November 7, 2016

Will a Trump Administration Bring Huge Changes to Health Care Benefits?

The Affordable Care Act (ACA) became a law on March 23, 2010. The process was forced and abrupt. It was followed by seven years of often agonizingly complicated regulatory pronouncements, legislative challenges, and court rulings. With the election results of November 8th setting a new mandate, many Americans expect the “repeal and replace” rhetoric to lead to an immediate reversal of the law. While the law as we know it will most certainly be changed, political obstacles will make an outright repeal unlikely in the short-run.

Initial Maneuvering under the New Administration

Despite Republican control of the House, the Senate, and the Presidency, the Republicans lack the super majority (60 votes in the Senate) for an outright repeal of the law – assuming no Democrats cross party lines.

Instead, Republicans will most likely use a combination of tools to weaken the law as they work on new health care policy initiatives. These tools may include:

  1. Budget reconciliation process – Without a super majority in the Senate, budget reconciliation (which requires a simple majority) could be deployed to affect revenues and spending for the ACA.
  2. Stop enforcement – Regulations that are in place can only be modified through a public notice and comment process. However, new leadership at the various government agencies can put a hold on any enforcement actions.
  3. Legal maneuvering – Multiple lawsuits challenging the ACA are in process. Vigorous defense from the Department of Justice is likely to wane.
  4. Grant waivers to states – Under Section 1332 of the ACA, innovation waivers are available for states to implement different approaches to health care provided there are similar levels of coverage. The broad parameters offered under section 1332 could be used to evolve ACA on a state by state basis under the auspices of the new administration.

Current economic realities (a breakdown of the financing mechanism), unmet promises (there is nothing affordable about the law), and the groundswell against regulatory complexity and overreach are contributing to the momentum for change. But the extent and timing of change will remain unclear well into the first half of 2017.

Health Care Reform under a Trump Administration

Speculation is abound as to what a Trump administration will propose under its “repeal and replace” mandate. The landscape is changing daily and sometimes hourly. There is no formal framework for a new law. Rather, broad concepts are presented on the Donald J. Trump website and interviews with the President-elect provide some insight.

In one interview President-elect Trump offered his support for preventing insurers from imposing pre-existing condition clauses. He also said that children up to a certain age could remain on the parent’s plan – presumably until age 26.

On his website seven major points are outlined. These are:

  1. Completely repeal Obamacare
  2. Modify existing law that inhibits the sale of insurance across state lines
  3. Allow individuals (not just businesses) to fully deduct health insurance premium payments
  4. Allow individuals to use Health Savings Accounts (HSAs)
  5. Require price transparency from all health care providers, especially doctors and healthcare organizations
  6. Block-grant Medicaid to the states
  7. Remove barriers to entry into free markets for drug providers that offer safe, reliable, and cheaper products – including the importation of safe and dependable drugs from overseas.

ACA Theory versus Reality

Keeping the “good” parts of the Affordable Care Act, while addressing affordability, is not going to be easy as special interest groups deploy their lobbyists to both sides of the House and Senate.

Trump’s major points rely heavily on individual responsibility (HSAs), price transparency, and the leveling of the tax law so that businesses and individuals can have the same advantages when purchasing health insurance. Also, there is a belief that a true national market for health insurance would unlock competition and creativity.

Missing from the Trump proposal is how to address the critical issue of underwriting health insurance. The keystone requirement of the Affordable Care Act was that every American be required to have health insurance so that risk can be shared between the sick and the healthy. Over time, risk pools would be balanced. With this requirement, pre-existing condition exclusions could be eliminated. “Participate or be Taxed” aligns nicely with economic models, but the law unraveled as millions of Americans joined the system with pre-existing conditions and millions more gamed the system to receive fraudulent subsidies in the federal health insurance exchange.

The final straw and perhaps the tipping point for the Affordable Care Act was the withdrawal of insurers from the health insurance exchanges and the often dramatic price increases imposed by those insurers that remained. A Kaiser Foundation study found that in 2016, 85% of exchange enrollees had a choice of three or more insurers. In 2017, the number dropped to 57%. In non-Metro areas, 41% of enrollees have only one insurer to choose from.

As predicted by some and proven with hindsight, the Affordable Care Act created far reaching unintended consequences. The promise of industry innovation did not materialize. Instead, health insurers and hospitals consolidated, leading to reduced access and higher prices.

Point by Point Thoughts

Implications of the seven point Trump proposal are identified below.

1. Completely repeal Obamacare

The complete repeal of the Affordable Care Act is probably not feasible given the lack of a super majority in the Senate. But a crippling of Obamacare is possible and in some ways already happening as the health insurance exchange model struggles and the costs outweigh tax revenue.

2. Modify existing law that inhibits the sale of insurance across state lines

Insurance was once the purview of the states. But over time, the federal government has become an equal regulator. The tipping point towards federal oversight emerged with the passage of HIPAA in 1996. Insurers must deal with a myriad of state regulators in addition to a multitude of federal government agencies. Self-funded employers for the most part deal only with federal law (ERISA) with the exception of stop loss insurance which is state regulated.

Today, the ability for a company or an individual to purchase insurance across state lines is restricted. An Ohio company cannot buy insurance from an insurance company in another state unless that insurance company is licensed to do business in Ohio.

Beyond the licensing issue in each state are two other key factors to consider.

  1. Insurance company consolidation has reduced choice. A study by the Commonwealth Fund estimates that the four largest insurers (including all Blue Cross / Blue Shield affiliates combined) increased employer-based and individual insurance market share from 74% in 2006 to 83% in 2014.
  2. Patient access is driven by networks. While major insurance companies are national in scope, each market has different provider networks subject to ongoing and complicated negotiations. A regional insurer in one part of the country will be unable to compete in a local market unless they can provide a cost advantage that today is driven in large part by network negotiations. An out of state regional insurer will not have the negotiating leverage in the local market and “renting” a national network will unlikely produce a lower cost. Pricing transparency at the provider level would be one of the economic catalysts required to develop a true national market for health insurance.

Regulatory complexities (State v. Federal), industry consolidation, and local health care market considerations make the goal of eliminating state lines in the purchase of health insurance more complicated than first appears.

3. Allow individuals (not just businesses) to fully deduct health insurance premium payments

In general, employer sponsored health care coverage is a tax-deductible expense to employers. In addition, employees are not taxed on the value of benefits received. The current tax law favors employer provided health benefits over direct compensation. To the employee, a $1 of health care benefits can be the equivalent of $1.20 or more of cash compensation.

Point three of the Trump proposal indicates that there will be an equalization of tax impact, whether health care insurance is purchased by an employer or individual.

This is a significant and potentially game-changing action that could lead to the decoupling of employer sponsored health care as we know it. With equal tax treatment at the corporate and individual level, employers may, depending on the condition of health insurance markets, decide over time to provide employees a stipend for benefits rather than an employer sponsored plan.

4. Allow individuals to use Health Savings Accounts (HSAs)

The Trump proposal advocates the use of HSAs. The reality, according to a recent Society of Human Resource Management study, is that 50% of employers already offer such a program, an increase of five percentage points in three years.

But the new administration may want to expand incentives around HSA plans. These incentives could include encouraging greater employer contributions into these plans or by allowing more flexibility to the plan designs of High Deductible Health Plans (HDHP) that are required as part of an HSA program.

5. Require price transparency from all health care providers, especially doctors and healthcare organizations

The scope and potential impact of pricing transparency is enormous. To the consumer, the cost of health care goods and services remains largely a mystery. Significant infrastructure has been built around contracting with hospitals, doctors, medical device companies, and the pharmaceutical industry. But simple questions about price at the point of service will mostly go unanswered.

The prevalence of high deductible health plans is rapidly increasing awareness about price. The pharmaceutical industry is under assault as millions of Americans now pay the full price of a prescription under their high deductible health plan. The same can be said for x-ray and lab services. On the fringes, services are developing to arm the consumer with pricing and quality tools.

Federal legislation that requires practical to use pricing transparency will assist consumers and potentially make the underwriting and pricing of insurance across state lines more feasible.

As so many organizations have an interest in protecting the status quo, expect major challenges in the push for transparency.

6. Block-grant Medicaid to the states

Medicaid expansion under the ACA increased the number of enrollees by more than 15,000,000 (ASPE Brief June 2016, Department of Health and Human Services). Estimates vary, but the ten year cost for expansion could reach $1 trillion.

The federal government sets guidelines for Medicaid with administration by the states. Funding is shared between the federal government (approximately two-thirds) and the states (approximately one-third).

Specifics around block-grant programs under a Trump administration are vague. Critics say block-grants are a way to cap federal spending while shifting the burden to the states. Others say that states need more authority in the administration of these programs.

Medicaid is a big line item in federal and state budgets with vigorous debate expected.

7. Remove barriers to entry into free markets for drug providers that offer safe, reliable, and cheaper products – including the importation of safe and dependable drugs from overseas.

The rising cost of pharmaceuticals has been front and center of the health care cost debate. A common argument is that the United States subsidizes research and development for the rest of the world by paying higher costs for the same drugs. Point 7 is an attempt to begin a dialogue about the general opinion that drug costs are too high.

The seven points of the Trump plan, though vague, offer at least some insight as to what is being discussed as the new administration begins to coalesce. Also, with each passing day new information becomes available through comments or interviews with the President-elect.

Interestingly, there is no position taken in the Trump proposal regarding Medicare. Funding for Medicare is under pressure as the baby boomer population continues to retire in record numbers. From 2000 to 2030 Medicare enrollment will have doubled to approximately 80 million lives.

There is little doubt that significant health care legislation will emerge in early 2017. While President-elect Trump has a mandate, it is not as strong as the one given to President Obama eight years ago. Perhaps a less forceful mandate will lead to more thoughtful debate and better outcomes. Time will tell.

The Fedeli Group as a Resource

While the Affordable Care Act is likely to change, it continues to be the law of the land. The election results did nothing to change in force regulations, taxes, fees, the employer mandate, the individual mandate, hour requirements, or any other provision.

As the new administration prepares to take office, The Fedeli Group is preparing for the onslaught of health care reform debate and corresponding legislation. In 2017 we will be actively communicating legislative and regulatory developments, assisting clients with technical issues specific to their plans, and providing as needed timely educational forums and seminars.

Our mission is to help clients protect assets and enhance employee outcomes through the delivery of exceptional risk management and employee benefit consulting services and products.

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