July 17 (Bloomberg) -- Two House committees approved a plan for the biggest overhaul of the U.S. health-care system in four decades today, including a surtax of as much as 5.4 percent on the nation’s wealthiest households to pay for it.

The tax-writing Ways and Means Committee voted 23-18 in favor of its part of the legislation at about 1:30 a.m. The Education and Labor Committee did the same nine hours later, 26- 22, with both votes largely along party lines.

“We’re very, very proud of what we’ve done,” Ways and Means Chairman Charles Rangel of New York said after the panel debated the measure for 15 hours. “We carried our weight.”

The legislation must now be voted on by a third House panel, the Energy and Commerce Committee, which began debate today. House Democrats expect to win approval by the full House before an August deadline set by President Barack Obama.

Democrats touted the measure as a landmark initiative to expand access to affordable health care to 46 million people who lack insurance while driving down costs. Republicans said it would increase costs and force tens of millions Americans into government-run care they said would be substandard.

“This is not some think-tank experiment,” Michigan Representative David Camp, the top Republican on the Ways and Means panel, said of the biggest health-care expansion since the establishment of Medicare and Medicaid in 1965. “These are people’s lives, people’s jobs we’re talking about.”

Deadline Looms

Democrats encountered a potential stumbling block when the head of the Congressional Budget Office said yesterday the proposals he has seen in Congress would fail to rein in spending.

Douglas Elmendorf, director of the nonpartisan agency, whose cost estimates can make or break legislation, told the Senate Budget Committee he doesn’t see “the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending.”

The House and Senate must each pass their own versions of the bill, then reconcile them before sending the legislation to Obama’s desk. The Senate health committee approved a plan this week, although the Finance Committee is struggling to reach a bipartisan compromise.

Partisan Votes

There was little bipartisanship on the Ways and Means panel. Democrats rejected a slew of Republican amendments that would have stripped a government-run plan from the legislation, prohibited rationing of health care and forced members of Congress into the public plan. Three Democrats -- Ron Kind of Wisconsin, Earl Pomeroy of North Dakota and John Tanner of Tennessee -- voted with the Republicans against the measure.

“The other side is trying to make people afraid,” said Washington Representative Jim McDermott, a senior Democrat on the panel.

Three Democrats also defected in the House health committee: Jason Altmire of Pennsylvania, Jared Polis of Colorado, and Dina Titus of Nevada. Democrats who supported the measure say they’re determined to see it enacted.

“Seventy-two percent of the American people want a public option,” said Representative John Tierney, a Massachusetts Democrat. “Let’s make it strong, let’s make it good and put a stop to the outrageous behavior of the insurance companies.”

Insurance Mandate

The legislation would require companies to provide health insurance or pay an 8 percent payroll tax to help pay for their coverage by the government plan. The House is also proposing a mandate on Americans above a certain income level: People would be penalized as much as 2.5 percent of their income for failure to buy health insurance.

The plan would cost about $1 trillion over 10 years and reduce the number of uninsured by roughly 37 million Americans, according to a preliminary analysis by the Congressional Budget Office. The nonpartisan agency said that by 2019 some 17 million people, about half of them illegal immigrants, would lack coverage.

The question of how to pay for the overhaul is the biggest challenge, and the idea of imposing surtaxes on the wealthiest households is drawing fire from Republicans and Democrats. Senator Ben Nelson of Nebraska has expressed skepticism, as have House Democrats in the Blue Dog Coalition, a group that advocates spending restraint.

Graduated Surtaxes

House Ways and Means Committee members approved a series of graduated surtaxes that kick in on incomes above $280,000.

The surtax would also place a 1.5 percent additional levy on couples with incomes between $500,000 and $1 million, and a 1 percent surtax on incomes over $350,000. The measure is intended to raise $544 billion over 10 years and calls for the taxes to increase if the bill doesn’t hit a target for cost savings. Capital gains as well as earned income would be subject to the surtax.

The legislation also contains several tax increases on corporations, and a new provision to prohibit reimbursements for over-the-counter drug purchases using pretax health-spending plans such as employer-administered Flexible Spending Accounts and individually owned health savings accounts.

The bill creates a new national health exchange that would allow small-business employers and individuals to comparison shop among insurers. The exchange would coordinate with state insurance departments to enforce regulations and administer the sliding-scale credits the bill would create to help low- and middle-income individuals and families buy coverage.

No Benefit Ceiling

The bill would prohibit insurance companies from establishing any lifetime or annual ceiling on benefits and limit companies from charging higher rates due to health status, gender or other reasons. Premiums would only be allowed to vary based on age, geography and family size.

Medicare would be overhauled to reward the efficiency of health-care services, not the volume, as is the case now. The so-called “doughnut hole,” or coverage gap in the Medicare program that provides drugs to seniors would be eliminated.

Democrats accepted a handful of amendments. One adopted in the health committee would speed up access to health insurance for people with pre-existing medical conditions.

The House bill would stop insurers from denying coverage because of pre-existing conditions starting in 2012. The amendment would move the implementation date up to six months after the bill takes effect.

Employer Mandate

Another amendment would enable the secretary of health and human services to grant employers a waiver from the employer mandate if the company can show that meeting the requirement would lead to job losses or negatively impact the company or the community in which it is located.

The committee also agreed to allow more small businesses to enter the health exchange, an option opposed by America’s Health Insurance Plans, the trade group for insurers. Representative Dina Titus, the Nevada Democrat who brought the amendment, said that according to U.S. Census Bureau, these increases would make the exchange open to an additional 428,000 firms in the first year and an additional 135,000 in the second year.

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net Nicole Gaouette in Washington at ngaouette@bloomberg.net.

Last Updated: July 17, 2009 12:42 EDT