First, a caveat: You should not use this piece to make health care decisions because this represents the author’s reading of the bill, and it is certain to be changed in the Senate.
Since ObamaCare, it has become part of America’s ethos that everyone should have health insurance and insurance companies should be compelled to accept people with preexisting conditions (called “guaranteed issue”), at community rates—paying the same as anyone else. [See exception for waiver, below] The Republican “repeal” and replace bill, the American Health Care Act (AHCA) does not change that.
How insurance works
Insurance works by people paying an affordable premium, and the insurance company covers them for losses according to the kind of insurance it is: loss of life, an auto theft, an illness. Insurance generally works because the risk of a loss is distributed across a large group of people. The insurer calculates the risk and charges sufficient premiums to pay claims and make a profit. Simple math.
In health insurance, the guaranteed issue presents a hurdle unthinkable in other varieties of insurance: insurers being required to accept and indemnify enrollees who have already suffered a loss. We wouldn’t expect an auto insurer to pay for an accident that happened before the policy is purchased; a company that did so would soon be out of business. But health insurers are now required to do just that.
Therefore, for people with preexisting conditions, this is an entitlement, not insurance. Health insurance companies have to be subsidized, one way or another, for accepting sick people, or premiums for all would go stratospheric. Having everybody purchase insurance would likely do the job, but since the AHCA repeals the individual mandate to carry insurance, other ways must be found to pay for this benefit.
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Essential Health Benefits (EHBs)
The AHCA also preserves other ObamaCare requirements that drive up premiums. “Essential Health Benefits” (EHBs) are services that must be covered whether insureds want them or not. ObamaCare provided these, and the AHCA does also:
EHBs “Include items and services in the following ten benefit categories: (1) ambulatory patient services; (2) emergency services; (3) hospitalization; (4) maternity and newborn care; (5) mental health and substance use disorder services including behavioral health treatment; (6) prescription drugs; (7) rehabilitative and habilitative services and devices; (8) laboratory services; (9) preventive and wellness services and chronic disease management; and (10) pediatric services, including oral and vision care.—CMS.gov
The requirement for dependent coverage for children up to age 26 has been kept. This provision not only raises premiums for everyone; it works against the mission of reducing premiums, because it’s a disincentive for young, healthy people to buy their own insurance. These people are vital to the insurance marketplace; if they don’t buy into it, the pool becomes saturated with sick people and eventually falls into a death spiral—as ObamaCare is doing now.
Health insurance marketplaces and state exchanges have been kept. It’s unclear how failing exchanges are expected to now succeed.
To be sure, some parts of ObamaCare have been eliminated (Source, Kaiser Family Foundation):
Individual and employer mandates are eliminated effective January 1, 2016. ACA cost sharing subsidies are repealed effective January 1, 2020, and a number of other ACA taxes are repealed. “The AHCA would reverse the eligibility expansion beginning in 2020 (anyone enrolled by then would remain enrolled), and it would reduce federal support for Medicaid with caps on coverage.”—govtrack.us
Some promised things have been included, such as increasing the health-savings account annual tax free contribution limit to $6,550 for self-only coverage; $13,100 for family coverage in 2017.
Other promised things have not been included, such as allowing purchase of insurance across state lines. However, this and other items may have been omitted so as not to run afoul of the Senate’s limitations on what can be in a bill passed by reconciliation, which allows passage with only a simple majority.
There is one crucial element in whether the GOP plan will escape the death spiral ObamaCare is now suffering: keeping premiums from skyrocketing and driving young, healthy people out of the market. Here’s the method the House came up with for doing this, in spite of the huge costs it baked into the plan.
The MacArthur Amendment
The purpose of the MacArthur Amendment [text] is to “encourage fair insurance premiums.” It provides exceptions, called “waivers,” to costly requirements like EHBs, community rating and guaranteed issue for those with preexisting conditions. The latter, only under certain conditions.
Types of Waivers Available
“States could apply for three different kinds of waivers,” writes the Health Affairs Blog. First, they may apply for waivers to set an age ratio for premiums higher for seniors vs. younger people than the 5 to 1 ratio established by the AHCA. Here’s a summary of the amendment that did that.
Under the second type of waiver, states would be able, after January 1, 2020, to specify their own set of essential health benefits (EHBs).
A disastrous blunder
Ominously, The Wall Street Journal reports that this right could extend to employer-funded insurance, “due to a little-noticed provision of the House Republican health-care bill,” discovered by “health analysts including Matthew Fiedler, a fellow at the Brookings Institution.”
“Insurers in states that obtain the waivers could be freed from a regulation mandating that they cover 10 particular types of health services, among them maternity care, prescription drugs, mental-health treatment and hospitalization,” wrote the Journal. [See EHBs, above.] Men have little use for maternity care, but they certainly would want to be covered for hospitalization.
Due to a quirk in ObamaCare provisions, a company wouldn’t have to be based in, or do business in a state to choose that state’s benefits level, analysts said. The company could just choose a state.
Large employers—always looking to cut costs for employee benefits—are likely to choose the state that had set up the most economical EHBs. There’s another concern. ObamaCare banned annual and lifetime limits on EHBs. The Brookings Institute warns that:
“Current rules implicitly allow these employers to adopt the definition of essential health benefits that applies in any state they choose when determining their obligations with respect to the out-of-pocket limit requirement and the ban on annual and lifetime limits.”
According to the Kaiser Family Foundation, “Of the 257 million non-elderly Americans, 156 million … are covered by employer-sponsored health insurance.”
Employer health insurance was a relatively stable segment of the health insurance picture. With Congress’s almost unlimited access to information and experts; how is it possible that no one on the planning team spotted this defect? Or was the real mission to “just get something passed”?
This is just the kind of pitfall that results from rushing through an overhaul of a complex law. It also makes a sane person wonder why the GOP chose to overhaul ObamaCare, rather than actually “repealing and replacing” it, as the president and his unlikely partner Paul Ryan promised.
In addition, House Republicans’ walking on eggshells to avoid a filibuster in the Senate may prove to be a fatal error for the GOP. If Mitch McConnell had come down from his ivory tower and eliminated the Senate’s filibuster for legislation, the House could have kept its promise. He can and should do that now, as the Senate rewrites the bill.
The third type of waiver deals with preexisting conditions. Even though insurance companies will be required to accept these individuals, if their state is granted a waiver, they will have the right to charge as much as they want for the first 12 months, if an applicant does not have “creditable” coverage during the previous year: States would only be able to apply a waiver to people who have allowed their insurance to lapse for 63 or more days during the previous year, according to the Health Affairs Blog.
This is a powerful incentive for the young and healthy to maintain health insurance, which would be relatively inexpensive for them.
Qualifying for this waiver would be “conditional upon the State operating a risk mitigation program [such as a high risk pool] or participating in [the] Federal Invisible Risk Sharing Program. Health status rating may not be waived for individuals who maintain continuous coverage.”
Reinsurance and high-risk pools
The Invisible Risk Sharing Program is a method of reducing the risk to insurance companies of accepting insureds with preexisting illnesses, while “offer[ing] those insureds the same coverage and access to the same providers … available to healthier enrollees for the same premium,” writes the health affairs blog.
The Program is actually a form of reinsurance, which has been established in Maine and Alaska, where it successfully lowered premiums, said the blog. The Centers for Medicare and Medicaid Services (CMS) “would develop a list of high-cost medical conditions that would automatically qualify individuals for program participation.” Or the insurance company could voluntarily qualify applicants.
The insurance company pays into the Program a percentage of the premium it collects from eligible individuals; in Maine, it was 90%. In that state, “the program reimbursed insurers for 90 percent of claims for qualified individuals between $7,500 and $32,500, and 100 percent of claims above that amount.”
The AHCA funds the program with $15 billion, over a nine-year period: “beginning on January 1, 2018, and ending on December 31, 2026.” However, this by itself is not nearly enough funding—only $1.66 billion a year—considering that ObamaCare had set up a temporary high risk pool which eventually covered 100,000 people; it cost $5 billion in its last year.
State high-risk pools are separate insurance groups for people with preexisting conditions, so they will not affect premiums in the general insurance market. In the past, these pools have not worked well because they were underfunded. The AHCA attempts to fund these pools in two ways. The first is a new 10-year $100 billion “Patient and State Stability Fund.”
It’s up to the states how best to use the funds, including providing financial assistance for high cost individuals, incentivizing insurer participation in their markets, reducing the cost of insurance, promoting access to preventive services, and reducing out-of-pocket costs for patients,” said the House Energy and Commerce Blog. Also, “governors could use the funds to reestablish the high-risk pools that prevailed in 35 states before ObamaCare,” wrote the WSJ. See here for the uses permitted by the law.
The Upton Amendment [see text] provides an additional $8 billion “for the period beginning with 2018 and ending with 2023, to be allocated to States with a waiver in effect….”
Dividing by the number of years and number of states reveals that this is clearly not enough money: The Kaiser Family estimated that 52 million Americans have a preexisting condition that would have made them uninsurable before ObamaCare. “While most have coverage through an employer or public program, such as Medicaid, they may intermittently seek insurance in the individual market during times when they’re ineligible for other coverage, such as following a job loss or divorce. People who are self-employed, early retirees, or lower-wage workers in jobs that don’t provide health benefits are also exceptions.” Also, the blunder described above, if not corrected, could leave employer-covered employees unable to pay for their care.
There is also the question of what happens to premiums in the general market, if only a few states request a waiver of guaranteed issue, and/or only a relatively few people are affected. If the market contains that many sick people, premiums will inevitably rise, driving young, healthy people to give up their insurance. There’s no certainty that the AHCA won’t wind up in a death spiral like ObamaCare. The Senate has a lot to think about. The first should be getting rid of the filibuster.
