In March 2017, we issued a Client Advisory (available here) on the proposed and ultimately unsuccessful “American Health Care Act” (the “AHCA”), House Republicans’ first attempted legislation to replace the Affordable Care Act (“ACA”) under President Trump’s Administration. Fearing that the original AHCA would not have enough votes to pass the House, the AHCA was pulled and no vote was held in the House. While it appeared that lawmakers were going to turn their efforts to tax reform, House Republicans made further changes to the AHCA to gain additional support. After several amendments to the original proposed legislation, the AHCA, as amended, finally came up for a vote in the House and was approved on May 4, 2017. It now moves on to the Senate where, as a reconciliation bill, it will need a simple majority to pass (51 votes, or 50 votes with Vice President Pence as the tiebreaker).
As we mentioned in our first Client Advisory regarding the AHCA, we do not typically comment on proposed legislation; however, the AHCA warrants special attention given its magnitude and the determination shown by the President and Congressional Republicans to see it through. To that end, we have updated our original Client Advisory to reflect the status of and the changes under the amended AHCA.
From an employer’s perspective, not much has changed in the amended AHCA versus the AHCA as originally proposed. The two primary amendments from the original version of the AHCA are (1) the ability for states to obtain waivers from certain ACA market reforms, including waivers that would allow a state to, among other things, (a) set its own essential health benefits; and (b) replace the AHCA’s continuous coverage incentive’s late-enrollment penalty with health status rating beginning in 2019 (note that with regard to (b), the waiver would only apply to individuals purchasing coverage in the individual (not group) market who do not maintain continuous coverage, defined as having no greater than a 63 day lapse in coverage), and (2) allocating an additional $8 billion for individuals who, as a result of their state obtaining a waiver, may be subject to increased premiums.
Employers will be pleased to know that the amended AHCA continues to include revisions to the penalties under the employer mandate, the ACA’s requirement for certain large employers to offer health coverage to full-time employees or be subject to penalties. Under the AHCA, employer mandate penalties are effectively repealed by reducing the applicable penalties to $0. This revision would be retroactively effective as of January 1, 2016.
The most important provisions of the AHCA for employers include the following (which were present in the original AHCA):
Reduction of Penalties under the Individual and Employer Mandates. The AHCA would effectively repeal the individual and employer mandate provisions of the ACA by reducing the applicable penalties to $0. The repeal would be retroactively effective as of January 1, 2016.
Supercharged HSAs and FSAs. The AHCA would increase contribution limits for Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) for individuals and families to use for health care expenses. The Act would increase the annual HSA contribution limit to equal the out-of-pocket limitation for high deductible plans (for 2018, a limit of $6,550 for self-only coverage and $13,100 for family coverage), and would repeal the ACA’s annual limitation on an individual’s contributions to an FSA.
FSA, HRA, or HSA Reimbursement for Over-the-Counter Medications. The AHCA eliminates the ACA’s limitation that a health FSA, HRA, or HSA could only reimburse over-the-counter medications (other than insulin) if prescribed by a physician. This change would be retroactively effective back to the beginning 2017.
Refundable Tax Credits. Repeal the ACA’s income-based premium tax credits and replace them with age-based, refundable tax credits for individuals and families who do not receive insurance through work or a government program to use for the purchase of insurance.
Further Delay to the Cadillac Tax. Delay the 40% “Cadillac Tax” on high-cost employer-sponsored health coverage for all tax years beginning prior to January 1, 2026.
As with the original AHCA, certain portions of the ACA would remain intact, including the requirement for certain plans to cover dependent children until age 26 and the prohibitions on lifetime and annual limits. The ACA’s prohibition on pre-existing condition exclusions would also remain in effect under the AHCA; however, to protect against adverse selection (when healthy individuals forego purchasing insurance and only purchase coverage after a health issue arises), the AHCA contains a “continuous coverage incentive,” which would allow insurance issuers to assess a flat 30 percent late-enrollment surcharge on top of the base premium for individuals with a lapse in health insurance coverage of greater than 63 days within the last 12 months. Issuers would be able to assess the late-enrollment surcharge for the first 12 months of coverage. Additionally, while we expect to see changes to employers’ ACA reporting obligations, it appears that some form of employer health coverage reporting will remain for employers (likely by using the W-2).
As with the original AHCA, it remains to be seen whether, and in what form, the AHCA will make it through Congress, and what impact the Act will have on employers and their health plans.
We expect the AHCA to face significant, if not insurmountable odds in the Senate, where Republicans hold a much narrower grip on the chamber. No Democrats voted for AHCA in the House and we can certainly expect the same partisanship in the Senate. With 52 Republicans and 48 Democrats (including two Independents who caucus with Democrats), the Republicans cannot afford to lose many Republican votes and still pass the AHCA. It seems likely that AHCA’s continuation of the Medicaid expansion and additional funding for individuals with pre-existing conditions will be enough for at least one of Senators Rand Paul, Mike Lee, or Ted Cruz, outspoken opponents of both facets of the original ACA, to vote no. Efforts to appease at least two of those Senators may come at the expense of votes from other, more moderate Republicans in the Senate. In short, we can expect the debate among Senate Republicans to look a lot like the national debate on the proper role of government in health insurance, a debate driven by simple economics on one hand and very personal, often emotional health circumstances on the other.