Many congressional Republicans are pushing to swiftly repeal most of the Affordable Care Act through an expedited budget process next month.
If they abolish the law, wealthy taxpayers, health insurers, medical-device manufacturers, hospitals, and other interest groups all are demanding that they also repeal the myriad revenue provisions that pay for the law's premium subsidies, Medicaid expansion, enhancement of Medicare benefits and extension of solvency for Medicare's hospital trust fund.
But some GOP lawmakers and health policy experts warn that axing those financing provisions—which the Congressional Budget Office estimated would reduce federal revenue by nearly $1.2 trillion over a decade—would leave the Trump administration and Congress with no politically popular, deficit-neutral way to help Americans obtain affordable insurance.
Cobbling together financing mechanisms is always one of the hardest parts of crafting legislation, requiring complex dealmaking with major stakeholders. Once the ACA's financing measures are undone, it would be extremely hard to replace them.
“If we're going to pay for coverage and not increase the debt and deficit, we need some revenue stream,” said Sen. Bill Cassidy (R-La.), a physician who co-sponsored an ACA replacement bill that would keep the ACA's revenue sources. “Insurance plans, hospitals and pharmaceutical companies offered this money because it works for their business plan to have everyone insured. The ideal solution would be to redirect that money into a different approach.”
Repealing the law's coverage provisions while keeping at least some of its financing measures is one approach GOP strategists are considering to address this problem. A less likely fallback is having the Trump administration make full use of an ACA provision that enjoys bipartisan support to let states establish their own alternative coverage systems. Giving states the freedom to create their own reform models under ACA Section 1332 could relieve Congress of having to immediately tackle the daunting task of repealing and replacing the entire law.
Under that scenario, the law's financing measures would be preserved and the money would be handed over to the states to set up their own coverage mechanisms. States, with federal permission, could do away with the ACA's insurance exchanges, the individual and employer mandates, and minimum essential benefits. They conceivably could replace them with more conservative models featuring vouchers, health savings accounts, more flexible benefit packages, and shifting Medicaid beneficiaries into private insurance. Or they could adopt liberal models such as a public health plan, if the Trump administration would allow that.
“If (Republicans) run into any problems in getting comprehensive repeal legislation done, this is a logical solution,” said G. William Hoagland, a former senior staffer for Senate Republicans and currently a senior vice president at the Bipartisan Policy Center, which has promoted the idea of Section 1332 innovation waivers. “Put the onus of responsibility back on the states and give them flexibility to carry out healthcare reform as best serves their state.”
The state innovation waiver approach previously was downplayed by some state officials because the Obama administration issued a rule late last year interpreting state flexibility more narrowly than they had hoped. The law and the accompanying rule require state innovation models to cover a similar number of people as the ACA does; offer coverage that is no less comprehensive and just as affordable; and have no effect on the federal deficit.
But the Trump administration potentially could give states greater leeway to launch innovations such as letting them combine federal subsidies for individual-market and Medicaid enrollees to establish a single private market for lower-income people. The Obama administration rule had blocked that option.
Cassidy said giving states greater flexibility under Section 1332 could be a backup strategy if Republicans can't get the 60 votes they'll need in the Senate to avoid a Democratic filibuster and pass an ACA replacement bill. The Trump administration could then approve state waiver proposals that resemble the GOP's legislative replacement model. “If we don't get 60 votes for the commonsense stuff in my legislation, then you have at least sent a signal to the states as to what kind of 1332 waiver would be approved,” he said.
But many conservatives, who have promised to rip out Obamacare by its roots, are unlikely to accept anything that preserves key parts of the law, especially its tax provisions. They face particular pressure from their wealthy constituents to repeal the law's Medicare payroll tax on high-income individuals, along with its surtax on net investment income. According to the CBO, eliminating those taxes would slash federal revenue by $346 billion over the next decade, a substantial portion of the ACA's total financing.
By comparison, eliminating the law's taxes on medical-device makers and on manufacturers and importers of branded drugs would cost the government $196 billion over that period. Ending the so-called Cadillac tax on high-value employer plans would cost $209 billion. Erasing the tax on health insurance plans would cut revenue by $87 billion. And wiping out tax penalties on individuals and employers who don't comply with the law's coverage mandates would cost $210 billion.
Another key financing measure is the law's reductions in Medicare payments to hospitals and insurers. Repealing those provisions would increase the federal deficit by $715 billion over the next decade and blow a hole in Medicare's long-term fiscal solvency. Hospital groups are insisting that those payment cuts be rescinded if the law's coverage expansions that reduce uncompensated care costs are repealed.
But both Republican and Democratic observers say the ACA's taxes on high-income Americans are the GOP's top target. Repealing the investment tax alone would give a $154,000 average annual tax cut to people in the top 0.1% of income, according to the nonpartisan Tax Policy Center.
“There would be a desire to particularly eliminate the Medicare payroll and investment tax increases,” Hoagland said. “That's a big one.”
Cassidy said he'd like to keep the ACA taxes and payment cuts directed at healthcare industry groups, and that he's making this argument to his Senate Republican colleagues. “Keep in mind that at the time the ACA was passed, those industry groups were enthusiastic about Americans being dragooned into this for some greater good,” he said. His question to his colleagues is, “What are you going to replace this with?”
But John McDonough, a public health professor at Harvard University who served as a senior adviser to Senate Democrats during the drafting of the ACA, said repealing the Medicare payroll taxes on affluent people while keeping the industry taxes would produce much less revenue for maintaining or expanding insurance coverage under the GOP replacement package. It would leave lower- and middle-income Americans worse off than they are under the current law, contrary to Speaker Paul Ryan's recent promise, he argued.
"If you lose revenue from the key components of financing, you can't keep it as expansive and generous as the ACA," he said. "There's no way 1 plus 1 equals 5."
Republican experts say the lost revenue from repealing the ACA taxes could be made up by restructuring Medicare into a defined-contribution, premium-support model and turning Medicaid into a capped program of federal block grants or per-capita payments to the states, as Ryan and HHS secretary nominee Dr. Tom Price have proposed. That could pay for whatever tax credits Republicans offer as a replacement for the ACA's premium subsidies and Medicaid expansion. Some Republicans also have proposed limits on the tax exclusion for employer health benefits as a budgetary offset to pay for new tax credits to individuals.
All these proposals likely would face strong political opposition.
Tom Miller, a health policy expert at the conservative American Enterprise Institute, argued it wouldn't be politically smart to rush through a repeal of the Medicare payroll tax and the ACA's other revenue provisions without carefully thinking through the consequences. Republicans should use those taxes as leverage to gain support from insurers and other industry groups, while considering which ones to keep to pay for their replacement tax credits.
Plus, they need to think about the optics of handing out a big tax cut to wealthy people while rolling back the ACA's Medicaid expansion. “That won't look real good,” he said. “It plays into the old story line of, 'We took care of rich Republicans and other folks will just have to get along.' ”