Paying for the Senate's Changes to the AHCA

Senate Republicans are continuing work on their iteration of the American Health Care Act (AHCA), and press reports indicate that senators aim to make changes to the AHCA that will likely cost more than the House-passed version. These changes include making the premium tax credits more generous, lengthening the phase-out of the Affordable Care Act's (ACA) Medicaid expansion, and increasing funds for the Patient and State Stability Fund. However, with these increased costs will come the need to fully pay for them – and, ideally, they would increase the amount of deficit reduction on top of the House-passed AHCA.

Reconciliation rules – the means by which Congress is attempting to pass the AHCA – require that the Senate pass a bill that contains at least as much savings as the House-passed version. The Congressional Budget Office (CBO) scored the last version as saving $119 billion over the next decade, so any changes the Senate makes must not let the savings fall below this level. Senators are already working with some funding the House intended to be a placeholder for changes in the form of changing the floor for the medical expense deduction to pre-ACA levels, which gives them about $90 billion of costs to replace if they choose to scrap this component. Yet it seems quite likely that the changes being discussed would cost more than $90 billion, so they will need to pay for these changes.

Just as we did when the House originally was making changes to the AHCA, we've come up with several ideas for senators to consider that would improve the bill and could even let them get more deficit reduction than the House. Below is a modified version of that list:

  1. Limit the medical expense deduction. Under current law, high out-of-pocket medical expenses are deductible above a certain threshold – 10 percent of income currently, 7.5 percent prior to the ACA, and 5.8 percent under the House-passed AHCA. Policymakers should certainly at least restore the 7.5 percent floor – the lower floor was meant to create a placeholder – to raise $90 billion. Another $35 billion could be raised if the legislation left the threshold at 10 percent of income.
  2. Adjust the tax credits for younger individuals. The House-passed AHCA contains tax credits that vary based on age – ranging from $2,000 for younger individuals to $4,000 for those in their 60s. However, these credits do not reflect actual differences in health or insurance costs, especially with the 5-to-1 age rating allowed under the AHCA. Much attention has been given to the idea of increasing the arguably insufficient credit for older Americans; this could be financed in small part by reducing the credit for younger individuals. With 5-to-1 age rating for adults, a $2,000 per child credit would be extremely generous and in many regions could cover the entirety of annual premiums. Reducing the credit amount for children and possibly young adults – say to somewhere between $1,000 and $1,500 at the lower end – would both save money and make it easier for age-rating of credits to reflect the 5-to-1 ratio of age rating of premiums (for example, if a 21-year-old received a credit of $1,500 and a 64-year-old $7,500, the credit would cover the same share of premium costs for each individual).
  3. Apply further means-testing to AHCA credits. The AHCA premium credits are available at most income levels, and in many cases they only phase out for those with very high income. The phase-out begins at $75,000 for an individual and $150,000 per family, reducing the credit by $100 for every $1,000 of income. A typical four-person family, under the AHCA, would therefore continue receiving credits until family income totaled around $260,000 – over 1,000 percent of poverty. In other words, for a typical family of four the AHCA credits phase out between 600 and 1,000 percent of poverty. By comparison, under current law the "Obamacare" premium credits begin phasing out immediately as income rises and are fully phased out by 400 percent of poverty. Much discussion has focused on increasing credits for low-income individuals. This could certainly be financed in part by phasing out the credit sooner than the current income thresholds. Based on prior analysis from CBO, doing so is unlikely to have a significant impact on coverage because more employers will continue to offer insurance if fewer of their employees can take advantage of subsidies on the individual market.
  4. Limit the tax exclusion for employer-sponsored health insurance (ESI). While wages and other income are generally taxable, companies can offer their employees health care benefits tax-free. This "ESI exclusion" is the single largest tax expenditure in the income tax code, and is also a significant driver of health care cost growth. Economists from both sides of the aisle agree that limiting the ESI exclusion would both slow cost growth and bring in additional revenue. Under current law, the ACA is scheduled to indirectly limit the ESI exclusion through a "Cadillac" tax on high-cost health plans that is scheduled to take effect in 2020. However, there is bipartisan opposition to this tax, and the AHCA further delays its implementation until 2026 – a gimmicky way of repealing the tax that could be fixed by replacing it with limiting the ESI exclusion. Instead, policymakers should simply repeal the Cadillac tax altogether and replace it with a limit on the ESI exclusion. We've previously offered options to do so in a way that could raise $200 billion to $400 billion of new funds while also helping to slow health care cost growth.
  5. Delay repeal of the ACA's taxes, possibly until enactment of the new subsidy and Medicaid system. The House-passed bill retroactively repeals the ACA's taxes to 2017 but continues to fund the ACA's subsidies and Medicaid expansion until 2020. Retroactive tax cuts serve no purpose; they add to the deficit but do not lead to any behavioral changes. Simply beginning the tax cuts in 2018 would generate about $50 billion to help pay for amendments. Delaying repeal of the cuts until 2020 – when the ACA's subsidies and Medicaid expansion are no longer in full effect – would save about $200 billion. This would prevent the AHCA from adding to the debt in the near term and rationalize the replacement's pay-fors with its costs.
  6. Scrap repeal of – or else replace – the Medicare Hospital Insurance (HI) surtax. The original AHCA repealed the ACA's 0.9 percent HI surtax on high earners, which we estimated would have helped advance Medicare Part A insolvency from 2025 to 2023. In the House-passed version of the AHCA, policymakers delayed repeal of the HI surtax until 2023. Even still, the Centers for Medicare & Medicaid Services (CMS) recently estimated that the AHCA would worsen Medicare Part A solvency by 0.45 percent of payroll (10 percent or program costs) over the next 75 years. To prevent this impact, policymakers could simply keep the HI surtax in place; doing so would raise about $50 billion over a decade. Alternatively, policymakers could repeal the HI surtax but replace it with a policy to eliminate the ESI tax exclusion for the HI tax so that health benefits would no longer be excludable from the Medicare payroll tax. Relative to the AHCA, this swap would raise $130 billion.
  7. Finance the Patient and State Stability Fund with an assessment on insurers. One of the immediate ways that the current version of the AHCA hopes to bring down premiums is through the stability fund, which would allow states to spend funds on things like reinsurance to help keep insurers in the exchange markets. This fund is financed through general revenue. Instead, senators could add an assessment on insurance companies – similar to how the risk adjustment and reinsurance programs were financed through the ACA – to either partially or fully fund the stability fund. Even at $10 billion a year, this assessment would still be smaller than the existing health insurance tax that is repealed under the AHCA.
  8. Enact medical malpractice reform. Current medical malpractice laws distort markets by increasing the cost of care through "defensive medicine," or forcing doctors to over-test and consume more medical care than necessary for fear of lawsuit. Many health reform proposals over the years have called 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 up to 0.5 percent and federal costs by $70 billion. A recently-introduced House bill on malpractice reform would reduce health spending by 0.4 percent and save $50 billion over a decade. Either version would be likely to slightly reduce overall premiums and increase overall coverage. While there are questions over whether tort reform would be considered "budget germane" for the purposes of reconciliation, it is a smart addition to the AHCA – whether as part of the legislation or as a companion.
  9. Further limit states' ability to inflate Medicaid matching rates. States currently inflate their claimed Medicaid spending in order to receive more federal money than current law intends through "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 only, 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.
  10. 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 proposed 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. 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.
  11. Reduce prescription drug costs. One of the cost drivers in Medicare, Medicaid, and the overall health care system is the rising cost of prescription drugs. The AHCA does not address prescription drugs despite the President's commitment during the campaign to lower prices. Even without having the government negotiate or set prices, policymakers could do a lot to reduce government and individual drug spending. A package of reforms might modify co-pays for the Low-Income Subsidy (LIS) population in Medicare Part D, change re-imbursement rules for physician-administered drugs, auto-sort Medicare beneficiaries into the most efficient prescription drug plan,  ban "pay-for-delay" agreements and reduce patent exclusivity periods to encourage the introduction of more generic drugs, modify federal drug reimbursement rules within Medicaid, or accelerate the Food and Drug Administration approval period for certain drugs. Such a package could easily save $25 billion to $50 billion.
  12. 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. Recently, we wrote about several Medicare options that could reduce federal spending without cutting benefits for individuals. Many of these and other ideas are part of the House "Better Way" plan include modernizing cost-sharing, restricting Medigap plans, and allowing private plans to compete directly with Medicare. Other options include reducing various provider payments, expanding bundled payments and other new payment models, equalizing payments for treatment regardless of the site of service, and expanding drug rebate programs.

Below is a table outlining the potential savings of these proposals:

Policy Option Potential Savings
Limit the Medical Expense Deduction $90 billion to $125 billion
Adjust the Tax Credits for Younger Individuals Dialable
Apply Further Means-Testing to AHCA Credits Dialable
Limit the Tax Exclusion for Employer-Sponsored Health Insurance (ESI) $200 billion to $400 billion
Delay Repeal of the ACA's Taxes $50 billion to $200 billion
Scrap Repeal of the Medicare Hospital Insurance (HI) Surtax $50 billion
Replace the HI Surtax with Elimination of the HI Tax Exclusion $130 billion
Finance the Patient and State Stability Fund with an Assessment on Insurers $100 billion
Enact Medical Malpractice Reform $50 billion to $70 billion
Further Limit States' Ability to Inflate Medicaid Matching Rates $50 billion or more
Raise the Medicare Age and Provide for a Buy-In at Age 62 $25 billion to $50 billion
Work to Lower Prescription Drug Costs $25 billion to $50 billion
Enact Medicare Reforms Dialable

As policymakers continue considering improvements to the AHCA, they must keep in mind that they must also pay for any changes. Ideally, those pay-fors should also help to slow health care cost growth.