Trump and Affordable Care Act (ACA) Replacement Proposals Trends and Implications

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1 We are your partner in government-sponsored health programs DATE: March 2, 2017 FROM: SUBJECT: Gorman Health Group Policy Team Trump and Affordable Care Act (ACA) Replacement Proposals Trends and Implications President Trump delivered his first address to Congress on Tuesday and promoted his high-level policy wish list for the repeal of Obamacare. Trump called for access to coverage for those with pre-existing conditions, the use of tax credits, expansion of Health Savings Accounts (HSAs), resources and flexibility for Medicaid, drug price reform, and insurance sales across state lines. These proposals closely mirror those endorsed by Speaker Paul Ryan. The comments come at the heels of criticism for the most recent draft repeal proposals for the ACA. ACA repeal talks eventfully closed out the work week last Friday, with a leak of a proposed draft of the House s ACA repeal proposal by Politico. The draft was quickly marked as outdated by both members of the House as well as governors who convened in Washington this week. Despite this, the contents of the draft were also quickly criticized by both sides of the political spectrum and failed to get the support from much-needed groups within the House such as the Freedom Caucus and the Republican Study Committee. The proposals include: New age-rated tax credits A 30% premium penalty on non-continuous coverage Move to a 5-to-1 age-band rating Protection of grandfathered and grandmothered plans Grants states authority to determine Essential Health Benefits (EHBs) Move to per capita spending for Medicaid Repeal of mandate penalties and ACA taxes

2 Even though we can no longer expect the reconciliation proposal to look exactly like this proposal, this Department of Health and Human Services draft, previous policy agendas such as Ryan s Better Way, and new Department of Health and Human Services (HHS) secretary Tom Price s prior proposals present some common trends on what Republicans aim to present. Most notably, most proposals include versions of HSAs, interstate insurance, the use of high-risk pools, and the reform of Medicaid. In this memo, our Policy Team examines the most widely-cited Republican healthcare proposals, their components, and their limitations. HIGH-DEDUCTIBLE AND ACCOUNT-BASED PLANS (HSAs) In 2016, 29% of covered workers were enrolled in a low-premium, high-deductible insurance plan combined with tax deductible savings accounts (HSAs) that pay for current or future healthcare expenses. The Trump administration is expected to pass legislation and regulations to allow more flexibility in these plans, and they can be expected to grow rapidly. Evidence to Date Articles in Health Affairs find evidence increased enrollee cost-sharing and high deductibles reduce overall service costs but disproportionately have adverse effects on low-income patients and enrollees with chronic conditions due to reduced use of necessary services. Studies found low-income enrollees are significantly more likely to forgo care than those with higher incomes. Chronic care conditions require expensive prescription drugs and long-term service use. A study by the National Bureau of Economic Research found the sickest enrollees in a high-deductible health plan (HDHP) decreased their medical spending between 18% and 22% in the first year, including fewer physician office visits, prescriptions filled, and cancer screenings with more emergency room visits. A high level of delayed or forgone care for these vulnerable populations was connected to an adverse impact on 4 of 30 conditions. Value-Based Insurance Design (VBID) While account-based plans now fully cover preventive services before the deductible, surveys show more than 80% of enrollees are unaware of this coverage. In addition, the preventive service safe harbor has been interpreted as excluding services related to an existing illness, injury, or condition. HDHPs and HSAs do not provide low-cost services for chronic conditions such as disease management services for diabetes, insulin, eye and foot exams, and glucose monitoring supplies. Indiana Medicaid Waiver In 2015, the Centers for Medicare & Medicaid Services (CMS) approved a demonstration waiver for the Indiana ACA Medicaid expansion plan that includes a HDHP and savings accounts similar to HSAs. These accounts are mandatory for enrollees with incomes of % of the Federal Poverty Level (FPL), but experience to date shows half of enrollees who made account contributions had incomes lower than 24% of FPL. An evaluation of the first year of the waiver program was not able to assess whether there were adverse outcomes due to costs. While 52% of members had no concerns with making payments PAGE 2 March 2, 2017

3 to their accounts, 16% were always worried about being able to make their contributions, and 29% sometimes worried. Eighty percent of enrollees were satisfied with their plan experience. Enrollees with chronic conditions were higher users of preventive and primary and specialty care services than were healthier members and demonstrated greater drug compliance. Improvements to HSAs Subsidized accounts can mitigate lower utilization of health services by low-income enrollees until the deductible is met. Regulatory and legislative action could provide more flexibility for HDHPs to incorporate VBID into plan designs to assist beneficiaries with chronic conditions, e.g., reduced copayment for services necessary for chronic care disease management programs or premium reduction in exchange for adherence to chronic care guidelines. INTERSTATE INSURANCE Interstate insurance competition as a panacea for finding affordable health insurance for all has been floating around for at least 10 years and has been proposed in at least 18 states. Five states actually have passed laws that allow interstate coverage. In addition, the ACA allows interstate sales. With all of this, no insurer has yet to offer an interstate plan. So what s the problem? Medical Cost Differences Insurers need to establish networks of providers willing to accept their payment rates. First, network development is a costly operational process. Second, rates for any product are developed based on the medical economy of the state where the insurer is licensed. Variations need to be configured into the payment rates so lower rates paid in an originating state are likely to present barriers to network development in a new state, so rates developed in Utah are likely not acceptable for California. Wide variations in costs also make for difficulty in developing blended-rate formulas that yield a viable product. Likely, this results in a product unsustainable in one state that is subsidized by the other. At the same time, an insurer could raise its rates in its home state but make it unmarketable with home state competition. Finally, lower payment rates will deliver a narrow and inferior network that is unlikely to attract membership. Regulatory Paternalism States want to maintain regulatory control over their markets. States want a stable competitive insurance market with adequately balanced risk pools that serve the greatest parts of their state constituencies who seek coverage. This means meeting state market conduct while simultaneously reserving requirements that protect covered lives and providers when insurers fail to make accurate projections. Bankruptcies and market withdrawal upset the stability of the risk pools regulators and insurers have developed over time. Also, states are generally unwilling to rely on other state regulators to police an insurer that fails to serve its out-of-state enrollees. Benefit Differences Insurers who serve markets with fewer state-mandated benefits are likely to be attracted to states with many mandated benefits where they can offer their home state benefit package. This leaves the marketplace infected by a competitive advantage for a cheaper interstate plan not weighed PAGE 3 March 2, 2017

4 down by the added benefit cost. The result of a cheaper plan will necessarily attract healthier persons who do not need the mandates. Persons needing mandated benefits are likely older and/or more likely to need more medical care, leaving them in insurance plans with everincreasing costs and premiums. So far, states have not been forced to accept plans without mandated benefits. Who Wants It? The notion that interstate plans will reduce costs has been around for some time. No doubt, insurers have looked this over, but none have pursued an interstate plan. The ACA allows for interstate plans. One major component when initially drafting a regulation to enact this proposal was the provision that requires licensure in both states. As initially conceived, this defeats the notion of an insurer licensed in one state selling their products in another state. The proposed regulation also required meeting EHBs and rating standards as well as federal approval. To most insurers, this presents a distinction not worth making. Needless to say, the ACA regulations were never completed. At the same time, some smaller states have attempted to develop regional plans aimed at growing larger risk pools when their current population yields smaller, less healthy risk pools. These states are concerned about increasing costs and decreasing numbers of insurers. In these instances, developing larger risk pools with nearby states that have similar medical economies could work to lower costs and premiums. Generally, the regional plans were to be constructed with equivalent benefits and market rules. Of the five states that have approved interstate sales, all anticipate some form or method to establish equivalence and local oversight. The race to the bottom starts if a company can see its way through the regulatory maze to offer a cheaper interstate product based on benefits and rating. However, states that want the broadest penetration of insured constituents will focus on making sure benefits, as well as other market conduct measures, are equally met. A state that fails to develop ways to address rate and benefit differences will see a pernicious effect on their marketplace and will fail to provide a viable health insurance market for its citizens. HIGH-RISK POOLS Another GOP proposal presented is the use of high-risk pools for those with pre-existing conditions. We already have a bit of past history in the use of high-risk pools to provide insight into why they were unworkable. First is the issue of funding these risk pools. According to a Commonwealth study, $178 billion per year would be needed to fund a federal high-risk pool that would cover the entirety of the population with pre-existing conditions. This analysis is based on the analysis that a quarter of American adults have a pre-existing condition which would make them uninsurable in the individual market prior to the ACA. More conservative estimates put this number to be at $20 billion. Regardless of the calculation method chosen, any current GOP proposal falls far short of funding these levels. Speaker Ryan s Better Way proposal, for example, presents a fund of $2.5 billion per year for ten years. PAGE 4 March 2, 2017

5 We saw the funding issue come up in past state high-risk pools that failed to cover the necessary population. Per a Kaiser Family Foundation (KFF) report, past high-risk pools only covered about 2% of the estimated 27% of people with pre-existing conditions. The argument was there was simply not enough funding for everyone. Even with this capped enrollment, the 35 state high-risk pools had a combined net loss of $1.2 billion, or $5,510 per enrollee in 2011 (KFF). Despite not covering the entire population, the cost was dramatically passed on to beneficiaries. Premiums for the high-risk market were about 1.5 to 2 times higher than the standard individual market. Only one-third of states subsidized these rates for low-income beneficiaries. Simultaneously, the plans had limited benefits. Most plans imposed lifetime maximums of $1 million or $2 million. Most plans also had fairly high deductibles. Most puzzling was the use of waiting periods of six months to a year to get on the plan which is strange as the high-risk pool was designed to get these beneficiaries who need coverage most enrolled in a plan. Given this past experience, it is clear any new high-risk pool market would need much more adequate funding and a more appropriate benefits package. The cost barrier will likely be a significant challenge to the resurgence of high-risk pools with any proposed replacement package. TAX CREDITS Most proposals include a move from cost-sharing and premium subsidies to age-adjusted tax credits. Thus far, the details have been murky on how these tax credits would be set up. It is possible premium support would be modeled after the Earned Income Tax Credit (EITC), for example. The EITC is used to incentivize low-income individuals and families to continue working. The credit helps those who have some tax liability and those who receive a credit that reduces the amount of tax they must pay. It also assists those with no tax liability by providing a refund if requirements are met. To borrow from this model, the Health Care Tax Credit could be implemented where low-income individuals and families would obtain a refund for health insurance premiums even when there is no tax liability. One major issue is that this credit is only accounted for or paid after the tax return is filed. This creates a serious barrier to the purchase of health insurance for those who are struggling to make ends meet or are living paycheck to paycheck. This would be unlike the ACA credit, which is paid directly and monthly to the insurer. The current ACA model already shows a level of difficulty for some beneficiaries who are still financially vulnerable on a month to month basis in meeting their own portion of the monthly premium. The move to tax credits could seriously limit access to coverage for this population, increase the uninsured rate, and have a negative effect on the risk pool by pricing out the younger, healthier population. Another issue with the use of tax credits is that most proposals promote the idea of age adjustments but not premium adjustments for the annual amount. The credits would also be set at a national level, not taking into account State and local healthcare cost variations. ACA subsidies currently take into account income as well as geographic variations. PAGE 5 March 2, 2017

6 MEDICAID FUNDING REFORM The reform of Medicaid funding is the source of the most controversy, even within the Republican Party itself. To see why, we need to examine the rationale behind the proposals as well as the practical reality in their application. Medicaid is currently administered by the states, with some federal requirements, and is funded by both the states and the federal government. Currently, the federal government matches state spending for eligible beneficiaries and services. With the federal matching comes federal oversight with certain requirements when it comes to cost-sharing, types of benefits, and eligibility standards. Block Grant Proposal With a block grant, states would receive a certain predetermined amount for Medicaid. The amount would increase each year to adjust for inflation and other growth factors. Because this proposal is intended to save federal dollars, the amount would be much lower than the current levels of funding. If a state needs to spend more on its program, the state would then be responsible for the entire extra cost of the program. With this type of proposal, we will certainly see states needing to cut back on beneficiary benefits in times of significant enrollment during economic changes. Increased healthcare costs would be passed on to these vulnerable beneficiaries through cuts to eligibility and benefits. Per Capita Funding Per capita proposals are similar in that they cap federal spending. Under the per capita approach, the federal government would cap funding per enrollee. The funding would be increased just as above through an annual adjustment for inflation and some other possible factors. The pre-set amount would either be the same for all beneficiaries or would be determined based on age or disability status. This approach is more preferable than block grants as it adjusts for enrollment. However, just as above, the approach would not take into consideration increasing healthcare costs, economic downturns, or other pressing state considerations when developing their annual budgets. State Flexibility or Pressure to Trim? The proposal that now has more likelihood of being enacted is the use of per capita payments. Under this proposal, the federal government will save less money but will allow for greater financing protections for states due to the adjustment for enrollment. These proposals are touted as granting flexibility for states by alleviating certain regulations due to less accountability for less federal matching. States would then, for example, be able to impose premium contribution or work requirements. The more unfortunate effect of this flexibility, however, is the likely decrease of beneficiary benefits and access due to budgetary constraints. If block grants or per capita proposals are enacted, we will likely see states faced with a choice of increasing their spending or passing on this cost through higher cost-sharing and a decrease in benefits. From this, we would also anticipate a squeeze in provider reimbursements, and higher pressure to reduce already low administrative expenses. PAGE 6 March 2, 2017