Senate releases draft of health care bill
Republicans continue their quest to replace the Affordable Care Act
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UPDATE (7/14/2017): On July 13, 2017, the Senate Republicans released a revised discussion draft of their health care reform bill, the Better Care Reconciliation Act of 2017 (BCRA). The revised bill continues to repeal many of the taxes on businesses and individuals imposed by the Affordable Care Act (ACA); however, in a departure from the original version of the BCRA, it does retain the following ACA provisions: (1) the $500,000 deduction cap on compensation paid to employees of health insurance providers, (2) the 0.9 percent Medicare surtax on an individual’s wages or self-employment income exceeding certain thresholds, and (3) the 3.8 percent net investment tax on investment income of individuals, estates and trusts.
The revised BCRA includes new provisions allowing individuals to purchase catastrophic health insurance plans through the Exchange with premium tax credits, and pay premiums for certain high deductible health insurance plans with Health Savings Account funds. With regard to health coverage, the revised BCRA allows insurance companies to offer health care plans in the individual market that do not meet certain ACA requirements, and boosts funding for state stability funds to address instability in the individual health insurance marketplace. As for Medicaid, the revised BCRA continues to change how federal Medicaid funds are provided to the states and phases out funding for the ACA’s Medicaid expansion. However, the revised BCRA does increase funding for public health services including substance abuse treatment.
The Republicans are anticipating that the Senate will vote on the BCRA later this month.
ORIGINAL (6/26/2017): On June 22, 2017, the Senate Republicans issued a discussion draft of the Better Care Reconciliation Act of 2017 (BCRA). The BCRA significantly changes the Affordable Care Act (ACA), commonly known as Obamacare. The Senate’s bill parallels the House of Representative’s American Health Care Act (AHCA) passed in May. Both bills repeal certain ACA taxes on businesses and individuals, reduce funding for Medicaid and modify the tax credits for purchasers of individual health insurance. Since the Senate is expected to vote on the Act prior to its Fourth of July recess, Republicans have only a short time to garner enough support to pass it. If the Senate approves the bill, it would then go to the House for consideration. Following is a brief summary of the key provisions of the BCRA.
The BCRA substantially changes the ACA’s tax rules for employers and individuals.
- Employer shared responsibility mandate (the play or pay penalty) – The ACA required certain large employers with at least 50 employees to either provide health insurance to their employees or pay a penalty. The BCRA repeals this requirement retroactive to months beginning after Dec. 31, 2015.
- Compensation deduction cap – The ACA denied health insurance providers any deduction for compensation paid to an individual in excess of $500,000. This limitation will no longer apply for tax years beginning after Dec. 31, 2016.
- The 0.9 percent Medicare tax – The ACA added a Medicare surtax of 0.9 percent of a person’s wages or self-employment income in excess of certain thresholds. The BCRA repeals this additional 0.9 percent Medicare tax after Dec. 31, 2022.
- Tanning tax – Under the ACA, there is a 10 percent sales tax on indoor tanning services. The BCRA repeals the tanning tax after Sept. 30, 2017.
- Prescription drug fee – The ACA added an annual fee on companies that manufacture or import branded prescription drugs. The BCRA repeals the fee for years beginning after Dec. 31, 2017.
- Health insurance tax – The ACA imposed an annual fee on certain health insurers. The BCRA repeals the health insurance tax after 2017. Congress already suspended this tax for 2017.
- Small business tax credit – The BCRA repeals the ACA’s small business tax credit beginning in 2020. For 2018 and 2019, the small business tax credit generally is not available for qualified health plans that provide coverage for certain abortions.
- Medical device excise tax – The ACA imposed a 2.3 percent excise tax on the sale of certain medical devices. Congress had already placed a moratorium on the collection of this tax for 2016 and 2017. The BCRA repeals the medical device tax for sales after Dec. 31, 2017.
- Retiree drug subsidy – As an incentive to employers to offer their retirees prescription drug coverage, Congress previously authorized a subsidy to employers that provided this coverage. In a reversal of course from the ACA, effective for tax years beginning after Dec. 31, 2016, employers who offer such coverage will be able to deduct the full cost of the benefits provided without reduction for the subsidy.
- Over-the-counter medications – Many employers offer their employees medical Flexible Spending Accounts (FSAs) under a cafeteria plan, Health Savings Accounts (HSAs) or Health Reimbursement Account (HRAs). Under the ACA, these accounts are generally not permitted to reimburse employees for over-the-counter medications. The BCRA eliminates that restriction effective for plan years beginning in 2017.
- FSA contribution limits – The ACA placed a $2,500 cap (indexed to $2,600 for 2017) on the amount an employee can contribute to a health FSA. The BCRA removes that cap and leaves the maximum funding amount to the discretion of the employer effective for plan years beginning after Dec. 31, 2017.
- Cadillac tax – The ACA imposes a 40 percent tax on certain high cost employer-sponsored health insurance benefits. The BCRA delays the effective date of the tax from Jan. 1, 2020, to taxable periods beginning after Dec. 31, 2025.
- Individual shared responsibility mandate – The current law requires most individuals to purchase health insurance or pay a penalty (determined monthly). The BCRA retroactively repeals this provision to months beginning after Dec. 31, 2015.
- Net investment tax – In order to fund the ACA, current law applies a rate of 3.8 percent to certain net investment income of individuals, estates and trusts with income above certain amounts. The BCRA repeals the net investment tax starting in 2017.
- Itemized deduction of medical expenses – Under current law, taxpayers who itemize deductions on their individual income tax returns can deduct medical costs that exceed 10 percent of their adjusted gross incomes. In 2016, for taxpayers who are 65 or older, the threshold is 7.5 percent. The BCRA reduces the cap to 7.5 percent for all taxpayers in 2017.
- Premium tax credits – The ACA allows individuals that meet certain income thresholds to purchase health insurance coverage through the Exchange (also known as the Health Insurance Marketplace) with premium tax credits. Premium tax credits are government subsidies toward the cost of the health insurance. The BCRA keeps the premium tax credit system, but makes modifications as explained below.
Eligibility for the premium tax credit. Starting in 2018, the BCRA tightens the eligibility criteria for the premium tax credit based on household income and eligibility for other coverage. In addition, the credit amount will be determined taking into consideration the age of the individual and family members, plus the median cost of coverage in the geographic area where the individual resides. Premium tax credits will not be available for plans that cover certain abortions.
Recapturing excess premium tax credits. In certain situations, individuals who receive excess premium tax credits do not have to repay the excess. Starting in 2018, the BCRA requires any individual who was overpaid premium tax credits to repay the entire excess amount, regardless of income.
- Health Savings Accounts (HSA) – The BCRA contains several HSA changes since the Republicans want to expand use of Health Savings Accounts.
Substantial increase in the HSA contribution limits. In 2017, the deductible HSA contribution limits (employer and employee combined) are $3,400 for self-only coverage and $6,750 for family coverage. Under the BCRA, the HSA contribution limits will increase to match the out-of-pocket limits. Thus, for 2018, the contribution limits are expected to be at least $6,550 for self-only plans and $13,100 for family plans, the same dollar amounts as the maximum out-of-pocket costs.
HSA catch-up contributions. In addition to the basic HSA contributions referred to above, individuals age 55 or older (and not enrolled in Medicare) can make catch-up contributions. Currently, each eligible spouse can make an additional $1,000 catch-up contribution to his or her own HSA. The BCRA would allow both spouses to make their catch-up contributions to one HSA instead of to separate HSAs beginning in 2018.
Payment of certain medical expenses with HSA funds. Under current law, a taxpayer cannot use HSA funds to pay for medical expenses incurred before the creation of the HSA account. Under the BCRA, starting in 2018, taxpayers can use HSA funds to pay medical expenses incurred after a high deductible health plan begins if the taxpayer establishes an HSA within 60 days of that date.
Tax on HSA distributions. Individuals own their HSA (or Archer Medical Savings Account), thus they have the ability to withdraw funds for non-medical purposes. Such withdrawals are taxable and the ACA imposed a 20 percent penalty tax on the amount distributed. The BCRA reduces the penalty to 10 percent on HSAs and 15 percent on Archer MSAs effective in 2017.
Health care provisions
Health insurance coverage
In general, the BCRA retains many of the ACA’s most popular provisions including: (1) coverage for adult children up to age 26 on their parents’ health plans, (2) coverage for pre-existing conditions, (3) guaranteed coverage renewals, and (4) prohibitions on lifetime and annual coverage limits, medical underwriting and discrimination based on race, creed, sex, etc. In addition, cost-sharing subsidies for individual policies purchased through the Exchange will continue through 2019, before being eliminated in 2020.
However, the BCRA does give states more jurisdiction over health care provisions and states can request waivers from certain federal requirements. In addition, states may allow insurance companies to charge older adults even more for individual health insurance compared to the premium charged to younger adults, starting in 2019. The current ratio of 3 to 1 can be increased to 5 to 1, or to any other ratio determined by the state.
State stability fund
In order to address instability in the individual health insurance marketplace, the BCRA establishes a temporary state stability fund to be in effect from 2018 through 2026. The states can apply for funding for a variety of purposes such as (1) providing financial assistance to high-risk individuals, (2) working with insurance companies to stabilize premiums and promote the marketplace, (3) paying medical providers for health care services, and (4) assisting individuals enrolled in marketplace coverage with out-of-pocket costs such as copayments, coinsurance and deductibles.
The ACA allowed states to expand their Medicaid coverage for the poor and funded the additional costs primarily with federal dollars. The BCRA phases out federal funding for this Medicaid expansion by 2024. Furthermore, in an effort to limit federal payments to the states, the BCRA adds a per capita model and a block grant program effective for the government’s fiscal year that starts Oct. 1, 2019. States also have the option to impose a work requirement on certain individuals seeking medical assistance.
Public health funding
The BCRA increases funding for community-based outpatient facilities that provide health services to medically underserved populations. In addition, it provides funds to the states to support substance abuse treatments for individuals.
Small business health plans
The BCRA, after it has been in effect for one year, will allow certain organizations to sponsor fully insured group health plans for small businesses. These organizations may include, for example, trade associations that wish to offer group health insurance to their members or franchisors that want health coverage for their franchisees. The organizations must meet certain certification requirements to be plan sponsors.
Although the BCRA is not a complete repeal and replacement of the ACA, it is a step forward under the Republican’s agenda to provide more choices regarding health care to states and individuals.