Tax Edge

By Robert Steere, Toolkit Staff Writer

Will there be a public option for health insurance coverage? Will Medicaid be expanded to cover more than 10 million newly eligible recipients? Will new excise taxes be imposed on various health sector industries? Will individuals and businesses be forced to buy health insurance, and will those that don't be penalized with a new tax? And by the way, what's the definition of "tax?"

As September gives way to October, we still await clear signals from Washington on the course of the health care debate, including all the questions above. After their August break, our elected representatives turned their attention once again (and almost exclusively) to the pursuit of a comprehensive restructuring of the American health care system. But even now, we await tangible results from all the talk. The stage is now being set for completing the work of the Senate Finance Committee and beginning the work of merging all the Committee bills into a single piece of legislation that could be ready for final vote in both houses by year-end.

Expected Impacts of Health Care Restructuring

One thing is clear: Whatever form the health care restructuring ultimately takes, given the core concepts in each legislative proposal there will be dramatic systemic changes to the health care system, substantial new financial obligations for the federal government, and new taxes (and tax credits) and other costs for many individuals and businesses. The core features of the systemic restructuring include the following:

• A statutory mandate for all individuals to have health insurance coverage. Compliance could cost currently uninsured individuals thousands of dollars.
• Either a statutory mandate or statutory 'encouragement' for employers to provide group health coverage to employees. Noncompliance could cost employers hundreds of dollars per employee. (Small businesses, by one definition or another, will be excluded from any mandate.)
• Some form of new, convenient 'marketplace' for obtaining individual or small group coverage, which may include a public option or nonprofit option to compete with private insurance options.
• New regulatory requirements for insurance companies prohibiting denial of coverage for pre-existing conditions, guaranteeing issuance and renewal of coverage, limiting the allowable variance in premiums charged to different insureds for the same coverage, and setting minimum coverage standards (among other requirements).
• A significant expansion of the eligibility criteria for Medicaid coverage.
• Changes in the reimbursement rates and methodologies in Medicare.

Most of the federal government's new financial obligations are driven by two major factors. The first is the substantial expansion of Medicaid eligibility expected to cover more than 11 million new recipients and cost the federal government around $300 billion over the 6 years beginning with its implementation in 2014. The second is the creation of new subsidies in the form of tax credits that can be either advanced or refunded to eligible individuals purchasing health insurance through the new 'marketplace'. The cost of the tax credit subsidies is expected to exceed $500 billion over 6-1/2 years beginning with its implementation in 2013. Obviously, the administration of a public-option insurance program would add significantly to federal financial obligations.

The tax code will play a crucial role in whatever bill emerges for enactment. Surely, any health care restructuring legislation will include new revenues to support the expanded role of government. Here are the most likely sources of revenue to be included:

• A confiscatory 35 to 40 percent excise tax on insurance companies for high-premium insurance plans appears to be steadily gaining support as a primary funding source for the restructuring. It is expected to bring in more than $200 billion through 2019. Of course, such a tax would simply be passed on in higher premiums to employers, increasing their costs for their group plans.
• New annual fees on certain health-related industries are gaining traction in the current debate. These are industry-wide fees that are apportioned among the companies within the industry based on market share. At the annual rates currently being proposed, these fees on insurers, drug providers and medical device providers would bring in $13 billion annually, or $130 billion over 10 years. Of course, these fees will be passed on to customers in higher prices, in essence increasing the cost of health care.
• The House bills call for an income tax surtax on wealthy individuals ranging up to 5.4 percent. Some form of this surtax should not be counted out as a possible revenue source in final legislation.
• While tax credits will be used to offer incentive to some individuals and employers to 'play ball' in the new, restructured system, the downside is that tax penalties will be imposed to punish individuals and employers who refuse to play along. The tax penalties vary greatly from one proposal to the next, but they are expected to bring in tens of billions of dollars over 10 years.

The Process

The most intense work of the Senate Finance Committee--the last of five legislative committees to offer its health care reform proposal--began last week following the unveiling of the "Chairman's mark" for the America's Health Future Bill by Senate Finance Committee Chairman Max Baucus on September 16. His mark constitutes a $900 billion health care restructuring plan.

The release of the Chairman's mark followed closely on the heels of President Obama's September 9 health care address to a joint session of Congress and the American public. The White House called the Baucus mark "an important building block" for comprehensive health care reform, but added that it does not reflect everything President Obama wants to see in a final plan.

House Speaker Nancy Pelosi said House Democrats would be studying Baucus' mark to determine its impact on the cost of health care borne by families and businesses. She hopes that the Senate bill will ultimately be modified to reflect House priorities that boost competition and force insurers to provide low-cost coverage. "I believe the public option is the best way to achieve that goal," she said.

So far, no Republican members have said they will support the measure. Said ranking member of the Senate Finance Committee, Senator Charles E. Grassley, R-Iowa, "I'm disappointed because it looks like we're being pushed aside by the Democratic leadership so the Senate can move forward on a bill that, up to this point, does not meet the shared goals for affordable, accessible health coverage that we set forth when this process began."

The Senate Finance Committee hearings, which began on September 22, have progressed slowly and steadily, and have resulted in numerous revisions of the Chairman's mark. The committee has completed its debate, which included votes on two controversial proposed amendments to include a public option for health insurance coverage in the bill. Ultimately, both public option amendments failed to get the necessary votes, and neither will be included in the committee's draft.

Meanwhile, as we await the upcoming vote on the health care bill in the Senate Finance Committee, the democratic leadership in the House is working feverishly behind closed doors to merge the three house committee drafts into a single version that can be presented to the House for a vote. Almost surely, its final bill will include the public option.

President Obama said he is optimistic that Congress will send him a bill in 2009 that is deficit-neutral and contains insurance reforms and some form of health insurance exchange. The president said he believes there are enough votes in Congress to pass "a good health care bill."

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Posted October 3, 2009.