Update on Kennedy-Dodd Legislation
Over the recess, the HELP Committee released a revised draft that contained changes to their legislative proposals, as well as further details not in the initial draft. Most of the changes were made to Title I — which concerns expanded coverage and insurance regulations, and has yet to be marked up by the panel. (Note however that Subtitle H, creating a new long-term care entitlement, REMAINS in the base bill, comments on the redline version notwithstanding.) The major changes and modifications, along with comparisons to the House discussion draft where applicable, include:
- Retention of current-law language permitting insurance companies to vary premiums for healthy behaviors (followed by companies like Safeway), and extension of this permission to individual insurance policies. These provisions would have been repealed as a result of changes proposed in the initial draft. However, the bill language would not amend existing regulations permitting no more than a 20% discount for healthy behaviors — which Safeway’s CEO and others have said is an insufficient differential to reflect the full cost of individuals engaging in unhealthy practices.
- Elimination of a requirement that insurance carriers with “excessive” administrative costs or profits (as determined by the Secretary) offer rebates to customers. Instead, the bill now only requires disclosure of medical loss ratios — i.e. the percentage of premiums spent on direct medical expenses, health care quality-related expenses (e.g. disease management), and all other activities. The House bill includes multiple provisions essentially establishing an 85% medical loss ratio nationwide — and imposing sanctions on carriers who do not meet the government-imposed price controls.
- Modification of language permitting those with individual insurance policies to keep their current coverage, such that the Secretary will now be empowered to state whether existing policies have been materially modified in a way that eliminates their “grandfathered” exemption from the new regime. Some Members may be concerned that this provision would give federal bureaucrats carte blanche to rob people of their current coverage in order to dump them into the new government-run program.
- Exemption of collectively bargained benefit coverage from all new mandates and regulations until such time as the collective bargaining agreement expires.
- Exemption of self-insured group policies from all the new requirements and mandates imposed by the bill. The House draft would only exempt existing group coverage for a five-year transition period, at which point the additional mandates would apply.
- Addition of language permitting States to keep their existing benefit mandates (over and above the federally-mandated package of benefits), provided they reimburse the federal government for additional costs associated with those benefit mandates. Similar language exists in the House discussion draft.
- Clarification that all carriers must treat all their enrollees as part of a single risk pool, regardless of whether or not the enrollee purchased coverage through the Gateway/Exchange or not.
- Removal of language creating a Medical Advisory Council (similar to the Health Benefits Advisory Committee created in the House draft) to establish minimum benefit standards. Instead this work would be conducted by the Secretary of HHS, in conjunction with the Chief Actuary of the Centers for Medicare and Medicaid Services. In other words, the bill would not create a new board of federal bureaucrats to establish coverage standards for all Americans — it would just use existing bureaucracies to do so.
- Reduction of “low-income” subsidies and the affordability standard for premiums. Subsidies will be extended to families with incomes under 400% FPL ($88,200 for a family of four), for whom premiums may not exceed 12.5% of adjusted gross income. (However, the amount of the premium cap will rise annually according to medical inflation, so that if health care inflation exceeds wage growth — as it has for much of the past decade — individuals will have to spend a growing percentage of their income on premiums.) Previously, the Kennedy bill extended subsidies up to 500% FPL ($110,250 for a family of four), and capped their premiums at 10% of AGI. By comparison, the House bill also extends subsidies to 400% FPL, but caps cost-sharing at 10% of AGI — whereas the revised Finance Committee proposals only extend subsidies to families below 300% FPL ($66,150 for a family of four), and cap premiums at 15% of AGI. Note also that, unlike the Finance Committee revisions, the Kennedy amendments did not reduce the richness of the benefit package itself — the actuarial value standards for “acceptable” coverage remain largely similar to the first draft, and thus may exclude some or all HSA-eligible policies from being “acceptable” insurance.
- Limitation on the amount that certain individuals can be charged for receiving excess subsidies — individuals with incomes below 400% FPL would be forced to repay no more than $400 in excess subsidies received. Some Members may be concerned that this provision would represent an invitation to defraud the government — as a family with $80,000 in income could claim annual wages of $20,000 to obtain additional subsidies in the knowledge that the most the family would be forced to repay only $400 of the thousands of dollars in subsidies potentially received.
- Clarification that the minimum tax penalty for non-compliance with the individual mandate would be 50% of the average basic premium. The bill had previously included no minimum tax penalty for violating the mandate, and still contains no maximum penalty for non-compliance, leaving tax levels entirely to the Treasury’s discretion.
- Imposition of a $750 per-employee tax ($375 for part-time workers) for firms who do not pay at least 60% of the cost of “qualifying coverage” for their workers. Firms with fewer than 25 employees (full-time and part-time) would be exempt from the tax. Some Members may be concerned that this provision would first raise taxes on businesses that cannot afford to offer coverage to their workers, and second encourage employers who are providing coverage to “walk away” from their current plans by paying a nominal fee — thus placing more individuals in the government-run health plan.
The amendments also include specific language for the government-run health plan (called the “community health insurance option”), which had not previously been released. The government-run plan would not be permitted to require providers to participate — a change from previously-rumored provisions in the Kennedy bill — and could offer coverage only for the minimum health benefit package, although states could impose additional requirements (at their own cost). The Secretary would “negotiate” with providers to set reimbursement rates — while the bill sets maximum reimbursement levels at the average paid by Exchange plans, it sets no minimum threshold, meaning that the government-run plan could pay doctors at rates below Medicare rates. (The House bill pays physicians at Medicare rates for the first three years — Medicare plus 5% if physicians participate in both the government-run plan and Medicare.)
The government-run plan would collect premiums to cover expected contingency costs, and the Secretary (the government-run health plan’s CEO) would be permitted to establish the solvency standards for the government-run plan — which many Members may view as a clear conflict-of-interest. The bill also contains an unlimited “start-up fund” for the government-run plan, which would finance administrative costs, the first 90 days of claim payments, and risk corridor payments similar to those established at the start of the Medicare prescription drug program. While the bill requires this “start-up fund” to be repaid within 10 years, it permits — but does not require — the Secretary to charge the government-run health plan interest. Some Members may view these provisions as indicative of a non-level playing field — one where taxpayers will end up paying the interest costs that the government-run plan will not carry.
Last Thursday, CBO also released an updated score of the bill, which can be found here. The score reveals total spending of $723 billion over ten years on low-income subsidies, and a net impact of $597 billion on the deficit; 34 million Americans would remain uninsured in 2019, the last year scored. Some additional points to keep in mind about the updated score:
- Both the coverage and cost numbers EXCLUDE the impact of a Medicaid expansion to those making under 150 percent of federal poverty. While Sens. Kennedy and Dodd claim that the Medicaid expansion would result in covering “97% of Americans,” such an expansion would also cost at least an additional $500 billion, and that cost is nowhere reflected in the current CBO score.
- The bill shows more limited “crowd-out” numbers, primarily for two reasons. The first is that lowering the subsidy eligibility levels from 500% FPL to 400% FPL will reduce individuals’ incentive to switch from their current coverage. The second is that, according to CBO, imposition of the $750 free rider tax on employers will minimize dislocation of individuals’ existing coverage. Some Members may question this logic, which states that employers who could pay the federal government $750 per worker to rid themselves of their health care obligations would overwhelmingly choose not do so.
- As with the prior score, the time needed to create the bill’s new bureaucracies and regulations means that most of the bill’s spending occurs in the budgetary “out-years.” According to CBO, the bill only spends a total of $87 billion in its first four years (i.e. 2010-2013), while spending nearly twice that amount — $148 billion — in its last year (2019) alone.
- The difference between the $789 billion in total spending ($723 on “low-income” subsidies, $56 billion on small business tax credits, and $10 billion on a reinsurance program) and the $597 billion total deficit figure is made up largely of tax increases: $52 billion in taxes on employers not complying with the employer mandate, $36 billion in taxes on individuals not complying with the individual mandate, and $10 billion in taxes from individuals shifting coverage sources and thereby losing tax preferences for their current coverage. (An additional $36 billion results from reduced Medicaid and SCHIP spending, as some beneficiaries would choose Exchange/Gateway coverage over current government programs.)
- The score also shows $58 billion in savings from establishment of a new long-term care entitlement program, which would take in “voluntary” premiums from all Americans (who would be automatically enrolled unless they opted-out). However, a footnote of the score admits that in time, benefit payments would exceed premium collections, such that “at some point beyond 2019, the proposal would add to the federal deficit.” Independent experts have suggested this program alone could add TRILLIONS to the deficit.
- The “97% of Americans” statistic being used by both Sen. Kennedy and Sen. Baucus is itself misleading, as it excludes undocumented aliens from counts of the uninsured. While no Democrat proposals to date have explicitly stated a desire to extend federal health benefits to the undocumented as part of health reform, aliens illegally present are still likely to seek care at hospital emergency rooms and elsewhere for urgent conditions — yet they have been explicitly exempted from a mandate to purchase insurance. Democrats ignoring this “free rider” problem to present rosier coverage statistics does not mean it will not persist for medical providers nationwide.
- The numbers again ONLY reflect provisions in Title I of the bill — such that the $150 billion in prevention and wellness entitlements created in other sections of the bill are not included in the score. Also excluded are the administrative costs (likely to be in the billions of dollars at minimum) needed to create the new bureaucracies included in the legislation.