Daniel Hemel
Sep 19, 2017 · 6 min read
The rule named for the late Senator from West Virginia poses a formidable threat to the latest ACA repeal effort.

The Graham-Cassidy bill is gaining momentum, but a significant procedural obstacle still lies in its path. Before the bill goes to a floor vote, Senate Parliamentarian Elizabeth MacDonough will rule on whether parts of the legislation violate the Byrd Rule, which prevents bills passed through the reconciliation process from containing any provision that “produces changes in outlays or revenues that are merely incidental to the non-budgetary components of the provision.” The parliamentarian’s verdict is not law — and, in theory, Senate Republicans could ignore it — but so far the Senate Republicans have abided by the parliamentarian’s rulings, and it would be a surprise if they did otherwise here.

Aside from the text of the Byrd Rule, we have relatively little information about how the parliamentarian interprets the “merely incidental” prohibition. But we do know what provisions in the Better Care Reconciliation Act died in the “Byrd bath.” In July, the parliamentarian struck, among other elements of the Republican repeal-and-replace plan:

— Provisions that restricted funding to Planned Parenthood and provisions that prevented tax credits from being used for insurance plans that cover abortion;

— A provision authorizing states to allow certain Medicaid-funded plans to drop coverage for “essential health benefits” that the Affordable Care Act required them to cover;

— A provision establishing a six-month waiting period before consumers could enroll in individual market plans if they had failed to maintain continuous coverage;

— A provision allowing states to modify the ACA’s medical loss ratio, which currently requires insurers to spend at least 80% of premium dollars on medical care rather than administrative costs and profits;

— A provision allowing states to use certain Medicaid funds for non-health purposes;

— A provision allowing insurers to charge older patients up to five times what they charge younger patients; and

— A provision allowing states to waive various ACA rules (including rules related to essential health benefits and preexisting conditions) if they adopted “innovation” plans that did not add to the federal deficit.

Meanwhile, the parliamentarian rejected a number of Byrd Rule challenges brought by Senate Democrats. These included challenges to a provision partially shifting Medicaid to a block-grant system as well as a provision allowing states to impose work requirements on Medicaid recipients who are not disabled, elderly, or pregnant. The parliamentarian ruled that these provisions produced budgetary effects that were more than “merely incidental.” And the parliamentarian had previously determined that Senate Republicans can use the reconciliation process to pass provisions that reduce the individual and employer mandate penalties to zero (though Senate Republicans would violate the Byrd Rule if they used reconciliation to remove the text of the mandates entirely from the Internal Revenue Code).

(Note: Most of what we know about the parliamentarian’s Byrd Rule decisions comes from a series of backgrounders produced in July by the staff of Senator Bernie Sanders, the ranking member of the Budget Committee. See here for a compilation of the Sanders staff’s releases.)

How much of the Graham-Cassidy bill is the parliamentarian likely to strike? The bill makes a number of important changes that seem pretty clearly compliant with the Byrd Rule (at least by analogy to the provisions of the Better Care Act that survived Byrd Rule challenges in July). These include:

— Provisions that phase out various ACA tax credits, eliminate Medicaid funding streams, and replace both of those with new block grants to the states;

— Provisions that reduce the ACA’s individual and employer mandate penalties to zero (note that these measures have already survived a Byrd Bath); and

— Dramatic changes to the rules for tax-advantaged Health Savings Accounts (changes that, I assume, the parliamentarian would characterize as expansions of a tax preference and therefore as “budgetary”).

At the same time, the Graham-Cassidy bill includes abortion restrictions that look very similar to the ones struck by the parliamentarian in July. These include: provisions that prevent ACA tax credits from being used for plans that cover most abortions between now and the end of 2019 (after which the tax credits will be eliminated entirely); prohibitions on using block grant funding for most abortions; and a provision preventing individuals from using their Health Savings Accounts to pay for plans that cover most abortions. Senators Graham and Cassidy must have known that these abortion restrictions would die in the Byrd Bath — I imagine that they have left the provisions in the legislation for now purely as gesture to pro-life advocates within the Republican Party (and a meaningless gesture at that, since these provisions aren’t going to survive long).

The parliamentarian is also likely to strike the provision of the Graham-Cassidy bill allowing individuals age 30 and up to purchase “catastrophic” health insurance plans on the individual market. A catastrophic plan is a high-deductible plan that fails to meet the ACA’s minimum “bronze level” coverage threshold. Under current law, only individuals under age 30 or individuals who are exempt from the ACA’s coverage mandate are eligible for catastrophic plans. The Graham-Cassidy bill lets everyone enroll. This is a pure insurance market regulation, like the insurance market regulations that died in the Byrd Bath in July (i.e., the six-month lockout, the medical loss ratio modifications, the premium hike for older patients, and the state innovation waivers). If those didn’t pass the Byrd Rule, I don’t see how this possibly could.

Finally, and most importantly, the Graham-Cassidy bill proposes to add a new provision to section 2105 of the Social Security Act (42 U.S.C. § 1397ee) allowing states that receive block grants to request waivers of certain federal statutory requirements. Under this waiver provision, states could allow insurers on the individual and small group markets to adjust premiums on the basis of any characteristic other than sex or membership in a constitutionally protected class. States could thus allow insurers to charge whatever they want to older patients and patients with preexisting conditions. The waiver provision also would allow states to turn off the ACA’s “essential health benefits” requirements for individual and small group plans. However, the waiver would apply only “with respect to health insurance coverage that is . . . provided by a health insurer that is receiving funding under a State program [receiving a federal block grant] . . . and provided to an individual who is receiving a direct benefit . . . under a State program that is funded by a [block] grant.”

As Timothy Jost has noted, the limitation on the scope of the state waivers may be illusory: “If waivers are approved, for example, for a reinsurance program that applies to all insurers in the individual or small group market, the waivers could apply to all enrollees in those markets.” So Graham-Cassidy’s additions to 42 U.S.C. § 1397ee could mean an end to the ACA’s most important insurance market regulations. The trillion dollar question is whether the parliamentarian will recognize this as a backdoor attempt to pass pure insurance market regulations through the Byrd Rule (in which case she would strike the provision), or whether she will view this as a string attached to the receipt of a federal block grant (which would arguably be “budgetary” and thus OK under the Byrd Rule).

My own prediction is that the parliamentarian is likely to strike the waiver provision. This prediction is based on her rulings regarding the abortion restrictions and the state innovation waivers in the Better Care Act. The abortion restrictions were formally framed as strings attached to tax credits and federal funds, but the non-budgetary intent was not hard to discern. Likewise, the state innovation waivers were cloaked in budgetary language (a state could qualify for a waiver only if it produced a plan that would not add to the federal deficit), but the parliamentarian evidently saw that the intent was to transform health insurance markets rather than save the federal government money.

If this prediction turns out to be right, then Senate Republicans will face a hard choice: Do they (i) proceed with a gutted Graham-Cassidy bill that leaves in place the ACA’s most important insurance market regulations, (ii) go “nuclear” and disregard the parliamentarian’s ruling, (iii) return to the drawing board, or (iv) give up on repeal-and-replace until after the November 2018 midterms? Note that option (iii) is made somewhat more difficult by the fact that the Senate parliamentarian has ruled that the authority granted by the existing reconciliation resolution runs out on September 30, but the Republicans could probably pass a new reconciliation resolution that would allow them to pursue both health care reform and tax reform with 50 votes. In any event, a Byrd Bath ruling that strikes the waiver provision of Graham-Cassidy would put Senate Republicans between a rock and several hard places. And it seems to me like Senate Republicans are very likely to wind up in that position quite soon.

Whatever Source Derived

Thoughts on tax and the law

Daniel Hemel

Written by

Assistant Professor; UChicago Law; teaching tax, administrative law, and torts

Whatever Source Derived

Thoughts on tax and the law

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