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This is the fourth in a series of Baker Tilly articles exploring the impact on ongoing U.S. healthcare reform.
The U.S. House of Representatives voted today to repeal and replace the Affordable Care Act (ACA). After the failure of the House to vote on the American Health Care Act (AHCA) in March, members worked to develop revised legislation that could garner enough votes to pass. In this article, we focus on the manager’s amendment as well as the MacArthur and Upton-Long amendments, each of which revise parts of the original legislation.
Key components of the AHCA
- Eliminates the individual and employer mandates
- Eliminates most of the ACA’s related taxes. However, while the 3.8 percent Medicare tax on net investment income is repealed, these amendments retain the 0.9 percent Medicare surtax on earned income (wages and self-employment income) for six years. Keeping the 0.9 percent tax, which applies to individuals with earned income over $200,000, was one of several last-minute concessions offered by House leadership back in March. It is unknown if this tax will be further addressed as part of any tax reform package.
- Allows states to opt out of requiring insurance companies to cover pre-existing conditions
The AHCA retains the provisions that allow children to remain on their parents’ insurance policies until age 26, prohibit coverage denial for individuals with pre-existing conditions (however, see MacArthur amendment below) and remove lifetime coverage caps. It also makes significant modifications to the premium tax credit system used to subsidize coverage for low-income Americans. In a compromise with the House Freedom Caucus, the manager’s amendment modifies the AHCA to eliminate the ACA’s “10 essential benefits” at the federal level. Under the ACA, these 10 benefits are the minimum level that insurers must offer in their health plans, and include emergency services, hospitalization, preventive services, prescription drugs and lab services. An additional $15 billion has been set aside for states to address mental health issues, maternity and infant care as well as substance abuse.
The manager’s amendment also includes the following:
- Repeals ACA-related taxes at the beginning of 2017 instead of 2018 (most notably the 3.8 percent tax on net investment income)
- Decreases the adjusted gross income (AGI) threshold for medical expense deductions to 5.8 percent from 10 percent. Keep in mind, with potential tax reform on the horizon, this deduction may be significantly modified or disappear altogether.
- Modifies the refundable tax credits made available to assist with insurance purchases. It increases the credits available for those over 50 years of age and also provides additional authority to the Senate to increase the age brackets and related credit amounts in the new age-weighted credit system.
- Extends relief from the “Cadillac” tax to 2026 from 2025
- Makes significant modifications to Medicaid rules
The Congressional Budget Office previously said the updated AHCA (including the manager’s amendment, but not later amendments) would reduce the deficit by $150 billion between 2017 and 2026, less than the $337 billion projected in the original CBO report. This would be primarily due to a decrease in the revenue generated from taxes, but spending would stay roughly the same as they projected in the first score, the CBO said. However, this report does not appear to include the last-minute change to maintain the 0.9 percent tax on earned income. The report continues to estimate that 24 million will lose health coverage by 2026.
Similar to the manager’s amendment, the MacArthur amendment retains the prohibition on gender discrimination, guaranteed coverage issuance to all applicants and coverage of dependents on the parents’ plan up to age 26. However, unlike the manager’s amendment, this one preserves the ACA’s federal essential benefits but offers limited waivers whereby states can opt out of the federal standards.
In order to be eligible for a waiver, the state plan must meet qualifying criteria, including reducing premium costs, increasing the number of individuals with health coverage or advancing another benefit to the public interest (such as growing the coverage of individuals with pre-existing conditions). Consequently, each individual state could potentially have its own coverage criteria for health insurance plans.
It is unclear whether this amendment replaces or modifies the manager’s amendment or the original AHCA bill. It appears it is designed to modify the manager’s amendment but no official explanation is yet available.
In an effort to control healthcare costs and coverage for those individuals with pre-existing conditions, the Upton-Long amendment provides $8 billion to states over five years. The money is expected to help affected individuals, who had let coverage lapse, purchase affordable insurance under the new AHCA risk pools.
Cost of repeal
The revised bill that incorporates the above amendments has not been and apparently will not be scored by the CBO before the House vote.
Baker Tilly observations: What this means to you
The original AHCA bill repeals the 3.8 percent net investment income tax in 2017. The 0.9 percent Medicare surtax on earned income (wages and self-employment income) will remain in place for six years.
In terms of healthcare costs, the nonpartisan Center on Budget and Policy Priorities said “tax credits that help people pay premiums would fall sharply (by an average of $2,200); average premiums would rise; and out-of-pocket costs such as deductibles, copays and coinsurance would increase (by an average of $1,200). Total cost increases would be larger for people who have lower incomes, are older or live in high-cost states: in 15 states, average increases would exceed $4,000.” However, these amounts do not factor in the cost implications resulting from the final changes and amendments to the legislation.
Mick Mulvaney, director of the Office of Management and Budget, indicated that House and Senate lawmakers have been involved in drafting the updated language of the AHCA; specifically mentioning the Senate budget committee members. However, the draft language of the legislation has not been made public as of yet. As a result, it is unclear what the final version of the AHCA actually says.
Several senators expressed concern over the initial legislation as drafted. However, there has not been a lot of Senate commentary on the different amendments. The one thing most people agree on is that this healthcare legislation is likely to be significantly modified by the Senate. We cannot predict whether the Senate modifications will be acceptable to the House or if a compromise can be agreed to that is acceptable to both chambers of Congress.
We expect the above process with the Senate to be played out over weeks and months, not days. All this will leave cost estimates as well as determining how to revise policies difficult for the insurance industry as they design plans that will take effect in 2018. The insurance industry previously indicated it will need significant lead time to write policies and make cost estimates. As previously noted in our alerts, all of this makes the cost of employer-sponsored plans difficult to forecast into next year and beyond. Therefore, we recommend you maintain regular contact with your insurance agent/broker to monitor how legislative proposals will affect your ability to renew your current coverage and on what terms.
Baker Tilly tax and benefits consulting specialists will continue to keep you informed on significant healthcare reform proposals and enacted legislation.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.