The Senate plans to release a draft of its counterpart to the House-passed American Health Care Act Thursday.

The House bill contains a number of sound proposals to begin to reverse the damage Obamacare caused.

These include a major reform of federal Medicaid funding, allowing states to opt out of some onerous Obamacare insurance mandates, repealing the individual and employer mandates, and providing substantial tax relief for the American people by repealing various taxes under Obamacare.

These policies will help reduce premiums and improve the environment that contributed to unaffordable (and now disappearing) health plans.

However, the bill falls short of a full repeal and replacement of Obamacare. The Senate should strive to get closer to that goal than the House-passed version as it seeks to undo the damage caused by Obamacare.

There are many areas in which the Senate can do so, but how the forthcoming bill tackles two particular problems created by Obamacare will be especially important to watch.

First, Obamacare’s insurance mandates drove up costs and decreased options for millions of Americans. Second, Obamacare made the Medicaid safety net less secure for those in need by expanding it in unsustainable ways well beyond those it was designed to serve.

The House bill took steps to address both of these problems, and the Senate can go further still to remove Obamacare’s mandates and ensure that the Medicaid safety net works for those truly in need.

Free States From Obamacare’s Federal Mandates

The Senate should pursue reforms to free states from Obamacare’s health insurance mandates and mitigate unaffordable health insurance premium increases. Ideally, all Obamacare insurance mandates should be repealed.

If procedural requirements related to the budget reconciliation vehicle under consideration restrict the Senate’s options, then the Senate should focus on near-term ways to advance regulatory relief goals.

Obamacare pre-empted state authority for insurance markets. Its imposition of new federal benefit mandates and regulations was unnecessary and short-circuited the ability of states to adopt different approaches or to modify rules to accommodate changing circumstances.

Obamacare’s structure of new federal health insurance regulations and subsidies was designed to provide lower-income individuals needing medical care with comprehensive coverage at little cost to the recipients.

Yet, Obamacare also applied those same regulations, but not the subsidies, to the broader individual and small employer health insurance markets.

The result is that Americans with unsubsidized coverage through individual market or small employer policies have borne the brunt of the premium increases and coverage disruption caused by Obamacare’s insurance market regulations. They are the ones most in need of relief from Obamacare.

The House-passed American Health Care Act provided a start toward addressing this situation. It repealed outright some costly regulations, including the individual and employer mandates, and allowed states to waive others.

The House bill’s repeal of Obamacare’s minimum actuarial value mandate will allow health insurers to offer leaner plans, including catastrophic coverage plans. Such plans would be more consistent with the type of coverage preferred by unsubsidized purchasers of individual market policies.

The House bill also expanded the allowable age-rating variation for adults from a ratio of 3 to 1 to a ratio of 5 to 1, which enables insurers to set premiums to match the normal variations in average medical expenses by age.

This would allow insurers to once again charge young adults premiums commensurate with their lower expected medical costs, and thus price their plans to be more attractive to younger, healthier individuals.

This change reverses Obamacare’s “age-rating compression,” which significantly increased premiums for young adults—contributing to lower-than-expected enrollment by those individuals in Obamacare-compliant coverage.

The House bill also created a process for waiving additional regulations (including Obamacare’s “essential benefit” requirements), and encouraging continuous coverage while repealing the individual and employer mandates, so that states can resume authority over their health insurance markets as they had before Obamacare.

The Senate should ensure that any waiver approach grants states as much flexibility as possible, with the objective of going beyond the House-passed bill.

For example, the Senate should expand the House-passed bill’s list of Obamacare insurance mandates that states may waive to include the mandate that insurers treat coverage sold on and off the exchanges as a “single risk pool.”

Additionally, it should allow states to waive Obamacare’s requirement to cover specified preventive services with no cost sharing charged to enrollees.

Prior to Obamacare, plans typically covered most of those services already, obviating the need to mandate coverage. Also, a number of those so-called preventive services are actually diagnostic tests or procedures, and allowing insurers to set patient copays is an appropriate way to manage utilization.

Second, the Senate should give states additional options to encourage continuous coverage.

The House-passed bill allowed states to authorize insurers to impose a one-year premium surcharge on individual market applicants who lack continuous coverage at the time of enrollment, or charge those without continuous coverage risk-rated premiums for a year.

The Senate should also allow states to authorize insurers to prohibit pre-existing condition exclusions only for those individuals who can demonstrate continuous coverage during the prior year.

Additionally, it should provide states with the option to allow insurers flexibility to impose additional cost-sharing requirements (e.g., higher deductibles) for a limited period of time on those who do not maintain continuous coverage.

Reform Medicaid’s Budget to Help Those Most in Need

Medicaid is a means-tested health care and social services program for low-income children, pregnant women, aged, and disabled individuals. At the federal level, Medicaid is an open-ended federal entitlement to states: If a state spends more on the program, federal payments automatically increase.

Obamacare expanded Medicaid eligibility to include able-bodied adults without children. The Medicaid expansion has accounted for over 80 percent of the net increase in total (both public and private) health insurance enrollment since Obamacare’s coverage provisions went into effect at the beginning of 2014.

The Senate should begin to address this situation by adopting, with some modifications, the House-passed reforms and end the automatic federal entitlement spending.

The Senate should, like the House, change how the federal government finances Medicaid and provide for federal payments on a per capita basis.

The federal government would provide states with a capped payment (based on average cost per enrollee) with different amounts set for each category of Medicaid enrollees: the elderly, the disabled, the “expansion” population, and poor women and children.

(Medicare dual-eligible enrollees—poor and disabled persons securing benefits under both the Medicare and Medicaid programs—would be excluded from reimbursement calculations under the House-passed per capita payment system.)

This is major reform consistent with policies recommended over the years by conservative health policy experts, including analysts at The Heritage Foundation.

It would give states new incentives to eliminate waste and fraud in the program, prevent states from gaming federal reimbursement formulas, and better target resources to the needy and most vulnerable to improve results.

An effective per capita approach requires that federal contributions grow over time at rates that are realistic and consistent with achievable expectations for the ability of states to moderate future spending.

If the indexing formula is too generous, then the incentives for states to better manage their programs will weaken over time.

The House bill set the indexing too high for some groups and too low for others. Therefore, the Senate should revise the indexing provisions in the bill to better match them to the historic and projected growth rates of the different beneficiary groups.

Further, to ensure states have the flexibility they need, the Senate should give them explicit authority to set and manage eligibility for their Medicaid programs through such means as asset tests, and remove restrictions Obamacare put on states’ abilities to make such decisions.

Finally, the Senate can adopt a much better way to help able-bodied low-income beneficiaries access care. The Senate should convert existing funding for able-bodied adults and children into a direct defined contribution (a “premium support” program) for the purchase of private health insurance coverage.

Such a change would be a major breakthrough in federal policy. It would have profound benefits for able-bodied Medicaid enrollees. It would mainstream these enrollees into the private insurance market along with their more affluent fellow citizens.

Today, many Medicaid enrollees cannot find a doctor to take care of them because the reimbursement rates and the regulatory system discourages physician participation in the program.

Moreover, low-income able-bodied adults cycle on and off of Medicaid as their employment and incomes fluctuate, experiencing disruption in their health care coverage.

With these proposed changes, the Senate would give them access to the same networks of doctors and medical professionals and superior medical care that their fellow citizens currently enjoy. This approach is also much cheaper than hospital emergency room care.

The Way Forward

Obamacare produced escalating premiums and higher deductibles. It also reduced access to insurers and providers.

Congress must act with urgency to begin reversing Obamacare’s damage and put health insurance markets back on a more stable footing. Building on the House bill’s reforms, the Senate can make further changes to provide individual Americans with better and more affordable health care options.

Even with these additional reforms, significant and ongoing work remains in order to undo the damage of Obamacare and resolve its preceding problems in the American health care system.

The list of reforms needed for the ailing health care system is lengthy. Congress must maximize every opportunity to bring relief to this system, beginning with the drafting of the American Health Care Act.