Everything You Need to Know About the Republican Bill to Replace Obamacare

By Sean Williams Markets Fool.com

After his first full day in the Oval Office, President Trump made it abundantly clear that the Affordable Care Act (ACA) was living on borrowed time.

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The ACA, which is more commonly known as Obamacare, was the hallmark legislation signed into law by Barack Obama in 2010. In many ways, it revolutionized how tens of millions of Americans currently shop for health insurance and receive medical care. One of its primary successes has been in lowering the uninsured rate from 16% in 2010 to just 8.9%, according to the Centers for Disease Control and Prevention, as of June 2016.

Image source: Obama White House, Flickr.

Obamacare's numerous shortcomings

However, Obamacare failed in some of its other endeavors. For example, it failed to keep premium inflation under control to the satisfaction of the public. Benchmark premiums (the average second-lowest-cost silver plan) for the 39 states covered by the federally run HealthCare.gov rose by a whopping 25% in 2017.

Obamacare also proved mostly unsustainable for health-benefit providers. After years of losses, UnitedHealth Group (NYSE: UNH), the nation's largest insurer, cut its coverage from 34 states in 2016 to just three this year. Aetna (NYSE: AET) and Humana (NYSE: HUM) followed suit by slicing their county-based coverage by nearly 70% and almost 90%, respectively. Humana has also commented that it would bow out of the individual ACA marketplace exchanges entirely by 2018.

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Most importantly, the individual mandate and accompanying Shared Responsibility Payment (SRP) were loathed by many. The individual mandate is the actionable component of Obamacare that requires consumers to purchase health insurance or face a penalty come tax time (the SRP). In 2016, the SRP was the greater of $695, or 2.5% of your modified adjusted gross income. Consumers never adjusted to being penalized for not buying health insurance.

With Republicans having a clear majority in the legislative branch of government, it's just a matter of time before big healthcare changes are in store.

Image source: Getty Images.

Two big questions Republicans need to answer

However, Republicans need to clear two hurdles before they even consider altering Obamacare in any meaningful way.First, they need to decide what sort of changes will be made. Will they be repairing the existing law or completely repealing Obamacare as we know it?

Repealing the ACA would require 60 votes in the Senate, which would mean having some Democrats support Republican legislation. That's a tall order when talking about Congress in this day and age.

One possible outcome involves reconciliation, which would allow Republicans to repeal and replace the components of Obamacare that impact the federal budget with a simple majority vote. While certainly the easier path, it would make implementing a new healthcare plan a bit trickier.

That leads to the second point: Republicans need a replacement plan! It's sort of meaningless to talk about rolling back the ACA if there isn't a firm replacement bill in Congress to be discussed.

Everything you need to know about the Republican draft to replace Obamacare

However, Politico got its hands on a draft copy of the Republicans' Obamacare replacement plan last week. While this is merely the first step in the refining process, it provides a glimpse of the key points Republicans are trying to hit with their Obamacare replacement plan.

Here are the key provisions you need to know.

Image source: Getty Images.

1. Obamacare's key subsidies would be no more

Call it the "given" of all provisions, but the Republican draft presented by House Republicans would essentially repeal everything we currently know about Obamacare, including its critical subsidies that allow lower-income folks the ability to afford coverage.

As the draft reads now, there would be no Advanced Premium Tax Credit (APTC), which is what lowers premium payments for those making between 100% and 400% of the federal poverty level. There would also be no cost-sharing reductions, which are responsible for lowering copays, deductibles, and coinsurance during outpatient visits for individuals and families making between 100% and 250% of the federal poverty level (and who also bought a silver plan).

A number of smaller provisions, including the medical device excise tax and Cadillac tax, would also be eliminated.

2. The individual mandate and SRP would go away... sort of

The individual mandate and SRP, which were designed to coerce consumers to purchase health insurance, would be officially repealed.

However, the Republican draft also contains a "penalty' for consumers who fail to maintain continuous coverage. According to the early-stage draft, insurers would be allowed to tack an additional 30% onto monthly premium prices for individuals who failed to maintain continuous insurance coverage. This 30% premium penalty would continue for a full year until the continuous coverage provision is met.

Image source: Getty Images.

3. Subsidies would now be based on age, not income

Arguably, one of the biggest changes is that premium subsidies would no longer be based on income. Instead, they'd be based on the age of consumers.

Under Obamacare, individuals and families earning up to 400% of the federal poverty level -- $47,520 for an individual and $97,200 for a family of four -- were eligible to receive some sort of premium subsidy (the APTC). However, one of the bigger complaints on affordability came from middle-class individuals and families that made just beyond these thresholds, and thusly didn't qualify for a subsidy.

The Republican draft would set up a staggered series of annual credits:

  • $2,000 for people in their 20s.
  • $2,500 for people in their 30s.
  • $3,000 for people in their 40s.
  • $3,500 for people in their 50s.
  • $4,000 for people in their 60s.

4. Insurers could charge older adults more

Although older adults would be netting higher tax credits with the Republican proposal, they would also be getting charged a lot more than younger adults.

Currently, the ACA caps the amount that insurers can charge older adults at three times that of younger adults. Under the Republican proposal, this ratio would be allowed to expand to 5-to-1. Since older adults tend to be substantially costlier to treat and insure than younger adults, this move appears to be a concession by Republicans to the insurance industry, which found Obamacare's restrictions and regulations unsustainable.

Image source: Getty Images.

5. Medicaid spending would be cut (along with Medicaid expansion)

Another major healthcare overhaul involves the elimination of enhanced federal reimbursements for Medicaid expansion beginning in 2020, along with capped Medicaid spending.

For those who may not recall, Medicaid expansion was a program that allowed all 50 states the opportunity to take federal funds and expand their Medicaid programs to cover individuals and families earning up to 138% of the federal poverty level. In all, 31 states chose to expand their programs, leading to an estimated 15 million additional people gaining coverage. The Republican bill would reduce extra reimbursements to these states and require that any additional funding -- should a state want to keep its Medicaid expansion criteria in place -- be raised by the state itself.

Additionally, Medicaid spending would be capped based on each state's population. Reducing Medicaid expenditures is one crucial way Republicans hope to reduce the federal government's share of healthcare costs.

6. State innovation grants would cover higher-risk patients

One of the bigger question marks when moving from Obamacare to "Trumpcare" is what will happen to consumers with pre-existing conditions. Prior to the implementation of the ACA, insurers could deny coverage to consumers because of a costly pre-existing condition like cancer or heart disease. After Obamacare became the law of the land, insurers were required to accept all consumers, regardless of their health.

Based on the House Republicans' bill, an aggregate of $100 billion would be apportioned to states between 2018 and 2026 that would be used to subsidize extremely expensive enrollees with pre-existing conditions. These "state innovation grants," as they'd be known, would essentially act as state-level risk pools that would allow people with pre-existing conditions to find coverage without necessarily crushing insurers.

Image source: Getty Images.

7. Essential benefits determined by the states

Another intriguing difference is that the Republican draft would allow every state to set up its own essential minimum benefits.

Under Obamacare, 10 minimum essential benefits were established that each ACA-compliant plan needed to contain -- e.g., maternity coverage -- in order to be listed on a marketplace exchange. The Republicans' plan would leave these essential benefits up to the states, which should have the effect of lowering premium costs since fewer benefits would likely be considered "essential."

8. Limited tax breaks for employer-sponsored coverage

Finally, even though the Cadillac tax would be eliminated -- the Cadillac tax applied a 40% excise tax to employer-sponsored high-deductible health plans beginning in 2020 -- the Republican bill would replace it with a similar revenue-generating tool.According to the Republican draft, employer-sponsored coverage in the 90th-percentile and under in cost would be tax exempt, meaning the 10% of employer-sponsored plans that cost the most would be required to pay a tax on premiums.

Plenty left to be discussed

Obviously, there's a lot left to be discussed and hashed out by Republicans. There's clear concern that Medicaid cuts could reduce the number of people insured by the program. On the other hand, giving states more control over setting their essential benefits should help lower premium costs for more Americans.

Perhaps the biggest question mark is whether some of the Republican proposals are even achievable given the struggle to reach 60 Senate votes. If budget reconciliation is the only option available, then altering the essential minimum benefits and adjusting the portfolio of what insurers can charge older versus younger adults may not even be legal.

Republicans have suggested that a more concrete plan will be released in the upcoming week, so you can bet we'll be ready to dissect the pros and cons of what lies ahead for healthcare in America.

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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.