Supplemental health industry for small companies: Challenges and opportunities
Small companies in the supplemental health products market need to understand the unique challenges these products present in order to compete effectively.
Based on House legislative language passed on May 4, 2017
The American Health Care Act (AHCA) would impose several reforms on the commercial market, repeal several taxes introduced under the Patient Protection and Affordable Care Act (ACA), and fundamentally reform the Medicaid funding process while allowing a glide path for the end of enhanced federal funding for the Medicaid expansion.
In 2010, then-President Obama signed into law the Patient Protection and Affordable Care Act (ACA). In 2017, it’s déjà vu all over again, as the House of Representatives has passed the American Health Care Act (AHCA), which would significantly amend large portions of the ACA if it becomes law. While this bill has not yet been through the Senate and will almost certainly change before it has the chance to reach the president’s desk and be signed into law, the policies proposed in this legislation would make many changes to the health insurance sector. In this paper, we explore the impacts of the May 4, 2017 version of this bill as passed by the House on different markets and stakeholders in the healthcare and insurance ecosystem.
The AHCA proposes some significant changes to the commercial market. While these changes generally impact the non-grandfathered individual market, certain provisions also address the non-grandfathered small group market.
Changes effective prior to year 2020
The individual mandate penalties are set to $0 for tax years beginning in 2016. If passed, individuals who paid individual mandate penalties for 2016 may be eligible to file amended tax returns to reclaim amounts paid in the form of a tax refund.
For 2018 and 2019, the ACA’s premium tax credits are extended to off-exchange coverage. Off-exchange enrollees would not receive advance payments of the tax credit, but would be eligible for the tax credit on their 2018 and 2019 tax returns.
Additionally for 2019, the AHCA would modify the ACA’s premium tax credits so that the required contributions for the benchmark silver plan would also incorporate the age of enrollees as well as household incomes. Currently, the ACA formula limits required contributions based only on household income relative to the federal poverty level (FPL).
Starting in 2017, many of the ACA’s taxes and fees would be repealed, including the Health Insurance Provider Fee (HIPF), Medical Device Excise Tax, and Branded Prescription Drug Tax. The repeal of these taxes and fees could affect premium growth in 2018 and provide some surplus relief for carriers in 2017, though 2017 relief will be limited because of the existing moratorium on the HIPF for 2017.
Starting in 2017, health savings accounts (HSAs) would see many enhancements related to tax treatment, including the ability to use HSA funds to pay for over-the-counter (OTC) medications and a reduction on the penalty for other withdrawals. In 2018, other enhancements would be made, including increased contribution limits and the ability for both spouses to make catch-up payments to a joint HSA.
Starting in 2018, the AHCA would institute a Patient and State Stability Fund (PSSF). This fund distributes $15 billion in 2018 and 2019 and $10 billion each year from 2020 through 2026, with states having broad flexibility to apply these funds to the individual and small group markets. States that do not choose a specific purpose for these funds would have a default reinsurance pool in the individual market, similar to the ACA’s transitional reinsurance program, with a $50,000 attachment point, $350,000 cap, and 75% coinsurance.3 Starting in 2020, states would have a required matching percentage that varies based on whether the state is using the default program or its own program. Depending on how the state chooses to use the funds, the individual and/or small group markets in a given state could see significant rate relief. Initial estimates of the impact of the default reinsurance parameters suggest a 15% to 20% reduction in premiums, though issuers could see results outside of this range, depending on their risk profiles and state levels of funding.4
Additionally, a Federal Invisible Risk-Sharing Program (FIRSP) would be established in 2018 as part of the PSSF, run by the federal government initially and potentially transitioning to state management in 2020. Issuers would be required to cede new enrollees with certain conditions and permitted to cede other new enrollees. In exchange for a percentage of premiums, the FIRSP would reimburse a percentage of costs above an attachment point. The Centers for Medicare and Medicaid Services (CMS) would provide all of these parameters in guidance. The AHCA would also provide $15 billion in initial funding for program costs in excess of premium contributions, and additionally allocate any funds left over at the end of the year from state allocations under the default reinsurance pool of the PSSF. With final details still to be determined, this program could provide moderate rate relief, depending on how the program interacts with the single risk pool.5
Any program receiving funds from the PSSF (which as currently constructed would appear to include the bulk of the individual market) would be considered a state healthcare program for the purposes of the federal anti-kickback statute, which would seemingly limit the ability of third parties to pay premium or cost sharing for individual market enrollees, in line with current restrictions in place on the Medicare market.
Starting in 2018, the federal age curve would be allowed to expand to 5-to-1 adult rating variation, although the change would not happen until a new age curve is released by the U.S. Department of Health and Human Services (HHS).6 States that choose to specify their own age curves would also be allowed to utilize the higher limit. States are also given additional flexibility regarding the age curve via limited state waivers.
Also starting in 2018, enrollments in the individual market would be subject to a continuous coverage provision. Individuals exceeding a 63-day gap in coverage in the previous 12 months (but not considering time periods prior to 2018) would be required to pay a 30%-of-premium penalty to the insurer for the plan year.7
The MacArthur amendment instituted limited state waivers. Starting in 2018, states would have two options. The first option would allow states to set an age curve wider than the default 5-to-1 age curve for adults. The second option would allow states to implement health status rating for individuals without continuous coverage in lieu of the 30% continuous coverage penalty. Individuals could only be health status rated for a plan year in which they would have owed the 30% penalty. In order to allow health status rating, the state must have a high-risk pool or reinsurance pool in the individual market (which would include the FIRSP). Rates would still not be allowed to vary by gender. Insurers would also be required to provide coverage for preexisting conditions. States would be able to implement these waivers as long as they attest that doing so would reduce premiums, increase coverage, stabilize the market, stabilize premiums for those with preexisting conditions, or be in the public interest. There are somewhat confusing non-applicability provisions that appear to prevent the waivers from modifying consumer operated and oriented plan (CO-OP) and multistate plan (MSP) eligibility as qualified health plans (QHPs), interstate sales compacts, §1332 waivers, and Congressional coverage requirements.8
In addition to the general funds under the PSSF, an additional $8 billion would be allocated for 2018 through 2023 in order to help offset premium and out-of-pocket costs for individuals with preexisting conditions and without continuous coverage who are subject to health status rating under a limited state waiver.
HHS would be given $1 billion to implement Medicaid per capita caps, the Patient and State Stability Fund, and changes to tax credits in 2018 through 2020 and beyond, consistent with amounts provided to implement healthcare reform provisions of the ACA.9
Changes effective for year 2020 and later
Starting in 2020, metallic tier actuarial value standards would be removed. This would likely not impact catastrophic plans. The ACA’s maximum annual out-of-pocket costs remain in place, which already limit coverage to a minimum bronze level of coverage according to the 2018 actuarial value calculator.
Also starting in 2020, the AHCA would repeal the ACA’s premium tax credits and cost-sharing reduction (CSR) subsidies and institute new refundable and advanceable premium tax credits in their place for those enrolled in individual market insurance coverage. These credits would be indexed to age, varying from $2,000 per year for those under 30 to $4,000 per year for those 60 and over, and would be reduced for individual taxpayers earning $75,000 or more and families earning $150,000 or more. Total tax credits would only factor in the five oldest individuals on the taxpayer’s return and would be capped at $14,000 per year for a family. These tax credits would be reduced by any health reimbursement arrangement (HRA) contributions from family members’ employers. Like the existing tax credits, amounts paid would be capped at the amount of actual healthcare premiums. At tax time, overreported tax credit amounts would be subject to a 25% penalty tax if caught and corrected, as opposed to the standard 20% penalty.
The ACA’s tax credits are designed to ensure that both the member’s contribution and premium tax credits keep pace with premium growth.10 Meanwhile, the AHCA’s tax credits grow at a rate of the consumer price index (CPI) + 1%, meaning enrollees would be responsible for any increase in premiums over the CPI plus 1%.
In 2020, a one-time infusion of $15 billion would be made available under the PSSF for the purposes of facilitating maternity coverage and newborn care, and for mental health/substance abuse (MHSA), with a focus on inpatient/outpatient care for treatment of addiction/mental illness and/or early identification and treatment of children and young adults with serious mental illness. It appears that states can roll funds from their allocations over to future years if any funds remain after 2020.
Starting in 2020, states would additionally be able to use limited state waivers to modify Essential Health Benefits (EHBs) for the purpose of individual and small group health insurance coverage in whatever way they deem fit, subject to satisfying one of the same five requirements necessary to expand the age curve or institute health status rating. It is worth noting that the ACA’s prohibitions on annual and lifetime limits and its annual limit on cost sharing only apply to EHBs, so a reduction in EHBs in a state could result in an increase in services that can be covered with either annual or lifetime dollar limits or without an annual limit on cost sharing—at least for individual and small group health insurance coverage. It is less clear what the effect of these waivers would be in applying these rules to self-insured and large employer group health plans.
Starting in 2020, states would be able to administer the FIRSP. It is unclear at this time if states would be required to do so in order to continue the program.
Notable ACA commercial market provisions that remain untouched for the individual and small group market:
A significant portion of the AHCA addresses Medicaid reform. These provisions would attempt to gradually roll back the Medicaid expansion, limit federal funding growth exposure for certain classes of enrollees, and give states additional tools to limit their costs.
Starting in federal fiscal year 2020 (October 2019 through September 2020), Medicaid would switch to a per capita capitation rate for most coverage categories. These rates would exclude the Children's Health Insurance Program (CHIP), Indian Health Service, Breast and Cervical Cancer Program, and partial benefit enrollees, including state-subsidized employer-sponsored insurance (ESI) enrollees.14 All other enrollees would be grouped into five classes:
2. Blind and disabled
4. Medicaid expansion enrollees
5. Other non-elderly/non-expansion/nondisabled adults
The per capita amounts would be based on fiscal year 2016 experience, adjusted by fiscal year 2019 experience at the class level.15 For fiscal year 2020 and beyond, the per capita cap amount for a given year would be based on the previous year’s amount, trended forward at CPI-Medical + 1% for categories 1 and 2, and at CPI-Medical for categories 3, 4, and 5. Additional federal funding would be made available for states to develop systems and procedures to comply with new requirements.
States also would have the option to set up a block grant for 10-year periods for category 5 and, optionally, category 3 above. Other enrollees would not be eligible for block grant coverage. States electing block grants would have significant flexibility with eligibility in category 5 (though pregnant women would still have to be covered), and would have additional flexibility on benefits as well, subject to some minimum limitations. Block grant amounts would initially be set based on the per capita cap amount and the state’s fiscal year 2019 Federal Medical Assistant Percentage (FMAP), trended forward at CPI. Any excess amounts would be available in future years as long as the state was still utilizing block grants. If the state chooses to revert to a per capita cap at the end of the 10-year period, cap amounts would be calculated as if the state had a per capita cap the entire time. State applications for the block grant program are deemed approved unless HHS determines, within 30 days of receipt, that the application is incomplete or actuarially unsound.
The enhanced FMAP for Medicaid expansion enrollees would only continue in 2020 and later for those already enrolled as of December 31, 2019, and only for as long as they maintain continuous Medicaid coverage. Starting January 1, 2020, the state would only receive the standard FMAP for any new expansion enrollees. The enhanced FMAP would not be available to any states that adopt Medicaid expansion after February 28, 2017.
The legislation makes several other changes to roll back earlier expansions of Medicaid coverage. It would remove the option for states to expand coverage to adults above 133% FPL after December 31, 2017. It also lowers the maximum income eligibility level for children ages 6 and older from 133% FPL to 100% FPL, effective January 1, 2020. This provision would also apply for children aged 6 to 18, which for many states may effectively move covered children who are from families with incomes greater than 100% FPL from Medicaid and into CHIP options.
Disproportionate share hospital (DSH) cuts imposed by the ACA and delayed by later legislation to impact fiscal year 2018 through 2025 DSH allotments would be terminated for fiscal year 2020 and beyond. States that did not expand Medicaid would have their DSH cuts restored in fiscal year 2018 and 2019.
States that did not expand Medicaid would also be eligible for funding from a $2 billion pool per federal fiscal year for fiscal years 2018 through 2022 to provide extra funding to safety net providers for Medicaid and uncompensated care.
Several other provisions would impact Medicaid coverage and funding:
Starting October 1, 2017, states would be allowed to impose work requirements for nondisabled/non-elderly/nonpregnant adults, modeled on the definitions from the Temporary Assistance for Needy Families (TANF) program. Exceptions would be provided for the two months following birth, those under 19, sole caretakers of children under 6 or children with disabilities, and heads of household under 20 who are in secondary education or employer training. States would receive an FMAP five percentage point higher than usual for administrative activities relating to implementing these requirements.
Alternative Benefit Plans would no longer be required to meet federal EHB standards after December 31, 2019.
Several provisions of the AHCA would impact the employer market, mostly in the form of changes to various tax provisions.16
The employer mandate penalty would be set to zero retroactively. Employers still must satisfy reporting requirements related to the mandate, but would no longer be subject to a financial penalty for failure to provide affordable minimum essential coverage. It is unclear what recourse, if any, would be available to employers that may have paid mandate penalties for plan years starting after December 31, 2015, as these penalties would no longer be owed under the AHCA.
Fully insured employers would also benefit from the repeal of the HIPF after 2017 (the moratorium on the 2017 HIPF is already affecting group rates, but rates would not see an increase for the restoration of the HIPF for 2018).
The excess 0.9% Medicare tax paid by high earners would be repealed for 2023, which would simplify payroll processing at that time.
The "Cadillac tax" would be delayed until 2026, and a previously floated idea of capping deductibility of employer-sponsored insurance was not included in the bill. Employers maintain broad flexibility to offer health plan designs for employees without incurring additional tax considerations.
The new tax credits in the individual market would be unavailable to employees who have an offer of employer-sponsored insurance. To the extent a small employer sponsors a health reimbursement arrangement (HRA) and employees use the HRA funds to purchase health insurance in the individual market, the tax credits are reduced by the amount of any HRA provided by the employer.17 When considering the removal of large group penalties for failure to provide affordable coverage, employers that do not significantly subsidize the cost of coverage may be incentivized to pare back or drop coverage altogether so that employees can access these tax credits.
The enhancement of HSAs, discussed earlier, would also benefit those with employer-sponsored coverage.
Non-grandfathered employer plans could also be impacted if a state chose to utilize a limited state waiver to revise EHBs.
The AHCA would restore Medicaid DSH payments to pre-ACA levels effective federal fiscal year 2018 for states that did not expand Medicaid and effective federal fiscal year 2020 for states that did expand Medicaid.
States that did not expand Medicaid would also receive a combined $2 billion in federal funding per year for 2018 through 2022, allocated by share of the population residing in non-expansion state with incomes beneath 138% FPL. Payments could be made to all types of providers who service the Medicaid community, and could cover up to the total cost of Medicaid and uncompensated care provided.
Community health centers would receive an additional $422 million in federal funding for 2017 as an offset to the proposed one-year prohibition on federal payments for services received at a Planned Parenthood affiliate.
The AHCA does not address Medicare portions of the ACA. Medicare Advantage organizations could also benefit from the repeal of the HIPF and could experience some limited pricing relief from the repeal of the Medical Device Excise Tax and the Branded Prescription Drug Tax.
The pharmaceutical industry would not be directly impacted by much of the AHCA, but would benefit from the repeal of the Branded Prescription Drug Tax.
Figure 1: Timeline of key provisions
|2016 and 2017||2018||2019||2020 and beyond|
|No individual mandate or employer mandate penalties
Numerous taxes repealed
March 1, 2017, deadline for Medicaid expansion in order to received enhanced FMAP
October 1, 2017, start date for work requirements for non-elderly/ nondisabled/ nonpregnant adults
|30% continuous coverage penalty, beginning with 2018 special enrollment periods (SEPs)
$15 billion to Patient and State Stability Fund
$15 billion to Federal Invisible Risk-Sharing Program 5:1 age curve
States waivers to expand age curve or allow health status rating for certain individuals
$8 billion in support for those with preexisting conditions experiencing health status rating under limited state waivers
Premium tax credits available for off-exchange enrollments
End of Medicaid option to cover childless adults over 133% FPL
|$15 billion to Patient and State Stability Fund
End of Prevention and Public Health Fund
Premium tax credits tied to age as well as income
Additional index amount on required contributions used to determine Advance Premium Tax Credit (APTC) amount
|New flat dollar amount tax credit structure replaces required contribution structure and CSRs
$10 billion to Patient and State Stability Fund, with state matching requirements
State management of Federal Invisible Risk-Sharing Program
States allowed to adjust EHBs under limited state waivers
$15 billion for maternity coverage, newborn care, and MHSA treatment
Cadillac Tax delayed to 2026
Medicaid per capita cap instituted with block grant option for certain population segments.
New Medicaid expansion enrollments receive regular FMAP
Repeal of CSRs
Repeal of metallic tier requirements
The author would like to thank Jim O’Connor, Scott Weltz, Michael Cook, Mike Gaal, and the Milliman Healthcare Reform Oversight Group for their insightful suggestions and review.
In preparing this paper, we relied on legislative text as contained on the House Rules Committee Website for H.R. 1628, the American Health Care Act with amendments as reported to the House floor for the May 4, 2017, vote. Differences between the details found in this legislation and final legislation will impact the conclusions found in this paper.
We are not attorneys and nothing included in this report should be interpreted as legal advice.
Guidelines issued by the American Academy of Actuaries require actuaries to include their professional qualifications in all actuarial communications. Jason Karcher is a member of the American Academy of Actuaries, and meets the qualification standards for performing the analyses in this paper.
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In January 2017, Congress passed budget reconciliation instructions that directed the House and the Senate committees responsible for healthcare policy and funding to find $1 billion in savings in the budget. While the resolution proposed a target date of January 27, 2017, the House committee markups for this bill finally became available on the evening of March 6, 2017.
The House Energy and Commerce Committee provided draft legislative components addressing Medicaid and other health policy reforms,18 while the House Ways and Means Committee introduced provisions relating to taxes, and, in particular, proposed major changes in tax credits available for qualified health plans in the individual market.19 Together, these committee markups constituted the first pass at the American Health Care Act (AHCA), and represent the main legislative vehicle in what has been advertised by Republican politicians as the “repeal and replacement” of the ACA.
On March 21, 2017, the House Rules Committee released manager’s amendments to the AHCA.20 These manager’s amendments were shortly thereafter themselves amended.21 In a last-ditch effort to earn enough votes for passage prior to a White House-requested March 24, 2017, deadline, an additional manager’s policy amendment was proposed.22 Ultimately, the vote was canceled as it became clear that the measure would fall short of the 216 votes necessary.
House Republicans returned to the bill in the following weeks. On April 6, 2017, an amendment from Gary Palmer and David Schweikert amended the last-ditch March 23 amendment and instituted a Federal Invisible Risk-Sharing Pool program,23 shortly before the House went on recess. Over the recess, moderate Tom MacArthur negotiated a deal with conservatives that brought them back into the fold, allowing for limited state waivers of certain ACA restrictions,24 with language released on April 24, 2017. Finally, the bill was amended by Fred Upton and others on May 3 to provide for an extra $8 billion to offset effects of the MacArthur amendment,25 paving the way for a May 4, 2017 vote.