On January 23, 2017, Senator Bill Cassidy (R-LA), joined by Senator Susan Collins (R-ME), Johnny Isakson (R-GA) and Shelly Moore Capito (R-WV), introduced the Patient Freedom Act of 2017 (PFA), their proposal for partially repealing and replacing the Affordable Care Act (ACA) (here are the press release, one-page description, and section-by-section summary). The legislation combines features of the Healthcare Accessibility, Empowerment, and Liberty Act, which Senator Cassidy introduced into Congress with Congressman Pete Sessions (R-TX) in 2016, and earlier Patient Freedom Acts which Senator Cassidy introduced as potential responses had the Supreme Court held in King v. Burwell that the federal marketplace could not issue premium tax credits.

Senators Cassidy and Collins state that the PFA would grant to the states power to “increase access to health insurance and improve patient choice, while preserving important consumer protections” from the ACA. The PFA does this by selectively—rather than entirely—repealing ACA provisions, and by giving the states three choices. Under the PFA, states could 1) keep the ACA (more or less); 2) adopt a different approach based on subsidized “Roth HSAs” (explained below); or 3) reject reform altogether. The hope is that the legislation will appeal both to supporters of the ACA and those who demand a less regulatory, more market-oriented, and more state-centered approach.

A Complex Approach

Beyond these fundamental ideas of selective repeal, state options, and subsidized consumer choice, the most striking feature of the PFA is its complexity. It contains not just one but three approaches to replacing the individual mandate. It creates a new form of high-deductible “default health insurance” in which states could auto-enroll the uninsured, and a scheme that would make insurers subsidize their competitors if enrollees switch plans. The PFA sets out a series of different algorithms for calculating the subsidies states would receive depending on the options they chose and pages of detailed new rules to govern its “Roth HSAs” (A Roth HSA works much as current HSAs do, except that money deposited in the HSA is subject to taxation and only investment income on the Roth HSA and withdrawals for health care expenditures are free from taxation).

The complexity of the PFA exceeds that of the ACA. If Congress adopts the PFA, and it could do much worse, it would likely need a much longer transition than that provided by the January 1, 2018 date in the bill.

The PFA Repeals Most Of Title I Of The ACA

The PFA only addresses Title I of the ACA, the insurance reform and affordability provisions. It does not attempt to deal with Medicare or the taxes imposed by the ACA. This is probably necessary because all of the money the ACA raised by Medicare savings and new taxes are needed to finance the PFA’s subsidies. The Cassidy-Collins proposal only deals with Medicaid incidentally insofar as it provides an alternative to the Medicaid expansion. It specifically does not include state-operated high-risk pools, as do a number of other plans, although it does not prohibit them.

The PFA begins by repealing all provisions of Title I of the ACA and restoring prior federal law except in states that choose to have it continue in force. This includes repeal of the Title I insurance reforms, the premium tax credits and cost-sharing reduction payments, the ACA’s essential health benefit and actuarial value requirements, the marketplaces, and the individual and employer mandate.

The PFA would retain, however, a number of the ACA’s popular provisions, including:

The ban on lifetime and annual limits;

Coverage of adult children until age 26;

The prohibition against pre-existing condition exclusions (although it does allow pre-existing condition exclusions against individuals who fail to maintain continuous coverage);

The prohibition against health status discrimination (again permitted against individuals who fail to maintain continuous coverage);

The preventive services requirement (but only if employers do not contribute to an individual’s Roth HSA, which would seem to imply that the requirement would only apply to employer coverage. No further explanation is offered as to this mystery);

Section 1557, which prohibits discrimination on the basis of race, national origin, sex, age, or disability (which has been one of the most controversial provisions of the ACA);

The requirement for coverage of mental health and substance abuse disorder services (with limited cost-sharing) as well as the extension of mental health parity rules to the individual market;

The provision of Black Lung benefits for coal miners;

The continuation of section 1332 state innovation waivers (which in fact means the bill in fact affords states many options and not just three); and,

The continuation of the federal marketplace for states that desire to use it.

State Options Under The PFA

Having laid down these baselines, the PFA turns to the state options, its key innovation. The PFA would allow states to:

Keep the provisions and requirements of the ACA, including access to the federal marketplace and including federal premium tax credits and cost-sharing reduction payments, but only funded at a level of 95 percent of the amounts that would have been available under the ACA;

Establish a new “state and market-based alternative” based on federal deposits into individual Roth HSAs, described in the remainder of the PFA (the sponsors’ favored alternative), also funded at 95 percent of ACA funding; or,

Reject the ACA’s Title I provisions altogether (except those preserved by the PFA), as well as federal financial assistance for residents not eligible for Medicaid.

If a state failed to make a choice, it would default into the second option, but states could change their option on a year-to-year basis. The PFA would continue the ACA’s Medicaid expansion but would allow Option 2 states to switch expansion recipients into Roth HSAs. Option 2 states would also have to establish rules for limiting provider billing in emergency situations.

Roth HSAs Are At The Center Of The PFA’s Favored Option

The PFA proceeds to describe in greater detail the second option. At its heart are the Roth HSAs, into which either the federal government or a state (at the state’s option) would deposit funds that could be used to purchase health insurance and cover cost sharing. These deposits could take the form of refundable tax credits, advanceable on a monthly basis (and which would become taxable income).

Any citizen or lawful alien residing in a state who is enrolled in a health plan and not otherwise covered by a federal health program (Medicare, Medicaid, VA, etc.) would be eligible. This apparently includes individuals enrolled in employer coverage, which would vastly expand the number of individuals receiving federal tax credits and correspondingly contract the size of the tax credits available to enrollees. The PFA explicitly appropriates the funds to cover the Roth HSA deposits to avoid the disputes over whether funds were appropriated that have resulted in litigation under the ACA.

The PFA allows states to auto-enroll their residents in both Roth HSAs and health insurance coverage, subject to the right of individuals to opt out and disenroll. How states would identify individuals to be auto-enrolled and actually enroll them, and how the states would determine into which plan consumers should be enrolled and in which financial institution their Roth HSA would be established, are issues not addressed, but would surely be daunting undertakings. It is also not clear that the Roth HSA deposits would be sufficient to cover the premiums of a policy in which an individual was auto-enrolled. In addition to the Roth HSA deposits, states that opted for Option 2 would also receive an amount equal to 2 percent of the total federal Roth HSA deposit amount for population health initiatives.

The amount of the Roth HSA deposits received by any individual is based on an average state per capita amount adjusted for age and geography (but not sex). The per capita amount is set at

95 percent of the amount that individuals in the state would have received in premium tax credits and cost-sharing reduction payments under the ACA, plus the amount the state would have received through the Medicaid expansion if it failed to expand Medicaid;

divided by the number of individuals in the state qualified for Roth HSA deposits.

States that failed to expand Medicaid would receive a federal contribution based on a 95 percent Medicaid match instead of the 90 percent Medicaid match which the ACA is moving toward for the expansion population. States could supplement the federal deposits for individuals to bring them up to the levels that they would have received under the ACA in premium tax credits and cost-sharing reduction payments, although the amount their residents received from the federal government would be reduced if they did so.

Roth HSA deposits would be income-adjusted but would provide more help for higher-income individuals and less for lower-income individuals, as compared to the ACA, with the deposits phasing out for individuals with income exceeding $90,000 a year and families with incomes above $150,000 a year. The proposal also contains a very odd provision that would reduce deposits into the accounts of “low-income individuals with employer-sponsored coverage” (with the term “low-income” never defined) to the extent that they received insurance contributions from their employers that were not taxable under the current health coverage tax exclusion, and would reduce the amount of funds available to the state accordingly. This suggests that the authors meant for the Roth HSA deposits to substitute for the current employer-sponsored coverage tax exclusion, as in earlier Cassidy bills, but that this was somehow left out.

In any event, the total Roth HSA deposits would be set at 95 percent of current ACA financial assistance expenditures and cover far more people than the current ACA financial assistance does, resulting in far less assistance for low-income individuals. It is unlikely that the amount low-income individuals would receive would be enough to make health insurance or health care available to the low-income individuals who receive the most assistance from the ACA. The only mechanism for increasing the amount of assistance available over time to account for health care cost inflation would be an annual recalculation of the amount that would have been spent in a state under the ACA, which seems like an unwieldy approach to updating for inflation.

An individual would have to maintain insurance coverage to qualify for a Roth HSA or pay a 10 percent penalty on contributions. Individuals could contribute $5,000 per year to a Roth HSA in addition to the federal contributions (plus up to $1,000 more annually for individuals age 55 or above). Amounts in Roth HSAs would be excluded from assets when determining Medicaid eligibility.

As noted above, Roth HSA contributions would not be tax free, but the income from the Roth HSA would not be taxable and distributions could be made tax-free for medical care not otherwise covered by insurance including premiums; out-of-pocket expenses; long-term care insurance; and fees for direct primary care (direct provision of primary care by a physician or group of physicians for a prepaid fee, which is not to be regulated as insurance). Payments from a Roth IRA for other purposes would be subject to taxation plus a 10 percent excise tax except when an individual dies, becomes disabled, or becomes eligible for Medicare based on age. Traditional HSAs would be phased out after 2016.

Other PFA Provisions

The PFA would allow states to repurpose state exchanges or use the technology of the ACA federal exchange to enroll individuals in coverage or to set up their own transparency portals to allow consumers to compare plans. States could also set up risk adjustment, reinsurance, or risk corridor programs, but without federal funding. Risk adjustment mechanisms would have to be based on the actual health status of enrollees.

Modified Health Status Insurance

The PFA contains another odd provision allowing states to provide for “Modified Health Status Insurance.” Under this arrangement, if an enrollee switched health plans during open enrollment, the initial insurer would be responsible for 75 percent of the health benefits administered to the enrollee for the first three months of coverage with the new insurer in exchange for 75 percent of the premiums that the individual would owe to the new plan for those first three months of coverage. This provision is apparently designed to encourage insurers to better serve their enrollees to hold onto them, but since expenditures during the first three months of a plan year are often subject to the plan deductible, this arrangement would in fact benefit rather than penalize the insurer that lost enrollees.

Default Health Insurance Coverage

The PFA creates a new form of insurance, “Default Health Insurance Coverage,” in which the states could auto-enroll otherwise uncovered individuals. This would be a high-deductible plan that could be paid for from a Roth HSA. It would cover “Tier 1” prescription drug coverage for a limited number of drugs for chronic conditions, offer an adequate provider network as determined by applying Medicare Advantage guidelines, and cover childhood immunizations without cost sharing. Presumably the default coverage option is intended to cover people who would otherwise remain uninsured, but the high deductibles it would impose would effectively make health care services unaffordable for many of the low-income individuals helped by the ACA.

Enrollment Periods And Continuous Coverage Requirements

States would be required to offer open enrollment periods to encourage continuity of coverage in the individual market, as well as limited special enrollment periods. They would be required to offer an initial open enrollment period of at least 45 days. Individuals would be allowed to enroll in coverage during this initial open enrollment period and subsequently upon birth, reaching age 26, or becoming independent from family coverage without underwriting.

Individuals who failed to maintain continuous coverage thereafter without a break of more than 63 days would be subject to medical underwriting, including denial of coverage, the imposition of pre-existing conditions exclusions, or differential premiums. These sanctions could continue for the number of months equal to the period during which the individual lacked coverage, up to 18 months. During this period the individual could, however, get default coverage. People who maintained continuous coverage could change plans each open enrollment period without medical underwriting, including presumably upgrading to more comprehensive plans if their health deteriorated.

States would also be required to impose a penalty on individuals who enrolled late in coverage (other than default coverage) equal to the lesser of 10 percent of the premium or 1 percent times the number of months during the previous two years that the person was uninsured (prior to the 18 months to which the continuous coverage underwriting sanctions apply). The penalty would be paid to the federal government.

Transparency And Emergency Charges

The PFA requires providers to post their prices in a manner that will allow consumers to compare prices among providers. It also imposes specific limits on the amount providers may bill for emergency services.

It has become increasingly clear in recent days that Republicans are trying to find a way to couple ACA repeal with ACA replacement. The PFA is an attempt to build a replacement plan on Republican principles of devolution of responsibility to the states and deregulation, but in a way that might appeal to some Democrats. The bill, however, appears to have been rushed into legislative language without adequate consideration of how it would actually work and what it would cost. It may form a basis for discussion, but it is not ready for enactment.