The Senate Musters 60 Votes, Now What?

By Stephen Jenkins, Vice President, Sg2

A health reform bill has won the support of 60 Senators and now appears headed for a successful floor vote before Christmas. One big hurdle remains: Senate Majority Leader Harry Reid and Speaker of the House Nancy Pelosi must now assemble a conference committee that can meld 2 significantly different bills into 1 that can win passage in both chambers. It will be a daunting task. Saturday’s announcement of the Senate deal was a big boost for President Obama’s health reform agenda, but this game is not over yet and time is the president’s biggest enemy. First, let’s understand the final Senate package, then turn to the political process to follow.

Key last-minute changes to the Senate bill include:

* Public option: Senator Reid tried every variation—the watered-down public plan, the trigger, the state opt-out—but none could win enough support, and the public option is out. Instead, the final bill directs the Office of Personnel Management (OPM, effectively the human resources department for the federal government) to contract with multistate plans offered by private insurers. These OPM-brokered plans will be offered alongside others in the insurance exchange. Confused? You ought to be; it is unclear what impact, if any, this will have on health insurance markets.

* Physician fee cut: The previous version of the Senate bill included a 1-year fix to the flawed Medicare sustainable growth rate (SGR) formula, the current legislative framework that governs spending on physician fees. The final draft deletes this provision, so a 0.5% payment increase turns into a 21% cut. This was pure budgetary math; Harry Reid needed savings to get a deficit-neutral bill. As in past years, expect another last-minute reversal of this cut next summer.

* Expanding penalties on individuals who opt out of the insurance market: The previous bill levied a flat $750 penalty by 2016 on most individuals who do not purchase health insurance either themselves or through an employer. The final version changes that penalty to the greater of $750 or 2% of income. This has the impact of increasing the penalty for higher-wage individuals. This change nets an additional $7 billion.

* More SCHIP funding: The final bill provides an additional $21 billion over 10 years.

* Payroll tax on high-income households: The hospital insurance payroll tax on individuals earning more than $200,000/year ($250,000 for families) goes from 0.5% to 0.9%. This change raises an additional $33 billion over 10 years.

* Small employer tax credit: The final bill increases the value of this credit from $27 billion to $40 billion over 10 years.

* Abortion language: Most significantly, states could decide to bar the insurance exchange from offering plans that cover abortion procedures. Ironically, the abortion language in the Senate bill has been denounced by both Planned Parenthood and the National Right to Life Committee—a sign of just how careful a compromise it is!

Key aspects of the final Senate bill are unchanged from the draft released by Senator Reid on November 18, including most notably:

* Individual/employer mandate: A requirement on most individuals and employers of more than 50 to purchase/provide health insurance coverage. Penalties apply to those who do not heed the mandate, and subsidies are available to lower-income households. One of the key wild cards in how a post-reform insurance market plays out is how households and employers respond to this system of penalties and incentives. Congressional Budget Office (CBO) math reckons that the direct purchase of health insurance by individuals and employers will continue to decline, by 9 million lives over the next decade. With such low penalties, the decline could be much steeper. We will see.

* Medicaid expansion: Most nonelderly people whose incomes are less than 133% of the federal poverty level ($29,326 for a family of 4) would be eligible for Medicaid. This single federal standard would replace the patchwork of state standards in place today. The CBO estimates that an additional 15 million individuals would be covered by Medicaid or SCHIP by 2019.

* Insurance exchanges: The bill would establish alternative marketplaces through which individuals and families could purchase private health coverage. Those with incomes between 133% and 400% of the federal poverty level could receive subsidies. By the CBO’s math, exchanges will capture 26 million new enrollees at the end of 10 years, most of them receiving a subsidy. This provision has the biggest impact on expanding the insurance rolls. It also holds one of the biggest wild cards—who will run the mandated local exchanges, and how much power will the exchanges exert on the insurance markets? An exchange in Texas might look very different from the one in New York.

* Tax on “Cadillac” plans: As a more politically palatable alternative to capping the tax deductibility of health benefits, the Senate bill would levy a 40% excise tax on insurers. The tax applies to every dollar above $8,500 ($23,000 for family coverage) in the annual actuarial value of an employer-sponsored plan. This would effectively set an actuarial ceiling on employer-sponsored plans—good-bye to most rich union-negotiated benefits and executive health packages.

* Insurance market reforms: By 2014, insurers would be barred from denying coverage or varying premiums on the basis of an individual’s health status. In addition, the bill would ban annual benefit caps and set a maximum 3-to-1 ratio of premium variation for age and gender.

The Senate bill is a fragile confection of a compromise that still could collapse. Independent Joe Lieberman’s vote was won by killing both the public option and a Medicare buy-in for 55−64 year-olds. But he could find something else in the bill not to his liking and bolt the coalition. Like him or not, Lieberman is a man of principle whose vote cannot be bought with such inducements as the extra Medicaid dollars Ben Nelson got for Nebraska or the $100 million that Mary Landrieu won for Louisiana. On the left, someone like Bernie Sanders of Vermont or Roland Burris of Illinois could decide the final bill bartered away too much and withhold their vote. But the measure passed the first of 3 procedural vote hurdles in the wee hours of this morning and for now, it appears the 60-vote filibuster-proof majority is holding.

Assuming the measure passes the Senate before year’s end, work in January will shift to the conference committee. That handpicked group will face its steepest challenge from the Democratic left in the House. House liberals are angry. They feel betrayed by the White House and their own leadership on core principles—the public option and abortion chief among them. It is clear that the health reform bill cannot move materially farther to the political left, or it will fail in the Senate. The art of the legislative process will be in keeping the House left on board, a task that may turn on President Obama’s personal persuasive powers.

So is the Senate reform bill good or bad for hospitals and physicians? That is a complicated question whose answer turns to a great extent on whether you believe the CBO’s assumptions. The answer also depends on the community you serve and your payer mix. To the extent that reform increases the insurance rolls, that will be good for providers, though the benefit will not be equally distributed. Hospitals that serve poor communities will certainly benefit from access expansion—Medicaid is better than no coverage. Hospitals that serve communities adjacent to poor areas may see an uptick in the poorer-reimbursement Medicaid segment of their payer mix. All hospitals will pay for broader insurance access in the form of reduced payments, to the tune of $147 billion over 10 years. Insurance exchanges remain a huge wild card, potentially subject to numerous local political forces. Most of the provisions of this legislation involve a multiyear phase-in period—a time during which every stakeholder will be maneuvering to increase their advantage or “get while the getting is good.”

Some final questions and answers about the Senate health reform bill:

Is it bipartisan? Clearly, no. National politics is different than it was decades ago, when broad bipartisan majorities enacted Social Security and Medicare.

Will it expand insurance coverage? Certainly, though the CBO’s estimate of 31 million fewer uninsured by 2019 might be too optimistic. The penalties for failing to comply with insurance purchase mandates—set at $750 per individual and $750 per employee for employers—are small relative to the annual cost of health insurance. Though I have been surprised before. When Massachusetts passed its universal access law 3 years ago I fully expected employers to flee the insurance market, and they have not. Perhaps employers were slow to respond to the changes, but will catch on and start dropping health insurance more quickly. Or perhaps the pre-recession labor market in Massachusetts forced employers to provide health benefits, and that is all changed now. Or perhaps employers in Massachusetts are just different from employers everywhere else in the country.

Does it bend the cost curve? No, though the CBO’s conservative accounting principles probably underestimate the impact of untested ideas like bundled payment and ubiquitous electronic medical records. Both the House and Senate bills contain an array of demonstration projects and pilots—some of which will work and be expanded, while others will run their course and be abandoned.

Is this the final word on health reform? No, the negotiations with the House could still make for significant changes. If a national reform measure is enacted early in 2010, there is another big wild card. Given the long-tailed multi-year phase-ins, we could have a new President and a new Senate before much of reform takes effect. That could mean major modifications or retreats in 2013 or 2014 from the measures so painstakingly negotiated this year. The message: national health reform is not an event, but a rolling experience over the next several years.