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April 28, 2017

MEMORANDUM

To: Members of Congress, Staff

From: Peter J. Nelson, Vice President and Senior Policy Fellow

Center of the American Experiment

Subject: American Health Care Act Amendment and Recommendations

As negotiations to repeal and replace Obamacare enter a new stage, concerns remain over
whether the House bill includes the right blend of policies that will deliver on the promises made
to the American people and lead to a better health care system. This memo focuses on 1)
explaining why a new amendment should successfully bridge competing concerns in the House
and 2) identifying additional policies the Senate should add to further improve the bill.

The MacArthur waiver addresses competing concerns over market stability and
preexisting condition protections. With so many state individual health insurance markets
crumbling, people rightly questioned whether the House bill gives states the regulatory flexibility
they need to maintain stable and affordable insurance markets. However, one solution to give
states greater flexibilityrepealing Obamacares core regulationshas raised serious concerns
over whether states, if given this level of flexibility, would continue to guarantee coverage to
people with preexisting conditions.

To bridge these competing concerns, Rep. Tom MacArthur proposed an amendment to allow
states to waive key Obamacare regulationsin particular, the essential health benefits (EHB)
and community rating requirementswhile at the same time retaining protections for people
with preexisting conditions.

The waiver gives states the immediate relief they need to stabilize their insurance markets.
Several state health insurance markets are in crisis and need immediate relief to regain their
footing. Average premiums rose by over 40 percent in eleven states and by 25 percent overall.
In response, insurers are leaving the market, leaving one in three counties with just one insurer.
The MacArthur amendment frees states to take various steps to improve their insurance market
by granting them a waiver from key regulations. Here are some examples of what the
amendment allows states to do with a waiver.

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 Establish a program to guarantee coverage to people with preexisting conditions
through a high-risk pool. Prior to Obamacare, a few states operated successful high risk
pools that kept premiums affordable for the general population while at the same time
provided high quality care at an affordable price to people with high risks.
Establish an invisible high-risk pool that allows people with preexisting conditions
to access the same coverage as everyone else. Traditional high risk pools have been
criticized because they segregate high risks from the rest of the market. A state may want
to segregate high risks for funding purposes only while at the same time giving high risks
the ability to shop for any product in the market.
Create a new marketplace for high risks where insurers compete to tailor products
to specific conditions. In the current market, insurers design products to avoid high
risks. States could create a new market for high risks where insurers tailor products to
specific conditions, such as cancer and diabetes.
Allow insurers to offer a more affordable set of benefits. Obamacares EHB
requirement forces insurers to provide a comprehensive set of benefits that covers both
expected and unexpected health care costs. States could allow insurers to offer a much
more affordable benefit set focused on providing financial protection.
Facilitate flexible insurance benefit designs that better coordinate with emerging
care delivery models. New models of care delivery, such as direct primary care and
telemedicine, should not need to operate within the confines of a traditional insurance
product. A state could allow these emerging care delivery models more freedom to
innovate outside the traditional insurance payment model.

The waiver guarantees coverage to people with preexisting conditions. Its important to note
that nothing changes for people with preexisting conditions unless a state determines it needs a
waiver to improve the stability and affordability of the market. Moreover, anyone who maintains
continuous coverage, including people with preexisting conditions, will continue to be
guaranteed coverage at standard rates. The amendment, however, does allow states to waive
community rating in regards to people who fail to maintain continuous coverage. But these
people are not left in the cold if they have a preexisting condition that might otherwise make
premiums unaffordable without community rating. States must either join the federal invisible
high risk pool or develop their own program to cover people with high risks.

Will these new programs, whether state or federal, provide good coverage for people with
preexisting conditions? This is largely a question of funding. Comparing the funding necessary
to operate a successful pre-Obamacare state high risk pool with the federal funding available to
kick off the Patient and State Stability Fund strongly suggests federal funds will be more than
adequate to guarantee coverage to people with preexisting conditions.

Minnesotas very successful high risk pool costed $160 million in 2011. By comparison, two
consulting firms independently estimate proposed federal funding would contribute between
$250 and $300 million in 2018 to a new Minnesota program to cover people with high risks.

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Similarly, Maines invisible high risk pool collected $14 million in 2012, but is projected to
collect between $40 and $80 million from federal funds in 2018. Given the higher level of
federal funding when compared to prior state programs, states should start out with enough
funding to begin a robust program to guarantee coverage to people with preexisting conditions.

There are a number of opportunities to improve the bill when it moves to the Senate. As
Speaker Paul Ryan explained early on, this bill is only the first phase in repealing and replacing
Obamacare. While the House bill now represents a solid starting point, the Senate can improve
on it by adding policy provisions that make the health care system more patient centered and
market driven. Here are some policies the Senate should consider.

Extend small employer health reimbursement arrangements to large employers.

The 21st Century Cures Act allows small employers to make pre-tax contributions to
individual market health plans, which can be expanded to large employers to extend
opportunities for employees to choose and own a truly portable health plan.
Let a health reimbursement arrangement (HRA) accumulate funds from year to
year. Unlike HSAs, a company can only claim a tax benefit from contributions made to
an HRA account until a claim is paid from the account. This restricts employers from
establishing HRA accounts that can accumulate actual funds for employees that the
employee can expect to retain when they leave their employer. Many employers prefer
HRAs to HSAs because they allow more flexibility.
Allow direct primary care arrangements to be coupled with an HSA. The IRS
currently considers direct primary care a second health plan and, therefore, restricts
people from using an HSA compatible health plan with direct primary care arrangements.
Allow comprehensive service provider systems to develop Exclusive Provider
Organization (EPO) plans for small employers and other groups. An EPO is a health
plan that requires all services be provided in network. EPOs are currently allowed for
self-insured plans, but not for fully insured small groups. EPOs are non-HMO, in-
network-only contracts for small groups in single resource communities where patients
primarily utilize a single system. Allowing EPOs could help providers develop
affordable health plans in counties that are down to one or possibly zero health plans.
Allow people to opt out of government programs and, instead, buy individual
insurance through a tax credit. Currently, people eligible for a public program like
Medicaid or Medicare must take the government program if they want public assistance.
Allowing people to opt for tax credits could provide more choice while at the same time
cut costs if the tax credit subsidy costs less than the public program. This option could be
especially beneficial for people who tend to churn on and off public programs.

Together, these ideas and the MacArthur amendment would combine to produce a blend of
policies that would advance America well beyond the failed policies of Obamacare. While more
work will need to be done, states would have the flexibility they need to stabilize their insurance
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markets and individuals would be given more control over their health care choices. Thats real
reform that will deliver immediate benefits to America.

Peter J. Nelson
Vice President and Senior Policy Fellow
Peter.Nelson@AmericanExperiment.org
(612) 336-4514

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