With the failure of the Republican’s American Health Care Act (AHCA), what’s next? Congressional Republicans face the ugly choice of admitting defeat and funding the Affordable Care Act (ACA), including the cost-sharing reductions (CSRs) that they have tied up in federal court, de-funding the ACA and likely being blamed for its demise, or compromising with Democrats to improve it. In all likelihood, the next set of moves will focus on avoiding/shifting blame for the imminent crisis of health plan withdrawals that failure to fund CSRs would precipitate.
But the long-term problems with the ACA should be addressed: How to sustain health plan competition? How to simplify a nearly incomprehensible medical financing scheme? How to cover more of the uninsured? How to win enough moderate Republican support to de-escalate partisan wars over the ACA? Sooner or later, Congress needs to consider serious compromise proposals for improving the ACA.
So, what might they consider?
Were a bargain on improving the ACA to be struck, Democrats would insist that it ensure full federal funding and maintain goals related to covering most Americans. Taxes will be the “sticking point” for many Republicans, but not all: Senators Cassidy & Collins’ Patient Freedom Act (PFA) retains 95% of current funding.) On the other hand, the price of support from moderate Republicans probably includes making substantial changes that borrow heavily from the best ideas in the AHCA and the PFA. The approach proposed below does both.
I propose three goals for a bipartisan effort to “reform and improve” the ACA:
- Stabilize the individual market and risk pool, long-term
- Simplify the ACA and de-regulate its marketplaces, so the private sector can support them
- Cover substantially more of the uninsured, without increasing federal spending per enrollee
Stabilize the market
The core element of this proposal is an alternative to the ACA’s method for making coverage affordable. The ACA tries to do so via a complex formula for tax credits that depends on projecting a household’s income next year – which is literally impossible to do with any credibility – so that eligible applicants pay a progressively scaled percentage of their income toward the second lowest cost silver plan (SLCSP).
As an alternative to this complex formula, let’s borrow from the AHCA and PFA, which I will refer to collectively, as “Republican,” but with one major modification that is crucial to my proposal: below, say, 300% of the federal poverty level (FPL), all eligible subscribers get advance premium tax credits (APTCs) amounting to 100% of the full premium of the most basic benchmark plan available to them i.e., the lowest-priced bronze plan in their zip code. Here is a simple, bronze, high-deductible health plan (HDHP) that might serve as this national benchmark plan:
60% AV level: Individual Family (2+)
Annual deductible $5,000 $10,000
Coinsurance 20% 20%
Max. OOP $6,600 $13,200
Free preventive services (zero deductible first)
PCP Office visits with $25 copayment (zero deductible first)
How much would the proposed tax credit — 100% of the premium for the benchmark bronze plan – cost, relative to the ACA’s current APTCs? Because of its lower actuarial value, premiums for the proposed benchmark bronze plan should average about 85% of the premium for the second lowest priced silver plan (SLCSP). For those who received APTCs under the ACA, they averaged 72% of the gross premiums for SLCSP prior to the large premium increases of 2017. (ASPE, Health Insurance Marketplace 2015)
Because the current ACA formula holds eligible enrollees harmless for year-to-year premium changes, in effect increasing APTCs as average SLCSP premiums increase, the large premium hikes of 2017 (averaging 22%) actually increased the level of APTCs relative to gross premiums: adjusting the 72% for large premium increases in 2017, APTCs should now average about 77% of gross premiums for SLCSPs [1-(.28/1.22) = .77]. And for those under 300% FPL, the percentage of gross premium for silver plans covered by APTCs should be even higher than 77%. Hence, I estimate that the premium for the lowest cost bronze plan – 85% of SLCSP – would only slightly exceed the today’s average APTC for a household between 100% and 300% FPL.
Beyond 300% FPL, which approximates median U.S. income, APTCs would phase out in large steps, such as 2/3rds of the full credit from 301-400% FPL, and 1/3rd the full credit from 401-500% FPL.
The focus on HDHPs is right out of the Republican policy book. The critical difference is that, by definition, APTCs would suffice to make the benchmark plan “free” for most of the uninsured. This offers three huge advantages:
- “Free” is literally the most powerful word in sales and marketing, and most of the uninsured should opt for coverage;”
- It works reasonably well even without the individual mandate, thereby undercutting much of the popular opposition to the ACA; and
- Having a free plan makes auto-assignment practical, so that when the uninsured land in ERs, apply for other benefits, or fail to renew coverage, they can be auto-assigned.
However, if 70% actuarial value in the ACA benchmark plan was considered skimpy coverage for those earning below 250% FPL – hence the addition of CSRs — then 60% actuarial value is even thinner coverage. Fortunately, there is a far simpler and more efficient method than CSRs to reduce cost-sharing. (CSRs must be “fronted” to the enrollee by health plans, and then retroactively claimed by carriers from the IRS. And because they are available only to silver plan enrollees on marketplaces, hundreds of thousands, if not millions, of marketplace enrollees forego them, often inadvertently.)
Adapting a third Republican policy preference, it would be far simpler, more equitable and easier to fund Health Reimbursement Arrangements (HRAs) than CSRs. Exchanges (public or private), brokers, and/or carriers could establish HRAs on behalf of each enrolled household under, say, 400% FPL, to be funded by a tax credit. A reasonable funding level for those below 300% FPL might be the full deductible on the benchmark bronze design, so that they would be responsible only for the 20% coinsurance payments, and then half that deductible (from 300% to 400% FPL). Like CSRs, HRAs are only expended as services are used — unused funds would revert to the IRS. But unlike CSRs, the HRA can bear a certain degree of retroactive funding, which is very helpful when administering credits tied to a household’s projected MAGI. This feature allows HRA funding to be tied directly into tax filings, including real MAGI calculation, for the plan year.
A fourth, important change to the ACA, taken from Republican bills, would reduce average premium levels overall, an important goal of Republican proposals. The ACA’s maximum premium range of 3-to-1, under which a 21-year old cannot be charged less than one-third as much as a 64-year-old, over-charges younger relative to older adults, and raises the average cost of coverage for all enrollees. The average medical cost of someone in their 20’s is about 1/5th of someone in their 60’s. By discouraging enrollment of the healthiest age group, this cross-subsidy from young to old makes the risk pool older and sicker in the aggregate, and thereby raises the average premium (index=1) around which the age range of rates are constructed.
While 5-to-1 strikes some sensibilities as an unfair burden on older Americans, covering the full premium of the benchmark plan for lower-income enrollees of all ages, as is proposed, largely negates the affordability and fairness arguments. Also, this is not a zero-sum game: by adding more young adults to the risk pool, a 5-to-1 age-rating band would reduce the average premium, perhaps enough that covering the full premium of the benchmark up to 300% FPL would cost less than today’s average APTC.
In addition to the four major changes described above, Republicans have proposed a series of small steps to stabilize the individual market, which should be adopted. For example, strictly enforcing the restrictions on off-season enrollment, so that Special Enrollment Periods are not “abused” by those who wait until they get sick to buy coverage. (See Oliver Wyman, “Special Enrollment Periods and the Non-Group, ACA-Compliant Market”.) Other common-sense underwriting practices include shortening the annual open enrollment window, reducing the 90-day grace period for lapsed premium payment, and reinstituting a federal-state funded stop-loss program for very high cost cases.
Finally, without an individual mandate, we need to encourage the maintenance of coverage and protection of the risk pool from those who jump in when they need services. Even if free to those below 300% FPL, those above 500% would pay full premiums. There are many ways to protect the risk pool from this sort of adverse selection, but the AHCA’s 30% surcharge strikes me as counter-productive – a penalty for enrolling. I prefer a conventional, commercial underwriting approach: a 6-month waiting period for covering pre-existing conditions for those who have not maintained continuous coverage.
Simplify the ACA & Reduce Market Regulations
ACA marketplaces depend upon the active participation of private health plans. So, let’s reduce all but necessary requirements on health plans that offer products in the direct market: one standard bronze plan (the benchmark plan) would have to be offered by any issuer that intends to offer health plans that qualify for a tax credit. This would help consumers make apples-to-apples shopping comparisons for the “benchmark” plan, and would likely intensify competition in terms of price, network breadth and service, rather than often mystifying benefit twists. Beyond that, qualified issuers should be required to offer richer benefits of their own design, including at least one at a reasonably rich level, such as 80% actuarial value. Although not full federal de-regulation, this proposal accords with Republican’s efforts to return insurance regulation to the states and flexibility to the markets.
Under the construct described above, eligibility determination for APTCs would be greatly simplified: legal residence, age, household size, and zip code would be required, as is the case with the ACA and the AHCA. However, instead of determining APTCs based on exact income projections, there are a few steps that most filers can understand and the IRS can readily assess: 100% – 300% FPL, 301-400% FPL, and 401-500% FPL.
HRAs are controversial, but are recommended here primarily as an administratively feasible cost-sharing mechanism that ties directly to annual tax filings. It also readily accommodates financial rewards for healthy patient behaviors, such as engagement with chronic disease management, and prudent consumer behavior, such as shopping for best value.
An important Republican innovation is to divorce eligibility determination from plan shopping. The IRS would administer the tax credits, and allow brokers and exchanges (public or private) to organize plan shopping. Or the consumer could buy directly from a health plan. The federal government is already working on a solution – Eligibility Verification as a Service (EVaaS) — to enable private entities at the point of shopping to understand the applicant’s net premium (after APTCs). This approach reduces the public costs of operating exchanges – or the surcharge on premiums that fund those public costs — and unleashes the private sector to locate, message and sell to the uninsured.
With sincere respect for the tremendous efforts made to date by state-based marketplaces, direct-to-consumer marketing is not generally considered a core strength of the public sector. Allowing a range of commercial (and public) web-based entities to market qualified health plans could add substantially to enrollment. (Private options, such as Softheon, eHealth, and Getinsured either did not exist or were far less robust when the ACA was drafted.)
Borrowing again from Republicans, over/under payments by IRS would be fully reconciled on each year’s tax filing and fully recoverable from filers. Indeed, given the simplification of calculating APTCs and the substitute of HRA for CSR, the IRS could rely on self-attestation for estimating the current year’s household income, using past filings as a check.
Any reform of the ACA should clear out the dead wood: eliminate both the small employer marketplace and the ACA’s convoluted 2-year tax incentive for very small employers (<25 FTEs) of low-wage workers to provide group coverage. Neither program has attracted significant use. By now, even ACA supporters can probably identify at least another half dozen special programs and pieces of the ACA which have simply failed – COOPs being the most spectacular of them – so let’s sunset them.
The ACA still falls short of its primary goal, to cover 95% of Americans. We could meet this goal with a few changes to Medicaid eligibility and qualified health plans that might attract a coalition of Democrats and center-right Republicans.
First, since expanding Medicaid eligibility to 133% FPL has not attracted voluntary participation by 19 states, let’s lower the bar. Why not let the remaining states choose to expand eligibility to 100% FPL, or cap the higher federal funding for all states at 100% FPL? With bipartisan reform, most of the holdout states are likely to raise their income-eligibility standard to 100% FPL, thereby rapidly boosting enrollment and filling in the awkward hole between those who earn too much for Medicaid and too little for APTCs. This one change would reduce the number of uninsured Americans by millions!
Second, one of the advantages of a zero-premium benchmark plan is that it virtually sells itself, even without a mandate. However, we can go even farther. We should make auto-assignment to the “zero-premium” benchmark plan the default option, and force eligible tax-filers to make a choice if they prefer to go bare. The ACA now covers only about 60% of APTC-eligible uninsured Americans. The combination of zero-premium coverage and auto-assignment might be so powerful that we end up covering a lot more of the uninsured without the individual mandate than with it!
Coverage is all about the money. My rough estimate is that APTC costs per enrollee would be comparable to the existing ACA, but this proposal contains plenty of variables that can be adjusted to make a 10-year budget impact comparable to the ACA’s:
- The cost/savings of the option to expand Medicaid eligibility to 100% fpl
- The income cut-off for full APTCs (300% fpl)
- The step-function for phasing out APTCs (to 500% fpl)
- The level of HRA funding;
- The income cut-off for full HRA funding
- The step function for phasing out HRA funding
- The start-date for capping employers’ contributions to ESI
Of course, there are strong arguments against cutting costs for these variables, as any savings to federal outlays will also reduce the number of subsidized enrollees and/or generosity of coverage. The one essential element of this proposal which cannot be altered to meet budget requirements is maintaining a free benchmark plan for lower-income households.
Admittedly, the likelihood of Republicans joining Democrats to improve the ACA any time soon seem modest. But the intermediate-term perils of inaction are also considerable: without any substantive action on the ACA, congressional Republicans look foolish entering the 2018 election cycle; with Republicans already attacking each other over tax reform, the President needs a legislation he can claim credit for; and Democrats need to improve and de-escalate the rhetoric around their landmark reform.
Jon Kingsdale, Ph.D., teaches health policy at Boston and Brown universities. He founded the Massachusetts Health Connector (marketplace) and consults with CMS and a dozen states on the ACA.