Legislative Bulletin: Key Provisions of H.R. 3590, Senate Democrats’ Government Takeover of Health Care

Background and Executive Summary: On November 18, 2009, Senator Harry Reid and the Senate Democrat leadership introduced the Patient Protection and Affordable Care Act as an amendment to a House-passed bill (H.R. 3590). The full Senate began consideration of the legislation on November 21, 2009. Backroom deals produced a manager’s amendment that was introduced early on the morning of December 19, and a vote on final passage of the bill as amended could come as early as December 24, 2009.

Buried within the contents of the more than 2,000 page bill—as well as the separate 383-page manager’s amendment, and a 276 page Indian Health Care reauthorization that would be enacted by reference—are details that would see a massive federal takeover of the health care system in America, including the following:

  • A new regime of government-run exchanges that would cause as many as 10 million Americans to lose their current employer-sponsored coverage—thus breaking the central promise of then-Senator Obama’s presidential campaign;
  • An increase in total national health spending, as well as an increase in premiums that could total $2,100 per year—a far cry from then-Senator Obama’s promise to lower costs for families by $2,500 annually;
  • Stifling insurance regulations that would raise premiums and encourage employers to drop coverage;
  • Trillions of dollars in new federal spending that would exacerbate the deficit and imperil the nation’s long-term fiscal solvency;
  • A board of unelected bureaucrats being empowered to re-write Medicare statutes in a way that could well lead to government rationing of health care;
  • Federal funding of insurance policies that cover elective abortion—and an unprecedented federally managed plan that would cover elective abortion procedures;
  • Tens of billions in unfunded mandates in the form of a massive Medicaid expansion that would compel all States—except Nebraska—to dedicate more scarce taxpayer resources to fund government-run health coverage in their States—or alternatively to drop Medicaid entirely;
  • Taxes on all Americans—individuals who purchase insurance, individuals who do not purchase insurance, and small and large businesses alike—that would kill jobs and raise premiums; and
  • Cuts to Medicare Advantage plans that would result in higher premiums and dropped coverage for more than 10 million seniors.

Summary of Key Provisions

The Government Takeover

Creation of Exchange: The bill requires States to create their own Health Benefit Exchanges. Uninsured individuals would be eligible to purchase an Exchange plan, as would those whose existing employer coverage is deemed “insufficient” by the federal government. Employees with an “unaffordable” offer of group coverage would be able to take the value of their employer’s contribution in the form of a tax-free voucher to shop for plans on the Exchange. The bill allows States to open Exchanges to all employers beginning in 2017, further expanding the scope and reach of the government-run Exchanges.

Benefit Standards: The bill establishes a process for the Secretary of Health and Human Services to impose benefit standards for all plans. Plans in the Exchange would fall into several tiers: bronze (covering 60 percent of anticipated expenses), silver (70 percent), gold (80 percent), and platinum (90 percent). A young adult plan offering streamlined benefits would also be available, but only to individuals under aged 30. Employer plans—including those with Health Savings Accounts—could impose maximum deductibles of $2,000 for an individual or $4,000 for a family. These onerous standards would hinder the introduction of innovative models to improve enrollees’ health and wellness—and by insulating individuals from the cost of health services with restrictive cost-sharing, could raise health care costs.

“Low-Income” Subsidies: The bill provides subsidies only through the Exchange, again putting private health plans at a disadvantage. Individuals with access to employer-sponsored insurance whose group premium costs exceed 9.8 percent of modified gross income would be eligible for subsidies. Some may note that the newly defined “modified gross income” (as opposed to adjusted gross income) excludes deductions for items like contributions to Individual Retirement Accounts (IRAs) or Health Savings Accounts (HSAs), thus imposing an effective tax on savings.

Premium subsidies provided would be determined on a sliding scale. Individuals with incomes above 133 percent of the Federal Poverty Level (FPL, $29,327 for a family of four in 2009) and thus ineligible for the Medicaid expansion would be able to receive subsidies, which would phase out entirely for individuals with incomes at 400 percent FPL ($88,200 for a family of four), who would be expected to pay 9.8 percent of their income. Many may also note that, because the definition of FPL for a couple is not twice the size of the poverty level for a single person, the bill creates a marriage penalty—meaning that married couples may lose hundreds, even thousands, of dollars in health insurance subsidies.

The bill further provides for cost-sharing subsidies, such that individuals with incomes under 100 percent FPL would have two-thirds of their cost-sharing covered for a platinum level plan, while individuals with incomes at 400 percent FPL would have one-third of their cost-sharing covered for a silver plan. These rich benefit packages, in addition to raising subsidy costs for the federal government, would insulate plan participants from the effects of higher health spending, resulting in an increase in overall health costs—exactly the opposite of the bill’s purported purpose.

“Fannie Med” Co-Operatives and National Plan: The bill as amended requires the Office of Personnel Management (OPM) to “offer at least two multi-State qualified plans through each Exchange in each State.” The bill requires that at least one insurance plan option offered be a non-profit entity.

The bill establishes a Consumer Operated and Oriented Plan (CO-OP) program to provide grants or loans for the establishment of non-profit insurance cooperatives to be offered through the Exchange, but does not require States to establish such cooperatives. The bill authorizes $6 billion in appropriations for start-up loans or grants to help meet state solvency requirements.

Many may be concerned that both the OPM federally sanctioned plans and cooperatives funded through federal start-up grants would in time require ongoing federal subsidies, and that a “Fannie Med” co-op would do for health care what Fannie Mae and Freddie Mac have done for the housing sector. Some may also note that former OPM Director Linda Springer has publicly expressed concern that her former office lacks the capacity to oversee such a project in the manner that it currently oversees the Federal Employee Health Benefits Program (FEHBP).

Medicaid Expansion: The bill would expand Medicaid to all individuals with incomes under 133 percent of the federal poverty level ($29,327 for a family of four). Under the bill, the bill’s expansion of Medicaid to more than 10 million individuals would be fully paid for by the federal government only through 2016—thus imposing billions in unfunded mandates on 49 States.

However, as part of the “compromise” negotiated by Leader Reid, one State—Nebraska, home of Sen. Ben Nelson—would have 100 percent of its Medicaid costs paid in perpetuity. Given public comments by Senate HELP Committee Chairman Tom Harkin (D-IA) that such a precedent could eventually lead to the federal government paying 100 percent of all Medicaid costs for all States, many may question whether this provision constitutes a special deal for Nebraska in exchange for Sen. Nelson’s vote, or a way to grow federal spending later by shifting unfunded State mandates back on to federal taxpayer rolls.

Federal Funding of Abortion Coverage: The bill specifically permits taxpayer subsidies to flow to private health plans that include abortion, but creates an accounting scheme designed to designate private dollars as abortion dollars and public dollars as non-abortion dollars.  Specifically, the provisions claim to segregate public funds from abortion coverage and would allegedly prevent funds used on abortion from being considered when determining whether plans meet federal actuarial standards. However, press reports have been skeptical about whether and how this accounting mechanism would prevent federal funding of abortions. The accounting scheme has likewise been rejected by pro-life organizations, which recognize it as a clear departure from long-standing federal policy against funding plans covering abortion (e.g., Federal Employee Health Benefits Program, Medicaid, SCHIP, etc.).

Unlike government-run programs like Medicare and Medicaid, which can specifically prohibit coverage of a particular service, funds provided to a third-party insurance company to subsidize an individual’s coverage would by definition make that individual’s “supplemental” abortion coverage more affordable. Therefore many Members may believe that the only way to prevent federal funds from subsidizing abortion coverage is to prevent plans whose beneficiaries receive federal subsidies from covering abortions.

The bill as amended by the manager’s amendment would modify the segregation regime slightly, requiring plans to follow “generally accepted accounting requirements” while establishing the regime. The bill also allows States to “prohibit abortion coverage in qualified health plans” offered in their State’s Exchange. However, these provisions would still result in federal funds flowing to plans that cover elective abortions—and would not prohibit citizens in States which have opted-out of elective abortion coverage in their own Exchange seeing their federal funds flow to plans that cover elective abortion in other States. To that end, even pro-life Democrats like Rep. Bart Stupak (D-MI) have criticized the bill language as unacceptable, and a far cry from the standards established in the Stupak amendment—which extended the current law Hyde Amendment prohibitions on federal funding for abortion coverage– that passed on a strong bipartisan vote in the House.

Further, the “Fannie Mae” model administered through OPM created by the manager’s amendment contains zero prohibition on coverage of elective abortion—an unprecedented federal sanctioning of plans that cover elective abortions. To that end, many may note that insurance plans within the FEHBP—which Members of Congress themselves utilize—have been prohibited from offering abortion coverage since 1995, and federal employees have expressed strong satisfaction with their choice of plan options.

Medicare Payment Board: The bill would create a new Independent Medicare Advisory Board established to make recommendations about the future growth of Medicare spending. The appointed bureaucrats would be required to submit recommendations to Congress to keep Medicare spending below targeted levels—and such recommendations would be legally binding absent legislative action by Congress.

Particularly given the controversy surrounding the recent recommendations by the US Preventive Services Task Force with respect to mammogram coverage, many may be concerned that the Medicare Board contemplated by the legislation could result in additional coverage decisions being made by unelected bureaucrats largely or exclusively on cost grounds. Moreover, many may be concerned that in time this provision could closely resemble a concept advocated by former Senator Tom Daschle—a board of unelected bureaucrats making health care decisions for all health plans nationwide, including decisions about which therapies and treatments the federal government will cover. In his book Critical, Daschle wrote that, “We won’t be able to make a significant dent in health-care spending without getting into the nitty-gritty of which treatments are the most clinically valuable and cost-effective.”

Funneling Patients into Government Care

Federal Insurance Restrictions: The bill imposes new regulations on all health insurance offerings, with only limited exceptions. The bill imposes price controls on insurance offerings, requiring insurers with a ratio of total medical expenses to overall costs (i.e. a medical loss ratio), of less than 80 percent in the individual and small group market, or 85 percent in the large group market, to offer rebates to beneficiaries. Some Members may be concerned that government-imposed price controls, by requiring plans to pay out most of their premiums in medical claims, would give carriers a strong disincentive not to improve the health of their enrollees through prevention and wellness initiatives—as doing so would reduce the percentage of spending paid on actual claims below the bureaucrat-acceptable limits. The bill would also “require health plans…to submit a justification for any premium increase” in advance, and permit Exchanges to reject bids by insurance companies with “excessive” (term undefined) price increases—thus permitting bureaucrats to exercise arbitrary controls over health insurance companies.

Existing policies could remain in effect—but only so long as an individual does not move, change jobs, or experience any other material change in life status. Contrary to President Obama’s repeated promises that “You will not have to change [health insurance] plans,” CBO found that “relatively few non-group policies would remain grandfathered by 2016”—meaning millions of individuals would lose their current individual health insurance plans as a result of Democrats’ government takeover of health care.

Mandates on Employers; “Fair Share” Penalties: The bill imposes a series of mandates related to employers offering health insurance coverage. Specifically, the bill taxes large employer plans (i.e. with more than 50 workers) that impose long “waiting periods” of over 30 days on coverage eligibility up to $600 per full-time employee. The bill also taxes large employers who do not offer coverage, or who offer coverage that results in employees obtaining subsidies because that coverage costs more than 9.8 percent of modified gross income, to pay taxes. The penalty in the first instance is $750 per employee, and in the second instance constitutes $3,000 per employee receiving subsidies, or $750 per worker, whichever is less.

Members may be concerned that the “fair share” penalties would most adversely affect those workers whom health “reform” is intended to help. For instance, the taxes would discourage employers from hiring married individuals or parents raising children—as such individuals would be more likely to qualify for subsidies, thus triggering penalties. In particular, single parents would be much more likely to qualify for insurance subsidies based upon their income, making it much less likely that such workers would be hired. The liberal Center for Budget and Policy Priorities also previously notes that the provisions “likely would have discriminatory racial effects on hiring and firing. Because minorities are much more likely to have low family incomes than non-minorities, a larger share of prospective minority workers would likely be harmed.”

Individual Mandate: The bill places a tax on individuals who do not purchase “minimum essential coverage,” as defined by the bureaucratic standards in the bill. The tax would constitute 2 percent of adjusted gross income, up to the amount of the national average premium for bronze plans offered through the Exchange. The tax would not apply to non-resident aliens, those exempted on religious grounds, individuals for whom coverage is “unaffordable” (i.e. costing more than 8 percent of modified gross income), and those with short (i.e. fewer than three month) gaps in coverage. “Acceptable coverage” includes qualified Exchange plans, “grandfathered” individual and group health plans, Medicare and Medicaid plans, and military and veterans’ benefits.

For individuals with incomes of under $100,000, the cost of complying with the mandate would be under $2,000—raising questions of how effective the mandate would be, as paying the tax would in many cases cost less than purchasing an insurance policy. As then-Senator Barack Obama pointed out in a February 2008 debate, in Massachusetts, the one State with an individual mandate, “there are people who are paying fines and still can’t afford [health insurance], so now they’re worse off than they were. They don’t have health insurance and they’re paying a fine.”

Medicare Advantage: The bill would phase in a system of Medicare Advantage (MA) competitive bidding over a three-year period beginning in 2012. The bill also imposes an arbitrary adjustment on MA payment benchmarks as part of the competitive bidding process. Many may note that despite its title, traditional Medicare would not be required to compete head-to-head against private health plans in MA “competitive bidding”—thus giving government-run Medicare an advantage. The Congressional Budget Office has stated that these provisions would collectively cut $120 billion from Medicare Advantage, and would result in millions of seniors losing access to their current plans, and/or having the extra benefits—reduced cost-sharing, dental and vision coverage, etc.—that MA plans provide curtailed or eliminated entirely.

The bill also gives the Secretary blanket authority to reject “any or every bid by an MA organization,” as well as any bid by a carrier offering private Part D Medicare prescription drug coverage, giving federal bureaucrats the power to eliminate the MA program entirely—by rejecting all plan bids for nothing more than the arbitrary reason that an Administration wishes to force the 10 million beneficiaries enrolled in MA back into traditional, government-run Medicare against their will.

Tax Increases

Government-Forced Insurance Penalties: Offsetting payments to finance the government takeover of health care would include taxes on individuals not complying with the mandate to purchase coverage, as well as taxes by businesses associated with the “fair share” penalties, as outlined above. The individual mandate as modified by the manager’s amendment would raise $15 billion and $28 billion respectively over ten years.

“Cadillac” Tax on High-Cost Plans: The bill imposes a 40 percent excise tax on the excess cost of employer-sponsored plans above threshold amounts. In 2013, the threshold amounts would be $8,500 for an individual policy and $23,000 for a family policy. Individuals in certain “high-risk professions” would be subject to a higher threshold, and the 17 States with the highest costs (as determined by the average employer-sponsored insurance premium) would see the threshold amounts phased in during the years 2013-2015. In future years the threshold amount would be raised for inflation at the rate of general price inflation (i.e. Consumer Price Index) plus one percent—which based on past trends would imply that the “Cadillac” tax would hit more plans over time. According to the Joint Committee on Taxation, the provisions would raise $148.9 billion over ten years.

While some Members may support changing the current tax treatment of health insurance, many may oppose the bill’s model of raising taxes to finance a government takeover of health care. Many may also note that the bill applies a standard 40 percent tax on all plans regardless of the purchaser’s income—potentially subjecting millions of low-income and middle-class families with employer-sponsored coverage to tax rates exceeding the highest marginal rate under current law.

Higher Payroll Taxes: The bill imposes a 0.9 percent increase in Medicare payroll taxes on individuals with incomes over $200,000 and families with incomes over $250,000, raising $86.8 billion over ten years. The tax is NOT indexed for inflation, meaning it would affect many more taxpayers over time. In addition to being administratively burdensome—as individual employers would have to base tax withholding in part on the salary of an employee’s spouse—many may be concerned about the precedent set for diverting Medicare payroll taxes in a way that finances a $2.5 trillion new entitlement scheme for younger Americans.

Taxes on Health Plans: The bill prohibits the reimbursement of over-the-counter pharmaceuticals from Health Savings Accounts (HSAs), Medical Savings Accounts, Flexible Spending Arrangements (FSAs), and Health Reimbursement Arrangements (HRAs), and increases the penalties for non-qualified HSA withdrawals from 10 percent to 20 percent, effective in 2011. Because these savings vehicles are tax-preferred, adopting these provisions would raise taxes by $6.3 billion over ten years, according to the Joint Committee on Taxation.

The bill would place a cap on FSA contributions, beginning in 2012; contributions could only total $2,500 per year, subject to annual adjustments linked to the growth in general (not medical) inflation. Members may be concerned that these provisions would first raise taxes by $13.3 billion, and second—by imposing additional restrictions on health savings vehicles popular with tens of millions of Americans—undermine the promise that “If you like your current coverage, you can keep it.” At least 8 million individuals hold insurance policies eligible for HSAs, and millions more participate in FSAs. All these individuals would be subject to additional coverage restrictions—and tax increases—under this provision.

The bill raises the threshold to itemize health expenses from 7.5 percent to 10 percent of adjusted gross income, beginning in 2013; seniors over age 65 would receive a four-year extension of the 7.5 percent income threshold for four additional years (i.e. until 2017). This provision would raise taxes by $15.2 billion. The bill also repeals the current-law tax deductibility of subsidies provided to companies offering prescription drug coverage to retirees, raising taxes by $5.4 billion. Many may be concerned that this provision would lead to companies dropping their current coverage as a result.

Taxes on Health Products: The bill would impose several health-related excise taxes: A $2.3 billion tax on drug makers (raises $22.2 billion over ten years), an annual fee on medical device makers rising to $3 billion (raises $19.2 billion), and a tax on insurance companies that rises to $10 billion annually in beginning in 2011, raising taxes by $59.6 billion. Many may echo the concerns of the Congressional Budget Office, and other independent experts, who have confirmed that these taxes would be passed on to consumers in the form of higher prices—and ultimately higher premiums.

Taxes on Insurance Industry Executives: The bill would cap the deductibility of insurance industry executive salaries at $500,000 beginning in 2013, raising $600 million. Many may question why the insurance industry—alone among health care industries, or indeed all industries—warrants such treatment, and whether or not this provision constitutes an attempt to extract political retribution on a particular industry out of favor with Democrats.

Cost and Other Concerns

Cost: According to the Congressional Budget Office’s preliminary score of H.R. 3590 and the manager’s amendment to the bill, the legislation would spend nearly $1 trillion over its first ten years. More specifically, CBO estimates that the bill would spend $871 billion to finance coverage expansions—$395 billion for the Medicaid expansions, $436 billion for “low-income” subsidies, and $40 billion for small business tax credits. The spending on coverage expansions does not even include additional federal spending included in the legislation—including a new reinsurance program for retirees, $10 billion in mandatory spending on community health centers, closing the Medicare Part D “doughnut hole,” and a $13 billion trust fund for public health—that totals $95.5 billion. When combined with the cost of the coverage expansions, total spending under the bill actually approaches $1 trillion. Moreover, staff on the Senate Budget Committee have estimated that the bill’s total cost in its first ten years once coverage expansions take effect (i.e. 2014-2023) approaches $2.5 trillion.

In its score, CBO notes that “under the legislation, federal outlays for health care would increase during the 2010-2019 period, as would the federal budgetary commitment to health care”—by a total of $200 billion over that ten year period. Many may be concerned that spending at least $1 trillion to finance a government takeover of health care would not only not help the growth in health costs, but—by creating massive and unsustainable new entitlements—would also make the federal budget situation much worse.

Savings would come from reductions within the Medicare program, of which the biggest are cuts to Medicare Advantage plans (net cut of $119.9 billion), reductions in adjustments to certain market-basket updates for hospitals and other providers (total of $147 billion), skilled nursing facility payment reductions (total of $23.9 billion), various reductions to home health providers (total of $39.4 billion), and reduction in imaging payments ($3 billion). A further $35.7 billion in savings would come from reducing subsidies (i.e. means-testing) to Medicare Part D prescription drug plans for the first time, and from freezing the current annual adjustment to the Part B means test at its current level (i.e. $85,000 for a single retiree and $170,000 for a couple) until 2019. A further $28.2 billion in savings is projected from the automatic reductions in Medicare spending expected to be triggered by the Independent Medicare Advisory Board during the years 2015-2019.

CBO has also confirmed that the legislation as introduced would raise health care premiums for struggling middle-class families, resulting in non-group premium increases of $300 per year for individuals and $2,100 for families. While the Obama campaign promised that its plan would reduce premiums by $2,500 per year for families, CBO confirmed that premiums would still continue to rise—and for millions, premiums would rise higher than under current law.

In terms of overall spending on health care costs, many may note that the independent actuaries at the Centers for Medicare and Medicaid Services found that H.R. 3590 would raise total national health spending by more than $200 billion between 2010-2019. Many may cite this data point to question the effectiveness of Democrats’ health “reform,” given that the legislation was originally intended to reduce costs, not raise them.

Tax Increases: Offsetting payments include $15 billion in taxes on individuals not complying with the mandate to purchase coverage, $149 billion from the “Cadillac tax” on high-premium insurance plans, $28 billion in payments by businesses associated with the employer “free rider” penalty, and $65 billion in associated other revenue interactions.

The Joint Committee on Taxation notes that other bill provisions would increase federal revenues over and above the $257 billion in tax increases noted above. JCT found that the increase in the Medicare payroll tax would raise $86.8 billion, corporate reporting would raise $17.1 billion, the worldwide interest implementation delay would raise $26.1 billion, the treaty withholding provisions would raise $7.5 billion, and the codification of the economic substance doctrine would raise $5.7 billion. Taxes on Health Savings Accounts (HSAs) and other similar savings vehicles would raise $19.6 billion, while provisions relating to retiree drug subsidies would raise taxes by $5.4 billion. Raising the threshold to itemize health expenses from 7.5 percent to 10 percent of adjusted gross income would generate $15.2 billion in revenue, limiting the deductibility of insurance industry executive salaries would raise $600 million, and a 10 percent tax on indoor tanning services would raise $2.7 billion.

The excise tax on medical devices would raise taxes by $19.2 billion. Similar excise taxes on insurance companies and drug manufacturers would raise $59.6 billion and $22.2 billion respectively. Finally, the tax on health benefits used to finance the Comparative Effectiveness Research Trust Fund would raise $2.6 billion over ten years.

Out-Year Spending: The score indicates that of the $871 billion in spending for coverage expansions under the specifications examined by CBO, only $17 billion—or less than two percent—of such spending would occur during the first four years following implementation (i.e. 2010-2013). Moreover, the bill in its final year would spend a total of nearly $200 billion to finance coverage expansions. In other words, the Democrat bill spends so much, it needs its many of its tax increases to take effect immediately to finance spending beginning in 2014—and even then cannot come into proper balance without relying on budgetary gimmicks.

Budgetary Gimmicks: While the CBO score claims H.R. 3590 as amended would reduce the deficit by $132 billion in its first ten years, Democrats achieved that “deficit-neutral” solely by excluding the cost of reforming the Sustainable Growth Rate (SGR) mechanism for Medicare physician payments—the total cost of which stands at $285 billion over ten years, according to CBO—from this bill, and including it instead in separate legislation (H.R. 3961; S. 1776) that is not paid for. While Members may support reform of the SGR mechanism paid for in a fiscally responsible manner, many may view any legislation that presumes a more than 21 percent cut in Medicare payments to physicians in 2010 as an inherent gimmick designed solely to hide the apparent cost of health “reform.”

The bill also relies on $72 billion in revenue from a new program for long-term care services. As the long-term care program requires individuals to contribute five years’ worth of premiums before becoming eligible for benefits, the program would find its revenue over the first ten years diverted to finance other spending in Democrats’ health care “reform.” However, even Democrats, such as Senate Budget Committee Chairman Kent Conrad (D-ND), have called the program a “Ponzi scheme,” and non-partisan actuaries at the Centers for Medicare and Medicaid Services found that the program faces “a significant risk of failure.” Therefore, many may find any legislation that relies upon such a program to maintain “deficit-neutrality” fiscally irresponsible and not credible.

Legislative Bulletin: Amendments to H.R. 3962, Pelosi Health Care Bill

The House is scheduled to consider H.R. 3692, the Pelosi health care bill, later today.  The bill will be considered under a modified closed rule, making in order only selected Democrat amendments and a Republican substitute amendment.  The rule provides that the manager’s amendment—as modified by the Rules Committee—shall be considered as adopted upon enactment of the resolution.  An updated summary of amendments made in order follows.

Amendments Made in Order

Rep. Dingell (D-MI):  The modifications to the Manager’s Amendment narrow the scope of the biofuel tax credit that only “black liquor”—a by-product of the pulp-making process—shall be excluded from eligibility for the credit.  The Manager’s Amendment as originally introduced would have made additional products ineligible for the credit.

The modified Manager’s Amendment also establishes two new public health grant programs—one related to the development of medical schools in health professional shortage areas, and the other a demonstration program permitting the National Health Service Corps to offer incentive payments to members assigned to “a health professional shortage area with extreme need.”

Finally, the modified Manager’s Amendment modifies Federal Trade Commission patent enforcement authority with respect to the new restrictions on generic drug makers’ patent settlements with brand name manufacturers.

Rep. Dingell (D-MI):  The 42-page Manager’s Amendment makes several technical and substantive changes to the bill.  With respect to the high-risk pool program established effective in January 2010, the amendment allows individuals with employer-based retiree coverage to buy into the pool if that coverage’s premiums exceeds “such excessive percentage as the Secretary shall specify.”  The amendment also extends the citizenship verification provisions required for insurance affordability credits in the bill—the same citizenship verification regime based upon that enacted in this year’s SCHIP reauthorization (P.L. 111-3).  However, many may be concerned that the provisions as drafted would not require individuals to verify their identity when confirming eligibility for subsidies—encouraging identity fraud while still permitting undocumented immigrants and other ineligible individuals from obtaining taxpayer-subsidized benefits.

Insurance Price Controls:  The amendment creates “a process for the annual review, beginning with 2010…of increases in premiums for health insurance coverage,” requiring carriers to submit justifications to States for any premium increases, and providing $1 billion for a five-year program of grants to States to facilitate such ends, beginning in 2010.  The amendment requires States to make recommendations to the Commissioner “about whether particular health insurance issuers should be excluded from participation in the Health Insurance Exchange based on a pattern of excessive or unjustified premium increases.”  Many may be concerned first that this provision would further increase the role of State and federal bureaucrats in micro-managing private insurance companies, and second would permit bureaucrats to deny all private plans access to the Exchange for the mere reason that an Administration desires to enroll all Americans in the government-run health plan.  Many may further question how a government-run plan will promote “competition” if the government itself will permit which plans are able to “compete.”

Other Insurance Changes:  The amendment permits the Commissioner to permit “direct primary care medical home plans” to meet the bill’s definition of a qualified plan.  Some may view this provision as an authorizing earmark intended to benefit Democrat lawmakers in specific locations.

With respect to the partial repeal of insurers’ anti-trust exemption, the amendment exempts State medical malpractice laws from the bill’s impact, removes an exemption in the bill allowing insurance companies to coordinate actions with respect to “information gathering and rate setting,” and makes other technical changes.  The amendment applies provisions of the Government Performance and Results Act to the bill, and requires reports every three years by executive agencies on “the quality of customer service provided.”  The amendment requires the development of standards for interstate insurance compacts by January 2014, and makes other technical changes to those provisions.  The amendment makes adjustments in reimbursements by the government-run health plan for States operating a cost-containment waiver for providers under provisions in the Medicare statute.

Tax Changes:  The amendment delays for two years (from 2011 to 2013) provisions withdrawing the tax-free status of subsidies provided to employers providing retiree prescription drug coverage, per provisions of the Medicare Modernization Act (P.L. 108-173).  The amendment repeals—rather than delaying until 2019—the application of worldwide interest allocation provisions first enacted into law (but never implemented) in 2004.  The amendment also includes a new provision making adjustments to the existing second generation biofuel producer credit, designed to exclude “black liquor”—a byproduct of the pulp-making process—from eligibility for the credit.

Medicare and Medicaid Provisions:  The amendment delays the application (from January 2010 to April 2010) of certain payment rules related to skilled nursing facilities, and expands the number of physician-owned specialty hospitals permitted to expand their facilities. (The bill would prohibit most physician-owned facilities from expanding.)  As the bill includes a “special rule for a high Medicaid facility,” many may view these provisions as an authorizing earmark intended to protect physician-owned specialty hospitals located in Democrat Members’ districts.

The amendment allows States to (within limits) reimburse nursing facilities for the cost of conducting background checks and screening required in the bill, and requires the Secretary to develop new quality measures for the care of individuals with Alzheimer’s disease.  The amendment allows the Centers for Medicare and Medicaid Services (CMS) to withhold payments for durable medical equipment for 90 days if CMS finds “a significant risk of fraudulent activity” within the program, and inserts provisions requiring disclosure of a toll-free fraud hotline number on Medicare beneficiaries’ explanation of benefits.

The amendment clarifies that all individuals under age 19 with family incomes under 150 percent qualify for Medicaid under the bill’s expansion, and adds sense of Congress language regarding States adding coverage of home- and community-based services to their long-term care programs under Medicaid.

Public Health Provisions:  The amendment provides that funding provided from the new Public Health Investment Fund may be spent “only if…the amounts specified…are equal to or greater than the amounts” spent during Fiscal Year 2008.  The amendment clarifies that the bill’s language regarding liability reform grants shall not pre-empt existing State laws imposing caps on damages or attorneys’ fees, and makes States with such caps eligible for grant payments—provided that the new laws enacted by States to receive incentive payments do not include such caps on attorneys’ fees or damages.

The amendment includes a new grant program for mental health and substance abuse screening in primary care settings, establishes additional Offices of Minority Health in the Centers for Disease Control, the Substance Abuse and Mental Health Services Administration, the Agency for Healthcare Research and Quality, the Health Resources and Services Administration, and the Food and Drug Administration, and imposes requirements related to diabetes screening and outreach and collection of vital statistics data.  The amendment includes a study on duplicative grant programs within the Public Health Service Act, and authority for the Secretary to streamline any programs found unnecessarily duplicative—provisions which many may view as ironic, given the 111 new bureaucracies, boards, and programs established in the bill itself.

Rep. Stupak (D-MI):  The Stupak amendment as modified strikes language requiring the government-run plan to pay for abortion services, and prohibits any federal funds authorized or appropriated by the bill—including those of the Indian Health Service—except in case of rape, incest, or to save the life of the mother.  The amendment further provides that nothing shall prohibit “any nonfederal entity (including an individual or a State and local government) from purchasing separate supplemental coverage for abortions” for which federal funding is prohibited.  Such supplemental coverage must be “paid for entirely using only funds not authorized or appropriated” by the bill, and may not be paid for by “individual premium payments required for a[n] Exchange-participating health benefits plan towards which an affordability credit is applied.”  Likewise, non-federal health plan offering entities (i.e., plans in the Exchange except the government-run plan) can offer separate supplemental abortion coverage.

Boehner (R-OH): The Republican substitute includes a total of $25 billion in mandatory funding for State-based high-risk pools, which provide coverage to individuals with pre-existing conditions.  The substitute provides that, in order to receive risk pool grants, States must ensure all individuals verify both citizenship and identity, under a regime established in the Deficit Reduction Act (P.L. 109-171).
Insurance Reforms:  The substitute eliminates a current-law requirement that individuals must exhaust their COBRA benefits (if eligible for same) before becoming eligible for guaranteed-issue individual coverage under the Health Insurance Portability and Accountability Act (HIPAA).  The substitute eliminates lifetime or annual limits on insurance benefits, and prohibits insurance companies from canceling policies except in cases of demonstrated fraud, further requiring third-party external review of any insurer’s decision to rescind a policy.
The substitute provides a total $35 billion in State innovation grants for States whose insurance reforms result in lower premium costs to individuals.  States would receive the maximum grant for reducing premiums by 8.5 percent over three years, 11 percent over six years, and 13.5 percent over nine years. (Smaller grant amounts would be available for States that achieve premium reductions slightly below the above levels.)  The program also includes bonus grants for States that reduce their percentage of uninsured individuals by 10 percent within five years, 15 percent within seven years, and 20 percent within nine years, with smaller amounts available for States that reduce their percentage of uninsured individuals at levels below the benchmark amounts above.  The substitute includes language encouraging the development of State-based health plan finders, and provisions for the administrative simplification of health insurance claim processing.
The substitute provides for the establishment of Association Health Plans, allowing small businesses to band together across state lines for the purposes of purchasing health insurance.  The substitute permits dependents under age 25 to remain on their parents’ health insurance policies, and prohibits States from enacting laws prohibiting employers from auto-enrolling their employees in group insurance coverage.  The substitute also permits individuals to purchase coverage across State lines.
Health Savings Accounts:  The substitute makes contributions to Health Savings Accounts (HSAs) eligible for the current-law saver’s credit, permits individuals to pay for high-deductible health plan premiums with funds from the HSA account, and includes other clarifying language regarding the coordination of high-deductible health plan enrollment and the establishment of the HSA itself.
Doctor-Patient Relationship: The substitute includes medical liability reforms, imposing caps on non-economic damages of $250,000, caps on punitive damages, restrictions on attorney contingency fees, and restrictions on the liability statute of limitations and collateral source damages.  The substitute includes language clarifying that “nothing in this Act shall be construed to interfere with the doctor-patient relationship or the practice of medicine,” and repeals the Federal Coordinating Council for Comparative Effectiveness Research established in the “stimulus” bill.
Wellness and Other Provisions:  The substitute expands current-law incentives for prevention and wellness, extending to 50 percent from 20 percent the maximum variation in insurance premiums for individuals’ compliance with healthy behaviors and wellness initiatives.  The substitute incorporates anti-fraud provisions, including full funding for the Obama Administration’s request for anti-fraud funding for activities within the Department of Health and Human Services.
Finally, the substitute includes a pathway for Food and Drug Administration approval for follow-on biologics, providing a period of patent exclusivity 12 years, with a six-month extension possible in cases where a manufacturer agrees to an FDA request for pediatric studies.  The substitute gives FDA the authority to issue general or specific guidance documents (subject to a notice-and-comment period) regarding product classifications.
Pro-Life Protections:  Finally, the substitute includes prohibitions on federal funding for abortions, and extends the current-law Hyde Amendment to prohibit federal subsidies being “expended for a health benefits plan that includes coverage of abortion,” except in cases of rape, incest, or to save the life of the mother.  The substitute also includes conscience protections prohibiting discrimination against any “health care entity that does not provide, pay for, provide coverage of, or refer for abortions.”
Score:  The Congressional Budget Office, in its analysis of the Boehner substitute, found that the provisions contained therein would reduce the deficit by $68 billion over the 2010-2019 period, and by similar amounts in future years.  CBO also concluded that 3 million more individuals would have access to insurance coverage than under current law.  Notably, CBO concluded that on average premiums would decline for all forms of health insurance under the Boehner substitute—by about 5-8 percent in the individual market, up to 3 percent in the large group market, and by up to 10 percent in the small group market.  Many may note that President Obama promised the American people that, “For those who have insurance now, nothing will change under the Obama plan—except that you will pay less;” the Boehner substitute meets the President’s own criteria.

Legislative Bulletin: Key Amendments to H.R. 3200

On July 14, 2009, the Chairmen of the three House Committees with jurisdiction over health care legislation—Education and Labor Chairman George Miller (D-CA), Energy and Commerce Chairman Henry Waxman (D-CA), and Ways and Means Committee Chairman Charlie Rangel (D-NY)—introduced H.R. 3200. On July 17, the Ways and Means Committee approved the bill by a 23-18 vote, and the Education and Labor Committee approved the bill by a 26-22 vote. The Energy and Commerce Committee approved its version of the legislation on July 31 by a 31-28 margin.

During consideration of H.R. 3200 in the three Committees, many amendments changed the bill text from the legislation as originally introduced. The Republican Conference has prepared the summaries below of the key substantive amendments offered by Republicans and Democrats that were adopted during the three markups.

Amendment Summaries

The list below is by no means exhaustive, and should not be construed as indicating that some or all of the amendments adopted in Committee will be incorporated into any manager’s amendment considered by the Rules Committee. Moreover, at the time the Energy and Commerce Committee completed its markup on July 31, there were as many as 60 additional amendments pending to the bill; at that time, Chairman Waxman indicated that he would hold a second markup in September to allow those amendments to be considered (the precise legislative vehicle for doing so still being unclear) before any synthesis of the respective Committee products is brought to the House floor for consideration.

Education and Labor Amendments

Chairman’s Mark: Prohibits group health plans from “reducing the benefits provided under the plan to a retired participant, or beneficiary of such participant” after the worker retires “unless such restriction is also made with respect to active participants.” Some Members may be concerned that this provision, by restricting employers’ flexibility to adjust retiree health coverage, may encourage firms to drop their health plans entirely—undermining the argument that “If you like your current plan, you can keep it.”

The Chairman’s mark also requires health plans to spend at least 85 percent of their premium revenue on medical claims, or offer rebates to their enrollees. Particularly as the Government Accountability Office noted in a report on this issue that “there is no definitive standard for what a medical loss ratio should be,” some Members may be concerned about this attempt by federal bureaucrats to impose arbitrary price controls on private companies. Some Members may also be concerned that such price controls, by requiring plans to pay out most of their premiums in medical claims, would give carriers a strong (and perverse) disincentive not to improve the health of their enrollees—as doing so would reduce the percentage of spending paid on actual claims below the bureaucrat-acceptable limits.

The Chairman’s mark also prohibits the transfer or use of prescription information, except in very limited circumstances. Some Members may be concerned that these new restrictions would prevent patients from receiving information of benefit to them—for instance, materials regarding less costly generic alternatives.

Courtney: Effective six months after the date of enactment, reduces pre-existing limitation exclusions from one year to three months, and shortens the “look-back” window for determining such exclusions from six months before enrollment to 30 days before enrollment. While supporting efforts such as high-risk pools to allow individuals with pre-existing conditions to obtain coverage, some Members may be concerned that these provisions could raise premiums for employers, potentially prompting some to drop coverage entirely. A similar amendment, offered by Rep. Sutton, was adopted at the Energy and Commerce Committee markup.

Titus: Expands eligibility for small employers seeking to purchase coverage on the Exchange. In 2013, employers with 15 or fewer employees would be eligible to join the Exchange (up from 10 in the base bill), in 2014, employers with 25 or fewer employees would be eligible (up from 20 in the base bill), and in 2015, all employers with 50 or fewer employees could join the Exchange (the base bill permits—but does not require—the Health Choices Commissioner to open the Exchange to employers with more than 20 workers). Adopted by a party-line vote of 29-19.

Scott: Expands the definition of the minimum benefits package to include early and periodic screening, diagnostic, and treatment services (as defined in the Medicaid statute) for all children under 21. Some Members may be concerned that this expansive definition—which includes “such other necessary…measures” to treat physical ailments, regardless of “whether or not such services are covered under the State [Medicaid] plan”—would significantly raise costs for businesses required to offer coverage, and the federal funds needed to subsidize Exchange enrollees receiving such rich benefits. Adopted by a 32-17 vote.

Kucinich: Permits States to seek a waiver of the Employee Retirement Income Security Act (ERISA) for a single-payer system that States may wish to adopt. Such a non-profit system—“under which private insurance duplicating the benefits provided in the single payer program is prohibited”—would operate in lieu of the proposed Exchanges, must provide benefits that meet or exceed federal benefit standards in the bill, and may not result in federal costs “neither substantially greater nor substantially less” than those associated with the underlying bill. While supporting the concept of State flexibility over health care regulations, some Members may be concerned by the provision’s prohibitions on private health insurance, which could cause millions of individuals to lose their current coverage. Adopted by a 27-19 vote.

Energy and Commerce Amendments

Capps: With regard to abortion in the government-run health plan, explicitly permits the Secretary to include abortion in the services offered by government-run plan, and—if the “Hyde amendment” restrictions on federal funding for abortion coverage are not renewed every year in the Labor-HHS appropriations bill—requires that the government-run plan cover abortions.

With regard to the subsidies authorized under the bill, referred to as “affordability credits,” the Capps amendment specifically permits taxpayer subsidies to flow to plans that include abortion, but creates an accounting scheme designed to designate private dollars as abortion dollars and public dollars as non-abortion dollars.  The Capps accounting arrangement is rejected by pro-life organizations, which recognize that it is a clear departure from long-standing federal policy against funding health plans that include abortion (e.g., Federal Employee Health Benefits plan, Medicaid, SCHIP, DOD, etc).

Other provisions in the Capps amendment appear to prevent State laws from being overturned and prohibit the Secretary from mandating that all plans include abortion.  Although in apparent conflict with the anti-mandate language, the Capps amendment also requires that a plan that includes abortion be made available in every region—which could in turn lead to mandates that abortion clinics be established to “protect” access to abortions. Adopted by a party-line 30-28 vote, with six Democrats opposing.

Pallone: Includes language intended to serve as a placeholder for introduction of the Community Living Assistance Services and Supports (CLASS) Act (H.R. 1721), much of which lies within the jurisdiction of the Ways and Means Committee (and was therefore not germane to the sections considered by Energy and Commerce). That bill would create a new entitlement to long-term care services, financed by a new “Independence Fund” generated from beneficiary premiums. The Fund would be excluded from the federal budget for purposes of both the President and Congress, and subject to a “lock-box” that would prohibit any legislation from diverting monies from the Fund without the consent of 3/5 of the Senate.

Under H.R. 1721, the plan would have a level monthly premium of $30, provided individuals enroll in the first year they are eligible to join. (Late enrollees would pay age-adjusted premiums.) All individuals over 18 receiving wage or self-employment income would be automatically enrolled in the program; premiums would be automatically deducted from workers’ wages, and firms would be eligible for a tax credit equal to 25 percent of the administrative cost of withholding. Individuals with incomes below 150 percent of the federal poverty level would pay a nominal monthly premium, subject to a self-attestation form verifying their status. Premiums would not increase so long as the individual remained enrolled in the program (or the program had sufficient reserves for a 20-year period of solvency), and under no circumstance could premiums more than double.

Under H.R. 1721, individuals’ eligibility for benefits would vest after five years. The minimum cash benefit would be $50 per day, with amounts scaled for levels of functional ability—and benefits not subject to lifetime or aggregate limits.

Some Members may be concerned by the concept of creating a new, expansive federal entitlement program when Medicare itself is not actuarially sound and the Medicare Hospital Insurance Trust Fund is scheduled to be insolvent by 2017. Moreover, Members may note that the Congressional Budget Office, in analyzing similar provisions included in Section 191 of legislation considered by the Senate HELP Committee, found that “if the Secretary did not modify the program to improve its actuarial soundness, the program would add to future federal budget deficits in a large and growing fashion beginning a few years beyond the 10-year budget window.”

Rogers: Prohibits any federally sponsored comparative effectiveness research from being used by the federal government to deny or otherwise ration access to health care. A second, similar amendment offered by Rep. Gingrey prohibiting the Centers for Medicare and Medicaid Services from using cost-effectiveness criteria to make coverage determinations was also adopted. (However, Ways and Means Committee Democrats blocked a similar amendment, offered by Rep. Herger, in their markup on a party-line vote of 26-15. Anti-rationing language was not offered in the Education and Labor Committee markup, as the issue falls outside the Committee’s jurisdiction.)

Stupak: Codifies the Hyde/Weldon annual appropriations provision, first enacted in FY 2005 and included in Labor, Health and Human Services Appropriations bills since then, providing conscience protection for health care entities by preventing local entities from discriminating against them if they refuse to provide, pay for, or refer for abortion.  The amendment seeks to protect health care entities/workers from discrimination and participating in health care plans.

Eshoo: Establishes a Food and Drug Administration approval process for generic biosimilars, also referred to as follow-on biologics. Grants a period of exclusivity for brand-name products of 12 years, with a six-month extension possible in cases where a manufacturer agrees to an FDA request for pediatric studies. Gives FDA the authority to issue general or specific guidance documents (subject to a notice-and-comment period) regarding product classifications. Adopted by a 47-11 vote.

Ross: Includes placeholder language amending the small business exemption for the employer mandate, which lies within the jurisdiction of the Ways and Means Committee and technically was not germane to the Energy and Commerce markup. The language would increase the exemption level from $250,000 to $500,000 of overall annual payroll, and provide reduced tax penalties to firms with payroll between $500,000 and $750,000; the full 8 percent payroll tax would apply to firms over the latter threshold. Some Members may still be concerned that this provision would impose costly taxes on businesses in the middle of a recession—taxes which the Congressional Budget Office recently notedcould reduce the hiring of low-wage workers, whose wages could not fall by the full cost of…a substantial pay-or-play fee if they were close to the minimum wage.” Members may also note that the underlying bill includes no annual inflation adjustment for the small business exemption threshold—making the “compromise” agreement increasingly irrelevant over time.

Modifies the sliding-scale affordability subsidy levels, such that individuals with incomes equal to four times the federal poverty level ($88,200 for a family of four) would be expected to pay 12 percent of their income on health coverage, as opposed to 11 percent in the underlying bill. Requires States to pay 10 percent of the cost of the bill’s Medicaid expansion, beginning in 2015; according to the preliminary CBO score of H.R. 3200 as introduced, this provision alone would require States to pay an additional $35.8 billion in matching funds over the next decade. Given that Governors in both parties have already voiced significant concerns about what Tennessee Democrat Gov. Phil Bredesen termed “the mother of all unfunded mandates” being imposed upon States, some Members may be concerned that these provisions would have—as the head of Washington State’s Medicaid program recently suggested—States facing severe financial distress saying, “‘I have to get out of the Medicaid program altogether.’”

Requires the Secretary to negotiate payment rates for the government-run plan, and notes that such payment levels should result “in payment levels that are not lower in the aggregate” than those paid under Medicare. Includes other changes intended to create a “level playing field” with respect to the government-run plan; however, Members may agree with CBO Director Elmendorf, who previously testified that it would be “extremely difficult” to create “a system where a public plan could compete on a level playing field” against private coverage. Clarifies that enrollment in the government-run health plan is voluntary; however, Members may note studies by the Lewin Group have found that up to 114 million Americans could lose their current health coverage due to the creation of a government-run plan.

Establishes a Consumer Operated and Oriented Plan (CO-OP) program to provide grants or loans for the establishment of non-profit insurance cooperatives to be offered through the Exchange, but does not require States to establish such cooperatives. Authorizes $5 billion in appropriations for the Commissioner to make start-up loans or grants to help meet state solvency requirements. Some Members may be concerned that cooperatives funded through federal start-up grants would in time require ongoing federal subsidies, and that a co-op would do for health care what Fannie Mae and Freddie Mac have done for the housing sector.

Establishes a Center for Medicare and Medicaid Payment Innovation, intended to develop budget-neutral payment models that “address a defined population for which there are deficits in care leading to poor clinical outcomes.” Requires qualified plans to offer information regarding end-of-life planning, and notes that such entities “shall not promote suicide, assisted suicide, or the active hastening of death.” Contains provisions intended to retain insurance brokers’ role in enrolling individuals in health plans, as well as other provisions related to State-based Exchanges. Adopted by a party-line 33-26 vote, with three Democrats opposing.

Baldwin: Directs the Secretary of Health and Human Services to develop a formulary for the government-run plan, and requires qualified health plans to contract with pharmaceutical benefit managers (PBMs), which shall disclose prices paid for drugs to the Commissioner. Some Members may be concerned that these provisions would require the disclosure of proprietary price information and could lead to additional federal price controls placed on pharmaceutical companies and/or a restrictive formulary in the government-run health plan. Permits States to establish accountable care organizations within their Medicaid programs, and permits a temporary enhanced federal match (up to 90 percent) for same. Includes language regarding administrative simplification of health care transactions, as well as an expansion of electronic funds transfer payments within Medicare.

Requires that any savings generated from the amendment’s provisions be directed towards increasing affordability subsidies provided in the Exchange. The first of two progressive “unity” amendments attempting to mitigate what liberals viewed as the harmful effects of the Blue Dog proposal to reduce federal insurance subsidies. Adopted by a party-line 32-26 vote, with three Blue Dog Democrats opposing.

Schakowsky: Prohibits Exchange plans from increasing premiums at more than 150 percent of medical inflation levels, unless the plan adds extra benefits or the restriction would threaten its financial viability. Some Members may be concerned that this provision would impose a federal price control that would unfairly target plans enrolling sicker individuals with above-average cost increases. Requires the Secretary of Health and Human Services to negotiate drug prices covered under the Medicare Part D program. Requires that any savings generated from the price controls be directed towards increasing affordability subsidies provided in the Exchange. The second of two progressive “unity” amendments attempting to mitigate what liberals viewed as the harmful effects of the Blue Dog proposal to reduce federal insurance subsidies. Adopted by a party-line 32-23 vote, with two Blue Dog Democrats opposing.

Ways and Means Amendments

Chairman’s Mark: Prohibits the reimbursement of over-the-counter pharmaceuticals from Health Savings Accounts (HSAs), Medical Savings Accounts, Flexible Spending Arrangements (FSAs), and Health Reimbursement Arrangements (HRAs), effective in 2010. Because these savings vehicles are tax-preferred, adopting this prohibition would raise taxes by $8.2 billion over ten years, according to the Joint Committee on Taxation.

Members may be concerned that this provision would first raise taxes, and second—by imposing additional restrictions on savings vehicles popular with tens of millions of Americans—undermines the promise that “If you like your current coverage, you can keep it.” At least 8 million individuals hold insurance policies eligible for HSAs, and millions more participate in FSAs. All these individuals would be subject to additional coverage restrictions—and tax increases—under this provision.

In addition, the Chairman’s mark extends current tax benefits for health insurance—including the exclusion from income and payroll taxes for participants in employer-sponsored coverage, the above-the-line deduction for health insurance premiums paid by self-employed individuals, and FSAs and HRAs—to “eligible beneficiaries,” defined as “any individual who is eligible to receive benefits or coverage under an accident or health plan.” Under current law, while employer-sponsored coverage provided to spouses and children is generally excluded from income, domestic partners do not qualify for similar treatment, as the Internal Revenue Code does not classify them as dependents, and the Defense of Marriage Act (P.L. 104-199) prohibits their classification as spouses. This section would effectively expand the current-law health insurance tax benefits to domestic partners and their children, beginning in 2010; the provisions would reduce revenue by $4 billion over ten years, according to the Joint Committee on Taxation.

Legislative Bulletin: H.R. 1108, Family Smoking Prevention and Tobacco Control Act

Order of Business:  The bill is scheduled to be considered under suspension of the rules on Wednesday, July 30, 2008.

Summary of Changes Made:  The latest draft text would make several substantive changes to the bill.  First, the revised text would require the Secretary of Health and Human Services to contract with states to enforce the FDA-promulgated regulations with respect to tobacco products.  However, the bill would also prohibit the Secretary from contracting with states to enforce the tobacco regulations on Indian tribal lands—or directly engage in enforcement activity on tribal lands—without the express written consent of the tribe involved.  This last change was made to resolve a jurisdictional issue raised by the Natural Resources Committee, which has jurisdiction over Indian tribal matters.

Some conservatives may note that the language discussed above creates a significant loophole in the enforcement mechanism for tobacco products—namely, that Indian tribal areas could represent a “no-man’s land” with respect to tobacco enforcement.  Some conservatives may question whether this loophole could allow unregulated products to be bought and sold on tribal lands, effectively undermining the entire regulatory regime for tobacco products which H.R. 1108 is intended to establish.

The bill includes two new offsets to pay for federal tax revenue lost as a result of the projected 2% reduction in tobacco use, which the Congressional Budget Office (CBO) estimates would cost $114 million over five years, and $446 over ten.  To offset this foregone revenue, the bill would incorporate the text of a measure (H.R. 6500) making changes to the Thrift Savings Plan (TSP) for federal workers.  That bill would require auto-enrollment of workers in the TSP, costing $225 million over five years, and $736 million over ten, due to revenue loss associated with additional employees making pre-tax TSP contributions.  However, H.R. 6500 (as incorporated into H.R. 1108) would result in a net revenue gain, due to an additional provision establishing an after-tax savings component (similar to the Roth IRA or Roth 401(k) options) in the TSP, which CBO estimates would generate $382 million in revenue over five years, and $2.0 billion over ten, resulting from employees substituting pre-tax TSP contributions with after-tax ones.

The second offset for the lost tobacco tax revenue would come from the elimination of unused sick leave in the calculation of survivors’ annuity benefits for participants in the Federal Employees Retirement System (FERS).

Press reports indicate that further language may be added to the bill requiring a study of the so-called “menthol loophole;” however, such language was not available at press time.

Summary:  H.R. 1108 would amend the Federal Food, Drug, and Cosmetic Act to grant new authority to the Food and Drug Administration (FDA) to regulate tobacco products and advertising, and amend the Federal Cigarette Labeling and Advertising Act to impose new restrictions on tobacco product labels and disclosure.  Specific bill provisions include the following:

Findings and Purpose.  The bill contains 13 pages of findings purporting the need to regulate tobacco products to protect the public health, and language designed to ensure that the bill does not affect the authorities of the Secretaries of Agriculture or Treasury.  The bill also includes severability language providing that judicial invalidation of one or more sections of the legislation will not result in the nullification of the entire regulatory regime proposed by the bill.

Regulatory Authority.  H.R. 1108 gives FDA the authority to regulate tobacco products, which are defined as “any product made or derived from tobacco that is intended for human consumption, including any component, part, or accessory of a tobacco product” and establishes a new Center for Tobacco Products within the FDA to exercise regulatory authority.  The bill states that tobacco does not qualify as a drug or medical device for purposes of FDA regulation, and limits the FDA’s regulatory authority to tobacco leaf in the possession of tobacco manufacturers (thus excluding tobacco growers).

Adulterated and Misbranded Products.  The bill defines adulterated and misbranded tobacco products, defining the former to include products that “consists in whole or in part of any filthy, putrid, or decomposed substance,” and defining misbranded products to include those that are “false or misleading,” as well as those which do not adhere to the registration, labeling, and other regulatory regimes established under the bill.  The bill grants the FDA, through the Secretary of Health and Human Services, the right to pre-approve statements made on tobacco product labels.

Information Disclosure.  The bill requires all tobacco manufacturers to disclose to the Secretary the names and descriptions of all ingredients, components, and compounds in tobacco products, including the nicotine content of same.  The bill grants authority to the Secretary to obtain information from tobacco companies on the health effects of smoking and requires the Secretary to publish “a list of harmful and potentially harmful constituents” in tobacco products by brand.

Registration and Inspection.  H.R. 1108 requires all tobacco manufacturers to register their names and places of business with the Secretary and requires the Secretary to make such information public.  The bill also requires inspection of every domestic tobacco manufacturing establishment at least once every two years, and a requirement that overseas tobacco manufacturing establishments have “adequate and effective means” for the Secretary to ensure that tobacco products manufactured overseas should be refused entry into the United States.

General Authority.  The bill would permit the Secretary to restrict by regulation the sale, distribution, and advertising of tobacco products “if the secretary determines that such regulation would be appropriate for the protection of the public health.”  In exercising this authority, the Secretary may not 1) “prohibit the sale of any tobacco product in face-to-face transactions by a specific category of retail outlets;” 2) set an age limit on the sale of tobacco products higher than 18 years of age; or 3) require use of a physician’s prescription in order to obtain tobacco products.  However, the bill does require the Secretary to promulgate regulations addressing the sale, distribution, and marketing of tobacco products remotely so as to discourage the purchase of tobacco products by underage individuals.

Product Standards.  H.R. 1108 would ban all “artificial or natural flavors” except for menthol, and requires all tobacco products to meet domestic standards with respect to pesticide use.  The bill permits the Secretary to impose further restrictions should the regulations be in the interest of the public health.  However, “because of the importance of a decision of the Secretary to issue a regulation” banning all cigarettes or reducing the level of nicotine permitted in tobacco products to zero, the bill explicitly prohibits the Secretary from taking either action.

Notification and Recalls.  The bill grants the Secretary the authority to order notification to the public, through public service announcements or other means, of tobacco products that “present an unreasonable risk of substantial harm to the public health…and no more practicable means is available…to eliminate such risk.”  The bill also authorizes the Secretary to order recalls in the event that “there is a reasonable probability that a tobacco product contains a manufacturing or other defect not ordinarily contained in other tobacco products on the market that would cause serious, adverse health consequences or death.”

Record-Keeping.  H.R. 1108 requires tobacco companies to create and preserve records, as established by regulation, designed to determine that tobacco products are not adulterated or misbranded and to protect the public health, and to provide reports of any corrective action taken by tobacco manufacturers to remove products from the market for health reasons.  The bill language states that identities of any patients discussed in applicable records should remain confidential, unless disclosure is necessary “to determine risks to public health of a tobacco product.”

Review of New Tobacco Products.  The bill requires pre-market review for all new tobacco products introduced after February 15, 2007, unless the product is “substantially equivalent” to existing products.  The application for pre-market review requires full disclosure of the products’ components, and research of the health effects of same.  The bill would require the Secretary to reject such new tobacco products if “there is a lack of a showing that permitting such tobacco products to be marketed would be appropriate for the protection of the public health,” among other conditions necessary for approval.  The bill also permits the Secretary to withdraw pre-market approval, due to a company’s non-compliance with regulations or new information on the public health effects of a product, effectively removing the product from the marketplace.

Modified Risk Tobacco Products.  H.R. 1108 places restrictions on the introduction or marketing of modified risk tobacco products.  Specifically, the bill requires that any product marketed as modified risk must “significantly reduce harm and the risk of tobacco-related disease to individual tobacco users” and “benefit the health of the population as a whole,” including both tobacco users and non-users.  In the event that the Secretary cannot make such a determination without long-term epidemiological data that is not available, the Secretary may issue a temporary approval of not more than five years for the marketing of modified risk products, provided that “the reasonably likely overall impact of use of the product remains a substantial and measurable reduction in overall morbidity and mortality among individual tobacco users,” and the product is subject to annual post-market surveillance review.  The bill also places additional restrictions on the marketing, advertising, and comparative claims presented by modified risk tobacco products.

Judicial Review.  The bill provides a process for individuals adversely affected by regulations issued pursuant to the bill, or whose application for pre-market approval was denied, to seek judicial review with the U.S. Court of Appeals for the circuit in which the party resides or has a principal place of business, subject to review by the Supreme Court.

Regulatory Requirements.  H.R. 1108 requires the Secretary to issue regulations within three years of enactment regarding tobacco product testing and disclosure of product constituents, and permits the Secretary to require label or advertising disclosure of tobacco product constituents.  The bill provides for delays of regulatory and testing requirements for “small tobacco product manufacturers,” defined as those employing fewer than 350 individuals.  The bill also clarifies that none of its provisions prohibit the Federal Trade Commission (FTC) from regulating tobacco advertising or sales.

Limited Pre-Emption.  H.R. 1108 pre-empts state laws relating to tobacco product standards, mis-labeling, adulteration, labeling, and related product standards; according to the Congressional Budget Office (CBO), this pre-emption language constitutes an intergovernmental mandate as defined in the Unfunded Mandates Reform Act.  However, the bill retains states’ ability to enact more stringent standards with respect to tobacco advertising and promotion.

Scientific Advisory Committee.  The bill establishes the Tobacco Products Scientific Advisory Committee to provide technical expertise and recommendations to the Secretary regarding the regulation of tobacco products.

Smoking Cessation.  The bill requires the Secretary to consider approving the extended use of nicotine replacement products “for the treatment of tobacco dependence.”

User Fee.  The bill assesses user fees on tobacco companies and funds FDA regulation of tobacco activities in the amount of $85 million in Fiscal Year 2008, increasing each year until reaching $712 million in Fiscal Year 2018 and each subsequent year.  The bill assesses user fees by class of tobacco products (e.g. cigarettes, cigars, etc.), and allocates them to companies within a class of tobacco products, based on the percentages outlined in tobacco buyout legislation (P.L. 108-357) passed in October 2004.

Restores 1996 Rule on Tobacco Advertising.  The bill requires the Secretary to publish within 180 days of the bill’s enactment a final rule on regulation of tobacco identical to regulations published on October 28, 1996, with an effective date of one year following the bill’s enactment.  The original regulations would restrict tobacco advertising by, among other things, prohibiting billboards within 1,000 feet of schools and permitting only black-and-white advertising.  The bill would modify the original regulation to permit the free distribution of smokeless tobacco only, and only in quantities of fewer than 15 grams (0.53 ounces) in certain “qualified adult-only facilities.”  The bill exempts the final rule, as modified, from review under the Congressional Review Act.

Nullifies Earlier Documents.  H.R. 1108 would nullify the precedent of certain documents issued by FDA during 1995-96 as they relate to a prior attempt to classify nicotine in tobacco products as a drug for purposes of FDA regulation. (H.R. 1108 would make tobacco subject to FDA regulation, but as a “tobacco product,” not a drug or medical device.)

New Penalties.  The bill would add failure to comply with the bill’s requirements as grounds for imposition of fines and/or criminal penalties, along with other offenses relating to counterfeiting tobacco products or “the charitable distribution of tobacco products.”  The bill also gives the Secretary the authority to impose a “no-tobacco sale order” against retail outlets and establishes a new system of federal fines against retail establishments selling tobacco products improperly, authorizing fines of up to $10,000 for establishments with six or more violations within a four-year period.

Studies.  The bill would require the Government Accountability Office to submit studies regarding youth smoking as well as cross-border trade and counterfeiting in tobacco products, and requires a specific study by HHS on raising the minimum age to purchase tobacco products, as well as an FTC report on concentration within the tobacco industry.

Labeling Requirements.  The bill requires all cigarettes and smokeless tobacco sold in the United States to bear clear warnings about the risks associated with tobacco use and prescribes the wording, typeface, and font size associated with such warnings. (Tobacco products manufactured domestically for international use are exempt from this requirement.)  H.R. 1108 further requires that all advertising, including matchbooks, contain language from the warning labels, and prescribes the proportions by which such labeling warning must relate to the overall size of the advertisement.  The bill gives the Secretary of HHS the authority to alter or increase the size of the labeling requirements, permits states to further regulate the type and manner, but not the content, of cigarette advertising, and extends a prohibition on television and radio advertising to smokeless tobacco products subject to the jurisdiction of the Federal Communications Commission.

Tar and Nicotine Disclosure.  The bill gives the Secretary the authority to conduct a rulemaking process to determine whether to require the disclosure of tar, nicotine, and other constituent levels in tobacco advertising, subject to a memorandum of understanding with the Federal Trade Commission.

Shipping Requirements.  H.R. 1108 requires that all packaging and shipping containers shall bear statements stating “sale only allowed in the United States” and requires the Secretary to issue regulations regarding the maintenance of records by entities manufacturing, transporting, or distributing tobacco products.  The bill also requires tobacco manufacturers and distributors to notify the Attorney General and the Secretary of the Treasury upon obtaining information “which reasonably supports the conclusion” that tobacco products formerly held by the entity have circumvented payment of applicable taxes or “diverted for possible illicit marketing.”

Cost to Taxpayers:  According to the Congressional Budget Office (CBO), H.R. 1108 would result in $2.1 billion in mandatory spending over five years, and $5.3 billion over ten, related to the Food and Drug Administration’s regulation of tobacco.  The bill would offset these costs by imposing a “fee” on tobacco companies to finance the FDA regulation.

CBO also estimates a decline in revenues of $114 million over five years, and $446 million over ten, related to a 2% reduction in overall smoking levels due to tobacco regulation, and loss of commensurate tobacco tax revenue.  In order to pay for this reduced revenue, H.R. 1108 incorporates provisions relating to the federal Thrift Savings Plan (TSP).  The bill would establish a system of auto-enrollment in TSP for all federal employees, causing a minor revenue loss, but would on balance generate additional tax revenue by establishing a new plan to permit after-tax TSP contributions, similar to a Roth IRA or the recently-established Roth 401(k) option.

Finally, CBO estimates a five-year increase in spending subject to appropriation of $3 million as a result of H.R. 1108’s enactment.

Committee Action:  The bill was introduced on February 15, 2007, and referred to the Energy and Commerce, which held a hearing and, on April 2, 2008, reported the bill as amended by a 38-12 vote.

Possible Conservative Concerns:  Numerous aspects of H.R. 1108 may raise concerns for conservatives, including, but not necessarily limited to, the following:

  • Process.  Some conservatives may be concerned that a 190-page bill seeking to establish new federal authority to regulate a multi-billion dollar industry is being considered under expedited procedures on the suspension calendar.
  • User Fee as Tax Increase.  The bill includes more than $5 billion in assessments on tobacco companies, ostensibly termed “user fees,” to finance the FDA’s work regulating tobacco products.
  • Restricts Free Speech Rights.  In addition to codifying federal restrictions, which tobacco companies agreed to in their 1998 settlement with state Attorneys General, H.R. 1108 places additional federal restrictions on tobacco advertising.  Some of the federal restrictions on advertising content in H.R. 1108 include the following specifications for the size of warning labels on tobacco products:

The text of such label statements shall be in a typeface pro rata to the following requirements: 45-point type for a whole-page broadsheet newspaper advertisement; 39-point type for a half-page broadsheet newspaper advertisement; 39-point type for a whole-page tabloid newspaper advertisement; 27-point type for a half-page tabloid newspaper advertisement; 31.5-point type for a double page spread magazine or whole-page magazine advertisement; 22.5-point type for a 28 centimeter by 3 column advertisement; and 15-point type for a 20 centimeter by 2 column advertisement.

Some conservatives may be concerned that the highly prescriptive restrictions described above, and elsewhere in H.R. 1108, constitute an undue intrusion on companies’ constitutional free speech rights to advertise a product that most Americans already know is unhealthy.

  • Hinders Introduction of Reduced Risk Tobacco Products.  H.R. 1108 places stringent restrictions on the introduction and marketing of new products that would reduce or modify the inherent risks associated with the consumption of tobacco.  The bill states that a reduced risk product may be marketed only if the product will “significantly reduce harm and the risk of tobacco-related disease to individual tobacco users” and also will “benefit the population as a whole,” including persons who do not consume tobacco products.  Some conservatives may be concerned that such onerous restrictions on the introduction of reduced risk tobacco products could have the effect of inhibiting the use of products that could reduce the risks associated with tobacco consumption while potentially serving as a barrier to entry for new market competitors.
  • FDA Improper Agency to Regulate Tobacco.  As FDA Commissioner Andrew von Eschenbach testified before the House Energy and Commerce Committee in October 2007, the FDA has heretofore been structured as an agency to promote and protect the public health.  In the Commissioner’s opinion, requiring FDA to “approve” tobacco products as a result of H.R. 1108 would dramatically change the agency’s focus: “Associating any agency whose mission is to promote public health with the approval of inherently dangerous products would undermine its mission and likely have perverse incentive effects.”

  • Other Important Priorities for FDA.  Energy and Commerce Oversight Subcommittee Chairman Bart Stupak (D-MI), in holding a hearing on FDA’s decision to approve an antibiotic despite receiving false clinical trial data, called the incident “a microcosm of the failure by all FDA stakeholders—FDA, pharmaceutical sponsors, and third-party monitors—to ensure the integrity of clinical trials used to support the safety and approval of new drug applications.”  On top of questions which Democrats themselves have raised regarding FDA’s competence, some conservatives may question whether the food safety concerns that have arisen in recent months make now an appropriate time significantly to expand the agency’s regulatory remit and mission.
  • Multiple Layers of Regulation.  While establishing FDA authority to regulate tobacco products, H.R. 1108 would also retain the FTC’s authority to regulate tobacco advertising and distribution on the federal level, and would provide only limited pre-emption of state laws, allowing more stringent state restrictions on tobacco advertising and promotion.  Some conservatives may be concerned that these multiple layers of regulation will impose undue bureaucratic and logistical difficulties on tobacco manufacturers—even though H.R. 1108 would explicitly retain tobacco as a lawful product.
  • Little Impact on Tobacco Use.  The CBO estimate of H.R. 1108 notes that under its budgetary model, smoking by adults would decline by only 2% after 10 years.  Some conservatives may question whether this marginal reduction in smoking levels warrants the significant intrusion on free speech rights and government-run regulatory bureaucracy that would be created under the legislation.
  • Billions in Unfunded Mandates; UMRA Point of Order.  The Congressional Budget Office, in its score of H.R. 1108, calculates that the fee imposed in the bill would constitute an unfunded mandate on tobacco companies of $249.1 million in Fiscal Year 2009, and more than $2.3 billion over five years, greatly exceeding the threshold established in the Unfunded Mandates Reform Act ($136 million in 2008, adjusted annually for inflation).   CBO also notes that the bill includes several unfunded mandates that would both pre-empt existing state tobacco regulations and require tribal governments manufacturing or distributing tobacco products to comply with the new federal regulatory regime.
  • Violates Trade Agreements.  HHS Secretary Leavitt, writing to Energy and Commerce Committee Ranking Member Barton on H.R. 1108, noted that the legislation could be viewed by foreign governments as a hostile trade action.  Because the bill bans clove and other flavored cigarettes—many of which are manufactured in foreign countries—while expressly permitting production of menthol cigarettes, Indonesia or other foreign governments could file complaints at the World Trade Organization claiming discrimination against their products.  Some conservatives may be concerned that passage of H.R. 1108 could ultimately result in retaliatory measures being taken against American-made products—and could lead to trade disputes with a negative effect on economic growth.
  • Menthol Loophole.  As noted above, H.R. 1108 would prohibit the use of all “artificial or natural” cigarette flavorings—with the exception of menthol, which is permitted under the bill.  Because data from the Centers for Disease Control indicate that 75% of African-American smokers consume menthol cigarettes, seven former Secretaries of Health and Human Services, representing both political parties, wrote to Congress to criticize a menthol “loophole” that “caves to the financial interests of tobacco companies” by “send[ing] a message that African-American youngsters are valued less than white youngsters.”

Because the bill is being considered under suspension of the rules, no amendments addressing the menthol issue can be considered.  Some conservatives may note that the House Democrat leadership would apparently rather retain the support of the major tobacco company (Philip Morris) supporting the legislation than permit a vote on amendments that seven former HHS Secretaries believe are in the best interests of African-Americans.

Administration Position:  Although a formal Statement of Administration Policy (SAP) was unavailable at press time, a letter from Health and Human Services Secretary Leavitt to Energy and Commerce Ranking Member Barton indicated that the Administration “strongly opposes” H.R. 1108.

Does the Bill Expand the Size and Scope of the Federal Government?:  Yes, the bill would grant new authority to the Food and Drug Administration to regulate tobacco products.

Does the Bill Contain Any New State-Government, Local-Government, or Private-Sector Mandates?:  Yes, the bill imposes new fees on tobacco companies, which CBO estimates would total $235 million in Fiscal Year 2009, $2.1 billion over five years, and nearly $5.4 billion over ten years, all greatly exceeding the thresholds established in the Unfunded Mandates Reform Act ($136 million in 2008, adjusted annually for inflation).

Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax Benefits/Limited Tariff Benefits?:  The Committee on Energy and Commerce, in House Report 110-762, reports that “H.R. 1108 does not contain any congressional earmarks, limited tax benefits, or limited tariff benefits as defined in clause 9(d), 9(e) or 9(f) of rule XXI.”

Constitutional Authority:  The Committee on Energy and Commerce, in House Report 110-762, cites constitutional authority under Article I, Section 8, Clause 3 (relating to the regulation of interstate commerce) and Article I, Section 8, Clause 1 (relating to legislation promoting the general welfare of the United States).

Question and Answer: Tobacco Regulation Bill

The House may soon be faced with a vote on a measure (H.R. 1108) to include tobacco products under the regulatory authority of the Food and Drug Administration (FDA).  The RSC has prepared the following analysis providing background information on the legislation, as passed by the House Energy and Commerce Committee on April 2, 2008.

What is the purpose of the provisions of H.R. 1108 regulating tobacco products? 

Both the stated purpose and expansive scope of the proposed FDA regulation of tobacco under H.R. 1108 can be observed in Title I of the bill: “The Secretary [of Health and Human Services] may by regulation require restrictions on the sale and distribution of a tobacco product, including restrictions on the access to, and the advertising and promotion of, the tobacco product, if the Secretary determines that such regulation would be appropriate for the protection of the public health.”  Under the bill, the definition of the public health is extended to both users and non-users of tobacco products.

Some conservatives may note that this language is a significant modification from the original justification for tobacco regulation—namely, the need to protect children from gaining access to tobacco products.  In fact, while children are mentioned several times in the findings section of H.R. 1108, the word “children” appears only four times in the remaining 176 pages of the bill.  Some conservatives may be concerned that this new focus on a more expansive goal of protecting the public health may divert energy away from efforts to combat underage consumption of tobacco products.

Does H.R. 1108 contain a tax increase?

Many conservatives may be concerned that it does.  The bill includes assessments on tobacco companies, ostensibly termed “user fees,” to finance the FDA’s work regulating tobacco products.  However, the Congressional Budget Office estimates that tobacco regulation will reduce the number of smokers—thus decreasing the amount of revenue derived to the federal government from tobacco taxes.

While the version of H.R. 1108 reported from full Committee attempted to address this matter by including a finding that the bill’s scope was not intended to intrude upon any authority under the Internal Revenue Code, the House Ways and Means Committee has requested a referral on the grounds that the fee ultimately constitutes a tax.  As Ways and Means Chairman Rangel wrote to Speaker Pelosi on April 3, 2008:

The amount of money raised by the assessment of the user fee is more than the amount of money being made available to the Secretary of Health and Human Services (HHS) for the regulation of tobacco….Since the bill forbids the funds from being spent on anything other than tobacco regulation, [the funds] would in fact revert back to the general fund of the U.S. Treasury.  The Committee on Energy and Commerce would then be financing the costs of government generally, which is clearly the jurisdiction of the Committee on Ways and Means.

Therefore, many conservatives may be concerned that, following Chairman Rangel’s own logic, the “user fee” in H.R. 1108 in fact constitutes a tax increase on tobacco companies.

Under what standard would tobacco be regulated under H.R. 1108?

The bill would re-institute standards first proposed in 1996 to regulate tobacco as a medical device.  However, it remains unclear how these standards can be reconciled with the inherent nature of tobacco products.  For instance, Title I of H.R. 1108 deems a tobacco product as “adulterated” if “it consists in whole or in part of any filthy, putrid, or decomposed substance, or is otherwise contaminated by any added poisonous or added deleterious substance that may render the product injurious to health.”  Based on this description, it is unclear how any tobacco product would fail to qualify as “adulterated,” raising questions as to how the standards can be appropriately applied.

Will H.R. 1108 impede the introduction of reduced-risk tobacco products?

H.R. 1108 places stringent restrictions on the introduction and marketing of new products that would reduce or modify the inherent risks associated with the consumption of tobacco.  The bill states that a reduced risk product may be marketed only if the product will “significantly reduce harm and the risk of tobacco-related disease to individual tobacco users” and also will “benefit the population as a whole,” including persons who do not consume tobacco products.  Other reduced risk products may be approved for distribution, but will be subjected to further marketing restrictions, post-market surveillance, and potential revocation of the distribution license after a five-year period.  Some conservatives may be concerned that such onerous restrictions on the introduction of new reduced risk tobacco products could have the effect of inhibiting the introduction of products that could reduce the risks associated with tobacco consumption while potentially serving as a barrier to entry for new market competitors.

How would tobacco advertising be regulated under H.R. 1108?

In addition to codifying federal restrictions, which tobacco companies agreed to in their 1998 settlement with state Attorneys General, H.R. 1108 places additional federal restrictions on tobacco advertising, while simultaneously eliminating federal pre-emption by allowing states to enact legislation “imposing specific bans or restrictions on the time, place, and manner, but not content, of the advertising or promotion” of tobacco products.  Some of the federal restrictions on advertising content in H.R. 1108 include the following specifications for the size of warning labels on tobacco products:

The text of such label statements shall be in a typeface pro rata to the following requirements: 45-point type for a whole-page broadsheet newspaper advertisement; 39-point type for a half-page broadsheet newspaper advertisement; 39-point type for a whole-page tabloid newspaper advertisement; 27-point type for a half-page tabloid newspaper advertisement; 31.5-point type for a double page spread magazine or whole-page magazine advertisement; 22.5-point type for a 28 centimeter by 3 column advertisement; and 15-point type for a 20 centimeter by 2 column advertisement.

Some conservatives may be concerned that the highly prescriptive restrictions described above, and elsewhere in H.R. 1108, constitute an undue intrusion on companies’ constitutional free speech rights to advertise a product that most Americans already know is unhealthy.

What implications might consumers draw from FDA’s proposed role in regulating tobacco?

As FDA Commissioner Andrew von Eschenbach testified before the House Energy and Commerce Committee in October 2007, the FDA has heretofore been structured as an agency to promote and protect the public health.  In the Commissioner’s opinion, requiring FDA to “approve” tobacco products as a result of H.R. 1108 would dramatically change the agency’s focus: “Associating any agency whose mission is to promote public health with the approval of inherently dangerous products would undermine its mission and likely have perverse incentive effects.”

Is FDA competent to regulate tobacco products?

The statements of several Congressional Democrats—who have criticized the agency’s handling of food and drug safety, particularly with regard to imported products—raise questions as to why they would support granting new and broad authority to FDA with regard to tobacco regulation.  For instance, Energy and Commerce Oversight Subcommittee Chairman Bart Stupak (D-MI), in holding a hearing on FDA’s decision to approve an antibiotic despite receiving false clinical trial data, called the incident “a microcosm of the failure by all FDA stakeholders—FDA, pharmaceutical sponsors, and third-party monitors—to ensure the integrity of clinical trials used to support the safety and approval of new drug applications.”  On top of questions which Democrats themselves have raised regarding FDA’s competence, some conservatives may question whether the food safety concerns that have arisen in recent months make now an appropriate time significantly to expand the agency’s regulatory remit and mission.