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Summary of House Republicans’ Latest Obamacare “Replace” Legislation

UPDATE:        On March 13, the Congressional Budget Office (CBO) released its score of the bill. CBO found that the bill would:

  • Reduce deficits by about $337 billion over ten years—$323 billion in on-budget savings, along with $13 billion in off-budget (i.e., Social Security) savings.
  • Increase the number of uninsured by 14 million in 2018, rising to a total of 24 million by 2026.
  • Raise individual market premiums by 15-20 percent in 2018 and 2019, but then lower premiums in years following 2020, such that in 2026, premiums would be about 10 percent lower than under current law.

Among CBO’s major conclusions regarding provisions in the bill:

Individual Market Changes, 2017-19:             CBO believes that eliminating the mandate penalties will effectively increase insurance premiums; however, the presence of subsidies will still induce “a significant number of relatively healthy people” to purchase coverage. The budget office believes that elimination of the mandate will increase the number of uninsured by roughly 4 million in 2017. In 2018, CBO believes the number of uninsured would increase by 14 million—6 million from the individual market, 5 million from Medicaid, and 2 million from employer coverage. “In 2019, the number of uninsured would grow to 16 million people because of further reductions in Medicaid and non-group coverage.” CBO believes most of these coverage losses would be due to repealing the individual mandate—as a result of individuals who stop buying coverage with repeal of the mandate penalties, or those deterred by expected premium spikes.

With respect to premiums, CBO believes that “average premiums for single policy-holders in the non-group market would be 15 percent to 20 percent higher than under current law, mainly because of the elimination of the individual mandate penalties.” Eliminating the mandate penalties would increase adverse selection (i.e., a disproportionately older and sicker enrollee population), mitigated somewhat by potential reinsurance payments from the State Stability Fund.

CBO believes that the availability of Obamacare premium subsidies (but NOT cost-sharing subsidies) to individuals purchasing coverage off of Exchanges in 2018 and 2019 will lead to about 2 million individuals taking the subsidies for off-Exchange coverage. Likewise, CBO believes that altering the subsidy regime for 2019 only—to increase subsidies for younger enrollees, while decreasing them for older enrollees—will increase enrollment by about one million, “the net result of higher enrollment among younger people and lower enrollment among older people.”

With respect to other market changes during the transition period, CBO expects that the State Stability Fund will operate through the Department of Health and Human Services (as opposed to the states) before 2020, as states will not have adequate time to set up their own programs for 2018 and 2019. CBO also notes that the “continuous coverage” provision—i.e., a 30 percent surcharge for those who lack coverage for more than 63 days—will induce about 1 million individuals to purchase coverage in 2018, but will deter about 2 million individuals from purchasing coverage in 2019 and future years.

CBO also notes that “the people deterred from purchasing coverage [by the surcharge] would tend to be healthier than those who would not be deterred and would be willing to pay the surcharge”—raising the question of whether or not this “continuous coverage” provision would exacerbate, rather than alleviate, adverse selection in insurance markets.

The expansion of age rating bands—from 3-to-1 under current law to 5-to-1 in the new bill—would increase enrollment marginally, by less than 500,000 in 2019, “the net result of higher enrollment among younger people and lower enrollment among older people.”

While CBO does not believe a “death spiral” would emerge in most sections of the country, it does note that “significant changes in non-group subsidies and market rules would occur each year for the first three years following enactment, which might cause uncertainty for insurers in setting premiums.” CBO believes that the health status of enrollees would worsen in 2018, due to the elimination of the individual mandate penalties. However, in 2019 CBO notes that two changes for that year—expansion of the age rating bands, as well as a one-year change to the Obamacare subsidies—may attract healthier enrollees, but “it might be difficult for insurers to set premiums for 2019 using their prior experience in the market.”

Individual Market Changes, 2020-2026: In 2020, CBO believes that roughly 9 million fewer individuals would purchase coverage on the individual market than under current law—a number that would fall to 2 million in 2026. Employer-based coverage would also decline, by a net of roughly 2 million in 2020, rising to 7 million by 2026, because elimination of the individual mandate penalties will discourage individuals from taking up employer-sponsored coverage. “In addition, CBO and JCT expect that, over time, fewer employers would offer health insurance to their workers.” Overall, the number of uninsured would increase to 48 million by 2020, and 52 million by 2026, with the increase “disproportionately larger among older people with lower income.”

With respect to premiums in years 2020 and following, CBO believes that “the increase in average premiums from repealing the individual mandate penalties would be more than offset by the combination of three main factors:” 1) a younger and healthier mix of enrollees than under current law; 2) elimination of actuarial value requirements, therefore lowering premiums; and 3) reinsurance payments from the State Stability Fund. CBO believes that “by 2025, average premiums for single policy-holders in the non-group market under the legislation would be roughly 10 percent lower than the estimates under current law.” Some conservatives may note that in 2009, CBO analyzed Obamacare as increasing premiums by 10-13 percent relative to prior law—meaning that under the best possible assumptions, the bill might only begin to undo one decade from now the harmful premium increases created by Obamacare.

CBO also notes that the overall reduction in premiums would mask significant changes by age, raising premiums for older enrollees while lowering them for younger enrollees. Specifically, “premiums in the non-group market would be 20 percent to 25 percent lower for a 21-year-old and 8 percent to 10 percent lower for a 40-year-old—but 20 percent to 25 percent higher for a 64-year-old.”

CBO notes that, while elimination of the actuarial value requirements would theoretically allow health insurance plans to reduce coverage below 60 percent of actuarial value (i.e., percentage of expected health costs covered by insurance), retention of Obamacare’s essential health benefits requirements would “significantly limit the ability of insurers to design plans with an actuarial value much below 60 percent.”

However, CBO does believe that the insurance market changes would lower plans’ average actuarial value overall, while increasing out-of-pocket costs. “CBO and JCT [also] expect that, under the legislation, plans would be harder to compare, making shopping for a plan on the basis of price more difficult.”

The transition to a new subsidy regime in 2020 would change market composition appreciably. Specifically, CBO believes that “fewer lower-income people would obtain coverage through the non-group market under the legislation than under current law,” and that because “the tax credits under the legislation would tend to be larger than current law premium tax credits for many people with higher income,” the new subsidy regime “would tend to increase enrollment in the non-group market among higher-income people.”

In general, changes in the age-rating in the individual market, coupled with changes in the subsidy regime, lead CBO to conclude that “a larger share of enrollees in the non-group market would be younger people and a smaller share would be older people.” Overall spending on subsidies would be “significantly smaller under the legislation than under current law,” due to both smaller take-up of the subsidies and smaller per-beneficiary subsidies. CBO believes that subsidies in 2020 will equal about 60 percent of average premium subsidies under current law, and will equal about 50 percent of current law subsidies in 2026.

According to CBO, the State Stability Fund grants “would exert substantial downward pressure on premiums in the non-group market in 2020 and later years and would help encourage participation in the market by insurers.” However, CBO did note that effects may be determined by whether states elect to participate in the grant programs, and whether states’ activities directly affect the individual market for health insurance.

CBO believes that the bill would encourage employers to drop employer-sponsored health coverage—both due to the elimination of the employer mandate penalties, and the broader availability of subsidies to individuals at higher income levels than Obamacare. In part as a result, CBO scores a total of $70 billion in savings due to interaction effects—that is, individuals’ compensation moving from pre-tax health insurance to after-tax wages as employers drop coverage. However, CBO also believes that the lower level of subsidies compared to Obamacare—which would grow more slowly over time—coupled with less rich health coverage offered on the individual market would mitigate employers’ incentives to drop coverage.

In 2020, CBO believes the State Stability Fund grants “would contribute substantially to the stability of the non-group market,” and that “the non-group market is expected to be smaller in 2020 than in 2019 but then is expected to grow somewhat over the 2020-2026 period.”

Medicaid Changes:  Overall, CBO believes that about 5 million fewer individuals with enroll in Medicaid in 2018 (due largely to elimination of the individual mandate penalties), 9 million fewer individuals in 2020, and 14 million in 2026.

If the bill passes, CBO believes that coming changes taking effect in 2020 mean that “no additional states will expand eligibility, thereby reducing both enrollment in and spending on Medicaid,” because CBO’s current-law baselines assume that additional states will expand their programs by 2026. This change would lead to a reduction in estimated enrollment of approximately 5 million by 2026.

CBO believes that “some states that have already expanded their Medicaid programs would no longer offer that coverage, reducing the share of the newly eligible population residing in a state with expanded eligibility to about 30 percent in 2026.” (CBO believes roughly half of the Medicaid eligible population currently lives in one of the 31 states that have expanded eligibility—and that, absent changes, this percentage will increase to 80 percent in 2026.)

CBO believes that, once the “freeze” on the enhanced Medicaid match takes effect at the beginning of 2020, “about one-third of those enrolled as of December 31, 2019 would have maintained continuous eligibility two years later,” remaining eligible for the enhanced federal match. By the end of 2024 (i.e., five years after the “freeze” takes effect), the enhanced federal match would apply to under 5 percent of newly eligible enrollees.

With respect to the per capita caps on Medicaid, CBO believes that the CPI-medical inflation measure in the House bill would reduce spending slightly compared to CBO’s baseline projections: CPI-medical would increase at a 3.7 percent rate, compared to a 4.4 percent increase in Medicaid spending under current law. CBO believes states would adopt a mix of approaches to reflect the lower spending growth: increasing state spending; reducing payments to health care providers and plans; eliminating optional services; restricting eligibility; or improving program efficiency.

 

Where available, scores of specific provisions are integrated into the earlier summary of the legislation, which follows below.

Legislative Summary

On March 6, House leadership released a revised draft of their Obamacare “repeal-and-replace” bill—the Energy and Commerce title is here, and the Ways and Means title is here.

A detailed summary of the bill is below, along with possible conservative concerns where applicable. Changes with the original leaked discussion draft (dated February 10) are noted where applicable. Where provisions in the bill were also included in the reconciliation bill passed by Congress early in 2016 (H.R. 3762, text available here), differences between the two versions, if any, are noted.

Of particular note: It is unclear whether this legislative language has been vetted with the Senate Parliamentarian. When the Senate considers budget reconciliation legislation—as it plans to do with the Obamacare “repeal-and-replace” bill—the Parliamentarian plays a key role in determining whether provisions are budgetary in nature and can be included in the bill (which can pass with a 51-vote simple majority), and which provisions are not budgetary in nature and must be considered separately (i.e., require 60 votes to pass).

In the absence of a fully drafted bill and complete CBO score, it is entirely possible the Parliamentarian has not vetted this draft—which means provisions could change substantially, or even get stricken from the bill, due to procedural concerns as the process moves forward.

Title I—Energy and Commerce

Prevention and Public Health Fund:             Eliminates funding for the Obamacare prevention “slush fund,” and rescinds all unobligated balances. This language is substantially similar to Section 101 of the 2015/2016 reconciliation bill. Saves $8.8 billion over ten years.

Community Health Centers:             Increases funding for community health centers by $422 million for Fiscal Year 2018—money intended to offset reductions in spending on Planned Parenthood affiliates (see “Federal Payments to States” below). The spending amount exceeds the $285 million provided in the leaked discussion draft. Language regarding community health centers was included in Section 102 of the 2015/2016 reconciliation bill. Costs $422 million over ten years.

Federal Payments to States:             Imposes a one-year ban on federal funds flowing to certain entities. This provision would have the effect of preventing Medicaid funding of certain medical providers, including Planned Parenthood, so long as Planned Parenthood provides for abortions (except in cases of rape, incest, or to save the life of the mother). This language is virtually identical to Section 206 of the 2015/2016 reconciliation bill. CBO believes that, after taking into account increased births (and Medicaid spending) due to lack of access to contraceptive care, this provision will save Medicaid a net of $156 million over ten years.

Medicaid:       The discussion draft varies significantly from the repeal of Medicaid expansion included in Section 207 of the 2015/2016 reconciliation bill. The 2015/2016 reconciliation bill repealed both elements of the Medicaid expansion—the change in eligibility allowing able-bodied adults to join the program, and the enhanced (90-100%) federal match that states received for covering them.

By contrast, the House discussion draft retains eligibility for the able-bodied adult population—making this population optional for states to cover, rather than mandatory. (The Supreme Court’s 2012 ruling in NFIB v. Sebelius made Medicaid expansion optional for states.) Some conservatives may be concerned that this change represents a marked weakening of the 2015/2016 reconciliation bill language, one that will entrench a massive expansion of Medicaid beyond its original focus on the most vulnerable in society.

With respect to the Medicaid match rate, the discussion draft reduces the enhanced federal match to states, effective December 31, 2019. The bill provides that states receiving the enhanced match for individuals enrolled by December 31, 2019 will continue to receive that enhanced federal match, provided they do not have a break in Medicaid coverage of longer than one month. (In the case of states that already expanded Medicaid to able-bodied adults prior to Obamacare’s enactment, the bill provides for an 80 percent federal match for 2017 and all subsequent years.)

Some conservatives may be concerned that—rather than representing a true “freeze” that was advertised, one that would take effect immediately upon enactment—the language in this bill would give states a strong incentive to sign up many more individuals for Medicaid over the next three years, so they can qualify for the higher federal match as long as those individuals remain in the program.

The bill also repeals the requirement that Medicaid “benchmark” plans comply with Obamacare’s essential health benefits, also effective December 31, 2019.

The repeal of the Medicaid expansion, when coupled with the per-capita caps, will reduce Medicaid spending by a total of $880 billion over ten years. CBO did not provide granularity on the savings associated with each specific provision.

Finally, the bill repeals the Community First Choice Option, eliminating a six percent increase in the Medicaid match rate for some home and community-based services. This provision saves $12 billion over ten years.

DSH Payments:         Repeals the reduction in Medicaid Disproportionate Share Hospital (DSH) payments. Non-expansion states would see their DSH payments restored immediately, whereas states that expanded Medicaid to the able-bodied under Obamacare would see their DSH payments restored in 2019. This language varies from both Section 208 of the 2015/2016 reconciliation bill and the leaked discussion draft. Spends $31.2 billion over ten years. In addition, increases in the number of uninsured will have the effect of increasing Medicare DSH payments, raising spending by an additional $43 billion over ten years.

Medicaid Program Integrity:             Beginning January 1, 2020, requires states to consider lottery winnings and other lump sum distributions as income for purposes of determining Medicaid eligibility. Effective October 2017, restricts retroactive eligibility in Medicaid to the month in which the individual applied for the program; current law requires three months of retroactive eligibility.

Requires, beginning six months after enactment, Medicaid applicants to provide verification of citizenship or immigration status prior to becoming presumptively eligible for benefits during the application process. With respect to eligibility for Medicaid long-term care benefits, reduces states’ ability to increase home equity thresholds that disqualify individuals from benefits; within six months of enactment, the threshold would be reduced to $500,000 in home equity nationwide, adjusted for inflation annually. These provisions were not included in the leaked discussion draft.

Eligibility Re-Determinations:             Requires states, beginning October 1, 2017, to re-determine eligibility for individuals qualifying for Medicaid on the basis of income at least every six months. This provision was not included in the leaked discussion draft. All told, this change, along with the program integrity provisions highlighted above, saves a total of $7.1 billion over ten years.

Non-Expansion State Funding:             Includes $10 billion ($2 billion per year) in funding for Medicaid non-expansion states, for calendar years 2018 through 2022. States can receive a 100 percent federal match (95 percent in 2022), up to their share of the allotment. A non-expansion state’s share of the $2 billion in annual allotments would be determined by its share of individuals below 138% of the federal poverty level (FPL) when compared to non-expansion states. This funding would be excluded from the Medicaid per capita spending caps discussed in greater detail below. This provision was not included in the leaked discussion draft. Costs $8 billion over ten years.

Medicaid Per Capita Caps:              Creates a system of per capita spending caps for federal spending on Medicaid, beginning in Fiscal Year 2019. States that exceed their caps would have their federal match reduced in the following fiscal year.

The cap would include all spending on medical care provided through the Medicaid program, with the exception of DSH payments and Medicare cost-sharing paid for dual eligibles (individuals eligible for both Medicaid and Medicare). The cap would rise by medical CPI plus one percentage point annually.

While the cap would take effect in Fiscal Year 2019, the “base year” for determining cap levels would be Fiscal Year 2016 (which concluded on September 30, 2016), adjusted forward to 2019 levels using medical CPI. The inflation adjustment is lower than the leaked discussion draft, which set the level at medical CPI plus one percent.

Creates five classes of beneficiaries for whom the caps would apply: 1) elderly individuals over age 65; 2) blind and disabled beneficiaries; 3) children under age 19; 4) expansion enrollees (i.e., able-bodied adults enrolled under Obamacare); and 5) all other non-disabled, non-elderly, non-expansion adults (e.g., pregnant women, parents, etc.). Excludes State Children’s Health Insurance Plan enrollees, Indian Health Service participants, breast and cervical cancer services eligible individuals, and certain other partial benefit enrollees from the per capita caps.

Requires the Department of Health and Human Services (HHS) to reduce states’ annual growth rate by one percent for any year in which that state “fails to satisfactorily submit data” regarding its Medicaid program. Permits HHS to adjust cap amounts to reflect data errors, based on an appeal by the state, increasing cap levels by no more than two percent.

For the period including calendar quarters beginning on October 1, 2017 through October 1, 2019, increases the federal Medicaid match for certain state expenditures to improve data recording, including a 100 percent match in some instances.

Some conservatives may note the bill’s creation of a separate category of Obamacare expansion enrollees, and its use of 2016 as the “base year” for the per capita caps, benefit states who expanded Medicaid to able-bodied adults under Obamacare. The most recent actuarial report on Medicaid noted that, while the actuary originally predicted that adults in the expansion population would cost less than existing populations, in reality each newly eligible enrollee cost 13.6% more than existing populations in 2016. Some states have used the 100% federal match for their expansion populations—i.e., “free money from Washington”—to raise provider reimbursement levels.

Some conservatives may therefore be concerned that the draft bill would retain the increased spending on adults in expansion states—extending the inequities caused by states that have used Obamacare’s “free money” to raise Medicaid spending while sending Washington the tab.

The per-capita caps, when coupled with the repeal of the Medicaid expansion, will reduce Medicaid spending by a total of $880 billion over ten years. CBO did not provide granularity on the savings associated with each specific provision.

Cost-Sharing Subsidies:      Repeals Obamacare’s cost-sharing subsidies, effective December 31, 2019. However, the bill does not include an appropriation for cost-sharing subsidies for 2017, 2018, or 2019. The House of Representatives filed suit against the Obama Administration (House v. Burwell) alleging the Administration acted unconstitutionally in spending funds on the cost-sharing subsidies without an explicit appropriation from Congress. The case is currently on hold pending settlement discussions between the Trump Administration and the House. Similar language regarding cost-sharing subsidies was included in Section 202(b) of the 2015/2016 reconciliation bill.

On a related note, the bill does NOT include provisions regarding reinsurance, risk corridors, and risk adjustment, all of which were repealed by Section 104 of the 2015/2016 reconciliation bill. While the reinsurance and risk corridor programs technically expired on December 31, 2016, insurers have outstanding claims regarding both programs. Some conservatives may be concerned that failing to repeal these provisions could represent an attempt to bail out health insurance companies.

Patient and State Stability Fund:              Creates a Patient and State Stability Fund, to be administered by the Centers for Medicare and Medicaid Services (CMS), for the years 2018 through 2026. Grants may be used to cover individuals with pre-existing conditions (whether through high-risk pools or another arrangement), stabilizing or reducing premiums, encouraging insurer participation, promoting access, directly paying providers, or subsidizing cost-sharing (i.e., co-payments, deductibles, etc.).

In the leaked discussion draft, the program in question was called the State Innovation Grant program. The new bill changes the program’s name, and includes additional language requiring the CMS Administrator, in the case of a state that does not apply for Fund dollars, to spend the money “for such state,” making “market stabilization payments” to insurers with claims over $50,000, using a specified reinsurance formula. Some conservatives may view this as a federal infringement on state sovereignty—Washington forcibly intervening in state insurance markets—to bail out health insurers.

Provides for $15 billion in funding for each of calendar years 2018 and 2019, followed by $10 billion for each of calendar years 2020 through 2026 ($100 billion total). Requires a short, one-time application from states describing their goals and objectives for use of the funding, which will be deemed approved within 60 days absent good cause.

For 2018 and 2019, funding would be provided to states on the basis of two factors. 85% of the funding would be determined via states’ relative claims costs, based on the most recent medical loss ratio (MLR) data. The remaining 15% of funding would be allocated to states 1) whose uninsured populations increased from 2013 through 2015 or 2) have fewer than three health insurers offering Exchange plans in 2017. This formula is a change from the leaked discussion draft, which determined funding based on average insurance premiums, and guaranteed every state at least a 0.5% share of funding ($75 million).

For 2020 through 2026, CMS would be charged with determining a formula that takes into account 1) states’ incurred claims, 2) the number of uninsured with incomes below poverty, and 3) the number of participating health insurers in each state market. The bill requires stakeholder consultation regarding the formula, which shall “reflect the goals of improving the health insurance risk pool, promoting a more competitive health insurance market, and increasing choice for health care consumers.” The formula language and criteria has been changed compared to the leaked discussion draft.

Requires that states provide a match for their grants in 2020 through 2026—7 percent of their grant in 2020, 14 percent in 2021, 21 percent in 2022, 28 percent in 2023, 35 percent in 2024, 42 percent in 2025, and 50 percent in 2026. For states that decline to apply for grants, requires a 10 percent match in 2020, 20 percent match in 2021, 30 percent match in 2022, 40 percent match in 2023, and 50 percent match in 2024 through 2026. In either case, the bill prohibits federal allocation should a state decline to provide its match.

Some conservatives may note the significant changes in the program when compared to the leaked discussion draft—let alone the program’s initial variation, proposed by House Republicans in their alternative to Obamacare in 2009. These changes have turned the program’s focus increasingly towards “stabilizing markets,” and subsidizing health insurers to incentivize continued participation in insurance markets. Some conservatives therefore may be concerned that this program amounts to a $100 billion bailout fund for insurers—one that could infringe upon state sovereignty.

This program spends a total of $80 billion over ten years, according to CBO.

Continuous Coverage:         Requires insurers, beginning after the 2018 open enrollment period (i.e., open enrollment for 2019, or special enrollment periods during the 2018 plan year), to increase premiums for individuals without continuous health insurance coverage. The premium could increase by 30 percent for individuals who have a coverage gap of more than 63 days during the previous 12 months. Insurers could maintain the 30 percent premium increase for a 12 month period. Requires individuals to show proof of continuous coverage, and requires insurers to provide said proof in the form of certificates. Some conservatives may be concerned that this provision maintains the federal intrusion over insurance markets exacerbated by Obamacare, rather than devolving insurance regulation back to the states.

Essential Health Benefits:              Permits states to develop essential health benefits—which include actuarial value and cost-sharing requirements—for insurance for all years after December 31, 2019.

Age Rating:   Changes the maximum variation in insurance markets from 3-to-1 (i.e., insurers can charge older applicants no more than three times younger applicants) to 5-to-1 effective January 1, 2018, with the option for states to provide for other age rating requirements. Some conservatives may be concerned that, despite the ability for states to opt out, this provision, by setting a default federal standard, maintains the intrusion over insurance markets exacerbated by Obamacare.

Special Enrollment Verification:                Removes language in the leaked discussion draft requiring verification of all special enrollment periods beginning for plan years after January 1, 2018, effectively codifying proposed regulations issued by the Department of Health and Human Services earlier this month.

Transitional Policies:           Removes language in the leaked discussion draft permitting insurers who continued to offer pre-Obamacare health coverage under President Obama’s temporary “If you like your plan, you can keep it” fix to continue to offer those policies in perpetuity in the individual and small group markets outside the Exchanges.

Title II—Ways and Means

Subsidy Recapture:              Eliminates the repayment limit on Obamacare premium subsidies for the 2018 and 2019 plan years. Obamacare’s premium subsidies (which vary based upon income levels) are based on estimated income, which must be reconciled at year’s end during the tax filing season. Households with a major change in income or family status during the year (e.g., raise, promotion, divorce, birth, death) could qualify for significantly greater or smaller subsidies than the estimated subsidies they receive. While current law caps repayment amounts for households with incomes under 400 percent of the federal poverty level (FPL, $98,400 for a family of four in 2017), the bill would eliminate the repayment limits for 2018 and 2019. This provision is similar to Section 201 of the 2015/2016 reconciliation bill. Saves $4.9 billion over ten years.

Modifications to Obamacare Premium Subsidy:         Allows non-compliant and non-Exchange plans to qualify for Obamacare premium subsidies, with the exception of grandfathered health plans (i.e., those purchased prior to Obamacare’s enactment) and plans that cover abortions (although individuals receiving subsidies can purchase separate coverage for abortion). In a change from the leaked discussion draft, individuals with “grandmothered” plans—that is, those purchased after Obamacare’s enactment, but before the law’s major benefit mandates took effect in 2014—also cannot qualify for subsidies.

While individuals off the Exchanges can receive premium subsidies, they cannot receive these subsidies in advance—they would have to claim the subsidy back on their tax returns instead.

Modifies the existing Obamacare subsidy regime beginning in 2018, by including age as an additional factor for determining subsidy amounts. Younger individuals would have to spend a smaller percentage of income on health insurance than under current law, while older individuals would spend a higher percentage of income. For instance, an individual under age 29, making just under 400% FPL, would pay 4.3% of income on health insurance, whereas an individual between ages 60-64 at the same income level would pay 11.5% of income on health insurance. (Current law limits individuals to paying 9.69% of income on insurance, at all age brackets, for those with income just below 400% FPL.)

Some conservatives may be concerned that 1) these changes would make an already complex subsidy formula even more complicated; 2) could increase costs to taxpayers; and 3) distract from the purported goal of the legislation, which is repealing, not modifying or “fixing,” Obamacare. No independent score of the cost of the modified subsidy regime is available—that is, the CBO score did not provide a granular level of detail regarding these particular provisions in isolation.

Repeal of Tax Credits:         Repeals Obamacare’s premium and small business tax credits, effective January 1, 2020. This language is similar to Sections 202 and 203 of the 2015/2016 reconciliation bill, with one major difference—the House bill provides for a three-year transition period, whereas the reconciliation bill provided a two-year transition period. Repeal of the subsidy regime saves a net of $673 billion (after taking into account the modifications to subsidies outlined above), while repeal of the small business tax credit saves an additional $8 billion.

In addition, CBO estimates an additional $70 billion of “interaction” savings—based largely on assumed reductions in employer-sponsored health coverage, which would see individuals receiving less compensation in the form of pre-tax health insurance and more compensation in the form of after-tax wages.

Abortion Coverage:             Clarifies that firms receiving the small business tax credit may not use that credit to purchase plans that cover abortion (although they can purchase separate plans that cover abortion).

Individual and Employer Mandates:             Sets the individual and employer mandate penalties to zero, for all years after December 31, 2015. This language is similar to Sections 204 and 205 of the 2015/2016 reconciliation bill, except with respect to timing—the House bill zeroes out the penalties beginning with the previous tax year, whereas the reconciliation bill zeroed out penalties beginning with the current tax year. Reduces revenues by $38 billion over ten years in the case of the individual mandate, and $171 billion in the case of the employer mandate.

Repeal of Other Obamacare Taxes:             Repeals all other Obamacare taxes, effective January 1, 2018. Taxes repealed include (along with CBO/Joint Committee on Taxation revenue estimates over ten years):

  • Limitation on deductibility of salaries to insurance industry executives (lowers revenue by $400 million);
  • Tax on tanning services (lowers revenue by $600 million);
  • Tax on pharmaceuticals (lowers revenue by $24.8 billion);
  • Health insurer tax (lowers revenue by $144.7 billion);
  • Net investment tax (lowers revenue by $157.6 billion);
  • Tax on high-cost health plans (also known as the “Cadillac tax”)—but only through 2025 (lowers revenue by $48.7 billion);
  • Restrictions on use of Health Savings Accounts and Flexible Spending Arrangements to pay for over-the-counter medications (lowers revenue by $5.5 billion);
  • Increased penalties on non-health care uses of Health Savings Account dollars (lowers revenue by $100 million);
  • Limits on Flexible Spending Arrangement contributions (lowers revenue by $18.6 billion);
  • Medical device tax (lowers revenue by $19.6 billion);
  • Elimination of deduction for employers who receive a subsidy from Medicare for offering retiree prescription drug coverage (lowers revenue by $1.7 billion);
  • Limitation on medical expenses as an itemized deduction (lowers revenue by $34.9 billion);
  • Medicare tax on “high-income” individuals (lowers revenue by $117.3 billion);

These provisions are all substantially similar to Sections 209 through 221 of the 2015/2016 reconciliation bill. However, when compared to the leaked discussion draft, the bill delays repeal of the tax increases by one year, until the end of calendar year 2017. Additionally, the bill does NOT repeal the economic substance tax, which WAS repealed in Section 222 of the 2015/2016 bill, as well as the leaked discussion draft.

Refundable Tax Credit:       Creates a new, age-rated refundable tax credit for the purchase of health insurance. Credits total $2,000 for individuals under age 30, $2,500 for individuals aged 30-39, $3,000 for individuals aged 40-49, $3,500 for individuals aged 50-59, and $4,000 for individuals over age 60, up to a maximum credit of $14,000 per household. The credit would apply for 2020 and subsequent years, and increase every year by general inflation (i.e., CPI) plus one percent. Excess credit amounts can be deposited in individuals’ Health Savings Accounts.

When compared to the leaked discussion draft, the bill would also impose a means-test on the refundable credits. Individuals with modified adjusted gross incomes below $75,000, and families with incomes below $150,000, would qualify for the full credit. The credit would phase out linearly, at a 10 percent rate—every $1,000 of income would cause the subsidy to shrink by $100. Assuming the maximum credit possible ($14,000), the credit would phase out completely at income of $215,000 for an individual, and $290,000 for a family.

The credit may be used for any individual policy sold within a state, or unsubsidized COBRA continuation coverage. The credit may also not be used for grandfathered or “grandmothered” health plans—a change from the leaked discussion draft. The bill also increases penalties on erroneous claims for the credit, from 20 percent under current law for all tax credits to 25 percent for the new credit—a change from the leaked discussion draft.

Individuals may not use the credit to purchase plans that cover abortions (although they can purchase separate plans that cover abortion). The credit would be advanceable (i.e., paid before individuals file their taxes), and the Treasury would establish a program to provide credit payments directly to health insurers.

Individuals eligible for or participating in employer coverage, Part A of Medicare, Medicaid, the State Children’s Health Insurance Program, Tricare, or health care sharing ministries cannot receive the credit; however, veterans eligible for but not enrolled in VA health programs can receive the credit. Only citizens and legal aliens qualify for the credit; individuals with seriously delinquent tax debt can have their credits withheld.

Some conservatives may be concerned that, by creating a new refundable tax credit, the bill would establish another source of entitlement spending at a time when our nation already faces significant fiscal difficulties.

Some conservatives may also note that, by introducing means-testing into the bill, the revised credit (when compared to the leaked discussion draft) by its very nature creates work disincentives and administrative complexities. However, whereas Obamacare includes several “cliffs”—where one additional dollar of income could result in the loss of thousands of dollars in subsidies—this credit phases out more gradually as income rises. That structure reduces the credit’s disincentives to work—but it by no means eliminates them. Costs $361 billion over ten years. The CBO score did not provide any granularity on the amount of the credit that represents revenue effects (i.e., tax cuts to individuals with income tax liability) versus outlay effects (i.e., spending on “refunds” to individuals who have no income tax liability).

Health Savings Accounts:  Increases contribution limits to HSAs, raising them from the current $3,400 for individuals and $6,750 for families in 2017 to the out-of-pocket maximum amounts (currently $6,550 for an individual and $13,100 for a family), effective January 2018. Allows both spouses to make catch-up contributions to the same Health Savings Account. Permits individuals who take up to 60 days to establish an HSA upon enrolling in HSA-eligible coverage to be reimbursed from their account for medical expenses. The increase in contribution limits would lower revenue by $18.6 billion, and the other two provisions would lower revenue by a combined $600 million.

Cap on Employer-Provided Health Coverage: Does NOT contain a proposed cap on the deductibility of employer-sponsored health insurance coverage included in the leaked discussion draft.

Summary of House Republicans’ “Repeal-and-Replace” Legislation

This evening, House leadership released a revised draft of their Obamacare “repeal-and-replace” bill—the Energy and Commerce title is here, and the Ways and Means title is here.

A detailed summary of the bill is below, along with possible conservative concerns where applicable. Changes with the original leaked discussion draft (dated February 10) are noted where applicable. Where provisions in the bill were also included in the reconciliation bill passed by Congress early in 2016 (H.R. 3762, text available here), differences between the two versions, if any, are noted.

Of particular note: It is unclear whether this legislative language has been vetted with the Senate Parliamentarian. When the Senate considers budget reconciliation legislation—as it plans to do with the Obamacare “repeal-and-replace” bill—the Parliamentarian plays a key role in determining whether provisions are budgetary in nature and can be included in the bill (which can pass with a 51-vote simple majority), and which provisions are not budgetary in nature and must be considered separately (i.e., require 60 votes to pass).

In the absence of a fully drafted bill and complete CBO score, it is entirely possible the Parliamentarian has not vetted this draft—which means provisions could change substantially, or even get stricken from the bill, due to procedural concerns as the process moves forward.

Title I—Energy and Commerce

Prevention and Public Health Fund:             Eliminates funding for the Obamacare prevention “slush fund,” and rescinds all unobligated balances. This language is substantially similar to Section 101 of the 2015/2016 reconciliation bill.

Community Health Centers:             Increases funding for community health centers by $422 million for Fiscal Year 2018—money intended to offset reductions in spending on Planned Parenthood affiliates (see “Federal Payments to States” below). The spending amount exceeds the $285 million provided in the leaked discussion draft. Language regarding community health centers was included in Section 102 of the 2015/2016 reconciliation bill.

Federal Payments to States:             Imposes a one-year ban on federal funds flowing to certain entities. This provision would have the effect of preventing Medicaid funding of certain medical providers, including Planned Parenthood, so long as Planned Parenthood provides for abortions (except in cases of rape, incest, or to save the life of the mother). This language is virtually identical to Section 206 of the 2015/2016 reconciliation bill.

Medicaid:       The discussion draft varies significantly from the repeal of Medicaid expansion included in Section 207 of the 2015/2016 reconciliation bill. The 2015/2016 reconciliation bill repealed both elements of the Medicaid expansion—the change in eligibility allowing able-bodied adults to join the program, and the enhanced (90-100%) federal match that states received for covering them.

By contrast, the House discussion draft retains eligibility for the able-bodied adult population—making this population optional for states to cover, rather than mandatory. (The Supreme Court’s 2012 ruling in NFIB v. Sebelius made Medicaid expansion optional for states.) Some conservatives may be concerned that this change represents a marked weakening of the 2015/2016 reconciliation bill language, one that will entrench a massive expansion of Medicaid beyond its original focus on the most vulnerable in society.

With respect to the Medicaid match rate, the discussion draft reduces the enhanced federal match to states, effective December 31, 2019. The bill provides that states receiving the enhanced match for individuals enrolled by December 31, 2019 will continue to receive that enhanced federal match, provided they do not have a break in Medicaid coverage of longer than one month. (In the case of states that already expanded Medicaid to able-bodied adults prior to Obamacare’s enactment, the bill provides for an 80 percent federal match for 2017 and all subsequent years.)

Some conservatives may be concerned that—rather than representing a true “freeze” that was advertised, one that would take effect immediately upon enactment—the language in this bill would give states a strong incentive to sign up many more individuals for Medicaid over the next three years, so they can qualify for the higher federal match as long as those individuals remain in the program.

Finally, the bill repeals the requirement that Medicaid “benchmark” plans comply with Obamacare’s essential health benefits, also effective December 31, 2019.

DSH Payments:         Repeals the reduction in Medicaid Disproportionate Share Hospital (DSH) payments. Non-expansion states would see their DSH payments restored immediately, whereas states that expanded Medicaid to the able-bodied under Obamacare would see their DSH payments restored in 2019. This language varies from both Section 208 of the 2015/2016 reconciliation bill and the leaked discussion draft.

Medicaid Program Integrity:             Beginning January 1, 2020, requires states to consider lottery winnings and other lump sum distributions as income for purposes of determining Medicaid eligibility. Effective October 2017, restricts retroactive eligibility in Medicaid to the month in which the individual applied for the program; current law requires three months of retroactive eligibility.

Requires, beginning six months after enactment, Medicaid applicants to provide verification of citizenship or immigration status prior to becoming presumptively eligible for benefits during the application process. With respect to eligibility for Medicaid long-term care benefits, reduces states’ ability to increase home equity thresholds that disqualify individuals from benefits; within six months of enactment, the threshold would be reduced to $500,000 in home equity nationwide, adjusted for inflation annually. These provisions were not included in the leaked discussion draft.

Non-Expansion State Funding:             Includes $10 billion ($2 billion per year) in funding for Medicaid non-expansion states, for calendar years 2018 through 2022. States can receive a 100 percent federal match (95 percent in 2022), up to their share of the allotment. A non-expansion state’s share of the $2 billion in annual allotments would be determined by its share of individuals below 138% of the federal poverty level (FPL) when compared to non-expansion states. This funding would be excluded from the Medicaid per capita spending caps discussed in greater detail below. This provision was not included in the leaked discussion draft.

Eligibility Re-Determinations:             Requires states, beginning October 1, 2017, to re-determine eligibility for individuals qualifying for Medicaid on the basis of income at least every six months. This provision was not included in the leaked discussion draft.

Medicaid Per Capita Caps:              Creates a system of per capita spending caps for federal spending on Medicaid, beginning in Fiscal Year 2019. States that exceed their caps would have their federal match reduced in the following fiscal year.

The cap would include all spending on medical care provided through the Medicaid program, with the exception of DSH payments and Medicare cost-sharing paid for dual eligibles (individuals eligible for both Medicaid and Medicare). The cap would rise by medical CPI plus one percentage point annually.

While the cap would take effect in Fiscal Year 2019, the “base year” for determining cap levels would be Fiscal Year 2016 (which concluded on September 30, 2016), adjusted forward to 2019 levels using medical CPI. The adjustment was reduced from medical CPI plus one percentage point in the leaked discussion draft.

Creates five classes of beneficiaries for whom the caps would apply: 1) elderly individuals over age 65; 2) blind and disabled beneficiaries; 3) children under age 19; 4) expansion enrollees (i.e., able-bodied adults enrolled under Obamacare); and 5) all other non-disabled, non-elderly, non-expansion adults (e.g., pregnant women, parents, etc.). Excludes State Children’s Health Insurance Plan enrollees, Indian Health Service participants, breast and cervical cancer services eligible individuals, and certain other partial benefit enrollees from the per capita caps.

Requires the Department of Health and Human Services (HHS) to reduce states’ annual growth rate by one percent for any year in which that state “fails to satisfactorily submit data” regarding its Medicaid program. Permits HHS to adjust cap amounts to reflect data errors, based on an appeal by the state, increasing cap levels by no more than two percent.

For the period including calendar quarters beginning on October 1, 2017 through October 1, 2019, increases the federal Medicaid match for certain state expenditures to improve data recording, including a 100 percent match in some instances.

Some conservatives may note the bill’s creation of a separate category of Obamacare expansion enrollees, and its use of 2016 as the “base year” for the per capita caps, benefit states who expanded Medicaid to able-bodied adults under Obamacare. The most recent actuarial report on Medicaid noted that, while the actuary originally predicted that adults in the expansion population would cost less than existing populations, in reality each newly eligible enrollee cost 13.6% more than existing populations in 2016. Some states have used the 100% federal match for their expansion populations—i.e., “free money from Washington”—to raise provider reimbursement levels.

Some conservatives may therefore be concerned that the draft bill would retain the increased spending on adults in expansion states—extending the inequities caused by states that have used Obamacare’s “free money” to raise Medicaid spending while sending Washington the tab.

Cost-Sharing Subsidies:      Repeals Obamacare’s cost-sharing subsidies, effective December 31, 2019. However, the bill does not include an appropriation for cost-sharing subsidies for 2017, 2018, or 2019. The House of Representatives filed suit against the Obama Administration (House v. Burwell) alleging the Administration acted unconstitutionally in spending funds on the cost-sharing subsidies without an explicit appropriation from Congress. The case is currently on hold pending settlement discussions between the Trump Administration and the House. Similar language regarding cost-sharing subsidies was included in Section 202(b) of the 2015/2016 reconciliation bill.

On a related note, the bill does NOT include provisions regarding reinsurance, risk corridors, and risk adjustment, all of which were repealed by Section 104 of the 2015/2016 reconciliation bill. While the reinsurance and risk corridor programs technically expired on December 31, 2016, insurers have outstanding claims regarding both programs. Some conservatives may be concerned that failing to repeal these provisions could represent an attempt to bail out health insurance companies.

Patient and State Stability Fund:              Creates a Patient and State Stability Fund, to be administered by the Centers for Medicare and Medicaid Services (CMS), for the years 2018 through 2026. Grants may be used to cover individuals with pre-existing conditions (whether through high-risk pools or another arrangement), stabilizing or reducing premiums, encouraging insurer participation, promoting access, directly paying providers, or subsidizing cost-sharing (i.e., co-payments, deductibles, etc.).

In the leaked discussion draft, the program in question was called the State Innovation Grant program. The new bill changes the program’s name, and includes additional language requiring the CMS Administrator, in the case of a state that does not apply for Fund dollars, to spend the money “for such state,” making “market stabilization payments” to insurers with claims over $50,000, using a specified reinsurance formula. Some conservatives may view this as a federal infringement on state sovereignty—Washington forcibly intervening in state insurance markets—to bail out health insurers.

Provides for $15 billion in funding for each of calendar years 2018 and 2019, followed by $10 billion for each of calendar years 2020 through 2026 ($100 billion total). Requires a short, one-time application from states describing their goals and objectives for use of the funding, which will be deemed approved within 60 days absent good cause.

For 2018 and 2019, funding would be provided to states on the basis of two factors. 85% of the funding would be determined via states’ relative claims costs, based on the most recent medical loss ratio (MLR) data. The remaining 15% of funding would be allocated to states 1) whose uninsured populations increased from 2013 through 2015 or 2) have fewer than three health insurers offering Exchange plans in 2017. This formula is a change from the leaked discussion draft, which determined funding based on average insurance premiums, and guaranteed every state at least a 0.5% share of funding ($75 million).

For 2020 through 2026, CMS would be charged with determining a formula that takes into account 1) states’ incurred claims, 2) the number of uninsured with incomes below poverty, and 3) the number of participating health insurers in each state market. The bill requires stakeholder consultation regarding the formula, which shall “reflect the goals of improving the health insurance risk pool, promoting a more competitive health insurance market, and increasing choice for health care consumers.” The formula language and criteria has been changed compared to the leaked discussion draft.

Requires that states provide a match for their grants in 2020 through 2026—7 percent of their grant in 2020, 14 percent in 2021, 21 percent in 2022, 28 percent in 2023, 35 percent in 2024, 42 percent in 2025, and 50 percent in 2026. For states that decline to apply for grants, requires a 10 percent match in 2020, 20 percent match in 2021, 30 percent match in 2022, 40 percent match in 2023, and 50 percent match in 2024 through 2026. In either case, the bill prohibits federal allocation should a state decline to provide its match.

Some conservatives may note the significant changes in the program when compared to the leaked discussion draft—let alone the program’s initial variation, proposed by House Republicans in their alternative to Obamacare in 2009. These changes have turned the program’s focus increasingly towards “stabilizing markets,” and subsidizing health insurers to incentivize continued participation in insurance markets. Some conservatives therefore may be concerned that this program amounts to a $100 billion bailout fund for insurers—one that could infringe upon state sovereignty.

Continuous Coverage:         Requires insurers, beginning after the 2018 open enrollment period (i.e., open enrollment for 2019, or special enrollment periods during the 2018 plan year), to increase premiums for individuals without continuous health insurance coverage. The premium could increase by 30 percent for individuals who have a coverage gap of more than 63 days during the previous 12 months. Insurers could maintain the 30 percent premium increase for a 12 month period. Requires individuals to show proof of continuous coverage, and requires insurers to provide said proof in the form of certificates. Some conservatives may be concerned that this provision maintains the federal intrusion over insurance markets exacerbated by Obamacare, rather than devolving insurance regulation back to the states.

Essential Health Benefits:              Permits states to develop essential health benefits—which include actuarial value and cost-sharing requirements—for insurance for all years after December 31, 2019.

Age Rating:   Changes the maximum variation in insurance markets from 3-to-1 (i.e., insurers can charge older applicants no more than three times younger applicants) to 5-to-1 effective January 1, 2018, with the option for states to provide for other age rating requirements. Some conservatives may be concerned that, despite the ability for states to opt out, this provision, by setting a default federal standard, maintains the intrusion over insurance markets exacerbated by Obamacare.

Special Enrollment Verification:                Removes language in the leaked discussion draft requiring verification of all special enrollment periods beginning for plan years after January 1, 2018, effectively codifying proposed regulations issued by the Department of Health and Human Services earlier this month.

Transitional Policies:           Removes language in the leaked discussion draft permitting insurers who continued to offer pre-Obamacare health coverage under President Obama’s temporary “If you like your plan, you can keep it” fix to continue to offer those policies in perpetuity in the individual and small group markets outside the Exchanges.

Title II—Ways and Means

Subsidy Recapture:              Eliminates the repayment limit on Obamacare premium subsidies for the 2018 and 2019 plan years. Obamacare’s premium subsidies (which vary based upon income levels) are based on estimated income, which must be reconciled at year’s end during the tax filing season. Households with a major change in income or family status during the year (e.g., raise, promotion, divorce, birth, death) could qualify for significantly greater or smaller subsidies than the estimated subsidies they receive. While current law caps repayment amounts for households with incomes under 400 percent of the federal poverty level (FPL, $98,400 for a family of four in 2017), the bill would eliminate the repayment limits for 2018 and 2019. This provision is similar to Section 201 of the 2015/2016 reconciliation bill.

Modifications to Obamacare Premium Subsidy:         Allows non-compliant and non-Exchange plans to qualify for Obamacare premium subsidies, with the exception of grandfathered health plans (i.e., those purchased prior to Obamacare’s enactment) and plans that cover abortions (although individuals receiving subsidies can purchase separate coverage for abortion). In a change from the leaked discussion draft, individuals with “grandmothered” plans—that is, those purchased after Obamacare’s enactment, but before the law’s major benefit mandates took effect in 2014—also cannot qualify for subsidies.

While individuals off the Exchanges can receive premium subsidies, they cannot receive these subsidies in advance—they would have to claim the subsidy back on their tax returns instead.

Modifies the existing Obamacare subsidy regime beginning in 2018, by including age as an additional factor for determining subsidy amounts. Younger individuals would have to spend a smaller percentage of income on health insurance than under current law, while older individuals would spend a higher percentage of income. For instance, an individual under age 29, making just under 400% FPL, would pay 4.3% of income on health insurance, whereas an individual between ages 60-64 at the same income level would pay 11.5% of income on health insurance. (Current law limits individuals to paying 9.69% of income on insurance, at all age brackets, for those with income just below 400% FPL.)

Some conservatives may be concerned that 1) these changes would make an already complex subsidy formula even more complicated; 2) could increase costs to taxpayers; and 3) distract from the purported goal of the legislation, which is repealing, not modifying or “fixing,” Obamacare.

Repeal of Tax Credits:         Repeals Obamacare’s premium and small business tax credits, effective January 1, 2020. This language is similar to Sections 202 and 203 of the 2015/2016 reconciliation bill, with one major difference—the House bill provides for a three-year transition period, whereas the reconciliation bill provided a two-year transition period.

Abortion Coverage:             Clarifies that firms receiving the small business tax credit may not use that credit to purchase plans that cover abortion (although they can purchase separate plans that cover abortion).

Individual and Employer Mandates:             Sets the individual and employer mandate penalties to zero, for all years after December 31, 2015. This language is similar to Sections 204 and 205 of the 2015/2016 reconciliation bill, except with respect to timing—the House bill zeroes out the penalties beginning with the previous tax year, whereas the reconciliation bill zeroed out penalties beginning with the current tax year.

Repeal of Other Obamacare Taxes:             Repeals all other Obamacare taxes, effective January 1, 2018, including:

  • Limitation on deductibility of salaries to insurance industry executives;
  • Tax on tanning services;
  • Tax on pharmaceuticals;
  • Health insurer tax;
  • Net investment tax;
  • Tax on high-cost health plans (also known as the “Cadillac tax”)—but only through 2025;
  • Restrictions on use of Health Savings Accounts and Flexible Spending Arrangements to pay for over-the-counter medications;
  • Increased penalties on non-health care uses of Health Savings Account dollars;
  • Limits on Flexible Spending Arrangement contributions;
  • Medical device tax;
  • Elimination of deduction for employers who receive a subsidy from Medicare for offering retiree prescription drug coverage;
  • Limitation on medical expenses as an itemized deduction;
  • Medicare tax on “high-income” individuals;

These provisions are all substantially similar to Sections 209 through 221 of the 2015/2016 reconciliation bill. However, when compared to the leaked discussion draft, the bill delays repeal of the tax increases by one year, until the end of calendar year 2017. Additionally, the bill does NOT repeal the economic substance tax, which WAS repealed in Section 222 of the 2015/2016 bill, as well as the leaked discussion draft.

Refundable Tax Credit:       Creates a new, age-rated refundable tax credit for the purchase of health insurance. Credits total $2,000 for individuals under age 30, $2,500 for individuals aged 30-39, $3,000 for individuals aged 40-49, $3,500 for individuals aged 50-59, and $4,000 for individuals over age 60, up to a maximum credit of $14,000 per household. The credit would apply for 2020 and subsequent years, and increase every year by general inflation (i.e., CPI) plus one percent. Excess credit amounts can be deposited in individuals’ Health Savings Accounts.

When compared to the leaked discussion draft, the bill would also impose a means-test on the refundable credits. Individuals with modified adjusted gross incomes below $75,000, and families with incomes below $150,000, would qualify for the full credit. The credit would phase out linearly, at a 10 percent rate—every $1,000 of income would cause the subsidy to shrink by $100. Assuming the maximum credit possible ($14,000), the credit would phase out completely at income of $215,000 for an individual, and $290,000 for a family.

The credit may be used for any individual policy sold within a state, or unsubsidized COBRA continuation coverage. The credit may also not be used for grandfathered or “grandmothered” health plans—a change from the leaked discussion draft. The bill also increases penalties on erroneous claims for the credit, from 20 percent under current law for all tax credits to 25 percent for the new credit—a change from the leaked discussion draft.

Individuals may not use the credit to purchase plans that cover abortions (although they can purchase separate plans that cover abortion). The credit would be advanceable (i.e., paid before individuals file their taxes), and the Treasury would establish a program to provide credit payments directly to health insurers.

Individuals eligible for or participating in employer coverage, Part A of Medicare, Medicaid, the State Children’s Health Insurance Program, Tricare, or health care sharing ministries cannot receive the credit; however, veterans eligible for but not enrolled in VA health programs can receive the credit. Only citizens and legal aliens qualify for the credit; individuals with seriously delinquent tax debt can have their credits withheld.

Some conservatives may be concerned that, by creating a new refundable tax credit, the bill would establish another source of entitlement spending at a time when our nation already faces significant fiscal difficulties.

Some conservatives may also note that, by introducing means-testing into the bill, the revised credit (when compared to the leaked discussion draft) by its very nature creates work disincentives and administrative complexities. However, whereas Obamacare includes several “cliffs”—where one additional dollar of income could result in the loss of thousands of dollars in subsidies—this credit phases out more gradually as income rises. That structure reduces the credit’s disincentives to work—but it by no means eliminates them.

Health Savings Accounts:  Increases contribution limits to HSAs, raising them from the current $3,400 for individuals and $6,750 for families in 2017 to the out-of-pocket maximum amounts (currently $6,550 for an individual and $13,100 for a family), effective January 2018. Allows both spouses to make catch-up contributions to the same Health Savings Account. Permits individuals who take up to 60 days to establish an HSA upon enrolling in HSA-eligible coverage to be reimbursed from their account for medical expenses.

Cap on Employer-Provided Health Coverage: Does NOT contain a proposed cap on the deductibility of employer-sponsored health insurance coverage included in the leaked discussion draft.

A PDF version of this document is available at the Texas Public Policy Foundation website.

Summary of House Republicans’ (Leaked) Discussion Draft

On Friday, Politico released a leaked version of draft budget reconciliation legislation circulating among House staff—a version of House Republicans’ Obamacare “repeal-and-replace” bill. The discussion draft is time-stamped on the afternoon of Friday February 10—and according to my sources has been changed in the two weeks since then—but represents a glimpse into where House leadership was headed going into the President’s Day recess.

A detailed summary of the bill is below, along with possible conservative concerns where applicable. Where provisions in the discussion draft were also included in the reconciliation bill passed by Congress early in 2016 (H.R. 3762, text available here), differences between the two versions, if any, are noted. In general, however, whereas the prior reconciliation bill sunset Obamacare’s entitlements after a two-year transition period, the discussion draft would sunset them at the end of calendar year 2019—nearly three years from now.

Of particular note: It is unclear whether this legislative language has been vetted with the Senate Parliamentarian. When the Senate considers budget reconciliation legislation—as it plans to do with the Obamacare “repeal-and-replace” bill—the Parliamentarian plays a key role in determining whether provisions are budgetary in nature and can be included in the bill (which can pass with a 51-vote simple majority), and which provisions are not budgetary in nature and must be considered separately (i.e., require 60 votes to pass).

In the absence of a fully drafted bill and complete CBO score, it is entirely possible the Parliamentarian has not vetted this discussion draft—which means provisions could change substantially, or even get stricken from the bill, due to procedural concerns as the process moves forward.

Title I—Energy and Commerce

Prevention and Public Health Fund:             Eliminates funding for the Obamacare prevention “slush fund,” and rescinds all unobligated balances. This language is substantially similar to Section 101 of the 2015/2016 reconciliation bill.

Community Health Centers:             Increases funding for community health centers by $285 million for Fiscal Year 2018—money intended to offset reductions in spending on Planned Parenthood affiliates (see “Federal Payments to States” below). A parenthetical note indicates intent to add Hyde amendment restrictions, to ensure this mandatory funding for health centers—which occurs outside their normal stream of funding through discretionary appropriations—retains prohibitions on federal funding of abortions. Language regarding community health centers was included in Section 102 of the 2015/2016 reconciliation bill.

Medicaid:       The discussion draft varies significantly from the repeal of Medicaid expansion included in Section 207 of the 2015/2016 reconciliation bill. The 2015/2016 reconciliation bill repealed both elements of the Medicaid expansion—the change in eligibility allowing able-bodied adults to join the program, and the enhanced (90-100%) federal match that states received for covering them.

By contrast, the House discussion draft retains eligibility for the able-bodied adult population—making this population optional for states to cover, rather than mandatory. (The Supreme Court’s 2012 ruling in NFIB v. Sebelius made Medicaid expansion optional for states.) Some conservatives may be concerned that this change represents a marked weakening of the 2015/2016 reconciliation bill language, one that will entrench a massive expansion of Medicaid beyond its original focus on the most vulnerable in society.

With respect to the Medicaid match rate, the discussion draft reduces the enhanced federal match to states, effective December 31, 2019. The bill provides that states receiving the enhanced match for individuals enrolled by December 31, 2019 will continue to receive that enhanced federal match, provided they do not have a break in Medicaid coverage of longer than one month. (In the case of states that already expanded Medicaid to able-bodied adults prior to Obamacare’s enactment, the bill provides for an 80 percent federal match for 2017 and all subsequent years.)

Some conservatives may be concerned that—rather than representing a true “freeze” that was advertised, one that would take effect immediately upon enactment—the language in this bill would give states a strong incentive to sign up many more individuals for Medicaid over the next three years, so they can qualify for the higher federal match as long as those individuals remain in the program.

Finally, the bill repeals the requirement that Medicaid “benchmark” plans comply with Obamacare’s essential health benefits, also effective December 31, 2019.

DSH Payments:         Repeals the reduction in Medicaid Disproportionate Share Hospital (DSH) payments. This language is identical to Section 208 of the 2015/2016 reconciliation bill.

Cost-Sharing Subsidies:      Repeals Obamacare’s cost-sharing subsidies, effective December 31, 2019 (the year is noted in brackets, however, suggesting it may change). However, the bill does not include an appropriation for cost-sharing subsidies for 2017, 2018, or 2019. The House of Representatives filed suit against the Obama Administration (House v. Burwell) alleging the Administration acted unconstitutionally in spending funds on the cost-sharing subsidies without an explicit appropriation from Congress. The case is currently on hold pending settlement discussions between the Trump Administration and the House. Similar language regarding cost-sharing subsidies was included in Section 202(b) of the 2015/2016 reconciliation bill.

On a related note, the House’s draft bill does NOT include provisions regarding reinsurance, risk corridors, and risk adjustment, all of which were repealed by Section 104 of the 2015/2016 reconciliation bill. While the reinsurance and risk corridor programs technically expired on December 31, 2016, insurers have outstanding claims regarding both programs. Some conservatives may be concerned that failing to repeal these provisions could represent an attempt to bail out health insurance companies.

Medicaid Per Capita Caps:              Creates a system of per capita spending caps for federal spending on Medicaid, beginning in Fiscal Year 2019. States that exceed their caps would have their federal match reduced in the following fiscal year.

The cap would include all spending on medical care provided through the Medicaid program, with the exception of DSH payments and Medicare cost-sharing paid for dual eligibles (individuals eligible for both Medicaid and Medicare). The cap would rise by medical CPI plus one percentage point annually.

While the cap would take effect in Fiscal Year 2019, the “base year” for determining cap levels would be Fiscal Year 2016 (which concluded on September 30, 2016), adjusted forward to 2019 levels using medical CPI plus one percentage point.

Creates five classes of beneficiaries for whom the caps would apply: 1) elderly individuals over age 65; 2) blind and disabled beneficiaries; 3) children under age 19; 4) expansion enrollees (i.e., able-bodied adults enrolled under Obamacare); and 5) all other non-disabled, non-elderly, non-expansion adults (e.g., pregnant women, parents, etc.). Excludes State Children’s Health Insurance Plan enrollees, Indian Health Service participants, breast and cervical cancer services eligible individuals, and certain other partial benefit enrollees from the per capita caps.

Requires the Department of Health and Human Services (HHS) to reduce states’ annual growth rate by one percent for any year in which that state “fails to satisfactorily submit data” regarding its Medicaid program. Permits HHS to adjust cap amounts to reflect data errors, based on an appeal by the state, increasing cap levels by no more than two percent.

For the period including calendar quarters beginning on October 1, 2017 through October 1, 2019, increases the federal Medicaid match for certain state expenditures to improve data recording, including a 100 percent match in some instances.

Some conservatives may note the bill’s creation of a separate category of Obamacare expansion enrollees, and its use of 2016 as the “base year” for the per capita caps, benefit states who expanded Medicaid to able-bodied adults under Obamacare. The most recent actuarial report on Medicaid noted that, while the actuary originally predicted that adults in the expansion population would cost less than existing populations, in reality each newly eligible enrollee cost 13.6% more than existing populations in 2016. Many states have used the 100% federal match for their expansion populations—i.e., “free money from Washington”—to raise provider reimbursement levels.

Some conservatives may therefore be concerned that the draft bill would retain the increased spending on adults in expansion states—extending in perpetuity the inequities caused by states that have used Obamacare’s “free money” to raise Medicaid spending while sending Washington the tab.

Federal Payments to States:             Imposes a one-year ban on federal funds flowing to certain entities. This provision would have the effect of preventing Medicaid funding of certain medical providers, including Planned Parenthood, so long as Planned Parenthood provides for abortions (except in cases of rape, incest, or to save the life of the mother). This language is virtually identical to Section 206 of the 2015/2016 reconciliation bill.

State Innovation Grants:    Creates a new program of State Innovation Grants, to be administered by the Centers for Medicare and Medicaid Services, for the years 2018 through 2026. Grants may be used to cover individuals with pre-existing conditions (whether through high-risk pools or another arrangement), stabilizing or reducing premiums, encouraging insurer participation, promoting access, directly paying providers, or subsidizing cost-sharing (i.e., co-payments, deductibles, etc.). A similar program was first proposed by House Republicans in their alternative to Obamacare in 2009.

Provides for $15 billion in funding for each of calendar years 2018 and 2019, followed by $10 billion for each of calendar years 2020 through 2026 ($100 billion total). Requires a short, one-time application from states describing their goals and objectives for use of the funding, which will be deemed approved within 60 days absent good cause.

For 2018 and 2019, funding would be provided to states on the basis of relative costs, determined by the number of Exchange enrollees and the extent to which individual insurance premiums in the state exceed the national average. Every state would receive at least 0.5% of the national total (at least $75 million in 2018 and 2019).

For 2020 through 2026, CMS would be charged with determining a formula that takes into account the percentage of low-income residents in the state (the bill text includes in brackets three possible definitions of “low-income”—138%, 250%, or 300% of the federal poverty level) and the number of residents without health insurance.

Requires that states provide a match for their grants in 2020 through 2026—7 percent of their grant in 2020, 14 percent in 2021, 21 percent in 2022, 28 percent in 2023, 35 percent in 2024, 42 percent in 2025, and 50 percent in 2026.

Continuous Coverage:         Requires insurers, beginning after the 2018 open enrollment period (i.e., open enrollment for 2019, or special enrollment periods during the 2018 plan year), to increase premiums for individuals without continuous health insurance coverage. The premium could increase by 30 percent for individuals who have a coverage gap of more than 63 days during the previous 12 months. Insurers could maintain the 30 percent premium increase for a 12 month period. Requires individuals to show proof of continuous coverage, and requires insurers to provide said proof in the form of certificates. Some conservatives may be concerned that this provision maintains the federal intrusion over insurance markets exacerbated by Obamacare, rather than devolving insurance regulation back to the states.

Essential Health Benefits:              Permits states to develop essential health benefits for insurance for all years after December 31, 2019.

Age Rating:   Changes the maximum variation in insurance markets from 3-to-1 (i.e., insurers can charge older applicants no more than three times younger applicants) to 5-to-1 effective January 1, 2018, with the option for states to provide for other age rating requirements. Some conservatives may be concerned that, despite the ability for states to opt out, this provision, by setting a default federal standard, maintains the intrusion over insurance markets exacerbated by Obamacare.

Special Enrollment Verification:               Requires verification of all special enrollment periods beginning for plan years after January 1, 2018. This provision would effectively codify proposed regulations issued by the Department of Health and Human Services earlier this month. Some conservatives may be concerned about the continued federal intrusion over what had heretofore been a matter left to state regulation, and question the need to verify enrollment in Exchanges, given that the underlying legislation was intended to repeal Obamacare—and thus the Exchanges—entirely.

Transitional Policies:          Permits insurers who continued to offer pre-Obamacare health coverage under President Obama’s temporary “If you like your plan, you can keep it” fix to continue to offer those policies in perpetuity in the individual and small group markets outside the Exchanges.

Title II—Ways and Means

Subsidy Recapture:              Eliminates the repayment limit on Obamacare premium subsidies for the 2018 and 2019 plan years. Obamacare’s premium subsidies (which vary based upon income levels) are based on estimated income, which must be reconciled at year’s end during the tax filing season. Households with a major change in income or family status during the year (e.g., raise, promotion, divorce, birth, death) could qualify for significantly greater or smaller subsidies than the estimated subsidies they receive. While current law caps repayment amounts for households with incomes under 400 percent of the federal poverty level (FPL, $98,400 for a family of four in 2017), the bill would eliminate the repayment limits for 2018 and 2019. This provision is similar to Section 201 of the 2015/2016 reconciliation bill.

Modifications to Obamacare Premium Subsidy:         Allows non-compliant and non-Exchange plans to qualify for Obamacare premium subsidies, with the exception of grandfathered health plans (i.e., those purchased prior to Obamacare’s enactment) and plans that cover abortions (although individuals receiving subsidies can purchase separate coverage for abortion). While individuals off the Exchanges can receive premium subsidies, they cannot receive these subsidies in advance—they would have to claim the subsidy back on their tax returns instead. Only citizens and legal aliens could receive subsidies.

Modifies the existing Obamacare subsidy regime beginning in 2018, by including age as an additional factor for determining subsidy amounts. Younger individuals would have to spend a smaller percentage of income on health insurance than under current law, while older individuals would spend a higher percentage of income. For instance, an individual under age 29, making just under 400% FPL, would pay 4.3% of income on health insurance, whereas an individual between ages 60-64 at the same income level would pay 11.5% of income on health insurance. (Current law limits individuals to paying 9.69% of income on insurance, at all age brackets, for those with income just below 400% FPL.)

Some conservatives may be concerned that 1) these changes would make an already complex subsidy formula even more complicated; 2) could increase costs to taxpayers; and 3) distract from the purported goal of the legislation, which is repealing, not modifying or “fixing,” Obamacare.

Repeal of Tax Credits:         Repeals Obamacare’s premium and small business tax credits, effective January 1, 2020. This language is similar to Sections 202 and 203 of the 2015/2016 reconciliation bill, with one major difference—the House discussion draft provides for a three-year transition period, whereas the reconciliation bill provided a two-year transition period.

Individual and Employer Mandates:             Sets the individual and employer mandate penalties to zero, for all years after December 31, 2015. This language is similar to Sections 204 and 205 of the 2015/2016 reconciliation bill, except with respect to timing—the House discussion draft zeroes out the penalties beginning with the previous tax year, whereas the reconciliation bill zeroed out penalties beginning with the current tax year.

Repeal of Other Obamacare Taxes:             Repeals all other Obamacare taxes, effective January 1, 2017, including:

  • Tax on high-cost health plans (also known as the “Cadillac tax”);
  • Restrictions on use of Health Savings Accounts and Flexible Spending Arrangements to pay for over-the-counter medications;
  • Increased penalties on non-health care uses of Health Savings Account dollars;
  • Limits on Flexible Spending Arrangement contributions;
  • Tax on pharmaceuticals;
  • Medical device tax;
  • Health insurer tax;
  • Elimination of deduction for employers who receive a subsidy from Medicare for offering retiree prescription drug coverage;
  • Limitation on medical expenses as an itemized deduction;
  • Medicare tax on “high-income” individuals;
  • Tax on tanning services;
  • Net investment tax;
  • Limitation on deductibility of salaries to insurance industry executives; and
  • Economic substance doctrine.

These provisions are all substantially similar to Sections 209 through 222 of the 2015/2016 reconciliation bill.

Refundable Tax Credit:       Creates a new, age-rated refundable tax credit for the purchase of health insurance. Credits total $2,000 for individuals under age 30, $2,500 for individuals aged 30-39, $3,000 for individuals aged 40-49, $3,500 for individuals aged 50-59, and $4,000 for individuals over age 60, up to a maximum credit of $14,000 per household. The credit would apply for 2020 and subsequent years, and increase every year by general inflation (i.e., CPI) plus one percent. Excess credit amounts can be deposited in individuals’ Health Savings Accounts.

The credit may be used for any individual policy sold within a state (although apparently not a policy purchased across state lines) or unsubsidized COBRA continuation coverage.

Individuals may not use the credit to purchase plans that cover abortions (although they can purchase separate plans that cover abortion). The credit would be advanceable (i.e., paid before individuals file their taxes), and the Treasury would establish a program to provide credit payments directly to health insurers.

Individuals eligible for or participating in employer coverage, Part A of Medicare, Medicaid, the State Children’s Health Insurance Program, Tricare, or health care sharing ministries cannot receive the credit; however, veterans eligible for but not enrolled in VA health programs can receive the credit. Only citizens and legal aliens qualify for the credit; individuals with seriously delinquent tax debt can have their credits withheld.

Some conservatives may be concerned that, by creating a new refundable tax credit, the bill would establish another source of entitlement spending at a time when our nation already faces significant fiscal difficulties.

Cap on Employer-Provided Health Coverage:                    Establishes a cap on the current exclusion for employer-provided health coverage, making any amounts received above the cap taxable to the employee. Sets the cap, which includes both employer and employee contributions, at the 90th percentile of group (i.e., employer) plans for 2019. In 2020 and subsequent years, indexes the cap to general inflation (i.e., CPI) plus two percentage points. Also applies the cap on coverage to include self-employed individuals taking an above-the-line deduction on their tax returns. While the level of the cap would be set in the year 2019, the cap itself would take effect in 2020 and subsequent tax years.

Excludes contributions to Health Savings Accounts and Archer Medical Savings Accounts, as well as long-term care, dental, and vision insurance policies, from the cap. Exempts health insurance benefits for law enforcement, fire department, and out-of-hospital emergency medical personnel from the cap.

Some conservatives may be concerned that this provision raises taxes. Economists on all sides of the political spectrum generally agree that an unlimited exclusion for employer-provided health insurance encourages over-consumption of health insurance, and therefore health care. However, there are other ways to reform the tax treatment of health insurance without raising taxes on net. Given the ready availability of other options, some conservatives may be concerned that the bill repeals all the Obamacare tax increases, only to replace them with other tax hikes.

Health Savings Accounts:  Increases contribution limits to HSAs, raising them from the current $3,400 for individuals and $6,750 for families in 2017 to the out-of-pocket maximum amounts (currently $6,550 for an individual and $13,100 for a family), effective January 2018. Allows both spouses to make catch-up contributions to the same Health Savings Account. Permits individuals who take up to 60 days to establish an HSA upon enrolling in HSA-eligible coverage to be reimbursed from their account for medical expenses.

Abortion Coverage:             Clarifies that firms receiving the small business tax credit may not use that credit to purchase plans that cover abortion (although they can purchase separate plans that cover abortion).

The President’s Shrinking Entitlement Savings

The President’s deficit proposal released this morning claims to achieve $320 billion in deficit savings.  As we’ve previously noted, given the size of our entitlement programs, that’s a comparatively insignificant amount – barely enough to finance a long-term “doc fix,” let alone make Medicare and Medicaid solvent for the long term.  But what’s interesting is how the size of the health care savings put forward by the President has actually SHRUNK over time.  The White House’s April “deficit framework” (i.e., a speech) claimed to achieve $340 billion in savings – $20 billion MORE than this morning’s proposal.

So what exactly prompted the President to LOWER his sights for entitlement savings over the last five months?  Was it the unprecedented downgrade of America’s debt rating?  The stock market swoon that quickly followed?  The chaos in Europe as that continent struggles to achieve fiscal discipline and avert a sovereign default crisis?  Or was it the event that happens on the Tuesday after the first Monday in November every fourth year?  You be the judge…

All that said, a detailed summary of the President’s (new) proposal follows below.  Keep in mind that Administration/OMB estimates may vary significantly from CBO scores, so remember that your budgetary mileage may vary.  (All scores are over a ten-year period unless otherwise indicated.)
 

Medicare Proposals (Total savings of $248 Billion)

Bad Debts:  Reduces bad debt payments to providers – for unpaid cost-sharing owed by beneficiaries – from 70 percent down to 25 percent over three years, beginning in 2013.  The Fiscal Commission had made similar recommendations in its final report.  Saves $20.2 billion.

Medical Education Payments:  Reduces the Indirect Medical Education adjustment paid to teaching hospitals by 10 percent beginning in 2013, saving $9.1 billion.  Previous studies by the Medicare Payment Advisory Committee (MedPAC) have indicated that IME payments to teaching hospitals may be greater than the actual costs the hospitals incur.

Rural Payments:  Ends add-on payments for providers in frontier states, saving $2.1 billion.  Reduces critical access hospital payments from 101% of costs to 100% of costs, saving $1 billion, and prohibits hospitals fewer than 10 miles away from the nearest hospital from receiving a critical access hospital designation, saving $3 billion.

Post-Acute Care:  Reduces various acute-care payment updates (details not specified) during the years 2014 through 2021, saving $32.5 billion.  Equalizes payment rates between skilled nursing facilities and inpatient rehabilitation facilities, saving $4.5 billion.  Increases the minimum percentage of inpatient rehabilitation facility patients that require intensive rehabilitation from 60 percent to 75 percent, saving $2.6 billion.  Reduces skilled nursing facility payments by up to 3%, beginning in 2015, for preventable readmissions, saving $2 billion.

Pharmaceutical Price Controls:  Expands Medicaid price controls to dual eligible and low-income subsidy beneficiaries participating in Part D, saving $135 billion according to OMB.  However, according to the Congressional Budget Office’s March 2011 Budget Options (Option 25), this proposal would generate smaller savings ($112 billion).  Some have expressed concerns that further expanding government-imposed price controls to prescription drugs could harm innovation and the release of new therapies that could help cure diseases.

MA Repayment Provisions:  Recovers payments to insurers participating in the Medicare Advantage (MA) program.  MA plans are currently paid on a prospective basis, with those payments adjusted according to the severity of beneficiaries’ ill health.  Some sample audits have discovered instances where plans could not retrospectively produce the necessary documentation to warrant the prospective coding adjustment that some beneficiaries received.  The deficit plan would apply this adjustment, currently contemplated for some beneficiaries based on the sample audit, to ALL beneficiaries.  OMB now scores this proposal as saving $2.3 billion; when included in the President’s budget back in February, these changes were scored as saving $6.2 billion.

Anti-Fraud Provisions:  Assumes $600 million in savings from various anti-fraud provisions, including limiting the discharge of debt in bankruptcy proceedings associated with fraudulent activities.

EHR Penalties:  Re-directs Medicare reimbursement penalties against physicians who do not engage in electronic prescribing beginning in 2020 back into the Medicare program.  The “stimulus” legislation that enacted the health IT provisions had originally required that penalties to providers be placed into the Medicare Improvement Fund; the budget would instead re-direct those revenues into the general fund, to finance the “doc fix” and related provisions.  OMB now scores this proposal as saving $500 million; when included in the President’s budget back in February, these changes were scored as saving $3.2 billion.

Imaging:  Reduces imaging payments by assuming a higher level of utilization for certain types of equipment, saving $400 million.  Also imposes prior authorization requirements for advanced imaging, saving $900 million.

Additional Means Testing:  Increases means tested premiums under Parts B and D by 15%, beginning in 2017.  Freezes the income thresholds at which means testing applies until 25 percent of beneficiaries are subject to such premiums.  Saves $20 billion over ten years, and presumably more thereafter, as additional seniors would hit the means testing threshold, subject them to higher premiums.

Medicare Deductible Increase:  Increases Medicare Part B deductible by $25 in 2017, 2019, and 2021 – but for new beneficiaries only; “current beneficiaries or near retirees [not defined] would not be subject to the revised deductible.”  Saves $1 billion.

Home Health Co-Payment:  Introduces a home health co-payment of $100 per episode for new beneficiaries only, in cases where an episode lasts five or more visits and is NOT proceeded by a hospital stay.  MedPAC has previously recommended introducing home health co-payments as a way to ensure appropriate utilization.  Saves $400 million.

Medigap Surcharge:  Imposes a Part B premium surcharge equal to about 15 percent of the average Medigap premium – or about 30 percent of the Part B premium – for seniors with Medigap supplemental insurance that provides first dollar coverage.  Applies beginning in 2017 to new beneficiaries only.  A study commissioned by MedPAC previously concluded that first dollar Medigap coverage induces beneficiaries to consume more medical services, thus increasing costs for the Medicare program and federal taxpayers.  Saves $2.5 billion.

Lower Caps on Medicare Spending:  Section 3403 of the health care law established an Independent Payment Advisory Board tasked with limiting Medicare spending to the growth of the economy plus one percentage point (GDP+1) in 2018 and succeeding years.  The White House proposal would reduce this target to GDP+0.5 percent.  This approach has two potential problems:

  • First, under the Congressional Budget Office’s most recent baseline, IPAB recommendations would not be triggered at all – so it’s unclear whether the new, lower target level would actually generate measurable budgetary savings.  (In August 2010, CBO concluded an IPAB with an overall cap of GDP+1 would yield $13.8 billion in savings through 2020 – not enough to make a measurable impact on a program spending $500 billion per year.)
  • Second, the Medicare actuary has previously written that the spending adjustments contemplated by IPAB and the health care law “are unlikely to be sustainable on a permanent annual basis” and “very challenging” – problems that would be exacerbated by utilizing a slower target rate for Medicare spending growth.

According to the Administration document, this proposal would NOT achieve additional deficit savings.

Medicaid and Other Health Proposals (Total savings of $72 Billion)

Medicaid Provider Taxes:  Reduces limits on Medicaid provider tax thresholds, beginning in 2015; the tax threshold would be reduced over a three year period, to 3.5 percent in 2017 and future years.  State provider taxes are a financing method whereby states impose taxes on medical providers, and use these provider tax revenues to obtain additional federal Medicaid matching funds, thereby increasing the federal share of Medicaid expenses paid while decreasing the state share of expenses.  The Tax Relief and Health Care Act of 2006, enacted by a Republican Congress, capped the level of Medicaid provider taxes, and the Bush Administration proposed additional rules to reform Medicaid funding rules – rules that were blocked by the Democrat-run 110th Congress.  However, there is bipartisan support for addressing ways in which states attempt to “game” the Medicaid system, through provider taxes and other related methods, to obtain unwarranted federal matching funds – the liberal Center for Budget and Policy Priorities previously wrote about a series of “Rube Goldberg-like accounting arrangements” that “do not improve the quality of health care provided” and “frequently operate in a manner that siphons extra federal money to state coffers without affecting the provision of health care.”  This issue was also addressed in the fiscal commission’s report, although the commission exceeded the budget proposals by suggesting that Congress enact legislation “restricting and eventually eliminating” provider taxes, saving $44 billion.  OMB now scores this proposal as saving $26.3 billion; when included in the President’s budget back in February, these changes were scored as saving $18.4 billion.

Blended Rate:  Proposes “replac[ing]…complicated federal matching formulas” in Medicaid “with a single matching rate specific to each state that automatically increases if a recession forces enrollment and state costs to rise.”  Details are unclear, but the Administration claims $14.9 billion in savings from this proposal – much less than the $100 billion figure bandied about in previous reports this summer.  It is also worth noting that the proposal could actually INCREASE the deficit, if a prolonged recession triggers the automatic increases in the federal Medicaid match referenced in the proposal.  On a related note, the deficit plan once again ignored the governors’ multiple requests for flexibility from the mandates included in the health care law – unfunded mandates on states totaling at least $118 billion.

Limit Durable Medical Equipment Reimbursement:  Caps Medicaid reimbursements for durable medical equipment (DME) at Medicare rates, beginning in 2013.  The health care law extended and expanded a previous Medicare competitive bidding demonstration project included in the Medicare Modernization Act, resulting in savings to the Medicare program.  This proposal, by capping Medicaid reimbursements for DME at Medicare levels, would attempt to extend those savings to the Medicaid program.  OMB now scores this proposal as saving $4.2 billion; when included in the President’s budget back in February, these changes were scored as saving $6.4 billion.

Third Party Liability:  Removes exceptions to the requirement that Medicaid must reject payments when another party is liable for a medical claim, saving $1.3 billion.

Rebase Medicaid Disproportionate Share Hospital Payments:  In 2021, reallocates Medicaid DSH payments to hospitals treating low-income patients, based on states’ actual 2020 allotments (as amended and reduced by the health care law).  Saves $4.1 billion.

Medicaid Anti-Fraud Savings:  Assumes $110 million in savings from a variety of Medicaid anti-fraud provisions, largely through tracking and enforcement of various provisions related to pharmaceuticals.

Amend MAGI Definition:  Amends the health care law to include Social Security benefits in the new definition of Modified Adjusted Gross Income used to determine eligibility for Medicaid benefits.  As previously reported, this “glitch” in the law would make millions of early retirees – who receive a large portion of their income from Social Security – eligible for free taxpayer-funded benefits, and would discourage work by providing greater subsidies to those relying on Social Security, as opposed to wage earnings, for their income.  Saves $14.6 billion.

Flexibility on Benchmark Plans:  Proposes some new flexibility for states to require Medicaid “benchmark” plan coverage for non-elderly, non-disabled adults – but ONLY those with incomes above 133 percent of the federal poverty level (i.e., NOT the new Medicaid population obtaining coverage under the health care law).  No savings assumed.

“Pay-for-Delay:”  Prohibits brand-name pharmaceutical manufacturers from entering into arrangements that would delay the availability of new generic drugs.  Some Members have previously expressed concerns that these provisions would harm innovation, and actually impede the incentives to generic manufacturers to bring cost-saving generic drugs on the market.  OMB now scores this proposal as saving $2.7 billion; when included in the President’s budget back in February, these changes were scored as saving $8.8 billion.

Follow-on Biologics:  Reduces to seven years the period of exclusivity for follow-on biologics.  Current law provides for a twelve-year period of exclusivity, based upon an amendment to the health care law that was adopted on a bipartisan basis in both the House and Senate (one of the few substantive bipartisan amendments adopted).  Some Members have expressed concern that reducing the period of exclusivity would harm innovation and discourage companies from developing life-saving treatments.  OMB now scores this proposal as saving $3.5 billion; when included in the President’s budget back in February, these changes were scored as saving $2.3 billion.

FEHB Contracting:  Proposes streamlining pharmacy benefit contracting within the Federal Employee Health Benefits program, by centralizing pharmaceutical benefit contracting within the Office of Personnel Management (OPM).  Some individuals, noting that OPM is also empowered to create “multi-state plans” as part of the health care overhaul, may be concerned that these provisions could be part of a larger plan to make OPM the head of a de facto government-run health plan.  OMB now scores this proposal as saving $1.6 billion; when included in the President’s budget back in February, these changes were scored as saving $1.8 billion.

Prevention “Slush Fund:”  Reduces spending by $3.5 billion on the Prevention and Public Health Fund created in the health care law.  Some Members have previously expressed concern that this fund would be used to fund projects like jungle gyms and bike paths, questionable priorities for the use of federal taxpayer dollars in a time of trillion-dollar deficits.

State Waivers:  Accelerates from 2017 to 2014 the date under which states can submit request for waivers of SOME of the health care law’s requirements to HHS.  While supposedly designed to increase flexibility, even liberal commentators have agreed that under the law’s state waiver programcritics of Obama’s proposal have a point: It wouldn’t allow to enact the sorts of health care reforms they would prefer” and thatconservatives can’t do any better – at least not under these rules.”  The proposal states that “the Administration is committed to the budget neutrality of these waivers;” however, the plan allocates $4 billion in new spending “to account for the possibility that CBO will estimate costs for this proposal.”

Implementation “Slush Fund:”  Proposes $400 million in new spending for HHS to implement the proposals listed above.

Updated Summary of President’s Budget Proposals

Below is a summary of the changes included in the President’s budget proposal, including the Administration’s justifications for reductions and terminations, the HHS Budget in Brief, and the Treasury’s Green Book proposals.  As previously indicated, the budget includes $62 billion in mandatory health care savings that would pay for approximately two years of a Medicare “doc fix.”  (However, the budget does NOT specify offsets for the $315.4 billion cost of a “doc fix” beyond 2013.) The $62 billion in savings comes from a “grab bag” of relatively minor tweaks to entitlement spending – the largest of which are $18.4 billion in savings from a reduction in Medicaid provider taxes and $12.9 billion in savings from the pharmaceutical industry, including a shorter exclusivity period for follow-on biologics and provisions to end so-called “pay-for-delay” arrangements.

I’ve also included discretionary request amounts for major HHS divisions below.  These numbers reflect the budget authority proposals included in the HHS Budget in Brief document.  (Some of these numbers are slightly different from the OMB budget document, but it’s not fully clear why – and unfortunately HHS staff weren’t particularly enlightening on this technical detail during their budget briefing.)  Of particular note is the more than $1 billion, 30% increase in the Centers for Medicare and Medicaid Services discretionary program management account – which likely reflects money needed to implement the health care law.  (Remember when Democrats attempted to refute the CBO letter indicating the law would lead to $115 billion in discretionary appropriations?  This 30% increase is a down payment on that $115 billion total…)  Since it’s drawn some attention, I’ll also point out that the Administration proposed eliminating the Graduate Medical Education program for children’s hospitals, which is a discretionary $318 million program run through HRSA. (For more details, see page 16 of the terminations document.)

I didn’t include it in the below summary, but page 97 of the Treasury Green Book “would repeal the additional [1099] information reporting requirements imposed by” the health care law.  However, the Treasury document scores this proposal as costing only $9.2 billion over ten years – far less than the $19 billion cost the Joint Committee on Taxation has previously assigned to 1099 repeal – so it’s unclear whether this discrepancy is a result of the differences in OMB and JCT scoring models, or whether there’s some other explanation.

A final note: Please keep in mind that these proposals were scored by the Office of Management and Budget, not CBO; the specific details on the scoring may change slightly when CBO issues its re-estimate of the budget in a few weeks.  (All numbers below represent 10-year totals, except for the section on discretionary appropriations.)

 

Mandatory Spending

Medicare “Doc Fix”:  Freezes Medicare physician payments under the sustainable growth rate (SGR) mechanism, preventing a scheduled cut of more than 25 percent scheduled to take effect in January 2012.  Total cost of the provision is $369.8 billion over ten years – $54.4 billion in 2012 and 2013, and $315.4 billion in 2014 and succeeding years.  While the cost of the two-year fix is paid for, the $315.4 billion extension beyond 2014 is not – the budget summary tables include a line marked “offsets,” but none are specified in the document.  (Details of the $62.2 billion in pay-fors that would fund a two year fix are listed below.)  Note also that this year’s proposal calls for a ten-year freeze on physician payments; last year’s budget document assumed a 1 percent per year increase, likely explaining its higher cost ($371 billion last year vs. $369.8 billion this year).

Tricare for Life:  Assumes $530 million in new Medicare spending associated with a proposal to shift Uniformed Services Family Health Plan enrollees into Tricare for Life and Medicare.

Transitional Medical Assistance/QI Program:  Provides for temporary, nine-month extensions of the Transitional Medical Assistance program, which provides Medicaid benefits for low-income families transitioning from welfare to work, along with the Qualifying Individual program, which provides assistance to low-income seniors in paying Medicare premiums.  The extensions cost $665 million and $495 million, respectively.

Liability Reform:  The Justice Department portion of the budget calls for $250 million in new mandatory spending – $100 million in fiscal year 2012, followed by $50 million in 2013 through 2015, to “provide incentives for state medical malpractice reform.”  Specific details are unclear, but an article on this issue can be found here.

Discretionary Spending

When compared to Fiscal Year 2010 appropriated amounts, the budget calls for the following changes in discretionary spending by major HHS divisions (tabulated by budget authority):

  • $380 million (13.8%) increase for the Food and Drug Administration;
  • $684 million (9.1%) decrease for the Health Services and Resources Administration;
  • $572 million (14.1%) increase for the Indian Health Service;
  • $580 million (9.0%) decrease for the Centers for Disease Control;
  • $745 million (2.4%) increase for the National Institutes of Health;
  • $1.029 billion (30.6%) increase for the Centers for Medicare and Medicaid Services program management account; and
  • $270 million (86.8%) increase for the discretionary Health Care Fraud and Abuse Control fund.

With regard to the above numbers for CDC and HRSA, note that these are discretionary numbers only.  The Administration’s budget also would allocate $1 billion in mandatory spending from the new Prevention and Public Health “slush fund” created in the health care law, likely eliminating any real budgetary savings (despite the appearance of same in the table referred to above).

Detail to Fund Two Year “Doc Fix” (Total savings of $62.2 billion)

Program Integrity Provisions (Total savings of $32.3 billion)

Medicaid Provider Taxes:  Reduces limits on Medicaid provider tax thresholds, beginning in 2015; the tax threshold would be reduced over a three year period, to 3.5 percent in 2017 and future years.  State provider taxes are a financing method whereby states impose taxes on medical providers, and use these provider tax revenues to obtain additional federal Medicaid matching funds, thereby increasing the federal share of Medicaid expenses paid while decreasing the state share of expenses.  The Tax Relief and Health Care Act of 2006, enacted by a Republican Congress, capped the level of Medicaid provider taxes, and the Bush Administration proposed additional rules to reform Medicaid funding rules – rules that were blocked by the Democrat-run 110th Congress.  However, there is bipartisan support for addressing ways in which states attempt to “game” the Medicaid system, through provider taxes and other related methods, to obtain unwarranted federal matching funds – the liberal Center for Budget and Policy Priorities previously wrote about a series of “Rube Goldberg-like accounting arrangements” that “do not improve the quality of health care provided” and “frequently operate in a manner that siphons extra federal money to state coffers without affecting the provision of health care.”  This issue was also addressed in the fiscal commission’s report, although the commission exceeded the budget proposals by suggesting that Congress enact legislation “restricting and eventually eliminating” provider taxes, saving $44 billion.  As proposed in the budget, the above provisions would save $18.4 billion.

Medicaid Third-Party Liability:  Strengthens third-party liability provisions allowing Medicaid to recover costs from other insurers, saving $1.6 billion.

High-Risk Products:  Requires states to track high prescribers and utilizers of prescription drugs within Medicaid, saving $3.5 billion. Also creates a system to validate orders for high-risk products and services (e.g., imaging services, DME, home health, etc.), saving an additional $1.8 billion.

MA Repayment Provisions:  Recovers payments to insurers participating in the Medicare Advantage (MA) program.  MA plans are currently paid on a prospective basis, with those payments adjusted according to the severity of beneficiaries’ ill health.  Some sample audits have discovered instances where plans could not retrospectively produce the necessary documentation to warrant the prospective coding adjustment that some beneficiaries received.  The budget would apply this adjustment, currently contemplated for some beneficiaries based on the sample audit, to ALL beneficiaries.  The budget scores this proposal as saving $6.2 billion.

Other Provisions:  Also included in the program integrity section are proposals that would:

  • Require manufacturers to repay states in cases of improper reporting (savings of $125 million);
  • Allow civil monetary penalties for providers who do not update enrollment information (savings of $80 million);
  • Permit the exclusion of officials affiliated with sanctioned entities from participating in health care programs (savings of $50 million);
  • Require prepayment review for all power wheelchairs (savings of $240 million);
  • Use up to 25 percent of Recovery Audit Contractor recoveries to implement anti-fraud actions (savings of $230 million);
  • Provide flexibility to HHS/CMS in using predictive modeling to recover improper and/or fraudulent payments (savings of $100 million); and
  • Limit debt discharges in bankruptcy proceedings associated with fraudulent activity (savings of $150 million).

Provisions without Scoreable Savings:  Included on this list are proposals to:

  • Enforce Medicaid drug price rebate agreements;
  • Increase penalties on drug manufacturers for fraudulent non-compliance with Medicaid drug price rebate agreements;
  • Require drugs to be listed with the FDA in order to be reimbursed under the Medicaid program
  • Prohibit federal funds from being used as a state’s share of Medicaid/SCHIP spending unless specifically authorized;
  • Increase scrutiny of providers receiving Medicare reimbursement through higher-risk banking arrangements;
  • Study the feasibility of using universal product numbers in Medicare to improve payment accuracy; and
  • Strengthen penalties for illegal distribution of Medicare, Medicaid, and SCHIP identity and billing information

Medicaid Provisions (Total savings of $10.6 billion)

Limit Durable Medical Equipment Reimbursement:  Caps Medicaid reimbursements for durable medical equipment (DME) at Medicare rates.  The health care law extended and expanded a previous Medicare competitive bidding demonstration project included in the Medicare Modernization Act, resulting in savings to the Medicare program.  This proposal, by capping Medicaid reimbursements for DME at Medicare levels, would attempt to extend those savings to the Medicaid program.  Saves $6.4 billion.

Rebase Medicaid Disproportionate Share Hospital Payments:  In 2021, reallocates Medicaid DSH payments to hospitals treating low-income patients, based on states’ actual 2020 allotments (as amended and reduced by the health care law).  Saves $4.2 billion.

Medicare Provisions (Total savings of $6.5 billion)

Quality Improvement Organizations:  Includes several provisions regarding the Quality Improvement Organization (QIO) program within Medicare.  Proposals would require QIO contracts to be determined on a geographic basis to maximize efficiency (savings of $2.2 billion), eliminate conflicts of interest between QIOs’ activities on beneficiary protection and quality improvement (savings of $710 million), expand the eligible pool of QIO contractors (savings of $170 million), extend QIO contract from three to five years (savings of $160 million), and align QIO contract terminations with federal regulations (no savings scored).  Provisions would save $3.1 billion total.

Health IT Penalties:  Re-directs Medicare reimbursement penalties against physicians who do not engage in electronic prescribing beginning in 2020 back into the Medicare program.  The “stimulus” legislation that enacted the health IT provisions had originally required that penalties to providers be placed into the Medicare Improvement Fund; the budget would instead re-direct those revenues into the general fund, to finance the “doc fix” and related provisions.  Estimated savings of $3.2 billion.

Pharmaceutical Provisions (Total savings of $12.9 billion)

Follow-on Biologics:  Reduces to seven years the period of exclusivity for follow-on biologics.  Current law provides for a twelve-year period of exclusivity, based upon an amendment to the health care law that was adopted on a bipartisan basis in both the House and Senate (one of the few substantive bipartisan amendments adopted).  Some Members have expressed concern that reducing the period of exclusivity would harm innovation and discourage companies from developing life-saving treatments.  Saves $2.3 billion over ten years.

“Pay-for-Delay:”  Prohibits brand-name pharmaceutical manufacturers from entering into arrangements that would delay the availability of new generic drugs.  Some Members have previously expressed concerns that these provisions would harm innovation, and actually impede the incentives to generic manufacturers to bring cost-saving generic drugs on the market.  Saves $8.8 billion over ten years.

FEHB Contracting:  Proposes streamlining pharmacy benefit contracting within the Federal Employee Health Benefits program, by centralizing pharmaceutical benefit contracting within the Office of Personnel Management (OPM).  Some individuals, noting that OPM is also empowered to create “multi-state plans” as part of the health care overhaul, may be concerned that these provisions could be part of a larger plan to make OPM the head of a de facto government-run health plan.  Saves $1.8 billion.

A Review of Deficit Reduction Plans

This Wednesday’s deadline for the fiscal commission to report a deficit reduction plan provides an opportunity to examine the health care components of the three proposals that have been released thus far:

  1. The Simpson-Bowles plan, named for the co-chairs of the fiscal commission, who released their own draft recommendations just after the midterm election;
  2. The Rivlin-Domenici plan, named for former CBO Director Alice Rivlin and former Senate Budget Committee Chairman Pete Domenici (R-NM), who released their own proposal as chairs of an independent commission operating under the aegis of the Bipartisan Policy Center; and
  3. The Rivlin-Ryan plan, which Alice Rivlin and House Budget Committee Ranking Member Paul Ryan released as an alternative to the Simpson-Bowles proposal, as both Dr. Rivlin and Rep. Ryan also sit on the fiscal commission.

CBO has conducted a preliminary analysis of the Rivlin-Ryan plan (the above link includes both the plan’s summary and score), and the Simpson-Bowles plan incorporates CBO scoring estimates where available.  However, it is unclear where and how the Rilvin-Domenici plan received the scores cited for its proposals.  The timing of the plans also varies; the Rivlin-Domenici plan postpones implementation of its plan until 2012, when the authors believe the economy will be better able to sustain a major deficit reduction effort.

The following analysis examines the similarities and differences of the three plans’ health care components in both the short term and the long term.  Keep in mind however that these are DRAFT proposals, which may a) change and b) be missing significant details affecting their impact.  Note also that the summary below is not intended to serve as an endorsement or repudiation of the proposals, either in general terms or in their specifics.

Short-Term Savings

Liability Reform:  All three plans propose liability reforms, including a cap on non-economic damages.  The Rivlin-Ryan and Simpson-Bowles plans both rely on specifications outlined in CBO’s October 2009 letter to Sen. Hatch; both presume about $60 billion in savings from this approach.  The Rivlin-Domenici plan is less clear on its specifics, but discusses “a strong financial incentive to states, such as avoiding a cut in their Medicaid matching rate, to enact caps on non-economic and punitive damages.”  Rivlin-Domenici also proposes grants to states to pilot new approaches, such as health courts; overall, the plan estimates $48 billion in savings from 2012 through 2020.

Prescription Drug Rebates:  Both the Simpson-Bowles and Rivlin-Domenici plans would apply Medicaid prescription drug rebates to the Medicare Part D program.  The Simpson-Bowles plan estimates such a change would save $59 billion from 2011 through 2020, whereas the Rivlin-Domenici plan estimates this change would save $100 billion from 2012 through 2018.  The disparity in the projected scores is unclear, as both imply they would extend the rebates to all single-source drugs (i.e., those without a generic competitor) in the Part D marketplace.  The Rivlin-Ryan plan has no similar provision.

Changes to Medicare Benefit:  All three plans propose to re-structure the Medicare benefit to provide a unified deductible for Parts A and B, along with a catastrophic cap on beneficiary cost-sharing.  The Rivlin-Ryan and Simspon-Bowles plans are largely similar, and echo an earlier estimate made in CBO’s December 2008 Budget Options document (Option 83), which provided for a unified deductible for Parts A and B combined, a catastrophic cap on beneficiary cost-sharing, and new limits on first-dollar coverage by Medigap supplemental insurance (which many economists believe encourages patients to over-consume care).  Conversely, the Rivlin-Domenici proposal provides fewer specifics, does not mention a statutory restriction on Medigap first-dollar coverage, and generates smaller savings (an estimated $14 billion from 2012 through 2018, as opposed to more than $100 billion from the Rivlin-Ryan and Simpson-Bowles proposals).

Medicare Premiums:  The Rivlin-Domenici plan would increase the beneficiary share of Medicare Part B premiums from 25 percent to 35 percent, phased in over a five-year period, raising $123 billion from 2012 through 2018. (When Medicare was first established, seniors paid 50 percent of the cost of Part B program benefits; that percentage was later reduced, and has been at 25 percent since 1997.)  The Rivlin-Ryan and Simpson-Bowles plans have no similar provision.

“Doc Fix:  The Simpson-Bowles plan uses the changes discussed above (i.e., liability reform, Part D rebates, and Medicare cost-sharing), along with an additional change in Medicare physician reimbursement, to pay for a permanent “doc fix” to the sustainable growth rate (SGR) formula.  The Simpson-Bowles plan would generate the final $24 billion in savings necessary to finance a permanent “doc fix” by establishing a new value-based reimbursement system for physician reimbursement, beginning in 2015.

The introduction to the Rivlin-Domenici plan notes that it “accommodates a permanent fix” to the SGR, but the plan itself does not include specifics on how this would be achieved, nor what formula would replace the current SGR mechanism.  Likewise, the Rivlin-Ryan plan does not directly address the SGR; however, the long-term restructuring in Medicare it proposes means the issue of Medicare physician reimbursement would become a moot point over several decades.  (See below for additional details.)

Other Provisions:  The Rivlin-Domenici plan would impose an excise tax of one cent per ounce on sugar-sweetened beverages; the tax would apply beginning in 2012 and would be indexed to inflation after 2018. (This proposal was included in Option 106 of CBO’s December 2008 Budget Options paper.)  The plan estimates this option would raise $156 billion from 2012 through 2020.

The Rivlin-Domenici plan also proposes bundling diagnosis related group (DRG) payments to include post-acute care services in a way that allows hospitals to retain 20 percent of the projected savings, with the federal government recapturing 80 percent of the savings for a total deficit reduction of $5 billion from 2012 through 2018.  Finally, the Rivlin-Domenici plan proposes $5 billion in savings from 2012 through 2018 by removing barriers to enroll low-income dual eligible beneficiaries in managed care programs.

The Simpson-Bowles plan includes a laundry list of possible short-term savings (see Slide 35 of the plan for illustrative savings proposals) in addition to the savings provisions outlined above that would fund a long-term “doc fix.”  Most of the additional short-term savings proposed would come from additional reimbursement reductions (e.g., an acceleration of the DSH and home health reductions in the health care law, and reductions in spending on graduate medical education), or from proposals to increase cost-sharing (e.g., higher Medicaid co-pays, higher cost-sharing for retirees in Tricare for Life and FEHB).

Long-Term Restructuring

Employee Exclusion for Group Health Insurance:  In its discussion of tax reform, the Simpson-Bowles plan raises the possibility of capping or eliminating the current employee exclusion for employer-provided health insurance.  (The Associated Press wrote about this issue over the weekend.)  One possible option would eliminate the exclusion as part of a plan to lower income tax rates to three brackets of 8%, 14%, and 23%; however, this proposal presumes a net $80 billion per year in increased revenue per year to reduce the deficit.  The plan invokes as another option a proposal by Sens. Gregg and Wyden to cap the exclusion at the value of the FEHBP Blue Cross standard option plan, which would allow for three income tax rates of 15%, 25%, and 35%, along with a near-tripling of the standard deduction.  Separately, the Simpson-Bowles plan also proposes repealing the payroll tax exclusion for employer-provided health insurance as one potential option to extend Social Security’s solvency.

The Rivlin-Domenici plan would cap the exclusion beginning in 2018, at the same level at which the “Cadillac tax” on high-cost plans is scheduled to take effect in that year.  However, the proposal would go further than the “Cadillac tax” (which would be repealed) by phasing out the income and payroll tax exclusion entirely between 2018 and 2028.  (This proposal would also prohibit new tax deductible contributions to Health Savings Accounts, on the grounds that health care spending would no longer receive a tax preference under any form.)  Notably, the Rivlin-Domenici plan accepts that some employers might stop offering coverage from this change to the tax code, and projects some higher federal spending on Exchange insurance subsidies as a result; however, if more employers drop coverage than the authors’ model predicts, the revenue gain from this provision could be entirely outweighed by the scope of new federal spending on insurance subsidies.

Although Rep. Ryan has previously issued his “Roadmap” proposal that would repeal the employee exclusion, the Rivlin-Ryan plan does NOT address this issue.

Medicare:  The Rivlin-Domenici program would turn Medicare into a premium support program beginning in 2018.  Increases in federal spending levels would be capped at a rate equal to the average GDP growth over five years plus one percentage point.  Seniors would still be automatically enrolled in traditional (i.e., government-run) Medicare, but if spending exceeded the prescribed federal limits, seniors would pay the difference in the form of higher premiums.  Seniors could also choose plans on a Medicare Exchange (similar to today’s Medicare Advantage), with the hope that such plans “can offer beneficiaries relief from rising Medicare premiums.”

The Rivlin-Ryan proposal would turn Medicare into a voucher program beginning in 2021.  (Both the Rivlin-Domenici premium support program and the Rivlin-Ryan voucher program would convert Medicare into a defined benefit, whereby the federal contribution toward beneficiaries would be capped; the prime difference is that the premium support program would maintain traditional government-run Medicare as one option for beneficiaries to choose from with their premium dollars, whereas the Rivlin-Ryan plan would give new enrollees a choice of only private plans from which to purchase coverage.)  The amount of the voucher would increase annually at the rate of GDP growth per capita plus one percentage point – the same level as the overall cap in Medicare spending included in the health care law as part of the new IPAB.  Low-income dual eligible beneficiaries would receive an additional medical savings account contribution (to use for health expenses) in lieu of Medicaid assistance; the federal contribution to that account would also grow by GDP per capita plus one percent.

The Rivlin-Ryan plan would NOT affect seniors currently in Medicare, or those within 10 years of retirement, except for the changes in cost-sharing described in the short-term changes above.  However, for individuals under age 55, the plan would also raise the age of eligibility by two months per year, beginning in 2021, until it reached 67 by 2032.

While the Rivlin-Domenici and Rivlin-Ryan plans restructure the Medicare benefit for new enrollees to achieve long-term savings, the Simpson-Bowles plan largely relies on the health care law’s new Independent Payment Advisory Board (IPAB) to set spending targets and propose additional savings.  The Simpson-Bowles plan suggests strengthening the IPAB’s spending targets, extending the IPAB’s reach to health insurance plans in the Exchange, and allowing the IPAB to recommend changes to benefit design and cost-sharing.  The plan also suggests setting a global budget for all federal health spending (i.e., Medicare, Medicaid, exchange subsidies, etc.), and capping the growth of this global budget at GDP plus one percent – the same level that IPAB capped spending in Medicare.  If costs exceed the target, additional steps could be taken to reduce spending, including an increase in premiums and cost-sharing or a premium support option for Medicare.  The plan also suggests overhauling the fee-for-service reimbursement system, or establishing an all-payer model of reimbursement (in which all insurance carriers pay providers the same rate) if spending targets are not met.

Medicaid:  The Rivlin-Domenici plan suggests that in future, Medicaid’s excess cost growth should be reduced by one percentage point annually.  The plan implies some type of negotiation between states and the federal government over which services in the existing Medicaid program that the state should assume and fund and which services the federal government should assume and fund.  While specifics remain sparse, the overriding principle involves de-linking Medicaid financing from the open-ended federal matching relationship as a way to reduce future cost growth by one percentage point per year.

The Rivlin-Ryan plan converts the existing Medicaid program into a block grant to the states, beginning in 2013.  The size of the federal block grant would increase to reflect growth in the Medicaid population, as well as growth in GDP plus one percent.  The costs of the new Medicaid expansion would be covered according to current law through 2020; in 2021 and succeeding years, the Medicaid expansion would be rolled into the block grant.

The Simpson-Bowles plan includes conversion of Medicaid into a block grant as one option to generate additional savings; however, it does not explicitly advocate this course of action.

CLASS Act:  The Rivlin-Ryan plan would repeal the CLASS Act.  The Rivlin-Domenici and Simpson-Bowles plans do not discuss any changes to this program.  This is the ONLY provision in the three deficit reduction plans that proposes elimination of any part of the health care law’s new entitlements.

States WILL Pay for Washington’s Health Law…

The Kaiser Family Foundation is out with a study today alleging that new state Medicaid costs will be relatively modest as a result of the health care law’s enactment.  But problems with the survey’s methodology – and the critical information Kaiser declined to include in its analysis – demonstrate that state costs will likely be much higher:

  • The Kaiser study assumes relatively low Medicaid take-up for individuals currently eligible for Medicaid but not enrolled in the program.  Even under the study’s “enhanced participation” scenario, the study presumes that only 5% of those currently in employer coverage, and 10% of individuals currently with individual insurance coverage, will enroll in Medicaid.  Given the “free” nature of the program, and the high levels of publicity associated with the law, the “woodwork effect” (whereby people come “out of the woodwork” after many years to enroll in a program) may be much greater.
  • Because states will only receive an average 57% federal match for currently eligible populations (as opposed to an eventual 90% match for newly eligible populations), any increase in Medicaid rolls due to the “woodwork effect” would hit state budgets particularly hard.
  • Even under the low “woodwork effect” assumptions discussed above, state spending on current eligibles would exceed that on newly eligible populations under the “enhanced participation” scenario (Table 4, p. 40 of the PDF).  As the “enhanced” scenario assumes that only 2.8 million currently eligible individuals would decide to enroll in Medicaid (Table 3, p. 39 of the PDF), and as some estimates suggest up to 10 million individuals actually fall into this category, state spending could skyrocket if several million more individuals who are currently eligible for Medicaid decide to enroll as a result of publicity surrounding the law (or if access to any existing coverage they may have is jeopardized as a result of the law’s enactment).

Meanwhile, the Kaiser study includes several key omissions:

  • The study only examines the years 2014-2019, when the federal government will be paying a higher share of Medicaid costs, as outlined in the law.  Costs for states will go up beginning in 2020 – and for every year thereafter – once the federal match declines, and the analysis did not take these increased costs “in the out years” into consideration.
  • The study also omitted an analysis of the primary care reimbursement provisions included in the health law.  Medicaid primary care providers would receive a reimbursement bonus in 2013 and 2014 – but would be subject to an average 50 percent pay cut beginning in January 2015.  Someone – either states or the federal government – will have to pay for this extension if Medicaid beneficiaries are actually going to have access to care (as opposed to an insurance card they can’t use), and the Kaiser study doesn’t address this looming unfunded mandate.
  • The study also omits the impact of the health law’s cuts to Medicaid disproportionate share hospital (DSH) payments, which CBO estimated would cut more than $14 billion in funding during the 2014-2019 period.
  • Because the study focuses on Medicaid, it does not attempt to quantify the law’s additional mandates on states not related to Medicaid spending, such as establishing exchanges, undertaking insurance law reforms, etc. – the full cost of which may not in fact be borne by the federal government.

So once again a study attempts to arrive at definitive “conclusions” while including several favorable assumptions to make that case.  Moreover, the entire study misses the point being driven home by the current “extenders” debate, whereby Democrats want to increase the budget deficit in order to pay a higher federal share of states’ existing Medicaid programs.  A majority of the House recently sent a letter saying the “stimulus” increase in federal Medicaid funding is critical because otherwise “states and territories will not have the resources they need to successfully implement health reform.”  So if states can’t fund their existing Medicaid programs, and even Democrats admit that a new federal bailout is needed for states “to successfully implement health reform,” what further evidence is needed to confirm that the law places an unsustainable burden on already strapped state budgets?

Policy Brief: A Reading Guide to the Senate Bill’s Backroom Deals

“I think the health care debate as it unfolded legitimately raised concerns not just among my opponents, but also amongst supporters that we just don’t know what’s going on.  And it’s an ugly process and it looks like there are a bunch of back room deals.”

 — President Obama, interview with ABC’s Diane Sawyer, January 25, 2010[i]

The White House recently enacted its health “reform” agenda by signing the 2,733 page legislation (H.R. 3590) that passed the Senate in December.[i]  While the Administration touts its removal of the “Nebraska FMAP provision” that saw 49 other states funding Nebraska’s Medicaid largesse (known as the “Cornhusker Kickback”), it did not address other deals negotiated by Democrats in the Senate legislation.  Many other backroom agreements are included in the legislation the President has now enacted into law:

Page 428—Section 2006, known as the “Louisiana Purchase,” provides an extra $300 million in Medicaid funding to Louisiana.[ii]

Page 2132—Section 10201(e)(1) provides an increase in Medicaid Disproportionate Share Hospital (DSH) payments for Hawaii, meaning 49 other states will pay more in taxes so that Hawaii can receive this special benefit.

Page 2203—Section 10317 amends provisions in Medicare so that hospitals in Michigan and Connecticut can receive higher payments.

Page 2222—Section 10323 makes certain individuals exposed to environmental hazards eligible for Medicare coverage.  The definition used in the bill ensures the only individuals eligible will be those living in Libby, Montana.

Page 2237—Section 10324 increases Medicare payments by $2 billion in “frontier states.”[iii]

Page 2354— Section 10502 spends $100 million on “debt service of, or direct construction of, a health care facility,” language which the sponsors intended to benefit Connecticut.[iv]

Page 2395—Section 10905(d) exempts Medigap supplemental insurance plans from the new tax on health insurance companies; press reports indicate this provision was inserted to benefit an insurer headquartered in Nebraska.[v]

Even after the public outrage from the “Cornhusker Kickback,” Democrats used separate legislation designed to “fix” this particular provision (H.R. 4872) to add yet more deals behind closed doors.[vi]  For instance, page 71 (Section 1203(b)) of the “fixer” bill provided an increase in Medicaid disproportionate share hospital payments just for Tennessee.  And Section 2213 (page 145) of the original version of the “fixer” bill[vii] included a sweetheart deal making the Bank of North Dakota the only financial facility in the country exempted from Democrats’ government takeover of student loans—a backroom deal so egregious that it was removed within hours once the bill was finally revealed to the American public.[viii]

These specific agreements and provisions also do not display the full scope of the White House’s legislative deal-making.  For instance, the head of the pharmaceutical industry said the Administration approached him to negotiate a deal with his industry: “We were assured, ‘We need somebody to come in first.  If you come in first, you will have a rock-solid deal.’”[ix]  And former Democratic National Committee Chairman Howard Dean publicly admitted at a town hall forum that “The reason that tort reform is not in the [health care] bill is because the [Democrat Members] who wrote it did not want to take on the trial lawyers.”[x]

The many pages of backroom deals included in the health care takeover legislation raise several questions: If the bill itself was so compelling, why did Democrats need billions of dollars in “sweeteners” negotiated in secret in order to vote for it?  If President Obama was so concerned about the public perceptions created by the backroom dealing, why did he not propose to strike all the special agreements?  Does he believe that this pork-barrel spending is the only reason why Democrats voted to pass his government takeover of health care in the first place?



[i] Senate-passed bill text available at http://www.opencongress.org/bill/111-h3590/text.

[ii] “Dems Protect Backroom Deals,” Politico February 4, 2010, http://www.politico.com/news/stories/0210/32499.html.

[iii] Congressional Budget Office, score of H.R. 3590 including Manager’s Amendment, December 19, 2009, http://cbo.gov/ftpdocs/108xx/doc10868/12-19-Reid_Letter_Managers_Correction_Noted.pdf.

[iv] “Dodd Primes Pump in Bid to Survive,” Politico December 22, 2009, http://www.politico.com/news/stories/1209/30881.html.

[v] “How Nebraska’s Insurance Companies Stand to Profit from Ben Nelson’s Compromises in Health Care Bill,” Huffington Post 21 December 2009, http://www.huffingtonpost.com/2009/12/21/how-nebraskas-insurance-c_n_400080.html.

[vi] Senate-passed bill (H.R. 3590) text available at http://www.opencongress.org/bill/111-h3590/text; reconciliation bill (H.R. 4872) text available at http://www.opencongress.org/bill/111-h4872/text.

[vii] House Rules Committee amendment in the nature of a substitute, http://docs.house.gov/rules/hr4872/111_hr4872_amndsub.pdf.

[viii] “Conrad Wants Controversial Carve-Out Axed,” Roll Call March 18, 2010, http://www.rollcall.com/news/44368-1.html.  The provision was stripped by the Rules Committee prior to full House consideration of H.R. 4872.

[ix] Quoted in “White House Affirms Deal on Drug Cost,” New York Times August 5, 2009, http://www.nytimes.com/2009/08/06/health/policy/06insure.html?_r=3&scp=8&sq=kirkpatrick&st=cse.

[x] Exchange at Town Hall forum in Reston, VA, August 25, 2009, available online at http://www.youtube.com/watch?v=IdpVY-cONnM.

Policy Brief: Obamacare — Bad for Rural America

Medicare Advantage Cuts.  The Congressional Budget Office (CBO) estimated[i] that provisions in the health care takeover[ii] will cut a total of $202.3 billion from Medicare Advantage plans that provide a range of health care options to seniors.  These harmful cuts could result in Medicare Advantage plans moving out of rural areas, limiting beneficiary choice and causing millions of seniors to lose their current coverage and the extra benefits Medicare Advantage plans provide.

According to former Clinton Administration official Ken Thorpe, while every senior in rural areas had access to a Medicare Advantage plan in 2007, only one in four rural beneficiaries had a choice of plans in 1999[iii]—and the significant cuts could return rural seniors to the days when the only option is a one-size-fits-all government plan.

Rural Hospitals Could Suffer.  CBO estimates that the health care takeover will result in $22.1 billion in cuts in Medicare disproportionate share hospital (DSH) payments and an additional $18.5 billion in Medicaid DSH reductions.[iv]  These reductions could inflict more significant harm on rural hospitals in States where Medicaid programs cover a low percentage of costs to care for the uninsured, as well as States where DSH payment levels are already below the national average.

Impact on Imaging Facilities.  According to CBO, the health care takeover will save $2.3 billion by increasing the presumed utilization rate for certain imaging equipment from 50 percent to 75 percent.[v]  Particularly for rural hospitals and clinics where imaging equipment might be used much less frequently than the legislation presumes, these savings could have a disproportionate impact on access to services.

Tax Increases.  The health care takeover raises the Medicare payroll tax by a total of $210.2 billion—leveling new taxes on many family farms and other small businesses that serve as the engine of new job creation.[vi]  Combined with additional taxes of up to $2,000 per full-time employee for firms that cannot afford to pay for their workers’ health plan premiums, these tax increases on small businesses represent a “double whammy” on American job growth in an already struggling economy.

Medicare Reductions.  The health care takeover establishes a new board of unelected bureaucrats empowered to make binding recommendations on cost reductions within Medicare.  There is nothing to prohibit this board of federal bureaucrats from reducing—or even eliminating entirely—any temporary payment increases for rural providers, given its authority to re-write Medicare law and regulations in a way that will curb federal costs.  For these reasons, CBO notes that these and other Medicare reductions “might be difficult to sustain over time,” and could “reduce access to care or diminish the quality of care” for patients.[vii]



[i] Congressional Budget Office analysis of H.R. 4872, March 20, 2010, http://cbo.gov/ftpdocs/113xx/doc11379/Manager%27sAmendmenttoReconciliationProposal.pdf.

[ii] Senate-passed bill (H.R. 3590) text available at http://www.opencongress.org/bill/111-h3590/text; reconciliation bill (H.R. 4872) text available at http://www.opencongress.org/bill/111-h4872/text.

[iii] Ken Thorpe and Adam Atherly, “The Impact of Reduced Medicare Advantage Funding on Beneficiaries,” April 2007, http://www.bcbs.com/issues/medicare/background/Medicare-Advantage.pdf.

[iv] CBO analysis of H.R. 4872.

[v] Ibid.

[vi] Joint Committee on Taxation analysis of substitute amendment to H.R. 4872 in concert with H.R. 3590, March 18, 2010, http://jct.gov/publications.html?func=startdown&id=3671.

[vii] Congressional Budget Office analysis of H.R. 3590, December 19, 2009, http://cbo.gov/ftpdocs/108xx/doc10868/12-19-Reid_Letter_Managers_Correction_Noted.pdf.

McCain Amendment 3570 to H.R. 4872 — Strike Sweetheart Deals

Senator McCain has offered an amendment (#3570) to strike the “sweetheart deals” included in the health care law and the reconciliation bill.

Summary:

  • The amendment repeals the following “sweetheart deals” included in the health care law and the reconciliation bill:
  1. Increase in Medicaid disproportionate share hospital (DSH) payments just for Tennessee (Section 1203, page 71 of H.R. 4872);
  2. Increase in Medicaid DSH payments just for Hawaii (Section 10201, page 2132 of H.R. 3590);
  3. The “Louisiana Purchase” to increase Medicaid funding just for Louisiana (Section 2006, page 428 of H.R. 3590);
  4. Increased Medicare reimbursement just for frontier states (Section 10324, page 2237 of H.R. 3590);
  5. Medicare coverage just for Libby, Montana residents exposed to environmental hazards (Section 10323, page 2222 of H.R. 3590);
  6. A $100 million hospital funding provision intended to benefit Connecticut (Section 10502, page 2354 of H.R. 3590); and
  7. Extension of Section 508 hospital reimbursement provisions just to Michigan and Connecticut (Section 10905, pages 2205-06 of H.R. 3590)

Arguments in Favor:

  • Citizens in other states should not be asked to see their taxpayer dollars funding special “backroom deals” for certain locales.
  • The public outrage over the “Cornhusker Kickback” included in H.R. 3590 may lead many to believe it is long past time for Congress to strip out ALL of the “backroom deals” included in the Senate bill – rather than using the reconciliation measure to add more of them.
  • Given President Obama’s campaign promises of transparency – including his famous pledge to televise negotiations on C-SPAN – the American people deserve action consistent with Democrats’ rhetoric.
  • If Democrats support this government takeover of health care, they should be willing to support the legislation on its own merits – without the need to add on extraneous “backroom deals” in order to win votes.