In Lessons Blog

After multiple failed attempts to “repeal and replace” the Affordable Care Act (ObamaCare), President Donald Trump took action into his own hands last month, issuing an executive order with major implications on the cost of health coverage and care delivery

An executive order is not a legislative change. Rather, it alters how the various federal agencies interpret and implement Congressional legislation. As a result, it will take several months before the details are released, the rules and regulations take effect, and the impact can be fully assessed.

President Trump addressed the executive order primarily to two federal agencies, the Department of Labor and the Health and Human Services (HHS). Here’s a brief explanation of the main points:

1. Trump’s executive order requested that new regulations help establish small business pools or “association health plans.” Businesses with fewer than 50 employees working in the same general area would thereby be treated as a single, large entity. Theoretically, this could allow more companies to pool their resources and buy group insurance for employees, even across state lines. This action could also result in lower premiums for enrollees, most likely by reducing the comprehensiveness of coverage, possibly eliminating payments for vital services like maternity care. The new health plans would benefit businesses with a younger, healthier set of employees while potentially worsening the “risk pool” for those remaining in the public exchanges. Lower premiums could lead to expanded use of tax-favored Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs), assuming business owners chose to pass on some of the savings to their workers. However, when these types of plans were allowed in the past, they proved financially unstable and left many workers in the lurch. Much of the outcomes will depend on the details of the new rules and regulations.

2. The second part of this executive order asked federal agencies to expand the amount of time individuals could participate in so-called “short-term insurance plans.” By design, these plans are inexpensive but often cover little more than catastrophic events. As such, they require extremely high deductibles and contain limited benefits. Obama-era regulations stipulated that in order for individuals to meet the ACA’s “individual mandate” requirement, they could be covered by one of these short-term plans for no more than 90 days. Trump is recommending the time be expanded to 364 days. Once again, the plan favors healthy individuals who’d rather save money on premiums than enroll in the public exchanges. The result could greatly unbalance the risk profile for those remaining in the exchanges, potentially leading to double-digit price increases and major instability.

3. Finally, the president asked regulatory agencies to review and provide recommendations on whether to limit provider consolidation among hospitals and physicians. The idea would be to “re-inject competition into healthcare markets by lowering barriers to entry, limiting excessive consolidation, and preventing abuses of market power.” This could be a shot across the bow for some Accountable Care Organizations, another component of the ACA that promoted the integration of local primary and specialty care practices and hospitals.

Putting the pieces together, the executive order shifts some of the control of healthcare coverage away from the federal government to the states, and loosens the requirements on businesses and individuals. Should the rules and regulations be deemed too extreme – by doctors, hospitals or insurers – legal challenges would invariably result.

A Word On Cost Sharing Reductions

Understanding the current volatility of the insurance marketplaces and the implications for the future requires a knowledge of the complicated issues surrounding cost sharing reductions or CSRs.

So, let’s begin with a primer on the insurance marketplaces, also referred to as the public exchanges: The implementation of the Affordable Care Act (ACA) sought to cover more Americans who otherwise couldn’t afford insurance. At the lowest end of the economic spectrum, there was Medicaid expansion, which covered families earning up to $33,000 in states that accepted additional federal payments. For families earning between $33,000 and $88,000, the ACA introduced the public exchanges, which served three important purposes.

First, the exchanges ensured that individuals and families with pre-existing medical conditions couldn’t be denied coverage. Second, the exchanges allowed enrollees to fulfill the requirements of the individual mandate (and thus not have to pay a penalty). And finally, they offered subsidies to individuals and families who were not Medicaid eligible but who still struggled to afford coverage.

This last point was made possible through two financial mechanisms:

  1. “Premium subsidies,” which cover the monthly cost of obtaining insurance in the first place.
  2. Cost sharing reductions (CSRs), which cover out-of-pocket expenses.

The ACA prohibited health plans from negatively impacting the finances of those at the lower income levels, and provided the CSR as the means to reimburse their additional costs.

However, Congress never approved the appropriations needed to fund this part of the ACA legislation. Therefore, subsequent court cases have challenged their legality.

President Obama made the payments despite the legal questions. And so did President Trump, up to this point. Trump now says he will no longer make the CSR payments, potentially leaving health plans to make up the difference. This is where the issue gets complicated.

The law requires the government to reimburse premium subsidies (covering the monthly cost of insurance) at a rate no less than the second-least expensive “Silver” plan on local exchanges. As such, if every health plan raises its rates (as most plan to do), they will receive the same or even more dollars, and the government will need to pay the added cost regardless.  

In addition, Congress may pass legislation restoring these dollars as part of the upcoming tax-reform bill. Already, senators from both sides of the aisle, including Lamar Alexander (R-Tenn.) and Patty Murray (D-Wash.), have indicated a desire to do so. If that happens, assuming health plans already raised their rates for 2018, the government might have to pay twice, depending on the wording of the legislation.

Contrary to what many might assume, the biggest losers most likely won’t be the poor whose premiums will be subsidized by the government but, instead, higher-earning participants in the exchange. Today, this group accounts for only 10 to 15% of all people currently enrolled in the exchanges. And if the government rescinds the individual mandate (as Congress is considering as part of its tax reform bill), fewer of them will purchase the higher priced insurance options.

Taken together, these actions ring an ominous tone, although there remain more questions than answers. Within the constraints of the current law, the president has done about as much as he can to undermine the Affordable Care Act. The next steps will be up to these various governmental agencies and Congress.

We’ll need to wait and see whether Congress votes to eliminate the individual mandate. If so, 13 million people could forego their healthcare coverage by 2025, according to the CBO report on the senate bill. At the same time, others question these numbers. The next two months will begin to tell the story.

This article was the focus of my November 2017 newsletter “Monthly Musings On American Healthcare.” If you didn’t receive the newsletter itself, email me directly or click the envelop icon at the bottom of the page. And if you have new colleagues whom I don’t know, please tell them about this source of monthly healthcare updates. The December issue will further analyze these legislative issues and examine how the most recent elections will influence healthcare future.

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