The Budget Hawks Are Circling

While it might be taking up the most oxygen, the debate on extending the 2017 Tax Cuts and Jobs Act tax reform provisions is not the only fiscal quandary facing Congress.

A similar, if less expensive, dilemma could be developing on healthcare spending.

The enhanced Affordable Care Act (ACA) subsidies first enacted in the 2021 American Rescue Plan Act and later extended in the 2022 Inflation Reduction Act also are set to expire at the end of 2025. The Congressional Budget Office (CBO) estimates that it would cost $335 billion to extend those subsidies for another 10 years. Many Republicans oppose extension. The CBO also projects that as many as 3.8 million Americans will lose their coverage if the enhanced subsidies are not renewed because the coverage will simply be too expensive. A recent Kaiser Family Foundation study concluded that enhanced subsidies reduce the net costs for eligible families by over 40%.

The situation feels intractable. There is, however, a potential path that could lower net premium costs without requiring as much direct federal government subsidization. And the best part? It would not even require enactment of new legislation.

Section 1302(b)(1) of the ACA states that the secretary of the United States Department of Health and Human Services (HHS) “shall define” the standard minimum “essential health benefits (EHB) package” for qualified health plans (QHPs). This EHB package was intended to serve as the basic plan on every exchange (for small businesses) and marketplace (for individuals). The expectation was that the basic EHB package would be very streamlined—and hence economical.

Section 1311(d)(3)(B) then allows states to impose benefit mandates for QHPs that go beyond the HHS-defined minimum essential health benefits package but dictates that a state must pay the requisite ACA subsidy for the extra premium cost associated with that benefit. This obligation was expected to lead to widespread elimination of many of the thousands of benefit mandates then (and now) in place.

Unfortunately, broad mandate reform and its attendant cost saving potential were thwarted when the Obama administration essentially punted on this obligation by issuing regulations that allowed each state to establish its own base plan that included every benefit mandate required by that state before 2012:

“A benefit required by State action taking place on or before December 31, 2011, is considered an EHB. A benefit required by State action taking place on or after January 1, 2012, other than for purposes of compliance with Federal requirements, is considered in addition to the [EHBs and thus must be subsidized by the state].”

At that time, HHS directed each state to develop its own independent plan, which generally can be based on the most widely sold plan in the state. Because every pre-ACA plan sold in any state was required by law to cover all of that state’s mandate requirements, exactly none of the expected benefit mandate reform has transpired.

These enhanced state-mandated plans, which are locked in place under current regulations, drive up costs for insurers and consumers. Now, even if states want to narrow their benefit requirements, they are not permitted to do so. Ultimately, rather than pursuing the cost-saving and reform-driving benefits of a slimmed down nationwide benchmark plan, the Obama administration left the market worse off via broad, costly state mandates.

This has had at least three critical consequences:

1) “Basic” exchange policies are much more expensive than they should be; 2) The federal subsidy obligations are much higher than they should be (because the U.S. government is subsidizing all of the state mandates); and 3) It is much more complicated than it should be for a small business to insure employees in multiple states.

Fundamentally, health plans in the United States have become too “rich” for many Americans. While benefits packages may be more robust, deductibles are so high that many families cannot actually access care. Council members report that individuals want the choice to purchase more basic coverage if it means that costs will decline and they can get the services they need. Today, though, insurers are prohibited from offering what people want to buy, at least in part because benefits mandated by many states go beyond basic care and force people into higher-cost plans.

Expanding plan options and competition is a hallmark of Republican proposals to reform our healthcare system, give consumers the freedom to purchase what they want, and control rising costs.

Other reform initiatives likely will be proposed in this congressional session, such as a widely discussed idea to allow sales of health plans across state lines. Health and Human Services’ establishment of the minimum essential benefits package the ACA dictates—which could even be modeled after existing state benchmarks—would, however, serve the same purpose as interstate sales and other similarly intended proposals (i.e., supporting the proliferation of more basic, affordable plans) without triggering complexity and concerns related to our state-based insurance regulatory system, oversight responsibility, and state consumer protection functions.

In 2017, on the first day of his first term in office, President Donald Trump issued Executive Order 13765, which directed federal agencies to do everything within their power to “minimize the economic burden” of the ACA. One of the more material measures that could be done now to fulfill the aspiration of that executive order is to effectuate Section 1302(b)(1) and establish the requisite standardized EHB package. It would solve a whole host of problems.