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Who picks up the tab for health reform?

/ Source: Business Week

The odds are shifting in favor of health-care reform legislation making it through Congress this year, to the point where bookies could put money on the ultimate winners and losers. Many details have yet to be determined, as congressional leaders try to merge two Senate and three House proposals, all of them more than 1,000 pages long.

And beyond the contentious battle over the public insurance option, there's a huge fight over another question: Who will pay to cover the uninsured? It's safe to say doctors will give up the least, pharmaceutical and medical device makers will fall somewhere in the middle, and insurers will be the big losers.

Then there's the taxpayer. Senate Democrats want to levy a 40 percent excise tax on so-called Cadillac plans, policies that cost more than $21,000 a year. Backers say the tax would bring in $215 billion, but unions are determined to block it, arguing that middle-income workers will get hit with the tax as well.

A fierce battle will erupt over the levy when the Senate and the House begin to work on the final bill. Meanwhile, the 85 percent of citizens with insurance of any kind, Cadillac or Hyundai, should probably assume that most costs levied on other parties to health reform will be passed along to them through higher premiums.

Most Washington observers now think the final bill will closely resemble the Senate Finance Committee proposal because it has a smidgen of bipartisan support, thanks to Senator Olympia Snowe, R-Maine. It also meets President Barack Obama's demands that a reform package cannot add to the federal deficit and the tab should come in at around $900 billion over 10 years. With billions in potential profits or lost benefits at stake, lobbyists are scrambling to make sure that someone else—anyone else—foots the bill.

"Figuring out how to pay for this package remains the hardest thing," warns Andy Laperriere, a Washington policy analyst with institutional broker ISI Group. Nevertheless, it is possible to envision which groups will have to pony up:

Health insurers
The insurance industry has been actively involved in efforts to craft a health-care bill ever since President Obama took office. Insurers have already agreed to several concessions on the assumption that they will gain 30 million or so new customers from the ranks of the uninsured. Those efforts haven't paid off the way they'd hoped. "The bill has certainly taken a turn for the worse for the [insurers]," says Rick Weissenstein, an analyst with Washington Research Group.

Lawmakers have proposed that the industry pay the government flat fees worth $67 billion over the next decade—an idea that's likely to get backing from House Speaker Nancy Pelosi, D-Calif. Throw in the $100 billion-plus that both chambers aim to get by cutting subsidies for Medicare Advantage plans, and the industry may have to give up more than $200 billion. "It's totally disproportionate to our share of the health-care expenditures," says Karen Ignagni, president of America's Health Insurance Plans, the industry lobby.

She argues that the industry will have no choice but to raise customers' premiums to fund the new fees. Moreover, a mandate requiring everyone to buy insurance or pay a fine has been so watered down that insurers won't gain enough new customers—the basis for their reform support in the first place.

On top of that, the House Judiciary Committee voted on Oct. 21 to end the industry's 60-year-old exemption from federal antitrust laws. "The insurance companies are obviously turning into the villain here," says Laperriere. "The chances are more likely that their costs will go up, not down."

Drug and medical device makers
There were hopes that covering the uninsured would mean a lot more customers for these companies as well. Consequently, drugmakers cut a deal with the White House in May to absorb $80 billion in cuts to Medicare reimbursements and fees over 10 years—a fraction of the industry's total revenues of more than $600 billion a year.

The device makers never came to the table, and that could haunt them. Although their industry brings in only one-sixth the revenues of the drug companies, the finance bill would have them absorb $40 billion in new fees, proportionally a much bigger hit.

"This is really a tax on innovation," complains Medtronic CEO William A. Hawkins, who says device makers would have to cut back on research and jobs.

Their points are gaining traction. Daniel Clifton, an analyst with Strategas Research Partners, predicts the device makers' contribution will likely be notched down to around $30 billion.

Doctors and hospitals
If there are winners in all this turmoil, it's the white coats. Never mind that doctors and hospitals are each responsible for one-third of the nation's health-care spending—far more than any other sectors—or the fact that nearly everyone acknowledges the waste in Medicare spending. Congress has proposed no major changes to the "fee-for-service" model that pays physicians for the volume of services they deliver, rather than the quality of care.

On top of that, Congress looks set to eliminate a 21 percent cut in Medicare payments to doctors that is already mandated under the 1997 balanced budget law. That will cost the federal government $247 billion over the next 10 years. The move is aimed at avoiding a full-out doctor revolt just as health-care reforms are within reach, so the issue—along with the hole it will leave in the budget—has been removed from the reform bill altogether.

"Congress just does not have the stomach to take on the doctors," says John L. Sullivan, director of health-care research at investment bank Leerink Swann.

Hospitals also come out ahead. The American Hospital Association agreed last spring to absorb $150 billion in cuts over the next 10 years by instituting safety and efficiency measures, but that wasn't much of a sacrifice, says Paul H. Keckley, executive director of Deloitte Center for Health Solutions: "Every hospital is already pursuing these measures. That's why the AHA was so eager to put it on the table."

The House bills propose raising $544 billion by imposing a 1 to 5.4 percent surtax on households earning an adjusted gross income of more than $350,000. Getting anything close to that amount will be difficult, however. The proposal has little support in the Senate, and even House moderates—many of whom face reelection in fiscally conservative, Republican-leaning districts—oppose it.

Already, Pelosi has hinted that the threshold might be shifted so that only individuals making over $500,000 or families earning more than $1 million get hit. That may be more politically acceptable, but it will raise a lot less money. Which means going back to someone else's well.