Homestretch 6: Paying for it and the impact on the deficit

Co-Authored by Carrie Gilbert

[This is the sixth in a series of six articles summarizing the leading categories of issues at stake in the final stages -- the homestretch -- of the debate on national health insurance and health care reform.]

Last week the Senate released their combined bill which has been sent to the floor for debate. Many of the basic principles of the Senate and House bills are similar; however there are still major differences, including the method for paying for reform. For our final installment in our homestretch series we will compare these two proposals on how they will pay for reform and their impact on the budget deficit. 

Covering millions of previously uninsured Americans obviously has an upfront cost; however given the current state of our broken health insurance system, the proposed reforms will actually reduce the deficit. Both bills have received deficit neutral scores from the Congressional Budget Office (CBO), despite having different methods for reducing the budget.

The House bill, called the Affordable Health Care for America Act or HR 3962, proposes a combination of mandate penalties, reforms to Medicare and Medicaid and a tax on wealthy individuals to raise revenue to pay for reform.   The House bill is projected to save $426 billion over ten years by reforming Medicare and Medicaid. The federal government currently pays about $1,100 more per person to cover the same beneficiaries through Medicare Advantage, private Medicare plans, than through traditional Medicare. HR 3962 will reduce overpayments to Medicare Advantage plans.   Overall, the bill attempts to reduce fraud and waste in both the Medicaid and Medicare systems. 

In addition to extensive reforms to Medicare and Medicaid, H.R. 3962 includes a 5.4% surcharge on couples with incomes over $1 million, which would affect less than 1% of taxpayers, and amount to a moderate tax burden for these households. Some people fear that this new tax would harm small businesses that file taxes as individuals. However, the Tax Policy Center calculates that just 1.6% of taxpayers in this group would face the surcharge, and that many in this group are actually wealthy investors and not true small business owners. Ultimately, only 0.6% of taxpayers who derive more than half of their income from business sources would face this surcharge

The newly released Senate bill, The Patient Protection and Affordable Care Act or HR 3590, may slow the growth of health care costs over time by, for instance, imposing an excise tax on high-cost health insurance plans, decreasing overpayments that private insurers receive through Medicare Advantage, and reducing the cost of prescription drugs in Medicaid.   The new tax on high-priced health insurance policies (or Cadillac plans with yearly premiums of $8,500 for individuals and $23,000 for families) applies to self-insured plans and plans sold in the group market, and not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). HR 3590 would also increase the Medicare payroll tax from 1.45 to 1.95% on individuals earning $200,000 per year and couples earning $250,000 per year. Both of these new taxes will yield considerable revenue.   

HR 3590 imposes many fees to pay for the bill, including on pharmaceutical manufacturers, medical device manufacturers and the health insurance sector. Many of these fees do not apply to companies whose sales are below $5 million and the fees are allocated across the industry based on market share. Moreover, HR 3590 mandates that non-profit Blue Cross Blue Shield (BCBS) organizations have a medical loss ratio of 85% or higher to receive the special tax benefits provided to them. This means that they have to spend at least 85% of profits on their beneficiaries’ medical care. 

Ultimately, the House bill will reduce deficits by $109 billion over the next ten years. The Senate bill will reduce deficits by $130 billion over the next ten years, and by about one-quarter of one percent of GDP in the decade thereafter, which amounts to about $55 billion in 2020 and several hundred billion dollars over the 2020-2029 period. The bill finances its expanded health coverage by redirecting existing spending and tax subsidies from less productive uses elsewhere in the health sector. Therefore, the Center for Budget and Policy Priorities’  and CBO report that the Senate Bill extends health coverage to 31 million more Americans, while keeping the total federal cost for all health care spending and tax subsidies in the decade after 2019 essentially where it would be under current law. Additionally, a group of economists sent a letter to President Obama last month advocating for many of the reforms in the Senate bill as a way to stem the costs of the health care industry. 

This does not mean that the Senate bill is the better bill. There are provisions in both bills which are worth preserving the in the final bill. Over the next several weeks, as the Senate works to pass their version of the bill and then the two bills go to conference committee, there will be several opportunities for improving the bills and producing a superior final bill. Both bills contain key provisions for slowing the growth of health care costs and paying to insure more Americans. As always, the ultimate goal is affordable quality health insurance for all Americans.

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