10 Ideas to Improve the House GOP Obamacare Replacement

Last week, a draft House GOP bill to repeal and replace the Affordable Care Act (ACA or "Obamacare") was leaked to several outlets, and some reports suggest it would result in substantial reductions in coverage if enacted. If policymakers work to extend coverage relative to this draft, they must do so in a fiscally responsible manner. In this blog, we suggest several options to ensure that any coverage expansion meets this test. 

The leaked bill would repeal the ACA's tax increases and penalties for the individual and employer mandates; replace its income-based subsidies with a flat, refundable, and advanceable tax credit; phase down and cap its Medicaid expansion; expand Health Savings Accounts (HSAs); encourage state innovation; and make other adjustments. Though the leaked bill appears to only be a draft and reportedly is being revised, some press reports indicate that an initial estimate by the Congressional Budget Office (CBO) finds this draft would result in substantial losses in insurance coverage compared to the ACA – possibly reducing coverage to as low as pre-ACA levels.

One option to expand coverage relative to the draft would be to increase the size of the health insurance tax credits – which as proposed would total $2,000 to $4,000 per person, depending on age. Another option would be to offer a higher matching rate for the Medicaid expansion population than the base population (the draft bill reduces the 90 percent matching rate down to each state's rate for their base Medicaid).

Unfortunately, these two options – along with many other non-regulatory changes to expand coverage – would also increase the cost of replacement. And it is important that any "repeal and replace" bill is fully paid for and does not add to the debt. Assuming the draft bill meets this test, a number of options exist to ensure future legislation with larger credits (or further spending or tax breaks elsewhere) continues to be fiscally responsible.

Some options to pay for increases include:

1. Means-test the flat tax credit for higher earners. The leaked draft would replace the ACA's income-based tax credits with a flat, refundable, and advanceable tax credit that varies only by age and goes to everyone who purchases insurance on the individual market. In other words, the tax credit would be available to middle- and high-earners, many of whom receive little or no subsidy under Obamacare. Flat credits do offer some simplicity, efficiency, and macroeconomic advantages over credits that vary by income, but they can also be significantly more expensive. In order to bring down the cost, policymakers could maintain the flat tax credit for most on the individual market but phase it out for higher-earning individuals. In 2013, CBO estimated that eliminating the ACA's subsidies for individuals with incomes over 300 percent of the federal poverty line would save over $100 billion over a decade and would actually slightly increase coverage in the process. It's possible a phase-out of this new tax credit could have a similar impact and perhaps generate greater savings.
2. Create a lower tax credit value for children. The leaked draft offers families a combined tax credit based on the number of family members and the age of each family member (considering the five oldest family members and capped at $14,000). Children appear to be counted as "under 30" and therefore families receive a credit of $2,000 per child. The credit per adult ranges from $2,000 to $4,000, depending on age. Rather than offering the same size credit for children as adults under 30, policymakers could create an additional category for children under 18 (or under 19 and still in high school). Because health costs tend to be lower for this group and insurance plans tend to charge less for adding an additional child rather than a young adult, this credit could be smaller than the credit for young adults.
3. Strengthen limits on the tax exclusion for employer-sponsored health insurance (ESI). The leaked proposal would repeal the "Cadillac tax" on high-cost health insurance plans and replace it with a limit on the ESI tax exclusion at the 90th percentile of annual premiums. Given that the health exclusion is both the largest tax expenditure and one of the most significant drivers of health care cost growth, policymakers should consider a tighter limit. Last week, we offered a few options to do so; for example, limiting the income tax exclusion to the 75th percentile would save $200 billion, or limiting it to the 50th percentile would save $400 billion. These limits would not only increase revenue to pay for a replacement but also help to slow the growth of overall health costs.
4. Retain the ACA's taxes until the transition to the new subsidy and Medicaid system. The leaked proposal would repeal all of the ACA's taxes immediately even though it would retain most of its coverage provisions until 2020. By repealing the ACA's pay-fors immediately but its costs on a delay, the draft bill will likely add to the debt in the near term. Keeping those pay-fors as long as ACA's coverage provisions would save roughly $150 billion.
5. Retain or replace the Medicare Hospital Insurance (HI) surtax in the ACA. The leaked House bill would eliminate the Medicare HI 0.9 percent surtax on high earners. This repeal would weaken the Medicare Part A trust fund and advance its insolvency date. Policymakers could consider retaining this dedicated tax, which would save $150 billion. Alternatively, they could replace the lost Medicare revenue by eliminating the ESI exclusion for the Medicare payroll tax only, which could raise up to $250 billion.
6. Finance "State Innovation Grants" with an assessment on insurance companies. The reinsurance and risk adjustment provisions in the ACA are fully paid for with contributions from insurance companies. The leaked draft proposes to encourage states to help high-risk populations through $100 billion of state innovation grants financed from general revenue. Instead, those innovation grants could be funded in part or in whole with contributions similar to those used to pay for reinsurance and risk adjustment. Doing so could save up to $100 billion.
7. Enact medical malpractice reform. Most GOP health reform proposals over the years – including the House GOP "Better Way" plan – call for medical malpractice reform (i.e. tort reform). Depending on the details, CBO estimates that medical malpractice reform could reduce total health care spending by about 0.5 percent, suggesting it is therefore likely to both slightly reduce premiums and slightly increase overall health coverage. Assuming it is allowed in a reconciliation bill, adding medical malpractice reform to the House replacement bill could save up to $70 billion over a decade.
8. Limit the ability of states to inflate Medicaid matches. The leaked draft reduces Medicaid costs in two ways: by reducing the matching rate on the expansion population and by placing a per-capita cap on total Medicaid spending in each state. However, the legislation continues to allow states to inflate their claimed spending in order to receive more federal money than current law intends. In order to partially replace or supplement other Medicaid policies, policymakers could improve restrictions on "creative financing" mechanisms, such as Intergovernmental Transfers (IGTs) and provider taxes. As we've explained before, provider taxes are especially troubling because they allow states to increase provider payments on paper, but not in reality, in order to increase federal Medicaid spending to the states. Currently, provider taxes are limited to 6 percent of net patient revenues. Reducing that threshold to 4 percent would save nearly $50 billion over a decade. Gradually banning the use of provider taxes altogether, as the Simpson-Bowles plan proposed, would save substantially more.
9. Raise the Medicare age and provide for a buy-in at age 62. The current age for Medicare eligibility is 65; the "Better Way" plan proposes transitioning the Medicare age to 67, which would align it with Social Security's full retirement age. Policymakers could adopt this change while also providing for a "buy-in" option for Medicare at age 62 – the same as the earliest eligibility age for Social Security. The buy-in would charge beneficiaries the full cost of Medicare, but it would be subsidized by the same tax credit as those who buy insurance on the individual market (though that credit could also be means-tested as in option 1). This proposal would likely save $25 billion to $50 billion over a decade and significantly more over the long run. At the same time, it could help to strengthen the individual market and slightly increase overall coverage.
10. Enact Medicare reforms. Medicare is the fastest growing and second largest government program. As a result, it is one of the most significant drivers of our growing national debt. Medicare cost growth must be slowed in order to ensure the solvency of the HI program and restrain the growth of our national debt. A fraction of these savings could also be used, in theory, to fund "replace" legislation. Some of the Medicare ideas included in the "Better Way" plan include modernizing cost-sharing, restricting Medigap plans, and allowing private plans to compete directly with Medicare. Policymakers could also pursue further means-testing of premiums, reductions in various provider payments, changes to reduce drug prices, and payment reforms to continue the transition away from fee-for-service.

House GOP leaders have an opportunity to pursue thoughtful health reform that begins with their leaked draft with some key adjustments. To the extent any improvements result in greater costs, however, they should ensure those costs are fully offset. Regardless, policymakers should use health reform as an opportunity to reduce deficits and slow health care cost growth. The ideas above could help achieve these goals.