Three Senate Republicans Propose to Repeal and Replace Obamacare

Senators Richard Burr (R-NC), Orrin Hatch (R-UT), and Tom Coburn (R-OK) recently released a legislative proposal that would repeal and replace the majority of the Affordable Care Act (ACA), although leaving in place the ACA's Medicare reforms. The Patient Choice, Affordability, Responsibility, and Empowerment Act (CARE Act) would repeal the ACA and replace it with a number of provisions to reform the individual insurance market, Medicaid, and the tax treatment of employer-based coverage. There is no formal cost estimate from the Congressional Budget Office (CBO) as it is not yet an official piece of legislation, so it is not possible to examine fully their claim of "not adding one cent to the deficit." There is a private estimate from an outside group that estimates it would achieve $1.5 trillion of net deficit reduction over ten years, but some important details of the legislation that could have significant budgetary impacts are still unclear, particularly the details of the cap on the tax exclusion for employer-sponsored health insurance (ESI) and the specifics of the Medicaid grants.

Medicaid Reform & Refundable Tax Credits

The Act alters healthcare options for low income individuals. Those making below 300 percent of the federal poverty level (FPL) would be eligible for an advanceable, refundable tax credit to assist in covering health insurance costs. This is a reduction from the 400 percent limit in effect under the ACA and is a significant source of budgetary savings. The proposal envisions creating an Office of Health Financing within the Treasury Department to oversee secure and efficient tax credit distribution. It also repeals the ACA's Medicaid expansion to cover individuals making up to 138 percent of the FPL. Instead, it proposes several Medicaid reforms including:

• Changing Medicaid payment to a system of targeted grants to states, similar to per-capita caps, for vulnerable populations such as pregnant women, low-income children and families, low-income elderly and disabled individuals. The grants would be based on the number of people in a state with income under 100 percent of the FPL, and would be adjusted annually for inflation plus one percentage point (CPI+1%) and for population and demographic factors. Because the grants would account for the growth in a state's low-income population, they would be more countercylical than standard block grants.
• Giving states a defined budget for long-term care services and support for low-income elderly or disabled individuals.
• Giving the option to those eligible for Medicaid to instead receive the tax credit and purchase private insurance.
• Reinstating Health Opportunity Accounts (HOAs), which were initiated as a five-year, ten state pilot in 2005. This program allows those eligible for Medicaid to obtain high-deductible insurance and federally- or state-funded savings accounts up to $2,500 per eligible adult and $1,000 per child to pay for medical expenses. Deductibles can be up to 10 percent greater than the HOA amount, in which case the recipient incurs out of pocket expenses for medical care within the coverage gap. CBO estimated the cost of the 2005 pilot program at $261 million over ten years. If expanded to all 50 states and made permanent, clearly the cost would increase.

Individual Mandate Repeal and Individual Market Structure

One of the key features of the Affordable Care Act is preventing insurance companies from charging higher premiums or denying coverage for people with pre-existing conditions. To prevent healthy people from waiting until they get sick to sign up for coverage, the ACA requires individuals to get insurance coverage each year or pay a penalty.

The CARE Act has a different approach to help prevent insurance companies from discriminating against people with pre-existing conditions. Instead of an individual mandate or an outright prohibition on companies denying coverage for pre-existing conditions, the CARE Act proposes a “continuous coverage” protection. Insurance companies must offer coverage at standard rates regardless of a pre-existing condition as long as the person has not had a lapse in insurance coverage, regardless of whether that coverage came from an employer, the individual market, or a public program. However, if they have had a lapse in coverage, insurers can take into account their health status and charge whatever premiums they like for a new insurance plan, or deny coverage altogether. There would also be a one-time open enrollment period after the Act’s rollout in which anyone could enroll in plans for standard rates regardless of health status. As a backstop for those without continuous coverage and in poor health, the Act would also provide some federal funding to help states administer high-risk pools for such individuals.

According to the bill's authors, this will sufficiently encourage insurance coverage without a mandate. While those who are uninsured would no longer face the tax penalty for lack of coverage, they would face the prospect of much higher insurance premiums in the future if they develop an expensive medical condition. To a perfectly rational consumer with foresight, this may actually be a stronger incentive to maintain health insurance for many Americans, but particularly combined with the partial rollback the ACA's Medicaid expansion, it appears likely that the CARE Act would leave more people uninsured than the ACA. The only private estimate to date projects that 5 percent fewer people would be insured in 2023 under the CARE Act than CBO's projection of coverage with the ACA.

Notably, the CARE Act would not establish federally-regulated marketplaces like the ACA, and no minimum benefits would be required of health insurance plans. Many more types of health plans, therefore, could be offered, including less comprehensive ones. Lifetime limits on benefits, however, would still be banned.

CBO’s most recent estimate of the revenue from the individual mandate penalty was $45 billion over 10 years.

Tax Provisions

The proposal removes the mandate penalty for large employers to provide health insurance and repeals several taxes, including the medical device tax, the tax on branded pharmaceutical drugs, and an excise tax on high-cost, “Cadillac" health insurance plans provided by employers. Instead, it places a cap on the tax exclusion for employer-provided health coverage, although the level of the cap is unclear, and indexes it to grow at CPI plus 1 percentage point annually. The primary summary states that the cap would be set at 65 percent of an average plan’s costs, but a Q&A released later states that it would be at "65 percent of the average market price for an expensive high-option plan." The difference between these two policies, and the specific levels they imply, will have a very large effect on the budget impact of the CARE Act. 

While the tax repeals would account for substantial lost revenue (CBO estimated that just the ACA's additional Medicare payroll taxes are scheduled to bring in $318 billion through 2022), the new cap on the tax exclusion could provide a significant new revenue base, depending on its specifications.  For reference, CBO recently estimated that replacing the Cadillac tax with a cap on the employer-sponsored health insurance exclusion at the 50 percentile of health premiums, indexed to economy-wide inflation, would raise more than half a trillion dollars over ten years.

Other Changes

On medical liability reform, the CARE Act is not specific, but it either enacts or provides incentives for states to adopt a range of solutions. The cost savings would vary based on the specific policies chosen, but most of the savings for the federal budget come from caps on lawsuit awards. CBO's Budget Options report has a relatively aggressive option which would save $64 billion over ten years.

The proposal also expands Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA), which let employees pay for health care expenses with pre-tax dollars. Certain eligibility restrictions would be eliminated, and the package of services covered would be expanded to include coverage for long-term care insurance and COBRA premiums.

Like the ACA, the CARE Act requires health plans to offer dependent coverage until age 26, although it gives states the ability to opt out of this provision.

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The Republican Senators have put forth a serious proposal to replace the Affordable Care Act, which includes multiple measures with the potential to help bend the health care cost curve. It keeps all of the Medicare savings embodied in the ACA, but offers alternative methods to reform Medicaid and cover preexisting conditions without an individual mandate. Since the CARE Act is not yet legislation, the Senators have stated their next step is to work with their Congressional colleagues and experts in the health community to further develop and refine the proposal. It will be interesting to see how it progresses.