Health reform: Where the money will come from
Democrats pushing for health care reform are closer to the finish line than ever, but it’s not over yet. And the question of cost will remain a central issue in coming days.
On Thursday, the Congressional Budget Office weighed in with a key — if still very preliminary — cost estimate.
The latest bill is a mix of provisions from a bill the Senate passed last December and proposals made by President Obama recently.
Like the Senate version, the so-called reconciliation bill would provide government subsidies to low- and middle-income families buying health insurance on their own, expand eligibility rules for Medicaid and provide coverage for a majority of uninsured Americans.
It would also establish a number of insurance reforms.
The whole package will cost $940 billion over 10 years to provide expanded insurance coverage, according to the CBO forecast. In addition, the new plan could reduce the deficit by $138 billion over the first 10 years — $20 billion more than the Senate bill.
Over the following decade, CBO projected, it could reduce the deficit by more than $1 trillion, although the agency stressed that such long-term projections are highly uncertain.
The estimated long-term deficit reduction comes mainly from more than $500 billion in savings from health programs like Medicare, and $438 billion in new tax revenue.
Here’s a breakdown of some of the ways the latest health reform bill would be paid for and where the legislation differs notably from the Senate bill.
Increase the Medicare tax on high-income households: The reconciliation bill’s changes to the Medicare tax represent the largest single revenue raiser in the health reform package.
The CBO estimates the provision would raise $210 billion over 10 years.
Currently, the Medicare payroll tax is 2.9% on all wages — with the worker and his employer each paying 1.45%.
The reconciliation bill, like the Senate bill, would raise the percentage paid by high-income individuals by 0.9 percentage points, so an individual would pay 2.35% on his wages.
The reconciliation bill, however, also would subject the investment income of high-income households, such as dividends, interest and rent, to a 3.8% Medicare tax.
High-income is defined as individuals making more than $200,000 ($250,000 for couples filing jointly).
The tax would be on the lesser of one’s investment income or the amount of modified adjusted gross income above the income threshold.
In other words, if a couple’s total income is $300,000 ($50,000 above the threshold), and they had $40,000 in investment income, the 3.8% tax would apply to the $40,000. If their investment income was $60,000, however, they would only pay the tax on $50,000.
Tax high-cost medical plans: The new bill still includes an excise tax on insurers offering high-cost health insurance policies.
But it is considerably weakened from the Senate bill, after objections from unions and others. Fiscal hawks have been arguing for a stronger excise tax since they believe it has the best chance of curbing the growth in health costs, which is a main goal of health reform.
The idea is that an excise tax would persuade workers and employers to choose lower-cost plans. While technically a tax on insurers, they are expected to pass along those costs to policyholders.
Once employers spend less money on health care, they will use the money saved to pay workers higher wages, or so the economic theory goes. The workers will then owe income tax on those higher wages, providing revenue to help pay for health reform.
But the new bill, compared to the Senate bill, raises the thresholds for plans that would be subject to the tax and delays its enactment by five years — from 2013 to 2018.
The new thresholds would be $10,200 for singles, up from $8,500 in the Senate bill; and to $27,500 for families, up from $23,000 in the Senate bill. The thresholds would be higher still for retirees and employees in high-risk professions ($11,850 for individuals and $30,950 for families).
Those thresholds could go up even more by 2018 if health care inflation is higher than expected.
The CBO estimates the provision would raise $32 billion over 10 years, nearly 80% less than the $149 billion in the Senate bill.
Penalties for those who don’t get coverage: Like the Senate bill, the reconciliation bill would impose a financial penalty on most Americans who don’t buy health insurance.
Come 2015, individuals who choose not to buy insurance would pay the greater of $325 or up to 2% in income ($695 or up to 2.5% in income thereafter).
Those whose incomes are low enough that they are not required to file a tax return would be exempt from this requirement.
The CBO estimates this provision would raise $17 billion over 10 years.
Require employers to pay if they don’t provide coverage: Like the Senate bill, the reconciliation bill would assess a penalty on employers with more than 50 workers if they do not provide health insurance coverage and have workers who would qualify for federal subsidies to buy insurance on their own. But the reconciliation bill ups the penalty from $750 per full-time worker to $2,000.
During an initial transition period, however, companies would only have to pay penalties on some of their employees.
The CBO estimates this provision would raise $52 billion over 10 years.
Impose new fees on the health industry: The reconciliation bill would impose new fees on health care companies such as drug makers, medical device makers and insurers. The fees would be in exchange for the new business that will come their way as a result of the expected influx of Americans who will obtain health coverage and use more medical services.
The CBO estimates this provision would raise $107 billion over 10 years.
Trim various health-related tax breaks: The reconciliation bill would impose an additional 20% penalty for non-health withdrawals from tax-advantaged health savings accounts, up from 10% in the Senate bill.
It would limit to $2,500 the amount workers may contribute to flexible health spending accounts at work. It would also increase how much the non-elderly and the non-disabled would have to rack up in medical bills before being allowed to deduct expenses above that amount on their federal income tax return.
Plus, it would make it harder to deduct medical expenses by raising the percentage of adjusted gross income that would have to be matched in health bills before being allowed to deduct any further medical expenses. The floor would be raised to 10% from 7.5% for those under 65.
These provisions combined would bring in an estimated $29 billion over 10 years.
Create a new long-term care insurance program: The bill would create the Community Living Assistance Services and Supports Act to help seniors in need of help with daily tasks such as bathing and dressing. Those who enroll in the program would have to pay premiums into the program for five years before being eligible for benefits.
In the first 10 years, the program it is expected to take in more money than it pays out, which is why the CBO says it would reduce the deficit by $70 billion. But in the second decade and beyond, the program is projected to pay out more than it takes in, and will therefore contribute to the deficit.
That’s why some say that the CLASS Act is a budget gimmick that will not contribute to the potential of health reform to reduce the deficit.
The reconciliation bill could come up for a vote in the House as early as Sunday.
It may not be amended in the House before the vote. But it may be amended in the Senate. And if Senate Republicans have their way, there will be plenty of proposed changes.
Whether those amendments pass or not, however, is another matter.