Baucus White Paper on Delivery System Reform

As you may know, Finance Committee Chairman Baucus released last night a white paper outlining potential options for reforming the health delivery system.  Release of the document precedes a discussion among Finance Committee Members of both parties scheduled to be held today.  Further discussions will be held on access and financing in the upcoming weeks, with white papers on those issues to be released in advance of those meetings.

The two biggest issues addressed in the delivery reform white paper surround Medicare Advantage (MA) and physician reimbursement.  On the former, the white paper proposes linking some portion of MA plan payment to pay-for-performance results on quality measures, as well as new overall payment methodologies that would result in lower payments to plans.  One approach would result in arbitrary reductions such that MA plan payments would be tied to fee-for-service Medicare spending, while the second approach would apply competitive bidding to MA plans—but traditional Medicare will not be required to compete.  Some Members may also note that the white paper discusses “simplifying the amount and type of extra benefits offered by MA plans”—suggesting that Chairman Baucus may want to limit plans’ attractiveness to beneficiaries by restricting their ability to provide services to seniors that traditional Medicare does not.

With respect to physician reimbursement and the Sustainable Growth Rate (SGR) mechanism, the white paper proposes a 1% update (i.e. increase) in physician reimbursement levels for 2010 and 2011, followed by no increase in 2012, and a reversion to current law formulas in 2013.  One proposal would establish a floor for the SGR, preventing physicians from receiving greater than a 3% cut in reimbursement levels (or 6% in areas with high growth rates of fee-for-service spending).  The white paper implicitly acknowledges the significant cost associated with both proposals, noting that “the Committee is continuing to explore other options” due to the high price tag associated with SGR reform.

Other highlights of the Baucus proposals include:

  • Establishment of pay-for-performance methodologies for hospitals, home health agencies, and skilled nursing facilities, with payment based on standards related to certain quality measures—the performance pool for hospitals would constitute up to 5% of existing inpatient reimbursement levels;
  • Expansion of the Physician Quality Reporting Initiative to require physician certification, as well as new quality reporting initiatives for inpatient rehabilitation facilities and long-term acute care hospitals;
  • Adoption of appropriateness criteria with respect to imaging services;
  • A 5% payment bonus for primary care physicians and general surgeons practicing in (newly defined) rural scarcity areas—paid for by an across-the-board reduction in reimbursement levels to other physicians, or other potential offsets;
  • Creation of a hospital re-admissions policy that would withhold up to 20% of hospital reimbursements for institutions with high levels of preventable re-admissions, along with a long-term move to bundled payment for all post-acute care services occurring within 30 days of discharge;
  • Creation of accountable care organizations (ACOs) in an attempt to deliver more integrated care, that would allow provider groups to share half of the potential savings to Medicare if operating efficiencies generate savings levels greater than 2%;
  • Expanded eligibility for health IT incentive payments created in the “stimulus” to include nurse practitioners, physician assistants, and other providers;
  • Creation of an independent institute to govern comparative effectiveness research—along with safeguards that, while attempting to recognize the personalized nature of health care, would permit government programs to use the research for reimbursement purposes in some circumstances;
  • New reporting requirements on drug manufacturers to disclose financial relationships and transactions with providers, and make such information publicly available;
  • A prohibition on physician-owned specialty hospitals, along with significant new restrictions on the expansion capabilities of current hospitals;
  • Additional requirements related to nursing homes, including ownership disclosure, compliance and ethics requirements, reporting of staff position categories and expenditures, independent monitoring, a standardized complaint form, and state-based complaint processes;
  • Re-distribution of unused residency training slots to encourage primary care or general surgery training, along with other provisions to increase and re-allocate the health care workforce;
  • Additional provider screening and data matching to combat fraud and abuse, along with a requirement for providers to implement compliance programs, additional penalties for violations, and enhanced fraud and abuse funding.

Weekly Newsletter: April 27, 2009

A Victory for Patients’ Rights; How Long Will It Last?

Last week, an overwhelming majority of the Senate voted to preserve Americans’ right to keep their doctor and health plan—only for the Democrat Congressional leadership to ignore the bipartisan will of the Senate.  On Thursday, the Senate by a 79-14 vote approved a motion to instruct budget conferees intended to prevent the Senate from considering “legislation that eliminates the ability of Americans to keep their health plan and eliminates the ability of Americans to choose their doctor.”  Clear majorities in both parties supported the motion, including Budget Committee Chairman Conrad, Finance Committee Chairman Baucus, and Majority Leader Reid.

It remains unclear whether this bipartisan Senate provision will remain in the budget conference report that the House and Senate may consider later this week.  However, some Members may be concerned that the Democrat leadership will attempt to strip the provision, in order to further the creation of a government-run health plan that will cause as many as 120 million Americans to lose their current health coverage.  Some Members may also be concerned that any refusal by the Democrat majority to guarantee that patients retain the ability to keep their current doctor and health plan, coupled with Health and Human Services Secretary-designee Kathleen Sebelius’ repeated refusal to state that government cost-effectiveness research will not be used to determine reimbursement levels, may be the first steps in creating a health system where Washington bureaucrats, not doctors and patients, determine appropriate levels of care.

Survey Says…

Last week, two online surveys about health reform provided some insight as to Americans’ views on the upcoming debate.  A Kaiser Family Foundation survey conducted in March included some important revelations:

  • More than seven in ten Americans (72%) believe that scientific evidence between two treatment options “is not always clear”—suggesting that Americans would be highly skeptical of attempts by bureaucrats arbitrarily to restrict access to certain treatments or therapies.
  • Support for an outside group to evaluate treatment options plummets among Americans of all parties when the group is “appointed by the federal government”—further evidence of Americans’ opposition to a bureaucrat-run health plan.
  • More than nine in ten Americans with health coverage believe their plan is “good” (51%) or “adequate” (41%)—meaning plans to create a government-run health plan causing as many as 120 million Americans to lose their current plan may spark significant public outcry.
  • More than one-third (34%) of the uninsured would not be willing to pay $100 per month to buy health insurance, and more than two-thirds (67%) would not be willing to pay $200 monthly—suggesting a significant segment of the uninsured may be choosing not to buy health insurance, and that a mandate might not be able to persuade Americans who apparently find health coverage of little value.

On Tuesday, the online edition of the journal Health Affairs released a new analysis of data from a poll taken in February 2008.  The poll found that an individual mandate to purchase health insurance lacked support of a majority of Americans.  And while support for a brief “shared responsibility” proposal exceeded that for a stand-alone individual mandate proposal, few demographic groups offered a whole-hearted endorsement.  Support for the “shared responsibility” approach remained below 60% for most groups, including independents, even though the poll mentioned none of the potential downsides to some of the Democrat plans currently being considered—tax increases on individuals and businesses, a government-run plan leading to Americans losing their current coverage, and delays and difficulties accessing treatments as a result of interference by Washington bureaucrats Americans’ personal health decisions.

Taken together, some Members may believe the poll results offer a cautionary note to Democrats as they weigh the option of using budget reconciliation legislation to advance health reform.  At a time when most Americans with coverage value their current plan—as well as their choice of doctor—and a public consensus on health reform has yet to emerge, some Members may believe that proceeding with the creation of a government-run health plan would represent bad policy resulting in a health system many Americans may not want and some Americans would resent.

Subcommittee Hearing Exposes Democrat Disagreements

An Education and Labor Subcommittee hearing on health reform last Thursday exposed fissures in the Democrat agenda for health reform, with some Democrats arguing for a single-payer system that would abolish private insurance entirely.  Press reports indicate that Rep. John Tierney, one single-payer advocate, argued for imposing de facto price controls on insurance companies, regulating the percentage of premiums which carriers must pay out in medical benefits.

Some Members may be concerned that imposing such arbitrary price controls on health insurance companies could well discourage new entrants that would detract from market competition, while also suppressing attempts by carriers to manage disease through chronic care and other administrative initiatives that may actually reduce the total amount of medical benefits paid.  Some Members may therefore question whether imposing price controls on insurance companies would have many of the same unintended and adverse consequences that have resulted from past attempts at government price fixing, such as the stagflation associated with price controls during the 1970s.

Weekly Newsletter: April 20, 2009

Administration Reiterates Support for Government Rationing to Reduce Health Costs

Yesterday, National Economic Council Director Larry Summers appeared on Meet the Press, where he offered his comments on the Administration’s health reform proposals.  Asked how the Administration intended to pay for the $1.5 trillion cost of its proposed new government-run health plan, Summers responded that “cost-effectiveness research [and] doing a better job on reimbursements” would achieve savings—“we could take as much as $700 billion a year out of our health care system.”

Some Members may be concerned that these comments, coupled with President Obama’s stated desire to create a government-run health plan that would cause as many as 120 million Americans to lose their current health coverage, would result in explicit rationing of care by government bureaucrats in order to pay for the costs of the Administration’s universal coverage scheme.  Some Members may also question how many jobs will be lost as a result of this arbitrary reduction of up to $700 billion in health care expenditures.

A previously prepared Policy Brief on the potential for health care rationing as a result of proposals in the Obama budget can be found here.

If It Walks Like a Duck…

During Congress’ two-week Easter recess, Administration officials and others have been talking about a government-run health plan, and how a so-called “public option” could be structured in such a manner as to address Member concerns on the issue.  On Wednesday, the head of the White House Office of Health Reform, Nancy-Ann DeParle, claimed that a government-run plan need not look like Medicare, and that, “when you start talking to [Members of Congress] about what [a government-run plan] might look like, you realize that you’re talking about two different things.”

However, many Members may remain concerned that the very nature of a government-run health plan means that it will end up eliminating private health coverage.  Congressional Budget Office Director Elmendorf recently testified that it would be “extremely difficult” to have a government-run plan compete “on a level playing field” with private coverage—and Democrats’ own actions prove that point.  For instance, some Members may note that the same Obama Administration that proposed a “level playing field” between a government-run health plan and private coverage want to eliminate the private market for student lending, forcing all students to use the government-run plan for college loans.  Some Members may therefore be concerned that Democrats would purposefully use a government-run health plan, no matter its structure, in order to eradicate private health coverage—just as they are currently attempting to do with the student loan marketplace.

A Policy Brief outlining potential concerns with a government-run health plan can be found here.

A Victory for Honest Budgeting

Just before the Easter recess, the Congressional Budget Office (CBO) released a letter with significant implications for the upcoming health reform debate.  In a letter to House Budget Committee Chairman Spratt, CBO defended its estimates for current law spending under Medicare—including the impact of a 21% cut in physician reimbursement levels scheduled to occur in January under the Sustainable Growth Rate (SGR) mechanism.  CBO Director Elmendorf noted it is unclear whether reductions in physician payment levels would, for instance, cause hospital spending to rise—a scenario which would likely reduce the estimated $285 billion cost of repealing the SGR.

Some Members may be heartened by this assessment, and what it portends for its analysis of health reform proposals.  Democrats have already admitted the implications of the CBO scoring model on the Congressional debate, with Senate Finance Committee Chairman Baucus going so far as to claim that the success or failure of health reform legislation hinges on the actions of CBO Director Elmendorf.  Yet despite Chairman Baucus’ public comments—and a letter from Chairman Spratt designed to create “phantom” budgetary savings unsupported by evidence—CBO has thus far indicated that it will not be moved by Democrat political pressure.  In a world of record budget deficits and seemingly unrestrained spending, some Members may find CBO’s impartial, evidence-based philosophy to budgetary score-keeping to date a refreshing approach.

Article of Note: A Democrat Leader Cautions His Party

Last Monday, a voice from the 1993-94 health reform debate re-surfaced to offer President Obama and Congressional Democrats advice on over-reaching in their efforts this time round.  Former House Majority Leader Dick Gephardt (D-MO), in an interview with the New York Times, warned his fellow Democrats to spend more time focusing on reducing health costs and less time on creating a government-run health insurance plan for all Americans.  Gephardt—who unsuccessfully attempted to cobble together a health reform bill that could pass the House in the summer of 1994—said that universal coverage “needs to be dealt with.  But the way to get to it is to show that we can deal with some of these problems [i.e. skyrocketing health costs] first.”

Some Members may agree with former Leader Gephardt’s assessment, and believe that slowing the growth of health costs while placing our existing entitlement programs on a stable long-term footing should take precedence over creating a new government-run health plan.  Medicare currently faces unfunded obligations of $36 trillion, and its Hospital Insurance Trust Fund is scheduled to be exhausted as soon as 2016.  However, Democrats have put forth no comprehensive plan to solve Medicare’s shortfalls, and President Obama proposed to use Medicare savings in order to create a “reserve fund” financing new entitlements—taking money from a program for seniors to expand health coverage for the young.  Some Members may believe that spending as much as $1.5 trillion on a new government-run health plan is precisely the wrong way to control costs, and that expanding competition—not government—represents a better approach to health reform.

Read the article here.

Legislative Bulletin: H.R. 1256, Family Smoking Prevention and Tobacco Control Act

Order of Business: H.R. 1256 is being considered under a structured rule making in order certain amendments.  The legislation was introduced by Rep. Henry Waxman (D-CA) on March 3, 2009, and was referred to the Committee on Energy and Commerce, which on March 4, 2009, reported the bill by a 39-13 vote.

Under new PAYGO rules in the 111th Congress, savings from prior bills passed by the House may count towards meeting PAYGO requirements.  Because the Congressional Budget Office projects a $955 million revenue loss over ten years associated with H.R. 1256’s provisions regulating tobacco due to a 2% reduction in adult smoking after ten years, the majority intends to pass H.R. 1804 under suspension of the rules to offset this lost tax revenue prior to the consideration of H.R. 1256.  The rule for consideration of H.R. 1256 provides that, at the time of engrossment, the Clerk will add the text of H.R. 1804 to the end of H.R. 1256, in order to meet PAYGO.

Summary: H.R. 1256 would grant the Food and Drug Administration (FDA) the authority to regulate tobacco products—financed through a tax on tobacco companies—and increase federal regulation of tobacco advertising and marketing.  Highlights of the legislation include the following:

FDA Authority:  The bill grants the federal government authority to regulate tobacco products through a new Center for Tobacco Products created as part of the FDA; however, the bill limits FDA’s authority to the manufacture of tobacco products, as opposed to the growth of tobacco itself.  Some Members may be concerned by the implications of giving an agency charged with approving the safety of food and drugs the authority to regulate an inherently unsafe product, echoing the concerns of then-FDA Commissioner Andrew von Eschenbach, who in a statement to the Energy and Commerce Committee in 2007 stated that regulating tobacco products would dramatically alter the FDA’s mission, and not for the better: “Associating any agency whose mission is to promote public health with the approval of inherently dangerous products would undermine its mission and likely have perverse incentive effects.”

Some Members may also note the statements from many Congressional Democrats that the salmonella and other crises demonstrate that the FDA is not undertaking its current mission effectively, and question whether now is the appropriate time to be burdening the FDA with imposing a sizable new regulatory regime.  In addition, some Members may be concerned that the bill’s provisions expressly retaining the Federal Trade Commission’s authority to regulate the sale of tobacco products may result in duplicate and/or conflicting regulatory regimes at the federal level.

The bill contains definitions related to tobacco products.  Under the bill, an “adulterated” tobacco product consists of materials “injurious to health.”  Using this definition, some Members may question how the FDA will be able to distinguish adulterated from un-adulterated tobacco products, given that tobacco is inherently injurious to human health.

Labeling and Branding Disclosure:  H.R. 1256 places numerous restrictions on tobacco products to prevent their “misbranding.”  Under the bill language, tobacco products will be considered misbranded if (among other things) “any word, statement, or other information required…to appear on the label…is not prominently placed thereon with such conspicuousness…as to render it likely to be read and understood by the ordinary individual” or if the label excludes “a full description of the components of such tobacco product or the formula showing quantitatively each ingredient of such tobacco product.”  The bill also grants the FDA the authority to require prior approval of statements on tobacco labels.  Despite language in the bill prohibiting tobacco companies from making such claims, some Members may be concerned that members of the public may construe FDA regulation of tobacco products as the federal government’s “approval” of a product now deemed safe, when in reality tobacco products are inherently unhealthy.

H.R. 1256 requires tobacco manufacturers to disclose to FDA “a listing of all ingredients…substances, compounds, and additives that are…added by the manufacturer,” as well as “any or all documents (including underlying scientific information) relating to research activities, and research findings, conducted, supported, or possessed by the manufacturer” regarding tobacco products, their health risks (including any adverse events), and tobacco marketing.  The bill also requires FDA to compile publicly searchable databases of additives and potentially harmful components with respect to each brand of tobacco product.

Registration and Inspection:  The bill requires tobacco manufacturers to register their establishments with FDA and provides for inspections every two years to each registered establishment—including those located overseas.

Scope of Regulations:  The bill grants FDA the authority to impose restrictions “on the sale and distribution of a tobacco product” where the agency “determines that such regulation would be appropriate for the protection of the public health,” and also permits restrictions on tobacco advertising and promotion.  Specifically, the bill requires FDA to promulgate regulations regarding remote (i.e. not face-to-face) sales of tobacco products, and regarding good manufacturing standards “to ensure the public health is protected.”

Product Standards; Menthol Loophole:  The bill prohibits most flavor additives in tobacco products following enactment, and gives the FDA the authority to adopt additional standards for tobacco products through a notice-and-comment process.  However, the bill expressly prohibits FDA from banning whole classes of tobacco products, or “requiring the reduction of nicotine yields of a tobacco product to zero…because of the importance” of such decision.

As noted above, the bill prohibits most tobacco flavor additives but expressly excludes menthol as the only “FDA approved” additive permitted to remain in tobacco products.  Some Members may echo the concerns of then-Health and Human Services Secretary Mike Leavitt, who last year pointed out that this provision—by prohibiting the sale of clove and other flavored cigarettes manufactured overseas, while permitting the continued sale of menthol cigarettes manufactured in the United States—could violate international trade commitments, potentially sparking trade disputes and retaliatory action during a recession.

Studies confirm that African-Americans and other racial minorities comprise a disproportionate number of menthol smokers; Centers for Disease Control data indicate that 75% of African-American smokers use menthol cigarettes.  Some Members may also note that seven former Health and Human Services Secretaries wrote to Congress to criticize a menthol “loophole” that “caves to the financial interests of tobacco companies” by “send[ing] a message that African-American youngsters are valued less than white youngsters.”

Notification and Recalls:  The bill grants the FDA authority to make public notifications about tobacco products—through public service announcements and other means—if FDA believes the product “presents an unreasonable risk of substantial harm to the public health,” and further grants FDA authority to recall defective tobacco products, subject to an informal hearing.

Pre-Approval of New Products:  The bill requires any new tobacco products introduced after February 15, 2007, or any substantially modifications of existing tobacco products, to complete a pre-approval process prior to their commercial introduction, and also grants FDA the authority to withdraw and/or suspend a prior issued approval of such new products on the basis of new information or non-compliance with the regulatory regime put in place by the bill.  H.R. 1256 also prohibits FDA to approve any new products if “there is a lack of a showing that permitting such tobacco product to be marketed would be appropriate for the protection of the public health.”

Modified Risk Products:  H.R. 1256 prohibits the sale of “modified risk” tobacco products—defined as those advertised as “less harmful than…other commercially marketed tobacco products,” including those labeled as “light” or “mild”—unless where expressly approved by the FDA.  The bill permits the commercial sale of modified risk products only where the FDA finds said products will “significantly reduce harm…to individual tobacco users; and benefit the health of the population as a whole.”  In cases where long-term epidemiological studies have yet to be conducted on modified risk products, the bill permits the FDA to grant authority to approve the products’ sale for a fixed but renewable term of up to five years, provided certain other requirements are met.  Some Members may be concerned that these burdensome restrictions—which effectively prohibit modified risk products unless expressly approved by federal authorities—may hinder the introduction and development of tobacco products that could reduce (but not eliminate) the adverse health consequences associated with tobacco consumption.

The bill also imposes additional marketing restrictions on modified risk products approved for sale, specifically regarding the quantitative comparisons of reduced levels of substances, and requires post-market surveillance of modified risk products—which relate to the FDA’s requirement to revoke approval in cases where additional research finds that the statements of modified risk no longer apply.

State and Local Authority; “Indian Country” Loophole:  The bill provides limited federal pre-emption of state and local laws with respect to product standards, labeling and branding, federal registration, and modified risk products; however, state and local governments retain authority in all other areas regarding “the sale, distribution, possession, exposure to, access to, advertising and promotion of or use of” tobacco products.

The bill requires FDA to contract with the states to carry out inspection of retailers to enforce its provisions.  However, the bill prohibits FDA from having its state contractors carry out inspections on Indian country lands “without the express written consent of the Indian tribe involved.”

Other Provisions:  The bill establishes a Tobacco Products Scientific Advisory Committee to evaluate technical evidence and make recommendations with respect to tobacco products and their effects.  The bill also contains provisions designed to accelerate the regulatory approval of certain smoking cessation and nicotine replacement products, and includes delays of up to five years in regulatory compliance and testing requirements for small tobacco product manufacturers (defined as those employing fewer than 350 employees).

“User Fees”:  H.R. 1256 imposes “user fees” on tobacco companies to finance the new Center for Tobacco Products within FDA.  Fees would total nearly $5.4 billion over ten years: $235 million in Fiscal Year 2010, rising to $712 million in Fiscal 2019 and all subsequent years.  Fees would be assessed to classes of tobacco products (i.e. cigarettes, cigars, etc.), and to individual companies within each class, in the same percentages applied to tobacco buyout legislation previously passed by Congress (P.L. 108-357) in October 2004.

Some Members may consider this “user fee” a tax on the tobacco industry, which manufacturers will pass on to their customers.  Some Members may also be concerned that tobacco taxes are among the most regressive forms of taxation, and that raising tobacco taxes still higher—on top of the 62-cent per-pack increase in taxes used to finance children’s health insurance legislation (P.L. 111-3)—will place additional burdens on working families during a recession.

Final Rule:  The bill would require the FDA to re-issue a 1996 rule (struck down by the Supreme Court as exceeding the agency’s authority in 2000) and would make several amendments to said final rule.  The original regulations would restrict tobacco advertising by, among other things, prohibiting billboards within 1,000 feet of schools and permitting only black-and-white advertising.  The amendments would prohibit the distribution of free tobacco products at all sporting or entertainment events, and would permit free samples only in a “qualified adult-only facility;” such facilities are specifically defined, and must include “a temporary structure…enclosed by a barrier that is constructed of, or covered with, an opaque material…[and] extends from no more than 12 inches above the ground or floor…to at least 8 feet above the ground or floor.”  However, the bill expressly strikes the preambles and findings to several FDA rules promulgated in 1995 and 1996 designed to regulate nicotine as a drug, and tobacco as a nicotine delivery device.  Some Members may be concerned at the level of prescriptive detail being written into law by these provisions—particularly as H.R. 1256 exempts the entire final rule from the provisions of the Congressional Review Act.

Retail Penalties:  The bill permits FDA to issue “no tobacco sale” orders against retailers that repeatedly violate the federal regulatory regime, subject to a hearing, and also imposes federal penalties for violations by retailers with respect to tobacco purchases.  A first offense would not be subject to a fine, provided the retailer has an “approved training program” in place; however, penalties would increase for additional incidents, such that a sixth (and subsequent) offense within a four-year period would warrant a fine of $10,000, regardless of whether the retailer participates in a training program.  The bill requires FDA to “consider” applicable state penalties for purposes of mitigating federal sanctions, but does not automatically reduce or eliminate federal sanctions where states have imposed their own (potentially higher) fines.

Advertising Warnings:  The bill imposes numerous new requirements on advertising for cigarettes and smokeless tobacco, and prohibits the sale or advertisement of any product not meeting the restrictions. Specifically, the bill requires labels carrying warnings in at least 17-point font or that comprise 70% of the label area, and requires advertisements to carry warnings of at least 20% of the total area (or, in the case of newspaper advertisements, a specific size font related to the overall size of the advertisement).  The bill gives the FDA the authority to change required statements through a notice-and-comment rulemaking process, pre-empts state or local activities only with respect to the content of tobacco advertising—permitting more stringent state and local regulations on the “time, place, and manner” of advertisements—and imposes a prohibition on television or radio advertisements for smokeless tobacco.

Some Members may be concerned that these prescriptive requirements exceed the voluntary restrictions that tobacco companies imposed upon themselves as part of the 1998 Master Settlement Agreement with state attorneys general, infringing on companies’ First Amendment rights to promote a product which H.R. 1256 would expressly keep legal.  Some Members may also be concerned that the lack of federal pre-emption would permit states and localities to impose more onerous, and potentially conflicting, restrictions on companies’ constitutional right to market their products.

Trade in Tobacco Products:  The bill requires tobacco manufacturers to label their products as “sale only allowed in the United States,” and requires federal regulations related to record-keeping, tracking, and tracing tobacco products in order to combat illicit activities.

Cost: According to the Congressional Budget Office, H.R. 1256 would cost the FDA $2.1 billion to implement over five years and nearly $5.4 billion over ten.  These costs would be offset by “user fees” assessed on tobacco companies.

CBO also projects a $955 million revenue loss over ten years associated with H.R. 1256’s provisions regulating tobacco, as the budget estimate assumes a 2% reduction in adult smoking after ten years.

Under new PAYGO rules in the 111th Congress, savings from prior bills passed by the House may count towards meeting PAYGO requirements.  Because the Congressional Budget Office projects a $955 million revenue loss over ten years associated with H.R. 1256’s provisions regulating tobacco due to a 2% reduction in adult smoking after ten years, the majority intends to pass H.R. 1804 under suspension of the rules to offset this lost tax revenue.

Lastly, CBO notes that the “user fees” imposed on tobacco companies by H.R. 1256 would constitute a private-sector mandate for the purposes of the Unfunded Mandates Reform Act (UMRA), and that other provisions associated with limited pre-emption of state tobacco laws would constitute an intergovernmental mandate under UMRA.  Some Members may be concerned by the impact of the billions of dollars in unfunded mandates placed on tobacco companies amount to a tax that will be passed on to consumers.

Amendment Made in Order Under the Rule:

Buyer (R-IN) Substitute:   Keeps FDA’s focus on its current mission by establishing a Tobacco Harm Reduction Center within the Department of Health and Human Services (but outside of FDA) to regulate tobacco products.  Requires Administrator of the new Center to assess the impact of proposed regulations having an economic impact greater than $50 million.  Pre-empts new state and local laws conflicting with the regulatory regime, and prohibits private rights of action.  Statutorily requires reduction in tar levels included in tobacco products, but defers prohibition of flavor additives or other chemicals to medical experts within the new Tobacco Harm Reduction Center.

Permits the introduction (without fixed-term time limits) of modified risk products, provided such products result in “measurable and substantial reductions in morbidity and mortality among individual tobacco users.”   Requires disclosure of tobacco product ingredients on product packaging.

Focuses tobacco efforts on youth smoking by reducing state substance abuse block grants by up to 40% in the case of states which have not enacted laws imposing civil penalties on sale or distribution of tobacco products to underage minors and restricting certain sales practices (e.g. self-service displays, licensing of tobacco vendors, etc.) to prevent the improper sale of tobacco products to minors.  Imposes penalties of up to one year imprisonment for willful violations of regulatory regime.  Reduces state substance abuse block grants by up to 40% for states which do not spend at least 20% of their Master Settlement Agreement funds on tobacco control programs.