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GOP reform plan rolls back Cadillac tax to woo conservatives

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Congressional Republican leaders are hoping to rally their colleagues behind a new repeal-and-replace package for the Patient Protection and Affordable Care Act.

The impetus is the King v. Burwell case pending before the U.S. Supreme Court that could strike down premium subsidies for millions of Americans in states that haven't established their own exchanges. Those low- and middle-income households are disproportionately residents of GOP-led states, causing a potential political headache for Republicans if large numbers of their constituents lose access to financial assistance.

A broad proposal released this week by Sen. Orrin Hatch of Utah, chair of the Finance Committee, Sen. Richard Burr of North Carolina, and Rep. Fred Upton of Michigan, chair of the Energy and Commerce Committee, is largely a retread of a plan put forth last year by Sens. Burr, Hatch and now-retired Sen. Tom Coburn of Oklahoma.

Republican leaders and conservative pundits have said they needed to offer a credible plan to convince the Supreme Court justices that they don't have to worry about creating chaos in the healthcare market if they strike down the subsidies.

The new proposal, dubbed the Patient Choice, Affordability, Responsibility, and Empowerment (CARE) Act, would offer means-tested premium tax credits to people earning up to 300% of the federal poverty level, rather than 400% under the Affordable Care Act. The proposal, issued as a general framework rather than as detailed legislation, also would eliminate the expansion of Medicaid for individuals with incomes up to 138% of the federal poverty level. It would convert Medicaid into a state block grant program and cap federal spending. And it would abolish the ACA insurance exchanges.

In addition, the GOP plan would scrap the individual and employer mandates and offer a different way of barring discrimination against individuals with pre-existing conditions. Insurers would be required to accept any customers who have been continuously covered, with an initial open-enrollment window in which health plans would have to take all comers.

The Hatch-Burr-Upton plan also would toss out the essential benefits requirements of the ACA, which only allows subsidies to be applied to plans designed to cover at least 60% of medical costs. It thus would allow more limited-benefit plans, subject only to state regulation. The GOP plan also would increase the premium cost-differential allowed for older customers from 3-to-1 under the ACA up to 5-to-1.

An analysis of the Hatch-Burr-Upton plan by the left-leaning Center on Budget and Policy Priorities concluded that millions of low- and middle-income individuals would lose access to coverage either because they'd no longer be eligible for Medicaid or premiums would no longer be affordable. The report also found that it would cause substantial disruption in the individual market, with millions of Americans losing access to their current coverage.

There are major differences in how the GOP plan would pay for the subsidies compared with the ACA. The GOP plan would repeal all the taxes associated with the ACA, including the increased Medicare payroll tax for higher-income houses, the medical device tax, and the health insurance premium tax.

It also differs from last year's GOP plan by scrapping that plan's proposal to tax premiums on employer-based plans with a value above 65% of the cost of the average plan. That would have raised roughly $1.5 trillion in revenue over 10 years, according to an analysis by the Center for Health and Economy.

That level of tax increase was a nonstarter for many conservative Republicans. “One of the things that made the original bill from last year kind of a mess politically was it basically was raising more taxes than the ACA,” said Stephen Parente, a healthcare finance expert at the University of Minnesota who worked on the Center for Health and Economy's analysis of the Hatch-Burr-Coburn plan. “For a lot of Republicans, there was a sense of 'Wait a second, that's our bill?' ”

The new Republican proposal would establish a tax model more like the ACA's so-called Cadillac tax on high-value health plans. Under the ACA, starting in 2018, most individual plans that cost more than $10,200 and family plans that cost upward of $27,500 will be taxed at a rate of 40% above those thresholds. The Hatch-Burr-Upton proposal raises the levels at which taxes will be levied to $12,000 and $30,000 respectively; households would pay the rate of taxes on the excess plan value corresponding to their income. Those plan value thresholds would be adjusted at a rate of 1% above the Consumer Price Index in future years.

“It's not exactly the same (as the Cadillac tax), but it's certainly a cousin,” said Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities.

J. Bradford DeLong, an economist at the University of California at Berkeley, points out another difference between the GOP proposal and the ACA: the tax will be imposed on individuals rather than on employer health plans and insurers. He raised a question about the proposal. “Generally when you propose to get rid of one tax you do not immediately propose to replace it with another tax that does pretty much the same thing,” Mr. Delong said. “So I really do not understand what is going on here.”

Another difference between the 2014 and 2015 Republican plans is that they're no longer promising to roll back the $700 billion-plus in Medicare spending reductions that were part of the ACA. Last year's plan promised to blunt the most harmful cuts. But this year's blueprint indicates that none of the Medicare payment reductions will be scrapped.

Medicaid cuts would provide a major source of financing for the GOP's premium tax credits under the Hatch-Burr-Coburn plan. In addition to scrapping the ACA's expansion, the Republican plan would implement a per-capita payment system to states for all individuals below 100% of the federal poverty threshold. States would have lots of flexibility in how they spend those dollars. But those payments would increase at a rate of 1% above inflation annually. The end result would be significantly lower Medicaid spending than under current law.

Whether Republicans will come together around the Hatch-Burr-Upton plan remains to be seen. A significant share of conservative Republicans still view anything short of wholesale repeal of the ACA as heresy, and are opposed to any significant federal spending or other role in health care.

“There are still lots of questions whether or not they're going to get many fellow Republicans to go along,” Van de Water said. “Last year's plan, when it was Burr-Coburn-Hatch, didn't generate a lot of enthusiasm.”

Paul Demko writes for Modern Healthcare, a sister publication of Business Insurance.