<nobr>Mar 20, 2010</nobr>

House to Take Up Senate Health Reform Bill, Along with Sidecar Bill

On March 18, Congressional Democrats released the legislative language of HR 4872, the Healthcare and Education Affordability Act of 2010. This is the bill known as the sidecar reconciliation bill. The purpose of this bill is to make changes to the Senate healthcare reform legislation (the legislation that the Senate approved on Christmas Eve) so that House Democrats will be persuaded to vote to approve both the Senate healthcare bill and the sidecar measure. (Helpful documents on the sidecar bill are available at the House Rules Committee website: http://rules.house.gov/)

The Process: The sidecar measure and the base Senate bill are slated to be voted on by the full House tomorrow (Sunday) afternoon. Tomorrow's vote will be a seminal event because, to date, securing House passage of the Senate bill has been the biggest challenge for Congressional Democratic leadership. Although originally the bills were to be considered together under the notorious "self-executing" rule, now it appears that there will be three votes: the first on the "rule," a procedural vote; the second on the underlying Senate bill; and the third on the sidecar measure.

In addition, if both the sidecar and the Senate bill are approved by the House tomorrow, then one "by-product" is that both chambers of Congress will have passed the Senate healthcare legislation. Once the president signs this bill, it will become law. Our understanding is that the president will sign the legislation because the Senate will not be able to vote on the sidecar bill unless the underlying legislation (i.e., the Senate healthcare bill) has been signed into law.

Once the sidecar leaves the House, the next challenge will be approval by the Senate. Because the sidecar bill is a reconciliation bill, it needs only 51 votes for approval rather than the normal 60 votes necessary to avoid a filibuster. The rules for reconciliation bills, however, are daunting, and Republican Senators opposing the bill are likely to throw up numerous procedural obstacles to its timely consideration.

Many people now believe that the Senate is unlikely to approve the sidecar bill without at least a few changes. If this happens, the sidecar bill would need to be returned to the House for another vote; a second House vote would be required because for a bill to be sent to the president for his signature, identical language must be approved by the House and the Senate. If the House and Senate eventually were unable to settle on a common bill, then -- under the scenario outlined above -- the Senate bill would become law, without the fixes contained in the sidecar reconciliation bill. (The Senate bill is HR 3590, the "Patient Protection and Affordable Care Act.")

Major new elements of the sidecar reconciliation bill, HR 4872: The following is a description of the major elements in HR 4872 that would affect large employers.

The biggest changes affecting large employers included in the sidecar bill relate to the excise tax on "Cadillac" plans, the "free rider" penalty, and the grandfathering provisions relating to certain consumer-protection items in the Senate bill. The sidecar bill does not appear to contain a provision that would allow states to waive ERISA preemption.

Excise tax on Cadillac plans: The 40% excise tax on "Cadillac" plans would be applied to healthcare premiums exceeding thresholds of $10,200 for individuals and $27,500 per year for families; the tax would become effective for taxable years beginning after 2017. The tax would be imposed on the value of coverage exceeding these thresholds, which would be indexed for inflation (CPI U). (These thresholds would be increased to $11,850 for individual coverage, and $30,950 for family coverage, for retirees and workers in "high-risk" industries.) Coverage under multiemployer plans would be deemed, for purposes of the threshold, to be family coverage.

Adjustments to the thresholds would be made for firms that have higher healthcare costs, due to the age and/or gender of their employees, than the national average. The dollar thresholds would be automatically increased in 2018 if the premium inflation rate between now and 2018 exceeded the amount estimated by CBO. The phase-in of the thresholds for residents of 17 high-cost states would be eliminated under the sidecar bill.

Amounts potentially subject to the tax would include the value of health coverage, health flexible spending accounts (FSAs), Health Reimbursement Accounts (HRAs), and employer contributions to Health Savings Accounts (HSAs); the tax would no longer be applicable to stand-alone dental and vision plans.

The sidecar bill would define the term "employee" to include any former employee, surviving spouse, or other primary insured individual.

Free rider penalty: For months beginning after 2013, employers (determined in accordance with the aggregation rules of Internal Revenue Code section 414) with more than 50 full-time employees would be subject to a "free rider" penalty if they did not offer health insurance to their employees or if they did offer coverage, but the coverage was unaffordable. The penalty would be applicable if employees purchased subsidized insurance through an exchange.

Employers that did not offer coverage to fulltime employees would face a penalty of $2,000 per year per fulltime employee, without taking into account the first 30 employees. Employers that did offer coverage would be subject to a penalty for each noncovered employee equal to $3,000 per employee, subject to a ceiling of $2,000 times the number of fulltime employees. (All dollar amounts would be nondeductible for tax purposes and would be indexed and calculated on a monthly basis.) For purposes of the ceiling, the first 30 full-time employees would not be taken into account.

For purposes of determining whether an employer had at least 50 full-time employees (and thus subject to the free rider penalty), part-time employees would need to be translated into the equivalent number of full-time employees and then added to the number of full-time employees. (For purposes of the penalty, full-time employees would be defined as those employees who were employed on average at least 30 hours per week with respect to any month.)

The penalty for waiting periods in excess of 30 days or longer would be repealed by the sidecar bill.

Retiree drug subsidy: The deduction of the subsidy amount for employers who maintain prescription drug plans for their Medicare Part D eligible retirees would be eliminated for taxable years beginning after 2012.

Prescription drug coverage: The sidecar bill would close the Part D "doughnut hole" coverage gap for Medicare beneficiaries by 2020. (A 25% coinsurance would still be applicable until the individual reached the catastrophic coverage ceiling.) A one-time $250 rebate would be given to individuals entering the doughnut hole in 2010.

Medicare Hospital Insurance tax on high-income taxpayers: For taxable years beginning after 2012, an additional 0.9% hospital insurance tax (from 1.45% to 2.35%) would be imposed on wages over $200,000 for individuals and $250,000 for couples. (This additional tax would apply only to the employee and not to the employer's share.) These threshold amounts would not be indexed for inflation.

In addition, for taxable years beginning after 2012, a new annual HI tax of 3.8% would be assessed on the "net investment income" (interest, dividends, annuities, royalties, and rents but not a distribution from a qualified plan) of these same high-income individuals. (The new tax would also apply to the net investment income of trusts and estates.) The tax would apply to the lesser of net investment income for the year or the individual's/family's income in excess of the $200,000/$250,000 threshold.

Medicare Advantage plans: The sidecar bill would freeze Medicare Advantage payments in 2011 and would reduce MA benchmarks beginning in 2012. The benchmark reductions would be phased in gradually.

Limit on health flexible spending accounts: For taxable years beginning after 2012, contributions to a health FSA would be limited to $2,500 per year, indexed in accordance with changes in the Consumer Price Index starting in 2014.

Grandfathered plans: Under some interpretations of the Senate bill, certain consumer protections and market "reforms" (such as increasing the age at which children could be kept on their parent's medical plan) would not generally apply to group health plans. The new sidecar bill would encroach upon these grandfathering "protections" by requiring that all group health plans would need to comply with the following provisions, regardless of their otherwise grandfathered status:

• Waiting periods: For plan years beginning after 2013, plans could not impose a waiting period in excess of 90 days;


• Lifetime limits: For plan years beginning on or after the date that is six months after the date of enactment, a plan could not impose lifetime limits on the dollar value of benefits for any participant or beneficiary for those benefits that are deemed to be "essential health benefits" under the Senate bill;


• Annual limits prior to 2014: For plan years beginning before 2014, plans could set only a "restricted annual limit" on benefits deemed to be "essential health benefits" under the Senate bill; the Secretary of HHS would define what these limits could be;


• Annual limits for plan years beginning in 2014 and thereafter: For plan years beginning on or after the date that is six months after the date of enactment, a plan could not impose annual limits on the dollar value of benefits for any participant or beneficiary for those benefits that are deemed to be "essential health benefits" under the Senate bill;


• Prohibition on rescissions: For plan years beginning on or after the date that is six months after the date of enactment, a plan could not generally rescind health coverage for a plan participant once covered under the plan;


• Prohibition on preexisting condition exclusions: For plan years beginning after 2013, a group health plan could not impose any preexisting condition exclusion with respect to the plan; and


• Coverage of adult dependents up to age 26: For plan years beginning on or after the date that is six months after the date of enactment and through plan years beginning before 2014, a group health plan that offers family coverage must make dependent coverage available for an adult child (regardless of marriage status) until the child turns age 26, provided the child is not eligible to enroll in another group health plan; amounts spent for medical care for these adult dependents would not be includible in the parent's taxable income through the end of the taxable year in which the child had not yet turned 27.


Questions or comments on this update or health reform in general should be addressed to either Gretchen Young, gyoung@eric.org, or Adam Solander, asolander@eric.org.

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Democratic Summary of Reconciliation Bill

Congressional Budget Office Report

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