Republican leadership in the U.S. House of Representatives introduced two bills to repeal and replace the Affordable Care Act (ACA), also known as Obamacare, through the budget reconciliation process. These bills are collectively known as the American Health Care Act.
To become law, these bills must go through the legislative process, although a budget reconciliation bill can be passed with a simple majority vote. Debate on the legislation is scheduled to begin on March 8, 2017.
Impact On Employers
This new act will not entirely repeal ACA, but will make significant changes to key provisions, including repealing the employer and individual mandates retroactively to 2016. This means employers will not be required to provide health insurance and the tax penalty for individuals who do not purchase health insurance will be reduced to zero.
Some key consumer protections will be retained such as the prohibition against excluding those with pre-existing conditions, as well as continuing dependent coverage to age 26.
Here is a summary of the bills’ important provisions.
The two separate bills that make up the American Health Care Act were released in response to a budget resolution passed by Congress on Jan. 13, 2017. The budget resolution is a nonbinding spending blueprint that directs House and Senate Committees to create federal budget “reconciliation” legislation.
Once drafted, any budget reconciliation bill can be passed by both houses with a simple majority vote. If these bills are passed in both the Senate and the House, the law would then go to President Donald Trump for approval. However, a full repeal of the ACA cannot be accomplished through this process.
ACA Provisions Not Impacted
The majority of the ACA is not affected by the new legislation. For example, the following key ACA provisions would remain in place:
- Cost-sharing limits on essential health benefits (EHBs) for non-grandfathered plans (currently $7,150 for self-only coverage and $14,300 for family coverage)
- Prohibition on lifetime and annual limits for EHBs
- Requirements to cover pre-existing conditions
- Coverage for adult children up to age 26
- Guaranteed availability and renewability of coverage
- Nondiscrimination rules (on the basis of race, nationality, disability, age or sex)
- Prohibition on health status underwriting
The requirement to offer the Essential Health Benefits package for individual and small group plans will remain intact, although the actuarial value requirement will be repealed. Under the new act, age rating restrictions would also continue to apply, though the age ratio limit is revised to 5:1, instead of 3:1, meaning a 60-year-old could be charged 5 times as much as a 30-year-old for the same coverage. States would also be allowed to set their own limits.
Repealing the Employer and Individual Mandates
The ACA imposes both an employer and individual mandate. The American Health Care Act would reduce the penalties imposed under these provisions to zero, effectively repealing both mandates (although they would technically still exist). These changes would apply retroactively for months beginning after Dec. 31, 2015.
The American Health Care Act would impose a “continuous coverage incentive” to encourage individuals to maintain health coverage. Beginning with open enrollment for 2019, issuers would be permitted to add a 30 percent late-enrollment surcharge to the premium for any applicants that had a lapse in coverage for greater than 63 days during the previous 12 months. The late-enrollment surcharge would end after 12 months.
Replacing Health Insurance Subsidies with Tax Credits
The ACA currently offers federal subsidies in the form of tax credits and cost-sharing reductions to certain low-income individuals who purchase coverage through the Exchanges. The American Health Care Act would repeal both of these subsidies, effective in 2020.
The American Health Care Act would replace the current ACA subsidies with a portable, monthly tax credit to all individuals that can be used to purchase individual health insurance coverage. The tax credit could be used to purchase any state-approved major medical health insurance and unsubsidized COBRA coverage.
The new tax credit would be both advanceable and refundable, and would be age-rated, with older individuals eligible for larger credits. The new tax credits would be capped at $14,000 per family and would be adjusted for inflation over time. In addition, the credits would be phased out for individuals making over $75,000 per year ($150,000 for joint filers).
The American Health Care Act would also repeal the ACA’s small business tax credit beginning in 2020. In addition, between 2018 and 2020, the small business tax credit generally would not be available for qualified health plans that provide coverage relating to elective abortions.
Enhancements to Health Savings Accounts (HSAs)
HSAs are tax-advantaged savings accounts that are tied to high-deductible health plans (HDHP), which can be used to pay for certain medical expenses. To incentivize use of HSAs, the American Health Care Act would:
- Increase the maximum HSA contribution limit: The HSA contribution limit for 2017 is $3,400 for individual coverage and $6,750 for family coverage. Beginning in 2018, the new law would allow HSA contributions up to $6,550 for self-only coverage and $13,100 for family coverage.
- Allow both spouses to make catch-up contributions to the same HSA: The new law would allow both spouses of a married couple to make catch-up contributions to one HSA, beginning in 2018, if both spouses are eligible for catch-up contributions and either has family coverage.
- Address expenses incurred prior to establishment of HSA: Starting in 2018, if an HSA is established within 60 days after an individual’s HDHP coverage begins, the HSA funds could be used to pay for expenses incurred starting on the date the HDHP coverage began.
Relief from ACA Tax Changes
The American Health Care Act would provide relief from many of the ACA’s tax provisions, including:
- Cadillac tax: The ACA imposes a 40 percent excise tax on high-cost employer-sponsored health coverage, effective in 2020. The new law would change the effective date of the tax, so that it would apply only for taxable periods beginning after Dec. 31, 2024.
- Restrictions on using HSAs for over-the-counter (OTC) medications: The ACA prohibits taxpayers from using certain tax-advantaged HSAs to help pay for OTC medications. The new law would allow these accounts to be used for OTC purchases, beginning in 2018.
- Increased tax on withdrawals from HSAs: Distributions from an HSA (or Archer MSA) that are not used for qualified medical expenses are includible in income and are generally subject to an additional tax. The ACA increased the tax rate on distributions that are not used for qualified medical expenses to 20 percent. The new law would lower the rate to pre-ACA percentages, effective for distributions after Dec. 31, 2017.
- Health flexible spending account (FSA) limit: The ACA limits the amount an individual may contribute to a health FSA to $2,500 (as adjusted each year). The new law would repeal the limitation on health FSA contributions for taxable years beginning after Dec. 31, 2017.
- Additional Medicare tax: The ACA increased the Medicare tax rate for high-income individuals, requiring an additional 0.9 percent of wages, compensation and self-employment income over certain thresholds to be withheld. The new law would repeal this additional Medicare tax beginning in 2018.
- Deduction limitation for Medicare Part D subsidy: The ACA eliminated the ability for employers receiving the retiree drug subsidy to take a tax deduction on the value of this subsidy. Effective in 2018, the new law would repeal this ACA change, and reinstate the business-expense deduction for retiree prescription drug costs without reduction by the amount of any federal subsidy.
Beginning after Dec. 31, 2017, the new law would also repeal the excise tax on the sale of certain medical devices, the annual health insurance providers’ fee, the annual fee on certain pharmaceutical manufacturers and the 10 percent sales tax on indoor tanning services. It would also restore the medical-expense deduction income threshold to pre-ACA levels beginning in 2018.
The American Health Care Act would repeal the ACA’s Medicaid expansion, and make certain other changes aimed at modernizing and strengthening the Medicaid program. For example, the new law would provide enhanced federal payments to states that already expanded their Medicaid programs, and then transition Medicaid’s financing to a “per capita allotment” model starting in 2020, where per-enrollee limits would be imposed on federal payments to states.
The legislation would also modernize Medicaid’s data and reporting systems, repeal the ACA’s disproportionate share hospital (DSH) cuts and make changes to the process for eligibility determinations.
There is still much to be done before these bills may be submitted to the full House for a vote, and changes are likely to be made. As always, you can depend on Roper Insurance to keep you up-to-date on any changes and on the progress of these bills.
To read the full text of these bills, you can download The American Health Care Act in PDF format here.