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House Democrat Health 'Reform' Legislation - Short Summary of the Government Takeover of Health Care

House Democrat Health "Reform" Legislation: Short Summary of the Government Takeover of Health Care

September 1, 2009

SEPTEMBER 8, 2009

BACKGROUND
 
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
Page 1 of 6 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).  
Page 4 of 6
 
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.
.