Thursday, December 29, 2016

Obamacare Repeal Has Already Begun For Small Businesses

(A version of this column was published by Forbes.)

My previous column suggested the 21st Century Cures Act, which President Obama signed on December 13, demonstrated Republicans can lead on health reform. Promoted as a pro-innovation bill, the new law will improve the Food and Drug Administration’s regulatory processes; as well as fund Vice-President Biden’s Cancer Moonshot, the National Institutes of Health, and steps to reduce the opioid epidemic.

However, the final version of the bill also included an important payment reform, which takes a small but significant bite out of Obamacare. Tacked onto the end of the bill, section 18001of the 21st Century Cures Act expands the use of Health Reimbursement Arrangements (HRAs) by small businesses. This is a win for small businesses which were harmed by Obamacare. Indeed, given the overwhelming bipartisan support for the 21st Century Cures Act, section 18001 could be defined as Democrat politicians’ first real step towards conceding Obamacare needs to be repealed and replaced.

The advantage of HRAs and similar funding vehicles is that they allow employers to give money directly to employees, which they can spend on medical care. This gets around health insurers’ bureaucracies, which add unnecessary administrative costs.
The Affordable Care Act (2010) limited employers’ use of these funding vehicles. The IRS promulgated rules levying an excise tax of up to $100 per employee per day. 

Although employers of fewer than 50 full-time equivalent employees were supposed to be exempt the employer mandate to offer so-called “affordable” coverage, this excise tax was effectively a penalty on small employers which had previously reimbursed employees’ medical expenses or premiums using HRAs. The 21st Century Cures Act abolishes this excise tax, restoring a valuable option to small businesses’ menu of benefits.

HRAs stand alongside Health Savings Accounts (HSAs) as ways to return control of medical spending to individuals. The primary difference is that an HRA remains the employer’s property, but an HSA is a bank account owned by the employee. Although an employer can roll funds over from one year to the next in an HRA, when the employee leaves, he abandons any remaining balance. For this and other reasons, HRAs are far from perfect. Nevertheless, they are a move in the right direction.
Obamacare was designed as a hand-out to health insurers. It did not quite work out that way. Nevertheless, the law forces as much health spending as possible through insurers’ claims processing. Not only does this add bureaucracy, but it inhibits proper price formation (which in a normal market takes place where the marginal supplier meets the marginal producer). Instead, health prices are determined administratively between insurers, governments, and providers.

Advocates of consumer-driven health care hope that an ever increasing share of medical payments will be paid by patients directly to providers. At some point, the insurers’ role in price-fixing will become so obviously absurd it will fall apart, and prices will be determined in a more properly functioning market.

The 21st Century Cures Act removes the Obamacare’s excise tax on small businesses using HRAs to fund employees’ medical spending, instead of overpriced health insurance. As an tax expert notes: “Because of the ACA, many small employers have been prohibited from using reimbursement arrangements that previously were long-standing and effective methods of providing employees with health care benefits. The new law is a welcome modification to the ACA since it gives small employers excise tax relief plus a method for providing health benefits to their employees via the QSEHRA [Qualifying Small Employer HRA].”

Like the HRA itself, the new reform is not perfect. For employees who are eligible for tax credits in Obamacare’s exchanges, there is a claw-back of those tax credits if their employers fund HRAs for them. It is hard to imagine a small business wanting to substitute its own money for federal taxpayers’ in the exchanges. Therefore, we can expect only higher-income earning workers (who are ineligible for tax credits in Obamacare’s exchanges) to take advantage of this new reform.

Nevertheless, this is a small but significant step towards reducing the control health insurers have over our medical spending. Hopefully, more such reforms will come in the next Congress.

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