This bill — the American Health Care Act (AHCA) — would repeal and replace the Affordable Care Act (commonly known as Obamacare) through the reconciliation process. In general, the bill repeals Obamacare’s individual and employer mandates, in addition to taxes on health insurance premiums, medical devices, and over-the-counter drugs. It makes reforms to premium assistance tax credits before repealing and replacing them with refundable tax credits, gives states the ability to take their Medicaid funding in the form of block grants rather than open-ended federal support, and makes health savings accounts more accessible to consumers. It would, however, retain two notable provisions of Obamacare: people with pre-existing conditions would not be excluded from coverage and children up to age 26 could remain covered by their parents’ health insurance plans.

Tax Credits

This bill would enact several reforms to premium assistance tax credits, which aim to assist consumers with the cost of health insurance by offering them a tax incentive for purchasing it, over a period of several years before repealing them at the end of 2019. They would then be replaced with refundable tax credits starting in 2020.

Under current law, individuals and households with an income less than 400 percent of the federal poverty level (up to $47,550 for an individual and $97,200 for a family of four) are eligible to receive premium assistance tax credits. The amount that a household receives is determined using the lower of two numbers — the premium for the health plan they enroll in, and the premium for the second lowest cost silver plan in their area reduced by their share of premiums.

Before the premium assistance tax credits are phased out completely, the share of premiums that individuals have to pay would be modified in 2019. The share paid by enrollees would be reduced slightly for those with income less than 133 percent of the federal poverty level (FPL), remain essentially unchanged for consumers between 133 percent and 300 percent of the FPL, and increase slightly for those earning over 300 percent of the FPL (more so for people age 50 and up).

Limitations on the recapture of advance payments of the tax credit (i.e. taking back overpayments to individuals) would be repealed for individuals making less than 400 percent of the federal poverty level. Excessive payments to those individuals would be treated as a tax liability in order for the government to get the money back. Premium assistance tax credits would be made available to individuals covered by catastrophic-only health insurance, as such consumers are prohibited from using the tax credits under current law. Additionally, the premium assistance tax credit wouldn’t be available for consumers insured by health plans that cover abortions that aren’t necessary to save the life of the mother or to end a pregnancy that’s the result of an act of rape or incest.

Starting in 2020, refundable tax credits would be available to consumers and would vary by age. Individuals under age 30 would receive a tax credit of $2,000 per year, for people between 30 and 40 the tax credit would be $2,500; for those between 40 and 50 it’d be $3,000; between 50 and 60 it’d be $3,500; and those over 60 who aren’t eligible for Medicare would get a credit of $4,000. The tax credit could be paid monthly directly to the insurer to reduce the recipient’s premium, or individuals can pay their total health insurance premiums without advance payments and then claim the credit at the end of the tax year.

Small business tax credits for buying their employees health insurance would also be repealed effective January 1, 2020 and in the meantime the tax credits would be disallowed for health insurance plans that cover abortions that aren’t necessary to save the life of the mother or to end a pregnancy that’s the result of an act of rape or incest.

Federal funding channeled to states through the bill’s State Stability Funds would be available to use to provide maternity and newborn care. It also clarifies that mental health and substance abuse funds would include inpatient and outpatient treatment for addiction and mental illness, and early intervention for children and young adults with serious mental illness. An additional $15 billion would be solely focused on meeting those needs.

States would be required to determine the “essential health benefits” that insurance plans need to cover to be eligible for enrollees to receive premium tax credits beginning in 2018.
Taxes

The tax penalty imposed by Obamacare’s individual mandate to buy health insurance would be lowered to zero, meaning that the individual mandate would be repealed immediately and apply for all months after January 2016. The tax penalty imposed the employer mandate for businesses with more than 50 employees to buy health insurance for workers would also be repealed in the same manner with the same effective date. Additionally, the so-called “Cadillac Tax” on high-cost, employer-sponsored health plans would be delayed during the 2020-2025 period before taking effect in 2026 (it’s currently delayed until 2020).

A tax imposed on purchases of over-the-counter drugs using funds from a health savings account (HSA) or Archer medical savings account (MSA) without a doctor’s prescription would be repealed effective in 2017. A scheduled tax increase of 20 percent on distributions from HSAs and MSAs would be reduced to 10 percent for HSA distributions and 15 percent for MSA distributions beginning in 2017. The $2,600 limit on pretax contributions to health flexible spending arrangements (health FSAs) would be repealed for tax years starting in 2018.

The 2.3 percent excise tax on medical devices would only apply to sales that occurred before January 1, 2016 and would be repealed starting with 2017. The additional Medicare tax of 0.9 percent on taxpayers earning more than $125,000 as individuals or $250,000 for couples filing a joint return (which is in addition to the 2.9 percent Medicare payroll tax) would be repealed starting with the 2023 tax year.

A tax on prescription medications imposed by Obamacare would also be repealed effective in 2017. The annual fee on health insurance providers that is passed onto consumers in the form of higher premiums for all calendar years from 2017 onward. An annual fee on branded pharmaceutical manufacturers and importers would also be repealed starting with 2017. A tax on indoor tanning services would also be repealed, effective as of June 30, 2017.

The net investment income tax that applies to individuals, estates, and trusts with income over various thresholds and subjects them to a 3.8 percent tax would be repealed effective in 2017. Under current law the tax applies to income over $250,000 for the surviving spouse of a couple that filed jointly, $125,000 for a married individual filing separately, and $200,000 in any other case.

The $500,000 limit on the amount of compensation that a covered health insurer can deduct as expenses would be eliminated, so they would effectively be treated the same as other businesses in terms of deducting their spending on employee health insurance as compensation beginning in 2018.

Health Savings Accounts

The limit on annual HSA contributions would be increased to equal the maximum annual deductible and out-of-pocket expenses permitted under a high deductible health plan, which are $6,550 for an individual and $13,100 for family coverage effective starting in 2018. Contribution limits would continue to increase by $1,000 for an eligible individual who has turned 55 as is permitted under current law. Both spouses would be allowed to make “catch-up” contributions to the same HSA if they’ve turned 55 before the end of a tax year and use the $1,000 contribution limit increase.

If an individual establishes an HSA within 60 days of enrolling in a high deductible health plan, it would be treated as if the HSA was established on the date the person’s coverage under the plan begins. This would have the effect of allowing those individuals to exclude money they spend from the HSA on healthcare during that period from their taxable income beginning in 2018.
Medicaid

This bill would give states the option of receiving a flexible block grant of funding for adults and children enrolled in Medicaid starting with fiscal year 2020 instead of federal assistance being tied directly to state spending. Funding for the block grant would be determined based on a fixed amount of money for each adult and child enrolled in the “base year” and growth rates for future years would be pre-set (funding for elderly and disabled enrollees would remain based on enrollment). This means that states would receive a fixed amount from the federal government of funding each year, rather than federal support matching state spending on Medicaid (federal dollars covered anywhere from 50.7 to 79.6 percent of a state’s Medicaid program in 2015). States that choose block grants would receive funding in that way for a period of 10 years.

States would be given the ability to institute a work requirement for non-disabled, non-elderly, non-pregnant adults as a condition for receiving coverage under Medicaid starting on October 1, 2017. Subsidized and unsubsidized employment, on-the-job training, work experience, job search and readiness programs, vocational training, community service, and study towards a general equivalence certificate would satisfy the work requirement. States that implement the work requirement would receive a 5 percent administrative boost to their federal assistance.

The requirement for states to expand their Medicaid program for certain childless, non-disabled, non-elderly adults up to 133 percent of the FPL would repealed, and the option for states to cover adults above that level would end on December 31, 2017.

States would retain the ability to cover enrollees in their state’s Medicaid expansion at the state’s regular federal assistance level. Expansion participants who enroll before the end of 2019 would be given “grandfathered” status, and states would receive the enhanced matching rate under current law for those enrollees as long as they’re eligible and enrolled in the program. Starting in 2020, states wouldn’t be able to expand Medicaid.

To prevent the state of New York from passing on Medicaid costs to the state’s counties, the federal government would be prohibited from reimbursing New York state’s Medicaid funds that were raised by local governments.

Amendments

Two notable amendments have been added to this legislation.

• The MacArthur Amendment would allow states to obtain waivers from requirements of the Affordable Care Act. That’d include the requirement for health insurers to cover “essential health benefits” which include things like maternity care or mental health services, age band ratings that prevent the elderly from paying more than five times what the young pay in premiums.  In their application, states would have to show that the waiver will do at least one of the following: reduce premiums, increase enrollment, stabilize the market, stabilize premiums for individuals with pre-existing conditions, or increase choice in the market. If a person fails to maintain continuous coverage, this amendment would allow them to be charged more when they seek insurance based on their health status.
• The Palmer-Schweikert Amendment would create a $15 billion risk sharing program to help states offset potential premium increases in the individual market.
• The Upton-Long Amendment would provide an additional $8 billion from 2018 to 2023 to states that have been granted a waiver under the MacArthur Amendment in order to help people with pre-existing conditions who haven’t maintained continuous health insurance coverage.