Legislative Bulletin: Health Provisions of H.R. 1, American Recovery and Reinvestment Act

Order of Business: During the week of January 26, 2009, the House is expected to consider H.R. 1 under a likely structured rule. The legislation was introduced by Rep. Dave Obey (D-WI) on January 26, 2009. The bill was referred to the House Committees on Appropriations and Budget, but was never considered; however, the House Energy and Commerce Committee and other relevant committees marked up provisions within their jurisdiction the week of January 19, 2009.

Summary of Health Provisions: The legislation contains several sections of major health care provisions, including expansions of health care subsidies for the unemployed, a bailout of state Medicaid programs, and new spending on health information technology. Provisions of these titles include:

Health Provisions Affecting Unemployed Workers

Temporary COBRA Premium Subsidy: Provisions of the Consolidated Omnibus Reconciliation Act of 1985 (COBRA) provide for separated employees and their dependents to remain on their previous employer’s group policy for 18 months, or up to 36 months in some cases. Employers are permitted to charge former workers electing COBRA coverage the full cost of their group insurance premiums, plus a 2% fee to cover administrative costs.

The bill would provide a 65% premium subsidy to employers to cover the costs of individuals electing COBRA coverage, provided such election comes as a result of the individual’s involuntarily termination from employment during the period from September 1, 2008 to December 31, 2009. The subsidy would continue for a maximum of 12 months, but would terminate once the individual becomes eligible for other employer-based coverage or Medicare.

The bill re-opens the COBRA election period for certain individuals, who had previously declined COBRA coverage, to allow them to accept continuation coverage in light of the new federal subsidy. Any pre-existing condition exclusions as a result of the temporary lapse in coverage would be waived if the former employee chooses to accept the COBRA coverage with the new federal subsidy. The bill imposes various notification requirements on employers to inform their separated workers about the COBRA subsidy program.

The bill includes a 110% penalty for individuals who lose eligibility for the COBRA premium subsidy (due to eligibility for other group coverage), but fail to report their changed status. However, because the reporting mechanism for individuals to report their changed status lacks transparency (i.e. employers may not know their former employees have obtained another job, or whether that job includes an offer of group health insurance), some Members may be concerned that the premium subsidy program could be ripe for abuse by individuals who could obtain a “better deal” by remaining on the COBRA subsidy.

According to the Joint Committee on Taxation (JCT), this provision would cost the federal government $28.7 billion in reduced revenue over five and ten years, as the subsidy would be paid to employers in the form of a reduction or rebate of taxes (both income and payroll) withheld. JCT estimates that 7 million individuals would receive COBRA subsidies at some point during calendar year 2009.

Permanent COBRA Expansion: The bill also includes a permanent expansion of COBRA in the case of “older or long-term employees.” Specifically, the bill would permit former employees over age 55, or those with at least 10 years of service with the employer, to remain on COBRA until becoming eligible for Medicare. These provisions are similar to language inserted by the House Rules Committee into H.R. 3920, the Trade Adjustment Assistance (TAA) Reauthorization Act, which passed the House by a by a 264-157 vote on October 31, 2007, but was never considered by the Senate.

Particularly as a 2006 study found that employers’ costs for administering the COBRA plan are already double the 2% maximum administrative fee permitted under the statute, some Members may be concerned that permitting former employees to remain on COBRA for decades could result in even higher administrative costs for firms due to the expanded requirements of the unfunded federal mandate.

Because the COBRA statute requires former employees to pay the full cost of their group health insurance, the individuals most likely to elect continuation coverage would be those for whom the coverage has value despite its high cost—i.e. those with significant expected medical expenses. Consistent with this premise, the 2006 employer study also found that workers electing COBRA coverage had overall health costs 45% greater than the active workers employed by the reporting firms. Some Members may be concerned that allowing workers to retain COBRA coverage would further exacerbate these adverse selection concerns, raising costs for all the participants in the group plan and potentially encouraging some employers to drop coverage altogether rather than absorbing these higher costs.

Medicaid Coverage for Unemployed: The bill provides a state option to cover unemployed workers through their Medicaid programs—with the federal government paying 100% of the cost of such coverage. Eligible individuals would include:

  • Individuals currently receiving unemployment compensation;
  • Individuals formerly receiving unemployment compensation whose benefits were exhausted after July 1, 2008;
  • Individuals who were involuntarily separated from employment between September 2008 and January 2011, whose gross family income remains below 200% of the federal poverty level (FPL, $42,400 for a family of four in 2008);
  • Individuals are eligible for food stamp assistance; and
  • Spouses and dependent children under age 19 of the individuals listed above.

The bill states that (except for the income-based criteria for the third group listed above) “no income or resources test shall be applied with respect to” any of the eligible groups. Some Members may be concerned that this provision would therefore allow fired CEOs formerly making millions of dollars in compensation to obtain free health care benefits from the federal government.

The bill makes eligible for Medicaid assistance all individuals in the groups listed above who are “not otherwise covered under creditable coverage.” Some Members may be concerned that because the bill language prohibits participation in the program only for individuals actually covered by another policy—as opposed to all those eligible for other coverage, as with the COBRA premium subsidy listed above—the bill provides eligible individuals with a perverse incentive to remain on federal health insurance rolls and obtain free health insurance, rather than switch to a group plan where higher premiums and co-pays likely would apply.

According to the Congressional Budget Office (CBO), the temporary Medicaid coverage provision would cost $10.8 billion over five and ten years. CBO estimates that in 2009, 1.2 million individuals (including spouses and children) would obtain health care coverage through this provision.

As noted above, the bill provides a 100% subsidy to states for Medicaid coverage of eligible individuals through January 1, 2011. Some Members may be concerned that having the federal government pay for the entire cost of covering unemployed individuals through Medicaid provides no incentive for states to police fraud and abuse of the program by these populations. Moreover, because the bill does not sunset the program to cover unemployed workers, only the 100% federal match, some Members may be concerned about the implications of a significant expansion of government’s role in providing health care under the guise of a “temporary” stimulus provision.

Health Care Aid to the States

Increase in Federal Medicaid Match: The federal share of spending on states’ Medicaid programs is determined through the Federal Medical Assistance Percentage (FMAP). Based on a formula that compares a state’s per capita income to per capita income nationwide—a mechanism designed to gauge a state’s relative wealth—the FMAP can range from a low of 50% to a maximum of 83%.

The bill would provide an across-the-board FMAP increase of 4.9% for a total of nine calendar quarters—from October 1, 2008 through December 31, 2010. The bill also includes language providing that no state’s FMAP percentage (exclusive of the 4.9% increase) shall decline during the nine calendar quarter period. Both the scope and the length of the FMAP increase exceed the 2.95% increase in the federal match rate for five fiscal quarters passed to help states during the last economic downturn as part of tax and budget reconciliation legislation (P.L. 108-27).

The bill includes further increases in the FMAP percentage for “high unemployment states,” which are defined by using a 3-month average unemployment rate. If, when compared to any prior 3-month period after January 1, 2006, unemployment in a state has increased 1.5%, the FMAP will be increased by 6%; if unemployment has increased 2.5%, the FMAP will be increased by 12%; and if unemployment has increased 3.5%, the FMAP will be increased by 14%. Once qualifying as having high unemployment, a state’s FMAP increases outlined above will remain until at least July 1, 2010, even if unemployment in that state falls prior to that date.

The bill includes “maintenance of effort” provisions such that states wishing to receive the FMAP increases may not impose more restrictive eligibility standards than those in effect on July 1, 2008 (unless the states retroactively remove such restrictions) and may not deposit any amounts “directly or indirectly” into a state’s rainy day fund or reserve account.

CBO scores the entire FMAP increase package as costing $87.7 billion over five and ten years.

Some Members may have concerns about this increase in FMAP funding, included but not limited to:

  • An increase in the federal Medicaid match by definition provides no “stimulus,” instead substituting federal expenditures for state spending.
  • The provisions as drafted could result in a FMAP rate for some states approaching 100%, meaning that the federal government would be paying nearly the full share of a state’s Medicaid expenses—a significant alteration of the traditional state-federal Medicaid partnership, and one which would give states a strong incentive to shift additional costs (whether directly health related or not) on to the federal government’s books.
  • An increase in the federal Medicaid match provides no incentive for states to reform their Medicaid programs to improve the quality of beneficiary care while reducing the growth in health costs—and by providing additional federal dollars, may provide states with a perverse incentive not to accelerate reform.
  • An FMAP increase will not halt states from expanding their Medicaid programs at an unsustainable rate, as evidenced by one study’s findings that state Medicaid expenditures during the economic “boom years” of 1994-2000 outpaced both state GDP growth and states’ revenue growth.
  • Increasing the federal Medicaid match does nothing to reform the flawed FMAP formula itself. The Congressional Budget Office in its December 2008 Budget Options report noted that the 50% minimum FMAP level results in nearly a dozen wealthy states receiving match rates significantly higher than they otherwise would have received; in one case, a state’s FMAP level would be 12% absent the statutory minimum percentage. Members may therefore be concerned that increasing the federal Medicaid match would not reform a system where studies have indicated that wealthier states spend more on Medicaid than poorer ones—exactly the opposite of FMAP’s intended goal.

Moratoria on Anti-Fraud Regulations: The bill would extend by three months—from April 1, 2009 to July 1, 2009—moratoria on the Centers for Medicare and Medicaid Services (CMS) from issuing six Medicaid regulations designed to bolster the fiscal integrity of the program. The regulations cover intergovernmental transfers, graduate medical education, school-based administrative and transportation services, rehabilitation services, targeted case management, and provider taxes. In addition, the bill extends the moratoria to cover a seventh regulation, relating to the definition of outpatient hospital services. Under a previous agreement between President Bush and Congressional Democrats negotiated in relation to the 2008 wartime supplemental appropriations act (P.L. 110-252), six of the proposed regulations were to be placed under the moratoria, while the outpatient hospital services regulation was to be implemented in full; this provision attempts to undo that agreement. CBO scores these moratoria as costing $200 million over five and ten years.

Some Members may be concerned by attempts to repeal regulations that respond to various state abuses within the Medicaid program that have been documented by the Government Accountability Office (GAO) in reports dating back well over a decade. Some Members may also note that even the liberal Center for Budget and Policy Priorities has published a report noting that several of the abuses—specifically, intergovernmental transfers and provider taxes, which constitute the majority of the projected $42 billion in 10-year taxpayer savings associated with the regulations—are often “designed primarily to provide a windfall for state governments.” Therefore, some Members may agree with the need to restore the Medicaid program’s fiscal integrity, and be concerned by Democrats’ frequent attempts—including the third extension of these “temporary” moratoria—to undermine regulations that would affect less than 1% of the total Medicaid spending of nearly $5 trillion over the next decade.

Transitional Medical Assistance: The bill extends for 18 months—through December 31, 2010—the Transitional Medical Assistance (TMA) program that provides Medicaid benefits for low-income families transitioning from welfare to work. Traditionally, the TMA provisions have been coupled with an extension of Title V abstinence education funding during the passage of health care bills. However, the Title V funds were excluded from the bill language, and will expire on July 1, 2009 absent further action. CBO scores the TMA extension as costing $1.3 billion over five and ten years.

Particularly given the Obama Administration’s desire for bipartisan agreement on economic stimulus provisions, some Members may be concerned at the removal of the Title V abstinence education funding and the potential end of this worthwhile program. Some Members may also question whether an extension of TMA funding—which has been included in Medicare and related health bills for several years—constitutes economic “stimulus,” or instead represents additional domestic spending that Democrats simply do not wish to pay for under regular order.

Family Planning Services: The bill includes several provisions related to family planning services. Specifically, the bill would amend the definition of a “benchmark state Medicaid plan” to require family planning services for individuals with incomes up to the highest Medicaid income threshold in each state. The bill also permits states to establish “presumptive eligibility” programs for family planning services, which would allow Medicaid-eligible entities—including Planned Parenthood clinics—to enroll individuals in family planning services and “medical diagnosis and treatment services” connected with a family planning service, subject to a later determination of eligibility. CBO scores this provision as costing $200 million over five years, and $700 million over ten.

Some Members may be concerned that these changes would, by altering the definition of a benchmark plan, undermine the flexibility that Republicans established in the Deficit Reduction Act to allow states to determine the design of their Medicaid plans, and would expand the federal government’s role in financing family planning services. Some Members may also be concerned that the presumptive eligibility provisions would enable wealthy individuals to obtain free family planning services—and potentially other health care benefits—financed by the federal government, based on a certification by Planned Parenthood or other clinics. Lastly, some Members may question the “stimulus” behind this family planning expansion, the effects of which on economic growth and recovery would be minimal at best.

Other Provisions: The bill also includes provisions prohibiting Medicaid cost-sharing for Indians receiving care through the Indian Health Service, and related provisions regarding Indians’ eligibility for Medicaid. Some Members may question whether and how these provisions constitute necessary economic stimulus.

The bill includes a 2.5% increase in Medicaid Disproportionate Share Hospital (DSH) payments for those hospitals treating a large percentage of low-income individuals. The increase covers Fiscal Years 2009 and 2010, and sunsets thereafter.

Health Information Technology

The bill contains language amending the Public Health Service Act and the Social Security Act designed to accelerate the adoption of health information technology, including the following:

Federal Office and Standards: The bill codifies the Office of the National Coordinator for Health Information Technology (ONCHIT) within the Department of Health and Human Services (HHS), which had previously been established by Executive Order. The Coordinator will be charged with updating the federal government’s health IT strategic plan and developing a program for voluntary certification of health information technology, among other duties.

The bill establishes a Policy Committee and a Standards Committee to make recommendations to the Coordinator on national strategy and health IT standards. The Policy Committee will determine which areas require federal standards and certification criteria, and the Standards Committee will recommend to the Coordinator specific standards and criteria in the areas highlighted by the Policy Committee. The National Institute for Standards and Technology (NIST) will assist the standards committee in testing implementation specifications to ensure their appropriate use, and develop a program of grants to institutions of higher education to establish multidisciplinary centers for health care information integration.

The bill provides the Department with a 90-day window to adopt or reject the standards proposed by the Standards Committee, and requires the Department to establish an initial set of standards and certification criteria by December 31, 2009. The bill also requires federal agencies and federal contractors to utilize information technology systems and standards consistent with those promulgated by the Department. The bill authorizes $250 million in appropriations for ONCHIT for Fiscal Year 2009.

The bill requires the Coordinator to “support the development, routine updating, and provision” of electronic health record technology, “unless the Secretary determines that the needs and demands of providers are being substantially and adequately met through the marketplace,” and permits the Coordinator to “impose a nominal fee” for providers choosing to use systems so developed. Some Members may be concerned that this provision may permit undue intervention by the federal government in the marketplace for health information technology.

Grant and Loan Funding: The bill would establish new programs designed to fund the implementation of health information technology, and authorizes such sums as may be necessary to carry out the programs for Fiscal Years 2009 through 2013. The bill would require the Department to “invest in the infrastructure necessary” to promote health IT nationwide, including IT architecture, electronic health records, training on best practices, and interoperability, including $300 million for regional efforts to support health information exchange.

The bill creates a Health Information Technology Research Center to provide technical assistance and develop best practices on IT adoption and utilization, as well as additional regional centers affiliated with non-profit organizations that would receive financial assistance from the federal government for up to four years to supplement the national efforts. The bill provides that federal financial support may not exceed 50% of any applying organization’s annual budget, except under certain circumstances.

The bill establishes a grant program for states and other state-designated non-profit entities to “facilitate and expand the electronic movement” of health records, subject to state matching contributions of no more than $1 for every $3 in federal funding. The bill creates another grant program for states or Indian tribes to loan money to providers for adoption of, or training for the use of, electronic health records, and requires that entities receiving grants under this program contribute at least $1 for every $5 in federal funding. Finally, the bill creates two grant programs—one for schools of medicine, the other for institutions of higher education—to develop curricula that integrate electronic health records into clinical training and education, subject to a match by the schools of at least 50%.

Some Members may be concerned that the spending authorized by these various grant and loan programs, coupled with the matching requirements that will result in the federal government shouldering half (and in several cases more than half) the financial cost of projects, will increase the federal deficit to support projects that may hold marginal value. Given the speed with which the private sector has adopted information technology in other industries, some Members may question the need for an intrusive and costly federal role in health IT over and above the establishment of nationwide standards.

Medicare Payments: The bill establishes a system of incentives and penalties related to Medicare reimbursement for providers to encourage the adoption of electronic health records. For physicians not working in a hospital setting, the bill provides for a bonus payment of 75% of Medicare billed claims, subject to total limitations of $41,000, paid out over five years. Incentives will begin in 2011, will be reduced for providers adopting health IT beginning after 2013, and will be eliminated entirely after 2015. The bill makes eligible for bonus payments all physicians receiving Medicare reimbursement, including physicians participating in Medicare Advantage Health Maintenance Organizations.

The bill requires that providers receiving incentives be “meaningful users” of electronic health records, based on a self-attestation by the provider and reporting any various clinical quality measures the Secretary may require, but includes no requirement that such meaningful users bill claims to Medicare on a regular basis. Payment incentives will not be taken into account when calculating the sustainable growth rate (SGR) for Medicare physician payment reimbursement, and limits judicial review of the Secretary’s decisions regarding the enhanced payments.

The bill provides for reductions for non-adopters of health information technology, beginning with a 1% fee reduction in 2016, and continuing with a 2% reduction in 2017, a 3% reduction in 2018, and reductions of up to 5% 2019 and subsequent years. The Secretary may grant limited exceptions from the Medicare penalties for up to five years.

For hospitals (including those affiliated with Medicare Advantage Health Maintenance Organizations), the bill provides a base incentive payment of $2 million for health IT adoption, coupled with a per-discharge payment of $200. Incentive payments (base and per-patient discharge) may total up to $6.37 million per hospital for the first year. (Note that this is an increase of nearly 50% in the maximum per-hospital payment from the originally introduced package.) Payments will be adjusted based on the percentage of Medicare patients treated by the hospital, and phased out entirely over four years, such that the maximum payment a hospital could receive would total more than $15.9 million. Payments would begin in Fiscal Year 2011, but that hospitals who fail to convert to electronic health records by 2016 shall not be eligible for the bonus payments.

The bill further provides for adjustments to the annual “market-basket” hospital update, beginning in 2016. Hospitals who do not adopt electronic health records will see their payments reduced by 0.5% in 2016, 1% in 2017, and 1.5% in 2018 and subsequent years, unless the Secretary grants a limited five-year exception.

The bill provides that the bonus payments outlined above shall not be taken into account when calculating beneficiaries’ premiums under Medicare Parts A and B.

The bill amends the Medicare Improvement Fund to shift funds from Fiscal Years 2016-2018 into Fiscal Years 2014 and 2015. While the Congressional Budget Office has written that this provision is budget-neutral, some Members may consider this timing shift a budgetary gimmick designed primarily to make future legislation compliant with five year PAYGO requirements under House rules. Some Members may therefore question this provision’s relevance in a measure designed to spur economic growth and recovery.

The bill authorizes and appropriates a total of $540 million—$60 million for each of Fiscal Years 2009 through 2015, and $30 million per year from 2016 through 2019—to allow the Centers for Medicare and Medicaid Services (CMS) to implement the IT incentive provisions. Some Members may be concerned that the nearly $1 billion in direct spending given to CMS to implement the Medicare and Medicaid provisions of the health IT title may “stimulate” nothing more than the growth of federal bureaucracy.

Some Members may believe that the size and scope of spending contemplated—up to $41,000 for every eligible physician, including practitioners who bill Medicare infrequently, such as chiropractors, and as much as $10.9 million per hospital—represent an inefficient use of government spending, particularly given widespread IT adoption in other industries without such heavy government subsidies. The Congressional Budget Office projects that passage of the bill’s provisions will increase implementation of health IT by only 25%—from the 65% rate of physician adoption in 2019 under current law to 90%, and has stated that it “anticipates near-universal adoption of health IT within the next quarter-century even without legislative action.” Some Members may therefore find the expenditure of $30 billion to achieve this marginal improvement in health IT adoption inefficient, particularly as it would not target subsidies to those providers who otherwise would not have adopted electronic health records.

Some Members may also be concerned that the bill provisions, by including various “carrots and sticks” related to health IT adoption by providers, would further increase the federal government’s role in patient-provider relations, and could encourage providers nearing retirement age to abandon their practices entirely rather than comply with the bill’s requirements. Lastly, some Members may believe that tying the physician payment bonus to the level of billed claims, coupled with the current fee-for-service model of reimbursement, may encourage providers only to increase the amount and intensity of services billed in order to raise their reimbursement levels, resulting in high and inefficient levels of government spending.

Medicaid Funding: The bill includes provides for a 100% federal FMAP match for certain Medicaid providers related to electronic health records technology, and a 90% match for administrative expenses associated with. In order to qualify for the enhanced federal match, providers’ Medicaid patients must exceed 30% of their overall patient load; children’s hospitals, acute care hospitals with at least a 10% Medicaid patient load, and federally qualified health centers with a 30% or greater Medicaid patient load will also qualify for the Medicaid payments. Payments under these provisions may not exceed a total of $75,000—$25,000 for the purchase of electronic health record technology, and up to $10,000 per year for five years for operation and maintenance. Providers receiving Medicaid funds would have to pay 15% of the cost of any electronic health records technology they acquire.

The bill provides that incentives under the Medicaid formula shall not exceed those provided under the Medicare formula established above, except that a provider’s Medicaid patient load may be substituted for its Medicare patient load in determining a higher payment level. However, in order to receive Medicaid funding, providers must decline to accept the Medicare health IT bonus payments discussed above.

The bill authorizes and appropriates a total of $360 million—$40 million for each of Fiscal Years 2009 through 2015, and $20 million per year from 2016 through 2019—to allow CMS to implement the Medicaid incentive provisions. Some Members may be concerned that the nearly $1 billion in direct spending given to CMS to implement the Medicare and Medicaid provisions of the health IT title may “stimulate” nothing more than the growth of federal bureaucracy.

CBO estimates that both the Medicare and Medicaid bonus payments will total $30 billion over ten years—$17.7 billion for Medicare and $12.4 billion for Medicaid—along with $900 million in mandatory administrative funding for CMS. However, CBO estimates that increased IT adoption will yield baseline savings in Medicare, Medicaid, and the Federal Employee Health Benefits Program (FEHBP) totaling $12.3 billion over ten years. CBO also estimates that revenues will increase under the health IT provisions, as slightly lower health costs will result in individuals excluding slightly less of their salaries from payroll and income taxes through the exclusion for employer-provided health insurance. Thus CBO scores the net cost of the Medicare and Medicaid bonus payment provisions as $17.1 billion over ten years.

Privacy: The bill extends the privacy and security provisions included in the Health Insurance Portability and Accountability Act (HIPAA, P.L. 104-191), as well as the civil and criminal penalties established in such legislation, from “covered entities”—health plans and other providers who transmit electronic health information—to the “business associates” of those entities. In general, the Privacy Rule requires covered entities to obtain consent for the disclosure of protected health information—defined as health information that identifies the individual, or can reasonably be expected to identify the individual—except when related to “treatment, payment, or health care operations.”[1] The regulations include several exceptions to the pre-disclosure consent requirement, including public health surveillance, activities related to law enforcement, scientific research, and serious threats to health and safety.[2] The HIPAA Security Rule requires covered entities and their business associates to safeguard protected health information held electronically, including administrative, physical, and technical safeguards that covered entities must follow.[3] Some Members may be concerned about the expansion of the full HIPAA privacy and security requirements to business associates, particularly given the additional unfunded mandates placed on businesses elsewhere in the bill.

In general, the bill includes four general categories of privacy provisions:

  1. Breach Notification: The bill requires covered entities holding unsecured personal health information to “notify each individual whose unsecured protected health information has been, or is reasonably believed by the covered entity to have been” disclosed as a result of an information breach within 60 days, and requires business associates of covered entities to notify those entities as a result of a breach of unsecured information. Notification is not linked to a security threat assessment—in other words, the same notification must occur in all instances, regardless of whether the potential for harm is significant or minimal. In cases where more than 500 individuals are believe to have been affected, notice must be provided to appropriate media outlets—a requirement which, coupled with the blanket notification provisions outlined above, some Members may consider unreasonable, costly to businesses, and likely to cause undue public alarm or confusion.

The bill places the burden of proof on the covered entity or business associate to demonstrate that required notifications were made; some Members may be concerned by such a burden of proof lying with the business entity. The bill also creates an education initiative within HHS to advise businesses and the public on their health privacy rights and responsibilities.

The bill establishes a temporary breach notification process for vendors of personal health records and other firms not classified as HIPAA covered entities. Entities must notify “each individual,” as well as the Federal Trade Commission (FTC), when information that does not meet security standards approved by the Secretary is breached; third party vendors must notify the entity to whom they provide their services. Failure to notify will be classified as a “unfair and deceptive act or practice” under the Federal Trade Commission Act for purposes of enforcement. The provision will expire when either HHS or the FTC publish standards for entities that are not covered entities to report data breaches. Some Members may be concerned that the bill would impose onerous penalties on entities, particularly as the bill language contains no link between a threat of harm and required notification.

  1. Disclosure: The bill places new restrictions on disclosures of health information related to insurance payment if an individual so requests that the covered entity (in this case, an insurance carrier) not disclose information and instead pays for the service out-of-pocket and in full. The bill requires that entities disclose the minimum amount of personally identifiable information necessary “to accomplish the intended purpose of such disclosure,” and requires entities to compile—and make available to individuals—an accounting of disclosures made with respect to protected information in an electronic health record. Some Members may be concerned that the ongoing compilation of disclosures (as opposed to providing them solely upon an individual’s request) constitutes a burdensome requirement on business, and also note that, because the disclosure requirements apply solely to those entities using electronic health records, this provision could actually discourage entities from adopting health IT.
  2. Operations and Marketing: The bill prohibits the sale of protected health information by entities and business associates without individuals’ express consent to allow entities to sell such information. Certain exceptions to this general prohibition would remain, including treatment of the individual or public health research where the price charged reflects the costs of transmitting the relevant data and ongoing business relationships between a covered entity and business associates. The bill also prohibits the use of personal health information for fundraising, or for paid marketing purposes without an individual’s express written consent, and instructs HHS to compile a list of health care activities “that can reasonably and efficiently be conducted through the use of information that is de-identified,” and remove these activities from the list of health care operations exempt from the HIPAA privacy rule. Some Members may be concerned that these provisions would hinder the ability of covered entities to provide information to individuals about products and services—for instance, cheaper generic drugs or affinity discounts at health clubs—that may be of value to them.
  3. Enforcement and Penalties: The bill includes privacy enforcement provisions, including a clarification that individuals who obtain personal health information from a covered entity, and then discloses said information, will be subject to current law civil and criminal penalties under the HIPAA statute. The bill also creates penalties for non-compliance due to willful neglect, “for which the Secretary is required to impose a penalty.” Penalties obtained due to a general failure to comply with requirements and standards will be transferred to HHS’ Office of Civil Rights for the purposes of enhanced enforcement, except that a certain percentage of penalties may be paid to individuals harmed by the offenses in question—a provision which some Members may view as providing monetary incentives for individuals to join class action lawsuits related to HIPAA non-compliance.

The bill establishes new higher, tiered penalties for failure to comply with HIPAA requirements, up to a maximum of $50,000 per violation, and $1,500,000 per year, due to willful neglect that is not corrected. Current law provides for penalties of up to $100 per violation and $25,000 per year. Some Members may be concerned that this 6000% increase in maximum fines for business could have a chilling effect on applicable entities, potentially lessening health IT adoption.

The bill would permit state attorneys general to bring action against companies “in any case in which the attorney general…has reason to believe that an interest of one or more residents of that state has been or is threatened or adversely affected by any person.” Attorneys general may file actions “in a district court of the United States of appropriate jurisdiction” seeking either an injunction or civil penalties for a general failure to comply with standards. State attorneys general must first notify the Secretary of intent to file such action, and may not bring actions against relevant persons if and when the Secretary has a separate action pending. Some Members may be concerned that these provisions, particularly when coupled with the provisions permitting affected individuals to receive a portion of penalties awarded, could lead to a proliferation of lawsuits against applicable individuals and entities for real or perceived security violations, which could discourage the adoption of health information technology that the bill is intended to promote.

The bill maintains current law pre-emption provisions with respect to the HIPAA statute, and includes various study and reporting requirements, including an FTC study on the implications of extending HIPAA’s privacy and security requirements to entities that are not covered entities or business associates under current law. The bill also provides a general exemption for pharmacists to communicate with their patients to improve patient safety and reduce medical errors, provided the pharmacists accepts no additional remuneration (over and above the amount paid for relevant prescriptions).

Other Medicare Provisions: The bill places a one-year moratorium on CMS’ introduction of a wage adjustment related to hospice reimbursement, and halts for one year a phase-out of capital costs paid to certain teaching hospitals in the form of a capital indirect medical education (IME) payment. Some Members may believe that these provisions have little to do with promoting economic recovery and therefore do not belong in a “stimulus” measure.

Lastly, the bill makes certain “technical corrections” regarding long-term care hospitals, specifically as it relates to implementation of a rule for referrals from non co-located facilities. According to CMS, at least one of these “corrections” will affect only three hospitals—two located in North Dakota, and one located in Connecticut. Some Members may believe this provision constitutes an authorizing earmark, and therefore believe its inclusion is inconsistent with President Obama’s pledge that economic recovery legislation should not include any “pork-barrel” spending.

 

[1] Definitions of protected health information and individually identifiable health information can be found at 45 C.F.R. 160.103; permitted use for “treatment, payment, or health care operations” can be found at 45 C.F.R. 164.506.

[2] The full list can be found at 45 C.F.R. 164.512.

[3] The safeguards are found at 45 C.F.R. 164.308, 164.310, and 164.312, respectively.

Top Ten Reasons NOT To Support a Medicaid Bailout

This week, the House is expected to consider “stimulus” legislation spending $100 billion on Medicaid—more than $87 billion for an increase in the federal Medicaid match, and nearly $11 billion to extend Medicaid benefits (fully paid by the federal government) to unemployed workers, among other spending provisions.  Below are a list of possible reasons to oppose these provisions which Members may wish to consider in advance of the vote.

  1. Provides $100 Billion in New Spending—with No Accountability.  In November, Speaker Pelosi conditioned Congressional approval of $25 billion in aid to automakers on the “Big Three” providing plans to show their long-term viability.  The Democrat “stimulus” package would give states four times as much money—without requiring states to take any steps to demonstrate or improve the sustainability of their Medicaid programs.
  2. Makes Disgraced Former CEOs Eligible for Free Government Health Care.  Under the Democrat legislation, workers receiving unemployment compensation are automatically eligible for Medicaid, regardless of their former salary level or other income sources.
  3. Does Not Reform Fraudulent and Improper Payments in a “High-Risk” Program.  In 2003, the Government Accountability Office (GAO) classified the Medicaid program as “high-risk” due to high incidence of fraud—and recently cited $32.7 billion in improper payments made during 2007 alone.  Additional federal funding will not resolve the “significant challenges to address the program’s vulnerabilities” which GAO identified and may provide a perverse disincentive for states not to recoup Medicaid dollars by pursuing anti-fraud cases vigorously.
  4. Unprecedented Expansion of Federal Medicaid Role. The Democrat plan could result in the federal government would be paying nearly all of a state’s Medicaid expenses—and will result in the federal government paying all state costs to cover unemployed workers.  This significant alteration of the state-federal Medicaid partnership would discourage states from fighting fraud and could give states a strong incentive to shift additional costs (whether directly health related or not) on to the federal government’s books.
  5. Significantly Larger than Past Medicaid Bailouts.  When compared to a 2003 increase in the federal Medicaid match to help states recovering from the last recession, the Democrat language spends nearly nine times as much money ($87.7 billion vs. $10 billion) and provides a significantly higher increase in the Medicaid match (a minimum of 4.9% and a maximum of 18.9%, vs. 2.95%) for a longer period of time (nine fiscal quarters vs. five).
  6. Provides No Stimulus.  Because increasing the federal Medicaid match only substitutes federal spending for state dollars, many may find it difficult to justify such a measure as providing economic “stimulus.”
  7. Medicaid Increases Private Insurance Costs.  A recent study from actuaries at the consulting firm Milliman found that low reimbursement rates for public programs including Medicare and Medicaid resulted in a 12% increase in private insurance costs.  Some may therefore view an increase in Medicaid enrollment as potentially placing additional strain on the private insurance system due to sizable cost shifting from public to private plans.
  8. Flawed FMAP Formula Encourages States to Overspend.  While the Federal Medical Assistance Percentage (FMAP) matching formula was originally designed to provide greater assistance to poorer states, an independent analysis of CMS data indicates that states with higher concentrations of poverty actually have lower per-capita Medicaid spending—exactly the opposite result of FMAP’s intended goal.  Some Members may therefore be concerned that an additional FMAP bailout will do nothing to reverse this disparity, and may exacerbate it.
  9. States Increase Medicaid Spending in Good Economic Times and Bad.  An American Enterprise Institute study found that during the 1994-2000 boom years, Medicaid spending grew faster than both GDP and state revenues.  Some Members may therefore question whether states acted responsibly in expanding their Medicaid programs during flush economic times, and whether the federal government should reward such behavior.
  10. Exacerbates Entitlement Shortfalls.  At a time when unfunded obligations for Medicare and Social Security exceed $53 trillion, some Members may be concerned by the impact of increasing Medicaid spending—and the federal deficit—on our ability to respond to this crisis with reforms to slow the growth of health care costs.

COBRA Provisions in the Democrat “Stimulus” Bill

LEGISLATIVE STATUS

As drafted, the Democrat “stimulus” package would provide a 65% premium subsidy to employers to cover the costs of individuals electing COBRA coverage, provided such election comes as a result of the individual’s involuntarily termination from employment during the period from September 1, 2008 to December 31, 2009.  The subsidy would continue for a maximum of 12 months, but would terminate once the individual becomes eligible for other employer-based coverage or Medicare.

In addition to the federal subsidy, the bill contains a permanent expansion of COBRA in the case of “older or long-term employees.”  Specifically, the bill would permit former employees over age 55, or those with at least 10 years of service with the employer, to remain on COBRA until becoming eligible for Medicare.  These provisions are similar to language inserted by the House Rules Committee into H.R. 3920, the Trade Adjustment Assistance (TAA) Reauthorization Act, which passed the House by a by a 264-157 vote on October 31, 2007, but was never considered by the Senate.

The “stimulus” package also includes an expansion of Medicaid coverage—with the federal government paying the full 100% cost of coverage—to unemployed workers, a new program separate and distinct from the COBRA mandates on businesses otherwise discussed.

BACKGROUND

In 1985, Congress as part of the Consolidated Omnibus Budget Reconciliation Act (COBRA) imposed continuation coverage mandates on certain employer-based health insurance plans.  Title X of COBRA requires plans with 20 or more employees to provide continuing coverage to workers for 18 months or 36 months in some cases.[1]  Employers may charge a maximum of 102% of monthly plan premiums to COBRA participants, with the 2% surcharge intended to cover administrative and related costs.

Several “qualifying events” trigger eligibility for COBRA coverage, both for workers and immediate family members.  Workers become eligible for coverage upon a reduction of hours of employment or termination of such employment, voluntary or involuntary, so long as the employee was not terminated for “gross misconduct.”  Spouses and dependents participating in the employee’s plan at the time of the “qualifying event” become COBRA eligible upon the employee’s death, the employee’s eligibility for Medicare, divorce or separation from the employee, or the end of a child’s dependency on a parent’s health insurance policy.  Retirees can be considered eligible, if the employer does not provide retiree health coverage, or such health coverage is not comparable to that provided under COBRA.

The time limits for COBRA coverage currently vary.  Terminated employees and their spouses or dependents generally may obtain coverage for up to 18 months.  In the event of the employee’s death, divorce or legal separation, or a child “aging off” a parent’s policy, coverage may continue for up to 36 months.  Retirees losing retiree health benefits under an employer’s Chapter 11 bankruptcy may maintain their COBRA coverage until death, while spouses and dependents may maintain their coverage until 36 months after the retiree’s death.  In addition to the usual 18 month of continuation coverage, disabled individuals remain eligible for an extra 11 months of coverage, to complete the 29-month waiting period for disabled individuals to become eligible for Medicare benefits; however, during the extra 11 months of COBRA coverage, the employer may charge the individual up to 150% of monthly plan premiums.

IMPACT OF THE COBRA MANDATE

Although enabling displaced workers to keep their employer-based coverage may sound appealing, some Members may be concerned by several potential ramifications of this policy, particularly with regard to extensions of the kind contemplated in the stimulus.  Some of these concerns may include:

Adverse Selection:  A potential concern surrounding COBRA coverage lies in the demographic groups most likely to invoke their right to continue on a former employer’s plan.  Because the statute permits employers to charge the full cost of a group health insurance plan—which in 2008 averaged $392 per month for individuals and $1,057 per month for families, according to the Kaiser Family Foundation—many workers may choose to find more affordable coverage in the individual market or elsewhere.[2]  Some healthy individuals eligible for COBRA may choose to forego coverage entirely rather than pay the full group premium, particularly if the “qualifying event” in question included some type of financial hardship (e.g. layoff, divorce, etc.).  In other words, because COBRA-eligible individuals must perceive the coverage as worth the high monthly premiums, the workers most likely to elect COBRA coverage are those having health needs in excess of the premium cost.

Given the potential for adverse selection inherent in COBRA coverage, it is reasonable to conclude that plan premiums rise for existing employees because the population electing COBRA coverage is sicker than the group population as a whole.  The 2006 employer COBRA survey found that workers electing to continue coverage with their former employers incurred total costs 45% higher than active workers.[3]  Moreover, the Human Resources Policy Association reports that workers aged 55-65—those who would be permanently eligible for up to 10 years of COBRA coverage under the Democrat proposal—incurred costs 85% higher than active workers.  Some Members may be concerned that a requirement that employers maintain former employees incurring $7,000 to $8,000 in annual health costs for up to a decade could raise premiums for existing workers—or cause employers to drop coverage altogether.

Because the current statute states that individuals forfeit their right to COBRA coverage only upon enrolling in (as opposed to becoming eligible for) another group plan, there may be instances where individuals would seek to remain on COBRA rather than accept coverage through a new employer.  Removing the current time limits on continuation coverage may encourage additional attempts to “game” the system, particularly if some employer policies provide easier access to expensive pharmaceuticals or other treatments that cost more than the 102% maximum monthly premium.

Administrative Costs:  The current COBRA statute permits employers to collect 102% of monthly plan premiums from eligible individuals electing continuation coverage.  However, nothing in the statute ensures that administrative costs—to notify all plan participants of their rights under COBRA, administer continuation coverage to separated individuals electing this option, and provide coverage to a re-located beneficiary if possible under the plan—may not exceed the 2% threshold permitted by law.  Thus, any additional costs above the 2% threshold can be viewed as an unfunded federal mandate on businesses with as few as 20 workers.

A 2006 survey of 122 companies providing COBRA coverage to over 13,000 former employees and their dependents found that while administrative costs varied, the average cost to administer COBRA coverage amounted to $406 per worker, or 4% of average claims costs—or double the 2% which employers are permitted to charge former employees under the statute.[4]  Thus, many businesses likely suffer from increased costs that they must absorb to comply with the unfunded federal COBRA mandate.  Lengthening the eligibility period for COBRA coverage may well increase the potential (and actual) administrative costs for group plans—especially those that prove attractive to particular sets of workers, as discussed above—thus raising the cost associated with the unfunded mandate.

Overall Effect on Group Coverage:  With respect to proposed extensions of COBRA coverage, the combination of higher administrative costs and further distortions due to adverse selection could have a significant impact on employer-sponsored insurance coverage.  Removing the time limit entirely could encourage shopping among chronically-ill individuals seeking to maintain coverage with the former employer that provides the richest health benefits.  Such behavior would likely raise premiums for existing employees in that group pool, potentially leading healthier individuals to re-assess the cost-benefit analysis of paying higher premiums to stay within the group.  Alternatively, employers may decide to absolve themselves of rapid rises in health costs and administrative overhead by abandoning group insurance altogether, eliminating any COBRA requirements as a result of such termination.

COST

According to the Joint Committee on Taxation (JCT), creating a federal entitlement to COBRA subsidies through the end of 2009 would cost $28.7 billion over five years.  It should be noted that entitlements currently consume over 60% of all federal spending and represent one of the largest obstacles to controlling federal spending, the growth of which is unsustainable.  According to the General Accountability Office (GAO), the federal government has accumulated $52.7 trillion in unfunded liabilities that must be met by future generations—amounting to over $450,000 in debt for every American family.  In 2040, the federal government will either have to double taxes or witness three federal programs—Social Security, Medicare, and Medicaid—crowd out every last federal priority.

JCT also estimates that 7 million individuals would receive COBRA subsidies during calendar year 2009 as a result of the Democrat proposals.  Some Members may be concerned that an entitlement expanding government-paid health coverage to so many individuals will not be anything near as “temporary” as its advocates currently claim—because Congress is unlikely to terminate coverage subsidies for 7 million individuals at a single stroke.  Therefore, some Members may further be concerned that given the long-term fiscal outlook, particular caution must be given to the larger budgetary implications of establishing such a new entitlement beyond the stated cost of the “temporary” measure.

CONCLUSION

Some Members may find the concept of extending COBRA coverage more appealing in theory than in its practical applications, whereby health insurance costs grow along with employers’ incentives to drop coverage for broader groups.  Moreover, to the extent that the federal government subsidizes COBRA premiums—no matter how “temporary”—some Members may be concerned that such subsidies would first tie separated workers to health insurance plans that may not meet individuals’ health needs and therefore not be as cost-effective (for the worker or the government) as other options, and second increase unfunded mandates on business due to the administrative costs associated with the COBRA statute.

Rather than extending eligibility for COBRA benefits, Members may support other reforms to increase portability while minimizing adverse selection in health insurance.  Equalizing the current tax treatment of health insurance—which gives large tax subsidies to employer-provided health insurance, but no subsidies to most other insurance policies not tied to a particular job—would encourage individuals to buy the most cost-effective plan that meets their personal health care needs.  Amending the current COBRA language to link termination of benefits to eligibility for (as opposed to enrollment in) alternative group coverage would reduce any adverse selection incentives for sick individuals.  Strengthening the current system of state-based high-risk pools for those with chronic or other costly illnesses would ensure continued access for COBRA-eligible individuals seeking to maintain coverage without imposing undue burdens on employers.  Members may believe that these reforms would maximize health insurance coverage while obviating the need for a new federal unfunded mandate in the form of expanded COBRA requirements on businesses.

 

[1] The relevant statutory language for employers is part of the Employee Retirement Income Security Act (ERISA), beginning at 29 U.S.C. 1161.  State and local governments are governed under similar requirements located in the Public Health Service Act, beginning at 42 U.S.C. 300bb-1.

[2] Kaiser Family Foundation, “Employer Health Benefits: 2008 Annual Survey,” available online at http://ehbs.kff.org/pdf/7790.pdf (accessed October 24, 2008), p. 17.

[3] Spencer’s Benefits Reports, “2006 COBRA Survey.”

[4] Spencer’s Benefits Reports, “2006 COBRA Survey,” summary available online at http://www.cch.com/press/news/2006/20061206h.asp (accessed January 7, 2009).

 

Legislative Bulletin: H.R. 2, Children’s Health Insurance Program Reauthorization Act

Order of Business: On January 14, 2009, H.R. 2 is expected to be considered on the floor under a likely closed rule, requiring a majority vote for passage. The rule is expected to waive all points of order against the bill, except those arising under clauses 10 of rule XXI (PAYGO), and provide for one hour of debate, equally divided between the Majority and the Minority, with one motion to recommit. This legislation was introduced by Representative Frank Pallone (D-NJ) on January 13, 2009. The bill was referred to the House Committees on Energy and Commerce and Ways and Means, but was never considered.

Summary: The State Children’s Health Insurance Program (SCHIP), established under the Balanced Budget Act (BBA) of 1997, is a state-federal partnership originally designed to provide low-income children with health insurance—specifically, those children under age 19 from families with incomes under 200 percent of the federal poverty level (FPL), or $42,400 for a family of four in 2008. Funds are provided to states on the basis of capped allotments, and states receive an “enhanced” federal match greater than the federal Medicaid matching rate in order to enroll covered children. SCHIP received nearly $40 billion in funding over ten years as part of BBA, and legislation passed by Congress in December 2007 (P.L. 110-173) extended the program through March 2009, while providing additional SCHIP funds for states.

H.R. 2 would reauthorize and expand the State Children’s Health Insurance Program (SCHIP), as follows:

Funding and Allotments: The bill would maintain the current capped allotment method of SCHIP financing but would increase the allotments over the four and a half year period of the reauthorization (through September 30, 2013). Including funding for the first half of the current fiscal year (i.e. through March 30, 2009) already provided under P.L. 110-173, the bill would include total SCHIP funding of nearly $69 billion—an increase of almost $44 billion in SCHIP outlays when compared to the statutory baseline.

The bill increases funding levels for the five fiscal years covered in the program—a total of $10.6 billion in FY09, $12.5 billion in FY10, $13.5 billion in FY11, and nearly $15 billion in FY12. For Fiscal Year 2013, the bill includes a total of $17.4 billion in funding. However, this funding would be delivered in two installments—one appropriation of $14.4 billion in October 2012, and a second six-month appropriation of $3 billion in March 2013. Some Members may be concerned that this funding “cliff”—which presumes a 66% reduction in SCHIP expenses, from $17.4 billion in FY13 to $6 billion in FY14—is a budgetary gimmick designed primarily to mask the true costs of an SCHIP expansion.

The bill shortens from three years to two years the amount of time states have to utilize their allotment funding and provides that unused state allotments would be redirected to states projected to have allotment shortfalls after that period. The bill rebases state allotments every two years to reflect actual state expenditures and provides that state allotments will increase annually to reflect increases in health care expenditures and the growth of child populations within each state. The bill language would permit states to obtain increases in their allotments to reflect planned future expansions of SCHIP coverage and would allow certain states to receive the enhanced SCHIP federal matching rate (if funds are available from the state’s allotment) for Medicaid coverage of children in families with incomes above 133% FPL ($28,196 for a family of four in 2008).

Child Enrollment Contingency Fund: The bill would establish a new contingency fund within the U.S. Treasury for states that exceed their allotments, while also increasing enrollment at a rate that exceeds the states’ child population growth by at least 1%. The money within the contingency fund would be carved out from the SCHIP allotments described above and could not exceed 20% of overall SCHIP funding. Some Members may be concerned that the fund—which does not include provisions making additional payments contingent on enrolling the low-income children­ for which the program was designed—will therefore help to subsidize wealthier children in states which have expanded their programs to higher-income populations, diverting SCHIP funds from the program’s original purpose.

Performance Bonus Payments: The bill creates a new performance bonus payment mechanism to offset state costs associated with enrollment outreach and retention activities. States which increase coverage of eligible low-income children in Medicaid by at least 2% will be eligible for bonuses of up to 15% of each beneficiary’s projected costs, and states which exceed their targets for enrolling eligible children by at least 10% will become eligible for additional bonus payments of up to 62.5%.

Funding for the performance bonus system under the bill totals at least $3.3 billion, which would be increased by any allotments not obligated to the states or any state allotments not expended or redistributed to other states. State eligibility for the performance bonuses would remain contingent on states’ use of several practices designed to increase ease of enrollment, including continuous eligibility for at least 12 months, eliminating or liberalizing asset tests associated with enrollment applications, automatic administrative renewal, presumptive eligibility for children, and participation in the “Express Lane” process outlined below.

As there are no provisions linking payment of performance bonuses to the enrollment of low-income children, some Members may be concerned that these performance bonuses may provide an inducement to instead enroll children from wealthier families, diverting the program from its original intent. Some Members may also be concerned that the provision linking performance bonuses to the adoption of at least four so-called best practices for enrollment—including the “Express Lane” process—will provide a strong financial incentive for states not to scrutinize the eligibility of certain applicants.

Coverage of Pregnant Women: The bill adds new language permitting states to utilize SCHIP funding to cover low-income, pregnant women. The bill imposes several requirements on states seeking to use SCHIP funds to cover pregnant women, including a minimum eligibility threshold of at least 185% FPL (and not below the Medicaid eligibility threshold) for pregnant women only after covering all children under and 200% FPL without a waiting list or other enrollment cap to limit children’s participation in the program. The provision provides that children born to certain low-income pregnant women participating in SCHIP will automatically be enrolled in the program for the child’s first year.

Coverage of Childless Adults: The bill prohibits the Centers for Medicare and Medicaid Services (CMS) from approving further waivers to cover childless adults under the SCHIP program and phases out SCHIP coverage of childless adults. States requesting an extension will receive a waiver to cover childless adults for two years under SCHIP. The bill also allows states to apply for a Medicaid waiver to continue to cover childless adults but at the lower Medicaid matching rate instead of the enhanced SCHIP rate. Some Members may be concerned that the bill would permit the continued coverage of childless adults within SCHIP for at least two years—and for indefinite periods beyond that using the lower Medicaid match rate—diverting its focus from the targeted low-income children for whom it was created.

Coverage of Low-Income Parents: The bill also prohibits the issuance of new SCHIP waivers permitting the coverage of low-income parents and phases out parent coverage. States may request an automatic two-year extension to cover low-income parents, and may continue coverage of low-income parents through the length of the authorization legislation (i.e. until October 2013), provided the state does not increase its income eligibility thresholds for parent coverage. Some Members may be concerned that the bill would permit the continued coverage of low-income adults within SCHIP for at least five years, diverting its focus from the targeted low-income children for whom it was created.

Coverage of Higher-Income Children: The bill places certain restrictions on states’ matching rate for coverage of children in families with “effective family income” higher than 300% FPL—$63,600 for a family of four in 2008—to the lower Medicaid match rate, rather than the enhanced SCHIP federal match. Specifically, the bill would prohibit states from using a “general exclusion of a block of income that is not determined by type of expense or type of income.” This provision is designed to address an issue related by New Jersey’s SCHIP program, which disregards all income between 200-350% FPL for purposes of eligibility—thus making children in families with incomes up to $74,200 eligible for federal health benefits.

However, the bill expressly retains states’ ability to disregard unlimited amounts of income by type of income (i.e. salary, capital gains) or type of expense (i.e. disregard all housing-related expenses)—thus permitting states to continue to use “income disregards” effectively to ignore some or all of a family’s income for purposes of determining whether the family income falls below the 300% FPL threshold. And the bill grandfathers in states (i.e. New Jersey) that already have programs in place using blanket income disregards.

Some Members may be concerned first that this provision does not prohibit states from expanding their Medicaid programs to families with incomes above $64,000, and second that the provisions allowing continued use of “income disregards” will only encourage states to use such mechanisms to expand their SCHIP programs to wealthier families—rather than covering poor children first.

Crowd-Out Provisions: The bill does not contain provisions to reduce “crowd-out”—that is, individuals leaving private coverage in order to join a government program—included in both versions of SCHIP legislation (H.R. 976, H.R. 3963) in 2007. Those provisions included several studies about the extent to which crowd-out occurs within SCHIP, best practices on how to reduce crowd-out, and authority for the Secretary to reduce payments to states enrolling too many children above 300% FPL. Some Members may be concerned that removal of these provisions will remove the last disincentive for states to enroll large numbers of children in families with incomes above $64,000—and possibly well above that threshold.

According to the Congressional Budget Office, the bill would result in 2.4 million individuals dropping private health insurance coverage to enroll in government programs—a higher level of crowd-out in both number and percentage terms than the first SCHIP bill (H.R. 976) presented to President Bush in 2007.

Outreach and Enrollment Provisions: The bill includes $100 million in new mandatory funding for grants to various entities—including states, localities, elementary and secondary schools, and other non-profit or faith-based organizations—to conduct outreach and enrollment activities, including 10% for a national enrollment campaign and an additional 10% set-aside for the Indian Health Service. The bill also provides a minimum 75% Medicaid and SCHIP match for translation or interpretation services under the two programs.

“Express Lane” Enrollment Option: The bill permits states to use eligibility determinations from “Express Lane” agencies as a means to facilitate enrollment in Medicaid and SCHIP, including renewals and re-determinations of coverage. Agencies—including but not limited to those which determine eligibility for Temporary Assistance to Needy Families (TANF), food stamps, federal school lunch programs, Head Start, and federal housing assistance—may not deem children ineligible for coverage based solely on an initial adverse determination with respect to income eligibility.

Under the program, states may establish an income threshold 30 percentage points above the Medicaid or SCHIP eligibility limit (i.e. if the SCHIP eligibility limit is 300% FPL, the state may establish a threshold of 330% FPL for purposes of Express Lane determinations). States may also temporarily enroll children in SCHIP if the child in question “appears eligible” (criteria undefined) based on the Express Lane agency’s income determination, subject to a “prompt follow up” (time limit undefined) by the state as to whether or not the child actually qualifies. The bill also allows states to “initiate and determine eligibility” for Medicaid or SCHIP “without a program application from, or on behalf of” children based on data from other sources.

The bill provides for a annual sample audit of Express Lane cases to establish whether or not the eligibility determinations made comport with eligibility determinations made using the full Medicaid review process and provides for state remedial actions (and eventually payment reductions) if the error rate for such audits exceeds 3%. The bill sunsets the Express Lane option at the end of the authorization and includes $5 million for a report on its effectiveness.

Some Members may be concerned first that the streamlined verification processes outlined above will facilitate individuals who would not otherwise qualify for Medicaid or SCHIP, due either to their income or citizenship, to obtain federally-paid health benefits.

Citizenship Verification: Current law applies citizenship verification requirements differently to state SCHIP programs, depending upon the nature of the program. The BBA permitted states to establish separate SCHIP programs, utilize Medicaid expansions to cover eligible populations, or some combination of the two. The eight states and the District of Columbia that chose Medicaid expansions, along with Medicaid beneficiaries of the 24 states that chose combination programs, must comply with citizenship verification provisions enacted as part of the Deficit Reduction Act (DRA, P.L. 109-171) in 2006. These procedures—which include verification of citizenship and nationality by presenting any of a variety of documents (e.g. birth certificate, passport, etc.)—were prompted in part by a July 2005 Inspector General report, which found that 47 states (including the District of Columbia) often relied on an applicant’s self-attestation of citizenship to determine Medicaid eligibility and that 27 of these states undertook no effort to determine whether the self-attestation was accurate. Beneficiaries in the 18 states with separate SCHIP programs are not subject to the DRA verification requirements with respect to either citizenship or nationality.

The bill provides an alternative to the Medicaid citizenship verification process enacted in DRA—and extends this process to beneficiaries in stand-alone SCHIP programs—for children up to age 21 by allowing states to verify applicants’ citizenship through a name and Social Security number match. If the Social Security Administration finds an invalid match, the state must make “a reasonable effort to identify and address the causes of such invalid match;” in the event the state cannot resolve the discrepancy, it must dis-enroll the individual within 120 days, during which time the individual in question has 90 days to respond and present satisfactory evidence to resolve the mis-match.

States will be required to submit data for each applicant to determine the states’ invalid match rates, but errors will only include cases where the individual has been dis-enrolled by the state after having received SCHIP benefits. The bill provides that states with error rates above 3% will be required to pay back funds used to pay for ineligible individuals in excess of the 3% threshold—except that the Secretary may waive such a return requirement “if the state is unable to reach the allowable error rate despite a good faith effort.”

Some Members may echo the concerns of Social Security Commissioner Michael Astrue, who in a September 2007 letter stated that the verification process proposed in the bill would not keep ineligible individuals from receiving federal benefits—since many applicants would instead submit another person’s name and Social Security number to qualify. Some Members may believe the bill, by laying out a policy of “enroll and chase,” will permit ineligible individuals, including illegal aliens, to obtain federally-paid health coverage for at least four months during the course of the verification process. Finally, some Members may be concerned that the bill, by not taking remedial action against states for enrolling illegal aliens—which can be waived entirely at the Secretary’s discretion—until states’ error rate exceeds 3%, effectively allows states to provide benefits to illegal aliens.

Coverage of Legal Aliens: The bill would permit states to cover legal aliens in Medicaid and SCHIP programs without imposing the five-year waiting period for most legal aliens to receive federal welfare benefits established as part of the welfare reform law (P.L. 104-196) signed by President Clinton in 1996. For decades, Medicare has maintained a five-year residency requirement for legal aliens to obtain access to benefits; this waiting period was upheld by the Supreme Court in 1976, when Justice John Paul Stevens, writing for a unanimous Court in the case of Mathews v. Diaz, held that “it is obvious that Congress has no constitutional duty to provide all aliens with the welfare benefits provided to citizens.”

Some Members may be concerned that permitting states to cover legal aliens without imposing waiting periods will override the language of bipartisan welfare reform legislation passed by a Republican Congress and signed by a Democrat President, conflict with decades-long practices in other federally-sponsored entitlement health programs (i.e. Medicare), and encourage migrants to travel to the United States for the sole or primary purpose of receiving health benefits paid for by federal taxpayers.

Premium Assistance: The bill permits states to establish premium assistance programs—which provide state and federal funds to finance employer-sponsored health insurance. The bill provides that employers must pay at least 40% of premium costs in order for the policy to qualify for premium assistance but prohibits high-deductible policies associated with Health Savings Accounts (HSAs) from qualifying under any circumstances.

The bill changes the current premium assistance criteria within SCHIP, such that rather than requiring the cost of covering the entire family through the employer policy be less than the costs to enroll a child in government-run coverage, states should instead use an “apples-to-apples” comparison of the marginal costs of covering the applicable child (or children) when compared to enrolling the child in SCHIP. The bill also permits states to “wrap-around” coverage to supplement the employer policy if the latter does not meet appropriate SCHIP benchmark standards, and to establish a purchasing pool for small employers (i.e. those with fewer than 250 employees) with low-income workers to provide workers options to utilize premium assistance to enroll their families.

The bill requires states that have created premium assistance programs to inform SCHIP applicants of the program and includes provisions regarding coordination with employer coverage and outreach to workers to inform them of premium assistance. However, the bill does not require states to establish premium assistance programs. Some Members may therefore be concerned that the bill does not ensure that all children with access to employer-sponsored coverage will be able to maintain their current coverage.

Quality Measures: The bill requires CMS to develop an initial set of child health quality measures for state Medicaid and SCHIP programs, including those administered by managed care organizations, and establish programs allowing states to report such measures and disseminate information to the states on best practices. The bill includes further requirements for the Department to create a second pediatric quality measures program “to improve and strengthen the initial core child health care quality measures” and authorizes grants and contracts to develop and disseminate evidence-based quality care measures for children’s health.

The bill requires states to report annually on state-specific health quality measures adopted by their Medicaid and/or SCHIP plans and authorizes up to 10 grants for demonstration projects related to improved children’s health care and the promotion of health information technology. The bill also authorizes (subject to appropriation) $25 million for a demonstration project to reduce childhood obesity by awarding grants to eligible local governments, educational or public health institutions, or community-based organizations.

The bill establishes a program to develop a model electronic health record for Medicaid and SCHIP beneficiaries and authorizes a study on pediatric health quality measures. These and the other quality programs addressed above would be funded through mandatory appropriations totaling $45 million per fiscal year.

Lastly, the bill applies certain quality provisions to the managed care organizations with whom states contract to provide SCHIP benefits—including marketing restrictions, required disclosures to beneficiaries, and access and quality standards both for the managed care organizations and the state agencies overseeing them. The bill also requires a Government Accountability Office (GAO) study on whether the rates paid to SCHIP managed care plans are actuarially sound.

Enhanced Benefits: The bill requires state SCHIP plans to have access to dental benefits, and mandates that those dental plans resemble a) coverage provided to children under the Federal Employee Health Benefit Program (FEHBP), b) “a dental benefits plan that is offered and generally available to state employees,” or c) the largest commercially-available dental plan in the state based on the number of covered lives.

The bill includes language requiring mental health parity in state SCHIP benefits, specifically that “financial requirements and treatment limitations applicable to such…benefits” are no more restrictive than those applied to medical and surgical benefits covered by the plan and establishes a prospective payment system for federally qualified health centers receiving Medicaid reimbursements. The bill also requires that states impose a grace period of at least 30 days on beneficiaries for non-payment of any applicable premiums due before terminating the beneficiaries’ coverage; under current law, such premiums generally only apply to individuals with family incomes above 150% FPL.

Other Provisions: The bill includes language stating that “nothing in this Act allows federal payment for individuals who are not legal residents.” However, as noted above, the bill provisions allow states to verify SCHIP eligibility without document verification and provide no financial penalties to states enrolling illegal aliens until those errors (which in the case of “Express Lane” applications will be derived from sample audits, not scrutiny of each application) exceed 3%—and these penalties may be waived in the Secretary’s sole discretion.

The bill includes language prohibiting the Department of Health and Human Services from approving any new state Health Opportunity Account demonstrations under the program established in DRA. Some Members may be concerned that the prohibition on this innovative—and entirely voluntary—program for beneficiaries may hinder beneficiaries’ ability to choose the health plan that best meets their needs.

The bill would disregard any “significantly disproportionate employer pension or insurance fund contribution” when calculating a state’s per capita income for purposes of establishing the federal Medicaid matching percentage for that state. According to CMS, only one state would benefit from this provision—Michigan. The bill would also increase Disproportionate Share Hospital (DSH) allotments for Tennessee and Hawaii and would clarify the treatment of a regional medical center in such a manner that the Congressional Budget Office, in its score of the bill, identified the provision as specifically benefiting the Memphis Regional Medical Center. Some Members therefore may view these provisions as constituting authorizing earmarks.

Tobacco Tax Increase; Pay-Fors: The bill would increase by 61 cents—from 39 cents to $1—the federal per-pack tobacco tax and place similar increases on cigars, cigarette papers and tubes, and smokeless and pipe tobacco products. Some Members may be concerned that an increase in the tobacco tax, which is highly regressive, would place an undue and unnecessary burden on working families during an economic downturn and could encourage the production of counterfeit cigarettes by criminal organizations and other entities.

The bill would impose additional restrictions on so-called specialty hospitals by limiting the “whole hospital” exemption against physician self-referral. Specifically, the bill would only extend the exemption to facilities with a Medicare reimbursement arrangement in place as of January 1, 2009, such that any new specialty hospital—including those currently under development or construction—would not be eligible for the self-referral exemption. The bill would also place restrictions on the expansion of current specialty hospitals’ capacity, such that any existing specialty hospital would be unable to expand its facilities, except under limited circumstances. Given the advances which several specialty hospitals have made in increasing quality of care and decreasing patient infection rates, some Members may be concerned that these additional restrictions may impede the development of new innovations within the health care industry.

Lastly, the bill increases the percentage of payment of certain corporate estimated taxes in the last fiscal quarter of 2013 by 1%, and reduces the next applicable estimated tax payment in the first fiscal quarter of 2014 by a similar amount.

Cost: According to the Congressional Budget Office, the bill would increase direct spending by a total of $39.4 billion between Fiscal Year 2009 and Fiscal Year 2014, and $73.3 billion over the FY09-FY19 period. Most of the spending in the first five years of the budget window ($34.3 billion) would be derived from the SCHIP expansion; and Medicaid spending in the latter five years would rise, as the score notes that children enrolled in SCHIP would be shifted to the Medicaid program upon SCHIP’s expiration. However, both the Medicaid and SCHIP scores are contingent upon provisions in the bill cutting SCHIP spending from $17.4 billion in Fiscal Year 2013 to $6 billion in Fiscal Year 2014. To the extent that Members believe this 66% reduction in SCHIP expenses will not take place, they may be concerned that the funding “cliff” is a budgetary gimmick designed to mask the true costs of the bill’s expansion of health care benefits.

The Joint Committee on Taxation estimates that the increase in tobacco taxes would generate $38.8 billion through Fiscal Year 2014, and $72 billion from Fiscal Years 2009-2018. The bill also increases revenues by $1.6 billion through Fiscal Year 2018 as a result of individuals dropping private health insurance in order to enroll in the SCHIP program, as employees with group health insurance would have less of their income sheltered from payroll and income taxes.

The JCT score on the tobacco tax notes that the tax provisions would generate $7.2 billion in FY10 (the first full year the tax increase would take effect), but only $6.4 billion in Fiscal Year 2019—a decrease of more than 10%. Some Members may be concerned that expansions of the SCHIP program would rely on a declining source of revenue.

Important Points on the Medicare Trigger

Virtually all independent experts have confirmed what most of the public already knows: Rising health care costs and the retirement of the Baby Boomers make Medicare’s financial future precarious. Yet while Republicans have advanced plans to improve this important program’s solvency, Democrats seem intent on ignoring the looming entitlement crisis until it is too late.

Medicare Comprises a Large—and Growing—Share of Government Spending

In 2006, the Centers for Medicare and Medicaid Services reports that Medicare outlays were $408.3 billion. Comparable 2006 data from other government agencies demonstrates the relative size of Medicare’s budget:

  • If Medicare were its own country, it would have the 20th largest economy of the 180 national economies ranked by the World Bank.
  • Federal Medicare spending exceeds the total national GDP of Israel, Peru, and New Zealand combined.
  • The federal government spends more money on Medicare than the Departments of Agriculture, Education, Energy, Homeland Security, Transportation, and Veterans Affairs spend combined.
  • The Medicare actuaries predict that over the next decade, Medicare spending will rise by an average 7.4% per year—more if scheduled reductions in physician payments do not take effect.

Medicare Faces a Bleak Financial Future

Projections from the Congressional Budget Office (CBO) and the annual report issued by the Medicare trustees provide some indication of the scope of the fiscal problems facing Medicare in the future:

  • The Medicare trustees report released in March projected that the Medicare Hospital Insurance Trust Fund will be exhausted in 2019—just over a decade from now.
  • The trustees also project that overall spending on Medicare will rise from its 2006 level of 3.1% of GDP to reach 7.0% of GDP by 2035 and 10.8% GDP by 2082—nearly twice the size of Social Security, and more than one dollar out of every ten spent (public or private) nationwide.
  • CBO estimates—which, unlike the trustees’ report, presume that health costs will continue to rise at a pace consistent with past trends—that Medicare alone will constitute 17% of GDP by 2082—a nearly sixfold increase from 2006 and equal to all health care spending (private and public) today.
  • A former Medicare trustee found that, in order to solve the program’s funding shortfall, Part B premiums would need to rise to over $3,000-$5,000 per month in today’s money if the share of general revenue Medicare funding remains constant.

Democrats Have No Plan to Restore Medicare’s Solvency

While the Congressional Budget Office has concluded that “the main message [from both reports] is that health care spending is projected to rise significantly and that changes in federal law will be necessary to avoid or mitigate a substantial increase in federal spending on Medicare,” Democrats have not acted to fix the problem:

  • When the Medicare trustees released their report noting that Medicare faces nearly $86 trillion in unfunded obligations, Ways and Means Health Subcommittee Chairman Pete Stark responded by saying, “I don’t think it makes any difference what [the trustees] say” about the precarious state of Medicare’s funding.
  • Last July, Rep. Alcee Hastings (D-FL) asserted that “The perceived problem with Medicare funding has already been addressed”—yet former Comptroller General David Walker has noted that each year Congress does not act to reform its entitlement obligations, the size of the debt the next generation of Americans face grows by $2 trillion.
  • Republicans have put forth several proposals to close the size of the Medicare funding gap—but Democrats would rather grow the federal debt than take reasonable steps to slow the growth of America’s massive government programs.

Questions for House Democrats on the Medicare Trigger

  • Ways and Means Health Subcommittee Chairman Pete Stark has publicly stated that “Medicare is not in crisis.” Yet the Medicare program faces unfunded liabilities of nearly $86 trillion—more than 70 times the total anticipated losses from subprime mortgages worldwide. Why do House Democrats believe that $1.2 trillion in mortgage losses requires the creation of massive new government programs to help borrowers, while $86 trillion in debt from an existing government program warrants no action at all?
  • Democrats have complained that the trigger is an “arbitrary” calculation of the health of the Medicare program. Since they find Medicare’s $86 trillion in unfunded obligations an “arbitrary” figure too low to prompt any concern, how high will Medicare’s expected losses have to rise before Democrats will take action? $100 trillion? $200 trillion?
  • “Fixing” the Medicare trigger this year requires finding less than $2 billion in savings during Fiscal Year 2013—this for a program projected to grow over the next five years from $455 billion to $636 billion in spending. Do Democrats really believe that nothing can be done to slow Medicare’s growth in spending from $181 billion to a mere $179 billion over the next five years?
  • When debating a resolution turning off the Medicare trigger last July, Rep. Alcee Hastings (D-FL) said that “The perceived problem with Medicare funding has already been addressed.” How is an $86 trillion shortfall a “perceived” problem—and if it has already been addressed, why do Democrats need to take further action turning off the Medicare trigger?
  • At a House Appropriations Committee markup last year, an amendment creating a bipartisan commission to examine entitlement spending and make recommendations to Congress was defeated on a largely party-line vote. Why do most House Democrats oppose even creating a commission to study the nation’s impending fiscal crisis due to unsustainable entitlement spending?
  • Why do House Democrats believe that wealthy seniors—including billionaires like Warren Buffett and George Soros—should not be asked to pay $2 per day more in premiums for their prescription drug coverage to help improve the solvency of the Medicare program?
  • Why would House Democrats embark on a new health care entitlement expansions—paid for by tax increases—without first ensuring the solvency of the existing Medicare benefit?
  • When gas prices topped $4 per gallon, a House Democratic aide said that the party’s advice to frustrated families struggling to fuel their cars consisted of “Drive small cars and wait for the wind.” What will Democrats tell seniors and those individuals looking to retire when the Medicare Hospital Trust Fund goes broke in 2019—exactly one decade from now?