This is the second post in a series of two. For a primer on reconciliation, please start here: What is reconciliation?

Let’s look at how reconciliation might apply to this fall’s health care reform debate.

Suppose in September Senate Finance Committee Chairman Baucus cannot reach an agreement with Republican Senators Grassley, Enzi, and Snowe. Suppose Senate Democrats are still not completely unified, and Senate Majority Leader Reid is afraid to bring a health care reform bill to the Senate floor under the normal rules, because he fears that his 60 Senate Democrats won’t stick together. His biggest fear would not be the vote on final passage – he would have a fairly high probability of getting 51 Democrats to vote aye, if he ever got that far. It’s the intervening amendment process and a potential filibuster that kill him.Republicans could craft amendments that moderate Democrats would support, and in effect rewrite the bill on the Senate floor. At a minimum, Senator Reid could fear that a large majority of more liberal Senate Democrats would be furious. Or you might expect that a large share of the 40 Republicans would refuse to end debate (they would be filibustering the bill), and Sen. Reid might not be able to get 60 votes to shut off debate. If the bill still contained a public option, or if it increased long-term budget deficits, or if it raised taxes on small businesses or increased private health insurance premiums, it’s easy to imagine some moderate Senate Democrats voting no on cloture.

Fearing this scenario, Senator Reid might instead choose to use the reconciliation instruction created last spring in the budget resolution for just this purpose, as a backup plan in case Democrats could not broker a deal with Senate Republicans, and in case they couldn’t hold all of their own caucus together.

This year’s reconciliation instruction orders two committees, Senate HELP (Kennedy/Dodd) and Senate Finance (Baucus) to report legislation to the Senate Budget Committee by October 15th. Each committee’s bill must reduce the deficit (through either spending cuts, tax increases, or a combination) by a net of at least $1 billion over the period 2009-2014.

Hold on. $1 billion?!? I thought this was supposed to be a budget bill? I thought these were trillion+ dollar bills?

You can see that Senator Reid created this instruction not to create a fast-track legislative vehicle for deficit reduction, but instead to create such a process for a bill that is basically deficit neutral.

We already have a bill from the Senate HELP Committee. Senate Finance Committee Chairman Baucus would have to get his committee to report a bill no later than October 15th.

It’s safe to assume that such a markup would be partisan. Reconciliation is a hardball process that shuts down the rights of the minority party. Using it would likely provoke a unified response from Senate Republicans, who would react quite negatively to being cut out of the legislative process. Senator Baucus has a 13-10 partisan majority on the committee. He could lose at most one of his 13 Democrats and still report out a bill.

The Senate Budget Committee would then make sure that both the HELP Committee and Finance Committee bills meet the instruction: that each reduces the deficit by at least $1 billion over the next five years. These two bills would be stapled together and become the reconciliation bill for consideration on the Senate floor.

Note that these two bills would likely be incompatible. They may have duplicative sections or conflicting provisions. There is nothing that requires the bill to be internally consistent.

From Senator Reid’s perspective, so far, so good. Before bringing the reconciliation bill to the Senate floor, I would expect that he would draft an alternative to the two bills, called a substitute amendment. He would take components of the two committee bills and combine them in a way that best achieves his policy goals and, more importantly, maximizes his probability of holding 51 Democratic votes on the Senate floor. As long as he stays close to the confines of the two committee-reported bills, he has nearly complete freedom to draft the substitute amendment any way he likes.

We learned in the first post that the reconciliation rules protect the bill from a filibuster and endless and non-germane amendments. If Senator Reid can hold 51 votes to defeat amendments, and to vote aye on final passage, then he’s home free. He has a further advantage in that the rules make it hard to add things to a reconciliation bill.

His problem is the Byrd rule. Any one Senator (presumably a Republican who opposes the bill) can surgically use the Byrd rule to remove sections of the bill. Senator Reid will need 60 votes to defeat each of these attempts, and there could be a lot of them. If Reid’s coalition is shy of 60 votes, the bill could end up being Swiss cheese by the end of the process and before Senate passage. The reconciliation bill that passes the Senate could contain enormous gaps from provisions stricken by skillful use of the Byrd rule.

We’re really down in the weeds, but this is critically important, so I’m going to dive a little further into the specifics of the Byrd rule and how it might apply to health care reform.

We learned in the first post that any provision which does not affect spending or taxes is “extraneous,” and therefore violates the Byrd rule, and therefore can be removed by a single Senator raising a point of order unless 60 of his colleagues vote to “waive” the point of order and leave that provision in the bill. Note that the Byrd rule has nothing to do with whether a provision is good or bad policy. It’s mechanical.

Here are the three most important parts of the Byrd rule:

  1. If a provision has no effect on spending or revenues, then it’s extraneous and violates the Byrd rule …
  2. … unless it is a necessary term or condition of another provision that does affect spending or revenues.
  3. If a provision has a small budget effect that is merely incidental to its broader non-budgetary policy effect, then it is extraneous and violates the Byrd rule.

Looking at the provisions of a likely reconciliation bill, here are my preliminary judgments. The ultimate arbiter is the Senate Parliamentarian. “OK” means that I think it doesn’t violate the Byrd rule, not that I think it’s good policy.

  • Medicaid expansions – The spending is clearly OK. Some of the detail changes within the Medicaid expansion are not.
  • New health insurance “exchange” subsidies – OK. Same as for Medicaid. Lots of the non-spending related details could violate the Byrd rule.
  • Tax increases – OK.
  • Individual & employer mandates – OK. They’re basically taxes with conditions.
  • Small business tax credits – OK

Here are provisions that I think violate the Byrd rule:

  • Exchanges / Gateways, and all the requirements imposed through them – They’re separated from the subsidies.Someone might argue that the exchanges are a “necessary term and condition” of making the subsidies work. That’s a huge stretch.
  • So-called health insurance consumer protections – Insurance mandates such as those requiring guaranteed issue and guaranteed renewability, no lifetime or annual limits, extension of coverage to 25-year old dependents, and modified community rating – As I wrote yesterday, I think these clearly violate the Byrd rule. A couple of friends pointed out that these provisions would make health insurance more expensive. That depresses wages, which reduces income tax revenues, which is a budgetary effect. I think this fits in the merely incidental bucket – these provisions would fundamentally restructure the insurance industry with a minor budget effect.
  • The public option – As currently drafted, it’s designed to be independent of federal spending. If so, it’s extraneous. I imagine they could redraft it to link it more closely to the spending so it doesn’t violate the Byrd rule.

In addition, I imagine that each of the broader spending and tax provisions that I labeled as OK, including the Medicaid expansions and the health insurance subsidies, would contain components that are not strictly necessary for the spending. I imagine that some of those provisions might be vulnerable to the Byrd rule as well.

Now you can see Senator Reid’s challenge. If he goes with a 51-vote strategy through reconciliation, he may lose large parts of his bill. In particular, he’ll have to figure out how to protect the public option from the Byrd rule, because a Left-side strategy only works if the public option stays in the bill.

I will conclude by repeating a point from yesterday. It is too soon to predict how this fall will play out. I hope these process details help you understand some of the rules of the game.

(photo credit: “The Ohio Clock Corridor” by mr_mayer)