From the September 2009 issue of Investment Advisor • Subscribe!

Danger & Opportunity: Stitching Together Healthcare Reform

As Congress returns from its recess, it's now back to the drawing board

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  • Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices.  Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
  • Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation.  Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.  

The healthcare debate moved outside the beltway in August, as members of Congress headed back home to face, in many cases, angry mobs of constituents bent on voicing their opinions on healthcare reform during townhall meetings.

President Barack Obama held his own townhall meetings during Congress's August recess, and stated at some of those events that he will push healthcare reform through this year whether or not he has Republicans' support. At press time, published reports said that Obama was willing to abandon the public option in healthcare reform and instead consider a nonprofit health cooperative being developed in the Senate. Senate Finance Committee Chairman Max Baucus was leading a bipartisan group of Senators in their bid to craft a healthcare bill during the break, and gave that group a deadline of September 15 to reach consensus. Obama wants Congress to send a bill to his desk by October 15.

While the debate over healthcare reform has reached a fever pitch, the only thing that seems clear at this point is that nothing is clear. "I don't see clarity, so what are we arguing about?" says Erika Safran, principal at Financial Asset Management Corp. in New York. She says her clients are basically "uninterested" in healthcare reform now because the ultimate outcome is still so fuzzy. Harold Evensky of wealth management firm Evensky Brown & Katz in Coral Gables, Florida, says clients aren't calling him with questions about healthcare reform either. "Somewhat to my surprise I've not had any client response," he says. Advisors' phones will likely start ringing, however, once legislation is signed into law and the changes start to hit home.

As it stands now, all eyes are on the Senate Finance Committee to finish up legislation, as all three committees of the House passed their versions of healthcare reform bills before the August break. Those three bills will have to be combined into one piece of legislation after Congress returns from its break, which ends September 7. Just before the recess, the House Energy and Commerce Committee approved its own version of healthcare reform, H.R. 3200, the America's Affordable Health Choices Act, by a 31-28 vote.

Frank McArdle, principal and manager of Hewitt Associates' Washington, D.C., research office, noted during a conference call to discuss healthcare reform that the Energy and Commerce Committee plans to mark up a bunch of amendments to their bill this month. He said that some of the provisions in the Energy and Commerce bill are "interesting and perhaps game changing." For instance, he noted that the Committee's version says that the public plan option will have to negotiate rates with medical providers rather than pay them Medicare rates. "That was a big sticking point ... and the Blue Dog [Democrats] advocated it and it's also closer to what the Senate has done in their HELP Committee, which is to say there should be negotiated rates," McArdle said.

The Energy and Commerce Committee is also echoing what the Senate Finance Committee is considering, notes McArdle, "saying that the states may also create consumer cooperatives (these would be plans that could compete along with the public option) because there still is a public option in the House bill." Energy and Commerce also included a provision in its bill that the pharmaceutical companies "are calling a deal breaker," McArdle said, "which is that Medicare would negotiate directly with pharmaceutical manufacturers to negotiate prices on drugs that are given to Medicare beneficiaries." This part of the Energy and Commerce bill puts "House Democrats at odds with the White House," McArdle said, because the pharmaceutical trade association has agreed to only give up $80 billion in savings in its discussions with the White House and Senate Finance Committee Chairman Max Baucus (D-Montana).

What's This Going to Cost?

McArdle noted comments Baucus made saying Congressional Budget Office (CBO) found the Senate bill would be under $1 trillion and the cost would be fully offset. The Wall Street Journal reported that Baucus "told reporters that the CBO has concluded the [Senate] legislation would provide health insurance coverage for 95% of Americans by 2015, two years after the health bill would take effect." The Journal went on to say that Baucus said the Senate bill "would be fully paid for, and would reduce the federal budget deficit in the 10th year of the program." But according to an assessment by the CBO and the Joint Committee on Taxation, enacting H.R. 3200 would result in a net increase in the federal budget deficit of $239 billion over the 2010-2019 period.

McArdle said that part of the reason the Senate Finance bill is financed and offset is because "they've come back with a couple ideas that had been on the table all along but they are now looking at them again with more earnestness." One, he said, has to do with a tax on high-cost healthcare plans. Under one scenario, the limits would be $8,000 for individuals and $20,000 for families, while the other would be $10,000 for individuals and $25,000 for families. So somewhere in that range might be imposed "a tax rate for plans that are above that cost...of up to 30%."

The Senate Finance Committee is also mulling limits on flexible spending accounts (FSAs), McArdle noted. "Right now there is no statutory limit on a healthcare flexible spending account," he said. Senate Finance is "talking about a limit of $2,000." On the House side, he continued, the House Ways and Means Committee bill includes a provision that says "you could not use FSAs for over-the-counter medicine."

What we'll see in September in Congress, McArdle said, will be the "great stitching job." All three House committees "will have to produce a compromise version they believe can win enough votes on the House floor." On the Senate side, the Senate Finance and Senate Health, Education, Labor, and Pensions Committee (HELP) bills will have to be woven together. "Baucus has said that 80% of what's in his bill is in the HELP bill," McArdle noted.

The Advisor Angle

Like other small advisory firms, Safran would like more information on the notion being bandied about that small business health insurance benefits will be taxable for the employee. Right now, "the business owner receives a tax deduction for health insurance coverage provided to employees," Safran explains. What's being proposed in healthcare reform is "taxing the employee for the benefit of health insurance they receive." So the tax would be included in your gross income, Safran says. "I don't know if that's good or bad, it all depends. How much is the insurance going to cost me? If you're going to double the cost of my insurance and tax me on it, I don't think I'll be happy," Safran says.

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