Editor’s Note: In the post below, Tim Jost takes a first look at the Senate Democratic health reform legislation. In a second post, Jost provides a detailed look at several issues that arise under the bill’s insurance reforms. In a third post, Jost looks at how the bill treats abortion coverage and also at the question of the individual mandate’s constitutionality. In a final post, Jost examines the bill’s provisions on Medicare and other subjects.

As readers of Health Affairs are undoubtedly already aware, the Senate Democratic leadership has released HR 3590, the 2,074-page Patient Protection and Affordable Care Act.  The bill combines the Senate Health, Education, Labor, and Pensions (HELP) Committee bill marked up this summer and the Senate Finance Committee bill marked up earlier this fall.  On the whole, the combined bill resembles the Finance bill more closely than the HELP bill, but it does include important elements from the HELP bill, the most prominent of which is provision for the community health insurance (public) option. 

As has been widely reported, the CBO has scored the gross cost of the coverage provisions of the Senate bill at $848 billion over 10 years, less than the cost of the House bill, and as reducing the budget deficit by $130 billion over 10 years.  The CBO also projects that the bill would reduce the number of uninsured by 31 million by 2019, leaving 24 million nonelderly Americans uninsured.  The bill would cover 92% of the nonelderly population–94% of the nonelderly population excluding unauthorized immigrants. 

This post will describe the new programs and regulatory requirements that would take effect immediately under the bill and briefly summarize HR 3590’s insurance reform, affordability, and mandate provisions.  My next post will take a closer look at the bill’s insurance reforms, including the exchanges, public plan, cooperatives, and other insurance options created by the bill.  A third and possibly fourth post will analyze the Medicaid, Medicare, quality, public health, workforce, program integrity, innovative medical therapy access, “CLASS Act,” and revenue provisions of the bill.  I will not address the politics of the legislation, which will be closely followed and breathlessly reported by the media.

The basic insurance accessibility and affordability provisions of HR 3590 parallel those of HR 3962, the House bill, although there are important differences between the bills.  The most significant differences in these parts of the bill, I argue, are two.  First, the key provisions of the House bill go into effect in 2013; the Senate, not until 2014.  To expect the key provisions of the bill to remain intact for three years is heroic; to expect them to remain for four years seems highly unrealistic. I view further delay, therefore, as a real problem.  Second, the House bill creates a new federal agency, the Health Choices Administration, to implement and enforce the provisions of the bill.  The Senate bill, however, relies largely on the states to do so and gives the states far more flexibility in how they go about doing so.  This will make implementation much more complex and uncertain.

Insurance Reforms Implemented Immediately

Although most of the financing reforms do not take effect until 2014, several take effect within six months of enactment.  The hope is, obviously, that these will be noticed and that Americans will patiently await implementation of the remainder of the bill. 

First, the bill bans lifetime coverage limits and unreasonable annual limits.  (The bill cross-references Section 223 of the Internal Revenue Code, the HSA provision, to define unreasonable, but 223 does not address coverage limits.)  The bill prohibits rescissions except for fraud and misrepresentation and bars cost sharing for specified preventive services.  It requires insurers to extend coverage of unmarried dependents up to age 26 (though not to the children of those dependents). 

HR 3590 requires HHS to develop within 12 months clear and comprehensive standards for disclosing insurance coverage and requires insurers and self-insured plans to begin using these forms within 24 months.  The legislation extends to insured group plans a prohibition against discriminating in favor of highly compensated employees.  This prohibition already applies to self-insured and cafeteria plans. 

HHS is supposed to develop within 2 years reporting requirements that plans must implement describing their health outcome improvement, patient safety, and wellness programs.  Health insurers must report the percentage of their premiums that they spend on administrative costs and rebate to their insureds amounts that they spend on administrative costs in excess of 20% in the group market or 25% in the individual market (subject to qualifications). 

Finally, the legislation requires insurers to offer internal and external review of coverage determinations, a provision almost universally available already under state law.  Curiously, the bill does not (like the Finance bill) explicitly also recognize the availability of judicial review for these determinations, although it would presumably remain available under existing state or federal law.

New Programs Implemented Immediately

The legislation also creates several new programs, effective in 2010.  First, it provides funding for grants to states to establish health insurance ombudsman or consumer assistance programs.  Second, it authorizes HHS to require insurers to justify “unreasonable” premium increases and provides grants to the states to review premium increases as well. 

Third, the bill establishes a high-risk pool for people who have been uninsured for at least six months and who have a pre-existing condition.  Coverage under the program must have an actuarial value of 65%, out-of-pocket limits that do not exceed those applicable to HSA-linked high-deductible policies (currently $5,950 for an individual, $11,900 for a family), and premiums that do not exceed those charged for a standard insurance policy.  This program resembles that in the House bill, but would have more limited eligibility.  HR 3950 provides $5 billion for this program. 

A fourth program provides reinsurance for high-cost claims for retirees with health benefits. A fifth program offers tax credits for small businesses (up to 25 employees) for up to 35% of the employer’s contribution if the employer pays 50% or more of the premium for 2011 through 2013, and then half of the cost of the employer’s premium contribution thereafter for two years. (Non-profit employers get smaller credits).  Seventh, the bill has additional provisions to facilitate administrative simplification.  A final provision reduces the Medicare Part D doughnut hole by $500 by raising the coverage ceiling for 2010 only.

The immediate regulatory reforms in the bill would by and large remain in effect after 2014 except insofar as they are superseded by the provisions of the new bill.  The rebates for excess administrative costs, for example, sunset at the end of 2013. Most of the accessibility and affordability provisions of the bill do not go into effect until 2014, however.  I now turn to these.

Insurance Reforms

These parallel the House bill rather closely.  Existing individual and group plans are grandfathered in, but new plans offered in the individual or group market after 2014 must comply with the bill’s requirements.  The bill bans all pre-existing condition exclusions, requires guaranteed issue and renewal, and prohibits discrimination on the basis of health status.  The bill does permit substantial discounts for participation in wellness promotion programs, with complex provisions to attempt to keep wellness programs from becoming a safe harbor for health status discrimination.  The bill prohibits insurers for varying rates except based on individual or family coverage status, age, geographic area, and tobacco use (1.5:1).  The age variance of 3:1 is a compromise between the Finance Committee’s 4:1 (originally 5:1) and the HELP committee’s 2:1, but should have the effect of making health insurance less expensive for younger people, but more expensive for those who are older.  Waiting periods of greater than 90 days are banned, as is discrimination in coverage based on type of provider.  

A health insurance plan in the individual or small-group market must cover a range of “essential health benefits,” to be defined by HHS, and which must be equivalent to the typical employer plan.  No health insurance plan can have out-of-pocket limits exceeding those that apply to HSA-linked high-deductible health plans, and small-group plans cannot have deductibles exceeding $2,000 for individuals and $4,000 for families.  Plans in the individual and small-group market must fit under one of four levels of coverage — bronze, silver, gold and platinum — which correspond to actuarial values of 60, 70, 80, and 90 %, respectively. The House bill has three levels, with actuarial values of 70, 85, and 95 %, so the Senate bill offers much less generous coverage.  Indeed, the Bronze level has deteriorated from the Finance bill, which set the floor at 65 %.   The Senate bill also makes available a catastrophic very high-deductible policy for people under age 30 or for whom insurance is otherwise unaffordable.  Special provisions affecting abortion coverage will be addressed in a later post.

The Exchanges

Unlike the House bill, which provides a single national exchange, the Senate bill depends on each of the states to establish its own exchange (or to cooperate in forming a regional exchange).  If a state fails or refuses to do so, HHS may either establish one itself or contract with a private nonprofit to do so.  The exchanges will be discussed in detail in my next post, but they will basically offer individuals and employees of employers (initially small employers) a choice of qualified health plans.  Both individuals and small groups can purchase insurance inside and outside of the exchange, but affordability subsidies are available only through the exchange.  The only Americans required to purchase insurance through the exchange are members of Congress and congressional staff.

HR 3590 creates a public plan, the community health insurance option, which like the House public option is national in scope and negotiates fees with providers.  States may opt out of the public plan by passing a law, and CBO estimates that about a third will.  The bill also provides $6 billion in federal start-up funds for cooperatives, although CBO projects that these will be ineffective and that only half the start-up money would be spent. 

A number of provisions are intended to assure that the public plans and cooperatives will enjoy no advantages over private insurers.   The legislation also permits states to establish “basic health programs” for people under 200% of the poverty level, and allows interstate insurance sales through compacts and the sale of nationwide plans that do not need to comply with state mandates.  States can opt out of permitting nationwide plan sales in their state.  Finally, a broad waiver provision permits states to opt out of most of the requirements of the legislation if they meet certain requirements and get federal permission.

The bill provides for three different risk-adjustment programs, two temporary and one permanent, that will be discussed in the next post.

Premium Tax Credits and Cost-Sharing Reductions

Among the most expensive provisions of the bill, and those most important for expanding coverage to the uninsured, are those providing for premium and cost-sharing subsidies.  Premium assistance tax credits are available to help cover premium costs for American citizens and aliens lawfully present in the United States whose household income does not exceed 400% of the federal poverty level (FPL).  The premium subsidy is intended to reduce the cost of insurance to 2% of income for those at 100% of the FPL increasing to 9.8% at 400% of the FPL.  The subsidies are quite generous at the upper end (compared to 12% of income in the House bill and 12.5% in the Senate HELP bill), but less generous at the lower end (compared to 1% in the HELP bill and 1.5% in the House bill). 

Cost-sharing subsidies are on the whole less generous than those in the House bill, reducing the standard out-of-pocket maximum (based on the HSA-linked high-deductible health plan) to one-third for persons between 100% and 200% of the FPL, one-half for those 200% to 300%, and two-thirds for those at 300% to 400% of FPL.

Premium subsidies would be available to the uninsured, but also to persons who are offered employer coverage where the employee’s share of the premium would exceed 9.8% of income or where the plan’s share of the total allowed costs under the employee benefit plan is less than 60%.  Eligibility for credits will normally be decided by HHS, subject to an appeal process.

The Individual and Employer Mandates

Individuals are required to maintain “minimal essential coverage” under HR 3590.  This can be public insurance (Medicare, Medicaid, VA, etc.), individual coverage purchased through or outside of the exchange, employment-based coverage, or grandfathered coverage. Individuals who are not covered face a penalty of $95 in 2014, $350 in 2015, and $750 in 2016 and indexed thereafter.  An additional penalty equal to half the penalty amount is imposed for each uninsured dependent of an individual up to 300% of the normal penalty.

Excepted from the individual coverage requirement are persons who belong to religious groups that object to insurance (such as the Amish), individuals not lawfully present in the United States, persons who belong to religious sharing ministries, and incarcerated individuals.  The penalty does not apply to persons who have to pay more than 8% of their income for insurance after applying the affordability credits, those uninsured for less than three months, persons with incomes under 100% of poverty, members of Indian tribes, and persons who receive a hardship waiver.  A person who refuses to pay the penalty cannot be criminally prosecuted.

The penalty is calculated differently than that in the House bill. The House penalty is 2.5% of income above the filing limit (currently $8,350 for a single person, $18,700 for a married couple filing jointly) up to the average cost of a basic insurance policy.  It would seem that the penalty would be higher under the Senate bill for lower-income persons, lower for higher-income persons.  The CBO scores the Senate penalty as producing $8 billion in revenue, the House, $33 billion.

The Senate bill purports not to have an employer mandate.  Employers who do not insure their employees, however, face stiff penalties.  Employers who have more than 50 employees who do not offer health insurance and who have at least one full-time employee who receives a premium assistance tax credit must pay an assessment of $750 times the number of its full-time employees. 

An employer who offers insurance, but who has at least one full-time employee who receives a premium assistance tax credit because employment-related insurance is not affordable or adequate must pay the lesser of $3,000 for each employee who receives a credit or $750 for each full-time employee. Employers are prohibiting from firing or otherwise discriminating against employees who receive tax credits.  It is hard to imagine that many large employers that do not offer health insurance coverage will have no employees earning less than 400% of poverty, so the bill effectively imposes a mandate.

Large employers who impose waiting periods in excess of 30 days before employees become eligible for insurance also face penalties; of $400 per employee for 30-60-day periods, $600 per employee for periods over 60 days.  This provision will probably have a major impact on retailers and others who have high employee turnover.  Employers with more than 200 employees must automatically enroll new full-time employees in insurance coverage with an opportunity to opt out (the Nudge solution).  Employers must also notify employees of their potential coverage through the exchange and of the possible availability of affordability subsidies if the employment-based insurance is inadequate.