Tax Reform Update

by Christoper E. Condeluci, Principal and sole shareholder of CC Law & Policy PLLC in Washington, D.C.

Would Repeal of the “Individual Mandate” Increase Taxes for Low- and Middle-Income Taxpayers (and also “kick people off of coverage”)?

Last Thursday, the Joint Committee on Taxation (JCT) – with the aid of the Congressional Budget Office (CBO) – released various tables showing the impact of the Senate’s Tax Reform bill on taxpayers based on their income. Interestingly, some of the tables representing the tax impact in 2021, 2023, 2025, and 2027 showed that low- and middle-income taxpayers would actually see a tax increase. While some of the tax impact in the out-years is due to some of the tax-related provisions included in the underlying bill, much of the purported tax increase is due to individuals and families foregoing the premium subsidies for “individual” market Exchange plans.
- Analysis: Before we talk about why foregoing the premium subsidy results in a tax increase, I first wanted to address the unrelenting political argument that by repealing the individual mandate, people are “getting kicked off of coverage.” The below points are something that The Hill published on my behalf as an opinion piece (click here):

- - CBO estimates that 13 million people would become uninsured by 2027 due to repeal of the individual mandate: 2 million people would no longer be covered by an employer-sponsored plan, 5 million people would no longer be covered under Medicaid, 5 million would no longer be covered by an individual market plan, and the remaining 1 million appear to come from the Basic Health Program.

Employer-Sponsored Coverage: No one has – nor will – argue that repeal of the individual mandate impacts employer-sponsored coverage, or increases premiums for employer plans. This means that the estimated 2 million people would be making their own rational choice not to obtain coverage under an employer plan. So they are NOT getting kicked off of coverage.

Medicaid Coverage: CBO estimates that 5 million people would no longer be covered under Medicaid. Medicaid coverage is free to eligible enrollees, and repealing the individual mandate – through the pending tax bill – would not impact the Medicaid program as it currently exists. So why is CBO estimating that 5 million people would no longer be covered under Medicaid? Because it appears that eligible enrollees would simply choose not to enroll in Medicaid coverage. In my opinion, it is 100% fair to argue that: (1) The current Administration – and future Administrations – would not properly engage in outreach efforts to encourage people to enroll in Medicaid and (2) The lack of encouragement to enroll – and the stigma of being covered under Medicaid – would result in fewer people enrolling. I think that is a bad thing, and I think our Federal government should do everything it can to help low-income individuals access health coverage. As provocative as it may sound, however, doing a poor job of encouraging people to obtain free coverage through Medicaid is NOT kicking people off of coverage.

Individual Market Coverage: This is where it gets a bit weedy. CBO estimates that by 2027, 5 million people in the individual market would no longer be insured. Out of this 5 million, how many people would be eligible to receive a premium subsidy? To isolate the number of subsidy-eligible people, divide the savings produced by repeal of the mandate in 2027 by the average premium subsidy in 2027. CBO estimates that the average premium subsidy in 2027 would be $8,610 (see page 11 in this CBO report). CBO also estimates that repeal of the mandate would save $28 billion in 2027 (see page 2 in this CBO report). $28 billion divided by $8,610 results in 3.25 million. So, out of the 5 million people without an individual market plan in 2027, 3.25 million of them would be subsidy-eligible. It is well-accepted that the premium subsidies absorb any premium increases in the individual market, meaning subsidy-eligible individuals are never affected by annual premium increases. So, similar to our discussion about people choosing not to enroll in Medicaid, it appears that the 3.25 million people who are subsidy-eligible would be choosing not to enrolling in heavily subsidized coverage. Again, you can argue that the current Administration – and future Administrations – would not properly engage in outreach efforts to encourage people to enroll in a subsidized individual market plan. But again, that is not kicking people off of coverage. Now, what about the remaining 1.75 million people who would no longer be covered by an individual market plan? It appears that these people would not be eligible for the premium subsidy. Which means, these people would bear the full brunt of the 10% premium increases that CBO projects. A strong argument can be made that these people are getting priced out of the market on account of repeal of the mandate. If these people are getting priced out of the market, it is reasonable to say that they are getting kicked off of coverage. So, to put things into perspective: 1.75 million is a lot less than 13 million. Note, on this last point, some analysts have suggested that the unsubsidized population would not be significantly impacted by the 10% premium increase because this population has already absorbed significant premium increases (like 100% and 200% increases) over the past 4 years. I don’t disagree. But, to get readers to focus on the most important point – which is people are NOT getting kicked off of coverage – I wanted to at least acknowledge the merit of some of the arguments that have recently been made.

Repeal of the Individual Mandate a Tax Increase?

So why does foregoing the premium subsidy show up as a tax increase? In short, the drafters of the ACA purposefully ran the premium subsidy through the Tax Code as a “tax credit.” More specifically, the premium subsidy was purposefully developed as a “refundable tax credit.” A “refundable tax credit” is a fancy way of saying “government spending.” Yes, all or a portion of a “refundable tax credit” will first go toward reducing the tax liability of an individual or family (in this case, a “taxpaying unit”). So, if a taxpaying unit has some tax liability they owe to the Federal government, JCT and CBO will “score” their tax lability as being reduced (i.e., a tax cut). BUT, if a taxpaying unit has NO tax liability – or in the case of the premium subsidy, the subsidy amount exceeds their tax liability – this taxpaying unit STILL receives the money in the form of pure “government spending.”
- Analysis: So, if a taxpaying unit with some tax liability is NO longer receiving a premium subsidy – because they chose NOT to purchase an Exchange plan – then JCT and CBO will find that their tax liability went UP. Interestingly, it is not as if Congress increased the taxes this taxpaying unit would owe the Federal government. Instead, this taxpaying unit’s tax liability stays the same – or is even reduced by some of the provisions of the Senate’s Tax Reform bill. BUT, what’s most important is that their tax liability is NO longer being reduced to $0 – or to something less – by the premium subsidy. As a result, this phenomenon shows up in the as a tax increase. In the case of a taxpaying unit receiving a premium subsidy but having NO tax liability, the amounts received in the form of the premium subsidy represent “government spending.” But because the premium subsidy is treated as a “refundable tax credit,” this taxpaying unit STILL shows up in the JCT/CBO distributional tables. As a result, if this taxpaying unit is NO longer receiving a premium subsidy – because they chose NOT to purchase an Exchange plan – then JCT and CBO will find that the government spending directed at this taxpaying unit will be reduced. And the resulting reduction in this government spending will show up as a tax increase. Look, I am by no means suggesting that it is a good thing when low- and middle-income individuals and families are no longer receiving a premium subsidy. Unfortunately, it means they are NOT covered by health insurance. But what I am trying to suggest is this: The way the premium subsidy was structured by the drafters of the ACA (i.e., as a “refundable tax credit”) – and the way JCT and CBO “score” the premium subsidy in the hands of a taxpaying unit – is the reason why repeal of the individual mandate shows up as a tax increase. Again, in most if not all cases, the Senate’s Tax Reform bill does NOT actually increase the taxes on these low- and middle-income individuals and families. Instead, the loss of premium subsidy – and the loss of the reduction in tax liability or loss of the government spending – makes it look like the Senate bill increases their taxes.

S&P Report Significantly Reduces the Savings and Uninsured Numbers of Individual Mandate Repeal – only $60 to $80 billion in savings and only 3 to 5 million people becoming uninsured

I was recently quoted in a news article saying this: “I find it interesting that S&P is finally saying this. It shows that CBO continues to over-estimate the impact of the mandate. It also means coverage losses would be lower, and there would not be drastic premium increases. But at the end of the day, what CBO says matters. So at least as of [Nov. 20, 2017], repeal of the mandate saves $318 billion over 10 years.”
- Analysis: The last sentence in the above quote is extremely important. Why? Because while the S&P has essentially legitimized what I and many others have been saying – that CBO is over-estimating the impact of the individual mandate – what matters most is what CBO says as of TODAY. Especially when it comes to the “savings” repeal of the mandate produces. Because it is this “savings” number that Republican tax-writers will abide by when balancing out the overall budgetary impact of the Senate’s Tax Reform bill. Opponents of repealing the mandate are now on the record arguing that Republicans should NOT be able to rely on CBO’s “savings” number ($318 billion over 10 years) because this number – in their opinion – is a “phantom number.” I find it interesting that ACA supporters are finally coming around to the notion that CBO has indeed been over-estimating the impact of the mandate all along. I find it even more interesting because these same opponents of repealing the mandate relied heavily on CBO’s previous estimates when they were screaming at the top-of-their-lungs that the Republican ACA “repeal and replace” bills would cause 23 million people to lose their health coverage. It is important to remember that half of the uninsured number was people choosing NOT to obtain health coverage because the mandate would be gone. My overall is point is that you cannot have it both ways. You CANNOT rely on CBO’s estimates when they fit your policy goals, and then conveniently say that CBO is UNRELIABLE when CBO’s estimates are adverse to your own political position. Another point is this: You can disagree with CBO all you want. BUT, what CBO says…goes. Period, end of story. Last comment: If for some crazy reason, CBO comes out with revised estimates between now and say Dec. 24^th, Republicans members are going to EXPLODE with fury. While I believe it would be best if CBO came out with revised estimates sooner rather than later (because the revised estimates will better reflect reality), I won’t blame Republicans for going NUTS. Why? Because CBO’s estimates from this summer – which included inflated coverage losses and premium increases associated with repeal of the mandate – was one of the larger reasons why ACA repeal-replace failed. Make no mistake, CBO’s estimates were not THE reason why Republicans failed. But, CBO’s estimates had a profound impact for sure.

The Politics of Repeal of the Individual Mandate and Bi-Partisan “Market Stabilization”

Sen. Collins (R-ME) has stated that repeal of the mandate should come out of the Senate’s Tax Reform bill. But Sen. Collins has also said that if repeal of the mandate stays in the bill, Republicans should enact (1) The Alexander-Murray bi-partisan package and (2) A Federal reinsurance program to help “stabilize” the markets. Sens. Graham (R-SC), Cassidy (R-LA), Collins (R-ME), Murkowski (R-AK), and Alexander (R-TN) recently lobbied the White House to at least fund the cost-sharing subsidies, and also to consider supporting the above stated “stabilization” provisions (that is, if repeal of the mandate gets to the President’s desk). Speaking of the White House, OMB Director Mulvaney recently said that the White House is willing to jettison repeal of the mandate if it ensured passage of the Tax Reform bill.
- Analysis: Importantly, Senate Minority Leader Schumer (D-NY) is saying that if Republicans repeal the mandate through the Tax Reform bill, then there is NO WAY Democrats are going to support the Alexander-Murray package, which presumably means Democrats will NOT support funding the cost-sharing subsidies. This is all setting up for an interesting showdown. Let’s start with Republicans: If the final Tax Reform package includes repeal of the individual mandate, there is question as to whether Sen. Collins and Sen. Murkowski, and possibly even Sen. McCain (R-AZ) will vote YES on the Tax Reform bill. To get them to YES, however, Majority Leader McConnell (R-KY) and the President might have to agree to propping up the ACA’s individual markets by funding the cost-sharing subsidies and agreeing to fund billions in Federal reinsurance dollars. Leader McConnell and the President may NOT want to do that. But, they don’t want to lose 1 to 3 votes either. At this point, I think it is a 50/50 proposition that repeal of the mandate falls OUT of Tax Reform. Why? Because I am not sure Republicans are willing to fund the cost-sharing subsidies, but more likely, because I do NOT believe Republicans are open to pumping reinsurance dollars into the individual markets. But to me, the Federal reinsurance dollars are “the key” here. Funding the cost-sharing subsidies is NOT going to reduce premiums. Yes, Republicans will “message” that they are reducing premiums because carriers won’t have to engage in “loading” the unfunded cost-sharing liabilities onto the “silver” Exchange plans anymore. BUT, most consumers outside of the Exchange are NOT impacted by lack of funding for the cost-sharing payments (because of this “silver loading” practice). However, what WILL help consumers outside the Exchange the MOST is billions of dollars of Federal reinsurance money. That is because the Federal reinsurance dollars have been shown by CBO to have a material impact on premiums. Let’s briefly talk about the Democrats. In my opinion, the Democrats have NO reason to vote for Alexander-Murray. As stated in previous updates, if the decision to cancel the cost-sharing subsidies will indeed improve the Exchange markets in the long-term – which CBO said would be the case – why would Democrats want to take away higher premium subsidies that consumers are inadvertently receiving? Interestingly, we don’t even have to answer that question. Why? Because Republicans are considering repealing the individual mandate. And Democrats are NOT about to help Republicans reduce premiums that CBO has projected will go up even further on account of the repeal of the mandate. But here is the kicker: If Democrats are asked to vote on Alexander-Murray – and funding for the cost-sharing subsidies – I believe that would be a VERY HARD vote for Democrats to take. Especially if Democrats are mobilized to oppose the package. After all, the Democrats have been be-rating Republicans over cancelling the cost-sharing subsidies payments – and calling the decision “sabotage.” To vote NO on ultimately funding the cost-sharing payments? The charge of “sabotage” could very easily be turned on Democrats. Maybe Republicans do have some leverage after all.

ACA Exchange Update

“Sign Ups” for ACA Exchange Plans Continue to Outpace Prior “Open Enrollment” Periods

Remember when I told you that if there is a good deal out there, word spreads? The Associated Press (AP) recently said: “Consumers are getting the word that taxpayer-subsidized health plans are widely available for next year for no monthly premium or little cost, and marketing companies say they’re starting to see an impact on sign-ups.” (see the article in the embedded link above).
- Analysis: Also, remember that I have been telling you that the Trump Administration wants to rely more heavily on agents/brokers (including Web-Broker Entities) and insurance carriers to “directly enroll” consumers in an Exchange plans, instead of Navigators and in-person assisters? I noted that one of the reasons why HHS reduced funding for enrollment marketing an outreach – and funding for Navigators and in-person assisters – was because the Administration feels that private-sector companies can do a better job at marketing and outreach. And the greatest benefit to the government: These private-sector companies can do the marketing and outreach on-their-own-dime. The thinking goes like this: By re-allocating funds toward “direct enrollment” activities – and away from Navigators and marketing campaigns launched by the previous Administration – we (meaning the Administration) can get a bigger bang-for-our-government-buck. Note, I am not suggesting that this is the reason why “sign ups” for Exchange plans is about 1 to 3 million higher than they were last year. But what I am suggesting is this: What appears to be a new Exchange enrollment strategy is arguably having a positive impact. It appears that the decision to cancel the cost-sharing subsidies is also having a positive impact on Exchange “sign ups.” As I have been saying ad naseum, cancelling the cost-sharing subsidies has increased the premium subsidies. As a result, the purchasing power of the premium subsidies has increased so much so that 98% consumers can purchase a “bronze” plan for free. Or, most consumers can buy a “gold” plan for the same amount of money they spent last year for a “silver” plan (see the attached update talking about the Avalere study on this). All of this “feel good” news about Exchange enrollment may be short-lived, however. We have to remember that this year’s “open enrollment” period ends on Dec. 15^th for the Federal Exchange States, instead of the prior year’s deadline of Jan. 31^st. If the “sign up” numbers continue to be even as a high as they have been the past 2 weeks, the “sign up” numbers are STILL going to fall short of even getting close to the 12.7 million “sign ups” last year. I am still guessing that – when all of the various “open enrollment” deadlines come and go (for example, some State-based Exchanges extended their deadlines to Jan. 15^th or Jan. 31^st) – “sign-ups” will be around 12 million. But, factoring in that “open enrollment” ends a month-and-a-half sooner than last year, the numbers could be closer to 10 million. We will have to wait and see…