On March 20th, House Republicans rolled out a number of changes to their bill, the American HealthCare Act (AHCA), seeking to repeal and replace the Affordable Care Act, the healthcare law better known as Obamacare. Although the House Leadership ultimately chose not to bring the AHCA to a vote, this ninth article in our series on the effect of a “slow repeal” of the ACA unpacks the Manager’s Amendment, and offers insights on what may still form the basis for health care legislation.

The AHCA Vote

The seven-page Manager’s Amendment added numerous key provisions designed to shore up support for the AHCA. The effort came as House Speaker Paul Ryan (R. – WI), GOP leaders, and President Donald Trump’s administration tried to solidify the necessary votes for the AHCA to pass the House.

The efforts to modify the AHCA and accommodate the disparate interests of the Freedom Caucus (the informal block of approximately 26-member conservative Republicans led by Chairman Mark Meadows (R. – NC) and the Tuesday Group (the informal block of approximately 50 moderate Republicans led by Charlie Dent (R. – PA), Tom MacArthur (R. – NJ) and Elise Stefanik (R. – NY), provide important insights into what may still emerge as a part of a potential overhaul of the Affordable Care Act (ACA). As the House and Senate begin their parallel reconciliation process for the Fiscal Year 2018 budget, it is noteworthy that much of the $337 billion in deficit reduction that the CBO credited to the AHCA was removed under the Manager’s Amendment. The Manager’s Amendment also accelerated the repeal of the ACA’s taxes, causing a revenue loss of at least $40 billion, and added expense due to the decrease in the threshold for deducting medical expenses — reportedly $85 billion — which the Senate can reallocate to tax credits for older enrollees. Similarly, in an effort to address concerns raised by Governors (both Republican and Democrat), the Manager’s Amendment increased the inflation update for the per capita cap funding.

The efforts to use the reconciliation process to pass legislation of this magnitude (to avoid a Democratic filibuster when the Senate considers the legislation) helps explain the patchwork quilt of items in the Manager’s Amendment. The AHCA was introduced on March 6th. It quickly encountered intense opposition not just from Democrats but also consumer advocates, the AARP and health care groups, including the American Hospital Association and the American Medical Association.

The AHCA was supposed to receive an up-or-down vote on March 23rd, and then (following additional changes late in the evening on March 23rd around what are “essential health benefits”) on March 24th. But Republicans could not prevent more than 22 defections from their own party, leaving them without majority support and causing the vote’s cancellation. House Speaker Paul Ryan confirmed the move at a press conference on March 24th. The bill was pulled at the last minute.

The original AHCA, as it passed the House Budget Committee (Budget Committee Report) contained provisions that would:

• Phase out the ACA’s Medicaid expansion;
• Impose a per capita cap on Medicaid going forward;
• Eliminate the ACA’s Prevention and Public Health Fund;
• Defund Planned Parenthood;
• Repeal the ACA’s cost sharing reduction payments;
• Create a $100 billion Patient and State Stability Fund for states to use for reinsurance and other purposes;
• Repeal the ACA’s individual and employer mandate penalties;
• Create a penalty for individuals who try to enroll in coverage who have not had continuous coverage for more than 63 days;
• Repeal the ACA’s actuarial value “metal” level (bronze, silver and gold plans) requirements;
• Change the ACA’s age rating ratios from three-to-one to five-to-one;
• Amend the ACA’s current premium tax credits to allow them to be used for off-marketplace plans and to change the tax credit formula to make it more favorable to younger enrollees;
• Create new fixed-dollar, age adjusted tax credits for after 2020; and,
• Liberalize some requirements pertaining to health savings accounts.

The Manager’s Amendment

The Manager’s Amendment leaves most of the original AHCA provisions in place. It consists of two sets of amendments, labeled technical changes and policy changes. In fact, however, some of the policy amendments (which deal primarily with the Medicaid program and tax repeals) are quite technical, while a few of the technical amendments (which deal primarily with changes in the tax credit program as well as Medicaid) make significant policy changes. Speaker Ryan stated that the technical changes were necessary for the House bill to comply with the Senate’s reconciliation rules, where the so-called “Byrd Rule” requires that all measures in the bill must be pertinent to the federal budget.

Medicaid Program Changes

Expansion Stopped. The Manager’s Amendment would have ended the ACA’s mandatory expansion for childless, nondisabled, non-pregnant adults up to 133 percent of the poverty level and sunset the ability of states to decide to cover adults above 133 percent of poverty with an enhanced Medicaid match as of the end of 2017. States could cover the ACA expansion population, however, as an optional category with their normal Medicaid match after that date. Medicaid expansion enrollees enrolled prior to the end of 2019 would retain the enhanced match after 2019 (90 percent in 2020), but only so long as they remained continuously enrolled and only in states that had expanded Medicaid by March 1, 2017.

New Work Requirement. The Manager’s Amendment would have allowed states to impose a work requirement on nondisabled, nonelderly, non-pregnant adults as a condition of Medicaid coverage. States could include as countable work activities subsidized private or public sector employment, on-the-job training, job search or readiness activities, community service programs, various educational programs, or providing childcare to an individual participating in a community service program.

Block Grants or Per Capita Funding. The biggest change contemplated by the Manager’s Amendment allowed the states to choose a block grant rather than a per capita cap to fund their traditional adult and children populations otherwise covered by the per capita cap. Block grants would not be available for the elderly and disabled. States choosing a block grant would be given considerable flexibility in determining which populations they would cover (although they would have to cover certain low-income women and children) and the services they would provide to them. A plan submitted by a state to administer a block grant program would be deemed approved unless the Department of Health and Human Services (HHS) concludes within 30 days that the plan was incomplete or actuarially unsound. The Manager’s Amendment included formulas for calculating block grant amounts and inflation updates.

New Funds. The Manager’s Amendment appropriated $1 billion to fund the administration of the Medicaid per capita cap and Patient and State Stability Fund programs and changes in the tax credit program.

Program Design. The Manager’s Amendment provided additional financing for the Patient and State Stability Fund, to provide the states with $100 billion to design programs that meet the needs of their unique patient populations.

Tax Credits. The Manager’s Amendment provided even more flexibility to the states to enhance the tax credit under the AHCA for individuals ages 50–64.

Use of Tax Credits. The Manager’s Amendment clarified that tax credits can only be used to help purchase insurance plans that do not cover abortions or abortion services.

Medical Expense Deduction. The Manager’s Amendment moved up by one year to 2017 the repeal of the ACA’s provision that increased the Medical Expense Deduction threshold to 10 percent of adjusted gross income. The amendment also reduced the threshold further from the 7.5 percent threshold found in pre-ACA law to a new lower 5.8 percent threshold. The House Rules Committee said that this change was designed to provide additional tax relief for persons, and in particular older persons with lower-incomes, who have high medical expenses, including expensive health insurance premiums. But since the tax relief is provided as a deduction rather than a credit, the Manager’s Amendment was quickly criticized by consumer advocacy groups who observed that the more robust tax relief will be of little use to low-income consumers who do not pay income taxes or are in very low tax brackets.

Technical changes. The policy amendments made a few changes, mainly technical, in the AHCA’s Medicaid per capita cap program. One of these modified the matching formula for the state of New York in a manner intended to force the state to rely less on tax contributions from rural counties and more on state tax revenues to fund Medicaid. (The local tax relief specifically does not apply to New York City). This provision was apparently necessary to secure votes from upstate New York Republicans.

Tax Changes

The Manager’s Amendment added an additional year to the relief the AHCA offered from the “Cadillac” plan excise tax, moving implementation from 2025 to 2026, and accelerating the repeal of all other ACA taxes from 2018 to 2017, including repeals of:

• The $500,000 limit on business expense deductibility for compensation to insurance executives;
• The branded prescription drug tax;
• The health insurance tax (already subject to a moratorium for 2017);
• The Medicare tax imposed on unearned income on taxpayers earning more than $200,000 ($250,000 for joint filers) (an amendment offered by Danny K. Davis (D. – Ill.) would have required that the persons who benefit from this tax break take a drug test before qualifying for this tax benefit, but was defeated in Committee);
• The prohibition against paying for over-the-counter medications with tax-subsidized funds from health savings accounts (HSAs), Archer MSAs, or flexible spending or health reimbursement arrangements;
• The ACA’s increase in the penalty for the use of HSA and Archer MSA funds for non-medical purposes (reducing the penalty from 20 to 10 percent for HSAs and 20 to 15 percent for MSAs);
• The ACA’s $2500 limit on contributions to flexible spending accounts;
• The medical device excise tax;
• The requirement that employers reduce their deduction for expenses allowable for retiree drug costs without reducing the deduction by the amount of retiree drug subsidy;
• The repeal of the ACA’s Medicare 0.9 percent tax surcharge on taxpayers with incomes exceeding $200,000 ($250,000 for joint filers); and
• The ACA provision prohibiting the use of tax-subsidized account funds to purchase over-the-counter drugs.

The tanning tax repeal is accelerated by six months and repealed effective June 30, 2017, reflecting the quarterly collection of the tax.

Other provisions of the AHCA remained the same (see our Healthcare Policy Update dated March 9, 2017, for more detail).

What to do now? Wait. Focus. Participate.

As the pundits weigh whether “Obamacare explodes,” the Manager’s Amendment has already impacted health care stocks, many of which surged significantly while the AHCA was under consideration.

Whether or not President Trump involves the Democrats, or the Freedom Caucus and the Tuesday Group can accommodate their positions, we believe the looming deadline (June 21, 2017, at the latest) for insurers to submit bids for participation in the ACA’s exchange for the 2018 enrollment period (which begins in November 2017) will be the bellwether. We anticipate some kind of “repair and rebrand” to provide stability to the individual insurance market, particularly in states where participants have few options. So, while the House Rules Committee and the Manager’s Amendment dominated everyone’s attention last week, pay close attention to the House Appropriation Health Subcommittee in the coming weeks, and whether the approximately $7 billion needed to provide stability to the markets is appropriated.