Senators Lindsey Graham (R-SC) and Bill Cassidy (R-LA) have proposed a new plan for rolling back key provisions of the Affordable Care (ACA). It is possible that the Senate will vote on this plan in the coming days. The plan has many similarities to the Better Care Reconciliation Act (BCRA), which Senate Majority Leader Mitch McConnell assembled during June and July and which failed when considered in the Senate by a vote of 43 to 57.

The Graham-Cassidy plan is built on the premise that the federal government should remove itself from many of the difficult policy decisions concerning how health insurance is subsidized and regulated. Those decisions would be left to the states. A key provision of the plan replaces the ACA’s premium credits and funding for the Medicaid expansion with a new block grant which would provide substantial flexibility to the states to design entirely different ways of subsidizing and regulating health insurance in the individual market.

Graham-Cassidy faces many challenges, not the least of which is the difficulty of passing a coherent plan using the budget reconciliation process. Republicans would repeal the ACA’s individual mandate, but the rules of budget reconciliation (which allow the bill to pass with a simple majority instead of 60 votes) make it difficult to include an adequate replacement for the mandate in their plan. Although an important policy goal for Republicans is to lower premiums in the individual market, Graham-Cassidy, like the BCRA, is likely to have the opposite effect, at least in 2018 and 2019.

Below we describe some of Graham-Cassidy’s key provisions. We then offer our thoughts on the bill’s substantive and political implications. Because Graham-Cassidy is so complex and far-reaching, we believe more time is needed to understand and debate its merits, and the legislation would benefit from a traditional mark-up in committee where serious amendments could be considered. Moving too fast risks significant unintended consequences and public resentment.

Key Provisions

Graham-Cassidy is a complex proposal with many provisions. The following is a brief summary of its most important features:

Repeal Of The ACA’s Individual And Employer Mandates

The plan repeals the penalties used to enforce the ACA’s individual and employer mandates, effective retroactively to tax year 2016. This provision would immediately relieve all Americans of any obligation to enroll in coverage because they would face no penalty for going uninsured.

Short-Term Insurance Assistance Program

Graham-Cassidy provides $25 billion over 2018 and 2019 to the Centers for Medicare and Medicaid Services (CMS) to directly subsidize insurers to avoid disrupting coverage in the individual market. The use of funds is flexible and could be used for reinsurance payments and similar mechanisms to stabilize markets in the short-term.

Replacement Of The ACA’s Medicaid Expansion, Tax Credits, And Cost-Sharing Subsidies With A Health Care Grant Program

The plan terminates the ACA’s Medicaid expansion, premium credits, and cost-sharing subsidies, effective calendar year 2020. In their place, the plan provides a new block grant to the states totaling nearly $1.2 trillion through 2026 with a complex formula for distributing the funds across states.

Each state is assigned a base amount of spending for 2020, which combines federal spending for the state’s Medicaid expansion enrollees plus premium credits and cost-sharing subsidies provided through the ACA’s exchanges. The state’s base amount is adjusted to account for the number of individuals in the state with low incomes (defined as 50 to 138 percent of the federal poverty level) compared with the number of low-income individuals nationwide. Adjustments are also made to account for clinical risk factors and the actuarial value of coverage for low-income individuals. By 2026, federal funding per low-income person under the Health Care Grant Program would be equalized across all states. The net effect is to shift federal funds from states (such as California and New York) that expanded Medicaid under the ACA to those that did not.

States are allowed to use block grant funds to expand their Medicaid programs (limited to no more that 20 percent of the block grant funding), establish high-risk pools, provide premium and cost-sharing assistance to insurance enrollees, make direct payments to insurers, and pay health care providers for serving patients. States must file applications to the federal government by March 31, 2019 detailing their plans for using block grant funding, including how they will protect individuals with pre-existing conditions. States are not required to provide any matching funds to be eligible for the block grant.

State Insurance Regulation Waivers

Graham-Cassidy does not directly repeal any of the primary insurance regulations of the ACA. Instead, the proposal would allow states to apply for waivers from these regulations. Under such waivers, states could allow insurers to set premiums according to the beneficiary’s health status rather than retaining the ACA’s community rating rules. States could also modify the ACA’s essential health benefits requirements. States would be required to have in place some mechanism for ensuring affordable coverage for persons with pre-existing conditions, but Graham-Cassidy does not provide a clear standard for assessing whether or not a state has met that requirement.

The waiver provision also allows states to develop their own replacement for the federal individual mandate penalty that Graham-Cassidy repeals. Presumably states could impose waiting periods or other penalties on persons who experience breaks in coverage as a way of reducing adverse selection in their markets.

The legislative language authorizing the waivers might be ruled out of order by the Senate parliamentarian under the Byrd Rule, which requires all provisions in a reconciliation bill to have a direct effect on federal spending or revenues. Waivers of federal insurance rules are clearly regulatory in nature, rather than budgetary. If the waiver provision of Graham-Cassidy were to fall under the Byrd Rule, states would not be able to impose a new penalty for those with coverage gaps, which would increase instability in state-regulated insurance markets.

Per-Capita Caps In Medicaid

The plan would retain the basic structure from earlier Republican plans for placing an upper limit on federal financing of Medicaid on a per-capita basis. These per-capita limits would be based on historical spending patterns for the non-expansion Medicaid population in each state. Separate limits would be established for four classes of beneficiaries: the elderly, blind and disabled, children, and all other non-expansion adults.

The caps would be indexed initially for medical inflation for children and non-expansion adults, and medical inflation plus 1 percentage point for aged, blind, and disabled beneficiaries. Beginning in 2025, the caps are adjusted for general inflation (for children and non-expansion adults) or medical inflation (for aged, blind, and disabled). State spending associated with public health emergencies would be exempt from the caps. The plan provides a separate $8 billion bonus pool to reward states with spending below the per-capita limits while maintaining acceptable quality measures.

While Graham-Cassidy imposes these new per-capita limits, the plan does not include significant rollback of existing federal requirements on state spending, including mandatory coverage of certain populations. Even if the plan included such liberalizations, they would likely be subject to removal on the Senate floor due to the Byrd Rule. States can apply for waivers from Medicaid requirements under current law, and that would likely remain the only way to give states more freedom to manage the program and keep spending within the new per-person limits.

Other Provisions

Graham-Cassidy retains most of the ACA’s major tax increases, but it does terminate the tax on medical devices. It also liberalizes the rules for contributions to Health Savings Accounts (HSAs) and eliminates the ACA’s prevention and public health fund.

What Would States Do?

States would face major challenges implementing the financing and regulatory changes established by the Graham-Cassidy proposal. States could establish an insurance system modelled after the ACA or one that is more reliant on market forces. The choice of a policy strategy is likely to be controversial, particularly in states where federal funding is significantly reduced. But even where there is broad agreement about the best approach, implementing that strategy would be extremely difficult.

States are required to submit proposals to CMS by March 2019 detailing how they would use block grant funds to reduce the cost of health insurance. States would have to decide the best combination of premium subsidies, cost-sharing subsidies, high-risk pools, reinsurance, direct payments to providers, and many other specific actions that could make insurance affordable. While Graham-Cassidy gives states greater flexibility to tailor their policies to local conditions, data and analysis sufficient to determine the best combination of specific policies is generally lacking. That is likely to discourage states from adopting innovative policies to promote private coverage.

In addition, Graham-Cassidy repeals ACA premium tax credits as of January 2020. That leaves states with little time to establish a fully-functioning system that gives individuals a choice of health plans and the financial support needed to help them buy coverage. If such a system is not operational, low-income individuals who cannot afford to buy insurance on their own will drop out. That would put pressure on hospitals and other providers faced with a spike in uncompensated care, and would generate a storm of criticism aimed at state officials.

Some states, notably California, might decide to continue their current state-based exchange mechanism to maintain a system similar to the ACA. Although that may appear to be the path of least resistance for some, state-based exchanges cannot operate on their own without substantial assistance from the federal government. Information necessary to determine eligibility for premium subsidies is available from the Federal Data Services Hub, which consolidates personal information (including Social Security numbers, birthdates, income, and employment status) from seven government agencies. Although Graham-Cassidy does not abolish the Hub, its activities would have to be re-evaluated to determine its role (if any) in the future.

Most states depend on the federal exchange to manage enrollment and other processes. They would be hard-pressed to develop an alternative in the available time. Several states suffered spectacular failures with their state-based exchanges despite having three years and considerable federal help to implement them. Less time and less help would discourage states from developing new systems to promote choice and competition in insurance markets.

Faced with implementation problems and the risk of large numbers of people becoming uninsured, states would likely expand Medicaid as their only practical alternative. States might also establish Medicaid-like public insurance options that are technically not within the Medicaid program; establishing such options would allow states to spend more than 20 percent of the federal block grant on public insurance expansion. Consequently, instead of promoting private coverage, it is quite likely that a GOP-drafted replacement of the ACA could result in a large shift of insurance enrollment from private plans offered on the ACA’s exchanges toward government-managed insurance arrangements.

Implications

Graham-Cassidy, like the AHCA and the BCRA, would reduce federal spending below the levels provided by the ACA. The plan also reduces some ACA taxes, but not nearly as much as the previous proposals. The net effect of the plan would likely be a reduction in future federal deficits. Moreover, the shift of federal funding for insurance enrollment toward a block grant, along with the per-person limits on federal financing of Medicaid (indexed to rates of inflation below the expected growth of the program under current law) would produce substantial budgetary savings over the medium and long-term. If enacted, Graham-Cassidy would represent the most far-reaching entitlement reform since perhaps the Social Security amendments of 1983.

CBO estimated that both the House-passed AHCA and the BCRA would reduce the number of Americans enrolled in insurance in 2026 by 23 million and 22 million, respectively. The repeal of the penalties enforcing the individual mandate and the reduction in federal funding for the Medicaid expansion in the ACA were the primary reasons CBO expected a large jump in the number of uninsured. Those policies are also included in Graham-Cassidy, so there is little doubt that CBO will estimate that the plan would also lead to a large number of people dropping out of insurance enrollment.

Nonetheless, because Graham-Cassidy allows for substantial state flexibility in the design of programs to replace the ACA, it is possible that CBO and others will project fewer uninsured under this plan compared to the AHCA or BCRA. Among other things, states could enact their own versions of the individual mandate (as Massachusetts did in 2006). Further, if the federal block grant is used by large numbers of states to subsidize enrollment in Medicaid-like insurance options, the cost of enrollment per person may actually be below the cost of the ACA’s premium credits and cost-sharing subsidies because Medicaid-like insurance plans may include state-enforced payment limits for hospitals and physicians that lower the overall costs of these plans. Regardless of what CBO assumes, the agency’s estimates of what Graham-Cassidy will mean for insurance enrollment will be even more uncertain than usual, given the wide variation in possible state responses to the legislation.

A certain consequence of Graham-Cassidy is large redistribution of federal resources among the states. The funding formula for the new block grant is complex, and leaves many important decisions to the Department of Health and Human Services to develop (including a risk adjustment formula). But even if there is some uncertainty around the exact estimates, the basic direction of what would occur is clear: there would be movement of federal resources from high-income, ACA expansion states (California, Connecticut, New York), to lower-income states that did not expand their Medicaid programs (Alabama, Georgia, Mississippi, Texas). Overall, because the plan would shrink the total amount of federal spending and because there were more states that chose to expand Medicaid under the ACA than those that did not, the number of states losing resources under Graham-Cassidy would far exceed the number of winners.

The Politics of Shifting Responsibility to the States

Graham-Cassidy differs from previous GOP plans mainly in its emphasis on converting federal spending provided in the ACA to a flexible block grant to states. The BCRA, and the House’s American Health Care Act (AHCA), attempted to replace the ACA’s premium credit structure with an alternative tax credit program. By adopting alternative premium credits, the previous GOP proposals clearly signaled a willingness to continue providing support for individuals who are ineligible for employer coverage or Medicaid to purchase their own insurance Because the amounts of the tax credits in these plans were below those provided in the ACA, the Congressional Budget Office (CBO) and others were able to demonstrate that many low-income households would get less support under the Republican alternatives than under the ACA, resulting in a substantial reduction in the number of individuals with health insurance.

It is more difficult for analysts to assess the impact of the Graham-Cassidy block grant on insurance coverage. States would have wide latitude to use their federal funds in ways that might be more effective in promoting health insurance enrollment. Even though the overall pie is smaller, it is not entirely clear who would do worse and who would do better under state-developed plans. This lack of clarity in how states would make use of their new flexibility may give some Republicans more political space to endorse Graham-Cassidy because it would be the states, not Congress, that have to make the difficult decisions on how to spend the limited resources provided in the bill.

Rushing to a Vote

If enacted, the Graham-Cassidy proposal would be a dramatic departure from the financing and regulatory structures created by the ACA. The proposal would end major provisions that expanded insurance coverage and replace them with a block grant based on a formula that fundamentally alters the distribution of federal funds across the states.

The complexity of the proposal and the uncertainty about state actions that could be taken make it difficult to assess its impact on coverage and spending. Although there are a number of estimates on the potential policy impacts of the proposal, the Senate needs a detailed estimate from the Congressional Budget Office (CBO) that allows consistent comparisons with previous reform proposals. Although CBO has indicated that it will provide a preliminary estimate, a full cost estimate will not be available before a possible Senate vote during the last week of September.

The Senate Finance Committee will hold a hearing on Graham-Cassidy, but that is far from Sen. John McCain’s plea for “regular order”. The legislation will not go through a committee mark-up, where it could be debated and perhaps improved. If it is brought up on the Senate floor, there will be essentially no time for public debate on its merits. Further, if passed by the Senate, the House is planning to take the bill up without delay, possibly scheduling a vote within days of Senate passage.

After the lengthy and difficult process of developing and voting on repeal and replace plans, it is understandable that Republican leaders are in such a rush to pass the legislation. The clock has almost run out, with the Senate’s ability to consider the reconciliation bill expiring on September 30. But they should be mindful of the public perception that the most important piece of domestic legislation in many years is being pushed through Congress before there is time to fully understand it or raise legitimate questions about it. The level of resentment that this will engender will frustrate other important policy initiatives and is likely to persist, at least until the next presidential election.