America's Bitter Pill

by Steven Brill

  The senators grilled Fowler and the staff over thousands of details, and proposed 564 amendments, of which 135 were voted on.

  The White House healthcare policy and economic teams were constantly sending in critiques of the amendments and even new ideas. Zeke Emanuel made a list of six new cost-cutting possibilities. They went nowhere.

  A public option amendment proposed by New York Democrat Charles Schumer was voted down, with three Democrats, including Baucus, voting no. A second version was also rejected.

  But on October 14, the night before the final vote, Schumer told Baucus that he and the still-agonizing Olympia Snowe wanted to offer another amendment related to the mandate. Baucus, making a joke of how everyone was still romancing Snowe, interrupted. “You mean the Snowe-Schumer amendment, right, Chuck?” he said to Schumer, a notorious show stealer.

  Their amendment passed. That panicked Gruber and everyone else who thought the individual mandate was pivotal. Under the amendment, there would be no penalty at all in the first year and the penalty would be only $95 in the second year, and go up slowly after that. “You’ve got to tell them to vote no,” Gruber pleaded to Fowler and anyone else on Capitol Hill or at the White House he could reach.

  “No senator is going to vote against a lower penalty in a straight-up vote,” one staff person told him. “Schumer knows that.”

  Schumer’s strategy was simple. From the start he had been skeptical about going for sweeping reform amid the economic crisis, and he was worried, in the aftermath of the Tea Party summer, that healthcare reform was going to hurt Democrats in the upcoming 2010 congressional elections. If Obama and Baucus, to whom he was not close, were going to insist on pushing ahead, he would at least make sure the bill had the mildest penalties possible and the most goodies (which is why he had also pushed for more generous subsidies and a broad package of free preventive care). For Schumer, keeping the penalties low, not to mention not having them even kick in until after the 2014 midterm elections, was a no-brainer.

  So, too, was the issue of who would get subsidies, something that Schumer and Senator Bob Menendez of New Jersey were focused on. Baucus’s idea to limit them to people making up to 300 percent above the nationally measured poverty level might make sense in Montana and other relatively low-cost, low income states. However, 300 percent of poverty for a family of four was only about $72,000. A family earning at that level in New York or New Jersey had to have a subsidy. Baucus agreed to raise the ceiling to 400 percent.

  TAXING THE RICH—QUIETLY

  During the nearly four-week markup, staffs from the White House, Treasury Department, and Finance Committee had been in constant touch about how to deal with the Obama administration’s opposition to getting rid of the tax exclusion on employee health insurance benefits because it violated the president’s campaign promise. They had finally come up with a solution that was in part suggested by Massachusetts senator John Kerry. They would not tax all benefits, just the value of insurance benefits that were overly generous. And the employers would pay, not the workers.

  Businesses would pay a 40 percent excise tax on any premiums it paid on behalf of its workers exceeding $27,500 per family. It was called a “Cadillac tax.” However, a $27,500 premium was likely to be more Buick than Cadillac. The cost of insuring workers, especially for employers subject to contracts negotiated by strong unions, was likely to exceed the benchmark in the coming years.

  The Cadillac tax was a way to skirt Obama’s promise not to raise taxes for the middle class because the employers, not the workers, would pay it. Yet the more union leaders heard about it, the more they complained, knowing it would encourage employers to cut back on generous benefits and force employees to pick up more of the cost of their insurance.

  To the economic team, though not to the political advisers in the White House, that was a significant plus: Businesses would put more pressure on insurers to design less expensive packages, and employees might be more careful about what they spent because their deductibles and co-insurance payments would be driven higher. All of that could moderate the rising cost curve.

  The expected revenue impact—estimated at about $110 billion over ten years—was far less than the $300 billion Baucus’s more direct plan had originally been projected to raise. But the Finance Committee staff and the Obama administration came up with a solution that filled that new gap, plus all the old gaps they had been dealing with. They bulked up on a plan to tax high earners, though not with an income tax boost. More than $300 billion would be raised by a .9 percent Medicare payroll tax on families earning more than $250,000, plus a new 3.8 percent tax on income from capital gains, dividends, and other non-job-related income. It was a hefty tax increase. However, because it did not tamper with basic income tax rates it did not attract nearly as much attention.

  At 2 A.M. on October 16, 2009, the Finance Committee voted 14–9 in favor of the marked-up bill. Olympia Snowe joined the Democrats in voting yes. “I thought the committee process had been really great,” she later explained. “I was hoping for the same open, full debate on the Senate floor.”

  MORE CBO GAMES

  The CBO scored the bill as deficit neutral. Pivotal in that calculation was yet another element of how unreal the CBO process was. It involved an issue that had been an obsession of Ted Kennedy’s: providing a safety net for the elderly who could not afford nursing home care or at-home assisted living.

  Medicare does not provide for long-term assisted living. Every year as people continued to live longer, they were forced to spend or shed assets until they were so poor that they could qualify for the barebones support that Medicaid offers to the poor. Kennedy’s father had needed care for eight years following a debilitating stroke in 1961. His mother had suffered a stroke, too, and was in a wheelchair for nineteen years until her death. Of course, his family was wealthy enough to pay for all of that. However, Kennedy had been working on the issue for decades.

  Now, under a provision Kennedy championed called the CLASS Act (Community Living Assistance Service and Supports), Americans would be able to buy insurance at a young age that would go into a fund to provide them assisted living later on. It was to be a government program, but Kennedy had had to accept as a compromise that it would be voluntary. That meant that people could self-select—the exact danger that proponents of an insurance mandate feared in fashioning the broader health insurance plan. To counter those fears, the secretary of health and human services would be required to certify that the plan would be fully self-supporting before it could be implemented.

  But there was this CBO catch: Because the insurance premiums would have to be paid in for five years before anyone could get any benefits paid, and because no benefits could be paid until someone had a “qualified disability,” CLASS was certain to take in much more money in its first ten years than it would pay out, even if it was destined to become insolvent. So despite the fact that CLASS was meant not to be a tax or a revenue raiser in any way, under CBO’s accounting rules it was going to be a big profit maker in the ten-year period from 2010 to 2020. In fact, CBO gave it a positive score of $70 billion.

  Within two years, on October 11, 2011, CLASS would be “indefinitely suspended” by Kathleen Sebelius, then secretary of health and human services, before it had even been launched, because it was deemed financially unsustainable. Yet in 2009, it was the CBO score—a positive $70 billion—that counted.

  “The whole thing was a fiscal masquerade,” Olympia Snowe would later tell me. “It was obvious.”

  On October 7, 2009, CBO blessed the Finance Committee bill while the senators were still completing their markup, scoring it not only as deficit neutral but as projected to produce a slight decrease in the deficit over the ten-year period.

  THE PRESIDENT GETS A “SNOW JOB”

  “Larry said Peter [Orszag] had misled POTUS [President Obama] on the intensity of the cost controls,” a member of Obama’s staff wrote in a diary. The staffer was describing an October 20, 200
9, memo that National Economic Council head Larry Summers had written to Rahm Emanuel about what budget office director Peter Orszag had told Obama about how the Finance Committee bill would affect overall healthcare spending. “Peter gave the President a snow job.”

  “Larry was right,” the staffer later explained to me. “Peter overstated to the president how great the bill was on costs and Larry called him on it.”

  By now the economic team was growing so frustrated that they were fighting not just with the healthcare reform policy people, such as DeParle and Lambrew, but among themselves. And the more they examined the Senate bill the angrier they got. They had gotten in a provision for an independent payment advisory board to suggest Medicare cost-cutting measures if healthcare inflation exceeded the growth of the gross domestic product by a certain amount. However, Tauzin and the PhRMA lobbyists were all over that one and had gotten the senators to weaken the trigger.*9 Worse, the hospital lobby had succeeded in excluding the biggest expense—Medicare hospital payments of any kind—from the board’s purview until 2019.

  Similarly, the malpractice reform pilot projects that they had pushed for had been whittled down to almost nothing.

  And the plan to start a real comparative effectiveness program to measure the costs versus benefits of devices and drugs had been gutted. Now the panel could research comparative effectiveness but various amendments had been inserted specifically prohibiting the research to be used by Medicare to limit or even advise on the use of any drug or other treatment. The researchers could discover that drug A, which cost ten times what drug B cost, was less effective, but Medicare could not respond by refusing to pay for drug A.

  “Healthcare reform continues to evolve, and we’re paying close attention,” Amgen CEO Kevin Sharer told stock analysts on a conference call the next day (October 21) to discuss his drug company’s 23 percent jump in earnings per share for the third quarter of 2009.

  FIVE BILLS, ONE LAW

  On Saturday evening, November 7, 2009, the House of Representatives voted on the bill that Speaker Nancy Pelosi and her staff had hammered together by merging the versions passed by the three House committees that shared jurisdiction. It had been an agonizing process, enabled by Pelosi’s determination to make it happen. Although House members were mostly moderate to left of center, there was a large contingent of conservative Democrats, called the Blue Dog Coalition, who came from what in 2009 were swing districts. Following the Tea Party summer, the Blue Dogs understandably feared a healthcare reform bill would be used to attack them from the right.

  One of their key concerns was abortion, the issue Obama had gotten an earful about from a bishop at Ted Kennedy’s memorial service and which the church had increasingly complained about since. Federal subsidies should not be used to pay for insurance that covered abortion—and maybe not even contraception, some of the Blue Dogs insisted.

  Other Blue Dogs were worried about more basic issues. They didn’t want any kind of public option, for example—a provision that Pelosi’s liberal members insisted on. In the end, a public option was included, but Pelosi had to yield on abortion, disappointing many of her members, by allowing a provision requiring that no subsidies would pay for abortion coverage. Women would have to buy it separately with their own money, which was arguably an accounting sleight of hand since those women could use the subsidies they were getting for their overall insurance to help pay for it.

  Just as the three House versions had now been merged and passed, the newly approved Senate Finance Committee bill now had to be combined with the version passed by Kennedy’s HELP Committee. After that a final Senate bill would have to be reconciled with that final House bill, then voted on again by both bodies and given to the president to sign.

  At a White House meeting of the healthcare reform team during the second week in November, the group speculated that getting the bills merged in the Senate was likely to be so difficult that the Senate vote on the final law might not come until just before Thanksgiving, about two weeks away. The same group had predicted a Baucus deal with Grassley, which had never come, by early July. This time, they would be only a month off.

  With Harry Reid and his staff in charge of the process, the pressure intensified. To get past a Republican filibuster, the bill was going to have to get all fifty-nine Democrats (plus independent Bernie Sanders) on board, or at least fifty-eight, if Snowe could be counted on to back up her yes vote for the Finance Committee bill with the same vote on the Senate floor.

  Some of the liberal Democrats wanted to use the process of merging the HELP and Finance Committee drafts to revive the public option. They threatened to oppose a bill that didn’t include it. Sanders, the Vermont independent, was making the same noises.

  “Why aren’t we jumping up and down about that, telling them how stupid it is?” Summers asked his White House colleagues on October 21, referring to the public option, according to notes taken by someone who was at the meeting. “Would it reassure you to know that they don’t care what we think?” Jason Furman from Treasury shot back.

  What Reid did care about was corralling all of his Democrats. And Joe Lieberman, the Democrat from insurance-industry-friendly Connecticut, told Reid he would not vote for a bill that had a public plan of any kind. Yet the liberals were threatening from the opposite direction, and the House bill, which would have to be reconciled with whatever Reid produced, had the public option.

  On November 19, 2009, Reid presented his bill merging the Finance Committee and HELP versions. It included:

  • Schumer’s and Snowe’s lower penalties;

  • the Cadillac tax;

  • the new Medicare payroll tax on high earners and a tax on their capital gains and dividends;

  • a tax on elective plastic surgery;

  • a device tax approximating the $60 billion (over ten years) that Tony Clapsis had first sketched out;

  • a $102 billion tax (again over ten years) on insurance companies, based on their revenues;

  • fifty state insurance exchanges instead of the House’s simpler national exchange;

  • the drug and hospital givebacks that had been negotiated;

  • and a public option, but one that each state could choose to opt out of.

  Just before Thanksgiving, the Senate cast sixty votes to begin debate on Reid’s bill. Snowe voted no; she wanted her colleagues to wait until after the New Year to vote, she said. However, she didn’t take a position one way or the other on how she might vote after the debate on the floor.

  THE VOTE TO MOVE the Reid bill to the Senate floor was only the starting bell for another round of hand-to-hand combat. As the Senate came back from Thanksgiving recess and began what would be three weeks of debate mostly featuring predictable, partisan speeches, Reid was running one-on-one bargaining sessions behind closed doors in his office. Every Democrat had something more he or she wanted from Reid, and they were all given an audience with the majority leader to demand it. Reid had decided he needed somehow to mollify all of them, because his instinct was that Snowe was going to cave.

  Since her yes vote in the Finance Committee, Snowe had become even harder to read. But the Democrats and their staff knew she had been ostracized by the other Republicans since that vote. She was shunned when she showed up at lunches of the Senate Republican caucus. It seemed to be getting to her, they speculated, which was why she had voted no on beginning the floor debate.

  Snowe told me she thought the treatment by her Republican colleagues was “more funny than troubling.”

  Although Baucus still wanted to win her over, Reid didn’t care. He could get it done with his fifty-nine Democrats and Sanders—thanks to Ted Kennedy.

  Besides writing that letter to Obama, Kennedy had done something else for the cause as he was about to die. He had convinced Massachusetts governor Deval Patrick to get a bill passed in the state legislature allowing for the immediate appointment (by Patrick, a Democrat) of a replacement in the event his seat became vacant. P
atrick had quickly appointed a Democrat, which is what gave Reid his filibuster-proof margin immediately and presumably in the foreseeable future, because a Democrat was assumed to be a sure winner in the election for the vacant seat now scheduled for January.

  Still, sixty votes meant sixty votes, not fifty-nine or fifty-eight. Which gave every Democrat in the Senate a veto over this enormously important bill.

  Evan Bayh of Indiana still thought the tax on his medical device companies back in Indiana was too high. The companies had refused to negotiate any givebacks with Baucus’s people, but their lobbyists had been all over Capitol Hill presenting a consultants’ study full of charts and calculations purporting to demonstrate that the tax would kill tens of thousands of jobs—despite the new patients the law would produce who would be buying the companies’ high-margin products with their new insurance. Reid agreed to cut the tax in half, which was also a favor to the newly seated Al Franken from Minnesota, where other device makers were headquartered.

  Within days, an analyst from Wall Street’s Bernstein Research reported that “as we previously anticipated, the medical [device] industry tax was reduced,” because of the industry’s lobbying efforts.

  “The impact of the reduced tax looks manageable to us,” the analyst concluded, “especially when offset by the benefits of expanded coverage.”

  Blanche Lincoln of Arkansas wanted a change that would ease the penalty on employers who did not provide health insurance by allowing them to delay coverage for three months for new employees after a one-month orientation period. (Walmart, among other home-state businesses, was concerned.) Lincoln got it. But she gave up her opposition to a tax on tanning bed services, even though many of the beds were made in her state, because Reid wanted to placate the lobbyists for the dermatologists, the drug companies that sold Botox, and the plastic surgeons. They were objecting to the proposed tax on elective cosmetic surgery that had been dubbed the Bo-tax. So Reid dropped the Bo-tax and substituted in the tanning bed tax.