Potential paths of healthcare reform

This is the second in a series of Baker Tilly articles exploring the impact of ongoing U.S. healthcare reform.

A priority of the U.S.115th Congress and the Trump administration is the repeal and replacement of the Affordable Care Act (ACA). In this article we examine Senator Rand Paul’s Obamacare Replacement Act as well as The Patient Freedom Act sponsored by Senators Bill Cassidy and Susan Collins. The final content and form of the ACA repeal and/or replacement legislation remains unclear.

Comparing the Obamacare Replacement Act and The Patient Freedom Act

 Obamacare Replacement ActThe Patient Freedom Act
ACA mandatesRepeal both the individual and employer mandates, essential health benefits requirements and other insurance mandatesRepeal both the individual and employer mandates, essential health benefits requirements and other insurance mandates
Use of health savings accounts (HSA)Allow $5,000 credit to HSA account; expand usage and types of expenses allowed from accountAllow $5,000 contributions to Roth HSA account; usage of accumulated funds used on tax-free basis for permitted health-related expenses
Key provisionTaxes health benefits to employees; potentially offset by universal deductionPushes healthcare administration to the states; state can choose one of three alternatives

Obamacare Replacement Act

Senator Paul’s plan would repeal the individual and employer mandates, essential health benefits requirements and other insurance mandates as provided for under the ACA. Paul’s plan would provide limited protection to individuals with pre-existing conditions by providing a two-year window under which they can receive coverage as well as restore HIPAA protections. However, the pre-ACA HIPAA rules only provided safeguards for pre-existing conditions for people going from one group coverage plan to another (i.e. changing employers who both offered group coverage); the plan appears to be silent for those outside of group coverage and doesn’t address the affordability of replacement coverage.

The plan would equalize the treatment of health insurance between employees and self-employed individuals. Rather than two sets of rules, health benefits would be taxable to employees, but could be offset by an above the line universal deduction. Self-employed individuals would be eligible for the same deduction. It remains to be seen to what extent a universal deduction would offset the cost of typical health insurance policies in order to make coverage non-taxable.

Similar to The American Health Care Reform Act of 2017 proposed by the Republican Study Committee, the Obamacare Replacement Act would expand the use of health savings accounts (HSAs). However, under the Senator’s plan, individuals would have the option to take a $5,000 tax credit for contributions to HSAs. Insurance premiums, currently not allowed, would be an eligible expense to be paid out of an HSA account; plus, pre-paid physician fees such as direct medicine payments could also be paid out of these accounts. Paul’s plan allows for unlimited contributions to these HSA accounts by removing the ceilings on maximum annual limitations. He proposes to remove the high-deductible health plan (HDHP) requirement for HSA usage as well. Individuals eligible for Veterans Affairs benefits, Medicare, TRICARE, healthcare ministries and similar benefits would be eligible to use HSA accounts to handle health costs.

A unique provision in Senator Paul’s plan permits physicians a bad debt deduction, limited to 10 percent of a physician’s annual gross income, for charity medical or uncompensated care.

Other facets of this proposed legislation involve changes to the individual insurance market by establishing independent health pools to allow individuals to pool together to purchase insurance, licensing insurers to sell policies across state lines, and creating association health plans that would allow small businesses to pool together across state lines via membership in a trade or professional organization to purchase health insurance for employees and their families. Changes to federal anti-trust laws and Medicaid waivers are also included.

The Patient Freedom Act

Similar to the Obamacare Replacement Act, the plan released by Senators Cassidy and Collins repeals the individual and employer mandates, essential health benefits requirements and other insurance requirements of the ACA. It also relies on the use of Roth HSAs and tax credits to fund taxpayer access to insurance. Their proposal does retain the prohibitions on annual and lifetime limits plus pre-existing condition exclusions and allows children under the age of 26 to remain on their parents plans.

In place of the ACA requirements, The Patient Freedom Act pushes healthcare administration to the states instead of the federal government. States, at any time, could choose one of three options:

  1. Reinstate the ACA, including the mandates and other requirements. States that elect this option could continue receiving federal subsidies (including premium tax credits, cost-sharing subsidies and Medicaid monies) as long as these subsidies would not exceed contributions made under option 2.
  2. New state alternative. Per beneficiary grants or refundable tax credits would be provided as a funding source so the state can provide premium tax credits, cost-sharing subsidies and Medicaid expansion. Funds would be deposited into a Roth HSA on a per-taxpayer basis.
  3. Design alternative without federal funding. The state has the authority to design and regulate its own insurance markets without federal assistance. If within one year of adoption, a state has not created its own market, option #2 will be the default method.

This plan authorizes states to utilize the infrastructure set up under the ACA or create new marketplaces to help taxpayers shop for healthcare. States would be allowed to apply risk mitigation techniques to limit market volatility. Uniform initial and annual open enrollment periods must be offered in addition to a standard health plan that includes a HDHP and a drug benefit. Residents could be automatically enrolled in coverage or opt-out. Rules protecting enrollees from excessive out-of-network emergency service costs must be included.

Contributions to Roth HSAs would not be tax deductible but would grow tax-free. $5,000 (adjusted by geographic region) plus an additional $1,000 for taxpayers at least age 55 may be contributed annually. Roth HSA funds can be used on a tax-free basis to pay for health insurance premiums, deductibles, long-term care insurance and direct primary care. Funds could be rolled over to a beneficiary.

What this means to you

Presuming ACA reform would not be effective before 2018, current coverage options, reporting requirements and mandate penalties are still in effect for the 2017 calendar year. Further, President Trump recently indicated a replacement could take “till sometime into next year.” If an extension is not ready, it is possible the repeal would also be delayed. It is also possible that transition rules would be enacted to ease the conversion from the ACA to the reformed policies. For now, the information reporting for 2016 health insurance benefits and coverage remains in place. This means Forms 1094/1095-B and 1094/1095-C are due to employees by March 2, 2017 and to the IRS by Feb. 28, 2017 (paper) or March 31, 2017 (electronic).

One item not addressed by either of the above replacement plans is that the ACA removed caps insurance companies typically placed on both annual and lifetime benefits. Often, payments for covered benefits were limited to either $1 or $2 million for the life of the policy holder. These annual and lifetime caps were limitations easily reached by individuals with severe health issues (cancer, paralysis, etc) and often caused such individuals financial hardship when their insurance coverage was exceeded. Failure to extend the prohibition on such caps could impact the public marketplace as well as employer provided group insurance. Employers may face the decision of attempting to keep such caps in place on group insurance, if such policies are offered if no longer federally mandated.

While it is difficult to predict the impact that the cost of repeal and replacement plans will have on the insurance market, we know markets do not like uncertainty. If the ACA is repealed and its replacement is enacted piecemeal rather than comprehensively, the market could potentially see upward pressure on premiums. For example, a recent Congressional Budget Office  (CBO) report (which was initially prepared in 2015 to analyze previous legislation and recently updated) estimated that premiums could increase by 20-25 percent if the ACA mandate penalties and subsidies were repealed.

In addition, the nonpartisan Economic Policy Institute recently issued a report estimating that ACA repeal would reduce national job growth by almost 1.2 million jobs in 2019. Their report says that reduced spending cuts would hurt job growth more than the impact of repealing ACA taxes would result in stimulus.

Finally, the new administration has indicated a desire to expand the use and applicability of HSAs. Currently, there are limits to how they are used as well as the annual contribution amounts. However, monies retained in these accounts could grow tax-deferred and withdrawals tax-free if used for qualifying medical expenses.

Both plans discussed above appear to legislatively encourage taxpayers to make contributions and expand usage. Certain key elements of any proposed legislation may stay in place or differ from the items outlined above once negotiations begin. The details of the replacement/modification of the ACA are likely to be very fluid and changing often as Congress works through different details and considers potential unintended consequences of revisions. Also there will be multiple moving parts, both on the spending and taxation side, and projections are likely to move in many directions as different provisions are discussed and finalized. All of this makes predicting the cost of employer sponsored plans difficult to forecast into next year and beyond. Therefore, we recommend you maintain regular contact with your insurance agent/broker to monitor how legislative proposals are impacting the ability to renew your current coverage and on what terms.

Baker Tilly tax specialists will continue to keep you informed on significant healthcare reform proposals and enacted legislation.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.


The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.