The Patient Choice, Affordability, Responsibility, and Empowerment Act

Senators Richard Burr (NC) and Orrin Hatch (UT), and Representative Fred Upton (MI) released, on February 4^th, an update to the Patient Choice, Affordability, Responsibility, and Empowerment Act (Patient CARE Act).  The white paper proposes a full repeal of the Affordable Care Act (ACA) and replaces the coverage provisions with alternative policy suggestions.[1] Key provisions include a premium credit for all individuals earning less than 300 percent of the federal poverty limit, a cap on tax-exempt income spent on employer sponsored health insurance, and a capped allotment funding design for Medicaid. This report is an update to the Center for Health and Economy’s (H&E) analysis of the previous version of the Patient CARE Act published in 2014. This analysis updates findings of the H&E Under-65 Microsimulation Model on the Patient CARE Act’s impact on health insurance premium prices, insurance coverage, provider access, medical productivity, and the federal budget. While our estimates are associated with some degree of uncertainty, the summary of our findings is as follows:

• Premium Impact: The Proposal is projected to decrease the total premium cost of private health insurance coverage, with the largest impact on Bronze and catastrophic coverage plans.

• Coverage Impact: The Proposal is projected to lead to 4 million fewer insured persons by 2025 relative to current law. The decrease in coverage is the net effect of increased enrollment in the individual market and lower enrollment through employer sponsored insurance and Medicaid.

• Provider Access: The Patient CARE Act is projected to result in greater patient access to providers. According to the H&E Provider Access Index, access will increase by 5 percent for the insured population by 2025.

• Medical Productivity: The Patient CARE Act is expected to lead to greater productivity than under current law. According to the H&E Medical Productivity Index, productivity is projected to increase by 2 percent by 2025.

• Budget Impact: Compared to current law, the insurance coverage provisions of the Proposal will decrease the federal deficit by $534 billion between 2016 and 2025.

 

Details of the Proposal

The Patient CARE Act, which would take effect on January 1^st, 2017, is a proposal to repeal and replace the ACA. Many of the consumer protections granted by the ACA remain intact under the Patient CARE Act. Health insurance issuers may not establish lifetime limits on the dollar value of insurance benefits to beneficiaries, cannot deny nor terminate coverage for medical reasons, and are required to offer coverage to dependents up to age 26. The Patient CARE Act repeals the requirements for guaranteed issue under current law and replaces it with a system of guaranteed renewal. Under the new scheme, individuals must maintain continuous insurance coverage in order to avoid being charged higher premiums based on health status. In the first year of implementation, there will be an open enrollment period in which all individuals are guaranteed the issue of health insurance without regard to health status. Additionally, the benefit mandates and age rating restrictions under the ACA are repealed and replaced only with a one-to-five maximum age rating ratio of which states may choose to opt out.

The Patient CARE Act repeals the system of health insurance premium tax credits administered through the Health Insurance Marketplace and replaces it with a tax credit based on age, family status, and income. The credits are offered in full to any household that earns less than 200 percent of the federal poverty level (FPL) and phase out linearly between 200 and 300 percent of FPL. The Patient CARE Act repeals the qualified health plan designations and requirements under current law, and H&E assumes eligible beneficiaries will be able to apply the tax credit to any health insurance product that provides, at a minimum, meaningful catastrophic coverage. These tax credits are not available to households that are offered health insurance through an employer with more than 100 full-time employees. Households may also use tax-exempt savings in Health Savings Accounts (HSA) to pay for HSA-qualified insurance premiums.

The Patient CARE Act replaces the excise tax on high-cost of employer sponsored insurance with a cap on the amount of tax-exempt income that can be spent on employer sponsored insurance premiums. The value of employer sponsored health insurance plan premiums that exceeds $12,000 for single coverage or $30,000 for family coverage will be subject to employee and employer income and payroll taxes.

The federal funding for the Medicaid expansion provided by the ACA is no longer available under the Patient CARE Act. Additionally, the current Medicaid funding mechanism will be replaced with capped, per-beneficiary allotments that are indexed to inflation. States will receive pass-through grants for certain high-risk populations and defined budgets for long-term and elderly care.

The Patient CARE Act provides states with a number of options to increase enrollment. States may use auto-enrollment to sort households that are eligible for coverage at no cost into plans designated by the state. This applies both to Medicaid and subsidized private health insurance. States will also have the authority to set up federally-funded high-risk insurance pools, establish regulatory framework for small business health plans, and enter into agreements to allow the sale of health insurance contracts across state lines. The Patient CARE Act also enacts several medical malpractice reforms aimed at reducing the cost of medical malpractice litigation and defensive medicine.

 

Premium Impact

H&E health insurance premium estimates are based on five plan design categories offered in the individual market: Platinum, Gold, Silver, Bronze, and catastrophic. Under current law, the cost-sharing designs of the four metallic categories correspond to approximate actuarial values: 90 percent, 80 percent, 70 percent, and 60 percent, respectively.[2] Catastrophic coverage plans refer to health insurance plans that reimburse for medical expenses only after members meet high deductibles—a maximum of $6,350 for an individual under current law. When analyzing the impact of policy proposals on health insurance premiums, the particular plan designs for each category are not held constant. For example, a proposal to repeal the out-of-pocket maximum would allow insurance companies to offer catastrophic coverage plans with much higher deductibles. The plan categories are meant to roughly demarcate the range of plan options available. All premium estimates reflect health insurance prices without any financial assistance.

H&E estimates that the Patient CARE Act will lead to lower health insurance premiums in all plan categories for both single and family coverage. The primary policy mechanisms that influence health insurance premiums are the repeal of actuarial rating restrictions, the repeal of Essential Health Benefits (EHB) and deductible restrictions, and the repeal of the individual mandate.

Under current law, health insurance plans are only able to alter prices based on three factors—geographic location, age (a maximum ratio of 3:1), and tobacco use (a maximum ratio of 1.5:1)—and are explicitly prohibited from taking into account any information on expected medical expenses.[3] Since insurance companies still need to cover the cost of insured lives, these actuarial pricing restrictions lead to more people paying close to average premiums. Intuitively, high-risk individuals who would otherwise pay higher than average premiums benefit from such restrictions, leading high-risk individuals to gain coverage in higher numbers. Similarly, some low-cost individuals, for whom a close-to-average premium is a bad value, may drop insurance coverage. These fluctuations in the pool of insured are likely to cause average premiums to rise. The Patient CARE Act is projected to lower average premiums by loosening these restrictions.

The ACA mandates that health insurance plans cover the EHBs and limit financial exposure to members through lower deductibles and maximum out-of-pocket spending in order to be considered qualified health plans. The EHBs include maternity care, mental health services, and other benefits that might not otherwise be included in a health insurance plan. Repealing the EHB requirements allows health insurance plans to remove more costly benefits in exchange for less expensive premiums. And allowing higher deductibles allows insurance companies to offer less generous and cheaper plans for those with low expected medical costs. H&E projects that removing the EHB requirements and deductible restrictions will lead to a decrease in average health insurance premiums.

The Patient CARE Act repeals the individual mandate which requires that all individuals who fail to obtain qualified health insurance coverage pay a penalty, as detailed by the Individual Shared Responsibility provision of the ACA. Besides raising tax revenue through the penalty, the individual mandate encourages healthy individuals who may otherwise forgo health insurance because of low medical service usage to join the pool of insured premiums. With more healthy, low-risk individuals paying insurance premiums, insurance companies can afford to charge lower premiums, on average. Thus, H&E estimates that repealing the individual mandate alone would lead to an increase in average health insurance premiums.

The individual mandate has a specific impact for catastrophic coverage. Under the ACA, adults over the age of 30 that purchase catastrophic coverage do not meet the qualified health insurance requirements of the individual mandate and must still pay the penalty. As a result, average catastrophic coverage premiums under current law are relatively low, which is partly a reflection of a young and generally healthy population of enrollees. Average premiums are projected to experience upward pressure absent the individual mandate due to an influx of older, higher-risk enrollment.

The net effect of these provisions is to decrease the average insurance premiums in all categories between 5 and 17 percent relative to current law by 2025. The largest effects are in Bronze and catastrophic plans for single coverage, and Silver and Bronze plans for family coverage.

 

Coverage Impact

H&E insurance coverage estimates reflect health insurance choices for the under-65 population as estimated by the H&E Under-65 Model.[4] H&E estimates that the Patient CARE Act will lead to 2 million fewer insured individuals in 2017 and 4 million fewer insured individuals by 2025. Under the Patient CARE Act, the 2025 uninsured rate among the under-65 population will be 16 percent—up from the projected uninsured rate of 14 percent under current law.

The primary reason that the Patient CARE Act insures fewer individuals than under current law is the roll back of the Medicaid expansion made available to states under the ACA. By eliminating the availability of federal funds for the “expansion population”—generally households earning between 100 and 133 percent of the Federal Poverty Level (FPL)—H&E expects that Medicaid programs will shrink and insure 11 million fewer individuals in 2017. The reduction in individuals insured by Medicaid is partially offset by tax credits for subsidized private insurance newly available to low-income households. Under current law, households eligible for Medicaid are not eligible for premium tax credits. Under the Patient CARE Act, low-income households may be eligible for both premium tax credits and Medicaid, leading some households to opt into a subsidized private insurance plan rather than Medicaid.

Table 4. Health Insurance Coverage Under CARE (millions)1
		2015	2016	2017	2018	2019	2025
Individual Market		32	39	46	45	43	37
Employer Sponsored Insurance		149	147	147	147	147	146
Medicaid		49	51	40	41	41	45
Other Public Insurance2		9	10	11	12	12	16
Total Population3		276	277	279	280	282	290
Total Insured3		239	247	244	244	244	245
Uninsured		37	31	35	36	37	46
Table 5. Change in Health Insurance Coverage Under CARE (millions)
		2015	2016	2017	2018	2019	2025
Individual Market		0	0	10	9	8	5
Employer Sponsored Insurance		0	0	-1	-1	-1	-1
Medicaid		0	0	-11	-10	-10	-9
Other Public Insurance		0	0	0	0	0	0
Total Insured3		0	0	-2	-2	-3	-4
1All insurance coverage estimates refer only to the under-65 population.
2Estimates of Other Public Insurance includes Medicare for disabled individuals.
3Total enrollment estimates may not equal the sum of all other enrollment due to rounding.

The age-based health insurance premium tax credit structure proposed by the Patient CARE Act, combined with lower average health insurance premiums and constricting Medicaid programs, is expected lead 10 million more individuals to obtain individual market health insurance than under current law. Some households will switch to subsidized private insurance plans as a result of losing Medicaid benefits and some households that remain eligible for Medicaid will decide to enroll upon becoming newly eligible for premium tax credits. For many currently eligible households, the credits available under the Patient CARE Act will be lower in value. Households earning between 300 and 400 percent of FPL will lose tax credit eligibility altogether. However, the tax credits may be used on a wider range of plans which leads to significant health insurance take-up. For example, under the Patient CARE Act, tax credits may be used to purchase low-cost insurance products such as catastrophic coverage and plan designs with tailored benefits, whereas the tax credits in the ACA are only applicable towards plan designs that meet strict benefit requirements. 

H&E estimates that the Patient CARE Act will lead to a slight decrease in enrollment through employer sponsored insurance. While the Patient CARE Act raises the threshold for a tax on high-cost employer sponsored health insurance, the repeal of the employer mandate and lower average prices in the individual market lead to a slight increase in households that either forgo employer sponsored insurance for individual market insurance or are no longer offered insurance by their employer.

In addition to premium tax credits, the Patient CARE Act also allows households to use tax-exempt medical savings in Health Savings Accounts (HSA) to pay for HSA-qualified health insurance premiums. It is not common for HSAs to be large enough to be able to pay for a significant amount of annual health insurance premiums, even those of relatively low-cost HSA-qualified plans, in part due to a cap on tax-exempt contributions. H&E estimates that this provision will lead to a small amount of savings on health insurance premiums for those who have the available funds, but this effect is small compared to other factors affecting premium prices and insurance coverage.

 

Productivity and Access

In an attempt to evaluate access and productivity in the health care system, H&E estimates: the Medical Productivity Index (MPI) and the Provider Access Index (PAI). Health insurance plan designs are associated with varying degrees of access to desired physicians and facilities, as well as incentives that promote or discourage efficient use of resources. H&E estimates each index by attributing productivity and access scores to the range of plan designs available and exploits changing plan choices to project the evolution of health care quality.

H&E expects medical productivity to increase under the Patient CARE Act. The shift from beneficiaries in employer sponsored plans and public insurance to the individual market leads to a net increase in efficiency, as individual market plans typically require more cost-sharing, which encourages price-conscious decision making among patients. Lower enrollment in traditional Medicaid also fosters higher productivity. These gains are partially offset by lower productivity in the employer sponsored market, as the weaker tax of high-cost insurance mitigates the trend towards more consumer-driven insurance products.

Table 8. Provider Access Index Under CARE1
		2015	2016	2017	2018	2019	2025
Individual Market		3.3	3.1	3.1	3.0	2.9	2.5
Employer Sponsored Insurance		3.8	3.8	3.8	3.8	3.7	3.7
Private Insurance		3.7	3.7	3.6	3.6	3.6	3.5
Medicaid		1.0	1.0	1.0	1.0	1.0	1.0
Total Insured		3.1	3.1	3.1	3.1	3.1	2.9
Table 9. Change in Provider Access Under CARE1
		2015	2016	2017	2018	2019	2025
Individual Market		0%	0%	6%	7%	8%	22%
Employer Sponsored Insurance		0%	0%	-1%	1%	1%	1%
Private Insurance		0%	0%	0%	1%	1%	2%
Medicaid		0%	0%	0%	0%	0%	0%
Total Insured		0%	0%	4%	4%	4%	5%
1Productivity and access estimates refer only to the under-65, non-disabled population

Under the Patient CARE Act, average provider access is projected to increase relative to current law due to large enrollment in catastrophic coverage plans that commonly offer a wide choice of providers. The structure of the Patient CARE Act’s premium credits encourage catastrophic coverage enrollment, as many households can purchase catastrophic for less than the value of the subsidy. H&E also projects an increase in average provider access for the total insured population as a result of lower enrollment in Medicaid, which generally offers poor access to physicians.

 

Budget Impact

H&E projects that the insurance coverage provisions of the Patient CARE Act will decrease the budget deficit by $534 billion over the next decade. The budget impact table is divided into two sections: Sources of Funds refers to changes in dollars raised by the federal government and Uses of Funds refers to changes of dollars spent by the federal government. Many of the insurance coverage provisions disseminate financial benefits through tax credits. Technically, these provisions reduce the effective tax rate and would lead to less money raised—except in cases where the tax credit exceeds a household’s total tax obligation. However, in the interest of simplicity and clarity, these provisions are categorized as Uses of Funds in H&E budget estimates.

H&E estimates that the Patient CARE Act will lead to a gross reduction in sources of funds of $209 billion. The Patient CARE Act repeals the individual and employer mandate without replacing it with any similar tax penalty, which H&E estimates will cost $177 billion between 2016 and 2025. The Patient CARE Act also repeals a tax on high cost employer sponsored insurance under the ACA that begins in 2018 and replaces it with a slightly weaker cap on the value of employer sponsored insurance that can be designated as pre-tax income, beginning in 2017. The Patient CARE Act generates additional revenue relative to current law by implementing a cap on the employer sponsored insurance tax exemption one year before it will be implemented under current law, but results in lower annual revenue beginning in 2018. The tax on high cost employer sponsored insurance under the Patient CARE Act raises less revenue than the tax under current law for several reasons. The tax threshold begins at a higher dollar value and is indexed annually at a higher rate than the threshold under current law. Additionally, the tax rate applied under the Patient CARE Act is equal to the employee’s income tax rate—25 percent for median income households—rather than the 40 percent excise tax under current law. The lower tax rate leads to less direct revenue raised by the tax and a smaller incentive for employees to switch to lower cost insurance plans, thereby increasing the overall income tax base. H&E estimates that the Patient CARE Act will lead to a net decrease in revenue of $32 billion through taxes on employer sponsored health insurance.

H&E estimates that the Patient CARE Act will lead to a gross decrease in uses of funds of $743 billion. The Patient CARE Act includes one new source of spending—funding for high risk pools. While the ACA initially appropriated funding for high risk pools, there is no requirement for annual funding to help states facilitate and cover the costs of insuring high risk individuals. The Patient CARE Act dedicates annual funding to the states for administering high risk insurance pools, which H&E expects will cost $23 billion between 2016 and 2025. The Patient CARE Act repeals the Medicaid expansion funded by the ACA and institutes a funding system of capped allotments, which H&E estimates will save $509 billion over ten years. The Patient CARE Act is also expected to save $61 billion over ten years on federal health care expenditures through medical malpractice reforms.

The core coverage provisions in both the ACA and the Patient CARE Act are those relating to health insurance premium credits. While the tax credits are lower, on average, under the Patient CARE Act, wider take-up of the credit will result in total spending on premium tax credits that initially exceeds spending under current law. Slower growth in spending eventually leads to savings on premium tax credit spending under the Patient CARE Act. Between 2016 and 2025, H&E projects that replacing the premium tax credits under the ACA with those specified by the Patient CARE Act would save $71 billion. The Patient CARE Act also repeals the cost-sharing benefits available to subsidized health insurance enrollees under current law, which is expected to save $124 billion over ten years.

In its analysis of a proposal’s impact on the federal budget, H&E looks only at provisions directly related to health insurance coverage. For proposals that repeal the ACA—such as the Patient CARE Act—there are a number of tax policy changes—including but not limited to the tax on medical devices, the health insurance tax, and cuts to Medicare payment rates—that are not directly related to health insurance coverage and are thus not included in our budget impact analysis.  In July 2012, the Congressional Budget Office (CBO) estimated that the net effect on the budget of repealing the non-coverage provisions of the ACA is a deficit increase of $1.3 trillion over the next ten years.[5]

 

Uncertainty in H&E Projections

As with all economic forecasting, H&E estimates are associated with substantial uncertainty. While our estimates provide good indication on the nation’s health care outlook, it is not likely that the policy environment will remain unchanged throughout our ten-year analysis period. And even if no major legislative action occurs, there still exists a wide range of possible future scenarios. H&E attempts to depict an unbiased, middle -ground representation of the future should the policy and economic environment remain constant. While the goal is to quantitatively describe the most likely scenario, actual events may differ significantly from published predictions.

 

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