Posted on 29 Nov 2012 by Neilson
With the country hurtling toward the so-called "fiscal cliff," a combination of severe budget cuts and expiring tax breaks that government economists said could spark a second recession, Congress is unlikely to take action on closely watched insurance issues until at least early next year.
Industry representatives acknowledge that they still want Congress to address insurance-specific concerns. But with a looming Dec. 31 deadline for solving a problem that has raised the stakes for breaking a long-running, partisan logjam over how to cut the national deficit, they said waiting out negotiations between Congress and the White House was a reasonable proposition.
If a solution is not reached, the U.S. economy will shrink by 0.5% in 2013 and unemployment will leap from 7.9% to 9.1%, according to a Nov. 8 report released by the Congressional Budget Office.
"The consequences of going over the fiscal cliff are so dire that the negotiations on how to solve it are going to take up a lot of oxygen in Washington," said Charles Symington, who leads the federal affairs team for the Independent Insurance Agents & Brokers of America.
That said, negotiations, which will focus on taxes and cuts to entitlement programs like Medicare and Medicaid, could themselves affect the industry directly.
"We're going to be watching these negotiations very closely," said Joel Wood, senior vice president of government affairs for the Council of Insurance Agents and Brokers.
During his re-election campaign, President Barack Obama put taxes at the center of his pitch to voters. Obama argued that Congress should extend the Bush tax cuts for individuals making less than $250,000 a year but allow them to expire for Americans making more. Without additional taxes on top earners, Obama has argued it is "mathematically impossible" to reduce the deficit by a meaningful amount. The president has promised to veto any deal that doesn't include tax revenue from wealthier Americans.
In exchange, Obama said he is willing to make significant cuts to entitlement programs.
Republicans, however, have balked at raising taxes on top earners, arguing it would stifle economic growth during a recession. Just days after Obama won re-election, House Speaker John Boehner said in a press conference that there are ways to increase revenue without raising tax rates, including by closing loopholes in the tax code and doing away with certain deductions.
The agent and broker community is keeping a close eye on the tax debate because many file their professional tax returns as individuals and not as businesses, said Symington. "These producers serve as pass-through entities, meaning these small businesses would be hit with a huge tax increase at the end of the year." One option lawmakers may consider is raising the "wealthy American" threshold to $500,000 or $1 million, which would mean fewer agents and brokers would be affected.
Symington said estate taxes are also set to increase dramatically. At current levels, individual estates larger than $5 million and joint estates larger than $10 million are taxed at 35%. If the current law expires, estate taxes would revert to their previous levels: 55% for individual estates greater than $1 million and joint estates larger than $2 million. "That would seriously hinder agents' and brokers' ability to bequeath their businesses to their families," he said.
The fiscal cliff negotiations could also be an opportunity for Congress to find savings in laws that have drawn fire from the insurance industry, Wood said.
"There will be a standoff, of course," Wood said. "But at this point, everything has to be on the table to reach a compromise. And if you're not on the table you're on the menu."
The Senate Farm Bill, passed by the full chamber in June, would decrease spending by more than $23 billion over the next 10 years by eliminating certain subsidies, consolidating programs and stepping up enforcement of food assistance abuse.
In August, the House Agriculture Committee approved its own version, which would cut $35 billion over 10 years. But progress on the House bill stalled after Democrats objected to a 10-year $16.5 billion cut to the federal food stamp program included in the bill.
The question is whether lawmakers will reach a compromise on a long-term Farm Bill during fiscal cliff negotiations or whether they will go with a short-term bill and then return to the issue later, Symington said. Crop insurers are hoping for a long-term deal after months of uncertainty, which they have said makes it difficult to plan for the future.
There are also potential savings in Obama's Affordable Care Act, said John Greene, vice president of congressional affairs for the National Association of Health Underwriters.
The law provides subsidies to families with incomes up to 400% of the poverty line and who purchase health insurance on state or federal exchanges. The Kaiser Family Foundation said that means a family of four making up to $92,200 will be eligible for subsidies.
"Four hundred percent is pretty high," Greene said. "That would cover a whole lot of people. If you lowered that a little, you could save a lot of money."
Meanwhile, other industry priorities will likely remain unresolved for the foreseeable future.
Greene pointed to provisions in the ACA that he said could hurt employers unless Congress finds a legislative solution.
The ACA includes a cap on deductibles that "does not play well" with health savings accounts, Greene said. The ACA doesn't make clear how those accounts would be credited to meet actuarial standards. In a fully insured plan, most people do not expect to use all of their benefits and typically renew their plan each year. A health savings plan, however, carries a balance over from year to year, Greene said.
"Say you have one year where you don't use your plan very much but the next year is a bad one and you use a large portion of your health savings. It isn't clear how the plan would be credited to comply with minimum coverage requirements," Greene said. "That could create a lot of confusion."
On the Medicare side, which is sure to be a focus of the fiscal cliff negotiations, a separate provision of the ACA requires those who dis-enroll from Medicare Advantage to join basic Medicare. Greene said many people join Medicare Advantage because they cannot afford to purchase a supplemental plan. Policyholders often decide to switch plans when their health status changes, which Greene said could lead to cases where financially vulnerable people are left with basic Medicare as their only other option.
"They're going to be paying a lot more out of pocket, and that runs counter to the entire point of the law, which was to keep people from going bankrupt because of medical costs," Greene said.
Beyond health care, there is the prospect of the National Flood Insurance Program collapsing under the weight of its crippling debt load.
The program is already $18 billion in the red, and Hurricane Sandy, which hit the East Coast last month, will add billions to the program's debt.
The 143,000 Sandy-related claims filed with the NFIP to date will account for estimated insured losses of between $6 billion and $12 billion three times the program's borrowing capacity at the high end, according to Edward Connor, deputy associate administration of the Federal Insurance and Mitigation Administration.
During a Nov. 14 meeting of the Federal Advisory Committee on Insurance, Connor said the NFIP currently has $840 million in cash on hand and will likely exceed the $2.9 billion it is authorized to borrow by the end of November. Unless an already debt-conscious Congress approves an increase to the NFIP's borrowing authority, the program will face even deeper financial instability.
Yet another concern for property/casualty insurers is the Terrorism Risk Insurance Act, which is set to expire in 2014. Property/casualty insurers have made reauthorizing TRIA a top legislative priority.
Symington said he doesn't expect Congress to take up TRIA in the near future, given the far more pressing challenges facing lawmakers. But American Insurance Association President Leigh Ann Pusey said AIA would continue to press the issue.
"TRIA is a fundamental part of this nation's economic security," Pusey said in a statement. "AIA will continue to work with members of Congress to achieve broad bipartisan support for TRIAs reauthorization prior to its expiration in 2014."