Editor’s note: This post has been corrected and updated. The author thanks Larry Levitt for pointing out errors in his earlier description of the formula found in Graham-Cassidy for grants to the states.

On September 13, 2017, senators from opposing parties introduced two bills in the Senate embodying radically different approaches to health care reform. This post will analyze the non-Medicaid provisions of a block-grant bill introduced by Republican senators Lindsay Graham (SC), Bill Cassidy (LA), Ron Johnson (WI), and Dean Heller (NV) late morning. A later post will describe the single-payer bill introduced by independent senator Bernie Sanders (VT) and sixteen Democratic co-sponsors mid-afternoon, while a third post will address the Medicaid provisions of Graham-Cassidy.

With only days left before budget reconciliation authority—which would allow Republicans in the Senate to pass ACA repeal and replace legislation without Democratic votes—lapses on September 30, the Graham-Cassidy bill is probably the Republican’s last chance at ACA repeal. The Sanders bill, on the other hand, does not stand any chance at being even considered until the Democrats retake Congress. It does mark the fact that the single-payer approach—long a fringe idea—is beginning to receive serious attention.

What’s In The Bill?

Earlier iterations of the Graham-Cassidy bill have been around for some time. See here and here and here. Two versions were released today. This summary follows the version on Senator Cassidy’s website, which reflects the official summary linked in the press release, rather than the version released with the press release itself.

The fundamental idea of the Graham-Cassidy bill is to terminate the ACA’s Medicaid expansions, premium tax credits, cost-sharing reduction payments, small business tax credits, and Basic Health Program as of 2019 and redistribute the money funding those programs to the states, using a complex formula described below. The bill would also impose per capita caps on Medicaid funding generally, also offering the states the alternative of a broader Medicaid block grant. Finally, the bill contains a number of tax cuts and health care regulation changes taken from earlier Senate repeal bills.

Graham-Cassidy bill would also repeal the individual and employer mandate penalties retroactive to 2016. It would prohibit premium tax credit or small business tax credit payments for health plans that cover abortions other than those that threaten the life of the mother or in cases of rape and incest after 2017, impose strict penalties on health plans that violate current abortion restrictions, and prohibit 1332 waivers that would limit HHS enforcement authority.

The bill would repeal the ACA’s prevention and public health fund after 2018. It would prohibit funding through federal payments for Planned Parenthood or similar groups for one year. It would allow all individuals purchasing coverage in the individual market to purchase catastrophic coverage as of 2019 and incorporate catastrophic plan purchasers into the individual and combined market single risk pools.

The bill would repeal the medical device tax as of 2018, but leave the other ACA taxes in place. It would include all of the changes other Republican proposals have made lessening restrictions on health savings accounts, including allowing over-the-counter medications to be paid for through tax subsidized HSAs, reducing the excise tax for non-qualified HSA expenses to 10 percent, allowing the purchase of high-deductible health insurance through HSAs, permitting HSA funds to be used to pay fixed periodic fees for primary care service arrangements for individuals with high-deductible coverage, raising the maximum contribution rate for HSAs to match the out-of-pocket limit, allowing both spouses to make catch-up contributions to the same HSA, and permitting HSA funds to be used for medical expenses incurred up to 60 days before an HSA was established. HSAs would not be allowed for high-deductible plans that cover abortions.

The Graham-Cassidy bill would create a short-term market stabilization program for 2018 and 2019,” to assist in the purchase of health benefits coverage by addressing coverage and access disruption and responding to urgent health care needs within States.” The bill would appropriate $10 million for 2019 and $15 million for 2020 for the program. The Administrator of the Centers for Medicare and Medicaid Services would be responsible for developing procedures and criteria for distributing these funds and health insurers would apply for the funds to the Administrator.

Transforming ACA Money Flows Into Grants For States

At the heart of the bill, however, as noted earlier, is its provision of money to the states for years following 2019 in lieu of the money the ACA provides for premium tax credits, cost-sharing reductions, the Medicaid expansions, and the Basic Health Plan Program. The money would be distributed through a complex formula that would change over the 2020 to 2026 time period. Each state would be assigned a base period amount based on the federal funding provided to the state through the ACA Medicaid expansions, the Basic Health Program, and the ACA’s premium tax credits and cost-sharing reductions during four consecutive quarters prior to 2018 chosen by the state. This amount would be trended forward using an update factor to determine the state’s allotment in 2020.

Beginning in 2021, each state would receive for each year this base amount plus one sixth of the difference between the amount that would be allocated to it for 2026 and its 2020 base amount. The 2026 amount for each state would be calculated by multiplying $190 billion, the amount appropriated for 2026, times the ratio of the number of individuals living in the state with incomes between 50 and 138 percent of poverty to the total number of individuals in all states in this income range. If the total amounts allocated to the states under this formula exceeded the amount appropriated for all the states for any one year, the amount due each state would be reduced proportionately.

This allocation would be adjusted in several ways that would be phased in over time.  First, between 2021 and 2023, an adjustment would be phased in that would modify allotments to the states based on the clinical risk profile of their low-income population. This adjustment could modify a state’s  allotment by up to 10 percent.  Second, beginning in 2024, another adjustment would be phased in that would reduce or increase each state’s allotment based on the proportion of its low-income population that did not have coverage that had at least the actuarial value of a CHIP benchmark plan.

HHS could apply a third adjustment  for non-clinical risk factors that affect health care expenditures in a state, such as demographic factors or wage or income levels. The bill would also offer some leeway for adjusting state allotments from year to year and for extra costs in 2021. Finally, the bill would provide an extra $6 billion for 2020 and $5 billion for 2021 for states with low-density populations and for states that had not expanded Medicaid.

In general, the legislation would over time move money away from states, predominantly Democratic, that have expanded Medicaid and aggressively pursued enrolling their lower income populations in Medicaid and exchange coverage. Money would move toward states, predominantly Republican, that have not expanded Medicaid.  The update formula is apparently intended to distribute funding equally among the states based on their low-income population, but it ignores the facts that current Medicaid expansion covers people with incomes below 50 percent of poverty and premium tax credits in all states cover individuals with incomes up to 400 percent of poverty, while cost sharing reductions are available to persons with incomes up to 250 percent of poverty.

Moreover, the funding formula would constrain payments to the states across the board, by at least $31 billion by 2026 according to the CBO’s most recent projections.

Waiver Provisions Could Neuter Prohibition On Pre-Existing Condition Exclusions

The final version does not seek to amend section 1332 as have earlier bills. It does provide, however, that states that receive funding under the bill can obtain waivers to permit insurers to charge different premiums based on health status, age, or any other factor other than sex or membership in a constitutionally protected class (such as race or national origin). States could also obtain waivers of the ACA’s essential health benefit requirements and the ACA’s medical loss ratio rebate requirements.

The bill requires states to explain how they will “maintain access to adequate and affordable health insurance coverage for individuals with pre-existing coverage,” but the requirement would seem meaningless if insurers could charge unaffordable rates based on preexisting conditions or exclude coverage for services needed to treat them. Also, once approved, waivers would remain in place until 2026, raising questions of what could be done if a state in fact failed to maintain access for people with pre-existing conditions.

The waivers would only apply to insurers that receive funding under the program and individuals who receive benefits under the program, apparently a move to avoid the objections based on the Byrd amendment—which limits the types of provisions that may be included in budget reconciliation measures—that changes to health insurance regulations in other Republican bills have faced. This may not limit the scope of essential health benefit or health status underwriting waivers, however. If waivers are approved, for example, for a reinsurance program that applies to all insurers in the individual or small group market, the waivers could apply to all enrollees in those markets. If, on the other hand, the waivers apply to some market participants but not others, significant adverse selection would likely occur against the regulated market.

A final concern is how it would Graham-Cassidy would be implemented. It would depend on each state independently establishing a program for distributing waiver program funding. States had three years to establish ACA exchanges, and in the end most defaulted to the federal government. There is no default federal program under Graham Cassidy. If states failed to create from scratch, within two years, programs to distribute the funding, their lower-income residents would presumably have to do without health coverage.