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.

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).

Durable Medical Equipment

Background:  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.[1]

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.[2]

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.[3]

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.[4]  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.

Implementation:  CMS previously announced that, pursuant to the Section 302 requirements, Round 1 of the DMEPOS competitive bidding process would begin on July 1, 2008 in ten Metropolitan Statistical Areas (MSAs): Charlotte, Cincinnati, Cleveland, Dallas, Kansas City, Miami, Orlando, Pittsburgh, Riverside, and San Juan.  A further 70 MSAs will be included in the program in 2009, with more expected to be included in subsequent years.

The three-year bids for the first round of MSA sites were submitted in September 2007; CMS notified winning bidders, and accepted contracts from winning bidders, earlier this spring.  Based on the Round 1 bids, CMS has indicated that the Medicare program and beneficiaries will save an average of 26% in the 10 categories of DMEPOS open to competitive bidding—ranging from a 14% savings on negative pressure wound therapy pumps and supplies to 43% savings on mail-order diabetic supplies.  When fully implemented, CMS estimates that competitive bidding will save the Medicare program approximately $1 billion per year.

Concerns Raised:  The introduction of DMEPOS competitive bidding has not been without controversy, and concerns raised by suppliers and other interested parties have generally fallen into two categories.  Some suppliers have raised specific concerns about the way in which CMS’ contractor conducted the Round 1 bidding process.  Many of these concerns have focused on a lack of communication from the contractor to the suppliers, resulting in some suppliers’ bids being rejected for lack of proper financial documentation without the suppliers having an opportunity to provide further information or clarification.  CMS has indicated that approximately 16% of all bids submitted were rejected solely due to a failure to meet proper qualification criteria; by contrast, 61% of all bids submitted were priced outside the winning range.

In response to the concerns raised regarding qualification criteria, CMS has utilized a twin-stage process of review for Round 1 suppliers who raised protests about the way the contractor conducted the bid process.  Both the contractor and CMS have taken steps to re-examine the documentation submitted during the review process, and in some cases, CMS has allowed those suppliers with winning bids who failed to meet accreditation or related requirements due to a lack of communication from the contractor to participate in the Round 1 location areas.  In addition, CMS has extended the accreditation deadline for suppliers participating in Round 2 bidding, and will also seek input from the Program Oversight and Advisory Committee established under the MMA for ways to refine and improve the DMEPOS competitive bidding process for subsequent bidding rounds.

The second group of concerns are broader in scope, and go to the heart of the competitive bidding program itself.  Concerns in this line include the potential impact on suppliers, particularly small businesses, who were not successful on pricing grounds.  Some policy-makers have also questioned the lack of scrutiny given to subcontractors not subject to the same accreditation requirements as DMEPOS contractors.  Lastly, other groups have questioned whether competitive bidding will lead to the sale of lower quality supplies and equipment to beneficiaries, as well as whether beneficiaries will be able to obtain access to DMEPOS equipment in instances where the winning bidders in an MSA had not previously serviced the area in question.

Some conservatives may question the need to delay the competitive bidding process on these 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.

While transitioning to a new system can create logistical difficulties, the staged implementation process will ensure that beneficiaries in a limited number of areas—only one-quarter of whom receive DMEPOS supplies in a given year—will experience the transition to a competitively bid environment this year.  This phased-in approach stands in contrast to the January 1, 2006 implementation of the Medicare Part D prescription drug benefit, where tens of millions of beneficiaries received new coverage at a single point in time—with logistical obstacles, though significant, relatively minor on a percentage basis.

Legislative Status:  On June 12, 2008, House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) and Ranking Member Dave Camp (R-MI) introduced H.R. 6252, the Medicare DMEPOS Competitive Acquisition Reform Act.  The legislation would terminate all Round 1 contracts made pursuant to the 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 (featuring an additional 70 MSAs) taking place during 2011, and competitive bidding in rural areas and smaller MSAs being delayed until 2015.  The estimated $3 billion cost of the delay would be paid for by an across-the-board reduction of 9.5% for all DMEPOS 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 DMEPOS sub-contractors, and establish an ombudsman within CMS to respond to complaints from suppliers and individuals about the DMEPOS competitive bidding process.

While competitive bidding language was not included in the Medicare legislative package (S. 3101) on which the Senate failed to achieve cloture last week, Finance Committee Chairman Baucus and Ranking Member Grassley have discussed incorporating language delaying the competitive bidding process into their competing packages covering an adjustment to Medicare physician reimbursement levels.

Implications of Delay:  Despite the contracting problems that have led some contractors to raise legitimate process concerns about the implementation of the first bidding round, some conservatives may still be concerned about the implications of the proposed legislative delay, particularly if coupled with a mandate that CMS re-bid the first round of DMEPOS bidding.  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, having had experience with the winning range of bids during the initial round.

In addition, some conservatives may be concerned that a delay of more than a few months would result in a new Administration being charged with implementation of competitive bidding, which could allow for further opportunities to undermine the program through the regulatory process.  Chairman Stark has indicated his desire to abolish the competitive bidding program altogether, paid for by the across-the-board cut in DMEPOS reimbursement levels currently being contemplated—so it is entirely possible that a new Administration and a future Congress could decide to make the “temporary” delay permanent and abolish competitive bidding outright.

Conclusion:  The debate surrounding DMEPOS competitive bidding finds many medical suppliers—some with understandable concerns about a lack of communication from the bidding contractor, others merely disappointed in not achieving a winning price for their bid—seeking redress from Congress for a bidding mechanism Congress established with the intent of creating arm’s-length transactions between the agency purchasing goods (i.e. CMS) and private suppliers.  Yet the alternative to a competitive bidding system where markets set prices for DMEPOS involves arbitrary reductions to inherently arbitrary fee schedules enacted by policy-makers with little proficiency in the minutiae of the myriad health care services for which the federal government acts as a payer.  As Senate Finance Committee Chairman Baucus conceded at a health care summit: “How in the world am I supposed to know what the proper reimbursement should be for a particular procedure?”[5]

For this reason, some conservatives may object to Congress’ frequent attempts to litigate these types of disputes, and may view the controversy surrounding DMEPOS competitive bidding as emblematic of larger problems with the current entitlement system.  In the myriad debates which it is perpetually pressured to referee—from the sustainable growth mechanism (SGR) to reimbursement levels for hospitals and nursing homes to the levels of epogen provided to kidney dialysis patients—Congress’ firsthand expertise is as limited as its jurisdiction is absolute.  The end result has frequently been an imbalance of attention paid to various reimbursement “crises,” with only secondary consideration given to the longer-term health and solvency of the underlying entitlement programs (i.e. Medicare and Medicaid) in question.

Some conservatives may believe that the lesson from these past and current controversies is that Congress has a poor track record in adjudicating provider-related disputes.  Many may find a better solution in a premium support mechanism that would convert Medicare into a system similar to the Federal Employees Benefit Health Plan (FEHBP), in which beneficiaries would receive a defined contribution from Medicare to purchase a health plan of their choosing.  In addition to ensuring long-term fiscal stability by confining the growth of Medicare spending to the annual statutory raise in the defined contribution limit, a premium support mechanism would result in reimbursement decisions being made by private insurance carriers, obviating the need for Congress to micro-manage provider payment levels.  Such a solution would provide a meaningful reform to the underlying problems that have erupted most recently in the DMEPOS competitive bidding controversy, by saving providers from the whims of Congress—and saving Congress from itself.

 

[1] 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.

[2] 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).

[3] 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).

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

[5] 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).

Weekly Newsletter: June 16, 2008

Durable Medical Equipment Legislation Introduced

Last Thursday, several House Members led by Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) and Ranking Member Dave Camp (R-MI) introduced legislation (H.R. 6252) to delay implementation of competitive bidding for durable medical equipment. The legislation would nullify contracts which suppliers signed with Medicare earlier this spring and delay implementation of the first round of bidding by at least six months, with the second round delayed by over a year.

In recent years, some conservatives have raised concerns that the prices on the Medicare fee schedule for durable medical equipment 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.

While there have been logistical difficulties associated with the first round of competitive bidding, some conservatives may still be concerned about the implications of a delay to a program that will save the federal government—and Medicare beneficiaries—billions of dollars by aligning the prices paid by Medicare for medical equipment and supplies with those in the private sector. Delays of the type contemplated by the legislation would delay competitive bidding’s implementation to a future Administration, and could enable a future President and future Congresses to take legislative action to eliminate the program altogether.

The RSC has prepared a Policy Brief on this issue, available here.

“Underinsured” Study’s Findings Subject to Interpretation

Last week several researchers associated with the Commonwealth Fund released a new study claiming that the number of “underinsured Americans” has risen sharply in recent years. According to the authors’ measure of “underinsurance”—medical expenses exceeding 10% of income (5% for low-income populations) or an insurance deductible of 5% of income—the number of “underinsured” Americans rose 60% from 2003 to 2007. This survey follows on the heels of a similar 60 Minutes broadcast on health
insurance that termed an individual receiving free care from an outreach clinic as “underinsured” due to his $500 annual deductible.

Some conservatives may have concerns both with the methodology of the study as well as its underlying rationale. The article releasing the study’s findings did not cite a recent Congressional Budget Office report noting that the percentage of out-of-pocket costs paid directly by individuals—as opposed to a third party insurance carrier or government program—declined from 31% to 13% of all health expenditures from 1975 to 2005. In addition, the survey’s authors did not assess the extent of private savings— whether in a Health Savings Account (HSA) or other vehicle—that could be drawn on by “underinsured” individuals to pay for medical expenses.

More fundamentally, the survey did not consider whether the subject individuals knowingly chose to select a plan with higher deductible exposure in order to receive lower premiums. Some conservatives may believe that implicit in the survey methodology are two questionable premises—the first that no rational person would choose to become “underinsured” according to the study’s definition of the term, and the second that policy-makers, particularly the federal government, should craft “solutions” to respond to this perceived problem. Instead, some conservatives may believe that additional reforms to create a true market in health care have the potential to slow the overall growth in health care costs, which may ultimately make the debate over “underinsurance” moot.

Article of Note: Switzerland in Massachusetts?

Last Friday’s monthly Health Matters column in CongressDaily highlighted the recent budgetary difficulties that the rising cost of health care has created for reformers in Massachusetts, which has seen the estimated cost of its comprehensive plan soar in the two years since its creation. Author Julie Rovner notes that both in its construction and its newfound financial obstacles, the Massachusetts plan looks surprisingly similar to a health reform model first adopted in Switzerland in 1994. While the Swiss model has several characteristics that conservatives may applaud—a wide choice of comprehensive plans, including those with higher deductibles that can yield savings on insurance premiums—as a model of consumer-directed health care, it also includes several forms of regulation—a mandate to purchase insurance coverage, guaranteed issue and community rating restrictions, and a prohibition on profit by carriers selling the standard benefit policy—which some conservatives may argue undermine the savings generated from a more open and transparent health system.

Whether in Switzerland, Massachusetts, or all 50 states, many conservatives have argued that health care needs more competition, not less—not just greater choice among policies for individuals and broader access to information about the price and quality of care, but a streamlining of the bureaucratic regulations that have raised the cost of health insurance. With health care costs continuing to rise at a rate that likely could make reforms like the Massachusetts experiment unsustainable, conservatives may argue that a dose of competition is just the novel concept needed to slow their unrestrained growth.