AHCA are trying to do. They want to continue to protect individuals with pre-existing conditions and promote a stable market by providing incentives for continuous enrollment in insurance. Unfortunately, the penalty they are willing to impose is far too small for the objective they have in mind.

Necessary Changes

To improve the AHCA, Congress should make several important adjustments.

Impose An Upper Limit On The Tax Preference For Employer-Paid Premiums

A leaked version of an earlier draft of the AHCA proposed an upper limit on the tax break for employer-paid premiums. The cap would have been set to affect only the most expensive 10 percent of all employer plans. The cap has now been removed from the plan. Moreover, the AHCA delays the ACA’s “Cadillac tax,” a poorly conceived alternative to an upper limit on the tax preference, until 2025.

Removing the tax cap eliminates the most effective tool to discipline cost growth and perpetuates a significant distortion in tax and health care policy. Moreover, imposing this upper limit would generate additional revenue that could be used to address other problems in the bill.

Strike A Medicaid Compromise Between Expansion And Non-Expansion States

If enacted, the AHCA would usher in the most significant reform of Medicaid since the program’s enactment in 1965. But a major roadblock to enactment is the continued resistance of governors from states that expanded the program under the ACA. To ease the way to passage of their plan, Republican leaders in Congress should strike a compromise between the expansion and non-expansion states. There should be a transition over several years to a new, uniform national income standard below which there would be strong federal support for coverage of all state citizens through Medicaid.

The reforms of the AHCA would still govern how the federal government made payments to the states. But the compromise would allow more funding to states that did not expand the program for persons up to the new national income threshold. Expansion states would be expected to phase down their programs to the new standard over time. A compromise of this sort would vastly increase the number of persons covered with insurance under the AHCA.

Increase Financial Support For The Lowest-Wage Households

The AHCA provides a new tax credit structure for persons who do not have access to employer coverage, ranging from $2,000 to $4,000 per person depending on age. This is roughly comparable to the tax benefit conferred on employer coverage and could be considered equitable for persons in the middle class. However, those amounts are probably not enough to ensure that those at the lowest end of the income scale can afford insurance.

A person under 30 years old with income high enough to be ineligible for Medicaid but below approximately 200 percent of the federal poverty line (around $24,000 in 2017 for a single person) would receive a $2,000 tax credit. That could cover a high-deductible insurance plan, protecting them from major medical expenses. But paying the deductible and routine expenses of seeing physicians and getting prescriptions filled would be a struggle.

The AHCA should be revised to provide additional support to lower-income families. That support could come in the form of somewhat more generous tax credits in this income range, or a block grant to the states which would be used to provide additional support to these households. The AHCA already includes a Patient and State Stability Fund designed to lower patient cost, mainly by providing extra help to high-risk individuals buying non-group insurance. For 2018 and 2019, $15 billion would be appropriated annually for that fund; subsequently, the appropriation would be $10 billion a year. A separate, parallel fund could be established explicitly for supplementing the federal tax credits for persons below a certain income threshold.

Use Automatic Enrollment To Increase Take-Up Of Insurance

Although the ACA expanded enrollment in insurance, there are still large numbers of Americans who have not signed up for coverage. Many have chosen to pay the tax penalty imposed by the ACA instead of insurance premiums, while some have secured an exemption from the tax. Even though the AHCA would provide a refundable tax credit to all households without access to employer coverage, some would not use the credit and would remain uninsured.

The AHCA should be amended to include an automatic enrollment feature to improve take-up of insurance among this population. Insurers should be required to offer plans with premiums exactly equal to the value of the standard credit (not adjusted for income). The deductibles for these plans would be adjusted as necessary to ensure the premiums and credits matched. These plans might prove to be attractive to many consumers who do not want to pay for any premium beyond the value of their tax credit.

Moreover, states could identify individuals who fail to use their credits using federal tax data and state data sources, and automatically enroll then into such plans. Under this approach, the affected individuals would be notified of their coverage but could choose a different plan or withdraw their enrollment at any time. Most people are likely to remain with their assigned plan, especially since there would be no financial obligation on their part. They would get a high-deductible insurance plan at no cost to themselves, which is far better than no coverage at all.

Substantially Increase The Penalty For Breaks In Insurance Coverage

The AHCA penalty imposed on persons who experience a break in their insurance enrollment of more than two months in the prior year would be a 30 percent premium surcharge payable for 12 months. For a plan costing $6,000 a year, that amounts to a surcharge of $150 a month. Healthy consumers are likely to take their chances, saving that $6,000 in the hope that they would not incur significant medical expenses during the year. With the repeal of the individual mandate, and the retention of the ACA’s insurance rules, the overall effect would be significant market turbulence, starting immediately in 2017.

To avoid a complete collapse of the market, the AHCA should provide a strong and clear penalty for persons who exit the market, covering multiple years. One approach would be to extend the current surcharge over several years. Another possibility would be to impose a waiting period before benefits would be paid. For example, individuals who have a lengthy break in coverage could be required to purchase insurance only during the annual open enrollment period. They would be offered coverage that would not take effect for some period of time, perhaps six months or a year. They would be guaranteed that they could purchase insurance at a set rate that does not penalize them for pre-existing conditions, but they would not be able to immediately use benefits and they would not pay premiums until the waiting period was over.

A waiting period combined with a premium surcharge would be a more effective deterrent to individuals who currently have a strong incentive to not enroll until they have medical needs, and then to drop enrollment once those needs are met.

A Desire For Haste Is Understandable, But Getting It Right Is More Important

The Trump administration and congressional Republicans are trying to pass the AHCA under an accelerated timeline that does not allow much opportunity to refine the bill. House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell have signaled that they would like to finish work on the bill by the time Congress breaks for two weeks in mid-April. Their sense of urgency is understandable. The first year of a new president is generally the time when major legislation gets passed. The farther it is from inauguration day, the harder it is to pass something complex and controversial. Ryan and McConnell know this, and they also have other major business they would like to address this year (namely tax reform).

While the emphasis on moving quickly is not surprising, there is also a significant risk that unnecessary haste could lead to major mistakes in the legislation that would generate strong political backlash. The ACA has extended insurance coverage to millions of people with expensive health problems, and to many lower-income households. Acknowledging this is not the same thing as saying the ACA should not be changed; however, Republicans would be well advised to take the time necessary to ensure that their plan will provide adequate insurance for these populations while remaining consistent with an overall framework of less federal control and regulation and more reliance on market incentives. Moving in this direction would help with public acceptance of the AHCA and improve the chances that what is ultimately passed remains on the books longer than the law it is intended to displace.