Christine Eibner, Sarah Nowak
C. Eibner and S. Nowak, Evaluating the CARE Act: Implications of a Proposal to Repeal and Replace the Affordable Care Act, The Commonwealth Fund, May 2016.
Since the Affordable Care Act (ACA) was enacted in 2010, the U.S. Department of Health and Human Services estimates that 20 million people have become newly insured, and approximately 24 million people have gained access to subsidized or free care through marketplace tax credits and Medicaid expansion. Despite these successes, there have been repeated calls to repeal the law and replace it with an alternative set of policy reforms. Those wishing to replace the law often argue that it goes too far in imposing requirements on individuals, businesses, and health insurers. The individual mandate, requiring most Americans to obtain coverage or face penalties, and the employer mandate, requiring large businesses to offer coverage or face penalties, are particular targets of criticism. Those opposing the law also argue that regulations restricting insurers’ ability to charge higher premiums to older and sicker adults may lead to unnecessarily high premiums for younger and healthier individuals. An additional concern is that the law could substantially increase federal spending in the long run, given the cost of Medicaid expansion and the ACA’s approach to subsidizing health insurance coverage in the marketplaces. Both the Medicaid expansion and the marketplace tax credits offer a minimum level of benefits to individuals and restrict cost-sharing amounts in a manner that protects enrollees from rising health care spending. Many proponents of repeal-and-replace alternatives favor a premium-support approach, in which federal subsidies are based on a fixed amount that grows over time at a predictable rate (e.g., based on the Consumer Price Index, or CPI).
In this report, we analyze the effects of the Patient Choice, Affordability, Responsibility, and Empowerment (CARE) Act, a comprehensive proposal to repeal and replace the ACA offered by Senator Richard Burr (R–N.C.), Senator Orrin Hatch (R–Utah), and Representative Fred Upton (R–Mich.). The CARE Act addresses many of the criticisms of the ACA raised by those wishing to repeal and replace the law, including capping federal Medicaid funding allotments, providing premium-support subsidies for low-income individuals, and relaxing health insurance rating regulations to allow age variation in premiums along the lines of variation in spending. The CARE Act would also eliminate the individual and employer mandates. To incentivize people to obtain health insurance, the CARE Act imposes a “continuous coverage” provision that would allow insurers to charge higher premiums or deny coverage to individuals who have not remained continuously enrolled.
One challenge in modeling options to repeal and replace the ACA is that there are many current proposals, and there is no clear coalescence around a single policy. We focus on the CARE Act because it is a relatively detailed proposal that addresses most of the standard criticisms of the ACA. Many other repeal-and-replace proposals contain similar ideas, although specifics vary. For example, like the CARE Act, proposals offered by Paul Ryan, Jeb Bush, John McCain, and Marco Rubio contained alternatives to the ACA’s marketplace tax credits that involve premium-support tax credits. Among the various alternatives, the CARE Act offers a particularly useful subject for analysis because it was written by legislators who have contributed to the health care reform debate for decades, and builds on a related proposal offered in 2012 by Sens. Burr, Tom Coburn (R–Okla., now retired), and Hatch.
Below, we describe the reforms introduced by the CARE Act:
Individual Market Reforms: The ACA requires insurers to offer coverage to all willing buyers at standard rates that vary only by age, place of residence, and smoking status. Older adults can be charged no more than three times as much as younger adults (3-to-1 rate banding). Under the CARE Act, insurers would be required to offer coverage to all willing buyers at standard rates that vary only by age and place of residence, as long as buyers maintain continuous coverage for at least 18 months. There would be a one-time open enrollment period during which standard rates would be offered to everyone, regardless of prior health insurance status. Insurers would be permitted to charge older individuals no more than five times as much as younger individuals (5-to-1 rate banding).
Tax Credits for Low-Income Individuals and Small-Business Workers: The ACA provides tax credits to individuals with incomes between 100 percent and 400 percent of the federal poverty level (FPL) who do not have access to employer-sponsored coverage (including small-group coverage) or Medicaid. These credits can be used to purchase coverage in the health insurance marketplaces. Eligible individuals must pay a percentage of their income toward health insurance premiums; in 2014 these percentages started at 2 percent for those with incomes between 100 percent and 138 of the FPL and rose to 9.5 percent for those with incomes between 300 percent and 400 percent of the FPL. Over time, the required contributions increase based on the ratio of premium growth to CPI growth, so that enrollees and the federal government share the costs of premium growth in excess of CPI growth. Once an individual or family reaches the required contribution amount, the federal government covers the remaining cost of coverage, up to the price of the second-lowest-cost silver plan available to the enrollee. Those with incomes between 100 percent and 250 percent of the FPL are additionally eligible for cost-sharing reductions to defray the cost of copayments, deductibles, and other cost-sharing.
The CARE Act would offer refundable, advanceable (i.e., credits are available upfront, rather than delayed until the end of the tax year), means-tested tax credits to small-business workers and individuals who 1) do not work for a large business, and 2) do not have an alternative offer of health insurance. The tax credit amounts would vary with age, income, and family status. Those with incomes below 200 percent of the FPL would be eligible for the full amount of the tax credit, and the value of the credit would fall to zero as income approaches 300 percent of the FPL. Small-business workers could apply their credits to a small-group plan (if offered) or to individual-market coverage. Medicaid-eligible individuals could opt to use the credit rather than enrolling in the Medicaid program. Because the credit would increase over time based on CPI plus one percentage point, enrollees would bear the full cost of any premium growth that exceeded that. We consider the CARE Act tax credits to reflect a “premium-support” model of health insurance subsidization because they are not adjusted based on regional variation in premium levels or health care cost growth.
Exhibit 1 shows the tax credit schedule proposed in the CARE Act for individuals and families with income under 200 percent of the FPL.
Notes: Tax credits are proposed for 2014, and would increase with CPI+1 in subsequent years. Those with incomes <200 percent of the federal poverty level (FPL) are eligible for the full tax credit. The value of the credit declines for individuals with incomes between 200 percent and 300 percent FPL, and is zero for those with higher incomes.
CARE Act Tax Credits vs. ACA Tax Credits
The premium tax credits offered by the CARE Act differ substantially from the ACA tax credits in terms of amounts, eligibility criteria, and the degree to which they scale with income and age. As a result, some people will pay more for health insurance under the CARE Act relative to the ACA, and some will pay less. Exhibit 2 shows the estimated difference between CARE Act and ACA premiums after tax credits for people who enroll in a 70 percent actuarial value plan. We consider three family structures: single adults, married couples, and a family of four. In general, the CARE Act favors younger enrollees, and is more favorable for single adults and married couples than for families. In some cases, 40-year-olds fare better than 30-year-olds under the CARE Act. This is because of the stepwise nature of the CARE Act credits. A 30-year-old individual is close to the top of the age eligibility range for the 18-to-34-year-old tax credit, while a 40-year-old is near the bottom of the age eligibility range for the 35-to-49-year-old tax credit. Because premiums increase steadily with age, those at the bottom of the tax credit age range fare better than those at the top.
Exhibit 2. Percent of Families Eligible for Premium Subsidies Under the ACA Who Would Pay Less for a 70 Percent Actuarial Value Plan Under the ACA Relative to the CARE Act
Notes: ACA tax credit amounts are estimated based on output from the RAND COMPARE microsimulation model. Orange shading indicates that the majority of families fare better under the CARE Act; blue shading indicates that the majority of families fare better under the ACA.
Medicaid Capped Allotment: The ACA allows states to expand Medicaid to cover all individuals with incomes at or below 138 percent of the FPL. The CARE Act would eliminate funding for this expansion. Instead, federal funding for Medicaid would reflect a capped allotment based on pre-2014 spending in each state, adjusted for inflation (based on growth in the CPI plus 1 percentage point) and demographic change.
We assume that, with the elimination of federal funding for Medicaid expansion, all states would roll back their Medicaid eligibility thresholds to pre-ACA levels. Because the capped allotment allows states flexibility in managing their Medicaid programs, it is possible that some states would maintain expansion and finance the extra costs with state funds. We assume this possibility is unlikely because—under current law—the federal government finances at least 90 percent of Medicaid expansion costs, and states would be hard-pressed to make up this difference. Further, while the CARE Act would not continue to support Medicaid expansion, it would allow many individuals with incomes in the Medicaid-expansion range (<=138 percent of the FPL) to obtain means-tested tax credits to purchase private insurance.
State High-Risk Pools: Under the CARE Act, states would have the option to implement high-risk insurance pools for people with costly conditions, using targeted federal funding. High-risk pools would keep the most expensive people out of the individual health insurance market, reducing premiums for the remaining population.
Malpractice Reform: Although medical malpractice reform has been a perennial area of focus among many of those seeking to reduce health spending in the U.S., the ACA did not make direct changes to medical malpractice law. The CARE Act, in contrast, supports a “range of solutions to tackle the problem of junk lawsuits and defensive medicine.” Although the proposal lacks specificity on what malpractice reforms would be adopted, it offers at least four examples of potential reforms, including capping noneconomic damages (e.g., compensation for pain and suffering), limiting attorneys’ fees, encouraging the adoption of dispute resolution through expert panels, and adopting payment compensation reforms modeled after workers’ compensation.
Tax Exclusion Cap for Employer-Sponsored Insurance: The ACA imposed a 40 percent excise tax on employer health insurance plans with premiums above $10,200 for individuals and $27,500 for families. However, this change was delayed, and is not expected to take effect until 2020. The CARE Act would make a slightly different change to the tax treatment of employer insurance, capping the existing tax exclusion at $12,000 for single coverage and $30,000 for family coverage. These caps would be indexed to grow at CPI plus one percentage point.
There are several additional provisions of the CARE Act that we do not model in this report, including targeted changes to eligibility for Health Savings Accounts and reforms aimed at increasing transparency in the health care system. In general, we have not modeled these provisions because implementation details in the CARE Act proposal are sparse. In addition, some of these provisions are dependent on state decisions, which are difficult to predict. We provide a more complete description of the reforms proposed in the CARE Act in the Appendix to this report.
Medicare Reform Under the CARE Act
One important aspect of the ACA that the CARE Act does not change involves Medicare reform. The ACA implemented many changes to the Medicare program, including reducing the growth of payment rates over time, penalizing hospitals with excessive readmission rates, and imposing an additional hospital insurance tax on individuals with high incomes. The Congressional Budget Office estimates that these changes will reduce the deficit by $802 billion between 2016 and 2025, with $44 billion in savings in 2018. Based on the text of the CARE Act, we assume these Medicare reforms will remain in place. We further assume that the CARE Act will retain the ACA’s increase in the Medicare hospital insurance tax, which is levied on those with incomes over $200,000 for single individuals or $250,000 for married couples.