Inside the Senate Panel’s Plan

The Senate Finance Committee released the initial draft of its reform plan (called America's Healthy Future Act of 2009) on Wednesday. Overall, the plan would expand coverage via Medicaid and by creating state-based insurance exchanges through which individuals and small businesses can buy insurance. The question is whether the subsidies provided would be sufficient to make insurance coverage affordable for the uninsured.

The plan has an individual mandate to purchase coverage and substantially reforms the individual health-insurance market, banning exclusions based on pre-existing conditions and rescission after illness and guaranteeing renewability. State-based exchanges to facilitate shopping for plans would begin in 2013; all policies sold must have a comprehensive benefit package.

The act also would regulate the amount that premiums may vary based on personal characteristics, with more variation allowed than in House bills. For example, premiums could vary by 5:1 from oldest to youngest, and smokers could be charged 50 percent more than nonsmokers. Variations would be allowed across geographical areas, with the maximum difference allowed based on all factors being 7.5:1.

Each plan would have to cover the same services, but consumers would pick from four benefit levels: bronze, silver, gold and platinum. The benefit levels would differ in terms of monthly premiums and the amount of out-of-pocket expenses incurred when care was used.

The bronze benefit package would represent catastrophic coverage that would have an out-of-pocket maximum of $5,950 a year for an individual, $11,900 for families. The platinum plan would have much lower out-of-pocket maximums (how low is not clear; only the maximum is set), but also higher monthly premiums. There would be no annual or lifetime benefit maximums.

Initially, the plan would allow uninsured individuals and employers with 50 or fewer employees (100 at state discretion) to use the exchanges. However, by 2022, employers of any size could be purchasing insurance through them. In addition, insurance companies would pay into a reinsurance pool that would reduce the reward for cherry-picking the healthiest patients, and states could construct multistate agreements that would allow out-of-state policies to be sold in exchanges.

Existing spending must be cut or new taxes levied to ensure deficit neutrality; the CBO says the plan would actually reduce the deficit by $49 billion over 10 years. Medicare and Medicaid payments to providers and Medicare Advantage plans would be cut by approximately $500 billion to offset new spending. Other financing would come from an excise tax of 35 percent on insurance companies selling high-value health insurance plans (above $8,000 for individuals, $21,000 for families). The insurance company would pay this tax, which would raise approximately $215 billion over 10 years.

Deleting a Tax Subsidy from the EquationMy family's combined premiums (paid by Duke and by me) as well as my flexible spending account amount to about $16,000 a year, below the level that would result in a tax on my insurance company.

Other financing would be raised through lump-sum taxes levied annually on the following industries, with tax liability to be attributed to companies based on market share: insurance ($6 billion), medical devices ($4 billion), pharmaceuticals ($2.3 billion) and clinical labs ($750 million), raising $93 billion over 10 years.

Would this work? Persons below 133 percent of the official poverty level would now be covered by Medicaid, which is straightforward, but an emerging issue for debate would be how much of this cost will be borne by the states. The market reforms and exchange regulations seem reasonable. The real question is whether insurance offered to those between 133 percent and 300 percent of the poverty level (the latter income being $61,500 a year) would be affordable to persons in North Carolina. The subsidies provided are lower than what Massachusetts provides using a similar approach and less than those envisioned in HR 3200.

Other important questions: How many insurers would offer plans in North Carolina? Currently Blue Cross and Blue Shield sells virtually all individual policies in North Carolina and about seven in 10 group policies. Would other insurers enter the market and provide competition that might drive down premiums?

The act would not allow a government insurance option to be available in an exchange, but it would provide $6 billion nationally as seed money to develop so-called insurance co-ops. I favor a public option, but that seems politically dead. I don't see how a co-op can possibly get up to speed in a meaningful way and compete in the insurance marketplace. This provision is a political compromise and not a meaningful reform so far as I can tell.

I would prefer capping the tax exclusion of employer-paid insurance premiums to the current tax on high-benefit plans. A cap at the average national premium level would raise twice as much money, which would allow for more meaningful subsidies, and would more directly reduce overinsurance and therefore help slow health-care cost inflation.

Donald H. Taylor Jr. is an assistant professor of public policy. His blog is available for discussion of this article and health care reform in general. This article was first published in The (Raleigh) News & Observer on September 18, 2009.  This is part of a weekly series of articles by Donald Taylor exploring aspects of the health care reform issue.