Back in 2017, when Republicans in Congress made a big push to repeal and replace the Affordable Care Act (ACA), they made some bold pledges:
- Protections for the most vulnerable.
- A patient-centered health care system that gives Americans access to quality affordable care.
- More choices, lower costs, and greater control over health care.
That effort failed, but behind the scenes, a few members have kept the idea of health care reform alive on the Republican side. One of the most ambitious efforts is H.R. 1332, the Fair Care Act (FCA), sponsored by Republican Bruce Westerman of Arkansas. (Summary; full text.) With polls showing that swing voters care a lot about health care, and with the pressure on for Republicans to come up with something specific, could the FCA be what the party needs to compete with Democratic health proposals in 2020?
The Fair Care Act is much more than another repeal-and-replace effort. It would retain, but reform, all of the major building blocks of current health care policy: the ACA, Medicare, Medicaid, and employer-sponsored health insurance (ESI). Many of its best features are drawn from the work of Avik Roy, a policy analyst and advisor to several GOP candidates. Those positive elements are the focus of this commentary.
Protection for the very sick
One of the biggest challenges for health care policy is the uneven distribution of health care spending. According to data from the National Institute for Health Care Management Foundation, just 5 percent of individuals account for half of all health care spending. Many people stay in that sickest group year after year because of persistent conditions like diabetes or congestive heart failure.
Preliminary figures show that total U.S. health care spending for 2018 was $3.65 trillion, or $11,121 per person. For the sickest 5 percent, that comes to $1.825 trillion, or $111,210 per person. Without insurance, expenses at that level are unaffordable for all but the very wealthy. With insurance, those same high medical bills drive up premiums for everyone in the insurance pool. The Kaiser Family Foundation reports that premiums alone — not counting out-of-pocket costs — now cost over $20,000 a year for families who get their coverage through their employers, the most common source of coverage..
The FCA proposes to address this problem by means of prospective reinsurance, also known as an invisible risk pool. Under the FCA version of prospective reinsurance, the government would create a fund to be used to pay the expenses of high-risk policyholders. Insurers could, at their discretion, choose policies to place in the pool. They would retain 10 percent of the premiums on those policies and would pay the first $10,000 of claims. The reinsurance fund would receive the rest of the premium and cover the rest of the claims.
For example, suppose a certain high-risk individual policyholder pays a premium of $10,000 per year and was expected to have claims of $100,000. Without reinsurance, the insurer would lose $90,000 on this policy. With reinsurance, the insurer would retain $1,000 in premiums and pay $10,000 in claims, for a loss of just $9,000. As a rough rule of thumb, the insurance company would be motivated to cede the policy to the reinsurance pool if it expected claims of $19,000 or more.
If competition among insurers worked as it should, the savings on policies with predictably high claims would lead to lower premiums across the board. The FCA’s backers calculate that even older policyholders, who could be charged a premium five times higher than those of the youngest, rather than the current 3:1 maximum, would see their premiums fall under the reinsurance plan. Sources of funding for the reinsurance plan are discussed below.
Income-based premium assistance and cost-sharing
The Fair Care Act retains but modifies the ACA’s approach of making coverage in the individual market affordable through income-based premium assistance and cost-sharing reductions.
The bill includes a table of premium assistance standards that limit premiums to a maximum percentage of income, based on income and age. Premiums after subsidy begin at 0 percent of income (full subsidy) for all ages for households below the federal poverty line (FPL). They are just 2 percent of income, regardless of age, for households with incomes below 200 percent of the FPL. For a worker near the median age and median income, the premium cap would be a little over 8 percent of income — about the same as the premium cap in Democratic proposals such as Medicare for America and Medicare for All Who Want It.
At higher incomes, premium assistance varies strongly with age. For incomes of 300 to 400 percent of FPL, the premium cap is just 4.3 percent of income for people under the age of 29 but 11.5 percent of income for those over 59. Together with deductibles and other out-of-pocket costs, that might seem to push the limits of affordability for older families, but FCA backers are confident that broadening the pool by attracting younger, healthier workers, plus the effects of reinsurance, will keep even those premiums affordable. (These numbers may be revised in future versions of the bill, and consideration is being given to offering premium assistance to families with incomes as high as 600 percent of FPL.)
In addition to premium assistance, the FCA includes several other measures that aim to keep medical costs affordable for low- and middle-income families. These include restoring recent cuts in cost-sharing subsidies, easing the rules for health savings accounts, and making a new tier of low cost (but low coverage) “copper” plans available on the ACA exchanges.
Employer-sponsored health insurance
About half of all Americans get their health insurance through their employers. Although many beneficiaries say they are satisfied with their coverage, critics see many problems. Employer-sponsored health insurance is highly inequitable. Workers in the top fifth of the income distribution get an estimated nine times more benefit from the tax-deductibility of ESI than do workers in the lowest fifth. Job lock is another problem. Many workers are afraid to seek career advancement with other employers, start their own businesses, or become self-employed because they fear losing coverage. In addition, thousands of small employer-plans contribute to fragmentation of the health care system and raise administrative costs.
The FCA would make several important changes to ESI:
- The act would terminate the employer mandate that now applies to firms with 50 or more employees. Some employers would undoubtedly continue to offer health benefits as an employee retention tool, but they would no longer have to do so.
- Employers would be allowed to contribute as much as they want to health reimbursement arrangements (HRAs). HRAs would allow workers to receive reimbursement for medical expenses, and also for insurance premiums, something that only became fully legal after regulatory changes initiated by the Trump administration. Under a forthcoming version of the bill, startup companies founded after 2021 that wish to sponsor health coverage would be required to deploy HRAs to do so.
- Employees who turn down an offer of ESI coverage and instead seek insurance in the individual market would not lose their right to premium subsidies and cost-sharing reductions, as they typically do now.
Taken together, the practical effect of these changes would be to leave ESI in place where it suits the needs of both workers and employers. Where it does not, either employers or workers would find it easier to move coverage to the individual market.
The currently published version of H.R. 1332 makes relatively few changes in Medicare. One exception is the introduction of limited means testing. Under Section 222 of the bill, people who reach the age of 65 in 2030 or later, and who have earned lifetime incomes in excess of $10 million, would lose their eligibility for automatic enrollment in Medicare parts B and D and Medigap coverage. That limit would apply to people whose average annual earnings over a 40-year career averaged $250,000, about four times the current median household income. Because the $10 million limit is not indexed for inflation, it would gradually creep downward over time in real terms.
Under the FCA, seniors would continue to have a choice between traditional Medicare and Medicare Advantage. A planned revision of HR. 1332 is expected to include additional reforms that would enhance competition among Medicare Advantage providers, with the effect of broadening choices and lowering costs for those who chose that option.
Changes to Medicaid
The FCA proposes a significant reform of Medicaid in the form of a block grant option. States that choose the block grant will have additional freedom in determining who qualifies for Medicaid in their state. States that do not opt for the block grant may continue their current program as is.
In states that opt for the block grant, the income threshold for premium tax credits is lowered to 60 percent of the federal poverty level (FPL). Currently, people with incomes in the range of 60 to 100 percent of FPL may fall between the cracks—depending on their state, they may not qualify for Medicaid, but they also do not qualify for the federal tax credit. Under the FCA, such people would receive a subsidy sufficient to reduce their premium to zero for individual insurance purchased on the ACA exchange. (Further changes to eliminate coverage gaps are being planned for future versions of the bill.)
Bending the cost curve
Health care represents a larger share of U.S. GDP than it does in other high-income countries. A recent comprehensive literature review in JAMA estimates that about a quarter of all that spending is wasted. The architects of the Fair Care Act believe that potential savings may be even greater than the JAMA estimate. They share the widely held view that no healthcare reform can be successful without an all-out effort to control those costs.
The range of measures specified in the FCA is considerably broader than those in some less market-oriented reform proposals. Highlights include:
- Improving access to generic drugs and biosimilar products, and reducing delays in their approval
- Limiting excessively long periods of patent exclusivity for drugs
- Improve competition in markets for drugs
- More competition and transparency for hospitals
- Expanding access to telemedicine
- Reforming medical malpractice
In addition, other features of the FCA mentioned earlier have a potential to reduce total spending. One is a provision that services rendered under the invisible risk pool would be reimbursed at Medicare rates rather than higher rates charged to private insurers. Another example would be greater consumer cost-consciousness for consumers who opted for high-deductible copper plans or who used HSAs to cover their medical expenses.
Viewed together, the cost-reduction measures in the FCA have two complementary aims. One is to increase competition, especially among hospitals, where regional monopolies now put upward pressure on prices, and among pharmaceutical companies, where regulations place unnecessary upward pressure on prices. The other aim is to increase innovation in treatment methods, new payment models to replace traditional fee-for-service medicine, and applications of information technology to health care.
Will it succeed?
The Fair Care Act offers an impressive package of measures designed to expand accessibility, make health care more broadly affordable, and accelerate innovation. How well it will succeed will depend on several factors.
How will employers and workers react? Despite the end of the employer mandate, employers will still have incentives to provide healthcare benefits to their workers under the FCA. In part, those incentives come from the tax-deductibility of benefits, and in part from their value for employee-retention. Those considerations will ensure a continued role for ESI, at least in the short run.
Over a longer period, both employers and workers will face a broader range of alternatives than they do now. Some employers may decide to stick the kind of ESI they offer now. Others may switch to the HRA model, which FSA rules will encourage. Still others may drop health benefits altogether in favor of higher cash wages.
Meanwhile, some employees will enroll in employer plans they like. Others, without changing their jobs, will opt for individual coverage. Still others, freed from the yoke of job-lock, will change jobs or start their own businesses, using some combination of individual insurance and health savings accounts to cover their medical needs.
It is hard to predict the speed or direction of these changes, since the decisions both for employers and workers will vary with the age, income, and occupational skills of the workers in question. Depending on how things develop, details of the FSA or the way it is implemented may need to change to keep up.
Will the FCA adequately protect the poor? Medicaid, now the largest healthcare program for the poor, does not provide universal coverage. Work requirements exclude some people in some states. Others fall into coverage gaps between Medicare and the ACA exchanges. Still others are eligible for Medicaid, but for one reason or another, do not sign up. Finally, some people experience interruptions in their coverage as their income cycles back and forth across eligibility thresholds due to season employment or variable work hours.
The FCA aims to reduce the number of uninsured people with low incomes. The current version of the bill would take a big step in this direction by lowering the income threshold for premium subsidies to 60 percent of the FPL. By itself, however, that would not guarantee that all the poor, including adults without children and able-bodied nonworking adults, could obtain affordable coverage either through Medicaid or subsidized individual coverage. FCA backers are working toward strengthening coverage for the poor in future versions of the bill. It will be important to watch how all of this develops.
Financing the reinsurance scheme. In the present version of the bill, the key reinsurance scheme has three sources of funding. One is an authorization of $200 billion to be appropriated to the Department of Health and Human Services over ten years. Another is the 90 percent share of premiums that go to the reinsurance scheme when policies are ceded by private insurers. The third is a special tax of $4 per policy on certain individual policies.
These income streams are expected to be adequate in the near term, in which the scope of the individual market, which no covers about 7 percent of insured persons, does not greatly change. Over a longer period, the financial needs of the reinsurance scheme are less certain. One the one hand, it is possible that flows of workers out of ESI, which is not subject to reinsurance, and into the individual market, which is, will be more rapid than expected. At the same time, other factors could decrease the cost of the reinsurance scheme, such as an improvement in the average health status of people participating in the individual market, or reductions in overall healthcare costs due to greater competition.
As the bill is now written, there is no automatic mechanism to guarantee that available funds will keep up with the costs of the reinsurance scheme if the pool of people covered by it grows faster than expected. Any additional funding that was needed would have to be provided through the annual Congressional appropriations process, with all its uncertainties. It is to be hoped that the authors of the FCA give that issue due attention as they further develop the legislation.
The bottom line
The FCA would represent a big step toward the most important goals of healthcare reform. It would resemble universal catastrophic coverage (UCC), about which I have often written, in that it links cost-sharing requirements to family income, with full coverage, at the margin, to the very sick and with extensive subsidies for people with low incomes. Like UCC, it employs market incentives encourage those who can afford to share their medical expenses to seek effective and high-quality care, and would improve provider competition to put downward pressure on excessive costs throughout the healthcare system.
In my view, the Fair Care Act, even as it stands, is the most credible attempt to date to translate market-based reform concepts into actual legislation. Planned refinements appear likely to make it even better.