Tax Reform Update
“Tax Reform” Update
by Christoper E. Condeluci, Principal and sole shareholder of CC Law & Policy PLLC in Washington, D.C.
- From a health care perspective, there is not much more to add when it comes to the Tax Reform legislation. You have heard me talk at length about repeal of the “individual mandate” penalty tax. In my opinion, repeal won’t have a material effect on the markets. The individual mandate has NOT worked in the first place, so why would the markets be adversely affected with it gone? Yes, premiums will go up to compensate for the fact that all of the ACA’s insurance market reforms will remain intact. But, I fear that insurance carriers will use repeal of the mandate as an excuse to arbitrarily increase premiums more than premiums should otherwise go up. But, people may disagree on that point.
- Analysis: There are 2 additional points to talk about when it comes to repeal of the individual mandate. The 1st point centers on the “reporting” requirements for the individual mandate penalty tax. The 2nd point is that there is talk that States may choose to enact their own State-based mandate to “protect their markets.” I suppose a 3rd point is this: With all of the hang-wringing over repeal of the mandate – and assertions like “the markets are going to crater without the mandate” – why don’t people re-channel their negative energy into coming up with a viable alternative to the penalty tax? Let’s start with the 1st point – the “reporting” requirements. We discuss the 2nd point in the following post:
- What Happens to the Individual Mandate Reporting Requirements?: Because the individual mandate is a penalty tax, Congress needed to give the IRS a “tool” to enforce this tax. The typical enforcement “tool” for any tax is a “reporting” requirement. The individual mandate’s “reporting” requirement can be found under Code section 6055. In short, Code section 6055 requires insurance carriers under-writing coverage for individuals and employees, employers with self-insured plans, and government entities providing coverage under a public health program to send a “notice” to people with health coverage. Notice must also be sent to the IRS. This “notice” was effectuated in IRS Form 1095-B, and in some cases, Form 1095-C (for self-insured employers). So what happens to the 1095-B Forms? My answer: The requirement to send these Forms should go away. But here is the confusing part: Because the Senate’s “reconciliation” rules only allowed Republicans to zero out the penalty amount to $0, technically, the individual mandate penalty tax is still “on the books.” And so is Code section 6055. However, because the penalty tax is effectively repealed – because the penalty is $0 – I believe Treasury will issue guidance telling insurance carriers and government entities that there is NO practical need to send out 1095-B Forms. As a result, I believe the requirement to send 1095-B Forms will cease to exist. When it comes to self-insured employers, Treasury allowed these “providers of health coverage” to include the 1095-B information on the Form 1095-C. In particular, the 1095-B information can be communicated in Section III of the 1095-C. In the guidance I mention above, I believe Treasury will tell self-insured employers that they NO longer have to complete Section III of the 1095-C Form. PLEASE NOTE, the 1095-C Form – which is in the law to help the IRS enforce the “employer mandate” and determine eligibility for a premium subsidy – WILL REMAIN in the law. The ONLY impact on the 1095-C Forms is that Section III will become obsolete because the individual mandate is effectively obsolete.
- As you know, Congress and the Trump Administration want to change the ACA. However, a number of States don’t like the changes that Congress and the Trump Administration want to make. So, these States – with pressure from ACA supporters and other consumer groups – are positioning themselves to resist these changes. In addition, ACA supporters and consumer groups are encouraging States to consider establishing their own “mandate”-like provision in the wake of repeal of the individual mandate penalty tax in the Tax Reform bill.
- Analysis: ACA supporters and consumer groups are asking States to refrain from adopting the expected changes to “short-term health plans” and also “association health plans” (note, we could see regulations on both of these any day now). The argument for resisting these changes is premised on the belief that the new rules for short-term health plans – and also association health plans – will adversely affect the individual and small group markets by siphoning off all of the healthy risks currently present in each market. States can resist these changes – it is argued – by re-adopting the rules that the Obama Administration put in place at the State-level (the Obama Administration rules limited the utility of short-term health plans, along with association health plans, all in an effort to “protect” the individual and small group markets). You may ask: How can States resist changes coming from the Federal level? After all, States have been forced to abide by the ACA’s Federal insurance market reforms (e.g., plans must cover the “essential health benefits,” and carriers operating in States must follow the adjusted community premium rating rules and comply with changes like “guaranteed issue,” among other requirements)? Answer: It comes down to the difference between a “ceiling” and a “floor.” Huh?!? The ACA’s Federal insurance market reforms are a “floor,” meaning States cannot develop their own rules that fall below the Federal standards. BUT, States can come up with rules that are more comprehensive – or more restrictive – than the Federal “floor.” For example, as you know, the ACA calls for a 3-to-1 ratio when developing premiums based on “age.” Well, States can choose a tighter ratio like 2-to-1, or the State can be a “pure” community rating State and not allow premium variations based on age or anything else. But what States CANNOT do is choose a 5-to-1 ratio (because this ratio is more generous than the Federal “floor”). In the case of short-term health plans, the Trump Administration will allow these plans to provide coverage for 12 months, as opposed to just 3 months. Importantly, this change would serve as a “floor.” So for example, a State could NOT allow a short-term health plan to provide coverage for say 18 months. But what a State CAN do is say that short-term health plans sold in the State can only last 3 months (or 6 months or whatever number less than 12). Here, the State would be developing more restrictive rules, which technically is NOT prohibited, considering States have the exclusive right to regulate their own insurance markets (so long as those regulations are NOT below the Federal “floor”). Same goes for restricting association health plans. States may prohibit self-insured association health plans outright (some States already do). Or, in an attempt to discourage self-insured association health plans, States could choose to regulate other insurance products that are necessary for self-insuring, like stop-loss insurance and/or private reinsurance. States could also prohibit fully-insured association health plans if they wanted to. Again, these actions would be more restrictive than the Federal “floor.” It’s unclear, however, whether States will go this route. When it comes to a State enacting its own “mandate”-like provision in the wake of repeal of the individual mandate penalty tax, States can indeed do this. It would be advisable that these States enact a new “mandate” through an ACA Section 1332 Waiver. After all, Section 1332 allows a State to waive the individual mandate penalty. So, even though the penalty tax is $0 – and effectively inoperative – the State could wipe the penalty tax rules from its “books,” and write-in a new mandate provision. Going the 1332 Waiver route is advisable because a State – in addition to establishing its own mandate – could set up a reinsurance program, not too dissimilar from Alaska. This way, the State could show that its reinsurance program reduces premiums, and the State can benefit by receiving “pass-through” funding (“pass-through” funding is the delta between what Federal spending the State would have received had there been no 1332 Waiver, and the actual cost of Federal spending accounting for the reduction in premiums). In the case of Alaska, this delta was $322.7 million over 5 years, and it is this money that is funding Alaska’s reinsurance program. To help further fund a State’s reinsurance program, the State could enact its own form of an individual mandate penalty tax and use that tax revenue for funding purposes, as opposed to using revenue from assessments on other insurance products or self-insured plans. While this all sounds fine-and-good, there are significant questions as to whether the “politics” of a State will allow for the creation of a mandate, even in deep blue States. Even if policymakers can overcome the “politics,” is a penalty tax the right way to go? Or, is there some other “mandate”-like alternative that ACA supporters and/or the insurance carriers can suggest is viable? I am anxiously awaiting to hear suggestions.
“Cost-Sharing Subsidy” Update
- Tim Jost – a left-leaning health care analyst – commented: “The litigation that long seemed so consequential likely ended in a whimper.” In my opinion, that is EXACTLY what happened.
- Analysis: So what did happen? In short, House Republicans, the Trump Administration, and 19 State Attorneys General chose to the “settle” the ongoing litigation over whether the Obama Administration wrongfully made cost-sharing subsidy payments in the absence of a Congressional appropriation. Each side agreed that the District Court ruling would NOT be “binding” on any future litigation on the question of whether Congress has “standing” to sue the Executive Branch, and also on the question of whether the Obama Administration indeed wrongfully made the cost-sharing payments. Previously, the District Court found that Congress did indeed have “standing,” and the Court believed that the cost-sharing subsidy payments were wrongfully made. Why “settle” now? Well, both the House and the Administration have asked the Appeals Court to place a hold on rendering a decision 3 times now. They arguably exhausted their ability to ask for yet another extension. More likely though, Congress is on the verge of actually appropriating the necessary funds for the cost-sharing subsidy payments. So, if Congress is going to appropriate the necessary funds, there is NO need for the litigation to continue. And, if the Trump Administration is going to re-instate the cost-sharing subsidies – because Congress has finally appropriated the funds – there is NO need for a court ruling that says the Executive Branch is prohibited from funding the payments (until Congress makes the necessary appropriation). To Tim Jost’s point above, it cannot be over-stated that the cost-sharing subsidy litigation has kept-a-lot-of-people-awake-at-night. There was a considerable amount of “political” rhetoric on how the markets will “come crashing down” if the payments are not made, which was fueled by the Trump Administration continually using the cost-sharing subsidy issue as a “political football.” In my opinion, both sides are to blame for the fever-pitch that rang loudly for at least a year now. Credit needs to be given to States that forced their carriers to “load” the unfunded cost-sharing subsidies onto the “silver” Exchange plans ONLY, because this “silver-loading” practice essentially held ALL consumers harmless (and the only one holding the bag is the Federal government in the form of higher government spending due to the higher premium subsidy amounts). Credit also needs to go to Congress if and when they appropriate the necessary funds for the cost-sharing subsidies, because this is how it should have always been all along. BUT, as I have said before – and I will say it again – at this point, actually funding the cost-sharing subsidies will be counter-productive at least from a “coverage” perspective. That is because consumers are currently enjoying the higher premium subsidy amounts and purchasing free “bronze” plans or more comprehensive “gold” plans at no additional cost to what they paid last year. It would appear that if Congress funds the cost-sharing subsidies for 2019 and 2020, this consumer-friendly phenomenon would end. The only benefit I see from funding the cost-sharing subsidies is saving the government $194 billion over 10 years (which is nothing to sneeze at, so please don’t misconstrue the point I am trying to make here).
“Market Stabilization” Update
- I wanted to talk about Tax Reform and the cost-sharing subsidies before I got to “market stabilization.” Why? Because – as I discussed in my update last week (see attached) – Sen. Collins (R-ME) conditioned her YES vote on Tax Reform on (1) The enactment of the Alexander-Murray “market stabilization” package and (2) The creation of a Federal reinsurance program with funding for 2018 and 2019.
- Analysis: Enacting Alexander-Murray is important because that package appropriates funding for the cost-sharing subsidies for 2018 and 2019. As stated above, I question whether funding the cost-sharing subsidies is advisable due to the benefit Exchange planholders are getting out of it, and due to the fact that off-Exchange planholders (i.e., the unsubsidized population) are essentially seeing NO additional premium increases. Setting that issue aside, here is another thing to think about: Alexander-Murray funds the cost-sharing subsidies for 2018 and 2019. But, insurance carriers already set their premiums for 2018 back in August/September. So, it’s not like Congress is going to be able to have any impact on 2018 premiums. In addition, the insurance carriers have already “loaded” the unfunded cost-sharing liabilities onto the “silver” Exchange plans, and Congress does NOT want to further enrich the carriers by (1) Funding the cost-sharing subsidies and (2) Allowing them to keep the revenue generated from the “silver loading” practice. So, to prevent this “double-dipping,” Alexander-Murray has a complex formula that requires a carrier that “silver loaded” to rebate amounts back to the Federal government or the consumer. My question is this: Why bother with this complexity? Why not just raise the “white flag” on 2018, and fund the cost-sharing subsidies for 2019 and 2020? In my last update, I also commented on Sen. Collins’ legislation that would allow States to set up a reinsurance program or an “invisible high-risk pool” with Federal funds ($5 billion in 2018 and $5 billion in 2019). Most analysts agree that $10 billion over 2 years is NOT enough to have a material impact on premiums (e.g., Avalere Health said the Collins reinsurance bill would reduce premiums by 4% in 2019). Another interesting point is this: Again, because 2018 premiums are already set, it’s not like the Collins bill is going to reduce premiums for 2018. So, why not shift the Federal funding to 2019 and 2020? Based on CBO’s prior estimates of a reinsurance-like program, the greatest impact from the Federal funds show up 1 to 2 years AFTER the effective date of the provision. Republicans could arguably benefit from funding for 2020 because 2020 is an election year – including a Presidential election – and they should want to keep premiums as low as they possibly can. Last comments: Despite my – and others – suggestion that it is ill-advised to fund the cost-sharing subsidies (at least from a “coverage” perspective), I expect that Congress will indeed fund the cost-sharing subsidies in the upcoming end-of-year legislative package. While House Republicans have signaled their disdain for funding the cost-sharing subsidies, if funding the payments is a part of a larger legislative package that includes funding for the government, I cannot see House Republicans shutting down the government over the cost-sharing subsidy funds. Also, if Democrats become cool to the idea of funding the cost-sharing subsidies – because Exchange planholders are better off without the funding – I still cannot see how Democrats vote NO on the cost-sharing subsidy funds. If Democrats vote NO, that would be a hard vote to explain, considering their continued bashing of Republicans over cancelling the cost-sharing subsidy payments. I also believe Sen. Collins’ Federal reinsurance bill will become a reality. There is NO way Majority Leader McConnell fails to make good on his promise to bring the Collins bill up for a vote. That is NOT how Leader McConnell operates. House Republicans won’t like it, but the interesting thing is that reinsurance is the best way to reduce premiums (which is what House Republicans have been calling for). For Democrats, they will NOT want to cooperate and be complicit in a “deal” that convinced Sen. Collins to (1) Repeal the individual mandate and (2) Vote YES on the broader Tax Reform bill. However, Democrats are in no position to vote NO on pumping billions of Federal dollars into the individual market.
“ACA Exchange” Update
2018 “Open Enrollment” for the Federal Exchange Ended on Dec. 15th, But 10 State-Based Exchanges Have Extended Their Deadlines (no news story)
- As I mentioned last week, while the number of “sign ups” at the Federal Exchange – as well as the State-based Exchanges – have been higher than what we saw last year at this time, overall “sign-ups” will be lower than last year.
- Analysis: Again, a reminder to all those who have criticized the Trump Administration for shortening the “open enrollment” period – the Obama Administration was first to suggest a shortened “open enrollment” period, and the Obama HHS had slated 2019 for its effective date. Believe-you-me, I am NOT trying to defend the Trump Administration. I am making this statement because in every news article I read, the ONLY thing I hear is that the Trump Administration “sabotaged” enrollment this year by shortening the over enrollment period. I just wish readers were given the entire picture on this policy change. Personally, I was NOT supportive of shortening the “open enrollment” period back when the Obama Administration proposed and finalized the Dec. 15th deadline. And, I was NOT supportive of the Trump Administration’s decision to put this policy change into effect a year early – for the 2018 “open enrollment” period. Here is something to think about: Because overall “sign-ups” will be lower for 2018 than they were for 2017, I could very well see the Trump Administration proposing to move the “open enrollment” period back to something like Dec. 31st or Jan. 15th or even back to Jan. 31st. But, if “sign-ups” for 2018 are somewhat close to the numbers for 2017, I could also see the Trump Administration being satisfied with their original decision to shorten the 2018 “open enrollment” period. Thus, no changes for 2019 and beyond. We will just have to wait and see how the numbers shake out. Last comment: Even though the Federal Exchange deadline is now past us, there are 10 State-based Exchanges that extended their deadline, with 8 of them extending their deadline into January (e.g., CT and MD ends 12/22, RI ends 12/31, CO ends 1/12, MN ends 1/14, WA ends 1/15, MA ends 1/23, CA ends 1/31, DC ends 1/31, and NY ends 1/31). Due these extended deadlines – and due to the increase in the pace of “sign-ups” relative to last year – I expect we will see a record number of “sign-ups” in these States. These record-breaking “sign ups” will buoy-up the overall Federal Exchange “sign ups” that were lower than last year. In the end, overall “sign ups” will be lower, but they probably won’t look that bad. Stay tuned.