Last Thursday, the House of Representatives narrowly passed legislation known as the American Health Care Act (ACHA) to repeal and replace major parts of the Affordable Care Act (ACA). Nonetheless, the future of the ACHA was immediately put in doubt when both Republican and Democratic members of the Senate rejected the bill outright, and several Republican senators began work on an entirely new version of the bill the very next day. Much of the initial public reaction surrounding the ACHA centers on issues such as the proposed cuts to Medicaid, the risk of higher premiums for those with pre-existing conditions, the likelihood of increasing premiums for older Americans and the scope of “essential health benefits” that insurance plans must cover, pursuant to the ACA. There are, however, a number of proposals that are worth understanding now and following in the future, especially by employers and human resource managers. Although the ACHA faces a long legislative road, it is likely that at least some of the provisions included in the ACHA will be included in a final version of the law and may affect employer-sponsored health plans.
Here is a comparison between some of the key provisions that exist under the ACA and the changes proposed to it by the ACHA:
Elimination of the Individual Mandate Penalty – Under the ACA, most individuals are required to purchase health insurance or pay a penalty. The ACHA reduces the penalty to zero for an individual’s failure to maintain minimum essential coverage.
Elimination of the Employer Mandate & Reduction of Tracking Requirements – Under the ACA, employers with 50 or more full-time equivalent employees are required to provide health insurance or pay a penalty. The ACHA eliminates the penalty for any such employers that fail to provide minimum essential coverage. Without such penalties, it is likely that regulatory changes would be enacted to eliminate the onerous employer reporting and notification requirements currently in place.
State Waivers – The original ACHA was revised by the House through an amendment that gives states the flexibility to apply for waivers from certain requirements that are imposed on individual market plans and group plans offered by small employers. If granted, a waiver would allow states to opt out of mandating that insurers cover 10 essential health benefits in their health care plans. This is particularly controversial as the ACA’s prohibitions against lifetime and annual limits, and caps on out-of-pocket expenditures only apply to “essential health benefits.” Under current law, the definition of “essential health benefits” includes medical treatment such as maternity care, mental health or substance abuse coverage. As a result, states granted a waiver would be able to define and potentially narrow such protections.
Similarly, the waiver would affect large group and self-funded employer plans that are prohibited from imposing annual and lifetime dollar limits on 10 essential health benefits. Therefore, based upon an individual state’s definition of the phrase, employers could effectively be permitted to begin imposing dollar caps on certain benefits that currently would be prohibited under the ACA.
This particular provision may prove most problematic for final passage. The budget process being used by Republicans is called a reconciliation and has very strict rules that require every piece of the bill to be directly related to the federal budget. The reason? Reconciliation requires only a simple majority for passage. In order to avoid a Democratic-led filibuster, Republican lawmakers will have to work carefully to avoid violating the “Byrd Rule” which limits what can be included in a budget reconciliation measure. This procedural requirement helps to understand why the ACHA fails to “repeal and replace” some of the more popular provisions of ACA such as the ability for parents to provide coverage for adult children up to age 26, the guaranteed renewability of health insurance coverage and the prohibition against discrimination based on gender for purposes of offering health insurance.
Increase Limits on Flexible Spending Accounts (FSA) – Currently, the ACA limits an individual’s total annual contribution to an FSA to $2,500 per year, indexed for inflation, with the 2017 limit set at $2,600. The ACHA would repeal these annual limits retroactively to taxable years beginning after December 31, 2016 and would once again allow FSAs to reimburse over-the-counter medications, which were permitted only with a doctor’s prescription under the ACA.
Health Savings Accounts (HSAs) – A variety of changes would be made to the ACA’s treatment of HSA’s if the ACHA becomes law. For example:
- Under the ACA, use of HSA dollars for anything other than “qualified medical expenses” must be included in an individual’s income and is subject to an additional 20% tax rate. But under the ACHA, the tax rate applied to non-qualified distributions from an HSA would return to the pre-ACA tax rate of 10% and would be effective retroactively for all distributions occurring after December 31, 2016.
- Under the ACA, the current yearly maximum HSA contribution is $3,400 for self-only coverage and $6,750 for family coverage. In contrast, the ACHA would nearly double the annual contribution allowable by law. Specifically, the ACHA would increase the annual contribution to the sum of the High Deductible Health Plan (HDHP) limit plus the HDHP out-of-pocket limit in any given year. For 2017, this would increase the limits to $6,550 for self-only coverage and $13,100 for family coverage.
- As the ACA currently stands, spouses over the age of 55 must have their own HSA account to make their individual catch-up contributions of $1,000. How would this change under the ACHA? The new law would allow both spouses to make HSA catch-up contributions to the same HSA account if they are both over the age of 55.
- Finally, under the ACA, only those qualified medical expenses that occur on or after the date an individual’s HSA has been established can be paid for using HSA funds. Under the ACHA, HSA funds could be used for qualified medical expenses if the individual was enrolled under an HDHP within the 60-day period prior to the HSA being established.
Cadillac Tax – The ACA includes a 40% excise tax on the annual value of employer-sponsored health plans exceeding $10,200 for individuals and $27,500 for family coverage, indexed for inflation, nicknamed the “Cadillac Tax.” Under current law, this tax is scheduled to go into effect in 2020. The ACHA, however, would further delay the tax until 2026 and will end all other ACA taxes on employers. This change is seen as a relief to employers as the Cadillac Tax is expected to disrupt employer-based health insurance significantly.
Over the Counter Medications (OTC) – Current law excludes over-the-counter medications from the definition of “medical care.” As a result, costs associated with OTC medications cannot be reimbursed as “medical care” by an FSA, an Health Reimbursement Arrangement (HRA) (health reimbursement arrangement), or an HSA unless such medications have been prescribed by a physician. The ACHA, however, would allow OTC medications to be reimbursed as medical care by an FSA, HRA or HSA without a prescription. These reimbursements would begin in 2017 and would be applied retroactively to expenses incurred as of January 1, 2017.
Clark & Gotzler will watch this bill carefully to help our clients understand the potential implications it may have on employer-sponsored coverage and the health care coverage these plans provide to their employees. Please contact Clark & Gotzler with any questions or concerns about the ACA, or the ACHA and its potential effect on your organization.
This article was also posted at InBusiness Madison and can be found here.