Everything You Need to Know About Rand Paul's Bill to Replace Obamacare

By Sean Williams Markets Fool.com

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The clock is ticking, and it's more or less a matter of time until the Affordable Care Act is no more. While the hallmark health legislation passed by now-former President Barack Obama did manage to enroll in excess of 20 million people through either the marketplace exchanges or via Medicaid expansion, Obamacare, as the ACA is more commonly known, failed on numerous fronts.

What went wrong with Obamacare?

For example, Obama had touted following the passage of his trademark health bill that consumers would be able to keep their health plans and their doctors. This turned out not to be the case for millions of Americans who were forced to seek new coverage and potentially a new primary care physician. It was up to the insurers to decide if they wanted to bring their preexisting health plans into compliance with the beefed-up minimum essential benefit requirements put in place by Obamacare. Some insurers simply chose not to, and thus millions of consumers were displaced from their longtime health plans.

Obamacare also failed to attract enough healthy adults to enroll, which was critical for the sustainability of the law for insurance companies. When Obamacare coverage went into effect on Jan. 1, 2014, it required health-benefit providers to accept all consumers even those with preexisting conditions. This left insurers with a large influx of sicker patients and in desperate need of healthier enrollees to balance out their higher costs. Unfortunately, there were never enough healthy enrollees. The Shared Responsibility Payment (the official name for the penalty you'd pay if you didn't purchase health insurance) never came close to replicating the cost of health insurance for a year, so some healthy adults simply chose to pay the penalty and save money instead of purchasing health insurance.

Finally, Obamacare never quite controlled healthcare premiums as much as the public would have liked. This was never more apparent than this year, in which the average benchmark premiums (the second-lowest cost silver plan) for the more than three dozen states covered by federally run HealthCare.gov rose by 25%. Weaker-than-expected enrollment figures and subpar young adult enrollment pushed three national insurers --UnitedHealth Group, Humana, and Aetna-- to significantly reduce their coverage for 2017.

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Everything you need to know about the Obamacare Replacement Act

Since President Donald Trump took the oath of office on Friday, Jan. 20, it's been a waiting game on the part of the consumer for Republican lawmakers to introduce a plan to replace Obamacare. Trump has cautioned his fellow Republicans against repealing the law without having a replacement plan at the ready. Yesterday, Americans got their first glimpse at what a Republican replacement plan could look like.

Former presidential candidate Sen. Rand Paul (R-Ky.) introduced the aptly named Obamacare Replacement Act on Wednesday. It's unclear at this point if it'll draw enough Republican support to be anointed as the next health law of the land, but Paul's plan offers critical insight into what a Republican replacement plan is likely to entail. Let's take a look at the key components of Paul's Obamacare Replacement Act.

1. It would repeal key Obamacare provisions

To begin with, Paul's proposal would do away with a number of requirements under Obamacare. These include the individual and employer mandates that threaten a tax penalty if not followed, the medical loss ratio that requires insurers to spend at least 80% of their premiums on medical care, the subsidies apportioned to lower- and middle-income Americans, and the aforementioned beefed-up minimum essential benefits. Paul's plan makes no mention of allowing children under the age of 26 to stay on their parents' plan, so that measure would presumably expire, too.

2. People with preexisting conditions would be protected

One of the primary concerns of repealing Obamacare is that it'll leave consumers with preexisting conditions once again out in the cold. Paul's health reform law would partially assuage these fears by providing a two-year window where those with preexisting conditions could obtain insurance. It would also reinstitute HIPAA preexisting conditions provisions, essentially guaranteeing that consumers with preexisting conditions would be able to get health insurance in a group market setting.

3. Equalizes the tax treatment of health insurance for individuals and employers

One point among Trump's seven-point healthcare reform proposal announced during the campaign was to allow individuals the ability to write off their healthcare premiums just like corporations. Rand Paul's health reform bill would do the exact same by "providing a universal deduction on both income and payroll taxes regardless of how an individual obtains their health insurance." This provision also doesn't infringe upon the tens of millions of Americans who prefer to purchase their health insurance through an employer.

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4. Strongly emphasizes the use of Health Savings Accounts

Another Trump proposal component that worked its way into Paul's proposal is the emphasized use of Health Savings Accounts, or HSAs. Trump had suggested they would be leaned upon when his health reform plan was released in March 2016. However, there were no substance on whether specific regulations guiding HSAs would be changed. Paul's proposal lays out some very specific (and major) HSA changes.

For starters, Paul's bill would provide a tax credit of up to $5,000 for contributions to an HSA. More importantly, the maximum contribution amount would be removed, allowing consumers to contribute as much as they'd like and if they do eclipse the $5,000 mark, their contributions will still be considered tax-preferred.

Another major implication is that consumers would no longer need to be enrolled in a high-deductible health plan to qualify to contribute to an HSA. It would also mean enrollees in Medicare, TRICARE, and VA benefits could enroll in an HSA.

Paul's bill would also expand the acceptable uses of HSA funds to cover the cost of monthly insurance premiums (which currently isn't allowed), select physical fitness and exercise equipment, and the costs of prescription and over-the-counter drugs. It would also protect HSA funds in bankruptcy. Some states already exempt HSAs during bankruptcy filings, but this bill would make it a federal law.

5. Offers physicians a tax incentive for charity care and bad debt

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Commonly forgotten in the health reform process are the physicians who are often obliged to eat a sizable portion of their service fees annually because of uninsured individuals or persons who can't afford the entirety of their medical care bill. Under Paul's proposal, physicians would be allowed to write off up to 10% of their gross income in a given year to cover instances of charity care and/or bad debt deductions. This would presumably ease the sting if the uninsured rate were to rise.

6. Gives more power to individual groups of people to pool together

One of the more intriguing aspects of Paul's proposal is it would allow individual people to pool together for the purposes of buying health insurance. These Independent Health Pools (IHPs), as they'd be known, would presumably give individuals pooled together more power with which to negotiate premium rates and deductibles. Examples of IHPs include non-profit organizations such as churches, alumni associations, and other civic associations, with the one exception being that organizations don't condition their membership on a specific ailment.

7. Allows insurers to cross state lines to sell insurance policies

Another popular idea culled from Trump's seven-point healthcare reform plan is the notion of allowing insurers to offer plans across state lines. The assumption behind selling policies across state lines is that it would increase consumer choice, and therefore competition, thus providing a drag on premium inflation.

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Right now, insurers need to comply with a laundry list of insurance regulations, most of which differ from state to state. Under the Obamacare Replacement Act, insurers licensed in one state would be allowed to sell policies in a secondary state, and the insurers would be exempted from state laws in the secondary state that would prevent policies from being offered. Secondary states would still have the power to impose certain consumer protections and applicable taxes, and states would be encouraged to "cooperatively govern" individual health insurance coverage.

8. Allows AHPs the ability to pool together across state lines

Similar to IHPs, Association Health Plans (AHPs) would allow small businesses of the same trade or profession to pool together across state lines in order to increase their bargaining power with health-benefit providers. To be clear, AHPs already exist, but the standards for qualifying as a single large-group health plan under the Employee Retirement Income Security Act of 1974 are difficult to meet. Paul's bill would amend ERISA to allow AHPs to being treated as if they were "large group single employer health plans."

9. State flexibility to conduct Medicaid waivers

Finally, Trump's seven-point proposal had suggested block-granting Medicaid to the states. The idea behind block-granting Medicaid (which very well could be the only aspect of an Obamacare replacement plan that Democrats might support) is that it gives all power to the states in disbursing Medicaid funds, once received. States have a much better understanding of where Medicaid funding should be directed than the federal government, so block-granting Medicaid could eliminate federal waste and make Medicaid dollars go further.

While not exactly the same, Paul's bill would allow states to make changes to their Medicaid plans and test new coverage rules without the interference of the federal government.

Image source: Getty Images.

Would it work?

Though "would it work?" may not be the right question, because we don't even know if the Obamacare Replacement Act will win over congressional Republicans, there are certainly a blend of positive and negative attributes to Paul's proposal.

As was touched on above, providing states Medicaid waiver flexibility sounds like a great idea. Similarly, expanding the ability of IHPs and AHPs to use their size to negotiate more attractive premiums and deductibles with insurers could work well.

However, not all provisions within the Obamacare Replacement Act are necessarily winners. Business Insider accurately points out that five states (Georgia, Kentucky, Maine, Rhode Island, and Wyoming) had a built-in Obamacare provision that allowed insurers to sell plans across state lines. The findings of this ACA experiment showed that attempting to negotiate with community healthcare providers was at best difficult and time-consuming. What's more, out-of-state insurers had no bargaining power since they had no market share in a given state, which actually had a net effect of increasing, not decreasing, premiums.

The other big problem is there still isn't a definitive pathway to affordable health coverage for low- and middle-income individuals and families, at least based on this initial look at Paul's bill. Leveling the tax deductions between individuals and employers and creating a tax credit associated with HSAs are nice treats for those consumers who can afford their own health insurance, but they might not be a replacement for the millions of Americans who needed monthly premium subsidies to afford health coverage.

My guess is Paul's bill will be tweaked many times over in the weeks and months to come. But at least for the time being, consumers have a replacement plan they can dissect.

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Sean Williams has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.