Senate Leaders Unveil Draft of Bill to Replace Affordable Care Act

June 22, 2017 | Kristine A. Tidgren

Note: It was announced on June 27, 2017, that any vote on this bill would be delayed until after the Fourth of July recess.

Today Senate Republican leaders unveiled a “discussion draft” of their bill to replace many provisions of the Affordable Care Act (ACA). As with the American Health Care Act of 2017 that passed the House on May 4, 2017, the Better Care Reconciliation Act of 2017 (BCRA) is designed to stay within the constraints of the budget reconciliation process. As such, the bill could pass with the approval of only 50 Republican Senators (the Vice President could cast the tie-breaking vote). It also means that the BCRA cannot include provisions that do not change the level of spending, revenues, or the debt limit. In other words, the provisions have to be budget related, and they cannot increase the deficit for any period beyond the budget reconciliation period (usually 10 years). These restrictions greatly limit the extent to which the bill can actually “repeal and replace” the ACA.

Nonetheless, the BCRA would significantly change much of the ACA. Although it is quite similar to the House Bill, there are differences, perhaps most notably those provisions related to premium tax credits. If the BCRA were to pass the Senate, those differences would be worked out in committee. The BCRA will likely come up for a vote before the July 4 recess. The Congressional Budget Office and the Joint Committee on Taxation should have the bill scored by that time. (Update: On June 26, 2017, they released this estimate).

Below is a brief summary of some of the key provisions included in the BCRA. We will provide further, more detailed analysis as the legislative process unfolds.

Eliminate the Individual Mandate Beginning with the 2016 Tax Year

The ACA requires that all individuals either have health insurance, qualify for an exemption, or pay an individual shared responsibility payment. The shared responsibility payment for 2016 is the higher of these two amounts:

  •     $695 per adult and $347.50 per child (under 18), up to a maximum of $2,085 OR
  •     2.5% of family income above the filing threshold

The BCRA would set the individual responsibility to $0 beginning with the 2016 tax year. Therefore, those that have paid or do pay the ISRP for the 2016 tax year could get the payment refunded if the BCRA is enacted.

House Bill: Would also eliminate the individual shared responsibility payment, beginning with tax years beginning after December 31, 2015.

Eliminate the Employer Mandate Beginning with the 2016 Tax Year

 Beginning with the 2015 tax year, IRS began assessing shared responsibility payments against employers with 100 or more full-time equivalent employees. Penalty payments applied to those employers who either (1) did not offer insurance to their employees or (2) did not offer coverage that was affordable or provided minimum value. These penalties were triggered when an employee received a premium tax credit on the Marketplace. Beginning in 2016, employers with 50 or more full-time equivalent employees were subject to the shared responsibility payment. The BCRA would reduce the employer shared responsibility payment to $0, beginning after December 31, 2015. Therefore, no employers will be liable for the penalty for tax years 2016 and forward.

House Bill: Would also eliminate the employer mandate, beginning with tax years beginning after December 31, 2015.

Repeal the Net Investment Income Tax

Implemented by the ACA, the NIIT went into effect for tax years beginning January 1, 2013. It imposes a 3.8% tax on net investment income (ie. interest, dividends, capital gains, rental and royalty income, and non-qualified annuities) for taxpayers with modified adjusted gross income above certain thresholds ($125,000 for single filers and $250,000 for married filing jointly). The BCRA would retroactively eliminate the NIIT, beginning with the 2017 tax year.

House Bill: Would also eliminate the NIIT, beginning with tax years beginning after December 31, 2016.

Recapture Excess Payments of Advance Premium Tax Credits

Under the ACA, taxpayers with incomes at or below 400% of the federal poverty limit may receive an Advance Premium Tax Credit to apply toward the cost of premiums for insurance they purchase on the Marketplace. The amount of this APTC is based upon household income estimates for the upcoming tax year. If household income turns out to be higher than estimated, too much APTC is paid on behalf of the taxpayer during the tax year, and the taxpayer must reconcile and repay this overpayment when filing his or her tax return. Current law caps this repayment amount based upon income level. The BCRA would eliminate these repayment limitations, beginning with the 2018 tax year.

House Bill: Would eliminate the repayment limitations for the 2018 and 2019 tax years.The House Bill would eliminate advanced premium tax credits entirely by 2020.

Repeal the Health Insurance Tax

Section 9010 of the ACA imposed an annual fee on those engaged in the business of providing health insurance beginning in 2014. Called the Health Insurance Provider’s Fee, opponents have argued that this tax significantly increases the cost of insurance to individuals.  The Consolidated Appropriations Act of 2016, Title II, § 201, suspended the collection of the Health Insurance Provider's Fee for the 2017 calendar year. The BCRA would eliminate this tax altogether after December 31, 2017.

House Bill: Would also eliminate the Health Insurance Tax, beginning with the 2018 tax year.

Further Delay Implementation of the Cadillac Tax until 2026

The Affordable Care Act imposed a 40% excise tax on high-cost employer-sponsored health plans. Although the tax was originally scheduled to be imposed beginning in 2018, Congress delayed the imposition of that tax until 2020. The BCRA would delay this implementation further, pushing its initiation forward to 2026. Budget reconciliation restrictions prevent any further elimination of this excise tax. Employees would continue to be eligible to exclude the full amount of coverage from income.  

House Bill: Would also delay implementation of the Cadillac tax until 2026.

Retain Premium Tax Credits, but Change Them

Although it retains the ACA’s premium assistance tax credit process, the BCRA would significantly change the way the credit is calculated. Currently, the ACA allows a premium tax credit to offset the cost of premiums paid to purchase individual health insurance on the ACA Exchange for those in households with incomes less than 400% of the federal poverty level. The amount of the premium tax credit is generally equal to the difference between the cost of the premium for the “second lowest cost silver plan” on the Exchange and the subscriber’s “required contribution.” The required contribution is calculated by multiplying the household income by a corresponding percentage found in IRC § 36B(3)(a)(1) and adjusted annually by IRS revenue procedures according to a statutory formula.

The percentage table for 2016 is as follows.

The BCRA would restrict those who are entitled to a premium tax credit to those with household incomes at less than 350% of the federal poverty level. The BRCA would then calculate the required contribution based upon a wholly renovated table including age-adjusted percentages. The required contribution would be significantly higher for older Americans with higher income ranges. This is likely designed to incentivize younger, presumably healthier Americans to purchase insurance and provide a barebones backstop for the older Americans whose incomes are at least 200% of the federal poverty limit. The table percentage table included in the BCRA draft (from which the required contribution would be calculated) is as follows.   

In other words, a 60-year old with income at 349% of the federal poverty limit would be required to pay 16.2 percent of income on premiums, while a 26-year-old with the same income would be required to pay 6.4 percent of income on premiums. It should also be noted that the calculation of the premium tax credit under the BCRA would be based upon the price of a “benchmark plan” instead of the “applicable second lowest cost silver plan.” The benchmark plan has an actuarial value of 58 percent, while the silver plan has an actuarial value of 70 percent. Thus, the amount of the credit would be generally equal to the difference between the cost of the premium for the “benchmark plan” and the “required contribution.” Because the price of a plan with an actuarial value of 58% would be lower than the price of a plan with a 70% actuarial value, a premium tax credit under the BCRA would be lower.

It is important to note that the changes made to the premium tax credit would not go into effect until tax year 2020.

House Bill: Would implement a tax credit based primarily upon the age of the taxpayer. These credits would range from $2,000 per year for those under 30 to $4,000 per year for those over 60. The credits would be phased out beginning with an adjusted gross income of $75,000 for those who are single and $150,000 for those who are married filing jointly. This new system would be fully implemented by 2020, with modifications to the current premium tax credits occurring in 2018 and 2019.

Make Many Other Tax Changes

The BCRA would also do the following:

  • Repeal the additional .9% Medicare tax beginning in 2023
  • Repeal the Medical Device Tax beginning after December 31, 2017
  • Repeal the $2,500 limitation on contributions to FSAs after December 31, 2017
  • Allow individuals to purchase over-the-counter medications using health savings account dollars beginning in tax year 2017
  • Restore the income threshold above which the medical expense deduction can be claimed to 7.5 percent for all taxpayers (down from the 10% threshold implemented by the ACA) beginning with tax year 2017
  • Reduce the penalty for improper withdrawal of funds from HSAs from 20 percent to 10 percent and from MSAs from 20 percent to 15 percent, beginning in the 2017 tax year
  • Repeal the tanning tax for services occurring after September 30, 2017.

Reduce Federal Funding for Medicaid

Although they are not tax provisions, the provisions in the BCRA causing the most controversy are those impacting federal Medicaid funding. Like the House Bill, the BCRA would end extra federal money for Medicaid expansion that has been implemented by 31 states, including Iowa. The BCRA, however, would phase out this funding from 2020 through 2023 while the House Bill calls for an immediate end to the funding beginning in 2020. The BCRA would also replace the federal guaranteed matching-fund system currently used to cover states’ Medicaid costs. Like the House Bill, the BCRA calls for a limited, per capita reimbursement, which could alternatively be paid through block grants.

We'll be watching for the CBO report and for any upcoming vote. It is sure to be a week of interesting debate, especially given that this bill is pegged a "discussion draft." Most Republican lawmakers are motivated to pass a bill, given that the budget reconciliation window is short. But significant disagreement endures.

We'll keep you posted!