Editor’s Note: Timothy Jost analyzes the insurance and revenue provisions of the President’s Proposal for Health Care Reform in the post below. In a second post, Jost analyzes the other provisions of the proposal.

On Monday, February 22, the White House posted the President’s Proposal for Health Care Reform.  Although the proposal was posted as “a prelude to the February 25 health care summit between Democrat and Republican congressional leadership and the president, it is not a mere ideas piece or discussion draft.  Rather, it is essentially the outline of a budget reconciliation bill that—in tandem with HR 3590, already enacted by the Senate—would complete the task of comprehensive health care reform when adopted by both Houses.  All of the provisions of the President’s Proposal arguably relate to the revenues and outlays of the federal government and should pass muster under the Senate reconciliation rules. 

As widely expected, the bill seems to reflect negotiations between House and Senate leadership that took place in January, prior to the Massachusetts Senate bombshell, intended to split the difference between the House and Senate bills. While those negotiations were presumably comprehensive, however, the President’s Proposal addresses only issues that can be resolved through reconciliation.  It does not, for example, change the Senate bill’s abortion language.  It also tends to follow more closely the Senate’s approach than the House’s, even on issues arguably amenable to reconciliation.  It does not, for example, include a public plan, sides with the Senate on state exchanges rather than a national exchange, and adopts the Senate’s 133 percent ceiling for Medicaid eligibility rather than the House’s 150 percent. 

The position of the White House, of course, is that it is merely putting out a proposal to debate with the Republicans.  Indeed, in the press conference accompanying the release, White House staff stated that Republican fraud and abuse ideas had been incorporated into the President’s Proposal. Republican proposals amenable to adoption through reconciliation could, of course, be added to or form the basis of modification to the President’s Proposal.  Republican proposals that cannot be adopted through reconciliation could be voted on separately at a later date, perhaps as part of a bipartisan package to amend parts of the current legislation after it is adopted by Congress. The president’s approach of merely putting out reconciliation language is, however, politically realistic.   It should be clear to everyone that simply starting over with a clean slate is not politically feasible at this point.  A year’s work has gone into the pending legislation, and this Congress has neither the time nor the good will to do it all over again.

Insurance Regulation Changes

Assuming that the president’s proposals are intended to amend the Senate bill, how would they change it?  Most media attention to date has been focused on Title I of the Senate bill, the provisions of the bill intended to improve the affordability and accessibility of private health insurance.  This post focuses on the insurance provisions of the President’s Proposal as well as its revenue provisions.  My next post will discuss Medicare, Medicaid, and other provisions of the proposal.

Title I of the Senate bill includes a host of provisions that tighten regulation of health insurance, particularly in the nongroup and small group market.  The President’s Proposal would go further in couple of respects.  First, it would increase oversight of premium increases at the federal and state levels.  The original Senate bill provided for federal and state review of unreasonable premium increases, while the manager’s amendment to the Senate bill permitted the states to take into account excessive and unjustifiable premium increases in deciding whether or not to allow insurers access to the exchanges.  Responding to dramatic and widely publicized premium increases in California and other states, the proposal would go further and allow the Department of Health and Human Services or the states to review rate increases and to require insurers to lower their premiums or provide rebates if increases were determined to be unreasonable. About half of the states reportedly now have authority for prior approval of rate hikes, but this proposal would strengthen this authority and supplement it with federal authority.  It would also create a new national Health Insurance Rate Authority that would, according to a report in The New York Times, generate an annual report on the reasonableness of insurance rate increases. 

Second, the President’s Proposal would extend the regulation of grandfathered plans.  Under the House and Senate bills, individual and group policies that existed at the time of the adoption of the law would not have been subject to the new law.  The Senate manager’s amendment extended a few provisions of the new law to grandfathered plans, including disclosure and medical loss ratio requirements.  The President’s Proposal would go further in regulating grandfathered plans, requiring them immediately to cover adult dependents to age 26, prohibiting rescissions, strengthening the appeals process, and extending state rate review.  After 2014 grandfathered plans would also become subject to the annual and lifetime limit bans, the preexisting condition exclusion prohibition, and the prohibition against discrimination for highly compensated individuals, and after 2018 they would be required to cover preventive services.  In essence, grandfathered plans would become subject to most of the consumer protections in the bill, except for the underwriting prohibitions. 

Affordability Subsidies and Mandates

Title I of the Senate bill also provides tax credits to help lower- and middle-income Americans afford health insurance in the nongroup market, an individual mandate to ensure that those who can afford health insurance accept the responsibility to buy it, penalties for employers whose failure to insure employees leaves them dependent on federal subsidies, and tax credits to help small employers insure employees. These provisions are incorporated into the President’s Proposal in modified form.  

The House bill premium subsidies tend to be more generous to lower-income Americans, while the Senate bill is more favorable to middle-income families.  The President’s Proposal sticks closer to the Senate than the House bill, but it marginally increases subsidies for Americans under 200 percent of the poverty level and, surprisingly, for families whose income is between 300 percent and 400 percent of the poverty level as well.  It also increases the cost-sharing subsidies for families with incomes under 250 percent of the poverty level more than the Senate bill would, although across the board the cost-sharing subsidies in the President’s Proposal remain less generous than in the House bill.  Tables showing how the premium subsidy tax credits and reduced cost sharing would change can be found here.

More concretely, The New York Times illustrates the changes as follows:

Under the president’s plan, a family earning about $88,000 a year would pay … about $8,380, not including out-of-pocket costs, such as co-payments or deductibles. Under the Senate bill, such a family could have paid $8,643 a year in premiums and under the House bill as much as $10,584 a year.

Under the president’s plan, a family earning $22,050 would have to pay $441 in annual premium costs compare to $331 under the House bill. And a family earning $33,100 would have to pay up to $1,324 a year in premiums . . . compared to a maximum of $993 under the House bill.

Both the House and Senate bills require individuals not otherwise covered by employee-based coverage or a public program to purchase health insurance.  For the nongroup market to function, healthy as well as unhealthy individuals and families must purchase insurance.  Once health status underwriting is outlawed, this will become even more essential.  The House bill imposed a percentage-of-income penalty on uninsured persons who refused to purchase insurance, while the Senate imposed the higher of a flat dollar amount or a percentage-of-income penalty.  The President’s Proposal adopts the Senate’s approach, but it reduces the flat dollar amount (from $495 to $325 in 2015, and $750 to $695 in 2016), while it raises the percentage-of-income penalty (from .5 percent to 1 percent in 2014, 1 percent to 2 percent in 2015, and 2 percent to 2.5 percent, the House bill level, in 2016 and thereafter).  As in the House bill, the penalty would not apply to persons with income below the tax filing threshold (currently $18,700 for a married couple), but also, following the Senate bill, it would exempt persons who would have to pay more than 8 percent of their income to purchase insurance. 

Like the Senate bill (and unlike the House bill), the President’s Proposal does not include an employer mandate but rather imposes a penalty on employers who do not offer insurance (or do not offer adequate insurance) and whose employees end up receiving public subsidies.  As in the original Senate bill, the mandate does not apply to small employees (with fewer than 50 employees), but the proposal also excludes from the penalty calculation the first 30 workers of an employer (so that a firm with 51 workers only pays a penalty based on 21 workers).  The assessment on a firm that does not offer insurance, but that has employees who received subsidized coverage through an exchange, would increase, however, from $750 per full-time employee to $2,000 (which is still less than half the average employer’s contribution for health insurance in 2009).  The President’s Proposal also eliminated penalties for employers that impose waiting periods for coverage eligibility, but caps waiting periods at 90 days.  As in the original Senate bill, the proposal contains $40 billion in tax credits for small businesses to cover their employees, beginning upon enactment.  

Additional Revenues

Although the President’s Proposal has not yet apparently been scored by the CBO, White House staff stated at the press conference that the increased premium tax credits and cost-sharing reductions, as well as the cost of Medicaid funding enhancements discussed in my next post, would increase the cost of the Senate bill from $871 billion to about $950 billion.   This cost would be partially offset by cuts in Medicare Advantage payments beyond those found in the original Senate bill. The increased individual and employer mandate penalties should also generate significant revenue.   However, the bill also requires additional tax revenue. 

The House bill depended largely on a tax increase for individuals earning more than $500,000 and families earning more than $1 million.  The Senate bill depended on a variety of taxes, most importantly a 40 percent excise tax on high-cost health plans—the so-called “Cadillac plan” tax.  The President’s Proposal claims to take the Senate approach, but it modifies that dramatically and includes a significant tax increase for high-income taxpayers.

The tax on high-cost health plans has been widely supported by health economists, who believe that the tax subsidy for employee health benefits has resulted in an inefficiently high level of health insurance.  Supporters of the tax contend that excessively generous insurance has resulted in inadequate cost sharing that blinds employees to the true cost of health care, leading to overconsumption.   Taxing health benefits would, according to this line of reasoning, not only raise revenue but also reduce costs.

Other health policy analysts, however, have challenged this reasoning.   They contend that high-cost health policies are more expensive primarily because they cover older and less healthy workers of employers in areas where health care costs are high.  Little of the variation in health insurance costs is attributable to health policy design.  Unions have been particularly vocal in their opposition to the excise tax, but in fact union health benefits plans are not notably more generous than nonunion plans, and the tax would fall on many more nonunion than union employees.  House and Senate negotiations in January had reportedly reached an agreement to delay imposition of the tax on union plans, an arrangement that was denounced in some quarters as a special deal for the unions.

The President’s Proposal delays the implementation of the high-cost health plan tax for everyone from 2013 to 2018, to give employers and employees time to adapt.  It also increases the threshold level from $8,500 to $10,200 for individuals, and from $23,000 to $27,500 for families.  These amounts would be increased by only 1 percent above the CPI per year, however, which would make them far less generous in 2018 than they are now.  But the proposal also states that “to the degree that health care costs rise unexpectedly quickly between now and 2018, the initial threshold would be adjusted upwards automatically.”  Adjustments would also be made to accommodate firms whose health care costs are higher due to the age or gender of their workers, while dental and vision benefits would not count toward the taxable amount.  As in the Senate bill, high-risk occupations would also be favored by higher thresholds.  The end result is a tax that is far more equitable, but also that will raise far less revenue and have less of an impact, for good or ill, on employment-related insurance coverage.

The biggest source of additional revenue in the President’s Proposal is an increase in taxes on high-income taxpayers.  Following the original Senate bill, the proposal increases the Medicare Hospital Insurance tax for single people earning over $200,000 a year and couples earning over $250,000 by .9 percent to 2.35 percent, with the additional income going to the Medicare HI trust fund.  In addition, however, a 2.9 percent tax (equal to the employer’s and employee’s combined share of the current HI tax), would be imposed on these taxpayers for income from interest, dividends, annuities, royalties, and rents (other than income derived in the ordinary course of a trade or business that is not a passive activity). This tax would be credited to the Supplemental Medical Insurance trust fund.  In this respect the proposal resembles the House’s bill more closely than the Senate’s. 

Additionally, the President’s Proposal would follow the House bill in denying eligibility under the biofuels tax credit for certain paper or pulp processing byproducts, and in increasing penalties on tax shelter arrangements that lack economic substance.  The proposal would increase taxes on brand-name pharmaceuticals by $10 billion, but it delays the tax imposed on health insurers until 2014 and exempts from that tax certain nonprofit insurers and VEBAs.  Finally, the proposal delays the medical device manufacturer fee found in the Senate bill to 2013 and converts it to an excise tax.   

My next post will examine the remaining provisions of the President’s Proposal.