Legislative Bulletin: H.R. 5613, Protecting the Medicaid Safety Net Act

Order of Business:  The bill is scheduled to be considered on Tuesday, April 22nd, under a motion to suspend the rules and pass the bill.

Summary:  H.R. 5613 would extend certain existing moratoria on the Centers for Medicare and Medicaid Services (CMS), prohibiting the agency from promulgating rules related to the integrity of the Medicaid program until April 1, 2009.  In particular, the bill would extend moratoria on proposed regulations placing restrictions on intergovernmental transfers and restricting payments for graduate medical education; the prohibitions were first enacted as part of last year’s supplemental wartime appropriation (P.L. 110-28) and are scheduled to expire on May 25, 2008.  The bill would also extend prohibitions on CMS regulations relating to rehabilitation services, as well as school-based administrative and transportation services; these prohibitions were first enacted in Medicare physician payment legislation (P.L. 110-173) last December, and are scheduled to expire on June 30, 2008.

In addition, H.R. 5613 would impose additional new moratoria on CMS relating to other proposed Medicaid regulations, also until April 2009.  Specifically, the bill would prohibit the Secretary of Health and Human Services from imposing additional restrictions with respect to targeted case management payments, the definition of outpatient hospital services, and Medicaid provider taxes (with certain exceptions).

The bill also appropriates an additional $25 million per year to CMS for the purposes of anti-fraud enforcement activity within the Medicaid program.

H.R. 5613 includes two reports to Congress on the proposed regulations.  By July 1, 2008, the Department of Health and Human Services (HHS) will report on its justification and authority for proposing the regulations.  The bill also includes $5 million in appropriations for HHS to hire an independent contractor to produce a report by March 1, 2009, on the proposed regulations and their impact on states.

H.R. 5613 also extends a web-based asset verification system to all 50 states, effective by the end of fiscal year 2013.  This provision would expand the Social Security Administration’s Supplemental Security Income (SSI) pilot program, giving states a new tool for verifying the assets of Medicaid recipients.  Currently, such a system only exists as a demonstration project in three states: California, New Jersey, and New York.

Additional Background on Changes Made in Committee:  During consideration in the Energy and Commerce Committee, Chairman Dingell and Ranking Member Joe Barton (R-TX) reached agreement on several modifications to the legislation.  The revised language incorporated at Subcommittee narrowed the scope of the proposed moratoria to permit CMS to engage in outreach activities with states.  Over the past several years, CMS has used various state-level audits to reach agreements with state Medicaid agencies to curtail abusive and/or questionable financing tactics.  The revised language in H.R. 5613 would permit CMS to continue these individual consent agreements with states, while maintaining the moratoria on CMS’ ability to enact regulations prohibiting these activities permanently.

In addition, the substitute language adopted in Committee included the additional $25 million per year in anti-fraud enforcement, as well as an independent study assessing the need for the regulations and their potential impact on states.  The Committee substitute also incorporated the web-based asset verification system to pay for the moratorium; the Administration had previously suggested that this program be extended as a savings mechanism to finance portions of the farm bill.

Additional Background on Proposed Regulations:  During the past year, the Centers for Medicare and Medicaid Services (CMS) has attempted to move forward on several proposed regulations addressing specific issues and service areas within the Medicaid program.  Many of these regulations respond to Government Accountability Office (GAO) studies and reports by the HHS Inspector General highlighting areas where the fiscal integrity of the Medicaid program needed improvement.  A brief summary of each rule that would be halted by H.R. 5613 follows:

Intergovernmental Transfers:  This rule would limit reimbursement for publicly-owned health providers to costs incurred, narrow the definition of unit of government, and require providers to retain all Medicaid payments, in order to restrain intergovernmental transfers designed primarily to maximize states’ federal Medicaid payments.  A final rule was issued on May 29, 2007; the moratorium currently in place expires on May 25, 2008.  The Congressional Budget Office (CBO) scores this regulation as saving $9.0 billion in federal outlays over five years, and $22.0 billion over a decade.

Graduate Medical Education:  This rule would eliminate Medicaid reimbursement for graduate medical education, on the grounds that reimbursements for medical training are outside the statutory scope of the Medicaid program.  A Notice of Proposed Rulemaking (NPRM) was issued on May 23, 2007; the current moratorium expires May 25, 2008.  Five year estimated savings are $0.8 billion, and ten year estimated savings are $1.9 billion.

School-Based Administrative and Transportation Services:  This rule would prohibit federal Medicaid payments for administrative activities performed by schools and transportation of children to and from school.  In some instances, school districts bill Medicaid for transporting students to and from school, even though this is an educational expense, not a reimbursable medical expense.  In addition, HHS audits found that schools were claiming capital and debt service as “administrative services” subject to Medicaid reimbursement.  The proposed rule would not alter the current policy of reimbursing schools for bona fide medical expenses incurred on school property, such as speech therapy.  A final rule was issued December 28, 2007; the current moratorium expires June 30, 2008.  Five year estimated savings are $4.2 billion, and ten year savings are estimated at $10.2 billion.

Rehabilitation Services:  This rule would restrict the scope of rehabilitation services subject to the federal Medicaid match and eliminate coverage of day habilitation services for individuals with developmental disabilities.  In many instances, CMS has found that states have billed therapeutic foster care as a “bundled” payment, resulting in federal payments for activities related to foster care as opposed to direct medical expenses.  In other cases, state plans for reimbursable expenses include recreational or social activities not directly related to rehabilitative goals.  An NPRM was issued on August 13, 2007; the current moratorium expires on June 30, 2008.  CBO scores this change as saving $1.4 billion over five years, and $3.5 billion over a decade.

Outpatient Hospital Services:  This rule would restrict the scope of Medicaid outpatient hospital services and clarify the upper payment classification for outpatient services to align more closely with the Medicare definition of outpatient services.  An NPRM was issued on September 28, 2007; no moratorium is currently in place.  Five year savings are estimated at $0.3 billion, and ten year savings are estimated at $0.7 billion.

Targeted Case Management:  This rule would restrict the scope of targeted case management services, and specify that Medicaid will not reimburse states for services where another third party is liable for payment.  In many cases, HHS audits have found a lack of documentation related to targeted case management claims, or state plans for reimbursement that fall outside the scope of the Medicaid program’s focus on medical services.  A final rule was issued December 4, 2007, subject to an implementation date of March 3, 2008.  The change would save an estimated $1.5 billion over five years, and $3.3 billion over ten.

Provider Taxes:  This rule would reduce the permissible level of Medicaid provider taxes, as included in the Tax Relief and Health Care Act of 2006 (P.L. 109-432), and would also clarify the hold harmless provision for provider taxes with respect to the positive correlation between the level of provider taxes imposed by states and direct or indirect Medicaid payments from states back to providers.  A final rule was issued February 22, 2008, subject to a compliance date of October 1, 2008.  Five and ten year savings are estimated at $0.6 billion.

In total, the proposed regulations are collectively projected to result in approximately $16-18 billion in savings to the federal government over the next five fiscal years, and more than $42 billion over a decade.[1]  By point of comparison, these savings would constitute just over 1% of total federal spending on Medicaid, which over the next five years is estimated to total more than $1.2 trillion.[2]

Additional Background on GAO Reports of Medicaid Abuses:  Since 1994, the Government Accountability Office (GAO) has compiled more than a dozen reports highlighting problems with Medicaid financing, and specifically the ways in which state governments attempt to “game” Medicaid reimbursement policies in order to maximize the amount of federal revenue funding state health care programs.  The persistent shortcomings in federal oversight of these state funding schemes prompted GAO to add the Medicaid program to its list of federal entities at high risk of mismanagement, waste, and abuse in 2003.

Several of the GAO reports discuss state reimbursement efforts for several of the services CMS proposes to change in its new regulations.  For instance, testimony in June 2005 analyzed the ways in which 34 states—up from 10 in 2002—employed contingency-fee consultants to maximize federal Medicaid payments.  The report found that from 2000-2004, Georgia obtained $1.5 billion in additional reimbursements, and Massachusetts $570 million.[3]  The report concluded that the states’ claims for targeted case management “appear to be inconsistent with current CMS policy” and claims for rehabilitation services “were inconsistent with federal law.”[4]

In other areas, GAO found potentially inappropriate behavior—higher reimbursements for school-based health and administrative services that were not fully passed on to the relevant school districts, and questionable administrative costs, such as a 100% claim on a Massachusetts state official’s salary as a Medicaid administrative cost, even though the official worked on unrelated projects for other states designed to increase their own Medicaid reimbursements.[5]

The GAO reports also demonstrate states’ use of intergovernmental transfers to maximize federal Medicaid reimbursements.  In these schemes, local-government health facilities transfer funds to the state Medicaid agency.  The Medicaid agency in turn transfers funds back to the local-government facility—but not before filing a claim with CMS to obtain federal reimbursement.  Although permissible under current law in many cases, GAO found that these schemes “are inconsistent with Medicaid’s federal-state partnership and fiscal integrity.”[6]

Many of the GAO reports over the past decade—whose titles are listed at the bottom of this bulletin—have included calls for additional federal oversight around various state Medicaid reimbursement initiatives, particularly the need for clear and consistently applied guidance from CMS about the permissiveness of various financing arrangements.[7]  Several of CMS’ proposed regulations attempt to remedy this problem, and restore clarity and fiscal integrity to the Medicaid program.

Additional Background on Medicaid Waste and Fraud: Although much of the debate surrounding the proposed CMS regulations has centered on the proper scope and limits of covered services within the Medicaid program, it is also worth noting the considerable amount of waste and criminal fraud present within some state Medicaid programs.  An extensive investigation published by The New York Times in July 2005 revealed several examples of highly questionable activity within the New York Medicaid program:

  • A Brooklyn dentist who billed Medicaid for performing 991 procedures in a single day;
  • One physician who wrote 12% of all the prescriptions purchased by New York Medicaid for an AIDS-related drug to treat wasting syndrome—allegedly so the steroid could be re-sold on the black market to bodybuilders;
  • Over $300 million—far more than any other state Medicaid program—in spending on transportation services, some of which involved rides for seniors mobile enough to rely on public transportation and other services which investigators believe may not have been performed at all; and
  • A school administrator in Buffalo who in a single day recommended that 4,434 students receive speech therapy funded by Medicaid—part of $1.2 billion in improper spending by the state on speech services, according to a federal audit.

A former state investigator of Medicaid abuse estimated that fraudulent claims totaled approximately 40% of all Medicaid spending in New York—nearly $18 billion per year, which may help explain why New York’s Medicaid expenditures greatly exceed California’s, despite a smaller overall population and fewer Medicaid beneficiaries.[8]

However, other audits emphasize that in some cases, providers can be victims of state efforts to reclaim additional federal Medicaid dollars.  A 2004 report from the Department of Health and Human Services’ Inspector General found that New York state required a nursing home to return more than half of its Medicaid revenues to the state, resulting in net revenues to the nursing home that were $20 million less than its operating costs.  The report noted:

The state’s upper-payment-limit funding approach benefited the state and the county more than the nursing home.  The state received $20 million more than it expended for the nursing home’s Medicaid residents without effectively contributing any money, and the county was reimbursed 100 percent for its upper-payment-limit contribution.  We are concerned that the federal government in effect provided almost all of the nursing home’s Medicaid funding, contrary to the principle that Medicaid is a shared responsibility of the federal and state governments.

The audit went on to note that the high level of Medicaid payments the nursing home was required to return to the state—and the operating losses the nursing home incurred on its Medicaid patients as a result—led to significant levels of understaffing that may have affected the quality of care provided to patients.[9]

Other HHS audits reflect Medicaid reimbursement submissions by states that either lack appropriate documentation for the claims or represent inappropriate use of Medicaid resources.  For example, one May 2003 claim for Medicaid targeted case management reimbursement included the following notation from the case manager explaining her contact with the beneficiary:

Phone call with mother.  Discussed the outstanding warrant for [name redacted].  She does not know where he is.  She will call police when he shows up.

While it may represent good public policy for this type of contact—which attempted to locate a juvenile for whom an outstanding arrest warrant existed—some conservatives would argue that such actions lie outside the scope of the Medicaid program’s intent and represent a far-from-ideal expenditure of federal matching dollars.

Committee Action:  On March 13, 2008, the bill was introduced and referred to the Energy and Commerce Committee.  On April 16, 2008, the full Energy and Commerce Committee reported the bill to the full House by a vote of 46-0.

Possible Conservative Concerns:  Numerous aspects of this legislation may raise concerns for conservatives, including, but not necessarily limited to, the following:

  • Process.  H.R. 5613 is being brought to the House floor under suspension of the rules, a procedure generally reserved for minor authorizations and smaller pieces of legislation, such as the naming of post offices.  Some conservatives may be concerned that a bill costing over a billion dollars is being rushed through House floor consideration under expedited procedures.
  • Budgetary Gimmick.  In order to comply with PAYGO rules, H.R. 5613 would impose a moratorium on CMS action until April 2009—and the legislation contains provisions offsetting the cost to the federal government for all savings not realized through that date.  However, staff for Energy and Commerce Committee Chairman Dingell have publicly stated that H.R. 5613 is intended to delay the implementation of the Medicaid rules just long enough so that a future Administration can withdraw them.  Because withdrawing the regulations would result in approximately $16-18 billion in lost savings to the federal government over five years, and because action taken by a future Administration would not be subject to PAYGO, some conservatives may believe that H.R. 5613’s sponsors intend to violate the spirit, if not the letter, of the PAYGO requirement under House rules.
  • Undermine Previous Republican Efforts to Reform Medicaid.  In December 2005, 212 Members of Congress—all Republicans—voted for legislation (P.L. 109-171) that generated less than $4.8 billion in savings from the Medicaid program as a first attempt to restore its fiscal integrity.  However, if the moratoria remain intact, those modest reductions in Medicaid’s growth rate would be more than exceeded by the $16-18 billion in foregone savings associated with the regulations’ repeal.
  • Encourage State Efforts to “Game” the Medicaid Program.  As highlighted above, nearly three dozen states have in recent years hired contingency fee consultants designed to maximize the portion of Medicaid costs paid for by the federal government.  Blocking regulations designed to respond to funding mechanisms which states and their consultants have established—and more than a dozen GAO reports over nearly 15 years have criticized—may only further encourage states to take steps that increase federal costs and  undermine Medicaid’s fiscal integrity.
  • Harm Hospitals and Other Providers.  As explained above, HHS Inspector General reports have revealed that various funding mechanisms designed to increase federal Medicaid revenues for states have often had the ancillary effect of reducing net payments to providers.  H.R. 5613, by blocking regulations designed to ensure that payments to Medicaid providers do not become ensnared in various schemes by states to increase federal Medicaid spending, may prevent some providers from seeing their net Medicaid payments rise when the proposed regulations take effect.

Administration Position:  Although the Statement of Administration Policy (SAP) was not available at press time, Health and Human Services Secretary Leavitt has previously written to Energy and Commerce Chairman Dingell and Ranking Member Barton indicating that the Administration strongly opposes H.R. 5613 and would recommend a Presidential veto.

Cost to Taxpayers:  A final score of the bill was not available at press time.  However, a preliminary CBO estimate indicated that H.R. 5613’s moratorium through April 2009 on the issuance of seven proposed regulations would cost taxpayers $1.65 billion over five and ten years.  However, as noted above, this score presumes the full implementation of the regulations in April 2009 under a new Administration.  Outright repeal of the regulations would cost $16.5 billion over five years—ten times the cost of H.R. 5613.

Additional mandatory spending—both $25 million annually for CMS anti-fraud enforcement activity with respect to Medicaid, and $5 million for an independent study on the proposed regulations—would cost $129 million over five years, and $254 million over ten.

H.R. 5613 would pay for this spending by extending an asset verification pilot program currently operating in three states to all 50 states, saving $1.0 billion over five years and $4.5 billion over ten.  The bill would also make adjustments to the Physician Assistance and Quality Improvement (PAQI) fund to comply with five-year PAYGO scoring rules, and deposit the additional savings over and above the ten-year cost of the moratoria.  Reports indicate that the $2.6 billion in additional ten-year savings will be withdrawn from the PAQI fund later this year to help finance Medicare physician reimbursement legislation.

Does the Bill Expand the Size and Scope of the Federal Government?:  Yes, the bill would prohibit CMS from taking administrative actions (which are already built into CBO’s budgetary baseline) to prevent states from expanding the scope of the Medicaid program.

Does the Bill Contain Any New State-Government, Local-Government, or Private-Sector Mandates?:  No.

Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax Benefits/Limited Tariff Benefits?:  A Committee report citing compliance with House earmark disclosure rules was unavailable at press time.

Constitutional Authority:  A Committee report citing constitutional authority was unavailable at press time.

 

[1] Because CMS proposals with respect to rehabilitation services (estimated savings of $1.4 billion over five years), graduate medical education ($0.8 billion estimated savings), and the definition of outpatient hospital services ($0.3 billion estimated savings) are at the proposed rulemaking stage, CBO assigns a baseline weighting factor of 50% to the proposed regulations, reflecting the uncertainties of the rulemaking process.  Thus, while CBO estimates a total of $17.8 billion in savings over five years if all rules were implemented as currently issued, a permanent prohibition on these seven rules would require $16.5 billion in savings under House PAYGO rules.

[2] Office of Management and Budget, Analytical Perspectives: Budget of the United States Government, Fiscal Year 2009, available online at http://www.whitehouse.gov/omb/budget/fy2009/pdf/spec.pdf (accessed April 1, 2008), p. 383.

[3] Government Accountability Office, “Medicaid Financing: States’ Use of Contingency Fee Consultants to Maximize Federal Reimbursements Highlights Need for Increased Federal Oversight,” (Washington, Report GAO-05-748, June 2005) available online at http://www.gao.gov/new.items/d05748.pdf (accessed March 31, 2008), p. 4.

[4] Ibid., p. 19.

[5] Ibid., pp. 27-29.

[6] Ibid., p. 24.

[7] See ibid., p. 30.

[8] Clifford Levy and Michael Luo, “Medicaid Fraud May Reach into Billions,” The New York Times 18 July 2005, available online at http://www.nytimes.com/2005/07/18/nyregion/18medicaid.html?_r=1&pagewanted=print&oref=slogin (accessed March 29, 2008).

[9] “Adequacy of Medicaid Payments to Albany County Nursing Home,” (Washington, DC, Department of Health and Human Services Office of the Inspector General Report #A-02-02-01020), available online at http://oig.hhs.gov/oas/reports/region2/20201020.pdf (accessed April 20, 2008), pp. 6-7.

Weekly Newsletter: April 21, 2008

Full House to Vote on Overriding Medicaid Fiscal Integrity Regulations

This Tuesday, the full House is scheduled to vote on legislation (H.R. 5613) that would impose moratoria on several proposed regulations issued by the Centers for Medicare and Medicaid Services (CMS) to restore fiscal integrity to the Medicaid program. The bill will be considered under suspension of the rules, which limits debate and requires a 2/3 vote for passage. Some conservatives may be concerned that a bill costing more than $1.5 billion is scheduled to be considered under such an expedited process normally reserved for naming of post offices and other smaller pieces of legislation.

In addition, some conservatives may remain concerned by congressional actions to block regulations that respond to more than a dozen Government Accountability Office (GAO) reports released since 1994 highlighting the various ways states have attempted to “game” the Medicaid program and increase the amount of federal matching funds received. The history of these abuses has prompted the Administration to threaten a veto of any measure attempting to block CMS’ attempts to restore the fiscal integrity of the Medicaid program.

Because HR 5613 only places a moratorium on further administrative action until April 2009, the stated cost of the legislation is $1.65 billion. However, some conservatives may be skeptical that Congress would ever let this moratorium be lifted, and thus may be concerned that passage of the legislation ultimately could result in the nullification of approximately $16-18 billion in proposed savings—which, though significant, will lower federal Medicaid spending by just over 1% over the next five years.

In December 2005, 212 Members of Congress—all Republicans—voted to reduce Medicaid spending by less than $4.8 billion as part of the Deficit Reduction Act. If these moratoria remain intact, some conservatives may be concerned that Congress will have more than undone the modest savings which a Republican-led Congress enacted over sharp Democrat protests.

RSC Policy Briefs on the federal-state Medicaid relationship can be found here and here.

Democrats Pass Restrictions on Health Savings Accounts

The full House last week passed legislation that would enact new restrictions on Health Savings Accounts (HSAs) as part of broader tax legislation (HR 5719). The legislation requires all HSA account holders to independently verify the qualified nature of medical expenses for all withdrawals, subjecting those transactions not substantiated to income taxes. This language prompted the White House to threaten a Presidential veto of the bill, which the Office of Management and Budget argued “would impose new administrative burdens on the trustees of HSAs…[that] could undermine efforts by employers, individuals, and insurers to reduce health care costs and improve health outcomes by empowering consumers to take greater control of health care decision-making.”

The bill passed by a 239-178 vote, but only after the Republican motion to recommit failed on a 210-210 tie. This vote on the motion to recommit was extended after the motion’s proponents had received a majority of votes cast after the allotted 15-minute vote time.

The outlook for action in the Senate is unclear, and the threat of a Presidential veto on these HSA restrictions looms as well. However, the RSC will continue to weigh in on the need to protect the important consumer-driven health programs which Republicans have succeeded in establishing in recent years.

An RSC Policy Brief discussing this issue can be found here.

Specialty Hospital Provisions Possible Farm Bill Offset

As conferees attempt to reach agreement on a farm bill reauthorization, some Democrats have introduced a potential new offset: Restrictions on physician-owned specialty hospitals. This particular offset has already been proposed twice by House Democrats to pay for expansions of the government’s role in health care—the first as part of legislation (HR 3162) placing millions of children on government-funded health insurance rolls, the second in legislation (HR 1424) that would increase health insurance premiums by forcing employers and insurance carriers to cover such mental health disorders as caffeine addiction and jet lag.

Some conservatives may be concerned that this provision—which, because it was included in neither the House nor Senate versions of farm bill legislation, is outside the scope of the conference—would undermine and stifle the innovative practices developed at physician-owned hospitals in order to pay for additional farm subsidies. Some conservatives may also be concerned that the Congressional Budget Office (CBO) scoring assumptions regarding these provisions remain in dispute, yet the Democrat majority is considering using “savings” that may or may not exist in order to finance additional government aid to the agricultural sector.

An RSC Policy Brief discussing specialty hospitals can be found here.

Article of Note: Free Health Care Isn’t Cheap

This week, Gov. Deval Patrick (D-MA) delivered the budgetary verdict on Massachusetts’ novel health reform act passed in 2006—and the statistics raised into question whether and how long the lauded Massachusetts experiment can be sustained. Only about half of the state’s estimated 600,000 uninsured have gained access to coverage since the Massachusetts law imposed an individual mandate to purchase health insurance. Moreover, many more individuals than expected claimed free or reduced-cost plans available through the state’s Commonwealth Care program, creating a $153 million budget gap for the program’s first year of operation—and aides admit that future years face similar funding difficulties.

Gov. Patrick has proposed a $1-per-pack increase in cigarette taxes in order to finance the shortfall created by rising enrollment in government-funded health insurance. This comes on the heels of reports that 748 employers have already been taxed a total of $6.6 million in “assessments” for failing to provide health insurance to their employees.

Some conservatives may not be surprised by the rising health care costs associated with Massachusetts’ plan, and may be concerned by the increasing reliance on additional taxes to finance the program. The state’s many benefit mandates and insurance regulations have consistently resulted in insurance premiums amongst the highest in the nation, and higher taxes on businesses and individuals will do nothing to control skyrocketing health care costs. Instead, many conservatives may support additional reforms to decrease costly regulations and reform the state’s health care market, reducing the growth of health care costs by empowering consumers to make wise choices about their health options.

Read the article here: “Universal Health Care to Cost Massachusetts More than Was Budgeted

Question and Answer: Health Savings Account Restrictions

On April 9, 2008, the House Ways and Means Committee passed legislation (H.R. 5719) with provisions placing additional restrictions on Health Savings Accounts (HSAs).  In anticipation of floor consideration of the measure, the RSC has prepared the following document providing context and background information on the proposal.

What change to Health Savings Accounts are Democrats proposing?

Section 17 of H.R. 5719 requires “substantiation” of all HSA transactions from an independent third party, to ensure that money withdrawn from an HSA pays for qualified medical expenses.  Specifically, the section would make the income tax deduction associated with HSA contributions contingent on substantiation of all withdrawals, beginning in 2011.  This oversight of every single account transaction would make HSAs similar to Flexible Spending Arrangements (FSAs), an earlier consumer-driven health care model.

How are FSAs and HSAs different?

One of the prime differences between the two account-based models lies in the control source for the funds in the account.  The Internal Revenue Code makes clear that FSA accounts are held by employers, while HSA funds remain exclusively the property of the employee.  This distinction explains why unused FSA funds in an employee’s account at the time of departure revert back to the employer, while HSA funds always remain with the employee, and remain portable from job to job and into retirement.  Some conservatives may be concerned about the potential implications of transferring a “substantiation” system designed for employer-owned FSAs to individually-owned HSAs—both in terms of the legal liabilities placed on employers and administrators to verify transactions, and the restrictions placed on individuals to control their HSA account dollars.

How are HSA and FSA withdrawals administered?

Right now, most HSA transactions take place using point-of-sale debit cards that make electronic fund transfers directly from the account.  Conversely, most FSA transactions remain paper-based, requiring out-of-pocket spending by the individual and subsequent reimbursement from the FSA after approval by an administrator.  While Treasury has released new regulations to make FSA reimbursement simpler, some conservatives may remain concerned that the Democrats’ proposed change may make the HSA model less attractive to consumers.

What penalties are currently in place to ensure HSA funds are spent on qualified medical expenses?

Under the Internal Revenue Code, non-qualified withdrawals from an HSA are subject to individual income taxes, as well as a 10% penalty.  HSA account activity is subject to audits from the Internal Revenue Service, and account holders are advised to retain their receipts documenting qualified medical expenses in the event of an audit.

What measures do HSA administrators currently have in place to ensure that withdrawals from the account are made for qualified medical expenses?

Right now, some banks that administer HSAs have electronic debit cards that can “read” the merchant code where the transaction is taking place (e.g. a doctor’s office).  If a request for transaction is occurring at a location not normally associated with qualified medical expenses, the debit card can decline the transaction.  Some administrators have developed more advanced technology to differentiate product codes within a merchant’s offerings—for instance, accepting grocery store transactions for cough syrup (a permissible over-the-counter drug) while rejecting attempts to purchase items within the same store for items without a clear medical use, such as beer or wine.  This advanced technology is in the process of being rolled out; however, many banks and account administrators have expressed their view that enactment of this legislative provision could prompt their withdrawal from the HSA marketplace.

Does the fact that some HSA withdrawals are made at places like grocery stores mean that these withdrawals are not for qualified medical expenses?

Not necessarily.  The list of qualified medical expenses is quite broad, and generally includes most items reimbursable from a Flexible Spending Arrangement or deductible on an individual tax return if total medical expenses exceed 7.5% of an individual’s adjusted gross income.  Under certain circumstances, legal expenses (to authorize mental health care), lodging and travel expenses (related to medical treatment) and even the cost of a telephone (for the hearing impaired) can be considered medical expenses.  Some conservatives may be concerned that the proposal under consideration would essentially shift the burden of proof from the government (to prove that an expenditure was improper in the context of a tax audit) to the consumer to prove compliance at the time of withdrawal, causing additional inconvenience to the HSA holder.

Are withdrawals made for causes other than qualified medical expenses unlawful?

Only if the account holder does not pay income taxes and a 10% penalty.  Under current law, it is the account holder’s obligation to declare such non-qualified withdrawals—a policy comparable to withdrawals from an Individual Retirement Account (IRA).  Account holders who do not pay appropriate taxes and penalties on withdrawals not for qualified medical expenses are subject to an Internal Revenue Service audit.

How many HSA withdrawals are unlawful?

The percentage is unclear for two reasons.  First, estimates of the amount of withdrawals made that do not involve qualified medical expenses vary.  While one HSA administrator claimed that 12% of withdrawals were made at vendors not normally associated with qualified medical expenses, HSA administrators affiliated with the American Bankers Association claim that only 2.7% of their withdrawals took place at such vendors—and, for the reasons explained above, the fact that a vendor is not a qualified health provider does not mean that a transaction itself is not a qualified medical expense.  A 2006 Government Accountability Office (GAO) study on HSA usage found that 10% of all withdrawals were made for purposes other than qualified medical expenses; however, GAO had only a single year (2004) of HSA withdrawal data available at the time it compiled its report.

What remains largely unknown is the percentage of transactions not associated with qualified medical expenses for which the account holder does not pay appropriate taxes and penalties.  At the Ways and Means markup, Treasury Department officials presented preliminary data indicating a relatively high rate of compliance with respect to self-attestation of non-qualified withdrawals, which if proven accurate would obviate the need for the legislative change.  Even as the Ways and Means Committee passed the substantiation language, both Democrats and Republicans decried the lack of available evidence to judge the need for this particular provision.

How does this provision save money for the federal government?

The Joint Committee on Taxation notes that Section 17 of H.R. 5719 would save $151 million over five years and $308 million over ten years.  However, the cause for this savings is unclear.  During the Ways and Means markup, Joint Tax staff admitted their inability to determine how much of the savings would result from newly captured penalties and taxes and how much of the savings would come from lower HSA take-up rates and/or lower contribution levels to HSAs.  Some conservatives may be concerned that it remains unclear whether this provision would achieve its stated purpose by increasing oversight of questionable HSA withdrawals—or will instead achieve budgetary savings by making HSAs less attractive to consumers.

Employers contribute money to their employees’ HSAs.  Shouldn’t they have a right to know that their contributions are being spent for medical purposes?

Unlike FSAs, which are considered as being held by the employer, an HSA is considered the employee’s property, and any cash contributions immediately accrue to the worker.  Thus an employer has no more or less right to know the employer’s contributions are spent on qualified medical expenses than a business has a right to determine that the employer’s share of 401(k) contributions is ultimately spent on retirement expenses.  In both cases, the penalties for a non-qualified distribution are the same—income taxes owed, plus a 10% penalty.

In an advisory opinion on the status of HSAs, the Department of Labor (DOL) held that an employer’s transfer of cash contributions into an employee’s HSA does not constitute group coverage under the Employee Retirement Income Security Act of 1974 (ERISA) because of the employer’s inability to control the funds in the employee’s account.  Many small businesses—who have heretofore not been able to finance health insurance coverage for their workers—have used the flexibility provided by the DOL opinion to place cash contributions into their employees’ HSAs without triggering the regulatory burdens imposed on ERISA group health insurance plans, benefiting both the business and the worker.

What may be the practical implications of this proposed change to HSAs?

In addition to increased inconvenience for end users, introducing a new step of independent “substantiation” may well increase costs for banks and account administrators, who are likely to pass these costs on to employers and/or consumers.  While Democrats have complained in recent months about the charges which banks and other commercial lending institutions pass on to their customers, this provision carries a strong likelihood of increasing those costs further.  In addition, some conservatives may also be concerned that should this proposal pass, an HSA mechanism created to reduce the growth of health care costs—and which has achieved some noteworthy successes in the time since its introduction—would lead to increased costs for businesses and individuals.

What organizations oppose this proposed change to HSAs?

Although some members of the business community support other provisions included in H.R. 5719, many organizations have expressed concern about the substantiation requirements—including the company (Evolution Benefits) that first brought the issue to the Committee’s attention.  A partial list of organizations opposing the HSA substantiation provision includes:

  • America’s Health Insurance Plans
  • Business Roundtable
  • Credit Union National Association
  • Financial Services Roundtable
  • HSA Council (part of American Bankers Association)
  • International Franchise Association
  • National Association of Health Underwriters
  • National Association of Manufacturers
  • National Federation of Independent Business
  • National Restaurant Association
  • National Retail Federation
  • National Taxpayers Union
  • U.S. Chamber of Commerce

Weekly Newsletter: April 14, 2008

Floor Vote Impending for Restrictions on Health Savings Accounts

The House Ways and Means Committee last week reported legislation that would enact new restrictions on Health Savings Accounts (HSAs) as part of tax legislation (HR 5719) anticipated on the floor this week. The legislative proposal would require all HSA account holders to independently verifiy the qualified nature of medical expenses for all withdrawals, subjecting those transactions not substantiated to income taxes. This language is a significant departure from an earlier draft proposal, which imposed an annual reporting requirement on beneficiaries to list their total substantiated and unsubstantiated HSA withdrawal amounts—but left enforcement in the hands of the Internal Revenue Service.

At the Ways and Means markup, Republicans and Democrats alike noted the scarcity of available data documenting whether and to what extent HSA holders are making non-qualified withdrawals without paying appropriate income taxes and penalties. In addition to the hurried process that saw the provision added to legislation without thorough vetting and/or committee hearings, some conservatives may be concerned by the Joint Committee on Taxation’s inability to determine what portion of the $308 million in purported “savings” from this provision stems from newly captured taxes and penalties and what portion of reduced tax expenditures comes from lower HSA take-up rates and contribution levels. In other words, it is unclear whether this provision will be effective in increasing oversight of questionable HSA expenditures—Democrats’ stated intent in passing this provision—or instead generate budgetary savings by making HSAs less attractive to consumers.

Some conservatives may be concerned that this proposal represents the first of perhaps many attempts by the Democrat majority to enact burdensome and bureaucratic regulations undermining HSAs, which in a few short years have proven successful at slowing the growth of health costs and insurance premiums for millions of individuals and small businesses. Some conservatives may also be concerned that the many banks and financial organizations who have expressed concerns about their ability to implement the substantiation requirements could end up increasing administrative costs for end users—or exiting the HSA marketplace entirely.

During floor debate, the RSC will weigh in to protect the important consumer-driven health programs which Republicans have succeeded in establishing in recent years.

An RSC Policy Brief discussing this issue is available here.

House Committee Marks Up Bill Overriding Medicaid Fiscal Integrity Regulations

On Wednesday, the House Energy and Commerce Committee held a subcommittee markup on legislation (H.R. 5613) that would impose moratoria on several proposed regulations issued by the Centers for Medicare and Medicaid Services (CMS) to restore fiscal integrity to the Medicaid program. The bill was passed by voice vote, after Members adopted substitute language that would narrow the scope of the moratoria to permit CMS to continue to negotiate agreements with states on issues related to the proposed rules.

Despite the narrowing of the proposed moratoria, some conservatives may remain concerned by congressional actions to block regulations that respond to more than a dozen Government Accountability Office (GAO) reports released since 1994 highlighting the various ways states have attempted to “game” the Medicaid program and increase the amount of federal matching funds received. Some conservatives also may be concerned that the moratoria on further regulatory action until April 2009 would transfer this issue to a new Administration, which could withdraw these proposed regulations to curb wasteful and abusive spending—and which will lower federal Medicaid spending by only 1% over the next five years.

Congressional Democrats have indicated their desire to include the moratoria provisions as part of the wartime supplemental appropriations measure. In addition, news reports have surfaced suggesting that a temporary increase in the federal Medicaid matching rate could be included in a second “stimulus” package, which could also be attached to the defense supplemental. Some conservatives may consider this proposed increase in federal matching funds a “bailout” to states who failed to incorporate into their long-term budgets the possibility of an economic downturn and its impact on state revenues.

Rather than attempting to enact measures that attempt to replace state funding with additional federal spending, some conservatives may believe that Congress should instead embrace the opportunity presented by this discussion to advance concepts for more comprehensive reform of Medicaid program financing, to control health care costs and set clear fiscal priorities for the use of scarce federal dollars.

RSC Policy Briefs on the federal-state Medicaid relationship can be found here and here.

Article of Note: “Is There a Doctor in the House?”

Last Sunday, a column in The Washington Post highlighted one of the key problems with government-funded health insurance—lack of access to care. The column cited a survey by the Medicare Payment Advisory Commission (MedPAC), noting that 29% of Medicare beneficiaries reported difficulty in searching for a new primary-care physician. Due to government-imposed price controls on physician reimbursement levels, many doctors have chosen not to accept additional Medicare-paying patients.

As Congress considers legislative actions connected with a 10.1% cut in physician reimbursements scheduled to take effect on July 1, some conservatives may believe that the access difficulties encountered by millions of American seniors—and the Medicare trustees’ recent funding warning noting that the Hospital Insurance Trust Fund will be exhausted in just over a decade—warrant a more comprehensive and lasting reform to entitlements. Converting Medicare into a system similar to the Federal Employees Health Benefit Plan (FEHBP), where beneficiaries receive a defined contribution from Medicare to purchase a health plan of their choosing, would ensure that all beneficiaries would have access to broad choices of insurance plans and physicians—rather than a government-controlled plan where rationed payments limit access to care. Just as important, by harnessing the benefits of competition, such a reform can slow the growth of health care spending, preserving Medicare for future generations.

Read the article here: “On Medicare and Scorned by the Docs” – The Washington Post

Weekly Newsletter: April 7, 2008

Democrats Plot Restrictions on Health Savings Accounts

Reports surfaced this week that the Democratic majority may be attempting to enact new restrictions on Health Savings Accounts (HSAs) as part of upcoming health legislation. The proposal being discussed would require that all HSA account holders submit information showing what portion of their HSA expenditures in a given year have been independently verified as constituting qualified medical expenses.

Available data suggest that the percentage of HSA funds being used for non-medical expenses is comparatively low—particularly upon close examination. For instance, purchases in a grocery store may at first blush appear irrelevant to HSA use—but in reality many of these transactions could involve permissible medical items (over-the-counter pharmaceuticals, prescriptions, medical supplies, etc.). And in those instances when individuals do use their HSA funds to make major non-health expenditures, the Internal Revenue Service has audit procedures in place to ensure that account-holders pay income taxes on non-qualified distributions—plus a 10% penalty to discourage such behavior.

When drafting the regulations implementing Health Savings Accounts in 2004, the Treasury Department attempted to create a framework that would ensure that HSA funds would be used for bona fide medical expenses, while avoiding burdensome regulations that would inhibit the growth of this innovative consumer-driven health product. The proposal under discussion places an additional burden on account holders to document their purchases—even the $3 bottle of cough syrup an individual might choose to buy at a grocery store like Safeway rather than at a CVS or other pharmacy—and may have a similarly chilling effect on insurance carriers and banks currently offering account-based products to individuals and employers.

Some conservatives may be concerned that this proposal represents the first of many impending attempts by the Democrat majority to enact burdensome and bureaucratic regulations undermining HSAs, which in a few short years have proven successful at slowing the growth of health costs and insurance premiums for millions of individuals and small businesses. Some conservatives may also be concerned that this particular provision, brought to the attention of the Democratic Ways and Means Committee staff by a former Republican staffer-turned-lobbyist, may constitute a legislative “earmark” drafted specifically to benefit one company (Evolution Benefits) seeking to market its substantiation technology to HSA administrators.

The attached policy brief explains the issue in further detail. The RSC will continue to monitor this or any similar attempts to enact burdensome restrictions on HSAs, and will weigh in to protect the important consumer-driven health programs which Republicans have succeeded in establishing in recent years.

House Committee Attempts to Override Medicaid Regulations Restoring Fiscal Integrity…

This past Thursday, the House Energy and Commerce Committee held a Subcommittee hearing on legislation (H.R. 5613) that would impose moratoria on several proposed regulations issued by the Centers for Medicare and Medicaid Services (CMS) to restore fiscal integrity to the Medicaid program. The regulations come as a response to more than a dozen Government Accountability Office (GAO) reports released since 1994 highlighting the various ways states have attempted to “game” the Medicaid program, reducing their share of program spending through various mechanisms designed primarily to increase the amount of federal matching funds received. The Energy and Commerce Committee may mark up legislation overriding the regulations as soon as this week.

While several state officials testified about the impact that the proposed regulations would have on their Medicaid programs in the current economic downturn, many conservatives may be concerned about the ways in which various questionable financing schemes—some of which have been used by states for more than a decade—have left Medicaid paying for non-health-related activities, such as trips to grocery stores and bingo games. With the proposed regulations reducing the federal share of Medicaid spending by only 1% over the next five years, some conservatives may have concerns should Congress attempt to override CMS’ modest attempts to restore fiscal integrity to Medicaid. However, some conservatives may embrace the opportunity presented by this discussion to advance concepts for more comprehensive reform of Medicaid program financing, to control health care costs and set clear fiscal priorities for the use of scarce federal dollars.

RSC Policy Briefs on the federal-state Medicaid relationship can be found here and here.

…While Marking Up New Regulations on Tobacco

Thursday’s hearing in the Health Subcommittee followed Wednesday’s full Energy and Commerce Committee markup of legislation (H.R. 1108) that would impose authority on the Food and Drug Administration (FDA) to regulate tobacco. While the bill as modified in Committee altered proposed “user fee” language, some conservatives may remain concerned that the bill would impose additional free speech and marketing restrictions on tobacco companies, and could increase black market activity of tobacco products. Some conservatives may also echo the statements of FDA Commissioner Andrew von Eschenbach, who has stated that tobacco regulation is not in line with FDA’s core mission—and question why Congressional Democrats who have criticized the FDA’s handling of various matters related to food and drug safety now consider the agency competent to regulate tobacco products.

The RSC will be monitoring this legislation as it makes its way to the House floor, and will be weighing in during the process to express conservatives’ concerns.

Interview of Note: “Crisis? What Crisis?”

This past week, Chairman of the House Ways and Means Health Subcommittee Pete Stark (D-CA) appeared on C-SPAN’s Washington Journal to discuss the Medicare trustees’ report released during the congressional recess. When asked about the impact of the trustees’ projection that the Medicare Hospital Insurance Trust Fund would become insolvent in 2019—just over one decade from now—Stark answered: “I don’t think it makes any difference what they say.” This followed on the heels of his statement at Tuesday’s Health Subcommittee hearing that “Medicare is not in crisis.”

Many conservatives may be concerned by Chairman Stark’s insouciance at a time when the federal government faces spiraling costs for Medicaid, Medicare, and Social Security that both the Medicare trustees and most independent observers agree are unsustainable. Many conservatives believe that the time has long since arrived for the federal government to place its own fiscal house in order, because, as countless homeowners have observed in recent months, further delay will do nothing to prevent the problem—and will only make the ultimate solution harder on all parties.

Medicaid and the States

Executive Summary:  The Centers for Medicare and Medicaid Services (CMS) has issued several proposed regulations concerning various issues relating to federal reimbursement of certain Medicaid services.  Although the proposed regulations address state financing arrangements that government reports have questioned for decades, the Democratic Congress passed moratoria prohibiting CMS from issuing final regulations.  Many conservatives may be wary of any further legislative efforts to override the proposed regulations—or to provide a temporary increase in the federal Medicaid match in an economic “stimulus” bill—as encouraging states to engage in questionable funding schemes and poor financial planning, resulting in significantly higher outlays for the federal government.

Background:  The Medicaid program, enacted in 1965, serves as a federal-state partnership providing entitlement health care coverage to certain low-income and disabled populations.  Federal funding for the program is provided on a matching basis, according to a Federal Medical Assistance Percentage (FMAP) formula established in statute.

Because of the nature of the federal match, states have for some time created mechanisms designed to maximize the federal share of spending on Medicaid services.  In 1991, Congress passed legislation (P.L. 102-234) designed to restrict Medicaid provider taxes, as states were collecting funds from providers, then rebating those funds back to the providers once the states had utilized the taxes collected to capture additional federal matching funds.  The 1991 provisions were designed to avoid provider-specific taxes, and included “hold harmless” mechanisms guaranteeing that providers would receive all their money back after it was used by the state to recoup additional federal funds; however, broad-based provider taxes remained permissible, and states soon developed other ways to maximize federal Medicaid spending.

Proposed Regulations:  During the past year, the Centers for Medicare and Medicaid Services (CMS) has attempted to move forward on several proposed regulations addressing specific issues and service areas within the Medicaid program.  Specifically, the various proposed rules would:

  • Limit reimbursement for publicly-owned health providers to costs incurred, narrow the definition of unit of government, and require providers to retain all Medicaid payments, in order to restrain intergovernmental transfers designed primarily to maximize states’ federal Medicaid payments;
  • Eliminate Medicaid reimbursement for graduate medical education;
  • Restrict the scope of rehabilitation services subject to the federal Medicaid match and eliminate coverage of day habilitation services for individuals with developmental disabilities;
  • Prohibit federal Medicaid payments for administrative activities performed by schools and transportation of children to and from school;
  • Restrict the scope of Medicaid outpatient hospital services and clarify the upper payment classification for outpatient services; and
  • Restrict the scope of targeted case management services, and specify that Medicaid will not reimburse states for services where another third party is liable for payment.

The proposed regulations were issued at various times between May and December 2007, and are collectively projected to result in at least $12.1 billion in savings to the federal government over the next five fiscal years.[1]  By point of comparison, these savings would constitute approximately 1% of total federal spending on Medicaid, which over the next five years is estimated to total $1.2 trillion.[2]

In addition, in February 2008, CMS issued proposed regulations altering current regulations on provider taxes; this rule, proposed as a result of legislative changes enacted in the Tax Relief and Health Care Act of 2006 (P.L. 109-432) and the Deficit Reduction Act of 2005 (P.L. 109-173), would reduce the maximum provider tax under the federal “safe harbor” from 6% to 5.5% and make other related changes, saving an estimated $400-600 million over five years.[3]

Recent Legislative Developments:  In response to several of the Medicaid payment rules proposed last year, Congress has taken action to block CMS from issuing final regulations.  Section 7002(a)(1) of the 2007 wartime supplemental appropriations bill (P.L. 110-28) prohibited promulgation of regulations related to cost limits for providers and graduate medical education (GME) for one year—until May 25, 2008.  In addition, Medicare physician payment legislation passed last December (P.L. 110-173) included prohibitions on promulgation of regulations addressing rehabilitation and school-based transportation services until June 30, 2008.

On March 13, 2008, House Energy and Commerce Committee Chairman John Dingell (D-MI) and Rep. Tim Murphy (R-PA) introduced H.R. 5613, Protecting the Medicaid Safety Net Act.  The legislation would extend until April 1, 2009, the existing moratoria on CMS’ issuance of the Medicaid regulations discussed above, and would further impose moratoria on issuance of  proposed rules addressing case management, re-defining hospital outpatient services, and allowable provider taxes.  An Energy and Commerce hearing on the legislation is scheduled for April 3, 2007, and further legislative action is possible, either as a stand-alone measure or as part of Medicare physician reimbursement legislation.

In addition, House Energy and Commerce Health Subcommittee Chairman Frank Pallone (D-NJ) has introduced H.R. 5268, which would provide a temporary increase in federal Medicaid matching funds to states under the FMAP formula for five fiscal quarters, through October 2009.  Similar proposals were circulated early this year as part of the debate surrounding the “stimulus” bill; while the National Governors Association and state Medicaid directors expressed strong support for these provisions, they were not included in the final legislation.  However, it is possible but not certain that such measures regarding FMAP could be attached to either the wartime supplemental appropriations legislation or a possible second “stimulus” package being discussed by the Democratic leadership.

GAO Analysis:  Since 1994, the Government Accountability Office (GAO) has compiled more than a dozen reports highlighting problems with Medicaid financing, and specifically the ways in which state governments attempt to “game” Medicaid reimbursement policies in order to maximize the amount of federal revenue funding state health care programs.  The persistent shortcomings in federal oversight of these state funding schemes prompted GAO to add the Medicaid program to its list of federal entities at high risk of mismanagement, waste, and abuse in 2003.

Several of the GAO reports discuss state reimbursement efforts for several of the services CMS proposes to change in its new regulations.  For instance, testimony in June 2005 analyzed the ways in which 34 states—up from 10 in 2002—employed contingency-fee consultants to maximize federal Medicaid payments.  The report found that from 2000-2004, Georgia obtained $1.5 billion in additional reimbursements, and Massachusetts $570 million.[4]  The report concluded that the states’ claims for targeted case management “appear to be inconsistent with current CMS policy” and claims for rehabilitation services “were inconsistent with federal law.”[5]

In other areas, GAO found potentially inappropriate behavior—higher reimbursements for school-based health and administrative services that were not fully passed on to the relevant school districts, and questionable administrative costs, such as a 100% claim on a Massachusetts state official’s salary as a Medicaid administrative cost, even though the official worked on unrelated projects for other states designed to increase their own Medicaid reimbursements.[6]

The GAO reports also demonstrate states’ use of intergovernmental transfers to maximize federal Medicaid reimbursements.  In these schemes, local-government health facilities transfer funds to the state Medicaid agency.  The Medicaid agency in turn transfers funds back to the local-government facility—but not before filing a claim with CMS to obtain federal reimbursement.  Although permissible under current law in many cases, GAO found that these schemes “are inconsistent with Medicaid’s federal-state partnership and fiscal integrity.”[7]

Many of the GAO reports over the past decade—whose titles are listed at the bottom of this brief—have included calls for additional federal oversight around various state Medicaid reimbursement initiatives, particularly the need for clear and consistently applied guidance from CMS about the permissiveness of various financing arrangements.[8]  Several of CMS’ proposed regulations attempt to remedy this problem, and restore clarity and fiscal integrity to the Medicaid program.

Reports of Medicaid Waste and Fraud:  Although much of the debate surrounding the proposed CMS regulations has centered on the proper scope and limits of covered services within the Medicaid program, it is also worth noting the considerable amount of waste and criminal fraud present within some state Medicaid programs.  An extensive investigation published by The New York Times in July 2005 revealed several examples of highly questionable activity within the New York Medicaid program:

  • A Brooklyn dentist who billed Medicaid for performing 991 procedures in a single day;
  • One physician who wrote 12% of all the prescriptions purchased by New York Medicaid for an AIDS-related drug to treat wasting syndrome—allegedly so the steroid could be re-sold on the black market to bodybuilders;
  • Over $300 million—far more than any other state Medicaid program—in spending on transportation services, some of which involved rides for seniors mobile enough to rely on public transportation and other services which investigators believe may not have been performed at all; and
  • A school administrator in Buffalo who in a single day recommended that 4,434 students receive speech therapy funded by Medicaid—part of $1.2 billion in improper spending by the state on speech services, according to a federal audit.

A former state investigator of Medicaid abuse estimated that fraudulent claims totaled approximately 40% of all Medicaid spending in New York—nearly $18 billion per year, which may help explain why New York’s Medicaid expenditures greatly exceed California’s, despite a smaller overall population and fewer Medicaid beneficiaries.[9]

Likewise, reports from the Department of Health and Human Services’ Inspector General reflect Medicaid reimbursement submissions by states that either lack appropriate documentation for the claims or represent inappropriate use of Medicaid resources.  For example, one May 2003 claim for Medicaid targeted case management reimbursement included the following notation from the case manager explaining her contact with the beneficiary:

Phone call with mother.  Discussed the outstanding warrant for [name redacted].  She does not know where he is.  She will call police when he shows up.

While it may represent good public policy for this type of contact—which attempted to locate a juvenile for whom an outstanding arrest warrant existed—some conservatives would argue that such actions lie outside the scope of the Medicaid program’s intent and represent a far-from-ideal expenditure of federal matching dollars.

Conservative Concerns:  Given the many GAO reports highlighting problems with state Medicaid financing schemes, and the disturbing reports of fraud and graft within many Medicaid programs, some conservatives may be troubled by potential legislative action to override CMS’ modest attempts at limiting questionable behavior by state Medicaid agencies.  Likewise, a potential increase in the Medicaid FMAP formula might be viewed by some conservatives as a “bailout” for states which over-extended entitlement promises over the last few years—and which have failed to implement strong anti-fraud programs to ensure that Medicaid funds are spent wisely.  Some conservatives may argue that states wishing to reverse CMS’ proposed rules, or to seek an “emergency” FMAP increase from the federal government, should first ensure that their own fiscal houses are in order with respect to Medicaid waste, fraud, and abuse.

Although many state governors and Medicaid directors have pointed to the recent economic slowdown as putting a particular squeeze on their budgets, a recent study by researchers at the Urban Institute found that revenue loss generates a measurably larger impact on state budgets than enrollment increases in Medicaid and related public health programs.[10]  Because potential state deficits during economic downturns therefore stem largely from failed revenue models rather than greater public reliance on Medicaid and related programs, some conservatives may question whether the tactic of relying upon the federal government for backstop assistance will have the twin negative effects of increasing federal spending and debt while encouraging “moral hazard” among states with flawed budgetary models.

However, the discussion of Medicaid funding levels does provide conservatives with an opportunity to raise the important issue of entitlement reform.  One possible solution would see Medicaid converted into a block grant program, allowing for predictable payments to states, ending state distortionary schemes designed to win additional federal dollars, and enabling Congress to engage in a more rational attempt to control health care costs while setting clear national fiscal priorities.  At a minimum, some conservatives may support efforts to convert those portions of Medicaid not directly related to essential medical services into a discretionary spending program, which would re-focus Medicaid on its original mission of providing health care for low-income individuals, while allowing services tangential to that mission to compete with other federal programs for scarce funding dollars.

 

[1] Kaiser Commission on Medicaid and the Uninsured, “Medicaid: Overview and Impact of New Regulations,” (Washington, DC, Report 7739, January 2008), available online at http://kff.org/medicaid/upload/7739.pdf (accessed March 31, 2008), p. 2.

[2] Office of Management and Budget, Analytical Perspectives: Budget of the United States Government, Fiscal Year 2009, available online at http://www.whitehouse.gov/omb/budget/fy2009/pdf/spec.pdf (accessed April 1, 2008), p. 383.

[3] Jean Hearne, “Medicaid Provider Taxes,” CRS Report RS22843, March 21, 2008, pp. 4-6.

[4] Government Accountability Office, “Medicaid Financing: States’ Use of Contingency Fee Consultants to Maximize Federal Reimbursements Highlights Need for Increased Federal Oversight,” (Washington, Report GAO-05-748, June 2005) available online at http://www.gao.gov/new.items/d05748.pdf (accessed March 31, 2008), p. 4.

[5] Ibid., p. 19.

[6] Ibid., pp. 27-29.

[7] Ibid., p. 24.

[8] See ibid., p. 30.

[9] Clifford Levy and Michael Luo, “Medicaid Fraud May Reach into Billions,” The New York Times 18 July 2005, available online at http://www.nytimes.com/2005/07/18/nyregion/18medicaid.html?_r=1&pagewanted=print&oref=slogin (accessed March 29, 2008).

[10] John Holahan, Stan Dorn, et al., “Medicaid, SCHIP, and Economic Downturn: Policy Challenges and Policy Responses,” (Washington, DC, Alliance for Health Reform briefing on Health Care and the Economic Slowdown, February 15, 2008), available online at http://www.allhealth.org/briefingmaterials/MedicaidSCHIPeconomicdownturn_2-14-2008-1079.ppt (accessed March 29, 2008).

Weekly Newsletter: March 31, 2008

Medicare Trustees’ Report Highlights Program’s Fiscal Woes…

While Congress was in recess last week, the trustees of the Medicare Trust Funds released their annual report, which quantified the size of the fiscal obstacles facing the entitlement program. According to the trustees, the Hospital Insurance Trust Fund is scheduled to be exhausted in early 2019—just over one decade from now. In addition, the trustees for the third straight year projected that Medicare is scheduled to consume a growing share of general federal revenues, “triggering” another funding warning that requires the next President to submit legislation to Congress with his (or her) budget remedying Medicare’s funding.

Of particular note in the report was the fact that while projections of future spending on hospitals (Medicare Part A) remained constant, and future estimates of physician payment levels (Medicare Part B) increased, estimated future costs for the Medicare Part D prescription drug benefit provided by private insurance companies decreased. As health costs continue to rise both inside and outside the Medicare program, some conservatives may believe that the benefits of competition and consumer empowerment seen in Part D could yield measurable savings if extended to the other parts of Medicare.

Here are RSC Policy Briefs on the Medicare trustees’ report and on health care cost growth. More information on the Medicare trigger—and the President’s proposals for reform—can be found here.

…While Democrats Minimize Need for Entitlement Reform

The trustees’ report also notes that in the past twelve months, the anticipated size of Medicare’s unfunded obligations has grown from $74 trillion to nearly $86 trillion. As Joe Antos of the American Enterprise Institute noted at an AEI briefing last week, the one-year increase in Medicare’s unfunded obligations is itself nearly ten times the size of the total losses anticipated from the losses in sub-prime lending markets.

Estimates of $1.2 trillion in worldwide losses due to the current credit crunch, less than half of which will hit American institutions, have sparked numerous “relief” proposals from the Democrat majority. Yet when it comes to the $86 trillion in losses on the horizon for Medicare, Democrats like Rep. Pete Stark (D-CA)—Chair of the House Ways and Means Health Subcommittee, with prime jurisdiction over entitlement reform—refrained from demands for swift action, calling Medicare “solvent and sustainable” and claiming that “the trigger has been pulled by Republican ideologues,” when in reality the report was written by the non-partisan actuaries at the Centers for Medicare and Medicaid Services.

By contrast, many conservatives believe that the ominous statistics in the trustees’ report provide further impetus for Congress to utilize the Medicare “trigger” to enact comprehensive entitlement reform this year. Every year that Congress does not address the unfunded obligations associated with Social Security and Medicare, their size grows by trillions of dollars. Some conservatives would argue that with the Hospital Insurance Trust Fund scheduled to be exhausted in just over a decade, Congress must act now to preserve the promise of Medicare for the neediest of American seniors.

Clinton Proposes Cap on Insurance Premiums, Additional Taxes

In an interview with the New York Times last week, Sen. Hillary Clinton offered additional details about the formulation of her health care plan. Clinton expressed a desire to cap insurance premiums for individuals at between 5-10% of individuals’ income. She also indicated her support for restrictions requiring health insurance companies to pay out a defined percentage of premium costs on health benefits (as opposed to administrative costs or profits). And she advocated an increase in the tobacco tax to finance health care reform, despite the dwindling base of smokers left to pay such taxes: “At some point, there’s going to be diminishing returns. But, sure, why not? I don’t have any objection to that.”

However, some conservatives may have objections to the Clinton approach, starting with a tobacco tax that may encourage counterfeiting and result in a long-term fiscal imbalance leading to more taxes once tobacco revenues dwindle. Both capping premiums on individuals and mandating that insurers pay a high percentage of premiums in health benefits would constitute significant government price controls on an industry that spends more than one in six dollars consumed in the United States. And some conservatives may share the concerns of MIT professor Jonathan Gruber, who generally supports Clinton’s approach but conceded that a cap on insurance premiums at 5% of income would not be “realistic” because of the heavy government subsidies necessary to finance the difference.

Instead of a heavy-handed approach that relies on additional government regulation and taxation, many conservatives support principles that rely on consumer empowerment. Unleashing the forces of competition, and providing financial incentives for individuals to curb marginal spending on health care, represents the best way to bring down costs and ensure access to care.

Article of Note: A Cry on the Left for Freedom

Just before the recess, former Senator and Presidential candidate George McGovern (D-SD) published an op-ed article in the Wall Street Journal advocating a greater role for consumers in several segments of the economy, including health care. Noting the growing array of state benefit mandates on health insurance plans while premium costs continue to rise, McGovern criticizes the “health-care paternalism” whereby “states dictate that you [have] to buy a Mercedes or no car at all.” McGovern also notes support for the idea of buying health insurance across state lines, where plan premiums may be more reasonable—a principle supported by many conservatives and introduced by RSC Member John Shadegg (R-AZ) in H.R. 4460, the Health Care Choice Act.

The fact that an icon of the Left such as Sen. McGovern can decry the growth of government regulation as a development consistent with paternalism demonstrates the incapacity of the public sector to respond to challenges such as the rapid growth in health care costs. Many conservatives believe that only through a freer market—and common-sense solutions like buying health insurance across state lines— will America finally come to take control of its skyrocketing expenditures on health care.

Read the article here: The Wall Street Journal: “Freedom Means Responsibility” (subscription required)

Medicare Trustees’ Report

Summary:  The report issued by the Medicare trustees notes several funding challenges for the program in both the short and long term.  The Hospital Insurance Trust Fund, which is funded primarily by payroll taxes and finances Medicare Part A, is “not adequately financed over the next ten years” according to the trustees’ assumptions.  The report projects that the Hospital Insurance Trust Fund will be exhausted by 2019—the same year of exhaustion as in last year’s report, but at an earlier point within the year, due to lower payroll tax receipts and higher-than-expected expenditures.

While Medicare Parts B and D, financed by the Supplemental Medical Insurance Trust Fund, are considered adequately financed by the trustees, this determination stems largely from the fact that these portions of Medicare can—and do—claim a large and growing share of federal general revenues.  The report notes that Part B costs have risen by an average 9.6% annually over the past five years, and is likely to grow by about 8% annually over the next decade, presuming Congress continues to override scheduled reductions in Medicare physician payment reimbursements.

In the longer term, the trustees project Medicare spending to rise sharply over the next 75 years.  The report projects that by 2082, overall spending on Medicare will more than triple, from 3.2% of national gross domestic product (GDP) to 10.8%—nearly twice the projected size of Social Security, and more than one in every ten dollars spent in the private and public sectors.

Medicare “Trigger”:  For the third consecutive year, the trustees report includes a finding that general revenue Medicare spending—that is, Medicare spending not financed by payroll taxes, or by beneficiary premiums and co-payments—will exceed 45% of total Medicare outlays within the next seven fiscal years.  This “trigger” language was included in Title VIII of the Medicare Modernization Act of 2003 at the behest of the Republican Study Committee, to provide a mechanism for policy-makers to measure the fiscal soundness of the Medicare program, and for Congress to consider ways to reform its operations should entitlement spending continue to rise.

The trustees’ warning means that, absent a change in current law, the next President will be required to submit legislation to Congress providing a remedy to bring general revenue Medicare spending within 45% of total Medicare outlays.  In addition, the 111th Congress would be required to consider legislation addressing the funding warning by the summer of 2009, with special discharge opportunities available in both the House and Senate should leadership not bring legislation to the floor of each chamber.  However, the “trigger” provision will not apply should Congress enact legislation remedying the trustees’ latest funding warning this year.

Additional Background:  Because of the uncertainties associated with budgetary projections spanning many decades, there are some suggestions that the significant unfunded liabilities included in the trustees’ report may actually underestimate the losses Medicare faces.  A November 2007 report by the Congressional Budget Office released 75-year projections materially divergent from the analysis released by the Medicare trustees.  The trustees’ report projects Medicare spending to consume nearly 11% of total GDP by the end of the 75-year period, while CBO estimates that Medicare will consume more than one in six dollars spent in the United States (17% of GDP).  The disparity in the two projections stems from the trustees’ assumption that excess cost growth—that is, the annual growth in health spending above the growth in GDP—would decline much more rapidly than both current and past levels of health care spending.[1]

Using data from the CBO report, as well as the trustees’ 2007 update, former Medicare public trustee Tom Saving analyzed the size of Medicare’s unfunded obligations.  If the CBO projections are accurate, Medicare faces 75-year obligations of $38.4 trillion and infinite horizon obligations of $84.2 trillion, as opposed to $34 trillion and $74 trillion respectively under the assumptions in last year’s official trustees’ report.[2]

While the specific amounts of Medicare’s future unfunded obligations by definition have yet to be determined, the trustees’ long-range model may make it more likely that the trustees would underestimate rather than overestimate the size of the shortfall which Medicare faces.  Fiscal prudence may therefore dictate that given that uncertainty, Congress should make every effort to restore Medicare’s fiscal solvency now, so that future policy-makers will have a margin for error should further reforms be needed some decades from now.  As the CBO report concludes, “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.”[3]

Comparison with Prior Year Data:  In addition to the updated projections regarding the date of the Medicare trust funds’ exhaustion, the trustees’ report also includes totals for Medicare’s unfunded obligations for a 75-year budget window and an “infinite horizon” projection.  Comparison charts for those projections follow:

 

Unfunded Obligation Projections for 75-Year Budget Window (2008-2082)

  2007 Trustees’ Report

(in trillions of dollars)

2008 Trustees’ Report

(in trillions of dollars)

Part A (Hospital Insurance) $11.6 (1.6% of GDP) $12.4 (1.6% of GDP)
Part B (Obligations less beneficiary premiums) $13.9 (1.9% of GDP) $15.7 (2.0% of GDP)
Part D (Obligations less beneficiary premiums and state “clawback” payments) $8.4 (1.2% of GDP) $7.9 (1.0% of GDP)
TOTAL $33.9 (4.7% of GDP) $36.0 (4.6% of GDP)

 

Unfunded Obligation Projections for Infinite Horizon

  2007 Trustees’ Report

(in trillions of dollars)

2008 Trustees’ Report

(in trillions of dollars)

Part A (Hospital Insurance) $29.5 (2.6% of GDP) $34.4 (2.6% of GDP)
Part B (Obligations less beneficiary premiums) $27.7 (2.4% of GDP) $34.0 (2.6% of GDP)
Part D (Obligations less beneficiary premiums and state “clawback” payments) $17.1 (1.5% of GDP) $17.2 (1.3% of GDP)
TOTAL $74.3 (6.5% of GDP) $85.6 (6.5% of GDP)

In general, the overall size of the unfunded obligations has remained nearly constant as a percentage of GDP, while growing in absolute dollar terms.  Of particular note is the fact that while Part A obligations remained constant in GDP terms, and Part B obligations rose as a percentage of GDP, the obligations associated with the privately-administered Part D prescription drug benefit remained constant in dollar terms and decreased as a percentage of GDP.  Although introduction of a prescription drug benefit has significantly increased Medicare’s unfunded obligations in absolute terms, the fact that competition among Part D participants has slowed the growth of its costs suggests that similar efforts to inject competition into Medicare Parts A and B could comprise one element of comprehensive Medicare reform.

Revenue-Based “Reform” and Its Impact:  Several studies have examined ways in which the Medicare program could be made fiscally solvent by increasing revenues, and these options appear neither economically viable nor politically palatable.  In 2005, the Heritage Foundation published a report using that year’s trustee data to determine the level of payroll taxes needed to close Medicare’s funding gap.  The report noted that, in order to achieve a 75-year balance, Medicare payroll taxes would need nearly to quintuple—from the current 2.9% up to 13.4%, where they would remain until 2079.  The study also found that this tax increase would sharply affect economic growth, lowering real GDP levels by nearly $200 billion annually (resulting in lower corporate and income tax receipts), and reducing private sector employment levels by more than 2.2 million jobs over the course of a decade.[4]  In other words, by decreasing personal income levels, a significant tax increase to ensure Medicare’s solvency would reduce personal consumption at rates that could have a long-term stagnating effect on the American economy.

Former Medicare public trustee Tom Saving has also published some unofficial projections about the level of beneficiary contributions required for Medicare to achieve fiscal balance, presuming that the share of general revenues used to finance the Medicare program remains constant.  In the case of such a scenario whereby only seniors pay for the increase in Medicare spending, premiums would rise exponentially, such that by 2081, retirees would be paying premiums in a range of $3,000 to $4,900 per month in year 2006 dollars.[5]  Although some additional cost-sharing for beneficiaries may be necessary in the context of overall Medicare reform, the idea that seniors could pay the future equivalent of $30,000-$50,000 annually in premiums alone is unrealistic.

Reform Options:  In light of the difficulties discussed above with revenue-based options to solve Medicare’s fiscal woes, a more feasible alternative might couple targeted opportunities for increased beneficiary cost-sharing with reforms designed to empower beneficiaries with the information and incentives needed to direct and control their health spending.  Comprehensive proposals to reform Medicare in this vein could include:

Premium Support:  This model would convert Medicare into a system similar to the Federal Employees Benefit Health Plan (FEHBP), in which beneficiaries would receive a defined contribution from Medicare to purchase a health plan of their choosing.  Previously incorporated into alternative RSC budget proposals, a premium support plan would provide a level playing field between traditional Medicare and private insurance plans, providing comprehensive reform, while confining the growth of Medicare spending to the annual statutory raise in the defined contribution limit, thus ensuring long-term fiscal stability.

Consumer-Driven Health Options:  These reforms would build on the success of the Health Savings Account (HSA) model in reducing health care cost growth for the under-65 population.  Reforms in this area would alter the existing prohibition forbidding holders of HSAs from contributing additional funds to their accounts once they become Medicare-eligible.  A new payment mechanism could allow these beneficiaries to keep their HSA-compatible insurance policy into retirement, with Medicare financing a portion of the premium.  In addition, reforms to Medicare Medical Savings Accounts (MSAs) could make them more attractive to beneficiaries who do not have an existing HSA, providing additional incentives for seniors to become more cost-conscious when considering health care treatment options.

Restructure Cost-Sharing Requirements:  This concept would restructure the existing system of deductibles, co-payments, and shared costs, which can vary based on the service provided.  Additionally, Medicare currently lacks a catastrophic cap on beneficiary cost-sharing, leading some seniors to purchase Medigap policies that insulate beneficiaries from out-of-pocket costs and provide little incentive to contain health spending.  Reforms in this area would rationalize the current system, generating budgetary savings and reducing the growth of health spending.

Means Testing:  This idea would establish an income-related Part D premium consistent with the Part B “means testing” included in Title VIII of the Medicare Modernization Act.  The proposal—which was included in the President’s Fiscal Year 2009 budget proposal—would achieve savings of $3.2 billion over five years.  The RSC has previously included similar proposals in its budget documents as one way to constrain costs and ensure consistency between a Part B benefit that is currently means-tested and a Part D benefit that is not.

Increase Medicare Part B Premium:  The RSC has previously proposed increasing the Part B premium from 25% to 50% of total Medicare Part B costs, consistent with the original goal of the program.  This concept would not impact low-income seniors, as Medicaid pays Medicare premiums for individuals with incomes under 120% of the federal poverty level.

Conclusion: The Medicare funding warning issued by the trustees last year, and again this year, provides an opportunity to re-assess the program’s structure and finance.  These two consecutive warnings—coupled with the trustees’ estimate that the Medicare trust fund will be exhausted in just over a decade’s time—should prompt Congress to consider ways to reduce the growth of overall Medicare costs, particularly those which utilize competition and consumer empowerment to create a more efficient and cost-effective Medicare program.

The Administration has put forward two separate proposals—the first in its Fiscal Year 2009 budget submission to Congress, the second as part of its formal submission of legislation (H.R. 5480) required under the MMA “trigger”—to address Medicare’s long-term solvency issues and begin a process of comprehensive reform.  Many conservatives are likely to view the trustees’ warning as providing another impetus for action on proposals that curb soaring entitlement spending, using the measures described above to advance the discussion beyond annual funding warnings and toward actions that ensure Medicare’s long-term fiscal stability.

 

[1] Congressional Budget Office, “The Long-Term Outlook for Health Care Spending,” (Washington, DC, November 2007), available online at http://www.cbo.gov/ftpdocs/87xx/doc8758/11-13-LT-Health.pdf (accessed March 24, 2008), p. 16.

[2] Andrew Rettenmaier and Tom Saving, “Medicare’s Future Burden: Trustees versus CBO Estimates,” (College Station, TX, Private Enterprise Research Center, Texas A&M University, March 2008), available online at http://www.heritage.org/research/HealthCare/upload/Medicares_Future_Burden.pdf (accessed March 25, 2008), pp. 16-19.

[3] CBO, “Long-Term Outlook,” p. 16.

[4] Tracy Foertsch and Joe Antos, “The Economic and Fiscal Effects of Financing Medicare’s Unfunded Liabilities,” (Washington, DC, Heritage Foundation Center for Data Analysis Paper CDA05-06, October 11, 2005), available online at http://www.heritage.org/Research/HealthCare/upload/83702_1.pdf (accessed March 24, 2008), pp. 7-9.

[5] Rettenmaier and Saving, “Medicare’s Future Burden,” p. 8.

Health Care Spending Growth

Background:  Last month, the Centers for Medicare and Medicaid Services (CMS) released its annual report projecting health care spending over the next decade.  The report concluded that nationwide health expenditures are expected to rise 6.7% annually in the next ten years, causing health care spending to rise to 19.5% of gross domestic product (GDP) by 2017.  These projections are consistent with a November report by the Congressional Budget Office (CBO) highlighting the long-term projections for health care spending, which estimated that health expenditures could comprise just under half (49%) of GDP within 75 years.

Ten Year Projections:  The report by the CMS actuaries, released online by the journal Health Affairs, documents the continued growth in health care spending and hints at upcoming trends associated with the retirement of the Baby Boom generation.  In 2007, health care spending is projected to have grown at a 6.7% rate, reaching $2.2 trillion, or approximately 16.3% of GDP.  The report provides a snapshot of current health expenditures, and also cites several projected spending trends over the next decade:

  • Private health insurance premiums grew at a slower rate (6.0%) than overall health care expenditures in 2007, consistent with trends evident since 2004.
  • Prescription drug spending grew by 6.7% in 2007, a measurable slowdown in spending when compared to the increases for the prior two years (12.0% in 2005 and 8.5% in 2006), due in large part to increased price competition and generic drug usage.
  • Private spending on health care is projected to grow more slowly in the latter part of the projection period (2007-2017), while public spending “is expected to accelerate…as the leading edge of the Baby Boom generation becomes eligible for Medicare.”  While the aging population will have minimal effects on overall health expenditures, its effects on public spending, particularly through Medicare, will be significant.
  • Enrollment in private Medicare Advantage plans is expected to rise to 27.5% by 2017, up from 16.4% in 2006.
  • Just over half of the growth in health care spending comes from increases in medical costs, with about one-quarter of the increase due to utilization (volume and intensity of services), and the remainder due to population growth, demographics, and related factors.

Overall, the report’s conclusions indicate that although all health spending continues to rise, the increase in public health spending has accelerated.  While the competition created by the Medicare prescription drug benefit may have contributed to the considerable slowing in pharmaceutical expenditures, an aging population moving to Medicare will only hasten the growth of public spending.

In fact, the true size of the government’s future obligations for health spending is likely underestimated by the model used in the actuaries’ report, which presumes that existing law adjustments in physician reimbursements under the sustainable growth rate mechanism (SGR) will take effect.  If the SGR’s proposed reductions are instead replaced by a 0% increase—in other words, if physician payments are held steady through 2017—Medicare spending will rise by 8.0% annually over the next decade, instead of the 7.4% projected under the trustees’ current law model.

Historical Examples and Long-Term Projections:  The report produced by the CMS actuaries follows on the heels of a study, conducted by CBO and released in November 2007, which examined both historical trends in health care spending and long-term projections for its growth over the next 75 years.  Most notably, the report documents a historical shift in health care expenditures: a significant reduction in out-of-pocket spending, which declined from 31% to 13% of all health expenditures between 1975 and 2005, and the nearly commensurate increase in third-party payment by insurance carriers, which increased from 25% to 37% of health spending nationwide.  While the growth in new technologies and services has helped drive the growth in health spending which CBO documents, the continued rise of third-party payment—which can insulate patients from the marginal costs associated with additional treatments—may well have had inflationary effects.  This shift away from out-of-pocket spending occurred despite the findings of a landmark RAND Institute study, which concluded that higher cost-sharing helped constrain health care spending at little to no adverse effect on patients’ health.

On a forward-looking basis, CBO projects that overall health care spending will more than double in the next thirty years, rising from 14.9% of GDP in 2005 (and 4.7% in 1975) to 31% in 2035, growing thereafter to nearly half the nation’s economy (49% of GDP) in 2081.  The net federal spending on Medicare and Medicaid is projected to rise at a higher rate than overall health spending, growing from 26% of total spending on health care currently to 30% within thirty years, and 38% of total spending by 2082.

These 75-year projections are materially divergent from the projections made by the Medicare trustees in their annual report.  The trustees project Medicare spending to consume nearly 11% of total GDP by the end of the projection period, while CBO estimates that Medicare will consume more than one in six dollars spent in the United States (17% of GDP).  As the Medicare trustees’ projection notes $36 trillion in unfunded liabilities for the program over the next 75 years, the significantly higher projections made by CBO in its study should provide yet another impetus to enact comprehensive entitlement reform that addresses the unchecked growth in health costs.

Excess Cost Growth:  Both the CMS actuaries’ report and the CBO study projecting long-term health expenditures highlight the issue of excess cost growth in health care.  In this context, “excess cost growth” does not imply a value judgment as to whether or not the spending is necessary or appropriate; rather, the term connotes spending that exceeds economic and productivity growth.  For instance, the CMS actuaries project that health spending will rise by 6.7% over the next ten years, while nominal (i.e. non-inflation-adjusted) GDP will rise by 4.7%, resulting in excess cost growth of 2.0% annually for the decade.

The CBO report projects that the growth of overall health care spending will exceed the rate of economic growth by more than 2% annually for at least the next decade, and will continue to exceed economic growth throughout the entire 75-year projection period.  The report also projects that excess cost growth for Medicare and Medicaid will continue at rates far exceeding cost growth within the private sector,  noting that “that aspect of the projections may appear unrealistic, but it highlights the core problem—the unsustainability of current federal law.”

Over and above the unrealistic nature of the promises made in current federal law, and the need for comprehensive entitlement reform to remedy a looming fiscal crisis for Medicare, the excess cost growth discussed in the CBO report could also have significant macroeconomic implications by displacing other spending.  While CBO projects that per capita economic consumption will increase by $15,000 (in current dollars) from 2005-2035, more than three-quarters of that higher spending will be spent on health care.  Absent external action, health care costs could grow to consume all marginal increases in economic productivity—at which point both consumption and growth of other sectors of the economy could stagnate, and standards of living apart from health care (e.g. clothing, housing, etc.) could fall over time.  Although this pessimistic scenario remains somewhat distant, it highlights the need to understand the factors behind the growth in health spending, and substantially reduce excess cost growth in the coming years.

Geographic Variations:  Another CBO report issued in February examined one source of excess cost growth in health care: geographic variations in total spending.  The report notes that state per capita health expenses in 2004 ranged from a low of about $4,000 in Utah to a high of nearly $6,700 in Massachusetts—a more than 50% disparity.  Analysis of Medicare claims data showed a similar disparity among states—ranging from a per-beneficiary expenditure of $5,600 in South Dakota to $8,700 in Louisiana—and additional variations in areas within states.

The report also notes that geographic differences in price inputs (i.e. cost of labor, etc.), health status, and demographic factors (e.g. income, race, education level) likely constitute at most half of the observed deviation in expenditures, meaning that much of the geographic variation in health spending cannot be explained by known factors.  In other words, similar patients with similar diseases, living in areas with similar prices, are likely to receive differing levels of medical treatments and services.  Of particular note is the fact that patients living in areas with higher spending yield no better results with respect to both health processes and outcomes than patients in low-spending areas—and on some measures at least may receive worse care.

While the CBO report cites studies attributing some geographic variations in health spending to areas with a high supply of health providers (particularly hospitals and specialist physicians) creating additional demand for services, competition among a greater number of providers is likely to exert downward pressure on prices, if not the number of services performed.  To the extent that geographic variation in health costs are in fact driven by excess supply, some conservatives may be wary of government efforts—such as a Certificate of Need model for approving new hospital construction, or restrictions on physician-owned specialty hospitals—that impose bureaucratic regulations to stifle the supply of health providers, as they are likely to have adverse and unintended consequences that reduce access to care.  Many conservatives might prefer a more productive solution focused on mechanisms to place reasonable restraints on demand, by reducing the historical trends that have increased reliance on third-party payment, and making price and quality measures more transparent, so that consumers can have more information about available treatment options—and make a rational choice as to whether or not the additional treatment justifies the marginal cost.

Summary and Conclusions:  The growth in health care spending projected in the coming decades, following upon years of sustained increases, is likely to place significant and exacting demands on both the private and public sectors of the American economy absent external action.  Many conservatives believe that a discussion of ways to stem the growth in health care costs should be a part of any discussion to achieve so-called universal coverage, as health insurance would become much more affordable for all Americans at the point when premium costs and related expenditures rise at a more modest (and therefore more sustainable) rate.

The geographic variations in Medicare spending, particularly those portions of which cannot be explained by regional differences in income or health status, might prompt some Democrats to call for a centralized, government-controlled mechanism to reduce spending in higher-cost areas, likely through rationed care.  One popular variation on this approach has emerged in the form of comparative effectiveness, which would attempt to conduct research on the cost-effectiveness of various treatment options with an eye towards establishing more uniform practice standards.  While such efforts by the private sector could help reduce costs, many conservatives might have strong concerns as to whether a government-run effectiveness institute—such as the center proposed by Democrats in a wide-ranging health bill last July (H.R. 3162), which would have been funded by tax increases on insurance premiums—would result in a federal bureaucracy micro-managing the doctor-patient relationship, and ultimately, rationing care to patients.

A better alternative might lie in the data showing that private health spending is not rising as dramatically as expenditures on public health programs, suggesting that competition—and placing health care dollars in control of patients—holds the true solution to containing health costs.  The significant decline in out-of-pocket spending over the past three decades, and the escalating rise in costs during that time, demonstrate the perils associated when third-party payment of health expenses, particularly incidental (i.e. non-catastrophic) expenses, insulates patients from the marginal costs of additional treatment.  Likewise, the geographic variations in Medicare spending stem from a publicly-funded system where the costs for additional treatment can be minor—especially in areas where a high percentage of seniors own Medigap policies that can insulate beneficiaries from any increase in marginal costs.

The funding warning issued by the Medicare trustees, and the subsequent action required by Congress to act on legislation addressing this “trigger,” provides an opportunity for conservatives to construct a system designed to address the geographic variations in Medicare costs—with an impact that could stretch throughout the entire health system.  An improved and enhanced Medicare system similar to the Federal Employee Health Benefits Plan (FEHBP)—where beneficiaries receive a defined contribution from Medicare to select a health plan of their choosing—would eliminate much of the geographic variations currently present within Medicare, slowing the growth of health costs and restoring the program’s long-term stability.

Weekly Newsletter: March 10, 2008

Democrat Budget Fails to Address Medicare’s Woes…

The concurrent budget resolution (H. Con. Res. 312), which Democrats will bring to the House floor this week, does not include provisions providing comprehensive Medicare reform. The budget includes reconciliation provisions instructing the Ways and Means Committee to reduce spending on mandatory programs within their jurisdiction—but by only $750 million over the next five years. An amendment offered during last week’s Budget Committee markup by RSC Chairman Hensarling, which offered reconciliation instructions to ensure that Congress addresses the funding warning issued by the Medicare trustees last year, was defeated on a party-line vote.

Many conservatives will be concerned that, with the Medicare trust funds projected to be exhausted in little more than a decade, the Democrats’ budget will make no substantive effort to address Medicare’s $74 trillion in unfunded liabilities. In addition, some conservatives may be concerned by press reports indicating that the Democrat leadership will use the reconciliation process to justify new spending proposals for health care, rather than using all savings achieved to reduce the deficit and improve Medicare’s long-term viability.

More information on the Medicare trigger—and the President’s proposals for entitlement reform—can be found here.

…And Increases Spending on SCHIP

The Democrat budget also includes a proposed $50 billion reserve fund to finance an expansion of the State Children’s Health Insurance Program (SCHIP). This reserve fund would be consistent with a bill (H.R. 3162) considered by the House last July, under which nearly two and a half million children would drop private health insurance coverage in order to join a government-financed program—including children in families with incomes of more than $80,000.

Most conservatives support the enrollment and funding of the SCHIP program for the populations for whom it was created. However, continued efforts to extend this government-financed program to wealthier children and families may give some conservatives concern. If Democrats wish to look out for America’s children, some conservatives might argue that the better way to help is to reform Medicare and Medicaid so that future generations will not be saddled with trillions of dollars of debt, not to work to expand public programs for wealthier families.

An RSC Policy Brief discussing Administration proposals on SCHIP can be found here.

Mental Health Parity Bill Passes House

A Top Ten list of conservative concerns about H.R. 1424 can be found here.

Votes on the motion to recommit and final passage can be found here: Motion to Recommit Final Passage

Article of Note: Silence on Medicare Reform

Last week, the New York Times highlighted the absence of plans by Sen. Hillary Clinton or Sen. Barack Obama to confront the fiscal entitlement crisis our country faces in the coming decade. Although a report issued last month by the Centers for Medicare and Medicaid Services estimated that federal spending on health care will increase by 7.3% annually for the next decade, neither Democrat candidate has provided details on how to address the trillions of dollars of debt this additional spending will create.

The Times article notes that much of Medicare’s fiscal problem stems from the overall growth in health care costs. Several reports released in recent weeks have highlighted the need for measures to examine, and ultimately slow, excess cost growth within the health sphere. The RSC is preparing a policy brief summarizing these reports and offering some principles for controlling health costs using conservative, free-market solutions. By contrast, proposals by Sens. Clinton and Obama to control health costs contain a heavy emphasis on government-imposed price controls on insurance and pharmaceutical companies.

With the first Baby Boomer scheduled to become eligible for Medicare in fewer than three years, and the winner in November’s election likely to seek re-election, any potential President will have to address this crucial entitlement reform at some point during his (or her) intended term of office. Moreover, the $2 trillion added to America’s collective entitlement obligations every year that Congress and the President fail to take action provides a strong justification for immediate reform. Hopefully the Democratic contenders will embrace the opportunity to propose real, market-oriented solutions that control health care costs, or otherwise, as Robert Reischauer of the Urban Institute notes, “it will be difficult for Senator Clinton and Senator Obama to retain popular support for their plans once the details are supplied.”

Read the article here: New York Times: “About Those Health Care Plans by the Democrats…