Health Care Reform Memo: November 9, 2009

A Deloitte Center for Health Solutions publication

The health care reform memos are issued on a weekly basis, highlighting news from the previous week's activities in the new administration and implications for the C-suite and various stakeholder groups.

HR 3962 passes 220-215; Democrat Blue Dogs vote “no” due to costs

At 11:17 p.m., the 14-hour marathon debate ended with passage of HR 3962 “Affordable Health Care for America Act” with 39 Democrats joining Republicans in opposition. The final tally 220-215 reflects the deep divide and harsh rhetoric that preceded the vote. One Republican joined Democrats, freshman Rep. Joseph Cao (R-LA) from New Orleans.

The final bill included last hour votes on two amendments — a vote on the Republican alternative bill that costs $61 billion over ten years, covered three million of the uninsured and featured tort reform and incentives for consumers to purchase insurance. The amendment was rejected along party lines.
A second amendment offered by Rep. Bart Stupak (D-MI) banning use of federal tax credits for abortions obtained through the health insurance exchange and public option passed 240-194. In accepting this amendment, the House Democrats were able to secure enough support to pass HR 3962 from wavering conservative Democrats.

Next: the Senate will debate its bill — a blending of the more moderate Finance Committee bill (Baucus, et al) and earlier Senate Health, Education, Labor and Pensions Committee (HELP) bill (Kennedy, et al). It will likely begin debate this week, though a vote before Veteran’s Day Wednesday appears unlikely. Assuming passage in the Senate, differences in the two bills will be reconciled via a House-Senate Conference Committee that might require deliberations into January or possibly later.

HR 3962 and the Senate Finance bill have sharply conflicting features making the reconciliation process difficult. Given the issues surrounding the debate to date, it is possible that a vote in the upper chamber might be delayed for two or three weeks, and the reconciliation process might mean a vote on the final bill could be in early 2010.

Key provisions of the bills are:

	Senate Finance Committee	HELP Committee	House Committee HR 3962
Health Reform Bills Comparison (11-9-09)
Cost and deficit reduction
10 year cost (CBO)	$879 billion	$611 billion	$1.1 trillion net
Deficit reduction (CBO)	$81 billion over 10 years	N/A	$30 billion over 10 years
Percent Americans insured	94%	97%	96%
Additional covered	29 million	39 million	36 million
Medicaid expansion	YES	YES	YES
Eligibility	Up to 133% of federal poverty level (FPL)	Up to 150% of FPL	Up to 150% of FPL
Individual mandate	YES	YES	YES
Penalty tax on individuals/ families that do not purchase insurance	$750 per adult per year to be phased in beginning 2014	Penalty of $750 per individual per year with family penalty maximum of 4 times individual penalty	Impose a tax of 2.5 % of modified adjusted gross income
Eligibility threshold; tax credits/income subsidies to lower income individuals/families	Refundable and advanceable premium credits to individuals and families with incomes 133 – 400 % FPL in 2013	Premium credits on a sliding scale to individuals and families with incomes up to 400 percent FPL	Sliding scale to individuals between 150 - 400 % FPL
Public option	YES	YES	YES
Public option	States can opt-out of public option	Provides public plan alongside private plans Provider negotiated reimbursement	Public option that would allow providers to negotiate directly with HHS Secretary
Insurance exchanges	Similar to HELP	State based offering of qualified health plans for individuals and small businesses starting in 2013	Similar to HELP
Actuarial values of plans in exchange	Bronze: 65% actuarial value Silver: 70% actuarial value Gold: 80% actuarial value Platinum: 90% actuarial value	Tier I – 76% Tier II – 84% Tier III – 93%	Basic Plan - 70% Enhanced Plan – 85% Premium Plan – 95%
Employer mandate	NO	YES	YES
Play-or-Pay if Group Health Plan requirement is not satisfied	Employers with greater than 50 employees pay $400 times the total number of FT employees who receive federal subsidies	$750 per full time employee $450 per part time employee	Requires employers to provide coverage to employees or pay up to 8% for employees in health exchange
Employer minimum contribution requirement	None	60% for Single person	72.5% of single 65% of family coverage based on lowest cost plan
Sources of funding
Medicare/ Medicaid spending cuts	$400 billion	No provision	$400 billion
Income tax increases on upper income individuals/ families	No provision	No provision	5.4% surtax on modified adjusted gross income in excess of $1 million for couples and $500,000 for single filers ($460 billion)
Penalties from individual/ employer mandate non-participation	No provision	No provision	$167 billion
Cadillac plan surtaxes on insurance companies, self insured employers; taxes on flex accounts	"Cadillac" plans subject to 40 % tax ( $201 billion)	No provision	No provision
Flexible Spending Accounts	Limit FSA contributions, 20% penalty on non-qualified HAS distributions etc. ($20 billion)	No provision	Substantially the same as Senate Finance bill ($20 billion)
Industry fees over ten years:	$39 billion medical device $60 billion on health insurance $22 billion on pharmaceutical	No provision	2.5% tax on medical device revenues ($20 billion)
Other taxes	$38 billion	No provision	$59 billion
Total new taxes	$381.3 billion	No provisions	$557.5 billion

Physician payment faces hurdle in House and Senate

In addition to approving the process for a Saturday vote on HR 3962, the House Rules Committee added the physician-pay bill to its agenda, calling it an “emergency” action. The process will be dicey for the $210 billion ten year permanent solution sought: Blue Dog Democrats in the House and moderate Senate Democrats want the costs offset by revenues via pay-as-you-go rule that could increase the deficit otherwise. Meanwhile, reports indicate up to 15 state medical societies have expressed concern to the AMA board about its support of HR 3962 that did not include the sustainable growth rate (SGR) fix.

Deloitte Tax analysis of IRS data: 0.33 percent of tax payers will be subject to 5.4 percent tax

The tax on individuals ($500,000+ adjusted gross income) and families ($1,000,000+ adjusted gross income) would have affected about 475,000 taxpayers in 2007 and will increase as a percentage over time (the threshold is not indexed so as incomes grow, more taxpayers will be subject to the tax).

Per the Congressional Budget Office (CBO), the tax will raise $460.5 billion over ten years to pay for reform

Scenario Key Facts	Scenario	Household Income	Current Law	Surcharge and High Income Increases	Increase from Current Law
Comparison of Tax Liabilities - Summary
Single, no children	1	$300,000	$66,500	$66,500	--
Married, 2 children, 2 under 17	2	$300,000	$57,100	$57,100	--
Single, no children	3	$450,000	$105,100	$110,200	$5,100
Married, 2 children, 2 under 17	4	$450.00	$102,600	$102,600	--
Single, no children	5	$800,000	$200,600	$240,300	$39,700
Married, 2 children, 2 under 17	6	$800,000	$190,800	$214,800	$24,000
Single, no children	7	$5,000,000	$1,378,700	$1,839,700	$461,000
Married, 2 children, 2 under 17	8	$5,000,000	$1,368,900	$1,803,400	$434,500

Assumptions:
Assumes: (1) Reinstatement of 36 and 39.6 percent tax rates under Obama Budget proposal (2) Twenty percent long-term capital gains and qualified dividend rates under Obama Budget proposal (3) Reinstatement of personal exemption phase-out and full limitation on itemized deductions under Obama Budget proposal, and (4) Surtax as proposed by House health care reform legislation. Also scenarios are calculated as if changes are effective for all of 2009.

Reflects ordinary and capital gains income, and itemized deductions based on patterns reflected at different AGI levels (source: analysis of recent IRS data).

Illustrations generally reflect rounded numbers.

Additional Notes:
The House proposed surcharge on high-income individuals would apply to modified adjusted gross income in excess of $500,000 for singles and $1 million for married couples. Modified adjusted gross income is generally AGI reduced by the investment interest expense deduction. The application of the provision also prevents benefits provided by the foreign earned income exclusion and any foreign tax, AMT or other credits.

Scenario #1
No change in tax liability since taxpayer is in AMT under current law and will continue to be under proposed legislation.

Scenario #2
No change in tax liability since taxpayer is in AMT under current law and will continue to be under proposed legislation.

Scenario #3
Change in tax liability attributable to reinstatement of 36 and 39.6 percent brackets, reinstatement of personal exemption phase out and itemized deduction limitation, reduction of AMT, and increase in long-term capital gains rate to 20 percent.

Scenario #4
No change in tax liability since taxpayer is in AMT under current law and will continue to be under proposed legislation.

Scenario #5
Change in tax liability attributable to reinstatement of 36 and 39.6 percent brackets, reinstatement of personal exemption phase out and itemized deduction limitation, increase in long-term capital gains rate to 20 percent, and House proposed surcharge.

Scenario #6
Change in tax liability attributable to reinstatement of 36 and 39.6 percent brackets, reinstatement of personal exemption phase out and itemized deduction limitation, and increase in long-term capital gains rate to 20 percent.

Scenario #7
Change in tax liability attributable to reinstatement of 36 and 39.6 percent brackets, reinstatement of personal exemption phase out and itemized deduction limitation, increase in long-term capital gains rate to 20 percent, and House proposed surcharge.

Scenario #8
Change in tax liability attributable to reinstatement of 36 and 39.6 percent brackets, reinstatement of personal exemption phase out and itemized deduction limitation, increase in long-term capital gains rate to 20 percent, and House proposed surcharge.

Biofuel subsidy to paper companies becomes funding opportunity for health reform

Leading up to Saturday’s vote, Democratic leaders of the House Ways and Means Committee agreed to a new revenue offset that would modify the cellulosic biofuel producer credit to preclude “black liquor” – the wood pulp by-product that paper companies use to power their mills – from eligibility. The revenue raiser is estimated to raise $23.9 billion.

Senate bill to require spiritual healing coverage by plans

As key Senators work toward a bill, a concession to Massachusetts Senators Kerry (D-MA) and Kirk (D-MA), supported by influential Republican Sen. Orrin Hatch (R-UT), is now included, requiring insurers to cover prayer treatments as medical expenses. The precise language precludes insurance companies from “discrimination against 'religious and spiritual health care.'”

Regional variation analysis in HR 3962; $1.42 trillion savings potential

Included in HR 3962 is funding for a two-year study of regional variations in Medicare spending that would lead to changes in Medicare payments based on “quality and value.” Unless Congress objects by May 31, 2012, the change would be automatically implemented by CMS.

Dartmouth Medical School researchers assert that Medicare could save $1.42 trillion by 2023 by reducing annual growth in per patient spending to 2.4 percent from the national average of 3.5 percent as a result of the change. Hospitals in urban areas with higher poverty and crime argue the Dartmouth model does not account for these discrepancies appropriately.

Some big questions from HR 3962 as the health reform process unfolds

Will constitutional challenges to the individual mandate be resolved in time for its implementation by 2013?
Is a 2.5 percent penalty for individuals who elect not to purchase insurance enough to encourage participation?
Will employers choose to pay instead of play if eight percent of payroll is less than their current costs of providing insurance to employees?
Will physicians continue to support HR 3962 since the SGR payment fix is not included and $500 billion in Medicare cuts are?
Will small businesses operating as Sub S corporations and sole proprietorships go out of business or reduce staff as a result of the 5.4 percent income tax?
Will insurance industry reforms, e.g. eligibility, premium controls, increased regulation, strengthen larger plans and drive smaller plans out of business?
Will the $890 billion price tag be enough?

Snapshot

Each week the Monday Memo will feature a special focus area to provide deeper background on topics related to health reform issues.

Costs of reform over ten years

As the Senate and House enact health reform that achieves the dual objectives set by the White House (February 24, 2009) to reduce costs and expand access, the price tag for health reform looms as the most significant barrier to a bill. Considering economic recovery appears slower than expected, and has reached 10.2 percent unemployment today, the value proposition to voters might be a key debate:

These costs are in addition to medical care provided these groups currently:

Per U.S. citizen (305M):	Senate Finance Bill - $2,931
	House Bill 3962 - $3,607
Per newly insured:	Senate Finance Bill - $30,310
	House Bill 3692 - $30,555

C-suite action items

Watch for the emerging debate in the Senate and these efforts:

Plans, providers, pharma, biotech, labs—Constitutional challenges to the individual mandate are being discussed. Industry fees (taxes) are predicated on high participation of previously uninsured adults in the insurance market. Without a strong penalty, the offsetting revenue to fund the new tax will be inadequate.
Providers—Information from the Office of the National Coordinator for Health Information Technology about clarification of policies about violations of privacy and security in use of personal health information.
Pharma, Bio—Announcements from the FDA regarding management of bio-similars (House bill provides 12 year patent protections for biotech data exclusivity).