**An update added the afternoon of March 20 at the end of this post provides a brief summation of the manager’s amendment to the health reform reconciliation bill being considered by the House.**

The House began its last step in the health reform legislative process early in the afternoon of Thursday, March 18, when it released HR 4872, the Health Care and Education Affordability Reconciliation Act of 2010. As this year’s health reform legislation has gone, this is a slender bill, weighing in at 153 pages, of which 35 are dedicated to student loans and 32 to revenue enhancements. Nonetheless, the reconciliation bill makes significant changes in the Senate bill, moving it closer to the House’s earlier legislation.

First, a quick recap for anyone who happens to have slept through the past few months. On November 7, the House passed its health reform bill, HR 3962, by a vote of 220 to 215. After more than a month of deliberation, the Senate finally cut off a filibuster and passed its own version of health reform, HR 3950, by a vote of 60 to 39 on December 24. Although the Senate and House bills are quite similar in their fundamentals, they are very different in their details. Deliberations began, therefore, to try to find a way to bring the two bills together. Then, on January 19, came the stunning Republican victory in a special election to replace Senator Kennedy from Massachusetts.

The Massachusetts election had two immediate effects. First, it deprived the Democrats of their filibuster-proof sixty-vote majority in the Senate. Second, it struck terror into the hearts of congressional Democrats—if they could lose in Massachusetts, where were they safe? The loss of 60 votes in the Senate meant that a full, substantive compromise between the House and Senate bills was no longer possible. The only way forward procedurally was through the budget reconciliation process, which allows legislation to pass the Senate with a majority vote.

The electoral setback for the Democrats led to what appeared to be a month of indecision while Democratic leaders tried to figure out how health reform fit into the future of the party. Finally, a show of strong leadership from President Obama—through the State of the Union address, the health care summit, and a flurry of public events and behind-the-scenes arm twisting—seems to have encouraged the Democrats in the House and Senate to move forward, leading to the introduction of the reconciliation bill on Thursday.

Reconciliation bills are subject to tight constraints under the legislation that establishes the reconciliation process. A reconciliation bill must also conform to the instruction contained in the budget resolution—which, in this case, was adopted last spring and authorized the use of reconciliation to adopt health reform. Together, these provisions require a reconciliation bill to meet both short- and long-term deficit reduction goals. It is likely that meeting these deficit reduction targets was one reason for incorporating student loan reform into the health reform legislation, although most of the savings in the bill come from the health reform provisions, and the House has wanted to make the Senate move on student loan reform in any event.

Reconciliation provisions must meet the strict requirements of the Senate’s Byrd rule, which prohibits a reconciliation bill from containing any provisions that do not affect the revenues or outlays of the federal government, and from containing “recommendations with respect to” the Social Security program. If the Senate parliamentarian rules that the Senate reconciliation rules have been violated, his ruling can be overridden by a sixty-vote majority, but, that would not happen now since the Republican opposition to health reform is unbendable.

Democrats Welcomed The Congressional Budget Office Report

It was with considerable relief, therefore, that the Democrats greeted Wednesday’s Congressional Budget Office report, which concluded that the reconciliation package would reduce the federal budget over the next ten years by $20 billion and, combined with the Senate bill, by $138 billion. The CBO concluded that the bill would also reduce the deficit further after the first ten years, and thus meet reconciliation act requirements. The total cost of the coverage expansions in the bill are estimated at $940 billion over ten years, more than the $875 billion cost of the Senate bill, but less than the president’s stated limit of $950 billion. The reconciliation bill would also cover thirty-two million uninsured Americans by 2019, 95 percent of the population of the United States excluding unauthorized aliens, up slightly from the Senate bill.

Because the reconciliation bill must pass Byrd rule scrutiny, all of its provisions arguably involve the revenues and outlays of the federal government. The coverage and benefit provisions of the legislation are in general more generous to individuals receiving premium support and to Medicare beneficiaries than are the comparable provisions of the Senate bill. This increased generosity is in turn offset by generally (though not always) greater restrictions on Medicare provider payments and increased revenues (although the revenues expected through the excise tax on high cost health plans are dramatically reduced through the delayed implementation of that tax and the reduction of its application).

Slightly More Generous Premium Subsidies. Premium tax credits under the new House bill are slightly more generous than under the Senate bill. Individuals with a household income of between 133 percent and 150 percent of the federal poverty level will need to pay only 3 percent to 4 percent of household income for health insurance, compared to 4 percent to 4.6 percent in the Senate bill. At the upper end, individuals with household incomes of up to 400 percent of poverty will have to pay only 9.5 percent of their income, compared to 9.8 percent in the Senate bill. The percentages will increase over time to reflect the growth in health insurance premiums relative to income, so that the share of premiums paid by individuals will remain more or less constant. However, after 2018 a new inflation formula will kick in that will increase individual responsibility more rapidly if federal subsidies under the bill exceed 0.504 percent of gross domestic product (GDP), a provision apparently necessary to assure deficit reduction after 2019.

Signficantly More Generous Cost-Sharing Subsidies. While the reconciliation legislation increases premium subsidies only slightly, it reduces cost-sharing responsibilities at the low end significantly as compared to the Senate bill. This will make health care itself significantly more affordable. Cost-sharing reduction payments will leave individuals from households earning 100 percent to 150 percent of poverty owing 6 percent in cost sharing rather than 10 percent; individuals from households at 150 percent to 200 percent of poverty owing 13 percent instead of 20 percent; and those from households at 200 percent to 250 percent owing 27 percent rather than 30 percent.

Penalties On Individuals For Failing To Purchase Coverage. The penalties for failure to carry insurance are increased for individuals with higher incomes and reduced for individuals with lower incomes. The flat dollar penalty is reduced from $750 to $695 after 2016 (and from $495 to $325 for 2015). The alternative percentage of income penalty, however, increases from 2 percent to 2.5 percent, but it applies only to income above the filing threshold (currently $12,050 for an individual and $18,700 for a couple). Moreover, individuals with household incomes below the filing limit are exempted from the penalty. Under the Senate bill, individuals with household incomes below the poverty level—which is lower than the filing threshold—were exempted.

Penalties On Employers For Failing To Provide Coverage. The penalty on large employers who do not provide health insurance and whose employees receive public subsidies is, on the other hand, significantly increased—from $750 to $2,000 per full-time equivalent (FTE). The penalty for employers who offer insurance but who have employees who receive premium assistance because they cannot afford the employer-offered insurance (with affordability now defined at 9.5 percent of income) is increased to $3,000 for each such employee. The first thirty FTEs of an employer, however, will be disregarded for calculating penalties, to ease the transition to large-employer status for growing businesses. Also, the penalty for imposing excessive waiting periods on employees is dropped from the reconciliation bill.

Enhancing The Senate Bill’s Insurance Reforms. The legislation enhances slightly the insurance reforms of the Senate bill, providing that the medical expenses of adult children up to age twenty-seven are deductible for income tax purposes, and extending to grandfathered health plans some of the insurance regulation protections of the Senate bill, beginning in the first new plan year after enactment—including provisions related to excessive waiting periods, lifetime limits, rescissions, and the extension of dependent coverage. It also extends to grandfathered group health plans the provisions relating to annual limits and exclusions for preexisting conditions.

A new definition of “modified adjusted gross income” is created for the use of all sections of the reconciliation bill where household income is significant, including Medicaid eligibility. This definition is less generous than the one now used for calculating Medicaid eligibility, which disregards certain income such as some child care or support obligations. However, the bill requires states to disregard a part—equal to 5 percent of the federal poverty limit—of the modified adjusted gross income in determining Medicaid eligibility.

More Federal Assistance For Relatively Generous State Medicaid Programs. The reconciliation bill significantly increases federal funding for the expansion of state Medicaid programs to cover individuals with household incomes of up to 133 percent of the poverty level. States will receive 100 percent federal matching funds for this population for 2014, 2015, and 2016; 95 percent for 2017; 94 percent for 2018; 93 percent for 2019; and 90 percent for each year thereafter. States that have already expanded their programs to cover this population will receive a gradually increasing enhancement of the federal match for this population, so that in 2014 they will receive 50 percent of what expansion states receive, and by 2019 they will receive 100 percent. The “Cornhusker kickback” is eliminated, but special treatment is retained for Louisiana and other states, as in the Senate bill.

Short-Term Federal Help For Medicaid Primary Care Payments. In a very important move, the reconciliation bill increases Medicaid payments for family and general practitioners and for pediatricians providing primary care services, to 100 percent of Medicare payment levels for 2013 and 2014 with 100 percent federal match. As was pointed out by Republicans at the health care summit, Medicaid expansions mean little if there are no practitioners to care for Medicaid recipients, so this provision will play a vital role in making Medicaid work. Unfortunately, it is limited to two years. The bill also increases to $1l billion new appropriations for community health centers, which will also serve the new Medicaid recipients (as well as the immigrants excluded from the exchanges).

The legislation also reduces but moves forward to 2014 Medicaid disproportionate share hospital payment reductions, and provides disproportionate-share hospital (DSH) payments for a state that would otherwise have none after FY 2011—reportedly this would apply only to Tennessee. The Medicaid provisions also increase funding for the territories (and allow them to decide to operate an exchange); delays by one year the Community First Choice Option, which will cover community-based attendant care services and supports for persons who would otherwise be institutionalized; and narrows the definition of new formulations of drugs, subject to an additional rebate under the Medicaid drug rebate program to line extensions of the drugs in the form of a solid dosage.

Closing the Doughnut Hole. The biggest change in Medicare from the beneficiary’s perspective will be the provisions of the bill intended to close the doughnut hole. The legislation provides for a $250 payment to anyone who ends up in that hole in 2010, but will then begin closing the dougnut hole by gradually reducing the coinsurance amount paid by beneficiaries until, by 2020, it reaches the 25 percent level imposed prior to the doughnut hole. The bill delays the 50 percent discount program for name-brand drugs bought by beneficiaries in the doughnut hole to 2011.

Cutting Medicare Advantage Payments. The reconciliation bill reduces Medicare advantage (MA) payments by almost $14 billion from levels in the Senate bill. It shifts MA payments toward benchmarks that will vary from 95 percent of fee-for-service payment levels in high-spending states to 115 percent in low-spending states. These benchmark-based payment levels will be phased in over three, five, or seven years, depending on the initial disparity between MA payment amounts and the benchmark. After 2014, plans will be able to earn increased payments of up to 5 percent based on quality rankings. Higher quality plans will also be able to make up for a higher percentage of their premiums to beneficiaries via lowered cost sharing or increased benefits. The bill extends the authority of the Centers for Medicare and Medicaid Services to risk adjust scores for observed differences in coding patterns between MA plans and fee-for-service plans.

The legislation requires MA plans that have administrative costs in excess of 15 percent to pay the difference to CMS, prohibits new enrollments into any such plan after three consecutive years of excessive administrative costs, and requires termination of the plan after five consecutive years. Finally, with little fanfare, the bill repeals the Medicare Modernization Act provision requiring competition between MA plans and traditional Medicare that provoked so much controversy in 2003.

In other Medicare provisions, the legislation accelerates the Medicare DSH reductions, but reduces their amount. It increases reductions in market basket-based payment updates for inpatient hospitals, long-term–care hospitals, inpatient rehabilitation facilities, psychiatric hospitals, and outpatient hospitals by an additional $9.9 billion over ten years. The bill delays from August 1, 2010, until December 31, 2010, the date after which physicians are no longer allowed to own hospitals to which they refer patients, and it creates a new exception to allow grandfathered physician-owed hospitals to expand in counties in which they treat the highest percentage of Medicaid patients and in which they are not the sole community hospital. Finally, the bill creates an assumption of a 75 percent utilization rate for determining the practice-expenses portion of advanced imaging payments, which will reduce those payments for low-volume providers..

Fraud And Abuse Provisions. No health care legislation is complete without new fraud and abuse provisions, and the reconciliation bill is no exception. It requires community mental health centers to treat a significant number of patients who are not Medicare beneficiaries to qualify for Medicare payments. It eliminates limitations imposed on Medicare prepayment medical reviews and provides for data matches between CMS and the IRS to identify fraudulent providers. It increases funding for fraud and abuse control and allows CMS to withhold funding from new durable medical equipment (DME) providers for up to ninety days if there is a significant risk of fraud.

The Excise Tax On High-Cost Plans. The legislation changes significantly the excise tax imposed on high-cost plans. It delays the tax from 2013 to 2018 and increases the threshold of the tax from $8,500 to $10,200 for individuals, and from $23,000 to $27,500 for families—in both instances, adjusted for excessive intervening increases in the cost of health insurance and for the age and gender characteristics of the specific employer compared to the national workforce. It excludes from consideration the cost of dental and vision plans. The legislation also increases the enhanced thresholds allowed for high-risk occupations, but it eliminates the Senate’s transition rule for high-cost states.

Initially, the premium-cost threshold at which the excise tax kicks in would increase by the level of general inflation (the consumer price index, or CPI) plus one percentage point. However, beginning in 2020, the threshold would increase only at the rate of general inflation, which would extend the tax to more plans over time.

Revenue Increases. To make up for lost revenue, the reconciliation legislation extends the Medicare tax to cover net investment income for those earning more than $250,000 a year (on a joint return) or $200,000 (on a single return). The bill delays but increases the tax on brand-name drugs. It changes the imposition on medical devices from a fee to a tax; delays it; and exempts eyeglasses, contact lenses, hearing aids, and devices purchased by individuals at retail. The legislation also delays to 2013 the limitation on flexible spending account (FSA) contributions and the elimination of the deduction for expenses allocable to the Medicare Part D subsidy.

The Path From Here

The bill now goes to the floor of the House, where it will be voted on, together with the Senate bill, on Sunday, March 21. It is still not clear if the Democratic leadership has the votes, but as of this writing the trends seem favorable. The reconciliation bill would then have to go back to the Senate, where it would have to survive parliamentary challenges and get at least fifty-one votes (which can include the vice president’s in the case of a tie). Finally it would go the president for his signature, presumably with much fanfare. Then the campaigns would begin for implementation, on the one hand, and for repeal, on the other.

Update, March 20: The nine page manager’s amendment released today includes few significant changes. The amendment does, however, reduce the rate in growth of the out-of-pocket cost threshold for the prescription drug benefit; provide $400 million in extra payments for hospitals in counties that rank in the lowest quartile of counties in the United States for age, sex, and race-adjusted Medicare Part A and B spending; remove the requirement that the Medicare unearned income tax must go to the Part B trust fund; decrease for some years and increase for others the taxes imposed on brand-name pharmaceuticals;, and extend the medical device tax to cover Class I medical devices while reducing the tax from 2.9 to 2.5 percent.