The Uncertain Affordable Care Act Landscape: What It Means for California

The Uncertain Affordable Care Act Landscape: What It Means for California MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • FEBRUARY 2017 AN LAO REPORT 2 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT EXECUTIVE SUMMARY Major Provisions of the Patient Protection and Affordable Care Act (ACA). The ACA was signed into law in March of 2010. The ACA made substantial changes to how health care services and health insurance coverage are provided nationwide. Major provisions of the ACA include: (1) insurance market changes, (2) subsidized coverage for qualifying individuals through federal and state Health Benefit Exchanges, (3) federal funding for an expansion of program eligibility in state Medicaid programs, (4) additional federal financial participation in other health care programs and services, and (5) new federal revenues. The ACA Fundamentally Altered California’s Health Care Landscape. California’s health care landscape looks very different from before the full implementation of the ACA. Some of the major impacts that the ACA has had on the state, in addition to the insurance market changes, include: • One in three state residents is now enrolled in the state’s Medi-Cal program, reflecting the state’s adoption of the ACA optional Medicaid expansion. • A significant reduction in the number of uninsured state residents—from 6 million in 2013 to 3 million in 2015. • More than $20 billion in additional federal funding each year for health care coverage, through enhanced federal funding for the ACA optional expansion and federal subsidies for coverage purchased on the state’s Health Benefit Exchange—Covered California. Significant Federal Uncertainty About the Future of the ACA. The new presidential administration and congressional majority leaders have stated an intent to repeal (or at least make major changes to) the ACA and have taken procedural steps to begin doing so. However, there is substantial uncertainty as to (1) whether and which components of the ACA might be repealed, (2) when any repealed components of the ACA would become inoperative, and (3) what policies could replace those in the ACA. The ACA Provisions Most at Risk for Repeal . . . Congressional Republicans have initiated the first steps of the federal “budget reconciliation process” to facilitate the potential repeal of certain major components of the ACA. Some of the components potentially subject to repeal through use of this process include federal funding for the ACA optional expansion, federal funding for premium subsidies and cost-sharing reductions through Health Benefit Exchanges, enhanced federal funding for other health care programs and services in Medicaid, and the individual and employer mandate tax penalties. . . . Would Have Significant Consequences for California. Changes in the ACA components most at risk for repeal—absent replacement policies—would have significant consequences for California. These include the potential loss of substantial annual federal health care funding, the uncertain survival of Covered California, a potentially considerable increase in the number of uninsured Californians, and a possible disruption of the commercial health insurance market. www.lao.ca.gov Legislative Analyst’s Office 3 AN LAO REPORT Common Themes of Republican Replacement Proposals. Congressional Republicans have offered several replacement proposals that build off of the repeal of some or all components of the ACA. Some of the broad common themes from several of the Republican ACA replacement plans include: (1) continuing to use the tax system to make health coverage available, (2) aiming to increase competition and choice while reducing costs, (3) promoting flexibility for state Medicaid programs, and (4) reducing growth in federal health care expenditures. Common Federal Health Care Policy Changes in Republican Replacement Proposals. To achieve the common themes of their proposals, Republican replacement plans often contain a number of common policy proposals, each with significant fiscal and/or policy implications for the state. These include: • Replacing ACA premium tax credits and cost-sharing reductions with an alternative health care tax credit structure. • Encouraging the use of health savings accounts. • Limiting the tax excludability of employer-sponsored health benefits. • Requiring continuous health insurance coverage. • Removing ACA requirements on essential health benefits. • Facilitating the use of catastrophic health insurance coverage. • Facilitating the interstate sale of health insurance plans. • Converting Medicaid into a block grant or per capita allotment program. • Reconstituting high-risk pools. Legislative Considerations Given the ACA’s Uncertain Future. Given the uncertainty around the future of the ACA and the substantial federal funding that is potentially at risk, we recommend the Legislature maintain fiscal prudence in preparation for changes at the federal level, and consider how changes to the ACA could require a reevaluation of the state-local health care financing relationship. 4 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT INTRODUCTION The Patient Protection and Affordable Care Act the ACA in 2014, the state has made considerable (ACA) has significantly transformed California’s progress in improving the accessibility of health health care landscape—imposing new, far-reaching care coverage, as evidenced by a reduction in the rules governing the state’s health insurance markets uninsured rate of approximately 50 percent. and providing considerable new federal funding to The ACA’s future, however, is highly uncertain. help Californians obtain health care coverage. The With the transition to a new presidential result has been a marked shift in how—and how administration, there is now a movement to undo many—Californians access health care coverage. portions of the ACA and pass legislation that would Before the ACA, the accessibility of health care again make far-reaching changes to health care coverage was limited for certain populations and policy. could vary depending on where in California an This report summarizes the major impacts individual or family lived. Since 1966, Medi-Cal, that the ACA has had in California, explores what the state’s Medicaid program and largest publicly the ACA’s repeal could mean for the state, and funded health care program, has provided health assesses a collection of policy alternatives to the care coverage to the state’s low-income residents. ACA that the new federal administration and Before the ACA, however, eligibility for Medi-Cal Congress are currently considering. At the time was generally limited to families with children, of this publication, however, no ACA repeal or seniors, and persons with disabilities. Low-income replacement legislation has been passed by either childless adults, for example, were generally house of the current Congress. Thus, there is ineligible for Medi-Cal, often resulting in members significant uncertainty as to (1) whether and which of this population being without health care components of the ACA might be repealed, (2) when coverage. Other state and county publicly funded any repealed components of the ACA would become health care programs existed to serve populations inoperative, and (3) what policies could replace those with limited access to alternative forms of health in the ACA. As a result, this report is a snapshot of care coverage, including county-run indigent health where federal policymaking stands at the time of its care programs and state-administered programs publication, and might be used to begin considering for individuals with high health care needs. how changes to the ACA could impact California Nevertheless, gaps in health care coverage existed and how the state might respond to best align the in California. Since the full implementation of state’s health care policies with its priorities. MAJOR PROVISIONS OF THE ACA This section outlines the major provisions of participation in other health care programs and the ACA, including (1) insurance market changes, services, and (5) new federal revenues. Figure 1 (see (2) subsidized health coverage through federal or next page) summarizes the effective dates for major state Health Benefit Exchanges, (3) federal funding provisions of the ACA, ordered chronologically and for an expansion of program eligibility in state into topical categories. Medicaid programs, (4) additional federal financial www.lao.ca.gov Legislative Analyst’s Office 5 AN LAO REPORT ACA Expected to Reduce Overall Federal Budget Office (CBO) in 2015 to be a little over Spending. Over the long run, the ACA was $100 billion nationwide, while ACA-related projected to reduce the federal budget deficit. For revenues, if fully implemented, were projected to federal fiscal year (FFY) 2017-18, ACA-related be $100 billion. (The FFY runs from October 1 spending was projected by the Congressional through September 30.) A combination of declining Figure 1 Effective Dates of Major Provisions of the ACA Category Provision Effective Date Insurance Market Changes Dependent coverage until age 26 September 2010 No lifetime coverage limits Guaranteed availability and renewability January 2014 of coverage Individual mandate No preexisting condition exclusions for all enrolleesa No unreasonable annual coverage limits Restrictions on factors by which premiums may vary Employer mandate January 2015 (delayed from January 2014) Creation of Health Benefit Essential health benefits January 2014 Exchanges Subsidized and unsubsidized health insurance coverage through Health Benefit Exchangesb Medicaid Optional Enhanced federal funding for Medicaid January 2014 Expansion optional expansion population Other Augmented Federal Prevention and Public Health Fund June 2010 (first allocation) Funding Under the ACAc Community First Choice Option October 2011 Children’s Health Insurance Program October 2015 New Federal Revenues Additional 0.9 percent Medicare tax on January 2013 Under the ACA high-income taxpayers 3.8 percent surtax on high-income taxpayers’ investment income Medical device excise taxd Health insurer provider feee January 2014 “Cadillac” tax January 2020 (delayed from January 2018) a Preexisting condition exclusion ban for dependents under age 19 effective September 2010. b Federal and state Health Benefit Exchanges required to be operational October 2013. c Augmented federal funding for Medicaid Health Homes and preventive services effective January 2011 and January 2013, respectively. d U.S. Congress enacted two-year moratorium on the medical device excise tax starting January 2016. e Collection of the health insurance provider fee was suspended in 2017. ACA = Patient Protection and Affordable Care Act. 6 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT ongoing ACA spending and higher ongoing (except grandfathered plans) across covered ACA-related revenues were expected to start beneficiaries. Plans can only charge varying generating annual federal savings beginning in FFY premiums based on (1) whether coverage is for an 2018-19. individual or family, (2) age, (3) tobacco use, or (4) geographical area. Insurance Market Changes Guaranteed Availability and Renewability The ACA reformed small group and individual of Coverage. A health insurer must accept all health insurance markets by setting new employers and individuals that apply for health requirements affecting access to health insurance insurance coverage, and permit annual and special coverage. While large group plans are exempt from enrollment periods for those with qualifying several of these new requirements, the ACA did lifetime events (such as marriage or the birth of impose some requirements, such as a prohibition a child). Once an enrollee is covered by a health on annual or lifetime limits on coverage expenses insurance plan, the ACA requires the plan to on these plans. “Grandfathered” plans, defined as guarantee renewal of that coverage regardless of the plans available in March 2010 that did not reduce enrollee’s health status, service use, or other related benefits or increase costs for their beneficiaries, are factors. also exempt from certain ACA requirements such Dependent Coverage Until Age 26. Health as rating restrictions, which we describe below. The insurers that choose to provide dependent health ACA phased in the insurance market requirements, insurance coverage for children under a parent or and the individual and employer mandates, over guardian’s health insurance plan must continue to time as shown in Figure 1. make coverage available to the child until he or she No Preexisting Condition Exclusions. turns 26 years of age. Preexisting medical conditions are health Individual Mandate. Individuals must be conditions that existed prior to an individual’s enrolled in health insurance coverage that meets enrollment in a health insurance plan. The ACA certain minimum quality standards under the ACA prohibits health insurers from imposing preexisting or pay a tax penalty. Individuals can file for an condition exclusions. These exclusions include exemption from the mandate if, for example, they denying health insurance coverage, charging more have a financial hardship or they have religious for that coverage, and limiting or refusing to cover objections to coverage. Those who can afford benefits associated with an individual’s preexisting coverage, but decide not to obtain it or to file for condition. an exemption from the mandate, must pay a tax No Annual or Lifetime Coverage Limits. penalty. The 2016 penalty is calculated either as The ACA bars all health insurance plans from a flat amount—$695 per adult and $347.50 per setting lifetime limits on the dollar value of health child under 18—or as 2.5 percent of household insurance coverage that individuals receive under income, whichever amount is greater up to certain their plan. With the exception of grandfathered maximums. The intent of the individual mandate plans, all other plans are also barred from setting is to provide a disincentive for individuals to avoid annual limits on coverage expenses. coverage, especially younger and healthier people Rating Restrictions. The ACA restricts (who balance the health insurance risk pool). how much and by what factors small group and Employer Mandate. Employers with at least individual health insurance premiums can vary 50 full-time equivalent employees during the www.lao.ca.gov Legislative Analyst’s Office 7 AN LAO REPORT preceding calendar year face tax penalties: (1) if coverage. The ACA gave states the option to either they do not offer health insurance coverage to administer their own Health Benefit Exchanges at least 95 percent of their full-time equivalent or use the federal platform, Healthcare.gov. The employees plus their dependent children, or (2) if majority of states opted to use the federal platform. they offer coverage the ACA does not consider Open Enrollment Period Limited to Certain affordable or of minimum value. Employer Months of the Year. In the absence of a qualifying coverage is considered to be affordable under life event such as marriage or the loss of alternative the ACA if employees pay no more than about health coverage, individuals may only enroll in a 9.5 percent of their household income towards Health Benefit Exchange health plan during certain coverage, and of minimum value if the insurer months of the year, typically November through pays for at least 60 percent of covered health care January. This limitation on open enrollment was expenses for a standard population. Employer tax established to prevent individuals from obtaining penalties vary based on the number of employees coverage only in the case of a medical event. and whether they are offered coverage. If employees Individuals who experience a qualifying life event are offered coverage, the coverage must also be may enroll in a health plan through the Health affordable and of minimum value to avoid tax Benefit Exchanges at any time during the year. penalties. The employer mandate is intended to ACA Standards on Essential Health Benefits discourage employers from reducing or not offering (EHB) and the Comparability of Health Plans. As coverage knowing that subsidized coverage is shown in Figure 2, the ACA requires that all health available through the Health Benefit Exchanges and plans offered through the Health Benefit Exchanges individuals are required to have coverage. (as well as all individual and small group insurance plans regardless of where they are sold) provide Creation of Health Benefit Exchanges a common set of benefits, known as EHB. In Online Marketplace for Individuals to addition, all health plans sold through the Health Purchase Commercial Health Insurance. The Benefit Exchanges are grouped into four standard ACA established online marketplaces, known as tiers according to the percentage of medical Health Benefit Exchanges, where individuals (and expenses the insurance plan is expected to cover. small businesses of 50 employees or less) can shop Health plans in the highest tier pay the highest for commercial insurance coverage, be referred for percentage of an individual’s expected medical Medicaid coverage, and receive federal financial costs (90 percent) and have higher premiums and assistance to help pay for commercial insurance lower copays and deductibles. Health plans in the Figure 2 ACA’s Ten Essential Health Benefits on Plans Sold Through Health Benefit Exchanges ✓ Outpatient Medical Care ✓ Mental Health and Substance Use Disorder Services ✓ Emergency Services ✓ Rehabilitative Services and Devices ✓ Hospitalization ✓ Laboratory Services ✓ Prescription Drugs ✓ Preventive Services and Chronic Disease Management ✓ Maternity and Newborn Care ✓ Pediatric Services (Including Vision and Dental) ACA = Patient Protection and Affordable Care Act. 8 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT lowest tier pay the lowest allowable percentage of Health and Human Services to withhold the of medical expenses (60 percent) and have lower state’s Medicaid allotment until it complied. premiums and higher copays and deductibles. The U.S. Supreme Court ruled in 2012 that this Premium Tax Credits and Cost-Sharing condition on a state’s Medicaid allotment was Reductions Available Through Health Benefit unconstitutional, and that states should have the Exchanges. Citizens and legal residents with option either to expand or to not expand eligibility incomes between 100 percent and 400 percent for their Medicaid programs. The population that of the federal poverty level (FPL) and for whom became eligible for Medicaid under the ACA is alternative forms of affordable health insurance now commonly referred to as the ACA optional coverage are not available are eligible for federal expansion population. tax credits and cost-sharing reductions to help pay Enhanced Federal Funding for the ACA for health coverage through the Health Benefit Optional Expansion. States that opt to expand Exchanges. The amount of federal financial eligibility for their Medicaid programs receive assistance available to an individual is higher for enhanced federal funding for the ACA optional households with lower incomes. Accordingly, expansion population. A state’s federal medical eligible individuals with the lowest incomes assistance percentage (FMAP) is the federally receive tax credits that reduce their monthly designated portion of a state’s incurred Medicaid premiums to between 2 percent and 4 percent of costs paid for by the federal government. For the monthly income, while eligible individuals with non-ACA optional expansion population, state the highest incomes receive tax credits that reduce FMAPs vary from a low of 50 percent (California) their monthly premiums to between 8 percent to a high of 75 percent (Mississippi). As shown in and 10 percent of monthly income. Additional Figure 3, with the implementation of the ACA, the federal financial assistance, known as cost-sharing federal government paid an FMAP of 100 percent reductions, is available to the lowest-income from 2014 to 2016 for the costs of covering the individuals who receive subsidized coverage to help ACA optional expansion population. Starting this them pay for out-of-pocket medical expenses such year, states that participate in the ACA optional as deductibles and copays. expansion—including California—are responsible Medicaid Optional Expansion Figure 3 Before the ACA, Medicaid eligibility was Federal Share of Costs for ACA generally restricted to families and seniors and Optional Expansion Population persons with disabilities with incomes below Federal Medical 108 percent of FPL. Therefore, childless adults Calendar Year Assistance Percentagea under 65 were ineligible for Medicaid regardless 2014 100% of income. The ACA originally required all states 2015 100 2016 100 to expand eligibility for their Medicaid programs 2017 95 to individuals under age 65 (children, parents, 2018 94 and childless adults) with household incomes at 2019 93 2020 and thereafter 90 or below 138 percent of FPL by January 2014. If a a Determines federal share of costs for covered services in state state did not expand Medicaid eligibility, Congress Medicaid programs. ACA = Patient Protection and Affordable Care Act. could direct the Secretary of the U.S. Department www.lao.ca.gov Legislative Analyst’s Office 9 AN LAO REPORT for 5 percent of the costs. In 2020 and thereafter, provided through the CFCO starting October 2011. participating states must pay 10 percent of costs for Increased federal financial participation in the the ACA optional expansion. CFCO is ongoing. Other Enhanced Federal Funding for Other Augmented Federal Medicaid. There is also increased federal Funding Under the ACA financial participation in Medicaid under the The ACA increases federal financial ACA for Medicaid Health Homes (enhanced participation for other health care programs and FMAP of 90 percent for the first two years services in a state’s Medicaid program in addition of implementation) and preventive services to the enhanced federal funding for the ACA (1 percentage point FMAP enhancement). optional expansion population. For each program Prevention and Public Health Fund. The or service, the federal government provides an Prevention and Public Health Fund supports grant enhancement to the state’s existing FMAP. While programs administered by several federal agencies some enhancements under the ACA are temporary, that promote state prevention, public health, and others are permanent. States can also apply for wellness activities. The ACA appropriated $7 billion grants authorized by the ACA. The ACA phased in funding for all states from FFY 2009-10 to FFY in these augmentations and grants over time as 2014-15, with $2 billion ongoing after FFY 2014-15. referenced below. Since the ACA appropriated this funding, the Enhanced Federal Funding for Children’s former federal presidential administration and Health Insurance Program (CHIP). CHIP is a Congress agreed to several cuts to the Prevention joint federal-state program that provides health and Public Health Fund. As of FFY 2016-17, insurance coverage to children in low-income $931 million is available ongoing annually. families, but with incomes too high to qualify New Federal Revenues Under the ACA for Medicaid. Historically, states received higher FMAPs for CHIP coverage than for The ACA established new sources of federal other Medicaid-covered children. FMAPs for revenue to help pay for the additional federal costs CHIP ranged from a low of 65 percent to a high associated with the ACA. For FFY 2017-18, ACA of 82 percent. The ACA enhanced FMAPs for revenues, if collected in full, were projected by CHIP starting October 2015, ranging from the CBO in 2015 to be approximately $100 billion. a low of 88 percent to a high of 100 percent. Below, we summarize the major new revenues Increased federal financial participation in CHIP established under the ACA: is authorized by the ACA until FFY 2018-19 but • New Taxes on High-Income Earners. funding is only appropriated through FFY 2016-17. The ACA imposed two new taxes on Enhanced Federal Funding for Community high-income earners: (1) an additional First Choice Option (CFCO). The CFCO is an 0.9 percent Medicare Tax on personal option available to states within their Medicaid incomes over $200,000 for single taxpayers programs to provide home- and community- and $250,000 for married taxpayers and based attendant services and supports to seniors (2) a 3.8 percent surtax on the portion of and persons with disabilities. The ACA created high-income taxpayers’ investment income the CFCO and provided states with an FMAP above $200,000 for single taxpayers and enhancement of 6 percentage points for services $250,000 for married taxpayers. For FFY 10 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT 2017-18, the ACA’s high-income earner • Health Care-Related Taxes. The ACA federal tax revenues are projected to exceed established an assortment of other health $30 billion annually. care-related taxes, such as the Health Insurance Provider Fee, a fee on health • Individual and Employer Mandate Tax insurers that raises a statutorily determined Penalties. As previously discussed, the total amount of revenue each year; the ACA imposed a mandate on individuals “Cadillac tax,” an excise tax on high-cost to obtain health care coverage and on employer-sponsored health plans that has large employers to make affordable health not yet been implemented; and the Medical insurance coverage available to their Device Excise Tax, for which there is employees. Tax penalties are imposed currently a moratorium. For FFY 2017-18, on individuals and employers that do the ACA’s health care-related taxes were not comply with the ACA’s individual expected to raise almost $20 billion in and employer health coverage mandates. annual revenue for the federal government For FFY 2017-18, total federal revenue were they all in effect. from the ACA’s mandate tax penalties is projected to be between $15 billion and $20 billion annually. ACA FUNDAMENTALLY ALTERED THE HEALTH CARE LANDSCAPE IN CALIFORNIA The ACA was far-reaching legislation that made Californians can no longer be denied insurance significant changes to health coverage and delivery coverage on the basis of having preexisting medical in California. New standards govern the insurance conditions, be charged higher premiums for having products sold in the state, billions of dollars in certain medical conditions, or face lifetime or additional federal funding for health coverage unreasonable annual limits on the dollar value of flow into California, the Medi-Cal program has benefits paid for by their insurer. grown to include over one in three state residents, California Opted for Medi-Cal Expansion. acquiring health coverage through the individual California opted to participate in the ACA’s insurance market has become relatively more optional Medicaid expansion, thereby expanding common, and the number of uninsured state Medi-Cal coverage to individuals with incomes up residents has been dramatically reduced. This to 138 percent of the FPL, now including childless section highlights several of the major impacts that adults. California’s ACA optional expansion the ACA has had on the state. population receives health care coverage through ACA Insurance Market Reforms Took Effect the same Medi-Cal fee-for-service or managed care in California Between 2010 and 2014. Between delivery systems utilized by all other Medi-Cal 2010 and 2014, California came into compliance enrollees. with the ACA’s requirements on commercial health Medi-Cal Mandatory Expansion. In addition insurance products sold in the state. As a result, to the expansion of eligibility in Medi-Cal www.lao.ca.gov Legislative Analyst’s Office 11 AN LAO REPORT through the ACA optional expansion, several ACA Significantly Augmented Federal Funding other ACA-related factors—such as the individual for Health Care Coverage in California mandate, enrollment simplification, and outreach— California receives more federal funding under were intended to increase Medi-Cal enrollment the ACA than any other state. Figure 4 shows that among individuals who were previously eligible, California will receive an estimated $24 billion in but not enrolled. This so-called “woodwork federal funds for programs and services authorized effect” is often referred to as the ACA mandatory by the ACA in 2017-18. expansion. Medi-Cal Receives Significant Enhanced California Established a State Health Benefit Federal Funding for ACA Optional Expansion. Exchange. In 2010, the state enacted legislation Nearly three-quarters of the federal funding that establishing the California Health Benefit California is expected to receive under the ACA in Exchange, also known as Covered California. 2017-18 ($17 billion) pays for the bulk of the costs Through Covered California, individuals and of covering Medi-Cal’s ACA optional expansion employees of participating small businesses are population. The amount of federal funding for the able to enroll in subsidized and unsubsidized ACA optional expansion is as high as it is because health coverage. Because California opted for the federal government pays 95 percent of the ACA the ACA optional expansion, subsidized health optional expansion population’s Medi-Cal costs in coverage through Covered California is available to 2017. individuals with incomes between 138 percent and Federal Government Provides Billions of 400 percent of the FPL. (Individuals with incomes Dollars to Help Californians Obtain Insurance between 100 percent and 138 percent of the FPL are Coverage Through Covered California. Much ineligible for subsidized health coverage through of the remaining federal funding that California Covered California because they are generally is expected to receive under the ACA in 2017 eligible for Medi-Cal under the ACA optional ($4.6 billion) will pay for premium subsidies expansion.) provided to most low-income Californians to In addition to administering the state’s Figure 4 online health insurance ACA Federal Funding to California marketplace, Covered (In Millions) California screens and makes referrals for Payments to the State Government—2017-18 Medi-Cal optional expansion funding $17,335 Medi-Cal and certifies Other enhanced federal financial participation in Medi-Cal 918 health insurance plans’ Prevention and Public Health Fund grants 60 compliance with ACA Subtotal ($18,313) requirements—for Payments for Insured Individuals—Calendar Year 2017 Covered California premium subsidies $4,600 example, EHB, certain Subtotal ($4,600) access standards, and Payments to Insurers—Calendar Year 2017 marketing and noticing Covered California cost-sharing reductions $800 practices. Subtotal ($800) Grand Total $23,713 ACA = Patient Protection and Affordable Care Act. 12 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT purchase health insurance coverage through level in 2017-18. Since 2007-08, federal funding Covered California. Health insurers in California for Medi-Cal has grown from $22 billion to a also receive $800 million in federal funding as proposed $67 billion in 2017-18. About one-third cost-sharing reductions for eligible individuals with of the increase in federal funding occurred after the lowest incomes. January 2014, when much of the ACA was fully CHIP. California’s base-level FMAP for CHIP implemented. Total state spending for Medi-Cal is 65 percent. With the ACA’s 23 percentage- has grown from $15 billion in 2007-08 to a point enhancement that started in FFY 2015-16, proposed $36 billion in 2017-18. California’s CHIP FMAP is currently 88 percent. Changes in Health Coverage in This enhanced CHIP rate will generate an California Under the ACA estimated $600 million in additional federal Graphic Sign Off funding for Medi-Cal in 2017-18. California’s Uninsured Population Has Fallen CFCO. Most in-home supportive services Substantially Under the ACA. Under the ACA, Secretary provided to Medi-Cal beneficiaries shifted into California has reduced the number of individuals Analyst the CFCO effective December 2011. The FMAP without health insurance by the largest amount of MPA enhancement of 6 percentage points over the base any state. Over 6 million Californians (17 percent ARTWORK #170055 Deputy FMAP of 50 percent for services provided through of the population) were uninsured in 2013, prior the CFCO will generate an estimated $300 millioTne mpltaot eth_eL AfuOllR imeppolermt_emntiadti.oanit of the ACA beginning in additional federal funding for Medi-Cal in in 2014. By 2015, around 3 million Californians 2017-18. (just over 8 percent of the population) lacked Prevention and Public Health Fund. Figure 5 Though federal grant Medi-Cal Spending 2007-08 Through 2017-18 amounts vary year (In Billions) to year, grants to the California Department $120 ACA's primary Medi-Cal of Public Health and provisions implemented beginning in January 2014. other state agencies 100 Other Non-Federal Funds from the Prevention General Fund and Public Health Fund 80 Federal Funds are projected to total $60 million in 2017-18. 60 ACA-Related 40 Federal Funding Responsible for Much 20 of the Growth in Medi-Cal Spending. Figure 5 shows the 2007-08 2009-10 2011-12 2013-14 2015-16 2017-18a increase in Medi-Cal a spending from 2007-08 Proposed. ACA = Patient Protection and Affordable Care Act. to its proposed www.lao.ca.gov Legislative Analyst’s Office 13 AN LAO REPORT health insurance coverage, a decrease of 50 percent eligible, but not enrolled, also likely increased.) The from 2013. The ACA optional expansion and state’s ACA optional expansion caseload continues subsidized coverage through Covered California, to grow. By June 2018, Medi-Cal’s ACA optional in conjunction with the individual mandate and expansion caseload is projected to be approximately streamlined enrollment and outreach efforts, were 4 million enrollees. the primary drivers of California’s significant Additional Gains in Insurance Coverage Due gains in coverage. Figure 6 shows shifts in health to Covered California. As of June 2016, more than insurance coverage types from 2013 to 2015, as 1 million Californians were enrolled in health well as the decrease in California’s uninsured insurance coverage through Covered California. population. Of those, nearly 90 percent received premium Graphic Sign Off ACA Optional Expansion Led to Millions of subsidies from the federal government. Health Californians Gaining Medi-Cal Coverage. As of insurers also received cost-sharing reSdeuccrtieotnasr fyor June 2016, over 3 million Californians obtained over half of Covered California’s plaAn nenarloylsletes. health insurance coverage through the Medi-Cal Total enrollment in health plans offered through MPA optional expansion. (In addition, Medi-Cal Covered California is expected to remain roughly Deputy enrollment among individuals who were previously steady in 2017. We provide additional information Figure 6 ACA: Major Reductions in Uninsured; Major Increases in Medi-Cal and Non-Group Coveragea Number of Enrollees, by Type of Insurance Coverage (In Millions) 20 18 16 2013 (Pre-ACA Implementation) 14 2015 12 10 8 6 4 2 Employer- Medi-Cal Medicare Non-Group Otherb Uninsured Sponsored Coverage a 2013 and 2015 American Community Surveys. b Includes, among other coverage types, public health plans available to current and former military members. ACA = Patient Protection and Affordable Care Act. 14 Legislative Analyst’s Office www.lao.ca.gov Template_CA_County Map.ait ARTWORK#170055 AN LAO REPORT on California consumers’ experience with health average, have experienced the highest proportional plan options and premiums under Covered increases in the number of individuals who receive California in the nearby box. ACA-funded health care coverage. Despite low ACA Impact on Health Care Coverage Varies total numbers, Trinity, Mendocino, and Humboldt by County. While the overall impact of the ACA Counties have the highest percentage of residents on health care coverage has been a marked increase with ACA-funded coverage—each with 17 percent in the number of California residents with publicly or more of their populations. Among the larger supported health care coverage, California counties counties that have experienced particularly have experienced varying impacts under the ACA. significant shifts in coverage under the ACA, As of fall 2016, 4.6 million residents (12 percent) around 13 percent of Fresno, San Bernardino, and statewide had obtained ACA-funded coverage, Los Angeles Counties’ residents are enrolled in which we define as coverage obtained either ACA-funded health care coverage. Figure 7 (see through the ACA optional expansion or through next page) shows the variation by county in the a subsidized plan from Covered California. number of residents with ACA-funded health care The state’s smaller and more rural counties, on coverage. The State’s Experience Under Covered California Nationwide, there are concerns that the number of health insurers participating in Health Benefit Exchanges has been decreasing, reducing consumers’ available health plan options as a result. For example, some states have only one health insurer offering a few plans in their state, and premiums in those and certain other states have increased substantially. Covered California—the state’s Health Benefit Exchange—has been relatively successful at offering several different health plan options to consumers in almost all counties. A total of 11 health insurers are currently participating in Covered California, which is the third highest number of insurers participating in any Health Benefit Exchange. A consumer shopping for health plans through Covered California can typically choose from four different health plan options in any given region of the state. Similar to the experiences of Health Benefit Exchanges nationwide, Covered California is also experiencing health insurance premium increases. The premium tax credits available under the Patient Protection and Affordable Care Act (ACA) have only covered a small portion of the increased costs. For example, between June 2015 and June 2016, average total monthly premiums rose by $17 (from $594 to $611). Meanwhile, the average premium tax credits available to Covered California plan enrollees only increased by $3 (from $437 to $440) during this time period, which, together with the total premium increases, resulted in at least some customers paying higher out-of- pocket premiums. We would note that the amount of the ACA’s premium tax credits is a function of Covered California customers’ incomes and the costs of their health insurance premiums. Since customers are paying a large portion of the increased costs of their premiums, increases in their incomes are likely covering their health insurance premiums’ higher costs. www.lao.ca.gov Legislative Analyst’s Office 15 Graphic Sign Off Secretary Analyst MPA AN LAO REPORT Deputy Figure 7 Number of Residents by County Who Receive Federal Financial Support Under the ACA to Obtain Health Care Coverage Number of Residents With ACA-Funded Coveragea 0 to 10,000 10,000 to 25,000 25,000 to 100,000 100,000 to 500,000 Over 1,000,000b a ACA-funded coverage refers to funding for the Medi-Cal ACA optional expansion population and federal premium subsidies and cost-sharing reductions for Covered California customers. b Pertains to Los Angeles County, with 1.3 million residents with ACA-funded coverage. ACA = Patient Protection and Affordable Care Act. Template_CA_County Map.ait ARTWORK#170055 16 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT About 3 Million Californians Remain is estimated to be enrolled. California’s individual Uninsured Under the ACA. Figure 8 identifies and small group health insurance market, which the remaining 3 million uninsured individuals in includes Covered California, has also expanded. California by their immigration status and income In 2015, around 8 percent of state residents had eligibility for different types of health insurance non-group health care coverage purchased through coverage. In 2017, 1.8 million (58 percent) of the the individual and small group health insurance remaining 3 million uninsured statewide under market, up from around 6 percent of Californians age 65 are projected to be undocumented adults. in 2013. Other forms of health care coverage, Undocumented children under the age of 19 most notably employer-sponsored insurance and became eligible for full-scope Medi-Cal in 2016 Medicare coverage, have not experienced as high under a new state-only program authorized by the of proportional gains in enrollment as Medi-Cal Legislature. The remaining 1.2 million uninsured and the individual and small group insurance state residents generally represent those who have market. Thus, there has been a downward shift Graphic Sign Off not been induced by the ACA’s various reforms, in the proportion of Californians with employer- including the individual mandate and expanded sponsored health insurance and an upward shift Secretary eligibility for publicly funded coverage, to obtain in the proportion of Californians with health Analyst health care coverage. care coverage that is directly supported by federal MPA ACA Shifted What Types of Health Care funding under the ACA. Deputy Coverage Californians Obtain. In addition to reducing the number of uninsured Californians, the Figure 8 ACA has caused a significant California's Remaining Uninsured Populationa shift in the types of health Californians Under Age 65 care coverage that state residents obtain. While Medi-Cal Eligible, the number of uninsured Not Enrolledb individuals in the state has ACA Subsidy declined from 17 percent Eligible, Coverage Not Purchasedc to around 8 percent of the population from 2013 to 2015, during this same period the percent of the population enrolled in Income-Ineligible Medi-Cal has increased for Medi-Cal or ACA Subsidiesc Undocumented from under 20 percent to almost 25 percent. Further significant growth in Medi-Cal enrollment is a August 2016 Projections, UC Berkeley and UCLA California Simulation of Insurance Markets. expected through 2017, at b Data exclude undocumented children who are eligible for Medi-Cal, but not enrolled. which time over one-third of c ACA subsidies are received through the state’s Health Benefit Exchange, Covered California. the state’s total population ACA = Patient Protection and Affordable Care Act. www.lao.ca.gov Legislative Analyst’s Office 17 Template_CA_County Map.ait ARTWORK#170055 AN LAO REPORT State Assumed Greater Role in Paying for approximately 3 million residents statewide. Adults Health Care Coverage Under the ACA whose immigration status makes them ineligible for comprehensive Medi-Cal coverage are likely Prior to the ACA, local governments— among the primary populations that continue to primarily counties—shared the responsibility utilize county indigent health care services. of providing health care services to low-income individuals, including childless adults previously ACA’s Impact on the State ineligible for Medi-Cal. To help counties pay for Economy and Workforce these services the state gave counties a dedicated In addition to the many changes to state health funding stream—referred to as realignment insurance markets, to how the state pays for health revenues—comprising a portion of state sales tax care, and to how Californians access health care, and vehicle license fee revenues. the ACA has had a varied impact on the state’s Some Costs of Providing Indigent Health economy and workforce. Coverage Shifted From Counties to the State. Growth in California’s Health Care Sector. Many formerly uninsured, low-income state The ACA resulted in a greater amount of federal residents obtained health care coverage through and state funding to help Californians obtain the ACA optional expansion, the ACA mandatory health care coverage, likely leading to increases expansion, or through subsidized health insurance in the state’s health care workforce and a relative available through Covered California. This caused increase in the size of the state’s health care sector counties to experience a reduction in the number compared to other areas of the state’s economy. of uninsured Californians who rely on county Between 2010 and 2015, when the health care sector indigent health care programs, reducing counties’ was preparing for and beginning implementation costs of serving the indigent population. At the of major components of the ACA, the number of same time, state health care costs have increased Californians employed in health care-related jobs significantly, reflecting (1) the state’s share of cost increased by approximately 150,000, a faster rate for the ACA optional expansion population and of growth than for employment across all sectors (2) higher Medi-Cal enrollment due to the ACA’s in the state. Similarly, the size of the health care individual mandate and the streamlining of sector grew at a faster rate than the California Medi-Cal eligibility and enrollment processes. economy as a whole during this same time period. As a Result, State Redirected Some County However, it is difficult to determine what changes Indigent Health Care Funding to the State. in California’s economy and workforce are uniquely In anticipation of these reduced county health care attributable to the ACA. expenditures, the state enacted Chapter 24 of 2013 Possible Reduction in Total Worker Hours Due (AB 85, Committee on Budget), which redirects to the ACA. The CBO has estimated that the ACA a portion of the revenues previously dedicated to would have the effect of reducing the total amount county indigent health programs to offset other of hours worked nationwide. These projections annual General Fund costs. of reduced total hours relate, for example, to the Counties Maintain Indigent Health Programs phasing down of federal financial support for for Remaining Uninsured. As required under health care coverage as individuals’ earnings current law, counties continue to administer increase as well as the ACA components that make indigent health care programs to serve a it easier for individuals to obtain health insurance portion of the remaining uninsured, numbering 18 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT through avenues other than employment. Based numbering in the low hundreds of thousands on CBO’s nationwide estimates, we estimate that in California than would exist in 2025 absent by 2025 the ACA, if it remains largely unchanged, the ACA. We would note that this estimate is might result in fewer full-time equivalent jobs uncertain. THE ACA’S UNCERTAIN FUTURE—WHAT CHANGES TO THE ACA COULD MEAN FOR CALIFORNIA New Federal Administration and Congressional the U.S. Constitution to ensure that the laws be Majority Support Changes to ACA faithfully executed. Uncertainty Regarding What Parts of the The new federal presidential administration ACA Could Be Undone Through Executive Action. and congressional majority leaders have stated an The new administration issued an executive order intent to repeal (or at least make major changes authorizing all federal departments and agencies to to) the ACA and have taken procedural steps to waive, delay, grant exemptions from, or delay the begin doing so. However, there remains substantial implementation of ACA requirements that pose a uncertainty as to which, if any, of the components burden on U.S. states or residents. It is uncertain of the ACA will ultimately be repealed or changed at this time, however, which parts of the ACA and what, if any, “repair” or replacement plan might be impacted by the executive order and how will ultimately be enacted. In this section, we much discretion would be afforded by the courts summarize what actions the executive and to the presidential administration to refrain from legislative branches have already taken related enforcing portions of the ACA. to changing the ACA, how procedures to repeal major components of the law differ in process and Use of Budget Reconciliation Process difficulty, and what repeal and/or replacement of to Make Changes to the ACA the major ACA components most at risk for change General Congressional Procedures. According could mean for California. to established legislative practice, a bill that passes Use of President’s Executive Authority both houses of Congress by a simple majority of to Impact ACA Implementation votes (50 percent plus one) in each house and is approved by the President becomes federal law. The Federal Administration Has Some Discretion U.S. Constitution affords each house the power to in the Enforcement of Federal Laws. Among its establish its own procedural rules. Under current many other powers and responsibilities, the federal Senate rules, 60 votes are generally required to end administration has significant discretion when it debate and proceed to a vote on a bill. In effect, comes to enforcing and implementing federal laws. this procedural rule has resulted in 60 votes being For example, the administration may temporarily needed for certain bills to pass the Senate. refrain from enforcing a new law in order to ensure Budget Reconciliation Process Allows that the transition to the new law does not result in Certain Bills to Move Through Senate by Simple undue hardship. Selective enforcement of federal Majority Vote to End Debate. Although Senate law by the administration is generally limited, rules practically require 60 votes, current Senate however, given the executive branch’s duty under www.lao.ca.gov Legislative Analyst’s Office 19 AN LAO REPORT rules also allow for what is called the budget direct impact on the federal budget. Full repeal reconciliation process, which allows the Senate to of the ACA would not be permitted under the bypass the 60-vote rule to end debate and approve budget reconciliation process because (1) provisions legislation that has significant budget implications without a direct impact on the budget could not with a simple majority vote. Restrictions exist for be included in the bill and (2) doing so would what may be included in a budget reconciliation increase the long-term deficit. As of February 2017, bill, restrictions that are collectively known as the congressional Republicans initiated the first steps Byrd Rule. Among other restrictions, the Byrd of the budget reconciliation process, paving the way Rule requires that every provision in a budget for possible changes to the ACA. It is uncertain at reconciliation bill directly affect federal revenue or this time, however, what changes to the ACA could spending and that the overall budget reconciliation ultimately be included in a budget reconciliation bill not increase the federal deficit in the long bill if one is enacted by Congress. term. Finally, the Byrd Rule allows provisions that Nonetheless, the case of last year’s budget do not meet the budget reconciliation process’s reconciliation bill, known as H.R. 3762, is requirements to be removed individually, rather instructive. H.R. 3762, or the Restoring Americans’ than blocking the entire bill. Recent examples Healthcare Freedom Reconciliation Act, would of congressional use of budget reconciliation to have repealed major provisions of the ACA but pass significant legislation include the enactment was vetoed by the former president. Figure 9 of certain final provisions of the ACA and the summarizes several of the major ACA provisions reforms that converted the former federal welfare that were either included in or explicitly excluded entitlement program, Aid to Families with from H.R. 3762, indicating which major ACA Dependent Children (AFDC), into the federal block provisions are likely eligible and ineligible for grant program, Temporary Assistance for Needy repeal through a budget reconciliation bill. Families (TANF). Potential Impact of Changes to Major Use of the Budget Reconciliation Process Components of the ACA on California to Make Changes to the ACA. The budget reconciliation process allows a simple Senate ACA Provisions Most at Risk for Repeal— majority to limit debate and pass legislation that Setting the Stage for What Is “At Stake” . . . repeals those provisions of the ACA that have a Significant uncertainty surrounds the possible Figure 9 Which Major ACA Provisions Could Potentially Be Changed Using Budget Reconciliation Process? Can Be Changed Using Provisions Budget Reconciliation Process? Medicaid optional expansion under the ACA Yes Health insurance premium subsidy tax credits and cost-sharing reductions through the Health Yes Benefit Exchanges ACA taxes, including the individual and employer mandate tax penalties Yes Prohibition against denying health coverage to individuals with preexisting conditions No Ability to remain on parents’ insurance plans through age 26 No Requirements on which benefits must be included in a health insurance plan No ACA = Patient Protection and Affordable Care Act. 20 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT repeal and replacement of, or the making of major • A possible disruption of the commercial changes to, the ACA, including the potential health insurance market, particularly if impact on California of changes to the ACA. insurance market reforms such as the Congressional procedures such as the budget prohibition on preexisting condition reconciliation process, for example, could facilitate exclusions were maintained absent the the repeal of certain major components of the ACA. ACA’s individual and employer mandates. Some of the components potentially subject to • A potentially significant loss in overall repeal—as evidenced by H.R. 3762—include federal state economic activity and employment, funding for the ACA optional expansion, federal especially in the short term, and potentially funding for premium subsidies and cost-sharing long-term losses in employment in the reductions through Health Benefit Exchanges, health care sector. enhanced federal funding for other health care programs and services in Medicaid, and the . . . But Ultimate Impact of ACA Changes to individual and employer mandate tax penalties. California Is Highly Uncertain. Though some Changes to these ACA components—absent of the proposed changes to major components of replacement policies—would have significant the ACA would have significant consequences for consequences for California including, but not California, it remains unclear which (if any) of the limited to: ACA’s provisions will be repealed and at what time the repealed provisions would become inoperative. • The potential loss of as much as $18 billion Congressional Republicans have offered several in annual federal funding for Medi-Cal. replacement proposals that build off of the repeal • The uncertain survival of Covered of some or all of the ACA. Whether any of those California absent premium subsidies and proposals are enacted, and on what timeline, cost-sharing reductions of $5.4 billion is unknown. Given the substantial uncertainty annually. around a possible ACA repeal and/or replacement, any proposed changes to the law will need to • A potentially considerable increase in be evaluated in their entirety to best determine the number of uninsured Californians. how they will affect California. To inform a later The costs of providing health care to this evaluation of any changes to the ACA, we identify population could shift back to the state and common themes from several of the Republican counties. ACA replacement plans and provide preliminary assessments of their potential state impacts. COMMON THEMES OF REPUBLICAN ACA REPLACEMENT PLANS Over the past several years, Republican • Continue Use of the Tax System to Make congressional members have proposed a number Health Coverage Available. Republican of plans to replace (or change) components of the health reform proposals generally continue ACA. Many of the plans have common themes: to use the tax system to try to make www.lao.ca.gov Legislative Analyst’s Office 21 AN LAO REPORT insurance more affordable for consumers. • Reduce Growth in Federal Health Care Under consideration are health care tax Expenditures. It is our initial assessment credits that would continue to cover a that most Republican reform proposals portion of individuals’ health insurance support some amount of reduction in costs, but differ in structure and generosity federal funding for health care coverage, from those available under the ACA. at least in the long term. Proposals such as limits on the excludability of employer- • Aim to Increase Competition and Choice sponsored insurance in employees’ taxable While Reducing Costs. In concept, many income, less generous health care tax of the proposed health care reforms aim to credits, and the conversion of Medicaid increase competition and remove or reduce into a block grant or per capita allotment certain regulations that govern health program all serve the intent of reduced insurance markets and products. The intent federal spending on health care coverage. is that health care policy reforms, such Below, we discuss the changes to federal health as facilitating the interstate sale of health care policy that appear frequently in Republican insurance and removing regulations that health care reform proposals. In some cases, we limit the availability of low-premium, provide a preliminary assessment of how these high-cost-sharing plans, would lead to reforms could affect California state government greater consumer choice and reduced costs. and residents. Figure 10 summarizes some of the Such market-based changes could have primary elements of Republican ACA replacement a significant effect on health insurance plans. We organize these elements into three markets in California. Individuals with categories: changes to tax treatment of health higher levels of risk tolerance could more insurance coverage, changes to rules governing easily obtain low-premium, high-cost- health insurance, and changes to publicly funded sharing health insurance coverage. This health care programs. Finally, we note that while added consumer choice could have we have separated out the various elements of implications for the health insurance a possible health care reform package, all the prices paid by other groups of people with individual reforms discussed below would affect different risk preferences and health care and, in turn, be affected by each of the other needs. individual reforms. As such, understanding the • Promote Flexibility for State Medicaid full potential impacts on California is a challenge Programs. Republican congressional without a complete reform proposal. leaders seek to promote greater flexibility Replace ACA Premium Tax for states to modify their Medicaid Credits and Cost-Sharing programs. By converting Medicaid into Reductions With Alternative a block grant or per capita allotment Health Care Tax Credit Structure structure, states could be afforded additional discretion to, for example, enact Tax Credits for Health Insurance Coverage. work requirements or, alternatively, keep A common feature among Republican health their existing Medicaid rules largely intact. policy reform proposals is the establishment of an We discuss this in greater detail below. alternative health care tax credit for individuals 22 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT who do not receive employer-sponsored health around the design of an alternative health care tax insurance that would replace the premium tax credit. As such, it is difficult to assess the impact of credits and cost-sharing reductions established converting to an alternative health care tax credit by the ACA. These alternative health care tax structure without a specific proposal detailing credits could be used to pay for health insurance such factors as (1) who will be eligible for the tax premiums as well as other out-of-pocket medical credit; (2) how much the tax credit will be; (3) what expenses. Under certain Republican proposals, the tax credit’s allowable uses are; and (4) how the and similar to the ACA’s premium tax credits, the tax credit will vary according to such factors as health care tax credits would be advanceable—so income, age, and family size. taxpayers would receive the benefit of the tax credit Amount of Health Care Tax Credit Could prior to filing their taxes—and refundable—so Be Lower Than ACA Premium Subsidies and individuals could receive the tax credit even if they Cost-Sharing Reductions. Previous Republican had no federally taxable income or their income health care reform proposals generally set was less than the amount of the credit. lower health care tax credit amounts than what Health Care Tax Credits Would Not is available in federal financial support for Necessarily Vary According to Costs of Premiums. commercial health coverage through the ACA. The proposed health care tax credits generally For example, the proposed federal Empowering differ from those in the ACA in one major respect. Patients First Act of 2015, supported by the new As previously discussed, the ACA’s premium tax Secretary of the U.S. Department of Health and credits are designed to equal an amount that the Human Services, set the health care tax credit ensures that an eligible individual’s out-of-pocket at between $900 and $3,000 per year depending health insurance premiums do not exceed certain on the recipient’s age. In contrast, the average percentages of her or his income. This results in the Covered California customer’s premium tax size of the tax credit being adjusted both by income credit in 2016 was around $3,700, which does not and the premium costs of a qualifying health include the additional cost-sharing reductions insurance plan. Under Republicans’ existing Figure 10 tax credit proposals, Summary of Common Elements From the amount of the tax Republican ACA Replacement Plans credit might vary by such Changes to Tax Treatment of Health Care Coverage factors as income and • Replace ACA premium tax credits and cost-sharing reductions with alternative age, but would not vary health care tax credits • Encourage the use of health savings accounts according to the cost of • Limit the tax excludability of employer-sponsored health benefits available health insurance Changes to Rules Governing Health Insurance premiums. • Require continuous health insurance coverage • Remove ACA requirements on Essential Health Benefits LAO Preliminary • Facilitate the use of catastrophic health coverage • Facilitate interstate sale of health insurance plans Assessment Changes to Publicly Funded Health Care Programs There currently is • Convert Medicaid into a block grant or per capita allotment program no consensus among • Reconstitute high-risk pools ACA = Patient Protection and Affordable Care Act. Republican policymakers www.lao.ca.gov Legislative Analyst’s Office 23 AN LAO REPORT available through Covered California. Ultimately, Replacement Proposals Differ in How They the amount of the health care tax credit would Encourage Use of HSAs. To encourage the use of determine how much of an individual’s premiums HSAs, some Republican replacement proposals and out-of-pocket medical costs would be financed offer tax credits to individuals for contributions by the federal government. into an HSA. (The tax credit could either be some Alternative Health Care Tax Credit Could portion of the alternative health care tax credit Restrain Growth in Health Insurance Costs. discussed above or a separate tax credit.) Others By not increasing the amount of the tax credits propose to increase contribution limits and limits in accordance with increases in the costs of on catch-up payments for older individuals or premiums, the alternative health care tax credits spouses. Many expand permissible uses of HSAs— could reduce growth in federal health care for example, to include the payment of insurance expenditures. As a consequence, in the future the premiums. A few suggest that government program alternative health care tax credits could cover a beneficiaries such as Medicare- or Medicaid-eligible relatively smaller portion of individuals’ health individuals pay monthly premiums that would be insurance premiums while also inducing others to deposited into HSAs for the beneficiary’s use. switch to lower premium plans. LAO Preliminary Assessment Encourage the Use of Health Changes in HSA Financing Arrangements and Savings Accounts (HSAs) Rules Could Determine Which Individuals Benefit Individuals Can Use HSAs to Save for Medical and by How Much. How HSAs are structured, Expenses, Insurance Deductibles, and Other and what current HSA rules are changed, would Health Care-Related Costs. Under current federal determine which individuals benefit from HSAs and law, individuals or employers can deposit funds by what amount. If the HSA structure (and funding (pre-tax income of the employee) into and take for it) remain substantially similar to today—a distributions from HSAs for qualifying medical defined purpose, tax-advantaged savings account— expenses without additional tax liability. HSA individuals who have money to save for qualifying contributions and “catch-up” payments—increased health expenses are more able to benefit than those contributions once an individual reaches a certain who do not. Increasing contribution limits and age—are subject to annual limits. Accrued interest allowing catch-up payments could further benefit and earnings in an HSA are also tax-free under those who have money to save in HSAs. current federal law. Current state law differs from Contributions to HSAs could also be federally federal law in that HSA contributions, interest, funded. For example, individuals could receive and earnings (but not distributions) are subject refundable tax credits to purchase health insurance to the state income tax. Federal law requires that coverage. If individuals do not use the entire tax consumers use HSAs in accompaniment with credit to purchase coverage, the remaining tax high-deductible health insurance plans, which credit could be deposited into an HSA. Individuals offer individuals lower monthly premium costs. would then use HSAs to pay deductibles and other Republican replacement proposals suggest HSAs costs. How much individuals benefit from HSAs encourage individuals to compare prices for would then depend on the amount of the tax credit. procedures at different facilities in order to reduce The larger the tax credit, the greater potential their own expenses paid through their HSAs. remaining tax credit in the HSA. (Alternatively, 24 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT individuals could purchase more comprehensive Require Continuous Health coverage with lower deductibles and other costs.) Insurance Coverage How federal changes to HSAs affected individuals ACA Requires Guaranteed Availability and would depend on who qualifies for an HSA and Renewability of Coverage Without Exclusions. All the amount of federal funding deposited into health insurers are required by the ACA to accept accounts. (Given differences in federal and state tax all employers and individuals that apply for health treatment of HSAs, the Legislature might consider insurance coverage; to guarantee renewal of that conforming changes in state law should federal coverage regardless of an enrollee’s health status, changes to HSAs be proposed.) service use, or other related factors; and to provide Limit the Tax Excludability coverage irrespective of an enrollee’s preexisting of Employer-Sponsored health conditions. (Grandfathered plans are exempt Health Benefits from the preexisting condition exclusion ban.) Consumers who switch from one source of coverage Limits on the Tax Exclusion of Employer- to another are not precluded from obtaining Sponsored Health Benefits Designed to Replace coverage or from any of the consumer protections ACA’s Cadillac Tax. Current federal law excludes under the ACA. employer-sponsored health insurance contributions Some Replacement Proposals Require from workers’ taxable income. Multiple Republican Continuous Health Insurance Coverage to health care reform proposals have included caps on Avoid Certain Underwriting Practices. Several the dollar amount of these employer contributions Republican replacement proposals permit the use of that can be excluded, though there currently is no preexisting condition exclusions and other medical consensus on the dollar amount of the cap. underwriting practices should an individual fail to Limits on the excludability of employer- maintain continuous health insurance coverage. If sponsored coverage would serve the same purpose an individual changes employment and experiences as the ACA’s Cadillac tax, which, once implemented a lapse in coverage, for example, health insurers under current law, would place a 40 percent excise could then evaluate the individual’s health history tax on employer-sponsored health insurance plans and potentially charge higher premiums. For that cost over $10,200 for individuals and $27,500 those who could not afford the higher premiums, for families. Both limited excludability and the some replacement plans propose increased federal Cadillac tax would remove the incentive to increase, funding for state high-risk pools to provide past a certain threshold, the portion of workers’ coverage to individuals with preexisting conditions. total compensation that is paid in the form of As an alternative to strict continuous coverage employer-sponsored health insurance contributions requirements, one replacement proposal provides an as opposed to wages or other benefits. The open enrollment period in which individuals could primary distinction between the two approaches obtain coverage regardless of their health status. would be that under the tax exclusion, the tax on Individuals would then be required to maintain health insurance contributions that exceed the continuous coverage outside of the open enrollment statutory limit would depend on the income of period to avoid medical underwriting. the individual, whereas the Cadillac tax applies Continuous Health Insurance Coverage Rules a standard 40 percent tax on the total cost of the Could Encourage Individuals to Stay Insured. health insurance benefit over the statutory limit. www.lao.ca.gov Legislative Analyst’s Office 25 AN LAO REPORT Individuals with preexisting conditions who might Premiums. Many Republican replacement plans have otherwise decided not to maintain coverage propose to eliminate EHB requirements and to may do so to avoid preexisting condition exclusions. provide health insurers with discretion to develop For this reason, several replacement proposals health insurance plans with the same or fewer see continuous health insurance coverage as one categories of benefits. Proponents of eliminating alternative to the ACA’s individual mandate. EHB requirements argue plans with fewer benefits would reduce monthly premiums for individuals LAO Preliminary Assessment who do not need one or more EHB. Continuous Coverage Requirements Could LAO Preliminary Assessment Lead to Higher Premiums for Affected Individuals. Individuals with preexisting medical conditions who Fewer EHB Would Create More Variation in do not maintain coverage—for example, because of Insurance Products. Eliminating EHB requirements a loss of employment and a delay in enrollment— and allowing health insurers to develop insurance could face higher premiums. If they cannot afford products with different categories of benefits the higher premiums, individuals could purchase would lead to greater variation in both the number other coverage with fewer benefits, apply for coverage of and the comprehensiveness of insurance through a state’s high-risk pool (if available), or go products. Consumers might have more difficulty uninsured. If individuals seek coverage through a understanding what benefits are included in the state’s high-risk pool, public funding for high-risk insurance products that are offered, reflecting the pools would likely be required to reduce premiums lack of standardization requirements for insurance and avoid some individuals being place on waiting products. However, there could be opportunities for lists. How continuous coverage requirements are additional monthly savings from lower premium applied could affect the insurance markets in costs. One important consideration is how employers different ways. For example, insurance regulations and individuals select from available insurance could include a grace period for short lapses in products. A 2016 analysis of how consumers coverage, which could preclude insurers from selected different health plans offered through considering preexisting conditions before offering Covered California showed that individuals coverage. responded to small increases in plan purchase prices and premiums by shifting to lower-cost plans. Remove ACA Consumers were often unfamiliar with annual Requirements on EHB deductibles, available benefits, or cost-sharing Current EHB Requirements Attempt to arrangements in different insurance products, and Standardize Insurance Products. The ACA requires made decisions often based primarily on premiums. small group and individual health insurance plans While most of the individuals who enroll in coverage (including those offering coverage on the Health through Covered California are low-income, Benefit Exchanges) to cover ten categories of EHB. individuals in the commercial insurance market This requirement helps standardize benefits across have also been shown to choose insurance products plans. primarily based on price. Removing EHB from Replacement Proposals Eliminate EHB insurance products could lead individuals to choose Requirements With Intent to Offer Health lower-cost coverage without understanding that their Insurance Products With Lower Monthly old and new plans offer different benefit packages. 26 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Facilitate the Use of increase for other individuals. This increased cost Catastrophic Health would reflect the difference in available health care Insurance Coverage services and the higher utilization of these services between the healthier and younger individuals and ACA Limits Availability of Catastrophic those who require more comprehensive coverage. Coverage. Catastrophic health insurance plans pay less of an individual’s routine health care costs, Facilitate Interstate Sale of but protect against the costs of serious health Health Insurance Plans events. As a result, such plans reduce monthly Current Health Care Choice Compacts premiums and increase deductibles and out-of- Allow Interstate Sale of Health Insurance Plans pocket costs. (The availability of HSAs is often Under the ACA. Health insurance plans can linked with catastrophic plans as a mechanism to sell their insurance products to individuals and help with these higher costs.) The ACA currently small businesses in more than one state through allows catastrophic coverage in a limited set of “health care choice compacts” authorized by the circumstances—individuals must be under age 30 ACA. Health care choice compacts are interstate and qualify for a hardship exemption. Catastrophic agreements through which health insurers can offer coverage under the ACA, however, is required to policies in all participating states. As of January provide the same EHB but sets a higher annual 2017, five states—Georgia, Kentucky, Maine, deductible. Rhode Island, and Wyoming—had enacted laws Replacement Proposals Eliminate Restrictions permitting health insurance plans approved for on Catastrophic Coverage. Republican replacement issuance in other states to be sold in their state. proposals generally allow health insurers to provide Some states such as Kentucky and Maine identify catastrophic coverage to individuals without age, which states can sell plans in their state. Other benefit, or exemption restrictions. The intent of states such as Georgia and Wyoming allow plans catastrophic coverage is to offer individuals with approved for issuance in any state to be sold in their higher levels of risk tolerance another health state. None of the five states, however, entered into insurance option with lower monthly premiums. a health care choice compact. (Some replacement proposals also propose to Plans Sold Through ACA Health Care Choice automatically enroll all individuals without health Compacts Must Comply With Federal and State insurance in a catastrophic coverage plan as a Regulations on Health Insurance Coverage. means of providing basic universal coverage.) One reason why states with laws permitting LAO Preliminary Assessment health insurance plans approved for issuance in other states to be sold in their state may not have Availability of Catastrophic Coverage entered into health care choice compacts is that Would Lead to Higher Costs for Comprehensive the ACA requires health insurers who sell through Coverage. Healthier and younger individuals these compacts to comply with federal and state could purchase catastrophic coverage—instead of regulations on health insurance coverage and be more comprehensive coverage currently offered licensed to sell in each state. In addition, all ACA under the ACA—at a lower monthly cost. If fewer coverage reforms—EHB, prohibitions on preexisting healthy, young individuals purchase comprehensive condition exclusions, and guaranteed availability coverage, the cost of comprehensive coverage would and renewability of coverage—still apply. www.lao.ca.gov Legislative Analyst’s Office 27 AN LAO REPORT Republican Replacement Proposals Facilitate Convert Medicaid Into a the Interstate Sale of Health Insurance Plans. Block Grant or Per Capita Many Republican replacement proposals are Allotment Program designed to facilitate the interstate sale of health Congressional Republican leaders have stated insurance plans. In addition to eliminating an intent to revisit the federal rules around how federal EHB requirements and other insurance Medicaid is funded and operated. In particular, market reforms, some of the proposals also reduce congressional leaders have proposed converting state regulation of health insurance coverage Medicaid into a block grant or per capita allotment and products. Unlike under health care choice program. As we noted earlier, the former federal compacts, states would not be required to enter welfare entitlement program AFDC, was converted into interstate agreements to sell plans and instead into the federal block grant program, TANF, could operate under the regulatory framework of through the budget reconciliation process. Because the state where they are headquartered. Health of programmatic differences between Medicaid and insurers headquartered in states with fewer AFDC/TANF, it is unclear whether the Medicaid regulations on—for example, benefits and provider program also could be converted into a block grant networks—could sell health insurance products or per capita allotment program through the budget in other states with stricter regulations. The intent reconciliation process. of these proposals is to increase competition and lower monthly premium costs for consumers. Potential Changes to Medi-Cal Funding and Administration LAO Preliminary Assessment Currently, the Federal Government Pays a Increased Facilitation of Interstate Sale Share of Medi-Cal Costs. As previously discussed, of Health Insurance Plans Could Increase the costs of administering Medi-Cal, including Competition, but Limit State Control. Allowing the provision of medical services, are shared by states to sell health insurance plans across state the federal government and the state according to lines based on the regulations of the state where the state’s FMAP, which in California is 50 percent they are headquartered would have a number (though the federal government pays a higher of potential ramifications. While potentially percentage of the ACA optional expansion’s increasing competition among health insurers, Medi-Cal costs). there are potential trade-offs. One such potential Federal Financing of Medi-Cal Would Change trade-off is state control over health insurers and Significantly Under a Block Grant or Per Capita the plans they offer—including benefits, consumer Allotment Structure. If Medicaid were converted protections, and financing arrangements—would into a block grant or per capita allotment program, be much more limited. Moreover, like with EHB the federal government would no longer pay a and catastrophic coverage, another trade-off could set share of the costs incurred by the Medi-Cal be greater variation in insurance products and program. Under a block grant program, the state higher costs for comprehensive coverage. would receive a total allotment of federal funds. By comparison, under a per capita allotment program, the state would receive an allotment of federal funds per Medi-Cal enrollee. (Potentially, the amount 28 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT of the federal allotment for an enrollee could vary Uncertain How Federal Medi-Cal Allotment depending, for example, on whether the enrollee Would Be Determined. There is a high degree is an elderly or disabled person or a low-income of uncertainty as to how California’s annual childless adult.) Under either a block grant or per Medi-Cal allocation would be determined if capita allotment program, a base year of federal Medicaid is converted into a block grant or per funding would likely be established, after which a capita allotment program. Current proposals have growth factor could be applied in subsequent years suggested that under such changes, a base year of to account for increases in health care costs. federal funding would be established, after which Increased Flexibility for States. Current a growth factor would be applied to account for Medicaid rules require states to seek approval on ongoing increases in the costs of services. Even a case-by-case basis from the federal Medicaid under such a methodology, however, there is authority if they wish to make certain significant considerable uncertainty around the amount of changes to their state Medicaid programs. Under a federal funding that would be incorporated into block grant or per capita allotment structure, states the block grant or per capita allotment federal would potentially be afforded additional flexibility funding base. In particular, the amount of ongoing to modify their state Medicaid programs in federal Medi-Cal funding could vary significantly accordance with state prerogatives without the need depending on whether, for example, (1) all or a for federal approval. This greater programmatic portion of federal funding for the ACA optional flexibility might allow states, for example, to modify expansion would be built into the base and (2) the their own rules on who is eligible for coverage, to enhanced federal funding that California receives require more cost-sharing on the part of enrollees, through its health care provider taxes and fees and to change what benefits are covered. would be built into the base. We would note that if Medi-Cal were converted into a block grant or per LAO Preliminary Assessment capita allotment program, and once the base was Greater Flexibility in the Design of Medi-Cal. set, health care taxes and fees might no longer be a Converting Medi-Cal into a block grant or per means of leveraging additional federal funds for the capita allotment program would likely afford Medi-Cal program. This is because federal funding the Legislature greater discretion in the overall might no longer depend on incurred Medi-Cal design of the Medi-Cal program. This could, costs, which the health care taxes and fees have the for example, allow the state to make significant effect of raising. changes to eligibility, benefit design, and delivery Block Grant and Per Capita Allotment systems without the need to seek federal approval Programs Bring Different Levels of Risk Related for waiving certain Medicaid rules. This greater to Caseload. A block grant program would provide flexibility could be utilized by the state Legislature a fixed amount of federal funds each year to to make programmatic changes to Medi-Cal in case California, potentially with a set adjustment for the conversion of Medicaid to a block grant or per year-over-year growth. However, the state would capita allotment program results in significantly primarily bear the financial risk of Medi-Cal reduced federal funding. At this time, however, it is caseload increases or declines. Under a block highly uncertain what kinds of additional flexibility grant, the state would bear the additional costs of would be granted to states under a block grant or increases in caseloads, while the state would benefit per capita allotment program. from federal Medi-Cal funding not declining even www.lao.ca.gov Legislative Analyst’s Office 29 AN LAO REPORT if Medi-Cal caseloads were to decline. To the extent structure could require California to either make that Medi-Cal caseloads increase in the future, cuts to the program or pay an increasingly larger however, it is possible that ongoing increases in share of total Medi-Cal costs in the future. It the amount of federal funding under a block grant should be noted, however, that it is uncertain would not cover all the costs of ongoing caseload what growth factor might be chosen, and that the growth. A per capita allotment structure would amount of federal Medi-Cal funding that the state mitigate some of the risks to the state associated would receive in future years under a block grant or with the block grant structure since federal per capita allotment program would closely depend Medi-Cal funding would vary based on the number on how high the chosen growth factor is. of Medi-Cal enrollees. Reconstitute High-Risk Pools Conversion to a Block Grant or Per Capita Allotment Program Could Result in Reduced Federal Funding for High-Risk Pools to Help Federal Funding for Medi-Cal Over Time. Individuals With Costly Preexisting Medical According to congressional Republican leaders, Conditions Obtain Health Coverage. Another one rationale for converting Medicaid into a block potential policy change with support from members grant or per capita allotment program would of the new Republican congressional majority be to reduce federal expenditures, at least in the is the reconstitution of high-risk pools. States, long run. For California, this would likely mean including California, have historically utilized and less growth in federal funding for the Medi-Cal funded high-risk pools to provide health coverage program over time. While block grant or per primarily to individuals whose preexisting medical capita allotment programs do not always include conditions prevent them from obtaining non-group growth factors that increase year-to-year total commercial health insurance. The implementation federal allocations, consideration is being given to of the ACA resulted in lower utilization of high-risk using a growth factor such as the rate of inflation pools because insurers could no longer deny to increase year-over-year federal Medicaid coverage to individuals with preexisting medical spending if the program is converted. Under conditions or charge individuals with preexisting current Medicaid rules, the federal government medical conditions higher costs. Were some of projects total Medicaid spending to grow at a the ACA’s insurance market reforms repealed, rate of approximately 6 percent annually, while high-risk pools could again help certain, costly inflation is expected to be less than 3 percent per to insure individuals obtain health care coverage. year in the near term. Holding the rate of increased Congressional leaders have proposed providing federal Medicaid expenditures to the inflation rate fixed amounts of federal funding for states to under either a block grant or per capita allotment expand the use of high-risk pools. 30 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT LEGISLATIVE CONSIDERATIONS GIVEN THE ACA’S UNCERTAIN FUTURE Considerable Uncertainty Around Whether including the ACA optional expansion, were to and What Portions of the ACA Might Be become inoperative. Repealed . . . The President and congressional . . . And What Policies Might Replace Those Republicans have yet to reach consensus on Found in the ACA. In addition to the lack of (1) whether some or all of the ACA should be consensus among the presidential administration repealed without the concurrent enactment of and the congressional majority around ACA repeal, replacement legislation, (2) which ACA components a common set of ACA replacement policies have yet should be repealed, and (3) when repealed to be agreed upon. Therefore, it is highly uncertain and components of the ACA should become what other changes might be made to the health inoperative. As such, there remains considerable care landscape in California. Below, we provide a uncertainty around the ACA’s future, particularly couple of high-level recommendations for how the for those ACA components that affect the federal Legislature might approach the uncertainty around budget and can therefore be changed through the the future of the ACA. budget reconciliation process with only the support Maintain Fiscal Prudence in Preparation of the majority party in Congress. The ACA for Changes at the Federal Level. As previously components that are eligible to be altered through discussed, the repeal of certain, potentially the budget reconciliation process include several vulnerable components of the ACA could—on their that have had significant fiscal- and coverage- own—significantly reduce the amount of federal related impacts in California, including: funding for Medi-Cal and disrupt individuals’ and small businesses’ ability to obtain health coverage • Over $18 billion in federal funding for through Covered California. These changes Medi-Cal, primarily related to the ACA would not only affect the state’s and individuals’ optional expansion. budgetary situations, but could result in an • Over $5 billion in federal funding for increase in the number of uninsured Californians. health insurance premium tax credits and Accordingly, maintaining fiscal prudence in the cost-sharing reductions available through face of uncertainty around the future of the ACA Covered California. would put the state in a better position to take on any future challenges associated with another • Several billion dollars in additional federal round of major federal health care reform. taxes that California residents pay under ACA Changes Could Require a Reevaluation the ACA. of the State-Local Health Care Financing Moreover, it is uncertain when the repealed Relationship. As previously discussed, with the provisions of the ACA would become inoperative. adoption of the ACA, California shifted a portion The previous ACA reconciliation legislation that of the costs of providing health care to low-income, passed both houses of Congress, before being uninsured residents from the counties to the state, vetoed by the former president, included a two-year and redirected a portion of county health care delay for when some of the repealed provisions, funding to pay for other state priorities. Changes www.lao.ca.gov Legislative Analyst’s Office 31 2017-18 BUDGET to the ACA might require a reevaluation of the return to the former state-county health care state-county relationship when it comes to health financing arrangement. The Legislature might care financing, in particular if federal funding choose to preserve the state’s expanded role in for the ACA optional expansion were eliminated providing health coverage to the state’s low-income or reduced. It should be noted, however, that population, which would require new state revenue such changes would not necessarily compel a sources or offsetting state spending cuts in the event of reduced federal funding for Medi-Cal. LAO Publications This report was prepared by Ben Johnson and Brian Metzker, and reviewed by Mark Newton. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 32 Legislative Analyst’s Office www.lao.ca.gov