On Wednesday, House Republicans, led by Speaker Paul Ryan, released a plan for reforming health care in the United States. The plan is part of Ryan’s broader effort to rally his House colleagues around an ambitious policy agenda, covering everything from taxes to national security to improving the safety net for lower-income households.
The health care plan is not yet in legislative form, and so some important details are not specified. Still, it’s an ambitious plan, and represents a real milestone. It is the first proposal released since the enactment of the Affordable Care Act (ACA) in 2010 that legitimately can be called the Republican alternative. If Congress were to take up legislation in 2017 to roll back the ACA and replace it with something different, the starting point for drafting the legislation would be this plan.
The House Republican’s health plan builds on the work of earlier proposals, including the plan authored by Sen. Richard Burr, Sen. Orrin Hatch, and Rep. Fred Upton as well as the plan introduced by Rep. Tom Price. These precursors to the House GOP plan were built on the same set of common principles and objectives: repeal and replacement of the ACA; more choices, lower costs, and greater flexibility for consumers; protection of the most vulnerable Americans; incentives for innovation and high quality medical care; and preservation and protection of Medicare.
Ryan and the key committee chairman who wrote the new plan — Rep. Kevin Brady of Ways and Means, Rep. John Kline of Education and Workforce, Price of Budget, and Upton of Energy and Commerce — have stressed that the plan they released this week is a work in progress; they plan to continue improving and refining it in the months ahead based on feedback from their colleagues, from the public, and from independent experts.
Intent And Organizing Principle
The basic goal of the plan is to ensure all Americans have access to affordable health insurance and high quality health care services, but without as much reliance on federal control and regulation as the ACA. The overriding theme of the plan’s many reforms is consumer-directed health care. The ACA moved substantial power and authority over the insurance marketplace and the care delivery process to the federal government. The House GOP wants to reverse this shift of authority by giving consumers and states more control over important decisions in the health sector.
The plan is far-reaching. There are major reforms in every important component of health care: the insurance marketplace for working-age individuals, employer coverage, Medicaid, and Medicare.
Access To Affordable Health Insurance For All Americans
The House GOP plan ensures access to health insurance for all Americans in much the same way the ACA does, by retaining employer-based coverage and providing a refundable tax credit to households without an offer of a job-based plan. Under this formulation, there is no reason why anyone in the United States who wants health insurance would be forced to go without it.
While the House plan, by necessity, has a structure that is similar to the ACA in this regard, with a large employer-based insurance system and tax credits for those outside of it, the plans are very different in their details.
Tax Preference For Employer Coverage Is Retained, With Upper Limit To Replace Cadillac Tax
In the past, some Republicans have proposed to fully replace the tax preference for employer-paid health insurance with a tax credit for all U.S. households. That idea was the foundation of Sen. John McCain’s plan when he ran for president in 2008. This plan, however, recognizes that job-based insurance has served many millions of American very well and should not be disrupted needlessly. More than 150 million Americans of working age, along with their families, get health insurance through their place of work. Most enrollees in these plans like what they have and are reluctant to give it up for something else that they are less familiar with. The House plan leaves employer coverage intact, and in fact removes the ACA’s many regulations on wellness plans and other requirements that have driven up costs for workers and their families.
The only change for job-based insurance in the House plan is an upper limit on the federal tax preference for employer-paid premiums. This tax would replace the much-maligned “Cadillac” tax of the ACA. The “Cadillac” tax imposes a uniform 40 percent excise tax on high-premium plans, regardless of the wages or salary of the workers. The House GOP plan does not specify the dollar amount of the upper limit but makes it clear that it would be set initially at a level that exempts the vast majority of plans. The limit would also be adjusted to account for high health care costs in certain areas of the country. Employer-paid premiums above the proposed limit on the tax preference would count as taxable income to workers, which means that, unlike the “Cadillac” tax, this tax would fall most heavily on upper-income taxpayers.
For Those Not Offered Employer Coverage, Refundable Tax Credits That Vary By Age But Not Income
Persons who are not offered employer coverage would be eligible for a refundable federal tax credit to help them purchase health insurance. This is also similar to what is provided in the ACA, but the GOP plan’s credits are markedly different in important respects. First, the credit would be available to anyone without an offer of coverage by an employer, and would not be reduced for people as their wages and incomes rise. This means middle-class families without an employer plan would get financial assistance for the purchase of health insurance.
Second, the credit would be set at a level sufficient to purchase a median-priced plan based on pre-ACA coverage levels and costs, and it would be adjusted for the age of the taxpayer. A credit of this size would allow all Americans outside of employer coverage to get insurance that protects them financially from high costs and provides them access to mainstream physicians and hospitals.
Third, there are no federal benefit mandates restricting the use of the credits. The credits can be used to purchase any state-approved insurance plan.
Fourth, consumers would be allowed to deposit any credit amount in excess of their insurance premium into a Health Savings Account (HSA).
The House plan eliminates the individual and employer mandates of the ACA, which means some changes in insurance regulation are also necessary. The plan would protect people who have a pre-existing condition by precluding adjustments in premiums or coverage for anyone who stays continuously insured. This would allow people to move seamlessly between the employer and individual markets without penalty. The ACA’s ban on rescissions and its requirement of coverage of young adults on their parents’ policies up to age 26 would be retained.
The ACA’s restrictions on age rating of insurance plans at the state level would be substantially relaxed; as a default, the proposal would allow the ratio between premiums charged to the oldest enrollees and the youngest to be 5:1, but states could choose to adjust the default limitation. Under the ACA, the ratio cannot exceed 3:1. The House plan would allow younger consumers access to more affordable coverage.
States would once again be the primary regulators of health insurance, but consumers in one state would be allowed to purchase plans licensed and approved by other states too. This proposal would increase pressure on states to review and eliminate costly and unnecessary regulations that drive up premiums for consumers.
The plan also provides $25 billion in new federal funding for high risk pools. These funds would be used to keep premiums down for everyone in the individual insurance market by directly subsidizing the most expensive enrollees.
The House GOP plan would transition away from the enhanced federal matching rates for Medicaid expansion of the ACA, relying instead on the federal tax credit to help families with incomes above Medicaid eligibility limits to purchase health insurance.
Medicaid would also undergo a substantial reform. The current federal matching system would be scrapped in 2019 and replaced with per-person allotments to states based on four eligibility groups: the elderly, the disabled, children, and able-bodied adults. The initial per-person payments would be based on historical spending patterns for these groups in the states.
The matching payments used to finance the program today are the source of much dysfunction in the program. The federal government pays for, on average, about 60 percent of each additional dollar of state Medicaid spending. This provides a strong incentive to the states to move more and more spending into Medicaid.
The House plan for fixed, federal per capita payments would provide financial support for the health care needs of the low-income populations needing public support for their medical care, but without the strong incentive for states to continually grow the program. States would be responsible for 100 percent of the costs above the federal per capita payments.
The switch to per capita allotments would come with substantial new flexibility for the states to manage the program without federal interference. States would have the freedom to set benefits and eligibility levels, and to pay providers as they see fit.
The proposal would also allow states to opt out of the per capita payment system and move to a full block grant. Federal payments to the states choosing this option would be based on actual spending in a reference year and then adjusted in future years. Under this option, states would have maximum flexibility to adjust eligibility and benefits for the non-disabled, non-elderly program enrollees but would be required to provide the services guaranteed under current law to the mandatory elderly and disabled populations.
State Innovation Grants
In addition to a newly flexible Medicaid program, at least $25 billion in federal funding would be available to support statewide reform efforts. States would apply for grants based on their plans to improve the health status of their populations. The grant applications would include targeted goals for health improvement and reductions in the number of uninsured residents. States would be eligible for bonus payments based on their performance.
The House GOP plan proposes reforms to strengthen Medicare and ensure that the program will continue to serve future generations of beneficiaries. The plan takes a three-step approach: changes would be made to promote greater choice and competition in Medicare; the fee-for-service Medicare program would be modernized to promote efficiency in delivering services and to bend the cost curve; and the program would transition to the premium support model, providing a choice of private plans alongside traditional fee-for-service Medicare.
To promote choice and competition, the GOP plan would restore flexibility to Medicare Advantage (MA) plans that was removed by the ACA. A bonus to plans achieving a 5-star performance rating would be reinstated, giving MA plans an incentive to offer high-value options. The current restriction on seniors that prevents them from switching to a new MA plan in the first three months of the year would be lifted, making enrollment in MA more attractive. MA plans would also be allowed to adopt value-based insurance designs, which provide incentives to use high-value services.
The Independent Payment Advisory Board (IPAB) and the Center for Medicare and Medicaid Innovation (CMMI) would be abolished. These organizations were granted unprecedented authority by the ACA to impose policy changes on Medicare that could threaten access to care for beneficiaries. CMS would continue to test new payment models using a more flexible approach that allows plans and providers greater opportunity to adapt payment models to local conditions.
Traditional Medicare’s confusing benefit structure and cost-sharing requirements would be modernized. Medicare Part A, which primarily covers hospital services, and Part B, which covers most outpatient services, would be combined. A single deductible, rather than separate deductibles for different services, and a cap on the maximum out-of-pocket expenses paid by beneficiaries would simplify the program and provide an important financial protection that has been lacking in Medicare for 50 years. To promote more careful purchasing on the part of beneficiaries and their providers, Medigap coverage for cost-sharing requirements would be limited.
Other changes include a personalized care demonstration project, which would allow beneficiaries and providers to voluntarily use items and services not covered by Medicare without a loss of benefits; replacing the separate disproportionate share programs provided by Medicare and Medicaid with a single uncompensated care fund; improving Medicare Compare to provide better information on quality of care and patient experience offered by traditional Medicare and MA plans; and phasing in an increase in the age of Medicare eligibility to match the Social Security retirement age.
The transition to premium support would build on these other reforms intended to promote choice, competition, and efficiency in Medicare. Beginning in 2024, newly enrolled Medicare beneficiaries would be given a uniform subsidy to purchase insurance from competing health plans, including the reformed fee-for-service Medicare program. (Those already on Medicare before 2024 would not be subjected to higher premiums based on the switch to the premium support model.) The premium support payment would be adjusted to provide the sick with higher payments (reflecting their greater use of health services). Lower-income seniors would receive an additional subsidy to help cover their out-of-pocket costs. Continuing current policy, higher-income seniors would pay a greater share of the premium than those with lower incomes.
The House GOP plan includes a number of other recommendations:
- Health Savings Accounts: The plan promotes more widespread enrollment in HSAs by: setting the maximum contribution to an HSA annually at the deductible level of the plan; allowing HSA funds to be used to purchase direct primary care arrangements and direct-practice medicine; allowing HSAs set up before April 15 to be used to pay for medical expenses from the prior year; allowing spouses to make catch-up contributions to the same HSA account; and making enrollees in TRICARE and the Indian Health Service eligible for HSAs.
- Protecting Self- Insurance: The plan preserves self-insurance as an option for small employers by preventing the Departments of Labor and Health and Human Services from reclassifying stop-loss insurance, often used in conjunction with self-insurance, as group health insurance. This would provide certainty to employers seeking more flexibility and control over the coverage plan they offer their workers.
- Medical Liability Reform: The plan would impose a nationwide limit on non-economic damages in medical malpractice lawsuits. The intent is to reduce the uncertainty created by the possibility of unlimited damage awards, which encourages physicians to practice defensively instead of based on the best clinical evidence. States would also be encouraged to pursue other reforms, such as health courts, “loser pays,” and independent medical panels for reviewing evidence prior to the discovery phase of filed lawsuits.
- Medical Innovation: The plan would encourage more rapid development and approval of new cures and treatments by: facilitating more research collaboration through lowering regulatory barriers to the sharing of data; incorporating more patient experience data in the treatment approval process; incorporating modern statistical tools into the clinical trial process; and removing regulatory uncertainty around medical apps and other technologies.
Opponents of the ACA in Congress have frequently been criticized for not coming forward with an alternative plan of their own. But it was not realistic to roll back the ACA during the Obama presidency, and so there was little incentive for opponents to offer up a plan that would open them up to criticism too.
As the political calendar has turned, circumstances have changed. The current administration will be leaving office in less than a year, and it may be possible to take up health care legislation in 2017. It is therefore appropriate for key GOP leaders to present an outline of their vision for reform at this time. The plan will help inform the political debate leading up to the elections in November, and allow voters to see more clearly what would happen under different political scenarios.
Of course, a vision for reform is not a full-scale legislative plan, so this is not the end of the story. Further, the ACA has already made far-reaching changes in insurance arrangements and many other aspects of health care in the United States that will not be easily reversed or even changed. But it is also not a forgone conclusion that the path we are now on is the only way to move forward. House Republican leaders have taken an important step toward defining for the country an approach to reform that differs in important ways from current policy. It will be up to the voters to decide if they like what they see.
James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute. Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute (AEI).