The Good, The Bad, and The Ugly of House Republicans’ Obamacare Replacement

On Thursday, prior to lawmakers returning home for the President’s Day recess, House leadership gave them a brief outline of policies likely to be included in “repeal-and-replace” legislation introduced next month. While this “full replace” strategy likely will encounter additional obstacles and delays, as I outlined last week, it’s worth analyzing the specific policies being proposed at this point, to see how they shape up.

The Good

State Innovation Grants: While sounding new to some, this concept was first introduced in 2009 in the House Republican alternative to Obamacare, and later reprised in an Obamacare alternative introduced by America Next and then-Gov. Bobby Jindal (R-LA) that I helped draft. The program provides federal incentives for states to reform their insurance markets in ways that will lower premiums, expand access, and ensure coverage for individuals with pre-existing conditions (i.e., high-risk pools).

Health Savings Accounts (HSAs): In recent years, health savings accounts have become a popular and effective way to reduce health care costs. In addition to making other minor reforms, the Republican plan would roughly double HSA contribution limits. This change would allow individuals—particularly those just establishing HSAs—to save more for medical expenses, while not sparking the over-consumption that an unlimited HSA might incentivize.

Medicaid: With respect to Obamacare’s expansion of Medicaid to the able-bodied, the House document says expansion states “could continue to receive enhanced federal payments for currently enrolled beneficiaries for a limited period of time” (emphasis mine). This language would effectively adopt my earlier proposal of freezing enrollment in the Medicaid expansion—perhaps the most effective way to unwind the Obamacare entitlement. Unfortunately, other changes (described below) might have the opposite effect.

The Bad (or Questionable)

More Obamacare? In discussing the transition period between Obamacare and the new regime they seek to establish, the House document states “the Obamacare subsidies are adjusted slightly [sic] to provide additional assistance for younger Americans and reduce the over-subsidization older Americans are receiving.”

Regardless, it seems questionable whether the answer to Obamacare’s problems lies in either more spending or another federal regulation that would only slightly ease the current micromanagement of health insurers. The focus should remain on repealing Obamacare, not fixing Obamacare.

Medicaid: At minimum, the House paper leaves more questions than it answers here, providing few specifics on the formula for a reformed Medicaid program (either block grants or per capita caps) in the future. In last year’s Better Way plan, House leadership proposed creating a “base year” for a reformed program of 2016, but that specific policy point did not appear in last week’s document.

Since release of the Better Way plan last year, new data from actuarial reports on Medicaid have shown how states that expanded Medicaid have “gamed the system” to increase their federal funding. Specifically, participants in the Medicaid expansion have averaged 14 percent higher costs than non-expansion enrollees—exactly the opposite of the actuary’s projections prior to the law’s implementation. That’s because states have used the prospect of the up to 100 percent federal match for expansion populations—so-called “free money” from Washington—to pay higher physician reimbursements.

Health Savings Accounts: While increasing contribution limits will increase HSA take-up, one other change should take precedence: Allowing HSA funds to be used to pay for insurance premiums, which is currently prohibited in most cases (except for COBRA continuation coverage, during periods of unemployment, and other limited circumstances). Allowing account funds to pay for premiums would represent a quantum leap forward in consumer-driven health care, by creating a defined-contribution model: Small businesses that cannot afford to purchase coverage for their workers can make predictable HSA contributions, which employees can then use to pay for health expenses, or to fund their own health insurance.

It is possible that the budgetary cost of ending the restrictions on premium payments prompted leadership staff to work instead on increasing the contribution limits. But the former should come before the latter, for multiple reasons: Allowing people to use account funds to pay premiums will create greater political movement to increase the contribution limits, while increasing the contribution limits now will make ending the premium restrictions more costly later. Both are positive reforms, but for multiple strategic reasons, ending the premium payment restrictions should take precedence over increasing the contribution limits.

The Ugly

New Entitlement (Funded by New Taxes?): The linchpin of the House plan lies in its system of advanceable, refundable tax credits—a new program of spending that would see the federal government writing “refund” checks to individuals with no income tax liability. However, the proposal likely will not receive a favorable score from the Congressional Budget Office (CBO) about the number of individuals covered by health insurance, at least compared to Obamacare.

Most economists agree that the tax treatment of employer-provided health insurance encourages over-consumption of health insurance and health care. However, there are better ways to reform the tax treatment of health coverage—and provide parity between employer-sponsored and individually purchased insurance—without raising taxes overall. The American people do not support repealing Obamacare’s revenue increases only to replace them with other tax hikes.

Therein lies the great disappointment of the House proposal. While in 2008 Barack Obama campaigned for his plan by saying it would reduce health-care costs, he governed with a singular focus on increasing the number of individuals with health insurance, and in so doing raised costs and premiums for millions of Americans. Going down the same failed Obamacare approach of more taxes and more spending will not lower health costs. That, and not repealing and replacing Obamacare’s taxes and spending, should be House Republicans’ ultimate objective.

This post was originally published at The Federalist.

Berwick’s Evasions on Single Payer

Under questioning from Chairman Camp, CMS Administrator Don Berwick refused to admit whether or not he remained “in love” with Britain’s National Health Service – and whether or not he agreed with his prior statement defining a “a single-payer mechanism as the only sensible approach to health care finance I can think of.”  He tried to evade the question by claiming that each country needs its own solution on health care, and that he favored a “uniquely American” approach.  The only problem with that statement is that Dr. Berwick has a LONG history of positively comparing the British single-payer health care system to American health care – and frankly denigrating the US health care system. (A sample of those quotes follows below.)

If he can’t answer a simple question whether or not he is “in love” with single-payer, why should any American be reassured that Dr. Berwick – who now controls (directly or indirectly) the health insurance coverage of EVERY American – will be able to keep their current plan, or won’t be subjected to top-down diktats from federal bureaucrats in Washington?

 

“In the US, we need to think about populations, about teamwork.  It is an uphill battle because we are so individualistic and have built such fragmented systems.  When I go to the NHS, I see a kind of dream.”[1]

“Both the UK and the US are struggling to improve their troubled healthcare systems.  Which is more likely to succeed?  The two countries are strikingly similar in the problems they face, and equally dissimilar in their plans of action.  I am a fan of both but, when bets are place, my money will be on the UK.”[2]

“The cost of health care…has been maintained in the United Kingdom at a remarkably low level…Though it has taken its share of criticism for its queues and rationing choices and for the development of a privileged private care market, the NHS remains overall a system that compares favorably to the American system in its commitments to equity of access and cost control.”[3]

“As for my optimism about the NHS—sorry, Richard, I simply can’t help it.  I do meet many leaders, in whom I have great faith, but I also meet many of the dedicated staff and patients, almost all of whom continue to be incredibly loyal to a pathfinding system of care that the United Kingdom started a half century ago.  They are smart enough to know a good thing when they have it, even while they demand that it get better.  I would trade the UK’s NHS, warts and all…for my nation’s health care chaos any day.”[4]

“I lose friends on this, but I think a lot of the other systems around the world, in the UK, Canada, Scandinavia, they’re far better models than we have.  They consolidate payment, they make public plans for progress, they’re able to make changes and they’re able to move resources around more easily than we can.”[5]

 

[1] “A Case of US and Them—The HSJ Interview: Don Berwick” by Paul Dempsey, Health Service Journal April 10, 2003

[2] “The Improvement Horse Race: Bet on the UK” by Donald Berwick, Quality and Safety in Health Care 2004; 13, p. 407.

[3] “Quality Management in the NHS: The Doctor’s Role—I” by Donald Berwick et al., BMJ January 25, 1992, p. 235

[4] “Would the NHS Benefit from a Single, Identifiable Leader?  An E-mail Conversation” by Donald Berwick, Chris Ham, and Richard Smith, BMJ December 20-27, 2003, p. 1424

[5] “Re-Engineering Health Care” by Pat Kiernan, CNNfn, June 6, 2002

GAO Report on Medicare Mailer

Late yesterday the Government Accountability Office released its report on a request by Reps. Camp and Herger to analyze the Administration’s Medicare mailer to seniors.  Although the report concluded that the mailer did not constitute taxpayer-funded propaganda – which GAO has historically interpreted on a narrow basis – the analysis did find that the mailer “presented abbreviated information and a positive view of PPACA that is not universally shared.”  Relevant excerpts include:

“We note that the brochure provides information about PPACA generally that may not be directly relevant to the Medicare program or recipients of the brochure, and, in some instances, provides abbreviated information, omitting some program details.  For example, the section titled ‘Improvements Beyond Medicare That You and Your Family Can Count On’ refers to programs for which Medicare beneficiaries are likely to be ineligible, such as health coverage options for young people up to age 26 and a new long-term care insurance program that requires enrollees to work while paying premiums.”

The brochure does not provide beneficiaries with a comprehensive summary of changes to Medicare that will be implemented as a result of PPACA, and in several instances it provides abbreviated information that leaves out details about PPACA.  For example, the brochure states that ‘[i]nsurance companies will be prohibited from denying coverage due to a pre-existing condition for children starting in September, and for adults in 2014,’ but does not explain that this provision of PPACA, although broad, does not apply to all health plans.  A subset of health plans—grandfathered individual health insurance plans—are exempt.” (Of particular interest to seniors, but not stated in the brochure: Medigap plans are also exempt from PPACA’s prohibition on waiting periods for coverage of pre-existing conditions.)

“In our view, the brochure presents a picture of PPACA that is not universally shared.  For example, two government analyses have determined that PPACA reductions in Medicare Advantage may decrease enrollment and result in less generous benefit packages….In its discussion of ‘Improvements to Medicare Advantage,’ the brochure focuses on the more immediate effects of the provisions related to Medicare Advantage rather than the projected impact over the next 10 or more years, and does not mention the government analyses.”

“We noticed, also, that the brochure overstates some of PPACA’s benefits.  For example, it states that PPACA ‘increases the number of primary care doctors, nurses, and physician assistants,’ when PPACA, in fact, only provides incentives for such increases.”

“The brochure mentions that ‘guaranteed Medicare benefits won’t change—whether you get them through Original Medicare or a Medicare Advantage plan’…Beneficiaries who participate in Medicare Advantage are guaranteed original benefits, but the specific benefits beyond original Medicare offered by Medicare Advantage plans are not guaranteed and could change at a plan’s discretion.”

The GAO report comes a month after the non-partisan factcheck.org issued an analysis, entitled “Mayberry Misleads on Medicare,” concluding that a promotional campaign featuring Andy Griffith used “weasel words” regarding Medicare’s “guaranteed benefits” because “for millions of seniors, benefits won’t remain the same.”

More Democrat Disarray on 1099 Reporting

In case you’re interested, the House is having an interesting debate this morning on repealing the 1099 reporting provision.  Rather than allowing an up-or-down vote last night on Rep. Camp’s motion to recommit repealing Section 9006 of the health care law, Democrats pulled their tax legislation from consideration.   They then brought to the House floor this morning under suspension of the rules a separate measure that would repeal Section 9006—paid for by other job-killing tax increases on business—while denying Republicans a vote on Rep. Camp’s alternative, which would not raise taxes on the small businesses who are the engines of job creation.

To recap: Democrats will vote to repeal a portion of the health care law, after having voted to pass it only four short months ago.  Rep. Bill Owens of New York says that this rapid about-face shows that “we listened” to the concerns of small businesses about implementing this legislation.  But if Democrats were really listening to small businesses—or the American people—why did they pass this unpopular and job-killing law in the first place?

Democrats in Retreat over 1099 Tax Reporting Requirements

The Wall Street Journal this morning reports on the troubles that the 1099 business tax reporting requirements included in Section 9006 of the health care law are causing for Democrats in Congress.  Under the provision, vendors and small businesses are required to file Forms 1099 for any goods purchases that total over $600 in the aggregate over the course of a year – which will force all businesses, including small businesses, to file tax forms listing the amount of their annual transactions with vendors like their paper supplier, bottled water distributor, caterer, etc.  The National Taxpayer Advocate has noted this provision will affect 40 million businesses – ten times the number of firms the Administration asserts will benefit from small business tax credits – and has called the paperwork requirements “disproportionate” and “burdensome”.

House leaders pulled pending tax legislation from the floor last night in response to a motion to recommit offered by Rep. Camp that would repeal this onerous requirement; as the Politico notes, “The worry was that the amendment would have been far too tempting for Democratic rank-and-file.  The risk of letting any kind of ‘repeal’ pass was too big to chance.”  Instead House leaders hope to craft an “alternative” that purports to address “concerns about overburdening business” while leaving the reporting regime intact.  Similarly, rather than adopting the Johanns 1099 repeal amendment to the small business bill (H.R. 5297) in the Senate yesterday, Democrat leaders instead attempted to offer an alternative that would have required the IRS “to request and consider comments and suggestions from the public” regarding how to implement the 1099 requirements.

In addition to questioning how exactly the IRS can make tax enforcement more “user-friendly,” some may wonder why Democrats are scrambling to leave in place a $17 billion tax increase on struggling businesses at a time of record unemployment.  Is the majority so insistent on keeping every facet of their health care law intact that they are willing to preserve new job-killing taxes and regulations on small firms at a time of significant economic uncertainty?

The Return of the Government-Run Health Plan…

You may have seen word that Progressive Caucus Co-Chair Lynn Woolsey and several other Democrats released a stand-alone bill (H.R. 5808) that would amend PPACA to create a government-run health plan in the new health insurance exchanges.  The language very closely mirrors the original government-run plan written into Subtitle B of Title II of the legislation (H.R. 3200) that House Democrats introduced last July.  There are a few technical changes, and a new requirement that any innovative payment models in the government-run plan must be certified by the Medicare actuary not to increase costs, but overall the legislation is nearly identical to the “robust” government-run plan advocated by liberal Democrats last year.

There’s a noteworthy element of the updated CBO estimate about a government-run health plan’s impact.  Today’s CBO letter to Rep. Stark about H.R. 5808 stated that the government-run plan’s “premiums would be 5 percent to 7 percent lower, on average, than the premiums of private plans offered in the exchanges.”  Yet one year ago, CBO told Rep. Camp that premiums in the nearly identical government-run plan included in H.R. 3200 “would, on average, be about 10 percent lower than that of a typical private plan offered in the insurance exchanges.”  As yet it’s unclear why the premium impact is lower for the government-run plan in H.R. 5808 when it’s nearly identical to that in H.R. 3200, but it’s worth remembering that if premiums aren’t lower in the government-run plan, there’s no point in creating it in the first place – unless its advocates have an ideological agenda to create a single-payer health care system.

In case you need a reminder on what was in H.R. 3200, a lightly edited/revised version of the government-run plan section from my original summary of that bill follows below.

 

Government-Run Health Plan:  The bill states that the Department of Health and Human Services “shall provide for the offering through Exchanges” a “public health insurance option” that “shall only be made available through Exchanges established” under PPACA.  The bill states the plan shall comply with requirements related to other Exchange plans, and offer basic, enhanced, and premium plan options.  However, the bill does not give the Exchanges the authority to reject, sanction, or terminate the government-run plan; therefore, some Members may be concerned that the bill’s headings regarding a “level playing field” belie the reality of the plain text.

The government-run plan would be empowered to collect individuals’ personal health information, posting a significant privacy risk to all Americans.  The government-run plan would have access to federal courts for enforcement actions—a significant advantage over private insurance plans, whose enrollees may sue in State courts.

The bill gives the government-run health plans $2 billion in “start-up funds”—as well as 90 days’ worth of premiums as “reserves”—from the Treasury, with repayment—not including interest—to be made over a 10-year period.  The bill requires the Secretary to establish premium rates that can fully finance the cost of benefits, administrative costs, and “an appropriate amount for a contingency margin” as developed by the Secretary.  Some Members may be concerned that this provision would allow the Secretary to determine the plan’s own capital reserve requirements, which could be significantly less than those imposed on private insurance carriers under State law, and question why Democrats who criticized banks for maintaining insufficient reserves are now permitting a government-run health plan to do the exact same thing—unless their motive is to give the government-run health plan a built-in bias.

The bill provides that the government-run plan shall pay Medicare rates for at least its first three years of operation. Physicians also participating in Medicare as well as the government-run plan would receive a 5 percent bonus for its first three years. Reimbursement rates for pharmaceuticals within the government-run plan would be “negotiated” by the Secretary-a provision which, with respect to Medicare Part D, the Congressional Budget Office has stated would not result in any appreciable savings when compared to negotiations undertaken by private health plans.
While the bill states that the Secretary “may utilize innovative payment mechanisms” to improve health outcomes and achieve other objectives, it also states that the Secretary must set payment rates “consistent with” provisions pointing to Medicare payment rates as the benchmark.  Given estimates from the Lewin Group that as many as 114 million individuals could lose access to their current coverage under a government-run plan—and that a government-run plan reimbursing at the rates contemplated by the legislation would actually result in a net $16,207 decrease in reimbursements per physician per year, even after accounting for the newly insured—many Members may oppose any effort to include a government-run plan in any health reform legislation.
The bill requires Medicare providers, including physicians, to participate in the government-run plan unless they opt-out of said participation, and provides that all providers who accept the government-run plan’s reimbursement rates shall be considered “preferred physicians”—regardless of their quality or expertise—and creates a new category of “participating, non-preferred physicians” who agree to abide by balance billing requirements similar to those in Medicare.  Other providers may participate in the government-run plan only if they agree to accept the plan’s reimbursement rates as payment in full. Some Members may be concerned that these provisions would therefore compel providers to accept Medicare-level reimbursements, which the Congressional Budget Office has noted are 20-30 percent below private health insurance payment levels.

The bill requires the Secretary to “establish conditions of participation for health care providers” under the government-run plan—however it includes no guidance or conditions under which the Secretary must establish those conditions.  Many Members may be concerned that the bill would allow the Secretary to prohibit doctors from participating in other health plans as a condition of participation in the government-run plan—a way to co-opt existing provider networks and subvert private health coverage.

Finally, the bill also allows the Secretary to apply Medicare anti-fraud provisions to the government-run plan.  Some Members, noting that Medicare has been placed on the Government Accountability Office’s high-risk list since 1990 due to fraud payments totaling more than $10 billion annually, may question whether these provisions would be sufficient to prevent similar massive amounts of fraud from the government-run plan.

The Fine Print on Small Business Tax Credits

Families USA and the Small Business Majority released a study today claiming that the vast majority of small businesses would be eligible for tax credits under the health care law.  As might be expected with a study commissioned by the law’s supporters, however, the devil is in the details, and as a result, the study’s main claims do not withstand great scrutiny:

  • The study examines firms eligible for the tax credit, but does not report on the number of small businesses that will actually receive tax credits.  In order to receive the credit, firms have to decide to offer coverage, and pay for at least half of employees’ premiums.  Rep. Camp’s staff prepared this helpful chart showing all the hoops small businesses have to go through to actually receive the credit – but the Families USA study omitted the last two steps (employers offering coverage, and paying at least 50% of premiums) in order to produce an inflated estimate of the credit’s impact.
  • In making the claim that over 80% of “small businesses” will be eligible for the credit, the study defines a small business as one with 25 or fewer employees – a convenient cutoff point for the study’s purposes, since small businesses with more than 25 employees aren’t eligible for tax credits under the law.  Under the study’s logic, if you’re not eligible for the tax credits, you’re not a small business.  Millions of firms with a few dozen workers struggling to pay for health coverage may disagree with this flawed conclusion.
  • The Congressional Budget Office also disagrees with the authors’ assumptions that the credit will help a wide array of small businesses – last November, CBO wrote that “A relatively small share (about 12 percent) of people with coverage in the small group market would benefit from that credit in 2016.”
  • Even under the authors’ rosy assumptions discussed above, less than one-quarter of small businesses with fewer than 25 will be eligible for – let alone receive – the maximum tax credit of 35% of premiums.  That fact alone signifies the limited impact the tax credit will have on small business.

NFIB has a helpful chart giving a more realistic estimate of the small businesses that may actually receive tax credits. (Note again that the percentage estimates only examine firms with under 25 workers; under a more expansive definition of “small business,” the percentage of affected firms would be appreciably lower.)

There are of course two bigger questions at play for small businesses – affordability and taxes.  In order to obtain tax credits, firms not currently offering coverage must absorb higher costs (firms must pay half of premiums to become eligible, but the credit this year only funds 35% of premium costs).  The credit itself is limited in both amount and duration – meaning that firms will need to absorb the full brunt of premium costs in relatively short order.  But the bill itself contains dozens of mandates to be implemented over the next several years, each of which could raise premium costs by 1-3 percent.  Who then would want to take on new health care costs – or even continue to offer coverage – knowing that the meager small business credit will soon expire, and a mountain of premium-raising federal mandates loom on the horizon in its stead?

In addition, the more than half a trillion dollars in taxes included in the new law will have a substantial economic impact on businesses.  For instance, Section 9006 of the health care law requires vendors and small businesses to file Forms 1099 for any goods purchases that total over $600 in the aggregate over the course of a year – which will force all businesses, including small businesses, to file tax forms listing the amount of their annual transactions with vendors like their paper supplier, bottled water distributor, caterer, etc.  According to the National Taxpayer Advocate, this provision – which she called “disproportionate” and “burdensome” for small firms in particular – will affect 40 million businesses, ten times the number of firms the study asserts will benefit from small business tax credits.

Higher taxes and rising premiums do NOT constitute true health care “reform” – and while the authors of today’s study may be attempting to re-direct focus on to a relatively paltry tax credit, American businesses, just like American workers, are already seeing the adverse effects of Democrats’ unpopular law emerge before their eyes.

CBO Predicts 20% Increase in Part D Premiums from H.R. 3200

This afternoon CBO released a letter requested by Ranking Member Camp regarding Part D provisions in H.R. 3200 as introduced, which can be found here.

The analysis found that provisions included in the bill “would lead to an average increase in premiums for Part D beneficiaries of about 5% in 2011, rising to about 20% in 2019.”  The letter noted that federal spending and Part D premiums would rise due to the gradual elimination of the Part D “doughnut hole,” and that the “voluntary” discounts provided in the “doughnut hole” until its elimination — one component of the PhRMA “deal” with the White House — “would increase federal spending” and thus beneficiary premiums.  Finally, while an expansion of drug rebates (i.e. government-imposed price controls) to dual eligible beneficiaries enrolled in both Medicare and Medicaid would lower federal spending on net, CBO estimates that pharmaceutical companies “would probably lower the rebates they pay to prescription drug plans” covering non-Medicaid eligible beneficiaries, which “would lead to an increase in beneficiaries’ premiums…[and] an increase in beneficiaries’ payments for cost sharing.”

Health Information Technology

Background:  Over the past several years, Congress and the Administration have focused on ways to improve the adoption of information technology as one way to foster reform within the health care system.  Advocates of health IT and electronic health records believe that their widespread adoption and use by practitioners could improve the quality of care and reduce the incidence of preventable medical errors, which kill up to 100,000 individuals annually.[1]  Some individuals also assert that health IT could generate significant savings within the health care system, though estimates vary and may be based in part on the systems changes that accompany IT adoption.

Legislative Proposals:  Although health IT legislation has been debated in previous Congresses, no proposal was enacted into law.  As a result, several pieces of legislation have been introduced or re-introduced in the 110th Congress.  In the House, the Energy and Commerce Committee approved on July 23, 2008 H.R. 6357, sponsored by Committee Chairman John Dingell (D-MI) and Ranking Member Joe Barton (R-TX).  The bill would codify the Office of the National Coordinator of Health Information Technology (ONCHIT)—previously established by Executive Order in April 2004—within the Department of Health and Human Services, set guidelines for the federal government and relevant stakeholders to develop health IT standards, and authorize grants for adoption of health technology, including electronic health records.  The bill also creates requirements for entities handling medical records to limit the circumstances under which records may be disclosed, and to notify patients in the event of an electronic data breach.

The Ways and Means Committee—which shares jurisdiction over Medicare with Energy and Commerce—is also expected to weigh in with legislative activity.  Ways and Means Health Subcommittee Ranking Member Dave Camp (R-MI) has introduced health IT legislation, H.R. 6179.  The bill would codify ONCHIT into statute, provide for a streamlined process for the promulgation of IT standards (including privacy standards), make permanent a regulatory exception promulgated by the Administration allowing hospitals to purchase IT software for physicians, and create new tax incentives for physicians to expense the cost necessary to implement a system of electronic health records.

In the Senate, the Health, Education, Labor, and Pensions Committee marked up S. 1693, sponsored by Chairman Ted Kennedy (D-MA), on June 27, 2007.  The bill is broadly similar to H.R. 6357, and includes provisions codifying ONCHIT’s role, authorizing grants for health IT promotion, and incorporating stricter privacy standards.  Press reports indicate that staff attempted to “hotline” the legislation before the August recess, but that objections from several offices precluded passage by unanimous consent.

Implications of Legislation:  While most policy-makers agree on the desirability of additional IT adoption by health practitioners, clarifying the federal role in such activity has proved more problematic.  As Congress considers potential legislative action to promote health IT, four key areas remain subject to controversy surrounding the federal government’s proper role.  These include:

Funding:  Several health IT bills—including both H.R. 6357 and S. 1693—authorize grants to promote interoperability among electronic health record systems and the adoption of health information technology.  H.R. 6357 authorizes $575 million over five years for grants to physicians, states, or local health-related entities to promote the effective use of IT, and an additional $20 million over two years for clinical education grants.   Similarly, S. 1693 authorizes $278 million over two years for grants to providers, states seeking to establish health IT loan programs, and the development of local or regional health IT plans, while including additional authorizations for clinical education grants and grants to promote telehealth services.  Some conservatives may question the need to authorize this additional new spending, and agree with the Administration’s position that market forces, not direct subsidies, are the most effective way to stimulate the growth of electronic health records and related technology.

Another approach discussed to promote the adoption of health IT focuses on adjustments to Medicare reimbursement rates—payment increases for adopters and/or payment reductions for non-adopters.  Such an approach was included in e-prescribing provisions attached to the latest Medicare physician payment legislation (P.L. 110-275).  Some conservatives may have both a specific and a general concern with this approach: first that any reimbursement adjustments be implemented in a budget-neutral manner, and second that any linkage between physician payment levels and health IT adoption could be perceived as a further attempt by the federal government to micro-manage the practice of medicine for physicians nationwide.

A third approach would utilize tax incentives—in the form of accelerated depreciation or increased deductions for the purchase of equipment related to electronic health records—as a means to spur greater health IT adoption.  While some conservatives may believe that tax expenditures constitute a more effective means of encouraging adoption of electronic health records than the direct government spending in the two examples above, others may question the necessity of federal involvement to promote health technology when other industries have adopted technological innovations much more quickly.

Some conservatives may believe that this central question—Why did it take only a few years to develop nationwide ATM networks, but decades to spur health IT adoption?—speaks to one of the fundamental drawbacks of the current health system: the distortionary effects of third-party payment.  While patients may be willing to pay for the benefits associated with an electronic health record, or the convenience of an e-mail consultation with a physician, many private insurance companies’ reimbursement and coverage decisions continue to follow the example of a Medicare program frequently slow to respond to changes in medical care.  Therefore, some conservatives may support initiatives like Health Savings Accounts as one way to minimize the effects of third-party payment and better align patient and physician incentives, improving the quality of care and thereby reducing the growth in costs.

Privacy:  Under current law, electronic health records, along with other paper-based health information, are regulated by standards promulgated pursuant to the Health Insurance Portability and Accountability Act (HIPAA, P.L. 104-191).  The law subjects “covered entities”—health plans, health clearinghouses, and providers who transmit any health information in electronic form—to a series of standards issued by the Department of Health and Human Services, commonly called the HIPAA Privacy Rule.[2]  In general, the Privacy Rule requires covered entities to obtain consent for the disclosure of protected health information—defined as health information that identifies the individual, or can reasonably be expected to identify the individual—except when related to “treatment, payment, or health care operations.”[3]  The regulations include several exceptions to the pre-disclosure consent requirement, including public health surveillance, activities related to law enforcement, scientific research, and serious threats to health and safety.[4]

In addition, current HIPAA regulations include a separate Security Rule, requiring covered entities and their business associates to safeguard protected health information held electronically.  The rule includes administrative, physical, and technical safeguards that covered entities must follow, and permits entities to contract with business associates to implement the regulatory requirements.[5]  Covered entities are not in compliance with the HIPAA Security Rule only if they become aware of “a pattern of an activity or practice” by the business associate in breach of its contract and the HIPAA security standards, yet fail to take remedial action.[6]

While supporting the desirability of personal medical information remaining private, some conservatives may also believe that privacy standards should not be implemented in a way that impedes the functioning of the health care system.  For instance, restrictions on “marketing” could be construed in such a way as to preclude pharmacists from e-mailing patient reminders to refill prescriptions, or consider cheaper generic drugs—both of which could be seen as unfortunate outcomes.  Similarly, requiring patient consent to utilize electronic health information for auditing purposes could be an invitation for patients to commit fraud, thereby encouraging criminal activity that raises costs for all individuals.

To the extent that Congress decides to incorporate a breach notification regime into health IT legislation, some conservatives may support setting clear standards for when notification is required, and safe harbor provisions for entities that act promptly to remedy any breaches that may occur.  Some conservatives may also support federal pre-emption with respect to breach notification provisions, so that covered entities will not be subjected to a patchwork of conflicting state laws.  In that same vein, some conservatives may be concerned by the implications of any attempt to introduce or expand a private right of action for individuals affected by security breaches that could serve as a breeding ground for costly litigation.

Physician Self-Referral:  One of the perceived impediments to wider health IT implementation lay in existing laws regarding physician self-referral.  In general, the so-called Stark law prohibits physicians who receive Medicare payments from referring their patients to entities with whom the physician has a financial relationship.[7]  While the statute contains a number of exceptions to the general prohibition, no portion of existing law would provide a safe harbor for a hospital or health system to donate health IT equipment to physician offices.

In response, the Centers for Medicare and Medicaid Services (CMS) in August 2006 published final regulations under which the Administration used its authority to create a “safe harbor” with respect to the Stark self-referral laws and health IT promotion; the same day, the Inspector General at the Department of Health and Human Services created a similar safe harbor with respect to the federal anti-kickback statute.[8]  Although the exception was intended to encourage the adoption of health IT by physicians and other providers without facing possible adverse legal actions, the regulations contain several potential drawbacks: the exception covers health IT software, but not hardware; requires a 15% payment by physician recipients; and, perhaps most importantly, expires in December 2013.

Some conservatives may support actions that expand the health IT exception created by the Administration to address its limitations and protect physicians from unnecessary regulations and/or legal action by CMS.  The self-referral exception created for electronic prescribing as mandated by Congress in the Medicare Modernization Act (P.L. 108-173) covered electronic hardware, providing little reason to qualify the exception with respect to electronic health records.  The required 15% payment by physician recipients appears contradictory to the exception’s purpose; a gift is either inappropriate or it isn’t—the size of any payment by a physician to the donor bears little semblance to the inherent nature of the relationship.  Finally, some conservatives may believe that eliminating the sunset date would provide important regulatory certainty for both physicians and the health IT community, rather than relying upon a future Administration and future Congresses to determine whether and how the self-referral exception should be extended.

Liability:  Unstated in most discussions about health information technology legislation is the impact which widespread health IT adoption may have on the current medical liability system.  Nevertheless, it may be reasonable to believe that the clarity afforded by electronic health records may have a measurable impact on tort claims—improved coordination of care may eliminate some medical errors before they occur, while the distinctions between frivolous and meritorious claims may become more clear.

Given this dynamic, some conservatives may support provisions in health IT legislation which create safe harbors for providers following accepted standards of care, as one potential way to minimize any increased costs associated with defensive medicine practices.  Additionally, some conservatives may view a health IT bill as a logical vehicle to attach liability reform provisions that reduce the number of frivolous lawsuits, allow for fair and reasonable compensation for individuals with legitimate claims, and encourage providers to utilize adverse events to improve the quality of future care.

Conclusion:  While health IT holds significant progress in terms of its ability to improve the quality of care and its potential to slow the growth in costs, its promise may rise or fall on the regime under which new technology is adopted.  If improperly implemented, costly new health IT mandates could spark senior physicians to take early retirement, depriving patients of well-trained and trusted providers.  Similarly, proposals that impose regulatory burdens that balkanize care in the name of privacy, while encouraging lawsuits against physicians and/or software providers, may well only inhibit the adoption of effective health IT and increase, rather than reduce, the growth of health costs.

Recognizing that the devil does indeed lie in the details, some conservatives may be cautious about assessing the implications of the final legislative product before supporting a health IT bill.  Specifically, while many conservatives may support legislation that reduces unnecessary regulations and avoids imposing new onerous burdens, bills that include significant increases in federal regulations and/or government spending may warrant stricter scrutiny.  Consistent with a belief that smaller government will allow private enterprise to thrive, conservatives may believe that a minimalist approach to health IT provides the best opportunity to allow the health system to create the innovative approaches to care that can slow the growth of costs.

 

[1] Institute of Medicine, To Err Is Human: Building a Safer Health System, summary available online at http://www.iom.edu/Object.File/Master/4/117/ToErr-8pager.pdf (accessed March 1, 2008).

[2] The definition of covered entity can be found at 42 U.S.C. 1320d-1(a); the HIPAA Privacy Rule can be found at 45 C.F.R. 160 and 164.

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

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

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

[6] Language can be found at 45 C.F.R. 164.314(a)(1)(ii).

[7] The Stark law can be found at 42 U.S.C. 1395nn.

[8] The regulations can be found at http://www.cms.hhs.gov/PhysicianSelfReferral/Downloads/CMS-1303-F.pdf and http://oig.hhs.gov/authorities/docs/06/OIG%20E-Prescribing%20Final%20Rule%20080806.pdf, respectively (accessed August 25, 2008).

Legislative Bulletin: H.R. 6331, Medicare Improvements for Patients and Providers Act

Order of Business:  The Democratic House Leadership has indicated that the House will likely vote to override the President’s veto of H.R. 6331 today, July 15, 2008.  The vote on H.R. 6331 is to either sustain or override the President’s veto.  For additional information on the process in the House regarding vetoed bills, please see the “Process for a Vetoed Bill” section below.

Process for a Vetoed Bill:

  • The House and Senate pass an identical bill.
  • The President vetoes the bill and sends a veto message to the House.
  • The Speaker “lays a veto message before the House on the day it is received…When the message is laid before the House, the question on passage is considered as pending.”
  • Consideration of a vetoed bill (a privileged matter) generally takes precedence over other floor matters (it can interrupt other floor business), except in certain specific instances: a motion to adjourn, a question of privilege under the Constitution (such as a blue-slip resolution), and unfinished business with the previous question order (such as a bill with the previous question ordered to passage on the day before, but the House adjourned before voting on passage of the bill).
  • If the House does not wish to proceed immediately to reconsider the bill, three motions are in order:

1)     motions to lay on the table (if passed, a motion to take it from the table is in order at any time);

2)     motions to postpone consideration to a day certain (it becomes unfinished business on that day); or

3)     motion to refer to committee (a motion to discharge is highly privileged and in order at any time).

  • If none of the above three motions are offered, the House proceeds to debate the override question under the hour rule and then votes on the question of overriding the veto.
  • If the veto is sustained, the bill is referred to committee. Since the bill has been rejected (when the veto was sustained), a motion to take the bill from committee is not privileged.

The Vote on H.R. 6331—Sustaining the Presidential Veto:  When a vote is requested on a vetoed bill, the question is:  “Will the House, on reconsideration, pass the bill, the objections of the President to the contrary notwithstanding.”  Thus, it is as if the bill is up for normal consideration again, only the threshold for passage is now 2/3 of those votingIf a member opposes the bill and voted NO when it was originally considered and passed, then he would vote NO again (still opposing the bill, thereby voting to sustain the President’s veto).

Summary:  H.R. 6331 eliminates for six months a reduction in Medicare physician payments scheduled to take effect on June 30, 2008, freezing payment levels for the balance of 2008 and providing a 1.1% increase in fee schedule levels for 2009.  H.R. 6331 also reduces payments to and modifies the structure of privately-run Medicare Advantage fee-for-service (FFS) plans that have shown significant growth in recent years.

Medicare:  H.R. 6331 contains many provisions that would alter Titles XVIII (Medicare) and XIX (Medicaid) of the Social Security Act as follows:

Coverage of Preventive Services.  The bill would create a process for the Secretary of Health and Human Services to extend Medicare coverage to additional preventive services under Parts A and B, and would waive the deductible with respect to the initial physical exam provided upon a beneficiary’s enrollment in the Medicare program.  CBO scores this provision as costing $5.9 billion over eleven years.

Mental Health Parity.  The bill would reduce over five years the co-payment for outpatient psychiatric services to 20%, consistent with the co-payment rate for physician visits under Medicare Part B.  CBO scores this provision as costing $3 billion over eleven years.

Marketing Restrictions on Private Plans.  The bill would impose restrictions with respect to the marketing tactics used by private Medicare Advantage and prescription drug plans.  The bill would eliminate unsolicited direct contact to beneficiaries, restrict the provision of gifts to nominal values, require annual training of agents and brokers licensed under state law, and impose related marketing restrictions.  No net cost.

Low-Income Programs.  H.R. 6331 would extend the Qualifying Individual program under Medicare and Medicaid for eighteen months, through December 2009, at a cost of $500 million.  The bill would also expand eligibility for enrollment in the low-income subsidy program by altering the asset test for the Medicare Savings Program, and engaging in further outreach to beneficiaries eligible for participation but not currently enrolled.  Other provisions in this section would codify current guidance eliminating the Part D late enrollment penalty for individuals eligible for low-income subsidies, and require the translation of the enrollment form into at least 10 languages other than English.  Total cost of these provisions is $7.7 billion over eleven years.

Hospital Provisions.  The bill includes several hospital-related provisions, including the extension of rural hospital flexibility program, new grants for the provision of mental health services to Iraq war veterans in rural areas, new grants to certain critical access hospitals, a re-adjustment of target payment amounts for sole community hospitals, a new demonstration program for integrating care in certain rural communities, and the reclassification of certain hospitals.  Total cost of these provisions according to CBO is $600 million over eleven years.

Physician Services.  The bill makes several adjustments to physician payment rates, including the following:

Conversion Factor:  The bill would extend the 0.5% update to the conversion factor for physician reimbursements, currently due to expire on June 30, 2008, through the end of calendar year 2008, effectively freezing payment levels for the balance of the year.  For 2009, the conversion factor will be 1.1%.  The bill also provides that the adjustments made for 2008 and 2009 will be disregarded for the purposes of computing the sustainable growth rate (SGR) conversion factor in 2010 and future years, which would necessitate a 21% reduction in reimbursement levels in 2010.

Quality Reporting:  H.R. 6331 would revise and extend existing quality reporting language to provide a 1.5% bonus payment in 2008, and 2.0% bonus payments in 2009 and 2010, to those physicians reporting selected quality data measurements.  Cost of both the quality reporting and conversion factor provisions is $6.4 billion over six years, and $4.5 billion over eleven.

Electronic Prescribing:  The bill provides bonus payments for physicians who participate in electronic prescribing and report relevant quality measures—2.0% in 2009 and 2010, 1.0% in 2011 and 2012, and 0.5% in 2013.  Physicians not participating in the electronic prescribing program will receive reimbursement reductions of 1% in 2012, 1.5% in 2013, and 2% in 2014 and thereafter.  Saves $1.4 billion over eleven years.

Other provisions:  With respect to physician services, the bill also revises a medical home demonstration project, extends the floor for Medicare work geographic adjustments under the physician fee schedule through December 2009, imposes accreditation requirements on the payment of diagnostic imaging services, and increases payment levels for teaching anesthesiologists.  H.R. 6331 also includes a requirement for the Secretary to report to Congress on the creation of a new system of value-based purchasing for physician services.  Total cost of $1.9 billion over eleven years.

Other Part B Adjustments.  The bill would make several other adjustments to the Part B program, among which are an extension through December 2009 of the exceptions process for Medicare therapy caps (costs $1.2 billion over eleven years), the inclusion of speech-language pathology services as a service for which providers can bill Medicare directly ($100 million cost), the establishment of cardiac and pulmonary rehabilitation programs ($500 million cost), a repeal of the transfer of ownership with respect to oxygen equipment, repeal of a competitive bidding demonstration project for clinical laboratory services coupled with other adjustments for lab services ($2 billion savings), increased payments for ambulance services ($100 million cost), payment clarification for clinical laboratory tests made at critical access hospitals ($300 million cost), and increased payment limits for federally qualified health centers treating Medicare patients ($100 million cost).

Kidney Disease and Dialysis Provisions.  H.R. 6331 makes several adjustments to the end-stage renal disease program, including new coverage for kidney disease education services, a 1% increase in dialysis reimbursement rates for 2009 and 2010, and a requirement that the Secretary develop a bundled rate payment system for renal dialysis by January 2011, to be phased in over four years, that includes payment for drugs and tests related to dialysis treatment for which Medicare currently reimburses providers separately.  Costs $1.5 billion over eleven years.

Delay of Durable Medical Equipment Competitive Bidding.  The legislation would terminate all Round 1 contracts for Medicare durable medical equipment made pursuant to the initial round of competitive bidding completed this spring, and would direct CMS to re-bid Round 1 at some point during 2009.  Future rounds of competitive bidding would also be delayed, with Round 2 taking place during 2011, and competitive bidding in rural areas and smaller metropolitan areas being delayed until 2015.  The approximately $3 billion cost of the delay would be paid for by an across-the-board reduction of 9.5% for all supplies scheduled to be subjected to competitive bidding.  In addition, the bill would require the CMS contractor to notify suppliers missing financial documentation related to their bids, extend disclosure and accreditation requirements to sub-contractors, and establish an ombudsman within CMS to respond to complaints from suppliers and individuals about the competitive bidding process.

Medicare Advantage Provisions.  H.R. 6331 would cut Medicare Advantage payments, primarily through two adjustments.  The first would phase out duplicate payments related to indirect medical education (IME) costs at teaching hospitals.  Currently, IME costs are incorporated into the benchmark which Medicare Advantage plans bid against, even though Medicare also makes IME payments to teaching hospitals in association with hospital stays for Medicare Advantage beneficiaries.  The Administration incorporated this proposal into its Fiscal Year 2009 budget submission to Congress.

The bill also would repeal “deeming” authority language for private fee-for-service plans within Medicare Advantage, which currently can reimburse providers at the traditional Medicare rate and “deem” these providers part of their network.  Instead, H.R. 6331 would require private fee-for-service plans to adopt physician networks in areas where at least two other types of coordinated care plans (e.g. Health Maintenance Organizations Preferred Provider Organizations, etc.) operate.

Preliminary data from CMS indicate that the provisions in H.R. 6331 would result in private fee-for-service plans losing their “deeming” authority in 96% of counties in which they currently operate, potentially resulting in loss of beneficiary access to a type of Medicare Advantage plan which has experienced significant growth in recent years.  The Congressional Budget Office confirms that the provision would reduce both Medicare outlays and enrollment in the Medicare Advantage program.  In a Statement of Administration Policy on the Senate bill (S. 3101) incorporating these provisions, the Office of Management and Budget opposed the changes as a “fundamental restructuring” of this segment of the Medicare Advantage program that would result in beneficiaries losing access to the enhanced benefits which Medicare Advantage plans provide.  The IME provision and the deeming language collectively cut Medicare Advantage by $12.5 billion over six years, and $47.5 billion over eleven years.

H.R. 6331 includes several other provisions relating to Medicare Advantage plans, including an extension of and revisions to plans for special needs individuals (costs $500 million over eleven years), garnishment of the remaining funds left in the Medicare Advantage stabilization fund (saves $1.8 billion over eleven years), and two studies by the Medicare Payment Advisory Commission (MedPAC) regarding Medicare Advantage quality data and payment formulae.

Pharmacy Provisions.  The bill makes changes to the Part D prescription drug program, most notably requiring “prompt payment” by drug plans to pharmacies for prescriptions within 14 days for electronic claims and 30 days for all other claims, at a cost of $700 million over eleven years.

Release of Part D Data.  The bill would permit the Secretary to utilize Part D claims data from private plans in order to improve the public health as the Secretary determines appropriate, and would further allow Congressional support agencies to obtain the data for oversight and monitoring purposes.  No net cost.

Medicare Improvement Fund.  H.R. 6331 would establish a Medicare Improvement Fund to allow the Secretary to make enhancements to Medicare Parts A and B, and appropriates funding from FY2014 through FY2017 to fund such efforts.  Costs $24.2 billion over eleven years.

Federal Payment Levy.  The bill would expand the federal payment levy—which provides for the recoupment of taxes owed the federal government by private contractors—to Medicare provider and supplier payments.  Saves $400 million over eleven years.

TMA and Title V Extension.  H.R. 6331 would extend for twelve months (until June 30, 2009), both the authorization for Title V programs (abstinence education programs), and the authorization for Transitional Medical Assistance (Medicaid benefits for low-income families transitioning from welfare to work).  TMA has historically been extended along with the Title V Abstinence Education Program.  Regarding the Title V grant program, in order for states to receive Title V block grant funds, states must use the funds exclusively for teaching abstinence.  In addition, in order to receive federal funds, a state must match every $4 in federal funds with $3 in state funds.  Costs $1 billion over eleven years.

Other Extensions.  The bill also adjusts the federal Medicaid matching rate for foster care and related services provided by the District of Columbia, and extends certain other provisions, including Medicaid Disproportionate Share Hospital (DSH) payments, TANF supplemental grants, and special diabetes grant programs.  Total cost of $1 billion over eleven years.

Additional Background on Senate Legislation:  H.R. 6331 closely resembles legislation (S. 3101) originally introduced by Senate Finance Committee Chairman Max Baucus (D-MT).  At least one circulating draft of H.R. 6331 includes “Sense of the Senate” language, despite the fact that the bill is ostensibly an original House measure.  On June 12, 2008, the Senate by a 54-39 vote failed to invoke cloture on a motion to proceed to consideration of S. 3101.

Despite sharing similar language, H.R. 6331 and S. 3101 differ in a few respects.  The House bill excludes cuts to reimbursement of oxygen supplies and power-driven wheelchairs included in the Senate version, instead incorporating the federal payment tax levy and other provisions to compensate for the lost budgetary savings.  In addition, H.R. 6331 includes legislation (H.R. 6252) introduced by Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) and Ranking Member Dave Camp (R-MI) to postpone competitive bidding of durable medical equipment.  Chairman Baucus had attempted to add these provisions to his Senate legislation, but was unable to persuade enough Senate Republicans to support cloture in order to allow him to do so, largely because Republicans objected to the Medicare Advantage cuts envisioned by his legislation.

Additional Background on Medicare Advantage:  The Medicare Modernization Act of 2003 made several changes to the bidding and payment structure for private Medicare Advantage plans to deliver health care to beneficiaries.  As currently constructed, plans receive capitated monthly payments that are subject to risk adjustment—so that plans caring for older, sicker beneficiaries receive higher payments than those with healthier populations.  In order to determine the capitated payment amount, plans submit annual bids to the Centers for Medicare and Medicaid Services (CMS).  The bids are compared against a benchmark established by a detailed formula—but the comparison against the benchmark does not directly allow plans to compete against each other, or against traditional Medicare, when CMS evaluates plan bids.

In the event a plan’s bid is below the annual benchmark, 75% of the savings is returned to the beneficiary in the form of lower cost-sharing (i.e. premiums, co-payments, etc.) or better benefits, with the remaining 25% returned to the federal government.  If a plan’s bid is above the benchmark, beneficiaries pay the full amount of any marginal costs above the benchmark threshold.

Most Medicare Advantage plans use rebates provided when bidding below the benchmark to cover additional services over and above those provided by traditional Medicare, and in so doing reduce beneficiaries’ exposure to out-of-pocket costs.  A Government Accountability Office (GAO) report released in February 2008 documented that in most cases, beneficiaries receive better benefits under Medicare Advantage than they would under traditional Medicare.  The GAO study found that beneficiary cost-sharing would be 42% of the amounts anticipated under traditional Medicare, with beneficiaries saving an average of $67 per month, or $804 annually.[1]  These savings to MA beneficiaries occurred because plans dedicated 89% of their rebates from low bids to reduced cost-sharing or lower premiums.  The remaining 11% of rebates were used to finance additional benefits, such as vision, dental, and hearing coverage, along with various health education, wellness, and preventive benefits.[2]  Due in part to the increased benefits which Medicare Advantage plans have provided, enrollment in MA plans is estimated to rise to 22.3% of all Medicare beneficiaries in 2008, up from 12.1% in 2004.[3]

Some independent studies have suggested that Medicare Advantage plans incur higher costs than the average annual cost of providing coverage through traditional Medicare, though estimates vary as to the disparity between the two forms of coverage.  However, to the extent that MA plans in fact receive payments in excess of the costs of traditional Medicare, this discrepancy remains inextricably linked to two features of the Medicare Advantage program—the increased benefits for beneficiaries, and the complexity of the MA plan bidding mechanism.  Because of the problems inherent in the statutory benchmark design, plans have little incentive to submit bids less than the cost of traditional Medicare, as plans that bid above the costs of traditional Medicare but below the benchmark receive the difference between traditional Medicare costs and the plan bid as an extra payment to the plan.[4]

Some conservatives would also argue that a discussion focused solely on Medicare Advantage “overpayments” ignores the significant benefits that MA plans provide to key underserved beneficiary populations.  Medicare Advantage plans have expanded access to coverage in rural areas.  Moreover, the disproportionate share of low-income and minority populations who have chosen the MA option suggests that the comprehensive benefits provided are well-suited to beneficiaries among vulnerable populations.  Data from the Medicare Current Beneficiary Survey demonstrate that almost half (49%) of Medicare Advantage beneficiaries have incomes less than $20,000, and that 70% of Hispanic and African-American Medicare Advantage enrollees had incomes below the $20,000 level.[5]

Additional Background on Medicare Physician Reimbursements:  Under current Medicare law, doctors providing health care services to Part B enrollees are compensated through a “fee-for-service” system, in which physician payments are distributed on a per-service basis, as determined by a fee schedule and an annual conversion factor (a formula dollar amount).  The fee schedule assigns “relative values” to each type of provided service.  Relative value reflects physicians’ work time and skill, average medical practice expenses, and geographical adjustments.  In order to determine the physician payment for a specific service, the conversion factor ($37.8975 in 2006) is multiplied by the relative value for that service.  For example, if a routine office visit is assigned a relative value of 2.1, then Medicare would provide the physician with a payment of $79.58 for that service.  ($37.8975 x 2.1)

Medicare law requires that the conversion factor be updated each year.  The formula used to determine the annual update takes into consideration the following factors:

  • Medicare economic index (MEI)–cost of providing medical care;
  • Sustainable Growth Rate (SGR)–target for aggregate growth in Medicare physician payments; and
  • Performance Adjustment–an adjustment ranging from -13% to +3%, to bring the MEI change in line with what is allowed under SGR, in order to restrain overall spending.

Every November, the Centers for Medicare and Medicaid Services (CMS) announces the statutory annual update to the conversion factor for the subsequent year. The new conversion factor is calculated by increasing or decreasing the previous year’s factor by the annual update.

From 2002 to 2007, the statutory formula calculation resulted in a negative update, which would have reduced physician payments, but not overall physician spending. The negative updates occurred because Medicare spending on physician payments increased the previous year beyond what is allowed by SGR.  The SGR mechanism is designed to balance the previous year’s increase in physician spending with a decrease in the next year, in order to maintain the aggregate growth targets.  Thus, in light of increased Medicare spending in recent years, the statutory formula has resulted in negative annual updates.  It is important to note that while imperfect, the SGR was designed as a cost-containment mechanism to help deal with Medicare’s exploding costs, and to some extent it has worked, forcing offsets in some years and causing physician payment levels to be scrutinized annually as if they were discretionary spending.

Since 2003, Congress has chosen to override current law, providing doctors with increases each year, and level funding in 2006.  In 2007, Congress provided a 1.5% update bonus payment for physicians who report on quality of care measures; however, Congress also provided that the 2007 “fix” would be disregarded by CMS for the purpose of calculating the SGR for 2008, resulting in a higher projected cut next year.  The specific data for each year is outlined in the following table.

Year Statutory

Annual

Update (%)

Congressional “Fix” to the Update (%)*
2002 -5.4 -5.4**
2003 -4.4 +1.6
2004 -4.5 +1.5
2005 -3.3 +1.5
2006 -4.4 0
2007 -5.0 +1.5***
2008 -10.1§ 0.5 (proposed)

* The annual update that actually went into effect for that year.

** CMS made other adjustments, as provided by law, which resulted in a net update of – 4.8%; however, Congress did not act to override the -5.4% statutory update.

*** The full 1.5% increase was provided to physicians reporting quality of care measures; physicians not reporting quality of care received no net increase.

  • The Tax Relief and Health Care Act signed last year provided that 2007’s Congressional “fix” was to be disregarded for the purpose of calculating the SGR in 2008 and future years.

Because the Tax Relief and Health Care Act (P.L. 109-432), signed into law in December 2006, provided that 2007’s Congressional “fix” was to be disregarded for the purpose of calculating the SGR in 2008 and future years, the 10.1% negative annual update for 2008 will be restored once the December 2007 legislation expires on July 1, 2008, absent further Congressional action.  In addition, H.R. 6331 includes a similar provision noting that the “fix” proposed would be disregarded for the purpose of calculating the SGR in 2010 and future years, resulting in a projected 21% reduction in fee schedule levels in January 2010.

Additional Background on Durable Medical Equipment:  In addition to providing coverage for outpatient physician services, Medicare Part B also helps pay for durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) needed by beneficiaries.  Currently, Medicare reimburses beneficiaries for supplies using a series of fee schedules, which are generally based on historical prices subject to annual updates or other adjustments.  Medicare finances 80% of the actual costs or the fee schedule amount, whichever less, with the beneficiary paying the difference.  The Centers for Medicare and Medicaid Services (CMS) estimates that about 10 million individuals—or about one-quarter of all beneficiaries—receive medical supplies under Part B in a given year, at a cost to Medicare of approximately $10 billion annually.[6]

In recent years, some conservatives have raised concerns that the prices on the Medicare fee schedule for DMEPOS were in excess of market prices.  In 2002, testimony by the Department of Health and Human Services Inspector General revealed that the prices paid by Medicare for 16 selected items of durable medical equipment were higher than prices paid by Medicaid, the Federal Employee Health Benefits (FEHB) plans, and consumers purchasing directly from retailers.  The Inspector General projected that using the lower prices by other payers for these 16 common items alone would have saved Medicare more than $100 million annually.[7]

In response to the above findings, Congress in the Medicare Modernization Act (MMA) of 2003 (P.L. 108-173) enacted cuts in the fee schedule levels for the 16 specific items studied by the Inspector General’s testimony, while creating a new competitive bidding process for DMEPOS suppliers in Section 302 of the law.  This nationwide program followed on the heels of three demonstration projects, authorized under the Balanced Budget Act of 1997, established during the period 1999-2002 in Florida and Texas.  The pilot programs demonstrated the ability of competitive bidding to reduce the costs of DMEPOS by an average 19.1%—saving the federal government $7.5 million, and $1.9 million in reduced beneficiary co-payments—while maintaining beneficiary access to required items.[8]

In addition to a program of competitive bidding for DMEPOS, the MMA also established a new accreditation process for suppliers designed to review suppliers’ financial records and other related documentation to establish their status as bona fide health equipment suppliers.  A November 2007 CMS estimate indicated that 10.3% of payments to medical equipment suppliers were improper—a rate of questionable payments more than double those of other Medicare providers.[9]  Coupled with the new competitive bidding program, the accreditation mechanism was intended to eliminate “fly-by-night” DMEPOS suppliers from operating within the Medicare program, and thus was included in the anti-fraud title of MMA.

In recent months, the competitive bidding program has come under criticism due both to procedural concerns as to how the bidding process was conducted—several of which CMS is working to address—and broader concerns as to whether the program will adversely affect beneficiary access to supplies and/or DMEPOS suppliers, particularly small businesses, whose bids were priced unsuccessfully.  Some conservatives may question the need to delay the competitive bidding process, particularly on the latter grounds.  CMS provided specific opportunities for small businesses to participate in the DMEPOS competitive bidding process, resulting in approximately half of firms who accepted winning bids having revenues of less than $3.5 million.  These small business opportunities occurred in the context of a market-oriented bidding mechanism that, when fully implemented, will save taxpayers approximately $1 billion annually—and will provide additional savings to Medicare beneficiaries in the form of reduced co-payments.  In addition, the accreditation mechanism established by Section 302 of MMA provides a quality check previously lacking for DMEPOS purchases and suppliers.

Cost to Taxpayers:  A Congressional Budget Office (CBO) score for H.R. 6331 was unavailable at press time.  However, a CBO estimate on a similar bill (S. 3101) introduced and considered in the Senate noted that that legislation would increase spending on physician and related services by $19.8 billion over six years and $62.8 billion over the 2008-2018 period.  These spending increases would be offset by spending cuts in other health spending, primarily Medicare Advantage plans.  Overall, S. 3101 was projected to reduce direct spending by $5 million over the six- and eleven-year budget windows.

Committee Action:  The bill was introduced on June 20, 2008, and referred to the Energy and Commerce and Ways and Means Committees, neither of which took official action on the legislation.  The House passed the bill under suspension of the rules on June 24, 2008 by a 355-59 vote, and the Senate passed the bill by voice vote after invoking cloture by a vote of 69-30 on July 9, 2008.

Possible Conservative Concerns:  Numerous aspects of H.R. 6331 may raise concerns for conservatives, including, but not necessarily limited to, the following:

  • Government Price Fixing.  By making alterations in physician and other Medicare fee schedules, H.R. 6331 would reinforce a system whereby Congress, by adjusting various reimbursement levels, permits the government, rather than the private marketplace, to set prices for medical goods and services.  Senate Finance Committee Chairman Max Baucus admitted some disquiet about this dynamic—and Congress’ lack of expertise to micro-manage the health care system—at a health care summit on June 16: “How in the world am I supposed to know what the proper reimbursement should be for a particular procedure?”[10]  Yet H.R. 6331, based on legislation Chairman Baucus himself introduced, would retain the current system of price-fixing—while repealing a competitive bidding demonstration project for clinical laboratory services and delaying a competitive bidding program designed to inject market forces into the purchase of durable medical equipment and supplies.
  • Budgetary Gimmick.  Because language in H.R. 6331 stipulates that the conversion factor adjustments in the bill shall not be considered when determining future years’ SGR rates, physician reimbursement rates will be reduced 21% in 2010—an action which, given past trends, many observers would consider highly unlikely.  Therefore, some conservatives may be concerned that this language is designed to mask the true cost of the physician reimbursement adjustments included in the bill, creating a budgetary gimmick that future Congresses will feel pressured to remedy.
  • Undermines Medicare Advantage.  H.R. 6331 includes several provisions designed to “reform” private fee-for-service plans operating within Medicare Advantage that would reduce their payments by $47.5 billion over eleven years, effectively ending their “deeming” authority, and requiring virtually all private fee-for-service plans to contract with health care providers.  Some conservatives may be concerned that these changes would undermine the effectiveness of the Medicare Advantage program, which has grown in popularity among seniors due to the benefit enhancements that private coverage can provide.
  • Creates New Medicare Fund.  The bill would establish a new Medicare Improvement Fund, which would receive $19.9 billion for the “enhancement” of traditional Medicare Parts A and B during Fiscal Years 2014-2017.  Some conservatives may consider this account a new “slush fund” that will be used to finance further expansions of government-run health programs, rather than to bolster Medicare’s precarious financial future.
  • Release of Part D Data.  H.R. 6331 would authorize the Secretary to utilize Part D claims data from private health plans for any use deemed by the Secretary as relating to the public health, and would further authorize Congressional support agencies to utilize the same data for oversight purposes.  Some conservatives may be concerned that these wide-ranging provisions could lead to the public release of private and proprietary information related to the claims and bidding practices of private health plans providing prescription drug coverage under Part D, and could be used to initiate “fishing expedition” investigations at the behest of Democrats philosophically opposed to having private entities provide coverage to Medicare beneficiaries.
  • Delays Competitive Bidding.  H.R. 6331 would delay the first round of competitive bidding for durable medical equipment, and would nullify contracts signed by CMS for the first round of bidding this spring.  Re-opening the bidding process could prejudice entities who won their bids earlier this year, while potentially reducing savings to the federal government by allowing suppliers to bid more strategically in a re-bid scenario.  Some conservatives may be concerned that the delay contemplated by H.R. 6331 would allow a new Administration to take steps undermining the competitive bidding program through the regulatory process, and/or allow a new Administration and a future Congress to make the “temporary” delay permanent and abolish competitive bidding outright.

Administration Position:  Although a formal Statement of Administration Policy (SAP) was unavailable at press time, reports indicate that the Administration opposes the legislation and will likely issue a veto threat on the bill.

Does the Bill Expand the Size and Scope of the Federal Government?:  Yes, the bill would expand eligibility for participation in the Medicare Savings Program.

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

Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax Benefits/Limited Tariff Benefits?:  An earmarks/revenue benefits statement required under House Rule XXI, Clause 9(a) was not available at press time.

Constitutional Authority:  A committee report citing constitutional authority is unavailable.

 

[1] Government Accountability Office, “Medicare Advantage: Increased Spending Relative to Medicare Fee-for-Service May Not Always Reduce Beneficiary Out-of-Pocket Costs,” (Washington, Report GAO-08-359, February 2008), available online at http://www.gao.gov/new.items/d08359.pdf (accessed May 19, 2008), p. 23.

[2] Ibid., pp. 17-20.

[3] Department of Health and Human Services, “HHS Budget in Brief: Fiscal Year 2009,” available online at http://www.hhs.gov/budget/09budget/2009BudgetInBrief.pdf (accessed May 19, 2008), p. 58.

[4] The Medicare Payment Advisory Commission (MedPAC) has alleged that the formula-driven benchmarks themselves exceed the cost of traditional Medicare.  See Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy (Washington, DC, March 2008), available online at http://www.medpac.gov/documents/Mar08_EntireReport.pdf (accessed May 9, 2008), Table 3-3, p. 247.

[5] America’s Health Insurance Plans, “Low Income and Minority Beneficiaries in Medicare Advantage Plans,” (Washington, DC, AHIP Center for Policy and Research, February 2007), available online at http://www.ahipresearch.org/PDFs/FullReportAHIPMALowIncomeandMinorityFeb2007.pdf (accessed May 19, 2008), p. 3.

[6] Cited in Government Accountability Office, “Medicare: Competitive Bidding for Medical Equipment and Supplies Could Reduce Program Payments, but Adequate Oversight Is Critical,” (Washington, Report GAO-08-767T), available online at http://www.gao.gov/new.items/d08767t.pdf (accessed June 9, 2008), p. 3.

[7] Testimony of Janet Rehnquist, Inspector General of the Department of Health and Human Services, before Senate Appropriations Subcommittee on Labor, HHS, and Education, June 12, 2002 hearing, available online at http://www.oig.hhs.gov/testimony/docs/2002/020611fin.pdf (accessed June 16, 2008).

[8] Testimony of Thomas Hoerger, Senior Fellow, Research Triangle Institute International, before House Ways and Means Subcommittee on Health, May 6, 2008 hearing on Durable Medical Equipment Competitive Bidding, available online at http://waysandmeans.house.gov/hearings.asp?formmode=printfriendly&id=6906 (accessed June 9, 2008).

[9] Cited in Government Accountability Office, “Medicare Competitive Bidding,” pp. 10-11.

[10] Quoted in Anna Edney, “Bernanke: Health Care Reform Will Require Higher Spending,” CongressDailyPM June 16, 2008, available online at http://www.nationaljournal.com/congressdaily/cdp_20080616_8602.php (accessed June 16, 2008).