President Trump today signed an executive order that urges executive-branch agencies to take steps that could free millions of consumers from ObamaCare’s hidden taxes, bring transparency to that law, and give hundreds of millions of workers greater control over their earnings and health care decisions.
Background: ObamaCare’s Hidden Taxes
Since the Affordable Care Act took full effect in 2014, premiums in the individual market have more than doubled. The average cumulative increase is 105 percent, equivalent to average annual increases of 19 percent. Family premiums have increased 140 percent. In Alabama, Alaska, and Oklahoma, premiums have more than tripled. Analysts predict an average increase of 18 percent for 2018; premium increases will average 24 percent in Washington State and 45 percent in Florida. Maryland Insurance Commissioner Al Redmer predicts that if these trends persist, the Exchanges “will implode.”
ObamaCare’s skyrocketing premiums are not due to rising health care prices. They are due to the hidden taxes ObamaCare imposes. The law’s community-rating price controls increase premiums for the healthy in order to reduce premiums for the sick. The law also requires individuals and small employers to purchase a government-defined set of “essential health benefits,” including coverage (e.g., maternity care) that many consumers do not want.
The cost of ObamaCare’s hidden taxes is substantial. The Department of Health and Human Services commissioned (and then, oddly, suppressed) a study from the consulting firm McKinsey & Co. estimating their impact. McKinsey found ObamaCare’s essential health benefits mandate has increased premiums for 40-year-old males by up to 23 percent over four years. Even more startling, McKinsey found community rating has increased premiums for 40-year-old males by a further 98 percent to 274 percent since 2013. Community rating’s impact on premiums has been three to nine times greater than the overall trend in health care prices and spending. Community rating has also been the driving force behind ObamaCare’s narrow provider networks, which McKinsey found have largely or entirely erased the benefit from requiring consumers to purchase additional coverage.
Finally, insurers are fleeing the Exchanges, leaving consumers with little or no choice of carriers. At last count, 49 percent of counties and 2.7 million Exchange enrollees (29 percent) will have only one carrier in the Exchange. Exchange coverage is also eroding because ObamaCare literally penalizes insurers for providing high-quality coverage to the sick.
Fortunately, Congress explicitly exempted one category of health-insurance products from ObamaCare’s crushing hidden taxes. While those provisions apply to individual health insurance coverage, the Public Health Service Act states, “The term ‘individual health insurance coverage’ means health insurance coverage offered to individuals in the individual market, but does not include short-term limited duration insurance.” Congress did not define “short-term limited duration insurance,” but HHS had traditionally defined them to be health plans with a term of less than 12 months and that were not guaranteed renewable.
After ObamaCare took full effect in 2014, the market for short-term health insurance policies grew by 50 percent as many consumers sought to avoid the law's hidden taxes. In 2016, the Obama administration tried to cut off that escape hatch and force consumers to pay those hidden taxes by prohibiting short-term plans with terms that exceeded three months.
Today’s executive order directs executive-branch agencies to “consider allowing such insurance to cover longer periods and be renewed by the consumer.”
If the Trump administration allows insurers to offer guaranteed renewable short-term plans, it would be truly revolutionary. Consumers could avoid ObamaCare’s hidden taxes and low-quality coverage by purchasing relatively secure insurance that protects them against the long-term financial cost of illness, and that protects them against their premiums rising if they get sick. Premiums would be far lower than they are in the Exchanges. If the administration gets the regulations right, this change could even allow innovations that reduce the cost of health-insurance protection by a further 80 percent. In effect, the Trump administration could enact Sen. Ted Cruz's (R-TX) compromise repeal-and-replace proposal via regulation.
Health Reimbursement Arrangements
The federal tax exclusion for employer-sponsored insurance effectively penalizes workers unless they surrender a sizeable chunk of their income to their employer and let their employer choose their health plan. Workers with family coverage lose control of an average $13,000. Overall, employers get to control $700 billion per year that rightfully belongs to their employees.
Health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs) allow workers to control a portion of their health care dollars without penalty, but different rules apply to each. Only HSAs give workers true ownership of their health care dollars. But HRAs have the potential to allow workers who purchase health insurance on the individual market to avoid the effective tax penalty the federal government has traditionally levied on workers who purchase such coverage.
President Trump’s executive order directs executive-branch agencies “to increase the usability of HRAs, to expand employers' ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup [i.e., individual-market] coverage.” Presumably, this means the administration is thinking of rolling back the Obama administration’s rule that employers could not use HRAs to make tax-free contributions to their employees' individual-market premiums.
If the agencies get the rules right, they could reduce taxes by reducing the penalty the federal government imposes on workers who want to control their health care dollars, and free workers to purchase relatively secure coverage (e.g., on the short-term market) that does not disappear when they change jobs.
Association Health Plans
The federal government imposes different rules on coverage for individuals, small employers, and large employers. It also imposes different rules on employers who purchase coverage from an insurance company versus employers who “self-insure” by bearing that risk and basically running their own insurance company. As a rule, large employers and those that self-insure are subject to less regulation.
Association health plans, or AHPs, are a way for multiple individuals or employers to purchase insurance together. Trump’s executive order directs the Department of Labor to “consider proposing regulations or revising guidance, consistent with law, to expand access to health coverage by allowing more employers to form AHPs.” It appears the goal is to allow AHPs to let groups of small employers qualify as large employers (and therefore become exempt from federal regulations such as ObamaCare’s essential health benefits mandate) and to let them self-insure (and therefore become exempt from state health-insurance regulations).
The AHP changes the executive order envisions would not be as clear a win for consumers. They seek to build on existing government favoritism toward employer-sponsored health insurance, a type of coverage that has the curious feature that it disappears when you get sick and can’t work anymore. Employer-sponsored insurance therefore does not solve but instead exacerbates the problem of preexisting conditions. It also operates under community-rating price controls that are similar to those in ObamaCare, and that produce similar effects. (Oddly, while the Trump administration is trying to free consumers from community rating, it boasts that AHPs would have that feature.) If the AHP-related changes allow employers to avoid ObamaCare’s hidden taxes, that is a step in the right direction. But to the extent they would move even more authority for regulating health insurance from states to the federal government, that would be a step in the wrong direction.
And note: expanding AHPs is not what free-market advocates have in mind when we talk about allowing consumers and employers to purchase insurance across state lines. The idea is to allow employers and individuals to purchase insurance licensed and regulated by a state other than their own, not by the federal government.
Working within the Law, Not Undermining It
Despite all the hype on both sides, Trump’s executive order is not radical, nor would it undermine ObamaCare. Indeed, by itself the executive order does literally nothing. It merely indicates what some in the administration would like executive-branch agencies to do.
The changes this executive order envisions would not, as some suggest, be the most significant changes the Affordable Care Act has seen. All three branches of government have already altered the constraints imposed by the ACA to a greater extent than these changes would.
- Congress and President Obama actually repealed parts of the ACA, including the “1099 tax” and the CLASS Act.
- Congress and President Obama curtailed the law’s tax cuts and subsidies by increasing premium-assistance-tax-credit clawbacks and limiting risk-corridor subsidies.
- In NFIB v. Sebelius, the Supreme Court radically rewrote the ACA by making the Medicaid expansion optional.
- President Obama unilaterally exempted people from the ACA’s health-insurance regulations when he created “grandmothered” plans.
The changes this executive order envisions would not go nearly so far. They would not alter the constraints imposed by the ACA or other federal statutes. They would work within those constraints.
It is therefore not accurate to claim these changes would somehow “undermine" ObamaCare. They would allow many consumers to avoid the Exchanges and ObamaCare’s hidden taxes—but then again, so did President Obama when he created “grandmothered” plans. They would make the costs of community rating, essential health benefits, and other hidden taxes more transparent—but so did “grandmothered” plans, as well as the steps President Obama took with Congress to increase premium-assistance-tax-credit clawbacks and to limit risk-corridor subsidies.
When healthy consumers flee the Exchanges, premiums could rise even faster than they already are, and the Exchanges could indeed collapse as Maryland’s insurance commissioner predicts. If so, we must understand that as a manifestation of ObamaCare’s unpopularity. If community rating and other provisions of the law were as popular as ObamaCare supporters claim, consumers would be lining up to pay the resulting hidden taxes. But they won’t--and even Democrats know it. So when Democrats object to reforms that would let consumers avoid ObamaCare’s hidden taxes, they are actually implicitly conceding that even the ObamaCare provisions that they claim are popular are actually unpopular. What Democrats appear to mean when they complain this executive order “undermines the law” is that it could undermine their illusions about ObamaCare’s popularity and sustainability.