The recent Republican election victories appear to ensure that the Affordable Care Act’s (ACA) days are numbered. But with nearly a fifth of the U.S. economy, and the health care coverage for some tens of millions of U.S. citizens, at stake, the law will not simply be repealed. Something will be enacted to take its place. And some popular features of the law (e.g., protection for those with pre-existing conditions) are likely to survive.
Our previous posts have attempted to outline the alternatives and to handicap their odds. Last week we looked that the Trump/Pence transition plan, “Healthcare Reform to Make America Great Again.” This week we turn our attention to particulars of the program offered by House Speaker Paul Ryan entitled A Better Way. In the next two weeks, we will look at legislative proposals offered by Representative Tom Price (R-Georgia), who is President-elect Trump’s nominee to head the Department of Health and Human Services, and by Senator Orrin Hatch (R-Utah). In future posts, we will speculate on the process by which the various policy prescriptions might become law—including whether the repeal of the ACA will be done quickly (we expect it will), whether there will be a transition period (we expect that the answer is “yes”), and if so how long (anywhere from two to four years).
Unlike the Trump/Pence plan, which consists of a series of high-level bullet points, the Ryan plan is a fairly detailed policy proposal. Hence, while not in actual legislative form, it provides a good sense of some of the likely features of the ACA’s replacement.
The Ryan Plan’s Core Principles
The Ryan Plan’s principles include: repealing Obamacare, providing all Americans with more choices, lower costs, and greater flexibility; protecting our nation’s most vulnerable [citizens]; spurring innovation in health care; and protecting and preserving Medicare. These principles are entirely familiar to anyone who has followed Republican critiques of the ACA over the last eight years. What has changed is that, rather than being mere policy suggestions, they are well on their way to becoming law.
The major themes of the Ryan Plan are entirely consistent with those of the Trump/Pence plan: trust in free markets, reliance on individual responsibility, and to the extent government must be involved at all, a shift from the federal government to the states. Claiming that “[a] modern-day health care model should trust that patients—with their health care provider—will make better decisions about their health care needs than a federal administrator,” the Plan advocates “putting individuals in charge [of their health care].” The Plan also promises to protect the health insurance Americans receive through their jobs and to move “toward a fairer system that ensures access to coverage for all Americans.”
The Policy Prescriptions
Expanding Choice through Consumer-Directed Health Care
Asserting that “[c]onsumer-driven health care allows individuals and families to control their utilization of health care by providing incentives to shop around,” the Plan urges the expansion of Health Savings Accounts (HSAs), noting that:
HSAs are tax-advantaged savings accounts, tied to a high-deductible health plan (HDHP), which can be used to pay for certain medical expenses. This insurance arrangement – in which a person is protected against catastrophic expenses, can pay out-of-pocket costs using tax-free dollars, and in turn takes responsibility for day-to-day health care expenses – is an excellent option for consumers. HSAs tied to HDHPs are popular tools that lower costs and empower individuals and families. This type of coverage also helps patients understand the true cost of care, allows them to decide how much to spend, and provides them with the freedom to seek treatment at a place of their choosing.
In particular, Ryan would:
- Allow spouses to make catch-up contributions;
- Allow qualified medical expenses incurred before HSA-qualified coverage begins to be reimbursed from an HSA account provided the account is established within 60 days;
- Set the maximum contribution to an HSA at the maximum combined allowable annual deductible and out-of-pocket expense limits (currently the two do not move in tandem); and;
- Expand accessibility for HSAs to certain groups, like those who get services through the Indian Health Service and TRICARE.
These proposals all seem commonsense. They make HSAs more attractive and useful. Nothing is said about medical outcomes, however. While there is good evidence to support the claim that HSAs reduce costs, there is also evidence that they can result in covered individuals forgoing necessary heath care. A Health Policy Brief by Health Affairs, citing a RAND study on the subject reports that:
The central debate over HDHPs is whether or not the plans reduce health care costs and use in a way that could negatively affect health. The Institute of Medicine estimates that 30 percent of health spending is waste. HDHPs are designed to reduce unnecessary use. There is mounting evidence that HDHPs are successful at reducing costs and care use, but results are mixed on the impact of this reduced care use on health status. Cost sharing can reduce the use of beneficial as well as unnecessary services. Prior to the ACA’s preventive service requirement, some HDHPs made preventive services free of cost sharing to provide consumers with incentives to continue using high-value care.
To be sure, this is a single study. But its conclusions nevertheless pose a challenge for the Ryan plan and its pronounced free-market orientation. If HSAs fail to live up to their promise, then a major plank of the Plan is at risk. If, on the other hand, consumer-driven care works as the Plan claims, the Ryan Plan will be building on a solid foundation.
Making Support for Coverage Portable
This plank opens with a statement in support of employer-sponsored group health insurance, claiming that the system generally works well for employees with this coverage. But it also recognizes that “millions of Americans don’t have this option.” The Plan thereupon proposes to “provide every American access to financial support for an insurance plan chosen by the individual.” For those without access to employer-sponsored health coverage, the Plan offers an “advanceable, refundable tax credit.” This credit replaces the ACA’s premium tax credit. While both approaches rely on the tax code to finance the purchase of coverage in the individual market, the two are very different. The ACA’s premium tax credit must be used to purchase products that provide an “essential health benefit” package, which includes 10 specified benefit categories and which, among other things, have prescribed limits on cost sharing.
In contrast to the ACA’s rigid approach to product design, the advanceable, refundable tax credit under the Ryan Plan, which the Plan refers to as a “portable payment,” can be applied to the coverage of a broad range of insurance products, the particular design features of which will be fashioned by the market in response to consumer demand. In addition, under a separate plank, the coverage could even be purchased across state lines. If a recipient of payment selected a health insurance plan that is less expensive than the value of the credit, the difference would be deposited into an HSA-like account and could be used toward other health care expenses.
There is a critically important, though little-discussed, consequence of the Plan’s reliance on the market to inform product design, which was raised in a recent blog post by Congressional Budget Office analysts Susan Yeh Beyer and Jared Lane Maeda. The authors frame the consequence as follows:
Some policymakers want to replace the current tax-based subsidies to purchase private insurance in the non-group market with alternative proposals. Under some proposals, refundable tax credits would generally be based on a fixed dollar amount and might vary by age or family size. The amount of such credits often does not depend on an enrollee’s income or a plan’s premium. A key question for federal policymakers is what types of insurance products would qualify for the tax credits. Often, such proposals would allow states to regulate the non-group market. In that case, regulation of the non-group market would probably vary widely from state to state. Without a federal standard, some states might not impose any regulations that would govern the depth and extent of coverage and that would define what insurance products qualify for tax credits (emphasis added).
It would be a simple matter to design a very inexpensive health insurance product under a regime that fails to “govern the depth and extent of coverage.” For example, in 2014, a product gained favor that achieved a 60 percent actuarial value (i.e., the level required of a Bronze-level plan) while excluding inpatient hospital coverage and physician services. (We discuss these plans in an earlier post on the subject.) It strikes us that in fashioning the ACA’s replacement, the Congress will need to decide whether there are any minimum standards for what constitutes health insurance and, if so, what might they be. After all, these are the products that are being subsidized with federal resources.
The ACA and Ryan Plan approaches to providing subsidies differ in another critically important way: The Ryan Plan ensures that the federal government can control its costs. But there is no guarantee that the individual will be able to afford the coverage. The ACA, in contrast, ties subsidies to the cost of coverage and ensures that individuals pay no more than a fixed percentage of their income. But the government’s costs rise with increases in the cost of coverage.
Preserving Employer Sponsored Health Insurance
Both the ACA and its replacement provide tax credits to moderate- and low-income individuals. This costs money, which must come from somewhere. The ACA raised these amounts from a variety of taxes, including the Cadillac tax, which the Ryan Plan repeals. Instead, the Ryan Plan proposes to raise the necessary amounts by capping the employer deduction for group health plan coverage. This is highly controversial among employers, who usually support the Republican agenda. Employers say they’ve been effectively working to reduce health care costs—through their ability to negotiate rates and through innovative plan designs. Capping the employer deduction, they argue, will not reduce health care costs and could drive up the cost for employees and their families.
Expanding Opportunities for Pooling
Group health insurance works primarily due to the law of large numbers. The larger the employer’s workforce, the more predictable health care costs become. Small employers are not so fortunate. While some, but not all, small employers are able to purchase coverage in state-regulated small group markets, the ACA exposed a little-noticed fault line in the small group insurance markets: Employers with large numbers of part-time, seasonal, and temporary workers—e.g., staffing firms, restaurants, franchise operator, and others in the hospitality industry, among others—found it difficult to obtain coverage from the mainstream carriers. Consequently, pre-ACA, these employers either made no offers of coverage or they offered “mini-med” plans.
Once the ACA employer mandate came on line in 2014, many small employers were effectively frozen out of coverage. While the ACA included a mandate on carriers to offer coverage under the guaranteed issue rules, carriers were free to set premium prices, which often were exorbitant. This is largely due to the difficulty in underwriting a group with a high propensity toward adverse selection and high levels of deferred health care costs. Many of these employers opted instead to offer so-called “skinny” MEC plans, which cover only preventive and wellness services, and which are not underwritten. The ACA made a policy tradeoff in such cases. Employers offering such low-value plans could avoid paying an excise tax on all their full-time employees. But income-eligible employees could choose to buy subsidized coverage on an ACA exchange and the employer would be subject to an excise tax on those who did.
The Ryan plan proposes to permit small employers to band together to create larger, more predictable groups for underwriting purposes. The challenge here is oversight. From a regulatory perspective, these plans are multiple-employer welfare arrangements or “MEWAs,” i.e., plans that cover employees of two or more unrelated employers. MEWAs have posed complex compliance issues that have challenged federal and state regulators for decades. To address those issues, the Ryan Plan will need to establish new and robust enforcement provisions.
A 1983 law amending ERISA clarified that the states were free to regulate self-funded MEWAs without fear of having their state insurance laws preempted by ERISA. The result is that self-funded MEWAs are often regulated as unlicensed insurance companies. (This is why group health plans offered by professional employer organizations are for the most part fully-insured arrangements.) While some states do have special MEWAs statutes, only a handful permit anything close to the banding together by small employers envisioned by the Ryan Plan. Thus, the Ryan Plan would need to include a clear and overarching federal mandate to enable these association-style plans. The Plan would also need to limit the application of state small group laws, which generally do not permit combining two or more small groups to make one large group for underwriting purposes.
There is a related issue, referred to in the Ryan Plan under the heading of “Protecting Employers’ Flexibility for Self-Insurance,” associated with stop-loss coverage. One of the post-ACA innovations has been the growth of stop-loss coverage through captive insurance companies that pool the stop-loss risks of unrelated small employers. While this approach takes many forms, a common design involves the establishment of a self-funded group health plan by a single employer; the purchase of a commercial stop-loss policy; and the ceding of a tranche of the stop-loss risk to a fronted (or “rented”) captive, the coverage under which is coordinated with certain similarly situated employers as part of a pre-arranged design. On the theory that stop-loss coverage is casualty insurance and not health insurance, pooling of this sort appears to be permitted. In our experience, these arrangements also seem to work as advertised.
From a purely legal perspective, the use of captive insurance companies in the manner described above remains unclear, but the market has overwhelmingly adopted this approach, and the regulators do not appear to have pushed back. That may be about to change. A recent proposal by the Department of Labor to revise the annual Form 5500 reporting form used by ERISA-covered pension and welfare plans have included the obligation to report on stop-loss coverage. This requirement was criticized by the Chamber of Commerce, among others in comments filed with the DOL. According to the Chamber:
Plan sponsors that self-fund their health plans may also purchase stop loss coverage to provide the plan sponsor with financial protection in the event of large claims. Still, the employer self-funds the underlying health plan and participants look to the employer to pay benefits, for which the employer is fully liable. Such stop loss coverage is typically not an ERISA-covered benefit. Information on the premiums paid, attachment points and claim limits for the stop loss coverage is proprietary to a plan sponsor, and is not information that the Agencies need to protect employee benefits. This request should be removed from the final rule.
The Chamber’s message is predictable and straightforward: keep your government hands off our stop-loss coverage. There is something to be said for this approach. The maintenance of self-funded plans by increasingly smaller groups is being driven by a real need in the marketplace. It is not clear to us that the reporting of stop-loss coverage on Form 5500 will inevitably lead to regulation, but there is nothing to prevent that result. The Chamber’s comments, therefore, seem entirely consistent with the legitimate interests of its members.
The Chamber’s claim that stop-loss coverage “is typically not an ERISA-covered benefit” (emphasis added) should not be overlooked. Where employee contributions go toward the purchase of stop-loss coverage, i.e., where working premium rates for contributory, self-funded group health plan coverage include stop-loss premiums, the Department of Labor’s long-standing position is that the stop-loss coverage is a “plan asset” that is subject to regulation under ERISA. Conversely, where the stop-loss coverage is purchased by the plan sponsor with its own funds outside the plan, a fair reading of the DOL’s position in the matter (based on a 1992 guidance item that was recently supplemented) is that that stop-loss policy is not a plan asset and, as a result, not subject to ERISA. We assume that distinction is what the Chamber is referring to when it added the “typically” qualifier. The problem is that, at least in our experience, the Department’s rule is being largely ignored. Working rates for contributory, self-funded group health plans routinely include stop-loss premiums, but the stop-loss policy is neither treated nor reported as a plan asset. This is not because plan sponsors intend to intentionally violate the law. Most plan sponsors fully intend to comply. Rather, it is because they and their advisors seem unware of the rule.
It is unclear what Secretary of Labor-designate Puzder’s view will be of the DOL proposal on stop-loss coverage; but one could reasonably surmise from his past statements and writings, and his “less-is-more” approach to government regulation, that he might be inclined to be sympathetic to the Chamber’s position on the matter.
Preserving Employee Wellness Programs
The captive arrangements that we mostly encounter rely heavily on wellness programs to control costs. Whether a plan is fully-insured or self-funded, the laws of actuarial science apply mercilessly. Captive-funded stop-loss coverage is not magic; it is simply another way to anticipate and allocate risk. For these arrangements to work, they need to something to control that risk. Many have seized on wellness programs as their “special sauce.”
The Ryan Plan “supports employers who want to reward their workers for healthy behaviors through lower health insurance premiums based upon participation in prevention and wellness programs.” It then excoriates the EEOC for “stand[ing] in the way of these commonsense programs. The reference is to final regulations issued by the EEOC in May of this year on voluntary wellness programs. Of course, the current EEOC is simply reading the law and interpreting it according to its view of its mission. That view could change in the new administration. The best course would be for Congress to resolve the conflicting standards between the ACA (or what might replace it) and the Americans with Disabilities Act.
We have criticized the EEOC’s approach in a previous post for being too harsh on employers. On the other hand, the EEOC was recently sued by AARP in connection with the very same rule as being too generous to employers and not sufficiently protective of the rights of employees. The Ryan Plan does not offer a solution. It instead merely promises to “provide much-needed certainty” in the matter. There is a simple way to provide much-needed certainty. Congress should pick one—the ACA approach or the EEOC approach. The Ryan plan seems to like the former; the AARP doesn’t even like the latter. As usual, whatever ultimately emerges will not please every constituency.
Protecting and Strengthening Coverage Options for All Americans
This plank of the Plan offers proposals to implement portions of the ACA that were popular and which the Plan seeks to preserve. It includes the ban on pre-existing conditions and coverage of dependents to age 26 under their parents’ plans. The plank emphasizes that “[i]nsurers should never be able to unfairly cancel coverage and drop Americans suddenly from the protection of a health insurance plan.” At the same time, the Plan proposes to repeal the ACA’s individual mandate and instead apply continuous coverage requirements that are similar to those that have applied to the group market since 1996 with the enactment of the Health Insurance Portability and Accountability Act. The plank offers the following explanation of how the requirement would work:
If an individual experiences a qualifying life event, he or she would not be charged more than standard rates – even if he or she is dealing with a serious medical issue. This new safeguard applies to everyone who remains enrolled in a health insurance plan, whether the individual is switching from employer-based health care to the individual market, or within the individual market.
The Plan would provide a one-time open enrollment period for individuals to join the health care market if they are uninsured, regardless of how sick or healthy they are. But individuals who fail to enroll during this one-time open enrollment period will have to wait to enroll, presumably until the next open enrollment period. Under this plank, coverage might be denied altogether or pre-existing conditions might be applied to individuals who fail to enroll in coverage and stay enrolled. For individuals who are “priced out” of coverage, the Plan endorses and seeks to reestablish and reinvigorated state high risk pools.
The plan also proposes to “fix the [3:1] age-rating ratio” mandated by the ACA, which the Plan characterizes as “ill-advised.” The Plan would instead apply a 5:1 age band under which premiums charged to older individuals could not exceed five times the premium rates charged to younger individuals. This is, at bottom, a policy choice that seeks to determine the extent to which younger policy holders will subsidize older ones.
The Ryan Plan acknowledges that the “Medicaid program today is a critical lifeline for some of our nation’s most vulnerable patients, as the program provides health care for children, pregnant mothers, the elderly, the blind, and the disabled.” The plan reports that Medicaid currently covers nearly 72 million Americans and that up to 98 million may be covered at any one point in a given year. The Plan criticizes the program’s expansion under the ACA, noting that “Medicaid accounts for more than 15 percent of all health care spending in the United States,”—about one in every four dollars in a state’s average budget. Following a detailed summary of Medicaid financing, the plan concludes that the Medicaid program as currently constituted is unsustainable.
The Ryan Plan proposes to reform Medicaid by giving greater power to the states to administer the program. In addition, Medicaid funding would be capped. The plan asserts that these reforms would, “reduce federal funding over the long term, while preserving a safety net for needy, low-income Americans.” The details of the proposal rest on two approaches, per capita allotment and block grants.
- Per capita allotment
The Plan proposes that, in 2019, a total federal Medicaid allotment would be available for each state to draw down based on its federal matching rate. The amount of the federal allotment would be the product of the state’s per capita allotment for the four major beneficiary categories—aged, blind and disabled, children, and adults—and the number of enrollees in each of those four categories. The per capita allotment for each category would be determined by each state’s average medical assistance and non-benefit expenditures per full-year-equivalent enrollee during the base year (2016), adjusted for inflation. The per capita allotment would be designed to grow at a rate slower than under current law.
- Block Grants
Under the block grant option, a state that opts out of the per capita allotment could automatically receive a block grant of federal funds to finance their Medicaid program. States would then be free to manage eligibility and benefits generally as they see fit without the need to apply to the Department of Health and Human Services for waivers.
Protecting and Preserving Medicare
Beginning in 2020, the Ryan Plan proposes to combine Medicare Parts A and B and impose a single, unified deductible. An annual maximum out-of-pocket spending cap would be imposed on the amount of money a Medicare beneficiary pays each year, and there would be a 20 percent uniform cost-sharing requirement for all services. Restrictions would be imposed on Medigap plans to prevent them from covering cost-sharing below a designated limit. These changes do not seem controversial to us. Indeed, if the Plan stopped here, it would be fair to say that is has preserved Medicare as we know it—i.e., as a fee-for-service program.
The Plan does not stop here, however. It instead offers a “final step to save [Medicare],” which involves “transforming the benefit into a fully competitive market-based model using premium support.” Beginning in 2024, Medicare beneficiaries would be given a choice of private plans competing alongside the traditional fee-for-service Medicare program on a newly created Medicare Exchange. While the Plan claims that this is “not a voucher program,” we would expect opponents of the plan to label the changes as such.