Despite the consistent assertions from President Obama and others that alternatives to the Affordable Care Act (ACA) are non-existent, a bold new proposal emerged from the Senate last year. Based on several earlier plans developed by Republicans in both chambers, Sens. Tom Coburn (R-OK), Richard Burr (R-NC), and Orrin Hatch (R-UT) produced the Patient Choice, Affordability, Responsibility, and Empowerment (CARE) Act.
Beyond the immediate repeal of the ACA, this health reform alternative centers upon five core elements: (1) Reinstating and expanding consumer protections (2) Modernizing Medicaid (3) Reducing Defensive Medicine (4) Increasing price transparency (5) Ending health care-related tax distortions.
According to the Center for Health and Economy, the CARE Act would reduce the deficit by $1.5 trillion, lower average premium costs, and cover just as many people as the ACA.
Below is a brief review and analysis of the specific provisions in the CARE Act as described in the available data. While this is the strongest alternative to health reform yet produced in the post-ACA era, the plan could be made better by better organizing its tax credits, making use of the existing ACA exchanges, and implementing changes to Medicare.
Initial Action: Repeal the PPACA and the HCERA
Similar in approach to welfare reform in 1996, the CARE Act would terminate the President’s health care law (PPACA) and its follow-up provisions (HCERA). The “root and branch” method to reform can be desirable because in very large bills, the interdependent structure of taxes, mandates, regulations, and bureaucratic institutions simply disappear instead of conducting a meticulous reconfiguration.
That said, political realities make it nearly impossible to outright repeal the President’s law in its entirety, but his own numerous extensions and delays indicate a reevaluation is necessary — all the more so as bipartisan analysis continues to show that the ACA does not seriously address health care costs and is causing severe drain on the nation’s finances.
First Action: Implement Health Care Protections for Patients
This section reinstates several ACA regulations and establishes new consumer protections that can be broken up into three areas: federal guarantees, patient-centered tax credits, and new state-based rules.
1. Federal Guarantees
- Prohibit insurance companies from imposing lifetime limits on a consumer. This is identical to the ACA protection that abolishes limits on the dollar value of benefits for any participant or beneficiary.
- Replace community rating with age rating, and allow state commissioners to regulate insurance again. Under the ACA, community rating said that a 54-year-old could not be charged more than three times the premium as a 22-year-old. This rating limit is causing unfair spikes in the cost of care for the young. This provision changes the 3:1 ratio to the standard 5:1, but also permits states the option to opt out of the federal ratio to adjust their own.
- Require health plans to offer dependent coverage up to age 26. While retaining this provision will only cover young adults on the margin, it does provide these dependents with more choice. Similar to the new insurance plan rating, however, any state could choose to opt out of this provision and set its own coverage level.
- Stipulate that insurers must guarantee renewability of health plans and can’t refuse to cover an individual solely because of health status. In some cases, coverage can be canceled but only because of fraud or misrepresentation, or failure to pay premiums on behalf of a consumer.
- Ensure that people with pre-existing conditions will always have access to care so long as they are continuously covered. If individuals stay insured with even minimum catastrophic coverage for a period of at least 18 months, they can’t be denied insurance coverage. In addition, these policies must be set at standard rates based on age and residence, not pre-existing conditions.
- Establish a one-time open enrollment period for the uninsured where they can purchase coverage regardless of health status or pre-existing conditions. If this opportunity is rejected, these individuals can still sign up later, but they will not be entitled to the consumer protections.
2. Patient Centered Tax Credits
- Provide a targeted tax credit to certain individuals that could be used only to purchase health coverage. These credits would operate similarly to the ACA tax credits, except they can be used to buy any plan on the market if an individual’s income meets the proper threshold.
- Give people with an annual income below 300% of the federal poverty line ($34,470 in 2013) the option to receive an age-adjusted, advanceable, refundable tax credit to buy health coverage or health care services. The credit scales down based on income from 200-300 percent of the FPL, and would be indexed to CPI+ 1, to encourage slower growth in health care spending over time. The credit would apply only to the self-employed, people in the individual market, as well as workers of a small business with fewer than 100 employees.
o A potential credit scale based on age and family status was released in the CARE Act’s detailed summary as follows:
- Create an Office of Health Financing at the U.S. Department of Treasury. Establish strict program integrity requirements and limit the new office’s function only to administering the health tax credits.
3. State-Based Rules
- Give state insurance commissionaires the power to auto-enroll individuals if they fail to sign up for coverage on their own. This means several default plans would be provided by insurers as designed by the individual state to match uninsured individuals with a policy.
- Establish state-based high-risk pools with federal funds to ensure coverage for patients with high cost conditions. However, states that create these pools must implement strong disincentives for insurers to dump excessive referrals to the high-risk pool.
- Allow small businesses to join into insurance compacts. By banding together to negotiate on small business health plans, local shops will be able to leverage purchasing power on policies similar to those of large employers.
- Permit states to enter into interstate compacts to make pooling easier and decrease administrative in developing innovative plans and reforms to their insurance markets.
- Restore the ability to use health savings accounts (HSA) to purchase over-the-counter medications as a qualified medical expense. These accounts could also be used to cover long-term premium insurance, COBRA, and other qualified policies. In addition, spouses would be able to make contributions to the same HSA account.
Second Action: Modernize Medicaid
The CARE Act focuses on substantial Medicaid reform to operate within the new tax credit structure, and to ease the financial burden the program places on state governments.
1. Give Medicaid eligible citizens the option to use tax credits to purchase insurance. Traditional Medicaid would remain an available choice, but now eligible individuals can use the health tax credit to help purchase private coverage.
2. Refinance Medicaid as a capped allotment program. For Medicaid-eligible individuals who forgo the tax credit option, states will receive a defined federal grant to cover long-term care services and support. Unlike a block grant, the capped allotment fixes funding based on the per-capita involvement of Medicaid patients. In other words, based on the approximate number of people still in the program the state will be reimbursed with a fixed and financed budget to cover their health needs.
- The changes in Medicaid still maintain the current taxpayer provided health care grants for pregnant women, low-income children, and low-income families.
- Funding for the allotments would derive from the previous year’s program costs with allocations based on the number of low-income individuals at or below 100 FPL. The allotments would grow at CPI+1 to reflect demographic and population changes.
- States are allowed to innovate in the low-income health care market. Current experiments include value-based insurance design, premium assistance programs, better aligned provider incentives, reduced administrative barriers, care coordination, and improved benefit design approaches to incentivize healthy behaviors.
3. Reauthorize the use of health opportunity accounts. An earlier pilot program in 2005 used HOA’s to pay out-of-pocket health expenses and was funded by the state and federal governments up to $2,500 annually for adults and $1,000 for children. These accounts could be paired with high-deductible insurance as a way to meet a Medicaid eligible individual’s health needs.
Third Action: Reducing Defensive Medicine
The CARE Act does not provide a clear set of provisions on reducing medical malpractice costs, but it suggests that the federal government should adopt or incentivize several options. Medical torts do increase the price of health services for individual practices and hospitals so addressing excessive litigation is a step in the right direction. Below are three elements outlined in the Senators’ proposal:
Fourth Action: Price Transparency
Health care is of the last industries to completely obscure price from a customer. Price transparency is vital for patients to compare hospitals and doctors that provide the same service. The incentives created by strong transparency in the health market can rapidly change consumer behavior by decreasing utilization rates and compelling doctors to compete for business.
Fifth Action: End health care tax distortions
Employers have been offering their workers health insurance as a job benefit ever since wage controls in WW2 limited pay raises. By excluding this insurance from taxes through a special exclusion, America has effectively been subsidizing large employer’s health plans. The CARE act modifies the tax exclusion to curb its economic distortions and to keep a part of the deduction available for businesses who still want to provide coverage.
Out of all five sections, most of the consumer protections, price transparency, and defensive medicine policy are sound policy. The ACA implementation debacle reveals the importance of information availability to the public. And giving patients popular guarantees that improve the quality of insurance combined with a check on the exploding trial attorney industry is a valuable step toward better health policy.
However, the tax credit mechanism that operates as the centerpiece for this reform to make insurance affordable should be improved. The proposed credit index is far too broad to effectively curb costs for low-income consumers. Age cohorts currently grouped in fourteen-year bands should be narrowed into three or five-year ranges. The relative health conditions between a 20- and 24-year-old are more similar than between a 20- and 34-year-old. The tax credits would of course then scale lower for the young because they do not use health care as regularly as older Americans.
In addition, the credits should be adjusted based on sex and be expanded to all citizens. The proposed structure excludes many Americans who are not self-employed or who are purchasing insurance on the individual market. Nevertheless, a refundable and scalable credit system similar to the Earned Income Tax credit (EITC) to purchase health care would be vastly superior the ACA’s current subsidy model.
While the CARE Act is quite clear in repealing the entire ACA and its follow-up legislation, it makes more political and policy sense to just reform the law. This is especially true in terms of the state exchanges. The Senators should seek to convert all state and federal exchanges into open hubs controlled by individual state insurance commissionaires. Instead of only providing federally designed policies as is the case now, each state should facilitate a central portal where citizens can view and compare any policy. Utah pioneered a free-market exchange before the ACA even went into effect and can lead reluctant red states in incorporating the exchange. In a world of constant technological advances, people should be able to shop for a health plan and evaluate side by side what is affordable and good for them.
The proposal makes some serious changes to Medicaid’s financing, but to be truly comprehensive reform, it needs to address Medicare. Federal health programs are the fastest growing portion of the federal budget, and if Congress can control such spending then our debt problems become so much easier. The CARE should include specific, bipartisan changes such as cutting federal price controls for Medicare reimbursements, reforming the current fee-for-service provider payment system, modernizing cost-sharing for beneficiaries, and better coordinating care for high risk patients.
One final critique centers around the tax exclusion cap for employer sponsored health coverage. Over ten years, the CARE act would reduce the deficit by $1.5 trillion, but $1.1 trillion of that reduction comes from curtailing the tax exclusion. This extraordinary boost in federal revenue eclipses the spending cuts outlined throughout the entire proposal.
This type of action could be politically difficult because many will view it as a “tax increase” unless Congress simultaneously uses the trillions in increased revenue to fund broader tax reform. If corporate, individual, or estate tax rates are decreased in direct proportion to reduced employer deduction, then net taxes will not actually go up. Moreover, a modernized tax code coupled with real health care reform would boost economic growth in the short and long run.
Ultimately, the CARE Act provides advocates of free-market health reform a palatable five-point-plan in contrast to the ACA. The bill could be improved by observing certain political realities and broadening health reform to other federal programs like Medicare, but overall it is a welcome step.