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Federal E-NewsHealth Care Reform: Special EditionNCTR's Federal E-News provides important information on the issues and events in Washington, D.C. that may impact NCTR members. For more information, contact Leigh Snell, NCTR's Director of Federal Relations, at (540) 333-1015 or by email at: lsnell@nctr.org. Healthcare Reform Advances; Application to Public Sector Raises IssuesBy the narrowest of margins, the House of Representatives passed a massive healthcare reform package in early November, and the Senate, with not one vote to spare, has just cleared the first procedural hurdle in the consideration of that chamber’s version of the legislation. While many issues remain to be resolved before the Senate actually attempts to pass a bill, certain features of both House and Senate measures are beginning to register some concern with public sector purchasers of healthcare, including the specter of a direct Federal tax on state and local governments and their instrumentalities, possibly including some public pension plans. Both bills also contain a number of details that should be of particular interest to employees and retirees, as well as to health plan sponsors. This “Special Edition” of the NCTR Federal e-News provides an overview of the House and Senate bills; a listing of some of the provisions of special interest for employees and retirees, as well as plan sponsors and administrators; a more detailed discussion of several provisions of particular interest to the public sector and the various questions that they raise; an in-depth discussion of the Senate’s proposed excise tax on so-called “Cadillac” plans; and a brief discussion of what may lie ahead as Congress approaches an historic decision on the future of the American healthcare system.
The House version of healthcare reform, the “Affordable Health Care for America Act” (H.R. 3962), passed on November 7th by a vote of 220 to 215, with only one Republican voting in support of the measure, and 39 Democrats voting “nay.” The final bill actually represents a merger of approaches approved by three separate House Committees – Ways and Means; Education and Labor; and Energy and Commerce. In addition to significant insurance reforms -- such as prohibiting insurance rating based on health status or pre-existing conditions, doing away with annual or lifetime limits on medical spending, and repealing insurance companies’ antitrust exemption -- the House bill would also do the following:
Disputes over Federal funding for abortion and coverage of illegal aliens had threatened to derail the legislation at the last minute. However, House leaders were able to convince pro-choice Democrats to go along with their more conservative brethren and include restrictions on the use of Federal funds for abortion services in the public option and in the insurance exchange. With regard to coverage for undocumented immigrants, the House ended up not including any restrictions or differences in treatment. This represented a big win for the Congressional Hispanic Caucus, but this issue is far from over, since the Senate appears intent on limiting reforms to U.S. citizens and legal residents. The action has now shifted to the Senate, where, in a rare Saturday session just prior to its Thanksgiving break, Senators voted to invoke cloture, thereby bringing to a close a GOP filibuster that was preventing the Senate from taking up for consideration their healthcare reform proposal, the “Patient Protection and Affordable Care Act.” This package had been fashioned by Senate Majority Leader Harry Reid (D-NV) from the separate measures approved by the Senate Finance Committee and the Senate Health, Education, Labor and Pensions (HELP) Committee earlier in the year. (NB: The Senate bill is technically an amendment in the nature of a substitute for H. R. 3590, a House-passed bill to amend the Internal Revenue Code to modify the first-time homebuyers credit. This bill will be used as the Senate’s vehicle for passage of their version of healthcare reform; this convoluted process is necessary because the Constitution requires all revenue bills to originate in the House, and the Senate health reform plan involves revenues.) The Senate vote was a real cliff-hanger. Under Senate rules, 60 votes are needed to cut off debate, and with 58 Democrats and two independents who caucus with them (Connecticut’s Joe Lieberman and Vermont’s Bernie Sanders), every vote counted – particularly when it became clear that Maine’s two Republican Senators, Olympia Snowe and Susan Collins, were apparently not going to be of help, at least on this vote. And with Democratic moderates Ben Nelson of Nebraska, Mary Landrieu of Louisiana and Blanche Lincoln of Arkansas playing their cards very close to their vests, it was down to the wire. But when the dust settled, all 60 members of the Democratic caucus voted to proceed; not one Republican joined with them. However, once again, this was only on the motion to proceed to the consideration of the legislation. It will likely be several weeks before it becomes clear whether or not there will still be this minimum number of votes if final passage of the legislation is, as expected, also the subject of another GOP filibuster. The version of healthcare reform that the Senate will now be considering is very similar to the House bill in several areas. For example, both approaches include significant reforms of the insurance markets, such as generally eliminating lifetime caps on benefits and addressing annual limits and pre-existing conditions. However, the Senate bill’s timing differs in that most of its significant health insurance market reforms would not take effect until 2014, while the House bill’s restrictions would generally begin in 2010. Both bills would also impose employee mandates. However, once again the Senate requirements would not take effect until 2014, and there are other differences. Under both bills, individuals will be required to maintain minimum essential health insurance coverage, but instead of percentage of income penalties for failure to do so, as in the House approach, the Senate bill would impose a flat penalty of $95 in 2014, $350 in 2015, $750 in 2016 (and indexed thereafter). For those under 18, the Senate penalty will be one-half the amount for adults. The Senate bill, similar to the House measure, would also create insurance “exchanges” through which certain individuals and families could receive Federal subsidies to substantially reduce the cost of purchasing coverage. However, instead of a national Exchange, the Senate bill would create state-based American Health Benefit Exchanges and Small Business Health Options Program (SHOP) Exchanges. The Senate bill would also provide new, refundable tax credits for individuals with incomes between 100 and 400 percent of the Federal poverty line (about $88,000 for a family of four). The credit is calculated on a sliding scale beginning at two percent of income for those at 100 percent, and phasing out at 9.8 percent of income for those at 300-400 percent of the Federal poverty line. The House bill provides for “individual affordability credits” to provide financial assistance with premiums and cost sharing for such individuals to use in purchasing insurance in the House bill’s proposed national Health Insurance Exchange. The Senate’s treatment of employers is also somewhat different from the House approach of imposing an overall mandate with penalties for failures to comply. The Senate bill would instead require employers with more than 200 employees to automatically enroll new full-time employees in coverage, but employees would be given the opportunity to opt out of any such automatic coverage. Also, instead of mandating that employers provide healthcare, the Senate bill would assess fees/penalties. For firms with more than 50 workers that did not offer coverage, they would have to pay a fee/penalty of $750 (indexed) for each full-time worker if any of their workers obtained subsidized coverage through the insurance exchanges. For an employer with more than 50 employees (1) that does offer coverage, (2) but whose coverage is determined to be unaffordable or to fail to meet minimum standards, and (3) who has at least one full-time employee receiving the premium assistance tax credit, such employer will be required to pay the lesser of $3,000 for each of those employees receiving a credit or $750 for each full-time employee. Firms with 50 or fewer employees would be exempt. Perhaps the biggest differences between the two bills involve the so-called “public option,” and the manner in which the two proposals approach the difficult issue of how to pay for reform. With regard to the public option, while both the House and Senate would create a new government-run health insurance program designed to compete with private companies – and both would require that this new Federal program negotiate rates with medical providers -- the Senate approach would allow States to enact a law to opt out of offering this option. Details of Interest to Employees and Retirees Turning from the major structural components of each bill, there are also a number of details in both measures that should be of particular interest to plan participants and retirees, including (but not limited to) the following provisions:
Details of Interest to Plan Sponsors Plan sponsors may be particularly interested in provisions that would:
Issues of Particular Concern for the Public Sector There are certain aspects of several provisions in both House and Senate bills that raise issues for the public sector. For example, the House bill would impose, as a condition of further Federal assistance (and thus technically not a Federal mandate), the requirement that State and local government employers offer health insurance to their employees. However, the assistance directed to small private sector employers in the form of tax credits to help with this mandate is of no use to such non-taxpayers, and there does not appear to be a comparable form of assistance for public employers offered by the legislation. In the Senate bill, the imposition of “assessments” on employers as part of the Senate bill’s so-called “free rider” employer-assessment-in-lieu-of-employer-mandate would also apply to public employers. Indeed, the CBO estimates that this will help produce a total cost of intergovernmental mandates that would “greatly exceed” the annual threshold established in the Unfunded Mandates Reform Act (UMRA) for state, local, and tribal entities of $69 million in 2009 (adjusted annually for inflation). As the CBO notes in its letter concerning the overall “scoring” of the Reid Senate compromise package, the provisions of the legislation that would penalize those entities -- if they did not offer health insurance to their employees and any of their workers obtained subsidized coverage through the insurance exchanges – “account for most” of these mandate costs. And to complicate matters even more, the Senate bill’s approach to these assessments would be to levy them by adjusting an employer's tax liability, which would clearly not work for the public sector. Another potential area of concern is with potential implementation issues regarding the proposed fund that would be created to finance a temporary reinsurance program to help offset the costs of expensive health claims for employers that provide health benefits for retirees age 55-64. While the legislation is clear that this reinsurance is to apply to public as well as private employers, the application process and other parameters of the program are left to the HHS Secretary to develop, and the inclination to use ERISA terminology may create headaches for public sector applicants. As this fund will essentially be a first-come, first-served opportunity, it will be critically important that any potential implementation issues for the public sector are identified now and, if possible, addressed in the legislation itself. One provision of the House bill that does not appear to apply to the public sector also deserves careful attention, and that is a limitation on post-retirement reductions of retiree healthcare benefits. Under this House provision, employers would be prohibited from reducing retirees’ health benefits after those retirees have retired, unless the reduction is also made to benefits for active participants. Whether the exclusion of the public sector from this provision was intentional is not clear, and there could be efforts made to adjust it to include governmental plans. Depending on your particular point of view, this may or may not be a good idea. The Senate "Cadillac Plans" Excise Tax Proposal However, perhaps the issue with the most potential problems for the public sector in the view of many deals with the Senate bill’s proposed excise tax on so-called “Cadillac” healthcare plans. Once again, the proposal, which would take effect in 2013, would impose an excise tax of 40 percent for any aggregate health coverage that is generally above the annual threshold of $8,500 for single coverage and $23,000 for family coverage. An additional amount of $1,350 for singles and $3,000 for families would be added to these thresholds for retired individuals age 55 and older and for plans that cover employees engaged in certain “high risk” professions, including public safety employees. Here is a brief summary of key details:
By way of background, in mid-May, the Senate Finance Committee released a policy options paper focused on financing comprehensive health care reform. One of the options discussed was the possible taxation of certain healthcare benefits by placing limits on the exclusion from income of employer-provided healthcare. While the idea is not new, and was resurrected during the last Presidential campaign by Senator John McCain (R-AZ), it has always run into a buzz saw of opposition, including from then-candidate Obama, who characterized it at that time as “the largest middle-class tax increase in history.” Therefore, even when some leading Democrats, including Senator Max Baucus (D-MT), the powerful chairman of the Senate Finance Committee, appeared to be willing to entertain the idea this summer, the political operatives at the White House apparently got cold feet over the thought of supporting what would be, in effect, a tax increase on middle America. So the idea of limiting the tax exclusion for individuals morphed into an excise tax on insurers. However, opponents were quick to point out that the excise tax was simply going to do indirectly what no one appeared to be willing to do directly. Indeed, by the middle of October, Congressman Joe Courtney (D-CT) had a letter in hand from the Congressional Joint Committee on Taxation (JCT) saying just that – namely, that “we expect the insurer to pass along the cost of the excise tax to consumers by increasing the price of health coverage.” Furthermore, the JCT said that while the result could well be that “consumers will seek less costly policies that would reduce their exposure to the excise tax” – which supporters of the excise tax argue would be a positive step in helping to control overall healthcare cost increases -- it would also mean an increase in income taxes for these same consumers. Indeed, the JCT goes on to point out that “When employers offer employees less costly plans, the employees will have less compensation in the form of non-taxable health care benefits and more in the form of cash compensation." The result, according to the JCT, is that "the insurance consumer indirectly pays the tax as taxable income increases with the increased cash compensation." In fact, according to the JCT, other than in the first year of the excise tax, the percentage of total tax receipts as a result of the proposal that is in the form of the excise tax itself actually declines dramatically “as consumers shift away from higher cost health coverage towards increased wage benefits.” Consequently, of the total revenues that the excise tax proposal would be expected to produce over the next decade, about 80% of that is in the form of individual income taxes, and not the excise tax paid by insurers, based on the JCT’s analysis. This is what has alarmed Congressman Courtney and some 180 of his fellow House members, who wrote a letter in October to Speaker Pelosi urging her to reject any Senate proposal that included such an excise tax. Furthermore, it would appear to many that the excise tax simply misses the mark as far as actually addressing high cost healthcare is concerned. For example, the tax does not address what a plan covers or why it is expensive. It therefore would not necessarily guarantee that “Cadillac” health care plans that provide so-called luxury health care benefits are curtailed. Additionally, even though Senator Reid’s final compromise bill (1) increased the overall thresholds for the tax, (2) upped it in the 17 states with the highest health care costs by another 20% initially, and (3) provided even higher limits before it would apply to retired individuals age 55 and older who are not eligible for Medicare and for employees engaged in high-risk professions, the thresholds will still be reached at some point. And since the thresholds are indexed to the CPI-U plus 1%, and not to inflation in healthcare costs, this will probably happen much sooner rather than later. Finally, as the National Education Association (NEA) has pointed out in its letter to Congress opposing the excise tax, it “makes no distinction, for example, for plans that cost more because (like many public education plans) they cover predominantly older workers and women.” Therefore, for any number of reasons, labor groups and their supporters have been strenuously opposing the excise tax for its impact on plan participants. But what about its impact on public plan sponsors and plan administrators, including some public pension plans? Specifically, the excise tax itself is to be paid by the “coverage provider” on its share of benefits provided. If the employer-sponsored health insurance coverage consists of coverage under a “group health plan,” then the term “coverage provider” will mean “the health insurance issuer.” (“Group health plan” is to have the meaning given such term by IRC section 5000(b)(1), while the term “health insurance issuer” is to have the meaning given such term by section IRC section 9832(b)(2). Briefly, IRC section 5000(b)(1) defines a “group health plan” as a plan, including a self-insured plan, of or contributed to by an employer or an employee organization, to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families. IRC section 9832(b)(2) defines a “health insurance issuer” to mean an insurance company, insurance service, or insurance organization (including a health maintenance organization) which is licensed to engage in the business of insurance in a State and which is subject to State law which regulates insurance; such term does not include a group health plan.) However, if the applicable employer-sponsored coverage consists of health savings accounts (HSAs) or medical savings accounts (MSAs, to include Archer MSAs and Medicare Advantage MSAs), then the term “coverage provider” is to mean “the employer.” Finally, for “any other applicable employer-sponsored coverage,” including self-insured coverage, then the term “coverage provider” is to mean the “person that administers the plan benefits.” This term – “person that administers the plan benefits” – shall include “the plan sponsor if the plan sponsor administers benefits under the plan.” Finally, the term “plan sponsor” is to have the meaning given such term in section 3(16)(B) of ERISA. While it would appear, then, that the standard healthcare insurance arrangement involving traditional insurance providers would result in the tax being imposed on the insurance companies, it also seems very clear that if coverage is in the form of an HSA, then the tax will be owed by the employer. Governmental employers often use health FSAs, HSAs, and other individual account arrangements, particularly to provide benefits not covered under medical arrangements. And some governmental plans sometimes provide retiree health benefits through contributions to Health Reimbursement Arrangements (HRAs) from accrued employee sick leave and vacation leave. Clearly, the public sector will be impacted by this provision, but the Senate bill appears to make no exceptions nor provide alternatives when the employer is a State or local government. Finally, a large number of State and local governments choose to self-insure for their healthcare needs. In many cases, a traditional insurance company may serve as the third party administrator (TPA) of the benefits, even though it is not technically the insurer. In other cases, the government may utilize a non-insurance company as the TPA. Then there are also some cases in which the entire administration of the healthcare plan has been brought in-house by the governmental entity. What constitutes “administering” the plan? Is it a contractual definition? If the plan sponsor “administers” the benefits in a self-insured setting, then it appears that it would be liable to pay the excise tax. However, the Senate bill uses an ERISA definition for “plan sponsor,” which could raise issues in the public sector. Also, in cases where smaller governmental entities have created purchasing coalitions, it may not be clear who the plan administrator for purposes of the tax is. Even in cases where it appears clear that a TPA, and not the governmental entity, would be responsible for paying the tax, liability for payment of a 40% excise tax may create significant hurdles that could clearly affect the structuring of such arrangements. Thus, the Senate bill’s excise tax presents a number of potentially very serious issues for State and local governments and their instrumentalities that, depending on the circumstances, could raise constitutional questions and set major precedents. However, to date, these concerns do not seem to have been the subject of serious discussion or negotiation with public employer groups, whose primary focus has apparently been more on other major revenue-related issues, such as Medicaid reforms. Nor have these issues been a focus for employee and retiree groups, which have instead devoted their primary efforts to opposing the tax itself, and have not been significantly concerned with its potential application in a public sector setting if such opposition is unsuccessful. The final problem area, although not necessarily unique to the public sector, nevertheless also raises major potential concerns, and that is with the administration of the excise tax. Specifically, the Senate bill would make each employer responsible for calculating the amount of the excess benefit subject to the tax, on a monthly basis. Of course, in order to be able to determine whether the threshold has been exceeded in any given month, the employer (or its designee) will need to identify all the possible various components of overall coverage as well as the nature of employment of each employee (in order to know if different thresholds apply – and remember, just because someone is retired doesn’t mean that they are automatically eligible for the higher threshold, since they must also be at least age 55). If a threshold has been breached for any employee, the employer is also responsible for determining each coverage provider’s applicable share of this excess benefit that would be subject to the tax, and for then notifying each provider accordingly – on a monthly basis! Then there is the case of coverage made available to employees through a multiemployer plan, in which case “the plan sponsor shall make the calculations, and provide the notice.” Once again, the definition of who is the “plan sponsor” will be critical. Also, where benefits are provided through a State plan that coordinates efforts with multiple local governments, financing for such may also be provided at both the State and local level for a single employee, thereby further complicating the issue of how the excise tax would apply in such circumstances. Finally, adding insult to injury, if the employer or plan sponsor makes a mistake, a monetary penalty could be imposed on it. Outlook for Reform in the Senate The public option plan continues to be one of the most contentious elements in the Senate bill. Republicans are adamantly opposed to it, while liberal Democrats are just as insistent that it must be a component of any real healthcare reform package. A possible compromise centers around a so-called “trigger,” under which the public option would be triggered several years after enactment of reform if – and only if -- healthcare costs have not been reduced and coverage not expanded thanks to the other aspects of the reform package. Under such a compromise, both opponents and proponents of the public option could save face, the former by insisting that the conditions for pulling the trigger will never occur, and the latter arguing just as vociferously that these conditions absolutely will come to pass. A similar trigger was previously advanced by Senator Olympia Snowe (R-ME), but she seems to have cooled to the idea. However, a related idea is reportedly circulating that would give States an “opt-in” choice, offering an insurance plan created by the Federal government but controlled by a nonprofit board if, after some period of time, insurance is determined to be unaffordable for average families. But any trigger approach is objectionable to Senator Lieberman (I-CT), who is continuing to insist that despite his vote to permit debate to begin on the Reid compromise, he (Lieberman) will absolutely not vote for a final measure that contains any possibility for a government-run health insurance plan. So it is hard to say if the White House and the Senate leadership will be able to once again amass the 60 votes necessary to defeat an almost-certain GOP filibuster on final passage of a Senate bill later in December. If they cannot, the question will then be whether Senator Reid will decide to “go nuclear,” which means that he would use the budget reconciliation process to pass the massive healthcare reform measure by a simple majority vote, since under Senate rules, budget reconciliation cannot be filibustered. However, such an approach would put an end to any pretense of bipartisanship for this – or any other – legislative effort, and would likely only be considered by President Obama if there were simply no other way of passing healthcare reform. So expect most of December to be spent in intense behind-closed-doors negotiations to avoid such an outcome while the Senate works its way toward final passage sometime before Christmas. Will such discussions include the excise tax? Certainly there are those in the Senate who are uncomfortable with this approach, and as has been noted, union opposition is intense. The NEA says that “In everything but name, this is a tax on workers.” As the NEA points out in its letters to the Hill, “The health care plans of hardworking public education employees are not luxuries stuffed with unnecessary medical benefits, as proponents of the excise tax would have the public believe,” but instead “are precisely the kind of good, comprehensive health benefit plans that health insurance reform is supposed to be encouraging.” According to the teacher organization, “We have no doubt that this tax would quickly have the devastating effect of causing instability and insecurity in the group health care market, and would threaten the existence of retiree health care benefits around the country.” In addition, according to a Watson Wyatt Worldwide survey of 160 employers released in September, only about 20% of respondents supported such a tax. Indeed, in one of Washington’s rarer cases of “strange bedfellows,” both the AFL-CIO and the U.S. Chamber of Commerce actually agree with each other when it comes to the Senate’s excise tax. For example, the Chamber’s senior manager of health policy, James Gelfand, has been quoted in the media as calling the excise tax “irresponsible and dangerous" in its current form, while the director of the AFL-CIO’s government affairs department has written to the Senate blasting the proposal and warning that it would “raise taxes and health care costs for workers, including some of the most vulnerable workers: workers in firms with older employees and firms with employees who have poor health status.” However, despite their vociferous opposition to the tax, no union wants to be held responsible for killing healthcare reform. Furthermore, the excise tax was supported in the Finance Committee by the all-important moderate Democrats, including Senator Blanche Lincoln (D-AR), and is also viewed favorably by Senator Bill Nelson (D-FL), another key centrist, who has been quoted in the press as saying that "If you really want to change policy, you discourage taxpayer subsidies for Cadillac, Mercedes and Ferrari plans." The Center on Budget Policies and Priorities also finds that the “vast majority of plans would be unaffected by the tax, since the dollar thresholds listed above far exceed the value of most plans,” estimating that “in 2013, more than 90 percent of family plans will have premiums below $23,000.” Finally, there is a very strong distaste in the more conservative Senate for the House approach of higher taxes on the wealthy. Add to this the fact that the excise tax is the biggest revenue-raiser in the Senate bill, and that there has been no real alternative to it that has been seriously advanced, and it looks increasingly likely that this tax could well survive Senate consideration and make it into conference with the House. This House-Senate conference is where the real deal-making will occur. Even if the Senate bill does not include a public option, it will still be in play thanks to its presence in the House bill. In addition, the primary funding mechanism to help pay for reform -- the excise tax on “Cadillac” plans or a tax on the wealthiest Americans -- will also remain a work in progress throughout the conference – and is likely to continue to be modified until the very last moment. Despite this guaranteed state of flux, the House-Senate conference will also be the most difficult place in which to raise and address new issues. For this reason, discussions concerning the potential impact of the Senate’s excise tax on State and local governments – as well as some of the other issues noted above with unique consequences for the public sector – need to begin occurring as soon as possible. Waiting to deal with them until after any law has been passed – either through regulation or remedial legislation – will be a very difficult task. Now is the time to ensure that public sector concerns in general –and those of potentially-affected government purchasers of healthcare in particular – are clearly articulated and addressed. The vote on the resulting House-Senate conference report will be the real, final “make-it-or-break-it” vote on healthcare reform. Every vote until then will continue to be a matter of posturing and positioning. But the day of reckoning is fast approaching, as the goal is to have a final bill to the President’s desk before his 2010 State of the Union address. It is very difficult politically to imagine that Congressional Democrats and the Obama Administration will have been willing to have spent the political capital to come this far and not enact a healthcare reform bill in some form or another. Whether or not it will improve the quality and affordability of the nation’s healthcare is certainly subject to debate – and will likely continue to be so for years to come, assuming its final adoption. Healthcare reform holds out the promise of great cost savings for the American economy – but at what price, opponents ask. The public sector will also clearly benefit if these savings materialize. But similarly, the question remains: at what price for governmental employers, employees, retirees and their health plans?
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