Hospital Impact: A closer look at the GOP’s latest ‘replace then repeal’ proposal

Jonathan H. Burroughs headshot

Despite Sen. Ted Cruz’s exhortations to repeal the Affordable Care Act immediately, most thoughtful Republicans realize that there must be a reasonable replacement on the table in order to prevent the risk of millions of Americans losing healthcare insurance or forcing insurance companies to exit the exchanges altogether in 2018.

Thus, under Speaker Paul Ryan’s leadership, Republican congressional leaders met last week to craft proposals that they hope will lead to a viable bill once Congress reconvenes following the Presidents Week break. The recommended changes are contained within a GOP Healthcare Policy Memo entitled “Obamacare Repeal and Replace Policy Brief and Resources” and include the following proposals:

Introduce healthcare tax credits

Tax credits have long been proposed by both sides of the aisle as a means of leveling the playing field and improving the ability of all Americans to purchase affordable healthcare coverage without regard to income level, employment, the number of insurance companies in the exchanges or marital status. Three key requirements are that they must be refundable (if a family’s income tax level does not rise to the level of healthcare insurance cost and it requires an additional federal subsidy); they must be advanceable (so that families don’t have to wait to file their income taxes to receive needed tax credits to support monthly insurance premiums); and they must universal, putting an end to the preferential tax treatment of job-based insurance and replacing it with universal tax credits that would apply equally to individuals and families regardless of employment, income, number of insurance companies in an individual market or marital status.

The proposed tax credit would increase with age, would be available to dependent children up to age 26, would be portable regardless of employment status and would not be based on income level. The tax credits could not be given to undocumented immigrants or to individuals who are incarcerated or who want to purchase plans that include coverage for abortions. Any unused tax credit could be rolled over into a health savings account (HSA) and used in the future.

In addition, Republicans would like to eliminate the taxes administered through the unpopular individual and employer mandate, and taxes on health insurance premiums, prescription drugs, medical devices and high premium/low deductible healthcare policies (the Cadillac tax).

Expand the use of health savings accounts

HSAs are supported by both political parties and have been in existence since 1985 as a means for Americans to manage their own healthcare expenses through tax-preferred accounts that can be rolled over annually without penalty. In the 1990s, these vehicles were expanded to enable unemployed or self-employed individuals to access them, and currently more than 20 million Americans use them. They are typically tied to high-deductible health plans.

Republicans propose to expand their use by:

  • Almost doubling the maximum contribution limit allowed, up to $6,550 for individuals and up to $13,100 for families
  • Allowing spouses to make “catch-up” contributions to the same HSA
  • Counting expenses incurred prior to the establishment of an HSA as a legitimate tax deduction.

Modernize Medicaid

Medicaid currently covers 72 million Americans, is the largest source of healthcare coverage in America and has always been a point of contention between the states and federal government. That’s in part because the program is heavily subsidized by the federal government but administered by the individual states. This subsidy may not be rational as the cost of coverage for able-bodied individuals should be less than for those who are disabled or in high-risk pools and often overfunds some while underfunding others.

Republicans would like to move to a per capita allotment similar to what President Bill Clinton recommended in the 1990s when Medicaid was a third of its present size. This would be drawn down from the federal medical assistance percentage, which is the formula used to calculate the federal subsidy for each state. The allotment would be based upon a new formula that takes into account the major beneficiary categories (aged, blind, disabled, children and adults) multiplied by the number of enrollees within each group with an inflationary index applied. States could choose between this form of payment and block grants or global waivers, which would give states wide discretion in how the money is allocated assuming that required services to the most vulnerable populations (e.g., aged and disabled) are provided.

In addition, Republicans propose to repeal the Medicaid disproportionate share payments, which were widely seen as a means of forcing states to accept Medicaid expansion or lose both the new federal subsidies for Medicaid and support for areas that care for a significant number of indigent or uninsured patients.

Optimize high-risk pools through state innovation grants

One of the major conundrums is how to finance care for those with the greatest need of healthcare services, who often make up disproportionate costs. For every group of covered lives, the top 1% of beneficiaries make up approximately 23% of costs, and the top 5% of beneficiaries make up almost half of all costs. These individuals have traditionally been managed in state-run high-risk pools. Republicans proposed to issue state innovation grants to incentivize and reward states that are able to successfully cut the cost of care and provide necessary services for those who are most vulnerable.

Unanswered questions

Healthcare tax credits: With the expansion of tax credits and the elimination of many of the Affordable Care Act’s less popular provisions, there will obviously be a negative impact on the federal budget and a federal deficit that had already expanded to $20.1 trillion. Thus, all initiatives will need to pass muster by the Congressional Budget Office to ensure that they are at least budget-neutral and ideally contribute toward a lower national debt.

Expand the use of HSAs: There are still discrepancies between HSAs that can be created for employed versus nonemployed and married versus single individuals, and these will need to be rectified and reconciled so that all Americans have equal access to this important self-funding mechanism.

Modernize Medicaid: The major concern with proposed per capita, block grant and global waiver allotments is the substantive differences between the needs of individual beneficiaries. To review, within any group of covered lives, past data from the federal government show that subpopulations emerge as follows:

  • Top 1% (critical care and dying) make up 23% of healthcare costs (>$90K/year)
  • Top 5% (multiple chronic diseases) make up 49% of healthcare costs (>$45K/year)
  • Top 10% (chronic diseases) make up 64% of healthcare costs (>$15K/year)
  • Bottom 50% (healthy population) make up 3% of healthcare costs (>$8K/year)

Thus, unless the proposed allotment strategies are risk- and severity-adjusted according to complexity and cost of existing illnesses, a majority of the population will receive more than they require whereas a small number (the top 1% and 5%) will receive less than they require for necessary lifesaving treatments and will be put at risk.

Most states are not set up to perform these calculations based upon the use of predictive analytics and incorporation of nonclinical social determinants (e.g., genetics, ZIP code, demographics, economic and behavioral) to accurately predict and budget how to prioritize and fairly allocate these essential and lifesaving resources.

Optimize high-risk pools through state innovation grants: The unpopular individual and employer mandates were included in the ACA in order to reduce the number of uninsured individuals in this country in an effort to dilute the high-risk pools, make healthcare coverage more affordable for everyone and reduce cost shifting. The challenge with voluntary healthcare insurance is that those with the greatest need tend to purchase insurance and those who are healthy tend not to—intensifying high-risk pools, making insurance more unaffordable for everyone and forcing healthcare organizations into shifting the cost of those who cannot pay onto those who can and do.

For instance, a CT scan that costs $295 to perform may result in a $2,000 charge in order to cover the cost of charity care, bad debt and declining reimbursement. Thirty-two industrialized nations have higher percentages of their population with healthcare coverage than the U.S., something that neither the ACA nor the Republican proposals choose to address.


The latest Republican proposals for replacing the ACA are actually modifications and reforms to the existing law that are important to consider. Addressing the unanswered questions, which represent the true complexity of the healthcare industry, will be necessary before any proposed legislation is enacted that may cause unwanted healthcare and political repercussions.

Jonathan H. Burroughs, MD, MBA, FACHE, FAAPL is a certified physician executive and a fellow of the American College of Healthcare Executives and the American Association for Physician Leadership. He is president and CEO of The Burroughs Healthcare Consulting Network and works with some of the nation's top healthcare consulting organizations to provide "best practice" solutions and training to healthcare organizations.