Legislative Bulletin: Key Provisions of H.R. 3200, House Democrats’ Government Takeover of Health Care
On July 14, 2009, the Chairmen of the three House Committees with jurisdiction over health care legislation—Education and Labor Chairman George Miller (D-CA), Energy and Commerce Chairman Henry Waxman (D-CA), and Ways and Means Chairman Charlie Rangel (D-NY)—introduced H.R. 3200. On July 17, the Ways and Means Committee approved the bill by a 23-18 vote, and the Education and Labor Committee approved the bill by a 26-22 vote. The Energy and Commerce Committee approved its version of the legislation on July 31 by a 31-28 margin.
The short summary and analysis below refers solely to the bill as introduced. The Rules Committee will merge the respective bills, and their amendments approved in Committee, for the House to consider one piece of legislation on the floor.
Summary of Key Provisions
The Government Takeover
Creation of Exchange: The bill creates within the federal government a nationwide Health Insurance Exchange. Uninsured individuals would be eligible to purchase an Exchange plan, as would those whose existing employer coverage is deemed “insufficient” by the federal government. Once deemed eligible to enroll in the Exchange, individuals would be permitted to remain in the Exchange until becoming Medicare-eligible—a provision that would likely result in a significant movement of individuals into the bureaucrat-run Exchange over time. Employers with 10 or fewer employees would be permitted to join the Exchange in its first year, with employers with 11-20 employees permitted to join in its second year. Larger employers would be eligible to join in the third year, if permitted to do so by the Commissioner.
Exchange Benefit Standards: The bill requires the Commissioner to establish benefit standards for all plans. These onerous, bureaucrat-imposed standards would hinder the introduction of innovative models to improve enrollees’ health and wellness—and by insulating individuals from the cost of health services with restrictive cost-sharing, could raise health care costs.
Government-Run Health Plans: The bill requires the Department of Health and Human Services to establish a “public health insurance option” through the Exchange. The bill states the plan shall comply with requirements related to other Exchange plans. However, the bill does not limit the number of government-run plans nor does it give the Exchange the authority to reject, sanction, or terminate the government-run plan.
Empowered to collect individuals’ personal health information, with access to federal courts for enforcement actions and $2 billion in “start-up funds”—as well as 90 days’ worth of premiums as “reserves”—from the Treasury, the bill’s headings regarding a “level playing field” belie the reality of the plain text. In addition, the bill requires the Secretary to establish premium rates that can fully finance the cost of benefits and administrative costs, but there would always be the implicit backing of the federal government.
The bill provides that the government-run plan shall pay Medicare rates for at least its first three years of operation. Physicians participating in Medicare as well as the government-run plan would receive a 5 percent bonus for its first three years; reimbursement rates for pharmaceuticals within the government-run plan would be “negotiated” by the Secretary. The Lewin Group has estimated that as many as 114 million individuals could lose access to their current coverage under a government-run plan—and that a government-run plan reimbursing at the rates contemplated by the legislation would actually result in a net $16,207 decrease in reimbursements per physician per year, even after accounting for the newly insured.
The bill requires the Secretary to “establish conditions of participation for health care providers” under the government-run plan—however it includes no guidance or conditions under which the Secretary must establish those conditions. Many may be concerned that the bill would allow the Secretary to prohibit doctors from participating in other health plans as a condition of participation in the government-run plan—a way to co-opt existing provider networks and subvert private health coverage.
“Low-Income” Subsidies: The bill provides subsidies only through the Exchange, again putting employer health plans at a disadvantage. Individuals with access to employer-sponsored insurance whose group premium costs would exceed 11 percent of adjusted gross income would be eligible for subsidies.
The bill provides that the Commissioner may authorize State Medicaid agencies—as well as other “public entit[ies]” to make determinations of eligibility for subsidies, and exempts the subsidy regime from the five-year waiting period on federal benefits established as part of the 1996 welfare reform law (P.L. 104-193). Despite the bill’s purported prohibition on payments to immigrants not lawfully present, the first provision could enable State agencies—who have no financial incentive not to enroll undocumented workers in a federal subsidy program—to permit non-eligible individuals, including those unlawfully present, to qualify for health care subsidies. The second provision would give individuals a strong incentive to emigrate to the United States in order to obtain subsidized health benefits without a waiting period.
Premium subsidies provided would be determined on a six-tier sliding scale, such that individuals with incomes under 133 percent of the Federal Poverty Level (FPL, $29,327 for a family of four in 2009) would be expected to pay 1.5 percent of their income, while individuals with incomes at 400 percent FPL ($88,200 for a family of four) would be expected to pay 11 percent of their income. Subsidies would be based on adjusted gross income (AGI), meaning that individuals with total incomes well in excess of the AGI threshold could qualify for subsidies.
The bill further provides for cost-sharing subsidies, such that individuals with incomes under 133 percent FPL would be covered for 97 percent of expenses, while individuals with incomes at 400 percent FPL would have a basic plan covering 70 percent (the statutory minimum). These rich benefit packages, in addition to raising subsidy costs for the federal government, would insulate plan participants from the effects of higher health spending, resulting in an increase in overall health costs—exactly the opposite of the bill’s purported purpose.
Medicaid Expansion: The bill would expand Medicaid to all individuals with incomes under 133 percent of the federal poverty level ($29,326 for a family of four)—denying these low-income individuals a choice of private plans through the Exchange. Under the bill as introduced, the bill’s expansion of Medicaid to approximately 10 million individuals would be fully paid for by the federal government.
Benefits Committee: The bill establishes a new government health board called the “Health Benefits Advisory Committee” to make recommendations on minimum federal benefit standards and cost-sharing levels. The Committee would be comprised of federal employees and Presidential appointees.
The bill eliminates language in the discussion draft stating that Committee should “ensure that essential benefits coverage does not lead to rationing of health care.” Many view this change as an admission that the bureaucrats on the Advisory Committee—and the new government-run health plan—would therefore deny access to life-saving services and treatments on cost grounds. As written, the Committee could require all Americans to obtain health insurance coverage of abortion procedures as part of the bill’s new individual mandate.
Funneling Patients into Government Care
Abolition of Private Insurance Market: The bill imposes new regulations on all health insurance offerings, with only limited exceptions. Existing individual market policies could remain in effect—but only so long as the carrier “does not change any of its terms and conditions, including benefits and cost-sharing” once the bill takes effect. With the exception of these grandfathered individual plans subject to numerous restrictions, insurance purchased on the individual market “may only be offered” until the Exchange comes into effect, abolishing the private market for individual health insurance and requiring all non-employer-based coverage to be purchased through the bureaucrat-run Exchange.
Employer coverage shall be considered exempt from the additional federal mandates, but only for a five year “grace period”—after which all the bill’s mandates shall apply. By applying new federal mandates and regulations to employer-sponsored coverage, this provision would increase health costs for businesses and their workers, encourage employers to drop existing coverage, and leave employees to access care through the government-run Exchange.
“Pay-or-Play” Mandate on Employers: The bill requires that employers offer coverage, and contribute to such coverage at least 72.5 percent of the cost of a basic individual policy—as defined by the Health Benefits Advisory Council—and at least 65 percent of the cost of a basic family policy, for full-time employees. The bill further extends the employer mandate to part-time employees, with contribution levels to be determined by the Commissioner, and mandates that any health care contribution “for which there is a corresponding reduction in the compensation of the employee” will not comply with the mandate—which would encourage them to lay off workers.
Employers must comply with the mandate by “paying” a tax of 8 percent of wages in lieu of “playing” by offering benefits that meet the criteria above. In addition, beginning in the Exchange’s second year, employers whose workers choose to purchase coverage through the Exchange would be forced to pay the 8 percent tax to finance their workers’ Exchange policy—even if they offer coverage to their workers.
The bill includes a limited exemption for small businesses from the employer mandate—those with total payroll under $250,000 annually would be exempt, and those with payrolls between $250,000 and $400,000 would be subjected to lower tax penalties (2-6 percent, as opposed to 8 percent for firms with payrolls over $400,000). However, these limits are not indexed for inflation, and the threshold amounts would likely become increasingly irrelevant over time, meaning virtually all employers would be subjected to the 8 percent payroll tax.
The bill amends ERISA to require the Secretary of Labor to conduct regular plan audits and “conduct investigations” and audits “to discover non-compliance” with the mandate. The bill provides a further penalty of $100 per employee per day for non-compliance with the “pay-or-play” mandate—subject only to a limit of $500,000 for unintentional failures on the part of the employer.
The employer mandate would impose added costs on businesses with respect to both their payroll and administrative overhead. An economic model developed by Council of Economic Advisors Chair Christina Romer found that an employer mandate could result in the loss of up to 5.5 million jobs. The bill’s employer mandates would effectively encourage employers to drop their existing coverage due to fear of inadvertent penalties, resulting in more individuals losing access to their current plans and being forced into government-run health care.
Individual Mandate: The bill places a tax on individuals who do not purchase “acceptable health care coverage,” as defined by the bureaucratic standards in the bill. The tax would constitute 2.5 percent of adjusted gross income, up to the amount of the national average premium through the Exchange. The tax would not apply to dependent filers, non-resident aliens, individuals resident outside the United States, and those exempted on religious grounds. “Acceptable coverage” includes qualified Exchange plans, “grandfathered” individual and group health plans, Medicare and Medicaid plans, and military and veterans’ benefits.
For individuals with incomes of under $100,000, the cost of complying with the mandate would be under $2,000—raising questions of how effective the mandate will be, as paying the tax would in many cases cost less than purchasing an insurance policy. Despite, or perhaps because of, this fact, the bill language does not include an affordability exemption from the mandate; thus, if the many benefit mandates imposed raise premiums so as to make coverage less affordable for many Americans, they will have no choice but to pay an additional tax as their “penalty” for not being able to afford coverage. Then-Senator Barack Obama, pointed out in a February 2008 debate that in Massachusetts, the one State with an individual mandate, “there are people who are paying fines and still can’t afford [health insurance], so now they’re worse off than they were. They don’t have health insurance and they’re paying a fine.”
Medicare Advantage: The bill reduces Medicare Advantage (MA) payment benchmarks to levels paid by traditional Medicare—which provides less care to seniors—over a three-year period. This arbitrary adjustment would reduce access for millions of seniors to MA plans that have brought additional benefits.
The bill imposes requirements on MA plans to offer cost-sharing no greater than that provided in government-run Medicare, and imposes price controls on MA plans, limiting their ability to offer innovative benefit packages. This policy would encourage plans to keep seniors sick, rather than manage their chronic disease.
The bill also gives the Secretary blanket authority to reject “any or every bid by an MA organization,” as well as any bid by a carrier offering private Part D Medicare prescription drug coverage, giving federal bureaucrats the power to eliminate the MA program entirely—by rejecting all plan bids for nothing more than the arbitrary reason that an Administration wishes to force the 10 million beneficiaries enrolled in MA back into traditional, government-run Medicare against their will.
Cost and Other Concerns
Cost: On July 17, the Congressional Budget Office released a preliminary score for certain provisions in the bill—with the noteworthy caveat that with respect to the cost of proposed coverage expansions and insurance reforms, the estimate “is based on specifications provided by committee staff, rather than on a detailed analysis of the legislative language.” As a result, CBO noted that “our review of that language could have a significant effect on our analysis.”
More specifically, CBO estimates that the selected provisions would result in at least $1.6 trillion in federal spending during the 2010-2019 period, including $1.28 trillion to finance coverage expansions—$438 billion for the Medicaid expansions, $773 billion for “low-income” subsidies, $53 billion for small business tax credits, and $15 billion in interactions relating to tax revenues (resulting from changes in employer-sponsored coverage).
Savings would come from reductions within the Medicare program, of which the biggest are cuts to Medicare Advantage plans (net cut of $162.2 billion), reductions to certain market-basket updates for hospitals and other providers (total of $141.7 billion), skilled nursing facility payment reductions (total of $32 billion), various reductions to home health providers (total of $56.8 billion), and reduction in imaging payments ($4.3 billion).
While the net savings from expansion of drug price controls would save $48 billion over ten years, the CBO scoring table indicates that the cost of eliminating the “doughnut hole” for the Part D benefit—which is phased in over many years, and does not take full effect until well after the 2019 end of the budgetary scoring window—would in time exceed any savings from the discounts provided by the pharmaceutical industry.
The House Democrat legislation would increase the federal deficit by approximately $239 billion over ten years, according to CBO’s estimate. Most notably, CBO Director Elmendorf admitted to Members that the Democrat bill would essentially have no impact on the long-term growth of health care costs—the legislation’s purported goal. This spending of $1.6 trillion to finance a government takeover of health care would not only fail to stem the growth in health costs, but by creating massive and unsustainable new entitlements would also make the federal budget situation much worse.
Tax Increases: Offsetting payments would include $29 billion in taxes on individuals not complying with the mandate to purchase coverage, as well as a total of $208 billion in taxes and payments by businesses associated with the “pay-or-play” mandate.
The bill also imposes a new “surtax” on individuals with incomes over $350,000, that would ultimately raise rates by 2 percent on individuals with incomes between $350,000-$500,000, 3 percent on individuals with incomes between $500,000-$1,000,000, and 5.4 percent on individuals with incomes over $1 million. The tax would apply beginning in 2011. The Joint Committee on Taxation (JCT) estimates that this provision alone would raise taxes by $544 billion over ten years. As more than half of all high-income filers are small businesses, this provision would cripple small businesses and destroy jobs during a deep recession.
The Joint Committee on Taxation notes that the bill provisions would increase federal revenues by $581 billion over ten years—over and above the $237 billion in tax increases related to the individual and employer mandates noted above—for a total of $820 billion in tax increases over ten years. JCT found that the “surtax” would raise nearly $544 billion, the worldwide interest implementation delay would raise $26.1 billion, the treaty withholding provisions would raise $7.5 billion, and the codification of the economic substance doctrine would raise $3.6 billion. Finally, the tax on health benefits used to finance the Comparative Effectiveness Research Trust Fund would raise $2 billion over ten years.
Out-Year Spending: The score indicates that of the nearly $1.28 trillion in spending for coverage expansions, only $8 billion—or 0.6 percent—of such spending would occur during the first three years following implementation. As a result, the Democrat bill faces large—and growing—annual deficits in each of the last six years of the budgetary window; according to CBO, deficits will rise from $5 billion in Fiscal Year 2014 to $65 billion in 2019. In addition, the more than half a trillion in proposed tax increases would take effect in 2011, while the coverage expansions would not take effect until 2013. In other words, the Democrat bill spends so much, it needs eight years of higher taxes to finance six years of spending—and even then cannot come into proper balance without relying on budgetary gimmicks.
OMB Director Orszag previously testified that the White House would not support legislation that was not balanced in the long-term—and further stated that the Administration would not support legislation that increased the deficit in the tenth and final year of the budgetary window. Even taking into account Democrat budgetary gimmicks, H.R. 3200 fails that test—as the bill’s $65 billion deficit in 2019 is nearly double the $38 billion cost of physician payment reform (which would be moved into the budgetary baseline under Democrats’ “fuzzy math.”)
Budgetary Gimmicks: As noted above, the bill includes several provisions—some of which are not reflected in the CBO score—to mask its true cost. Most egregiously, the bill includes “directed scorekeeping” provisions ordering CBO not to count nearly $100 billion in spending included in the plain text of the bill regarding the retiree reinsurance and public health investment funds. The bill also makes several changes designed to lower the bill’s apparent cost—for instance, moving most of the cost of filling in the Part D “doughnut hole” to outside the ten-year budget window.
Some Democrats claim their legislation is “deficit-neutral” by excluding the cost of reforming the Sustainable Growth Rate (SGR) mechanism for Medicare physician payments—the total cost of which stands at $285 billion over ten years, according to CBO. While Members may support reform of the SGR mechanism, many may oppose what amounts to an obvious attempt to incorporate a permanent “doc fix” into the baseline—a gimmick designed solely to hide the apparent cost of health “reform.”
Between the $285 billion unpaid-for cost of reforming physician reimbursements, the nearly $100 billion in “phantom” new entitlements created, and the collective interest on the debt necessary to finance these unfunded obligations, the Democrat legislation contains approximately a half-trillion dollars in additional deficit spending within the ten-year budget window.
Undocumented Individuals: The CBO score notes that the specifications examined would extend coverage to 94 percent of the total population, and 97 percent of the population excluding unauthorized immigrants. However, the score goes on to note that of the 17 million individuals remaining uninsured, “nearly half”—or about 8 million—would be undocumented immigrants. Given that most estimates have placed the total undocumented population at approximately 12 million nationwide, some Members may question whether this statement presumes that some undocumented immigrants would obtain health insurance—including health insurance funded by federal subsidies.