Q&A on the Healthcare Legislation
March 24, 2010
By: Taylor Graff, Senior Associate

What Happens Next?

After months of drama, debate, and deliberations, President Obama’s long-sought healthcare legislation has become law. The House of Representatives voted 219-212 to pass legislation already approved by the Senate on Christmas Eve. President Obama signed the bill into law yesterday.

The House also voted on some alterations to the bill which will be sent to the Senate. Senate Majority Leader Harry Reid intends to pass these alterations as part of a reconciliation bill, which requires only 51 votes for passage.

Republicans contend that the bill being sent to the Senate violates the complicated rules for reconciliation. The Senate’s parliamentarian will rule on the issue and throw out any provisions deemed unacceptable. But even if the parliamentarian sides with Republicans, it will only affect the details since President Obama already signed the main bill into law.

Opponents also vowed to challenge many provisions in court but this will likely take years to work out. In addition to possible court challenges, many provisions do not take effect for several years, so Congressional amendments and bureaucratic administrators will greatly affect the implementation of this legislation.

What are Major Points Contained in This Health Care Reform Package?

• Increased Medicare Payroll Tax:
  • The Medicare Payroll Tax will increase to 2.35% for individuals making $200,000+ and families making $250,000+, beginning in 2013.
  • Additionally, the reconciliation bill adds a 3.8% Medicare tax on all “unearned income” (i.e. dividends, taxable interest, capital gains) in 2013.
• High-End Health Insurance Tax:
  • High premium employer-sponsored insurance plans (over $8,500 for individual plans and $23,000 for family plans) will pay a 40% excise tax starting in 2014 according to the original legislation or 2018 with the reconciliation bill. This is aimed at corporate executives’ first-class insurance plans and many union-based plans are exempt.
• Fees on Health Care Companies:
  • Health insurers, pharmaceutical companies and medical device manufacturers will bear a significant amount of the legislation’s cost in the form of excise taxes and additional fees.
• Effect on Medicare:
  • Substantially reduces federal subsidies for private Medicare Advantage plans.
  • Rebates $250 for Medicare enrollees who face high prescription drug costs in 2010 (one-time).
  • Gradually increases Medicare subsidies for prescription drugs to close the so called “donut hole” (currently, Medicare enrollees get no coverage on drug costs between $2,830 and $6,300 per year).
  • Overall, $500 billion is cut from Medicare over next 10 years.
• Medicaid Expansion:
  • Medicaid eligibility is expanded to 133% of poverty level.
• Insurance Subsidies:
  • Low-income individuals and families and some small businesses will qualify for federal subsidies to cover health insurance premiums.
• Individual Mandate:
  • Beginning in 2014, individuals are required (with a few exceptions) to obtain health insurance or pay a fine starting at the greater of $95 or 0.5% of income in 2014 and going to $750 or 2% in 2016 (capped at $2,250 in 2016 and adjusted for inflation after that).
• Employer Mandate:
  • Employers with 50 or more full-time employees would be required to offer coverage or pay $750 per full-time worker. Additionally, even if an employer offers coverage, they will be charged $3,000 for any employee who chooses to utilize the insurance exchange.
• Insurance Exchanges:
• State exchanges will be set up where small businesses individuals who do not receive insurance through an employer can purchase health insurance.

Do the New Taxes Affect My Tax-Exempt Bond Income?

Income from tax-exempt municipal bonds remains exempt from these new taxes. The increased Medicare taxes will make tax-exempt income even more valuable. This should boost demand for tax-exempt municipal bonds.

Does This Legislation Affect the Way CCM Views Health Care Related Sectors?

CCM analyzes health care investments within two distinct sections of the bond market:

1. Corporate debt of pharmaceutical, insurance, equipment manufacturing and for-profit health care providers.
2. Municipal debt of public and non-profit health care providers.

In all cases, this legislation comes with benefits and drawbacks. Obviously, the fees levied upon medical related companies hurt their profitability and the cuts to Medicare will hurt health care providers; however the legislation also provides benefits. Pharmaceutical companies benefit from increased subsidies on drug purchases within Medicare. Health Insurance companies benefit from the employer and individual health insurance mandates. Equipment manufacturers and health care providers will benefit as broader insurance coverage leads to greater demand for health services and lower indigent care for health care providers.

The initial market reaction, based on stock price movement, was positive for health care providers and mildly negative for health insurers, pharmaceuticals and equipment manufacturers. However, it is difficult to determine how each sector will be affected overall because there is still significant uncertainty about the legislation’s implementation.

CCM will continue to monitor developments pertaining to the legislation. If you have a specific question about your portfolio or anything else related to health care reform, we encourage you to call or e-mail us at contact@cavcap.com.