Legislative Bulletin: H.R. 4872, Health Care and Education Reconciliation Act

Title I—Coverage, Medicare, Medicaid, and Revenues

Subsidies: Increases subsidies for health coverage, offered as refundable, advanceable tax credits payable directly to insurance companies. Specifically, the bill raises premium subsidy levels for those with incomes between 133-150% of the federal poverty level (FPL), and those between 250-400%.   Individuals with incomes between 300-400% FPL would be forced to pay 9.5% of their adjusted gross income on health insurance, instead of 9.8% in the Senate bill. The federal share of cost-sharing would also be increased for individuals with income of between 133-250% of FPL.

Revises the income definitions in the Senate bill, using “modified adjusted gross income” instead of “modified gross income” for purposes of determining subsidy eligibility, and permitting states an income disregard of 5% of income with respect to determining Medicaid eligibility. However, the bill also includes an additional adjustment and trigger mechanism after 2018 to slow the growth of the premium subsidy levels. The Congressional Budget Office has stated that “over time, the spending on exchange subsidies would therefore fall back toward the level under H.R. 3590 by itself.”

Increase in individual mandate:  Modifies the penalty for not having health insurance from $750 or 2 percent of income to $695 or 2.5 percent of income.  The effect of this is to shift the burden of the mandate slightly from lower income Americans to upper income Americans.  Raises $2 billion more in revenue relative to Senate bill.

Increase in employer mandate:  Increases the penalty for businesses that don’t offer health insurance and have at least one employee receiving a subsidy in the exchange from $750 per full time employee to $2,000 per full time employee.  The first 30 workers are disregarded in calculating the penalty.  Strikes the small business exemption carve-out for the construction industry.  Raises $25 billion more relative to the Senate bill.

Implementation Funding: Provides $1 billion in new mandatory spending in a “Health Insurance Reform Implementation Fund” created within the Department of Health and Human Services.

Medicare Part D “Doughnut Hole:” Provides a $250 rebate for 2010 for any Medicare beneficiary who enters the prescription drug coverage gap. Some may note that the flat $250 payment is not tied to a beneficiary’s actual spending within the coverage gap; thus a beneficiary would receive the full $250 payment if he or she only entered the “doughnut hole” by $10. The bill also postpones until January 2011 the start of the prescription drug “discount” program created in the Senate bill by six months, until January 1, 2011.

Starts a process of closing the “doughnut hole” beginning in 2011; however, that gap will not be filled until 2020—outside the ten-year budget window. Some may view the delay as a budgetary gimmick designed to mask the true cost of this new entitlement.

Medicare Advantage Cuts: The bill imposes yet more cuts to Medicare Advantage, phasing in a new system of blended benchmarks. Benchmarks will be phased in beginning in 2012, and are based on overall levels of Medicare spending, with low-cost areas receiving up to 115% of traditional Medicare spending and high-cost areas receiving 95% of traditional Medicare spending. Benchmarks are phased in over longer periods in areas currently receiving higher MA rebates. These cuts, over and above those included in the Senate bill, will further reduce access to both MA plans and the additional benefits they provide.

Establishes a new mechanism to increase payments to “high-quality” MA plans, even though traditional Medicare does not base its payments on quality measures. Plans receiving at least four stars in a new scorecard will be subject to bonus payments of 5% in 2014 and succeeding years, with those amounts doubled in urban markets with high MA penetration and below-average Medicare spending. Requires additional adjustments to MA plan payments reflecting differences in coding intensity compared to traditional Medicare, and repeals a comparative cost adjustment program created as part of the Medicare Modernization Act (P.L. 108-173). Requires MA plans to spend at least 85 percent of their premium costs on medical claims, and directs rebates from plans not meeting that threshold into a management account at CMS.

Other Medicare Cuts: Begins reductions in Medicare disproportionate share hospital (DSH) payments in 2014, rather than 2015 in the Senate bill, but lessens the overall impact of DSH reductions by $3 billion through 2019. The bill makes further market basket adjustments to inpatient hospitals, long-term care hospitals, inpatient rehabilitation facilities, psychiatric hospitals, and outpatient hospitals than those included in the underlying Senate bill. The bill also accelerates and expands changes in the Senate bill regarding the presumed increase in utilization rates for imaging services, resulting in an additional $1.2 billion in savings.

Physician Self-Referral: Extends from August 1, 2010 to December 31, 2010 implementation of a ban on new physician-owned hospitals included in the Senate bill, and adds a limited exception to growth caps on existing physician-owned facilities for those hospitals that treat the largest number of Medicaid patients in their county.

Medicaid Funding: The bill amends the Senate legislation to “fix” the “Cornhusker Kickback,” such that all states would have 100% of their Medicaid expansion costs paid in 2014 through 2016, 95% in 2017, 94% in 2018, 93% in 2019, and 90% in 2020 and future years. Some may however note that these provisions still leave states responsible for tens of billions in unfunded liabilities through 2019—sums that will only grow in the years outside of the budget window.

Provides for a five-year transition period in 2014-2018 for “expansion states” that have already broadened their Medicaid programs to include the populations (namely, childless adults) covered under the Senate bill.

Provides an increase in Medicaid reimbursement levels to the prevailing Medicare rates in each Medicare fee schedule area, fully funded by the federal government—but only for years 2013 and 2014. Many may consider this “cliff” in the years following 2014 a budgetary gimmick to mask the bill’s true cost, similar to the sustainable growth rate (SGR) mechanism now used to calculate Medicare physician reimbursements. Some may also question whether this reimbursement bias in favor of primary care will give providers and states a greater incentive to classify their treatments as constituting primary care, in order to obtain higher reimbursements fully paid for by federal dollars.

Further reduces Medicaid disproportionate share hospital (DSH) payments beyond those included in the Senate bill, and establishes a payment methodology whereby the largest DSH reductions would be imposed on the states with the largest reduction in the number of uninsured individuals. Provides special language increasing DSH allotments for Tennessee, which some may view as a “backroom deal” designed to win the votes of Tennessee House Members.

Other Medicaid Provisions: The bill increases Medicaid funding for American territories, delays establishment of the “community first choice option” for long-term care services from October 2010 to October 2011, and narrows the definition of a covered drug with respect to the Medicaid drug rebate program.

Fraud and Abuse Provisions: The bill re-defines “community mental health centers” within Medicare, and repeals a section of the Medicare statute related to Medicare prepayment medical review. Authorizes the disclosure of information regarding seriously delinquent tax debts to the Centers for Medicare and Medicaid Services (CMS), and requires CMS to consider such information in reviewing provider enrollment applications and reimbursing Medicare providers. The bill includes a total of $250 million in new funding for the Health Care Fraud and Abuse Control Fund, and links future increases in funding for the Medicaid Integrity Program to consumer price inflation. The bill also provides for a 90-day period of enhanced oversight of the initial claims of durable medical equipment (DME) providers in cases deemed a significant risk of fraud.

Tax Increases

Decrease in high-cost plans excise tax: Delays the effective date of the high-cost plans tax from 2013 to 2018 from 2013; raises the thresholds for what qualifies as a high-cost plan to $10,200 for singles and $27,500 for families, adjusted upwards by 55 percent and then again adjusted for each percentage point the cost of the FEHB Standard Blue Cross/Blue Shield plan grows over 55 percent between 2010 and 2018. Strikes the transition rule for high-cost states, and indexes the thresholds after 2020 for CPI inflation instead of inflation plus one percent. Includes a carve out for multiemployer plans that generally cover unionized firms that allows single employees to qualify for higher the family threshold. Raises $116.9 billion less relative to the Senate bill.

New Medicare HI tax on investment income: For the first time in history, imposes a 3.8 percent tax, transferred to the Medicare Trust Fund, on investment income (interest income, dividends, annuities, royalties, or rents) for singles earning over $200,000 and families earning over $250,000; exempts active income from certain business ownership stakes and expenses and distributions from retirement plans. Much like the Alternative Minimum Tax, these thresholds are not indexed for inflation, so an ever increasing number of Americans will become subject to these investment and wage taxes over time. Raises $123.4 billion more relative to the Senate bill.

Delay limitation of flexible spending accounts by two years: Delays the effective date of the $2,500 cap on flexible spending accounts from 2011 to 2013. Raises $1 billion less relative to the Senate bill.

Increase in tax on pharmaceutical industry: Delays the effective date of the pharma tax one year to 2011, increases the annual fee within the budget window to $4.2 billion in 2018, and increases the per-year fee in perpetuity to $2.8 billion. Raises $4.8 billion more relative to the Senate bill within the budget window.

Increase in tax on medical device manufacturers: Changes the annual fee with a set dollar amount to an excise tax on medical device sales at 2.9 percent of the price of the device; delays until 2013. Exempts eyeglasses, contacts, hearing aids, and “generally purchased” goods. Raises $800 million more relative to the Senate bill.

Increased fees on health insurers: Delays the effective date on the net premiums for the insurance company tax from 2010 to 2014, provides an exclusion for certain non-profit insurers and voluntary employees’ beneficiary associations (VEBAs); increases the annual fee to $14.3 billion in 2018, increasing thereafter annually based on premium growth. Raises $500 million more relative to the Senate bill within the budget window and significantly more outside it.

Delay of elimination of deductible Part D subsidy: Ends the deduction for the Medicare Part D subsidy two years later, in 2013. Raises $900 million less relative to the Senate-passed bill.

Elimination of cellulosic biofuel credit for “Black liquor”: Uses the revenue raiser from the Senate-passed Baucus extenders bill that prevents a byproduct from paper production known as “black liquor” from qualifying for the cellulosic biofuels tax credit. Raises $23.6 billion over ten years.

Codification of the Economic Substance Doctrine: Uses the revenue raiser from the Senate-passed Baucus extenders bill that codifies a judicial code used to determine the economic substance of a transaction for tax purposes. Raises $4.5 billion over ten years.

Title II – Education and Health

Federal Pell Grants: Provides mandatory funding to increase the maximum Pell Grant to $5,500 in 2010 with progressive increases up to $5,975 by 2017. Beginning in 2013, Pell Grant increases would be indexed to inflation using the Consumer Price Index. CBO estimates this will cost $22.6 billion over 10 years.

Student Financial Assistance: Provides $13.5 billion in mandatory funds to partially cover the discretionary Pell Grant shortfall. Funds will remain available until September 30, 2012.

College Access Challenge Grant Program: Provides mandatory funding in the amount of $750 million over five years for the College Access Challenge Grant Program which promotes partnerships between federal, state, and local governments and philanthropic organizations through matching formula grants that are intended to increase the number of low-income students who are prepared to enter and succeed in postsecondary education.

Historically Black Colleges and Universities: Provides mandatory funding in the amount of $2.55 billion for Historically Black Colleges and Universities through the end of fiscal year 2019.

Termination of Federal Family Education Loan Appropriations: Ensures that no funds can be expended after June 30, 2010 can be used to support new lending activity in the Federal Family Education Loan (FFEL) program and shift all new loans to the federally run Direct Loan (DL) program. CBO estimates this will save $61 billion over $10 years.

Federal Consolidated Loans: Gives temporary authority for certain borrowers who are still in school to consolidate their loans into a Direct consolidation loan. These loans would have the same terms as Direct consolidation loans except the interest rate on the underlying loans are the applicable in-school rates and the rate is not rounded up to the nearest one-tenth. The goal of this provision is to ensure students have one servicer of their loans which could be split between the FFEL and Direct Loan program after the transition. CBO predicts this will cost $40 billion

Direct Loans at Institutions Outside the United States: Allows foreign institutions to participate in the Direct Loan program by making arrangements with domestic banks designated by the Secretary for loans to American students attending such institutions. Under current law, American students attending foreign institutions could only receive a federal loan through the FFEL program.

Contracts, Mandatory Funds: Provides mandatory funds and requires the Secretary of Education to award contracts to non-profit loan servicing agencies. Each eligible agency would be given a maximum of 100,000 student loans to service initially. Provides $50 million in mandatory funds for the U.S. Department of Education to provide technical assistance to institutions of higher education so they can switch from FFEL to DL. Provides $50 million in mandatory funds for fiscal year 2010 and 2011 ($25 million each year) for payments to loan servicers for retaining jobs.

Agreements with State Owned Banks: Would allow banks that are guaranteed by a state, owned by a state, under the control of a board of directors that includes the Governor, and originates or holds loans under the FFEL program prior to July 1, 2009 to continue to provide federally guaranteed loans to students who are residents of that state or are attending an institution of higher education in that state. The only bank that currently meets this definition is the Bank of North Dakota.

Income Based Repayment: Beginning July 1, 2014 would expand the existing income-based repayment program which limits the percentage of an individual’s income that goes to student loan repayment, as well as the length of time they have to pay off the loan. The provision would decrease the limit on loan payments from 15% to 10% of individual income and forgive loans after 20 years rather than 25 years. CBO estimates this will cost $1.5 billion over ten years.

Insurance Reforms: The bill applies to all “grandfathered” health plans provisions in the Senate bill regarding excessive waiting periods before becoming eligible for employer-based insurance, lifetime limits on benefits, rescissions, and coverage of dependents, and clarifies that only non-married dependents may remain on their parents’ insurance policies until turning 26. These provisions would both raise premiums and violate the promise that “If you like your current plan, you can keep it.”

340B Program: The bill repeals the Senate bill’s expansion of the program to inpatient drugs, and exempts orphan drugs from the 340B program with respect to new participants in same.

Community Health Centers: The bill amends the Senate legislation to increase mandatory funding for community health centers by $2.5 billion. However, neither the reconciliation bill nor the Senate-passed measure include ANY prohibition on community health centers using these federal funds to offer elective abortion.

Cost

According to the Congressional Budget Office (CBO), the reconciliation bill, when combined with the Senate bill, would spend a total of $940 billion on coverage expansions. However, these provisions exclude other non-coverage spending: $93.9 billion in related mandatory health spending in the Senate bill, $50.3 billion in mandatory health spending in the reconciliation bill, $41.6 billion in mandatory education spending in the reconciliation bill, and at least $70 billion in discretionary spending included in the Senate bill, bringing the total cost in the bill’s first 10 years to $1.2 trillion. Moreover, Republican staff on the Senate Budget Committee estimates that the total spending in the Senate bill’s first 10 years of full implementation (fiscal years 2014-2023) would total $2.4 trillion.

To pay for the additional spending on subsidies and education spending, the bill would raise taxes by an additional $50 billion, and reduce Medicare spending by $60.5 billion. The reconciliation bill and the Senate bill impose Medicare Advantage cuts totaling $202.3 billion. Tax increases include $25 billion in additional revenue from the employer mandate, $23.6 billion from removing “black liquor” from the cellulosic biofuels tax credit, $123.4 billion from the new Medicare taxes on investment income—all offset by a $119 billion reduction in revenue from the “Cadillac tax” delay. The bill also includes $67 billion in savings from the abolition of the FFEL program, which is channeled into $41 billion in new education spending and $19 billion in new health care mandatory spending.

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