House Republicans officially launched their efforts to repeal and replace the Affordable Care Act (ACA) (aka Obamacare) on March 6 by introducing the American Health Care Act (AHCA) and immediately starting committee consideration of the bill.

While Congress is currently focusing on the financing arm of healthcare reform, additional substantive policy changes will be considered after this first bill is done, and will unfold over the next six to twelve months.

The House Committee on Ways and Means and the Energy and Commerce Committee have both debated the AHCA in long sessions. The legislation is being considered under the fast track process called "reconciliation" which prevents filibusters in the Senate.

While this is just the beginning and changes are likely as the legislation moves through the Congress, the President's endorsement suggests that it is a very important marker and may set the parameters for what ultimately is enacted. Numerous industry sectors and companies will be affected by this legislation. They may wish to seek guidance in order to take part in the process.

The House debate this week is the start of a long process that will result in major changes affecting every aspect of the healthcare system and every employer. There has been criticism of the bill from a number of stakeholders, and the coming days will be crucial for the future prospects of the bill. We are following the debate very closely and would be very pleased to discuss how your organization can make its views known to policymakers.

We urge you to stay engaged and act quickly. The House plans to vote on its version of the legislation by the end of March and to reach a deal with the Senate sometime in April.

This Alert provides an overview of major changes from prior drafts and the key provisions of the AHCA.


The AHCA bill text released on March 6 differs in several significant ways from drafts that were previously circulated:

  • The new bill drops a proposed cap on the tax exemption for employer-sponsored coverage but retains the infamous "Cadillac Tax" on high-cost health plans with a delayed 2025 effective date.
  • It imposes income limits on eligibility for new tax credits to subsidize coverage.
  • The bill delays repeal of many of ACA-related taxes until 2018, a year later than previous versions.
  • The bill phases out Medicaid expansion, with states getting capped payments based on Medicaid enrollment (a per capita allotment).
  • The bill includes instructions, per the reconciliation process requirements, that the legislation should achieve a $2 billion reduction in the federal deficit over ten years.


The following is a summary of the AHCA provisions that affect employers and employees:

  • Repeals the employer mandate. Under the current AHCA bill, effective January 1, 2016, large employers would no longer be required to provide health insurance coverage to full-time employees, and the employers would not be subject to any penalties for failing to provide coverage. If the current bill passes, there would no longer be any need to file Forms 1095 and 1094; however, until such time, we recommend continued filing.
  • Repeals PCORI fee. Starting in 2018, self-funded employer health plans would no longer have to pay the PCORI fee imposed by the ACA. However, the PCORI, while allocated funding, has never realized the use or function for which it was initially intended.
  • Eliminates flexible spending account limit. Currently, employees can contribute up to $2,550 on a pre-tax basis to flexible spending accounts (FSAs) to be used to reimburse qualified medical expenses. Under the AHCA bill, effective January 1, 2018, there would be no limit on pre-tax contributions to flexible spending accounts. However, if existing rules continue to apply, the accounts would still be subject to the "use it or lose it" rule where unused amounts in excess of $500 are forfeited at the end of the year, notwithstanding any aditional rollover provision in the plan, and use of the benefit would be subject to nondiscrimination testing.
  • Increases health savings account annual contribution limit. Health savings accounts (HSAs) are tax-favored IRA-type accounts to which eligible individuals may contribute to pay for qualified medical expenses if they are covered by certain high-deductible plans (HDHPs). Unlike FSAs, HSAs are not subject to the "use it or lose it" rule, and HSAs are portable. Currently, the annual individual contribution limit is $3,400 and family contribution limit is $6,750. Starting in 2018, the individual limit would be at least $6,550 and the family limit would be at least $13,100, and both spouses would be able to make catch-up contributions to one HSA. Also, the tax rate on distributions not used for qualified medical expenses would be reduced starting in 2018.
  • OTC drugs pre-tax/tax-favored again. Currently, due to the ACA, over-the-counter medications cannot be reimbursed on a pre-tax or tax-favored basis under an FSA or HSA. Under the AHCA bill, effective in 2018, over-the-counter medications would be reimbursed pre-tax or tax-favored under these plans.
  • Delays Cadillac Plan tax to 2025. Currently, the 40 percent excise tax on high-cost employer-sponsored health coverage added by the ACA is set to go into effect in 2020. Under the AHCA bill, the effective date would be delayed until 2025, giving employer groups five more years to make the case to Congress for why it must be eliminated.
  • Reinstates deduction for retiree drug subsidy. Currently, due to the ACA, employers cannot take a tax deduction for the value of retiree drug subsidies. Effective in 2018, the pre-ACA business expense deduction including the value of the drug subsidy would be reinstated.
  • Repeals employment tax increase. Effective in 2018, the 0.9 percent Medicare employment tax increase on high income individuals imposed under the ACA would be repealed.


The following is a summary of the AHCA provisions that affect individuals who do not have access to employer-based coverage:

  • Repeals mandate to buy health insurance. The AHCA bill would repeal the individual mandate to purchase health insurance and the ACA penalties for failing to do so.
  • Adds refundable tax credits to purchase health insurance. The bill would repeal the income-based subsidies for purchasing health insurance introduced by the ACA and replace them with refundable tax credits. The current AHCA proposal provides the following advanced, refundable tax credits based on age and income:

Up to age 30: max of $2,000

Age 30 – 40: max of $2,500

Age 40 – 50: max of $3,000

Age 50 – 60: max of $3,500

Age 60 and over: max of $4,000

Tax credits would be reduced for individuals with incomes above $75,000 and households earning more than $150,000. Individuals earning more than $215,000, or joint filers reporting $290,000 in income, would lose tax credits.

  • Surcharge for coverage lapse. While the preexisting condition coverage mandate would continue, the bill incentivizes individuals to maintain continuous coverage by imposing a 30% premium surcharge if an individual buys coverage after having a defined lapse in coverage.
  • HSA limit increase. As described above, the bill would increase the annual HSA maximum allowable tax-free contribution to equal the combined annual sum total of maximum allowable insurance deductible and out-of-pocket expenses permitted under a high-deductible health plan.


The following is a summary of the AHCA provisions that would affect the pharmaceutical and medical device industries:

  • The ACA placed an indirect tax on over-the-counter (OTC) medications by disallowing the use of tax-favored account funds to pay for OTC medications. The AHCA would restore the ability to use tax-favored funds toward the purchase of OTC medications.
  • The current AHCA proposal would repeal the 2.3 percent excise tax on medical devices.
  • The current proposal repeals the annual fee on brand name pharmaceutical manufacturers.
  • The AHCA would reinstate the pre-ACA provision allowing employers to take a business-expense deduction to incentivize them to provide adequate prescription drug coverage to retirees.
  • The AHCA would increase funding to Community Health Centers to assist in the provision of medical, dental, mental health, and reproductive care.


The following is a summary of the AHCA provisions that would affect the financial/investment and IT systems industries:

  • Net investment income tax repeal. Repeals the ACA-imposed tax of 3.8 percent on net investment income of individuals, estates, and trusts beginning in 2018.
  • Data collection. Requires modernization of the Medicaid program's data collection and reporting systems. Congress has become acutely aware in recent years of a serious issue for the future of constructive policymaking: a lack of data on its programs, the populations served, and how federal and state dollars are being used relative to outcomes, particularly in the health space. For IT stakeholders, this data collection provision could translate into a longer-term focus on building out better, more dynamic IT systems so policymakers and agencies are able to access more robust data.


The current proposal:

  • Allows Medicaid expansion states (31 total states, 15 of which are led by Republican governors) to retain the expanded program coverage and continue to enroll the expanded eligibility population until 2020.
  • Eliminates the ACA phaseout of federal reimbursement for uncompensated care in hospitals, also known as Disproportionate Share Hospital (DSH) payments, for states that did not expand their Medicaid program.

The retention of the Medicaid expansion provisions until 2020, as well as retention of federal payments for uncompensated care in non-expansion states, provides at least some renewed certainty to hospitals and providers located in areas with significant low-income and/or rural populations.


Here are the five questions that may determine the outcome of the bill:

  1. Will the House or Senate make changes to the tax credit provisions meant to cushion against coverage losses?
  2. What will the Congressional Budget Office (CBO) ultimately determine is the cost of the bill and the coverage provided by the bill?
  3. Will the near-future CBO score change its ability to pass the House?
  4. Will changes be made to the Medicaid provisions to address concerns of a number of States that enacted expansion under the ACA?
  5. What will be the impact of the President's advocacy efforts in support of the bill?