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How to Thread the Repeal and Replace Needle

The Trump administration just revived talks on repealing and replacing Obamacare with a new offer to the House Freedom Caucus.  The proposal would allow states to opt out of certain Obamacare regulations that are inflicting the most damage and risk to the individual health insurance market.Replace

This is an incredibly positive step that tracks an approach I proposed a couple weeks ago.  However, it likely won’t seal the deal when moderates were already skittish over the previous package, which is likely why The Hill reports Speaker Paul Ryan tried to tamp down expectations today.  As Ryan explained to reporters, “These are ongoing talks. We want our members to talk with each other about how we can improve the bill to get consensus. Those productive talks are happening. We’re at the concept stages right now.”

To get to a consensus there are a couple more provisions that should be put on the table to help sweeten the deal for both moderates and the Freedom Caucus.  With these additional items on the table, an agreement may be reached that not only threads the needle between moderates and the Freedom Caucus, but also between good politics and good policy.

A waiver may be necessary to save insurance markets
Before getting to those items, here’s why a waiver from the regulations is such a good idea.  The Trump administration’s waiver language has not yet been released, but my previous proposal would tie a waiver to a state’s request for market stabilization funds.  Because the regulations are what’s behind market instability, it makes sense for states to develop a market stabilization plan that combines federal funding with regulatory relief.  As I previously explained, this approach might be the most politically feasible approach to paring back Obamacare regulations, especially the more popular ones.

It hands real power over insurance markets back to the states, which addresses one of the main criticisms coming from the right. Yet, it also avoids repealing some of the more popular federal insurance market regulations. Instead, it opens the door for states to experiment.

The ability for states to experiment may be the only way to modify some of the more popular regulations that are disrupting markets. States facing the most market volatility might actually have the political will to challenge the requirement on employers to make coverage available to adult children up to age 26. It’s a very popular requirement, but it’s also a key reason younger and healthier people are not enrolling in the individual market. The federal government will never be able to face that reality. A state desperate to save their individual insurance market can.

Ultimately, a waiver from regulations may be necessary to save state insurance markets from a situation where spiraling premiums lead consumers and insurers to abandon the market entirely.  The fact is, the connection between regulations and market instability is very well established.  Obamacare’s guaranteed issue and community rating provisions are two regulations that when combined force insurers to cover any taker at basically the same price regardless of health status.  Washington, Maine, Massachusetts, and Kentucky all experienced rising premiums and shrinking markets after implementing these regulations back in the 1990s.

In a 2008 paper, economists Amanda Kowalski, William Congdon, and Mark Showalter found that the “combination of guarantee issue regulations with community rating regulations in New Jersey is associated with premium increases of well over 100 percent for individual and family policies (108 to 227 percent).”  This prior experience and research strongly suggests states may be powerless to contain premium increases without a waiver.

Income-adjusted tax credits reduce coverage losses
While allowing states to waive regulations might be a great idea, there is still the matter of the 24 million people who the Congressional Budget Office projects will lose health coverage that continues to make moderates so nervous.

Several conservative health policy wonks, most vocally Avik Roy with Forbes, also expressed concern over how unaffordable health insurance would become for most low-income people under the House bill.  Roy recommended adjusting the tax credits by both income and age.

However, this is where conservatives are the most severely divided.  The Freedom Caucus and others consider refundable and advanceable tax credits a new entitlement.  They simply don’t believe the federal government should be in the business of funding insurance purchases.

The Freedom Caucus was already strongly opposed to tax credits when they were based primarily on age, not income.  But to get to a deal, moderates will need even more from the tax credits to keep more people covered.  There will need to at least be some income-adjusted tax credit for low-income people on the table.  Roy makes a strong case for an age adjustment as well.  This is where the Freedom Caucus will need to compromise.  The Freedom Caucus can’t expect the moderates to give in to a full repeal of the Medicaid expansion without getting anything in return.

The deal might be structured in a way that’s easier for the Freedom Caucus to swallow.  First, make the repeal of the Medicaid expansion immediate upon the availability of the new tax credits.  Second, extend tax credits to low-income people who would otherwise be covered under Medicaid. Third, make it easy for states to supplement the federal tax credit.  Many states supplement the federal Earned Income Tax Credit with their own state tax credit and they could be encouraged to do the same for health care tax credits.  Continued funding from states may help justify a more modest federal tax credit.

Reduce the tax incentive for comprehensive health insurance coverage
One more provision should be put on the table to sweeten the deal for the Freedom Caucus without alienating the moderates.  So far, no one has advanced any substantial proposal to reduce the tax incentive for comprehensive health insurance coverage, one of the key cost drivers in our health care system.  To address this issue, employers should be given more flexibility to design health plans using a health reimbursement arrangement (HRA) in order to give employees more control over their health care dollars and choices.

An HRA is a tax-advantaged health plan already used by many employers to set up consumer-driven health plans that look a lot like a Health Savings Account (HSA).   But there are limits to how they can be used.  There are two ways HRAs could be improved to give employees more control over their health care dollars.

First, give states the option to allow large employers to fund individual health insurance premiums through an HRA.  The CURES Act, signed into law last December, allows small employers to fund individual market health insurance plans through an HRA.  Extending this option to large employers would allow employers to establish a defined contribution health plan that gives employees the freedom to choose and own a portable health plan they can keep regardless of their employment.  Moreover, it may help stabilize the individual market by increasing the size of the pool.  It should be a state option because states will need to consider whether the option is compatible with their large group insurance regulations.

The second way to improve HRAs is to allow employer contributions to the HRA to accumulate from year to year.  Currently, employers can only qualify for a tax exclusion under an HRA for health care expenses paid in any given year.  Nonetheless, employers set up notional accounts that look a lot like HSAs, but the account represents just a promise to pay at a future time.  Kind of like the Social Security Trust Fund.   Letting HRA contributions accumulate would allow employers to design health plans that allowed employees to build health care savings that they could take with them to another job.  Like 401(k) savings, it could be structured to roll over into the next employer’s HRA or an individual’s HSA.

Combined, the flexibility offered by these changes to HRAs would begin addressing one of the main cost drivers in America’s health care system.  The current tax incentives push employers to offer a one-sized-fits-all health plan tied to the tax year.  These incentives favor comprehensive health insurance in which every health care dollar must be funneled through the insurance company bureaucracy.

The comprehensiveness of health coverage stifles value-enhancing competition at many levels.  The employee does not choose the insurer and has little incentive to shop among providers.  With more flexibility, HRAs can be structured to narrowly tailor health insurance products to function as real insurance, a protection against unexpected financial loss.  Expected medical costs would be funded outside insurance through the HRA, just like every other expected expense is funded, such as regular car maintenance.

The Freedom Caucus may prefer equalizing the tax code by eliminating the tax preference for employer-sponsored health insurance, either by eliminating tax preferences completely or moving to an individual deduction.  That would be a more ideal system if starting from scratch.  But you can’t ignore the fact that employer-sponsored health insurance is deeply embedded within American culture and expectations.  Upset the current model too quickly and Republicans will find themselves out of power and by such margins that a single-payer health care system would be sure to follow.

Giving employers more flexibility in designing health plans with HRAs might be the ideal glide path away from the present tax incentive for comprehensive health coverage.  Employees gain more control over their health dollars and choices, while employers retain an important role in financing and advising.

Altogether, there is a lot of give and take within the ideas just discussed.  The Freedom Caucus ends up with regulatory relief and immediate repeal of the Medicaid Expansion.  Moderates don’t have to vote to repeal popular regulations and they gain income-adjusted tax credits.  And both groups get a meaningful reform to the tax treatment of employer-sponsored coverage.

It also provides the best chance to improve America’s health care system.  The waiver from regulations gives states the tools they need to stabilize and maintain insurance markets.  The income-adjusted tax credits keeps more low-income people covered by private insurance.  And the changes to HRAs could begin to truly bend the cost curve by substantially lessening the tax preference for comprehensive coverage.

In the end, good politics could make good policy.

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