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The Plan: A Closer Look The Plan: A Closer Look

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The Plan: A Closer Look

The following are highlights and analysis of the health reform legislation that President Obama is likely to sign this week. The House passed the legislation Sunday, along with budget reconciliation legislation to make some changes. The Senate has already passed the main reform bill, but now is tasked with approving the reconciliation changes.

Insurance Changes


The Plan: Six months after enactment, health plans would be required to cover dependents up to age 26 on their parents' policies. Insurers couldn't place lifetime limits on coverage, require excessive waiting periods or rescind coverage except in cases of fraud. Starting in 2014, individual and group health plans couldn't place annual limits on coverage. Also starting that year, group health plans could not exclude applicants due to pre-existing conditions. Before 2014, that also would apply to non-dependent children who didn’t have an offer of employer coverage.

Health plans would have to spend 85 percent of their premium dollars on medical services for large group plans, and 80 percent for individual and small-group plans. States would have to report on trends in premium increases and recommend whether plans should be excluded from the insurance purchasing exchange.

The federal government would create a temporary high-risk pool to get health benefits to individuals with pre-existing medical conditions. Premiums could vary within the pool, but the highest premium couldn't be more than four times greater than the lowest premium.


Health plans in the individual and group markets in the exchange would have to have the same rules regarding the guaranteed issue of policies, premium rating and the prohibition on pre-existing conditions.

Analysis: While the insurance industry agreed to many new requirements early on, it did so with the understanding that Congress would make sure nearly all Americans had insurance coverage. Even though the insurance industry has expressed disapproval of many of the proposals, its own public approval is weak, giving it little leverage to force change.

"Insurance companies have never been much loved," said Alan Weil, executive director of the National Academy for State Health Policy. "In the last year, there has been a harnessing of that sort of general sentiment toward an agenda that opposed insurers. We go into this season with a lot of variation across states in the form of regulation. The current debate has prompted some re-examination of what is the right level of scrutiny. What are the right rating rules and practices for health insurance?"

Anthem Blue Cross and Blue Shield’s recent announcement that it was raising insurance premiums in California by up to 39 percent drew more attention to the industry. The House Energy and Commerce Subcommittee on Oversight and Investigations scheduled a hearing on the matter for Wednesday, and Health and Human Services Secretary Kathleen Sebelius wrote a letter asking parent company WellPoint to defend the action. "It remains difficult to understand how a company that made $2.7 billion in the last quarter of 2009 alone can justify massive increases that will leave consumers with nothing but bad options: pay more for coverage, cut back on benefits, or join the ranks of the uninsured," Sebelius wrote in a statement. "High health care costs alone cannot account for a premium increase that is 10 times higher than national health spending growth."


Anthem's action "is a reminder that people get mad and insurers are there for a place to take some of that anger out," said Weil. He added, however, that he finds targeting "insurers as [a] scapegoat not very helpful. What we really have in this country is a very poorly functioning system of delivering health care services, and insurers are both contributors to that problem and solutions."

Currently, many insurers allow dependents to remain on their parents’ policies until they are 21, and sometimes 25 or so if they are in college. Some states have considered raising the maximum age as high as 30.

Many experts argue that pre-existing conditions requirements on insurers would have to be accompanied by proposals to require all individuals to carry insurance and guarantee that both sick and healthy people signed up, to keep costs from skyrocketing. Generous subsidies to help lower-income people afford policies would also be necessary, they say. While Obama is proposing more generous subsidy funding than is included in either the House or Senate bill, he would require fewer people to purchase insurance.

Paul Ginsburg, president of the Center for Studying Health System Change, points to New York and New Jersey, which require insurers to take all applicants but don't require everyone to have insurance. The result? "Individual insurance coverage is extremely expensive and only sick people buy it," he said, adding, "They made their individual market less able to provide value for their public."

Sandy Praeger of the National Association of Insurance Commissioners suggests setting a threshold at, say, age 25. A person younger than 25 could get an insurance policy without underwriting, meaning that insurers wouldn't consider his health status and other factors that they currently take into account to assess an individual's potential cost. As the person aged, he still would not face underwriting if he maintained his policy.

A person who allowed his policy to lapse, however, would face underwriting if he again sought coverage. "This would encourage people to buy it and keep it," Praeger said. "It's not a mandate, but it gets you where you want to be. It puts the onus on the individual to stay covered." Lower-income people would still need subsidies to help them afford insurance, she added. Karen Ignagni, president of America's Health Insurance Plans, which has been working with states on various reform proposals, said that her group has been "looking closely" at this option.

When it comes to high-risk pools, both the House- and Senate-passed bills have them on a national level. House Republicans are pushing a proposal to provide states with a total of $25 billion for these pools. States would have to eliminate waiting lists, and premiums would be capped at 150 percent of the state's average insurance premium (down from 200 percent).

But requiring states to add certain populations to the pools without giving them enough money could lead to large unfunded mandates, health care experts caution. Moreover, the Republican proposal to cap premiums at 150 percent of average premiums wouldn't guarantee affordability for enrollees, said Uwe Reinhardt, an economics and public affairs professor at Princeton University. "The average [annual premium] is still about $12,000, so 150 percent would be $18,000," he said. "A family making $40,000 can't afford $18,000 for health insurance."

Insurance Subsidies

The Plan: Starting in 2014, those with incomes below 400 percent of the poverty level ($43,320 for an individual and $88,200 for a family of four) could get tax credits to help with the cost of insurance premiums. Subsidies would be higher for those with lower incomes. For example, premium contributions would be limited to 2 percent of income for those at 100 percent of poverty, but 9.8 percent of income for those between 300 percent and 400 percent of poverty.

Tax credits would be more generous than in either the House- or Senate-passed bill. Like the Senate and House bills, people with incomes below 400 percent of poverty could get tax credits, but the subsidies for that group would be more generous.

Analysis: Consumer advocates argue that ending subsidies at 400 percent of the poverty level would leave many people who earn slightly more unable to afford premiums, and that many people just under 400 percent of poverty would find it difficult to pay their share. Still, pressure from fiscal conservatives has kept subsidies from being more generous.

Subsidies are on a sliding scale and grow smaller as incomes rise. Under the House bill, for example, a 50-year-old earning 150 percent of the poverty level ($16,245 for a single person) would get nearly $5,000 in premium subsidies, while a person earning 400 percent of the poverty level ($43,320) would receive $662 for the same benefits.

Nevertheless, qualifying for even minimal subsidies makes a difference because under the legislation, premiums for those getting subsidies can't exceed a certain percentage of income. Currently, the average premium for insurance coverage is about $13,000 a year for family policies, according to the consumer group Families USA. And that doesn't include deductibles, co-payments or other cost sharing. That's why members of Congress have proposed limiting the amount of money people must spend beyond premium payments.

The complicated cost-sharing formulas are based on the actuarial values of health plans. The House bill would create a basic benefits package, and the insurer would be financially responsible for 70 percent of the actuarial value of the covered benefits, leaving the patient to pay the remaining 30 percent. The actuarial value is the measurement of a health plan's worth, based on its benefits and cost-sharing. Two health plans can have the same actuarial value even if one offers more generous benefits by charging higher deductibles. Assigning actuarial value to a health plan allows consumers to compare the value of plans that look different.

According to a Congressional Budget Office report in December, one health plan can have a $400 deductible and require the insured to pay 25 percent of the costs out of pocket, up to $2,500. A second plan might have the same actuarial value, even though it has a $650 deductible, because it requires the individual to pay just 20 percent of the costs out of pocket, up to $2,000. "An analysis of those plans' actuarial values would simply take the same set of claims, apply the two benefit designs, and determine the average amount of spending covered by each policy," according to the CBO, and actuarial values can be expressed as a percentage of health claims that an insurance plan will cover.

Today, employers tend to cover more than the 70 percent of a health plan's actuarial value required under the House bill. For employer-based plans, management pays an average of 80 percent to 85 percent of medical claims, with the individual picking up 15-20 percent, CBO said. The total of deductibles and other cost sharing is typically larger for an individual who buys insurance on his or her own; in those cases, the person pays, on average, 55-60 percent of the plan's actuarial value, CBO reported.

Polls show that individuals don't yet grasp exactly how a new law would affect them financially, and some reform advocates worry that, once they understand, there could be either a call for repeal -- or for additional help. Indeed, Congress in 1989 repealed a law it had just passed to provide catastrophic health care coverage under Medicare after many seniors angrily objected to the benefit's cost.

"Once health reform passes there may be an 'expectations gap,' with the public expecting help with their health insurance to arrive much faster than it actually will," Drew Altman, president of the Kaiser Family Foundation, wrote Jan. 6. He cited a recent Kaiser tracking poll that showed that about half of Americans believed that people would begin getting help buying coverage and insurance companies would be required to take all comers this year or next. However, he said, "the actual timeline in the bills is slated to be quite a bit slower, and in the meantime, it's likely that costs will rise and the number of uninsured will increase as they would have if no health reform bill had passed."

Public Insurance Expansions

The Plan: Beginning in 2014, Medicaid eligibility would extend to people with annual earnings lower than 133 percent of the federal poverty level ($14,440 for an individual). The federal government would foot the entire bill for newly enrolled people in expansion states between 2014 and 2016. Starting in 2017, states would start chipping in, but the federal matching rate for the new population would still be more generous. Federal contributions would be capped at 95 percent of the cost in 2017 and 90 percent in 2018. Beginning in 2019, expansion states would kick in the same state share of the costs that they do for covering non-pregnant childless adults as non-expansion states.

Medicaid would have to pay primary care physicians at Medicare rates in 2013 and 2014, at 100 percent federal funding for the incremental costs to states.

Analysis: A significant expansion of Medicaid, the federal-state health care program for the poor, would get health care coverage to more uninsured people, but the prospect also has state officials worried about how they would come up with their share of the new financing. Medicaid could admit as many as 13 million new beneficiaries as part of health reform. Because the greater federal contributions would apply to new enrollees, states that currently have low eligibility standards would benefit the most because they would have the most new additions receiving the higher federal matching rate.

There would be fewer new enrollees with the preferable federal matching rate in states that already cover more people under the program. "Because of the current match rate structure, a larger share of federal dollars would go to the South and West so the share of state spending is lower than the share of new enrollees in these regions if eligibility is expanded to 100 percent or 150 percent [federal poverty level] for adults. For example, in an expansion to 150 percent FPL, the South is expected to account for 49 percent of the new enrollees but 44 percent of the new state spending," the Urban Institute's John Holahan wrote in a December report for the Kaiser Commission on Medicaid and the Uninsured.

The conservative Heritage Foundation in December made the case that "nearly every state would be better off" leaving Medicaid altogether, and that states could save over $1 trillion over 10 years. But this would also increase federal spending as more low-income people became eligible for federal subsidies to buy insurance through an exchange.

Nevada Republican Gov. Jim Gibbons has threatened a lawsuit to stop a Medicaid expansion if it becomes law. While the National Governors Association hasn't taken a position, it has made clear that states already are struggling to pay their share of Medicaid costs, due in large part to the sour economy. "Even with cuts and tax increases, states are experiencing new budget shortfalls totaling $14.5 billion for 2010 and $21.9 billion for 2011. Given projected revenue shortfalls, however, these shortfalls will increase dramatically over the next several months," according to Ray Scheppach, executive director of the NGA. Medicaid spending already consumes about 22 percent of state budgets, and enrollment is estimated to grow nearly 7 percent this year, as the recession drives more people onto Medicaid roles.

Individual Requirements

The Plan: Most people without health insurance would have to pay a penalty, starting in 2014. Those with incomes below the tax filing threshold would be exempt. In 2014, the penalty would be $95. After that, there are two possibilities. A flat payment would be $325 in 2015 and $695 in 2016. Or, a person could pay 2.5 percent of income.

There would be some exemptions, including for those with incomes below the poverty line, and if the lowest-cost plan exceeded 8 percent of income.

Analysis: Conservative opponents argue a mandate is unconstitutional, and that it would set a worrisome precedent for government power. Many health reform advocates are also concerned, but for different reasons. They worry that some people would ignore the mandate at this level of financial penalty -- especially those who are younger and healthier. America's Health Insurance Plans, which represents health insurers, shares this concern. Insurers agreed early on to stop denying policies to people with pre-existing conditions and in poor health in exchange for universal coverage.

Reform opponents have threatened lawsuits challenging the constitutionality of a mandate. In December, Senate Republicans were unsuccessful in efforts to kill the individual mandate with a point of order, declaring it unconstitutional. The Senate defeated the motion, although Sen. John Ensign, R-Nev., said he would "do everything in my power to ensure Congress does not legislate beyond what our Constitution allows."

Employer Requirements

The Plan: Employers with more than 50 workers that don't offer health care coverage would have to pay $2,000 per employee. Companies would not be assessed for the first 30 workers. Those companies with more than 50 full-time employees that do not offer health coverage would be assessed $2,000 for each employee.

Analysis: The U.S. Chamber of Commerce argues that the requirements of the House- and Senate-passed bills would kill jobs, lower wages and stymie business growth. The chamber projects that 10 million people could lose their employer-sponsored health plans. Tax credits would be available for small employers, but the chamber argues that they would be ineffective and temporary. Nevertheless, employer requirements are expected to be around for a while. Massachusetts enacted an employer mandate as part of near-universal health care legislation in 2006, and employers have not found the new law to be a significant burden. Still, employers raise the slippery slope argument that any new mandates on employers could open the door to other, more significant requirements.

Insurance Exchanges

The Plan: States would create their own exchanges through which individuals and small businesses could buy private policies. The federal government would give states money to help them establish the exchanges within one year of enactment. By 2017, larger businesses could participate.

Analysis: The National Association of Insurance Commissioners has advocated state exchanges, and argued in a Jan. 6 letter to members of Congress that federal regulation of insurance in such programs as Medicare Advantage has led to "inadequate federal oversight and action has left consumers vulnerable to widespread marketing abuses." Currently, insurance is regulated by individual states.

Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured, pointed out that a national exchange doesn't have to mean the same health insurance for all. "A national exchange may have to offer different plans in different areas," she said. "It could be that a plan doesn't exist in one area, or there's a homegrown Minnesota plan. Those could be choices in a national plan but only available to people in a specific area." State-specific exchanges, she said, might be more difficult in smaller states where a small number of people in an exchange might not be worth the large amount of administrative cost.

A national exchange would have "greater ability to demand higher performance and possibly lower rates from participating plans," Alan Weil wrote on's Health Care Expert Blog Jan. 19. However, he added, "this is a theoretical benefit only; the experience with Medicare Advantage shows that the federal government is perfectly willing to not exercise its clout when it doesn't want to."

Moreover, Paul Ginsburg argued on the blog that some states are more prepared than others.

'Cadillac Tax'

The Plan: An excise tax would be imposed on high-end, or "Cadillac," health insurance plans to discourage employers from offering overly generous benefits. However, the penalty is less than it was in the Senate-passed bill, and it would kick in later. With less coverage, the theory goes, people would have to pay more out of their own pockets and thus become thriftier about purchasing medical services.

The tax on high-end insurance plans would apply to health plan premiums over $10,200 for individual coverage and $27,500 for family coverage. That tax would begin in 2018 and increase with inflation. The Senate-passed bill would have indexed the tax to inflation plus 1 percentage point.

The Senate bill would have created a bidding model for payment rates in the Medicare Advantage program. Medicare currently pays HMOs, PPOs and other private insurers about 14 percent more than it does to care for beneficiaries in its traditional fee-for service plan. The new plan would increase the cuts to Medicare Advantage, and would shift some funding between areas to bring up payments in lower-payment areas.

Analysis: Some health care experts argue that levying the tax based on premiums is a mistake. "A health plan can have a high premium because it is a Cadillac plan -- for example, one with first-dollar coverage (no cost sharing) and no restrictions on the doctors that can be seen or the prescription drugs that are available. A health plan can also have a high premium because the workers in the plan are older," Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute, wrote on's Health Care Expert Blog on Jan. 11.

Although there are staunch opponents of both a high-end “Cadillac” tax and a tax on the wealthy, the pressure to finance generous subsidies and insurance expansions is expected to keep these taxes in the plan, both before and after any passage of legislation. Removing them would place the burden on Congress to come up with other financing means.

Medicare Changes

The Plan: The Senate bill's Independent Payment Advisory Board would be a new entity, and its 15 members would recommend ways to reduce the growth of Medicare spending on a per capita basis if it exceeded a target rate. Starting in 2013, the chief Medicare actuary at HHS would determine whether Medicare spending would grow faster than a measure of inflation, defined as the average of the growth rates of the Consumer Price Index for medical services and the overall index for all urban consumers, according to CBO. Starting in 2018, the board would submit recommendations if spending per beneficiary exceeded gross domestic product plus 1 percentage point. Its proposals would go into effect automatically unless Congress stopped them. Rick Foster, the chief Medicare actuary, estimates the board could save as much as $39 billion by 2019. At the same time, he sees the board's job as challenging, especially since it couldn't recommend payment reductions to hospitals, physicians, hospices, and suppliers of durable medical equipment.

Analysis: The idea behind a Medicare board is to hold down cost growth in Medicare, limit increases in annual Medicare payments for most services in its traditional fee-for-service program, and lower payments for health plans in the Medicare Advantage program, through which about one-quarter of Medicare recipients get their insurance coverage in HMOs, PPOs, and even some private fee-for-service health plans.

While the pressure is on to limit Medicare spending, which consumes 13 percent of the federal budget and 22 percent of total national health spending, according to the Kaiser Family Foundation, the power of the seniors lobby is well-known. John Rother, executive vice president for policy and strategy at the seniors group AARP, already is expressing concern that Medicare is bearing the brunt of the cost-saving proposals in the reform bills.

Congress in 1989 repealed a law it had just passed to provide catastrophic health care coverage under Medicare after many seniors objected to the benefit's cost. Moreover, in recent years, Congress has simply ignored a statutory Medicare trigger that should have required it to vote on legislation to slow the growth of spending in the program.

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