House Republicans pushed through their health care bill on a narrow 217 to 213 vote after weeks of difficult negotiations, but the final product faces an uncertain future.
The American Health Care Act (AHCA) survived opposition from all 193 Democrats and 20 Republicans after intense lobbying by House leadership and President Trump and last-minute changes meant to appease opposition. The final version would repeal most of the taxes of the Affordable Care Act (ACA) effective for 2017, but would not repeal the 0.9% Medicare surtax until 2022.
The AHCA is estimated to cut taxes by $1 trillion over the next 10 years, though the latest estimate did not include changes to the repeal of a 0.9% Medicare surtax. Despite the revenue loss, early estimates showed the bill saving $150 billion overall thanks to spending cuts. No estimates from the Congressional Budget Office (CBO) or Joint Committee on Taxation are currently available for the final bill as passed.
Despite House passage, the bill still faces a very uncertain outlook for several reasons:
- Changes to appease conservatives make Senate passage very difficult.
- The CBO estimated that up to 24 million individuals would lose insurance under earlier versions of the plan, and this isn’t expected to change under the current version, making it politically costly.
- Many of the provisions appear to violate reconciliation rules needed to avoid 60-vote procedural hurdles in the Senate.
House Republicans were forced to dramatically pull the bill twice over the last two months, and won enough votes only by making several controversial concessions to conservatives. These changes, such as removing protections for people with pre-existing conditions, alienated many moderate Republicans. Just enough House moderates were swayed by the last-minute addition of $8 billion for state high-risk pools, but this change isn’t likely to appease skeptical Senate Republicans. It’s hard to envision a compromise that could satisfy both the House conservatives and Senate moderates needed for final passage.
In addition, none of the last-minute changes are expected to significantly reduce the CBO’s estimates of the number of individuals who will lose insurance, leaving the threat of political backlash. Perhaps most important, the bill appears to violate reconciliation rules. Reconciliation would allow Senate passage without Democratic votes, but comes with severe restrictions. Reconciliation bills generally cannot include provisions that don’t have a revenue affect at all. Many of the changes, including removing coverage requirements, appear to run afoul of this rule.
Still, passage represents the first step toward fulfilling a key Republican campaign promise to replace the ACA. The Senate will now be under serious pressure to respond.
If ACA repeal is ultimately successful, tax reform would be easier with $1 trillion in taxes removed from the revenue baseline. But the AHCA doesn’t necessarily have to go first for tax reform to work. Republicans could simply leave ACA taxes out of tax reform and address them later, temporarily suspend the ACA taxes as part of a separate reconciliation tax cut or find revenue offsets to pay for certain ACA tax cuts as part of tax reform.
Tax title overview
At its heart, the AHCA would retroactively repeal the excise taxes for individuals who fail to obtain coverage and employers that fail to offer coverage in the 2016 tax year. In place of the individual excise tax, a new provision would allow insurers to increase premiums substantially for any individual who has a 63-day lapse in coverage.
The premium tax credit that individuals currently receive for purchasing insurance on the exchanges would be expanded in 2018 and 2019 to cover “catastrophic only” coverage and plans not on the exchanges, but would then be repealed for 2020. It would be replaced by a new refundable tax credit of up to $4,000 that would be age-adjusted and phased out beginning when modified adjusted gross income (AGI) reached $75,000 for individuals and $150,000 for joint filers. House leaders also added a funding mechanism that would allow the Senate to increase these tax credits.
The bill would repeal most of the revenue-raising tax provisions in the ACA, starting in 2017. These taxes include the following:
The 3.8% Medicare tax on net investment income (NII)
- Limits on the deductibility of salaries paid to health care executives
- The ban on reimbursements for over-the-counter medication from Health Savings Accounts (HSAs), Flexible Spending Arrangements (FSAs) and Medical Savings Accounts (MSAs)
- Increased penalties on impermissible HSA and MSA disbursements
- The cap on FSAs (cap is $2,600 in 2017)
- The limit on employer deductions related to the Medicare Part D subsidy
The 0.9% Medicare surtax would not be repealed until 2022. The 40% excise tax on high-cost health plans known as the “Cadillac tax” would be delayed until 2026 instead of repealed. The repeal of the 10% tax on tanning services would be effective June 30, 2017. The medical device excise tax and the health insurance industry fee are suspended until 2018 under current law, and both would be repealed before they are scheduled to come back into effect. The fee on the pharmaceutical industry remains in effect and would be repealed in 2018. The 10% AGI floor for deducting medical expenses would be reduced past the pre-ACA level of 7.5% to 5.8% effective for 2017.
The legislation would not repeal the codification of economic substance doctrine, which was enacted as part of the ACA, or the Patient-Centered Outcomes Research Institute (PCORI) fee, which is scheduled to expire on its own in 2019. The small business tax credit for small employers to purchase health coverage would be repealed beginning in 2020. The ACA employer-coverage reporting requirements would be retained but amended. The legislation would also nearly double the limit on HSA contributions.
The following covers some of the tax provisions in more detail.
The ACA included two Medicare-related tax increases. For earned income over $200,000 for singles and $250,000 for joints filers, the individual portion of Medicare payroll tax was increased 0.9% to 2.35% (making the self-employment rate 3.8%). The ACA then created a new equivalent 3.8% tax on NII to the extent AGI exceeded those same income thresholds.
The AHCA would repeal the tax on NII retroactively for 2017. An earlier version also would have repealed the Medicare surtax immediately, but the version that passed the House delayed repeal of this tax until 2022.
The Cadillac tax imposes a 40% tax on the value of certain health plans that exceed a set threshold. The tax was originally meant to curb over-spending on health care and slow cost growth, but has become very unpopular in both parties. An early draft of the House GOP bill would have replaced this provision with a cap on the exclusion from income for employer-provided health care.
Conservative Republicans objected to the cap, and the current bill retains but further delays the effective date of the Cadillac tax from 2020 to 2026. The tax is likely being retained only for revenue scoring reasons, and its unpopularity makes it ripe for further delay or repeal in the future.
HSAs, MSAs and FSAs
The ACA included the following provisions on HSAs, MSAs and FSAs in order to raise revenue:
Ban on spending for over-the-counter medication without a prescription
- Increased penalties on impermissible HSA and MSA disbursements
- $2,500 yearly cap on FSA contributions (indexed and reached $2,600 in 2017)
The House GOP bill would repeal all three of these provisions effective for 2017 and add new benefits for HSAs. The limit on HSA contributions would be increased to equal the maximum deductible, equivalent in 2017 to an increase from $3,400 to $6,550 for self-only coverage and $6,750 to $13,100 for family coverage. The increase would not be effective until 2018 (maximum deductibles in 2018 not available yet). In addition, if both spouses have attained age 55, and are thus eligible for the $1,000 catch-up contribution, and either one has family coverage, the spouses can contribute the catch-up contribution between their HSAs in whatever amounts they decide (including contributing the entire amount to only one of the spouse’s HSAs). Under current law, this treatment is permitted for the regular annual contribution limit but not for the catch-up contributions.
House Republicans are very supportive of HSAs and originally proposed to make employer HSA contributions exempt from their proposed cap on the exclusion for employer-provided health coverage. The cap was removed in the final draft, but legislators are likely to continue to look for additional ways to incentivize HSAs.
The ACA created three fees or taxes meant to require the industries expected to benefit from health care reform to help pay for it. The 2.3% medical device excise tax is currently suspended for sales in 2016 and 2017, and the legislation would permanently repeal it before it takes affect again in 2018.
The health insurance industry fee was first imposed in 2014 as an $8 billion fee allocated based on market share among all insurers with “aggregate net premiums written.” The fee rose to $11.3 billion for 2015 and 2016, but was suspended for calendar year 2017. The bill would repeal the fee before it would otherwise be scheduled to return at a $14.3 billion level.
The pharmaceutical industry fee was first imposed in 2011. It reached $4 billion for 2017, but would be repealed beginning in 2018, when it would otherwise be scheduled to rise to $4.1 billion.
Health coverage taxes and credits
The ACA created a new tax to encourage individuals without insurance to obtain coverage, and provided a premium tax credit to help them purchase coverage on newly created exchanges. The bill also encouraged employers to offer insurance by imposing excise taxes for failing to offer coverage or failing to offer coverage that meets certain standards. These provisions were deeply unpopular with Republicans, and while the employer excise taxes would be repealed outright, the individual provisions would be replaced with somewhat similar provisions.
The legislation would expand the Section 36B premium tax credit in 2018 and 2019 before replacing it in 2020 with a new refundable tax credit. For 2018 and 2019, the credit could be used on plans outside the exchange and on “catastrophic only” plans, which were previously not permitted. However, taxpayers would be required to repay in full any excess premium tax credit in 2018 and 2019 if income is higher than the projection used to calculate the original credit.
In the place of a premium tax credit, the legislation would enact a new, refundable health insurance coverage tax credit that would be used to purchase health insurance coverage. There are certain restrictions on eligibility, and the credits, as offered, are based on the age of the individual:
- Under age 30: $2,000
- Age 30 to 39: $2,500
- Age 40 to 49: $3,000
- Age 50 to 59: $3,500
- Age 60 and older: $4,000
The legislation would stack the credits for a family and be capped at $14,000 per year, but would be indexed for inflation. Notably, the credits would also begin to be phased out for single earners with modified gross income in excess of $75,000 per year (or $150,000 for joint filers). Critics have argued that the credits will not be enough for many taxpayers to afford insurance, so House leadership added a fund that would allow the Senate to increase credit amounts.
Both the individual and employer excise taxes would be repealed effective for 2016, so if enacted, the bill would forgive tax from any lapses last year. However, the legislation would require insurers to impose a 30% surcharge on the premium of any individual with a lapse in coverage of more than 62 days. The provision would be effective for plan years beginning in 2019, and, like the individual ACA tax, it is meant to discourage individuals from waiting until they are sick to purchase coverage.
The legislation would also repeal the following provisions:
Executive compensation: The ACA limited the amount of employee pay insurance companies could deduct to $500,000 per employee if at least 25% of premium income comes from plans meeting creditable coverage requirements. This provision would be repealed beginning in 2017.
- Employer coverage credit: The ACA created a credit for employers with 25 or fewer employees who offer health coverage. The current credit is 50% of coverage costs for insurance purchased through a state exchange in the first two years employers offer coverage but would be repealed starting in 2020.
Medicare Part D subsidy: The ACA eliminated the ability of an employer to take a deduction for prescription drug coverage provided to employees to the extent the employer received a retiree drug subsidy from the federal government that was excluded from income. This deduction would be reinstated beginning in 2017.
Medical expense deduction: The ACA raised the threshold for the itemized deduction for medical expenses from 7.5% of AGI to 10% of AGI. The change became effective for taxpayers 64 and younger in 2012 and seniors in 2017. The bill would make the threshold 5.8% for all taxpayers beginning in 2017.
Tanning service excise tax: The bill would repeal the ACA’s 10% tax on indoor tanning services, effective June 30, 2017.
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