The House of Representatives took the first step last week toward attaining a long-desired goal—the repeal and replacement of the Affordable Care Act (ACA).
The American Health Care Act (AHCA) (H.R. 1628) passed the House on May 4, 2017, in a 217–213 party-line vote. The Republican-sponsored bill removes many of the tenets of the ACA and implements funding changes to premium tax credits and the Medicaid program, among other health care provisions.
U.S. small business owners have largely supported efforts to amend the ACA, and the AHCA—if passed—would bring several changes to the small business community.
In this post, we’ll cover the history of the AHCA, its major provisions, what must happen to make it law, and how its passage would affect small businesses.
Let’s dive in.
History of the American Health Care Act
Since the Affordable Care Act became law in 2010, Republicans have campaigned on promises to repeal and replace it. When the party gained control of the executive and legislative branches of government in 2017, it set to work creating the bill that would become the AHCA.
The two bills that constitute the AHCA were introduced on March 8, 2017, in the House Energy and Commerce Committee and the House Ways and Means Committee. Because Republicans don’t hold a filibuster-proof majority in the Senate, the bill is what’s known as a budget reconciliation bill—legislation that focuses solely on matters affecting the federal budget. A budget reconciliation bill can be passed with a simple majority in the Senate.
Both committees approved the AHCA on a party-line vote, and the bill moved to the House Budget Committee. It was again approved and then sent to the House Rules Committee.
The House scheduled the AHCA for a vote on March 23, but Speaker Paul Ryan withdrew it when it became clear that both moderate and far-right Republican lawmakers opposed the bill.
The largest Republican opposition came from the conservative House Freedom Caucus. It wanted any health care bill to abolish more provisions of the ACA—particularly essential health benefits requirements.
In April 2017, Republicans worked together to reconcile their differences on the bill. The result was the MacArthur amendment, named for New Jersey Representative Tom MacArthur.
The amendment allows states to waive essential health benefits and parts of the community rating program. It also grants insurers the right to charge higher premiums to people with pre-existing conditions, as well as for enrollees in their 50s and early 60s.
This new version of the bill earned more Republican support. It passed the House on May 4 with 217 votes. All 193 Democrats and 20 Republicans voted against it.
What Stays in the AHCA
Because the AHCA is not a full repeal of the ACA, many pieces remain intact. In fact, the MacArthur amendments preserve pieces of the ACA’s market reforms.
The following ACA provisions remain in effect under the AHCA:
- Ban on lifetime and annual limits for essential health benefits
- Guaranteed issue and renewability of coverage
- Coverage for adult children up to age 26
- Age rating restrictions*
- Requirements to cover pre-existing conditions*
- Ban on health status underwriting*
- Restrictions on discrimination based on race, nationality, disability, age, or sex
- Cost-sharing limits on essential health benefits for nongrandfathered plans
Additionally, the AHCA keeps changes, made by the 21st Century Cures Act, that permit the use of Small Business Health Reimbursement Arrangements (HRAs).
*The AHCA allows states to request waivers to alter or suspend these requirements.
What Changes Under the AHCA
The AHCA changes several U.S. health care laws as they relate to the federal budget. These include:
- Eliminating the employer and individual mandates (check out more on small business health insurance requirements)
- Scaling back health insurance subsidies
- Removing the ACA’s small business tax credit
- Implementing state waivers from the ACA’s essential health benefits requirement and community rating rules
- Providing funding for high-risk pools
- Enhancing Health Savings Accounts (HSAs)
- Rolling back several ACA taxes
- Defunding Medicaid expansion and altering the program
- Altering premium tax credits for the qualified small employer health reimbursement arrangement (QSEHRA)
We’ll explore each of these points in more detail below.
Eliminating the Employer and Individual Mandates
The AHCA effectively repeals both the employer and the individual mandate by reducing the penalties imposed under the provisions to zero beginning in 2016.
However, the bill allows insurers to add a 1-year, 30 percent late-enrollment fee starting in 2019 to the premium of any applicant with a coverage lapse of more than 63 days during the past 12 months.
Scaling Back Subsidies
The AHCA would repeal both premium tax credits and cost-sharing reductions to low-income individuals beginning in 2020.
Instead, everyone would receive a monthly tax credit to buy health insurance on or off state or federal exchanges. The amount of the credit would depend on age and family status rather than income level, though the value of the tax credits would phase out at $75,000 for individuals and $150,000 for families.
For more details on the AHCA’s tax credits, check out Kaiser Family Foundation’s interactive map. It compares tax credits across the country under the ACA and the AHCA.
Removing the ACA’s Small Business Tax Credit
The AHCA would repeal the ACA’s small business tax credit as of 2020. Between 2018 and 2020, businesses choosing a policy that covers elective abortions would not have access to the tax credit.
Implementing State Waivers
The MacArthur amendments allow states to apply for waivers from the ACA’s essential health benefits requirement and certain community rating pools. The three waivers would allow states to:
- Set their own essential health benefits. Insurers would abide by these new essential health benefits beginning in 2020.
- Allow insurers to charge more based on age. Under the ACA, insurers can charge older people up to three times as much as younger people for coverage. The AHCA would adjust this 3:1 ratio to 5:1, meaning insurers could charge older people up to five times as much. A waiver would allow states to permit insurers to expand that ratio further.
- Allow insurers to charge more based on health status in some cases. The ACA’s ban on basing premiums on health status is still in effect, but a waiver would suspend that ban for people who don’t maintain coverage. Insurers could charge policyholders higher premiums for pre-existing conditions for one year.
Instead, states would set up a high-risk pool or participate in a federal risk-sharing program, which reimburses insurers for covering sicker, higher-risk people.
States requesting a waiver must demonstrate that the waiver would reduce premium costs, increase enrollment, stabilize the market, stabilize costs for individuals with pre-existing conditions, or increase the choice of policies in the state.
The federal government would have 60 days to approve the waivers.
Providing Funding for High-Risk Pools
The AHCA establishes a federal high-risk pool called the Patient and Stability Fund, which would be in effect from 2018 to 2023. The fund would provide an additional $8 billion to states granted a waiver from community rating.
States must use the money to reduce premium and out-of-pocket costs for people facing a premium hike because they:
- Live in a state that was granted a waiver;
- have a pre-existing condition;
- are uninsured because they didn’t maintain continuous coverage; or
- purchased health insurance on the individual market.
The AHCA aims to encourage HSA use by doing the following:
- Increasing the maximum HSA contribution limit to $3,400 for self-only coverage and $6,750 for family coverage in 2017. The 2018 limit would be at least $6,550 for self-only coverage and $13,100 for family coverage.
- Allowing both spouses to make catch-up contributions to the same HSA beginning in 2018.
- Allowing HSA funds to cover expenses incurred the day the account owner’s high-deductible health plan (HDHP) went into effect, as long as the HSA was established within 60 days.
Rolling Back Several ACA Taxes
The AHCA makes several changes to the ACA’s tax provisions, including:
- The Cadillac tax. The AHCA would delay the 40 percent excise tax on high-cost group coverage to 2026.
- Investment income tax. The AHCA repeals the ACA’s 3.8 percent tax on investment income.
- HSA taxation. Under the AHCA, HSA account owners could use HSA funds to pay for over-the-counter medication beginning in 2017. In addition, a lower, pre-ACA taxation rate would apply to HSA funds used for unqualified purchases.
- FSA contribution limits. The AHCA repeals the $2,500 contribution limit under the ACA.
- Medicare tax. High-income individuals currently pay an additional 0.9 percent toward Medicare. The AHCA repeals this extra tax as of 2023.
- Medicare Part D subsidy. Effective 2017, the AHCA would restore businesses’ ability to take a tax deduction for the Medicare Part D subsidy without reducing it by the amount of any federal subsidy.
- Medical devices excise tax. The AHCA would repeal the 2.3 percent medical devices excise tax, the health insurance providers fee, and the fee on select brand pharmaceutical manufacturers.
- Indoor tanning tax. The 10 percent sales tax on indoor tanning services would be repealed effective June 30, 2017.
- Medical expense deduction income. The AHCA would reduce the medical expense deduction income threshold to 5.8 percent beginning in 2017.
Defunding Medicaid Expansion and Altering the Program
Under the AHCA, the state-by-state Medicaid expansion enacted by the ACA would be phased out as of 2020.
The bill would also end Medicaid’s status as an open-ended entitlement. Instead, states could choose either to convert the program to a block grant or to accept per-capita limits on funding. As a block-granted program, states could take federal money as a lump sum with fewer federal rules. Under a per-capita system, states would receive a portion of federal money for each beneficiary.
The AHCA also suspends Medicaid reimbursement to Planned Parenthood for one year. The bill would also allow states to impose a work requirement for nondisabled, nonelderly, and nonpregnant adults as a condition for receiving Medicaid.
Because Medicaid benchmark plans are subject to the essential health benefits requirement under the ACA, states could also apply for waivers to limit the scope of Medicaid coverage.
Altering Premium Tax Credits for the QSEHRA
The AHCA would alter the way the QSEHRA interacts with federal tax credits.
Under current law, participants in a QSEHRA must first determine whether the HRA’s monthly allowance counts as affordable coverage. If so, the participant doesn’t qualify for a premium tax credit. If the allowance is not affordable coverage, however, the participant can receive a premium tax credit. The premium tax credit is then reduced by the amount of the monthly HRA allowance.
The AHCA would eliminate the need for participants to determine whether their HRA allowance qualifies as affordable coverage. Instead, the participant would only need to ensure their tax credit is reduced by the amount of their HRA allowance.
The ACA vs. the AHCA
If the AHCA passes, it would reshape several features of U.S. health care under the ACA.
Here’s a chart to compare the two bills.
Individual mandate and employer mandate on companies with 50 or more employees
No individual or employer mandate, but insurers can charge a 1-year, 30% surcharge on consumers with a lapse in coverage of 63 days or more
Income-based subsidies for premiums and an after-subsidy cap on cost; tax credits for out-of-pocket expenses; annual limits on coinsurance, copays, and other costs
Age-based tax credits for premiums, phased out for higher-income individuals and families; no tax credits for out-of-pocket expenses
Health Insurance Underwriting
A ban on health status underwriting, including denying coverage for pre-existing conditions; a 3:1 ratio for premium costs for older policyholders
Permission for states to opt out of the health status underwriting ban, including mandated coverage for policyholders with pre-existing conditions; a 5:1 ratio for premium costs for older policyholders
Essential Health Benefits
Requirement for insurers to offer 10 essential health benefits
Permission for states to redefine essential health benefits
40% excise tax on high-cost group plans, implemented in 2020; 3.8% tax on investment income; 0.9% tax on individuals with an income higher than $200,000 or families with an income higher than $250,000; 2.3% tax on medical devices
Delay in 40% excise tax to 2025; repeal of all remaining taxes
Matching federal funds to states for qualified recipients; expanded eligibility to 138% of poverty level income
Federal funds granted on a block-grant or per-capita basis starting in 2020; states allowed to impose work requirements on some recipients
Health Savings Accounts (HSAs)
Individual contribution limits of $3,400 and family limits of $6,750; 20% additional tax on nonqualified use of HSA funds
Individual contribution limits of $6,550 and family limits of $13,100; returns taxation levels on nonqualified use of HSA funds to pre-ACA levels
The American Health Care Act passed the House, but both the Senate and President Donald Trump must approve the bill before it becomes law.
Already, members of the Senate are working on possible changes. The legislation’s stances on Medicaid, tax credits, and Planned Parenthood are particularly likely to see alteration.
President Trump has championed the bill and is urging the Senate to find a way forward. Any bill that reaches his desk, though, will likely be somewhat changed.
What the AHCA Means for Small Businesses
The American Health Care Act contains several items likely to affect small businesses.
First, it eliminates the employer mandate, meaning small and large businesses would be on an equal playing field when it comes to the requirement to offer employees health insurance.
Second, beginning in 2020, small businesses would no longer be able to claim the small business tax credit.
Finally, the AHCA would reaffirm and even improve other small business benefits options. The bill would enhance the value of HSAs, which can be offered or funded by small businesses, and it would confirm the status of the QSEHRA and make tax credit coordination easier for employees.
Whether the AHCA is passed and proves to be valuable to small businesses remains to be seen, but it’s certain it would change the small business benefits landscape.