AHP Proposed Rule: Expanding Affordability, Washington Control, or Both?

Why would Sen. Rand Paul praise as “conservative care health reform” a proposed regulation that increases Washington’s power?

A proposed rule released Thursday regarding association health plans (AHPs) will likely provide more affordable health coverage options to the self-employed, or individuals working for small businesses. However, it would do so by increasing the number of individuals purchasing health coverage regulated by Washington, making it a mixed bag for conservatives.

A Look at Current Law

  1. Essential health benefits (including actuarial value requirements, limits on out-of-pocket expenses, and deductibles in the small group market);
  2. Risk adjustment payments;
  3. Single risk pool requirements (i.e., requiring insurers to consider all individual coverage, and all small group coverage, offered in a state as one block of business); and
  4. Premium variation requirements imposing strict limits on age-rating, and prohibiting variation by anything other than age, family size, geography, and tobacco use.

The absence of all these requirements gives large group coverage a decided regulatory advantage compared to individual and small group coverage. Self-insured health plans—that is, employer plans that retain the insurance risk themselves—are likewise exempt from the Obamacare requirements listed above, regardless of the business’ size (i.e., whether they have more or fewer than 50 employees).

However, for AHPs that currently buy coverage from insurance carriers (i.e., “fully insured” plans), the Obama administration in 2011 issued guidance that stated regulators would “look through” the association to its members to determine whether their coverage qualified as small group or large group. To give an example, consider an association of restaurant franchises with two members: one with 30 employees, and one with 75 employees. While the restaurant with 75 employees would meet the standard of a large group plan, the one with 30 would classify as a small group plan.

As a result of the 2011 guidance, coverage for the latter would have to meet all the Obamacare coverage requirements for small group plans listed above, making coverage for the larger employer either administratively cumbersome (because two employers would have two different regulatory benefit packages), costlier (because the larger restaurant would have to comply with the small group requirements as part of an association, even though that restaurant would not have to comply if it bought coverage on its own), or both.

What the Proposed Rule Does

In general, the proposed rule would:

  1. “Relax the existing requirement that associations sponsoring AHPs must exist for a reason other than offering health insurance.” Associations must still be run by their members—for instance, Blue Cross or other insurers couldn’t try to form, and run, an “association” just to offer group health coverage—but need not exist for other purposes.
  2. “Relax the requirement that association members share a common interest, as long as they operate in a common geographic area”—either a state, or a metropolitan area encompassing multiple states (e.g., greater Washington DC).
  3. “Make clear that associations whose members operate in the same industry can sponsor AHPs, regardless of geographic distribution.”
  4. “Clarify that working owners and their dependents,” including the self-employed, “are eligible to participate in AHPs.” These individuals must meet certain proposed requirements—working for the business at least 30 hours per week, or 120 hours per month, or generating income from the business equal to the cost of coverage for the owner and his/her family—designed to ensure individuals do not form “businesses” solely for the purposes of purchasing association health coverage.

The Effects on Insurance Offerings

Even prior to the rule’s release, liberal Obamacare supporters claimed the policy represents another attempt to “sabotage” the law, because healthier people will purchase AHP coverage lacking Obamacare’s “consumer protections.” Attempting to respond to that criticism, the proposed rule includes several non-discrimination provisions, prohibiting associations from discriminating in offering membership based on the health status of members’ employees, or varying premiums or eligibility for benefits based on health status. Liberals respond that employers could discriminate through benefit offerings—for instance, not covering chemotherapy to discourage businesses with cancer patients from applying.

However, large employers already exempted from the Obamacare benefits don’t have to offer any such coverage currently, and I have yet to hear any major reports about IBM or General Motors “discriminating” against patients with pre-existing conditions. If these employers haven’t used an exemption from Obamacare coverage requirements to offer shoddy health coverage, then why do liberals believe that other employers will?

How This Affects Federal Power

In general, the rule would expand cross-state purchasing of health insurance. However, it would not do so by allowing people to purchase coverage across state lines—for instance, allowing a Maryland resident to buy a policy regulated in Virginia. Instead, it would allow more individuals to buy federally regulated coverage, regardless of the state in which they live.

Because the rule would eliminate the need for AHPs to comply with Obamacare requirements, it would lower premiums in the short term. However, in the longer term, the nature of the proposal raises two risks. On the one hand, a future administration could revoke the rule, minimizing AHPs’ scope and impact. On the other, a new administration—or a Democratic Congress—could easily glom more federal regulatory requirements on to AHPs and other forms of group coverage.

As I have written previously, the regulatory regime represents the heart of Obamacare. The proposed rule attempts a “kludgy” work-around of that regime, but one that, by increasing federal control over health insurance, may end up causing more trouble over the long term. Congress can—and should—do far better, by repealing the regulatory regime outright, and returning control of health insurance markets where it belongs: To the states.

This post was originally published at The Federalist.

What You Need to Know about President Trump’s Health Care Executive Order

On Thursday morning, President Trump signed an Executive Order regarding health care and health insurance. Here’s what you need to know about his action.

What Actions Did the President Take?

The Executive Order did not change regulations on its own; rather, it instructed Cabinet Departments to propose changes to regulations in the near future:

  1. Within 60 days, the Department of Labor will propose regulatory changes regarding Association Health Plans (AHPs). Regulations here will look to expand the definition of groups that can qualify as an “employer” under the federal Employee Retirement Income Security Act (ERISA). AHPs have two advantages: First, all association health plans regulated by ERISA are federally pre-empted from state benefit mandates; second, self-insured plans regulated by ERISA are exempt from several benefit mandates imposed by Obamacare—such as essential benefits and actuarial value standards.
  2. Within 60 days, the Departments of Treasury, Labor, and Health and Human Services (HHS) will propose regulatory changes regarding short-term health plans. Regulations here will likely revoke rules put into place by the Obama Administration last October. Last year, the Obama Administration limited short-term plans to 90 days in duration (down from 364 days), and prevented renewals of such coverage—because it feared that such plans, which do not have to meet any of Obamacare’s benefit requirements, were drawing people away from Exchange coverage. The Trump Administration regulations will likely modify, or eliminate entirely, those restrictions, allowing people to purchase plans not compliant with the Obamacare mandates. (For more information, see my Tuesday article on this issue.)
  3. Within 120 days, the Departments of Treasury, Labor, and HHS will propose regulatory changes regarding Health Reimbursement Arrangements (HRAs), vehicles where employers can deposit pre-tax dollars for their employees to use for health expenses. A 2013 IRS Notice prevented employers from using HRA dollars to fund employees’ individual health insurance premiums—because the Obama Administration worried that doing so would encourage employers to drop coverage. However, Section 18001 of the 21st Century Cures Act, signed into law last December, allowed employers with under 50 employees to make HRA contributions that workers could use to pay for health insurance premiums on the individual market. The Executive Order may seek to expand this exemption to all employers, by rescinding the prior IRS notice.
  4. Within six months—and every two years thereafter—the Departments of Treasury, Labor, and HHS, along with the Federal Trade Commission, will submit reports on industry consolidation within the health care sector, whether and how it is raising health care costs, and actions to mitigate the same.

How Will the Order Affect the Health Sector?

In general, however, the issues discussed by the Executive Order will:

  • Give individuals more options, and more affordable options. Premiums on the individual market have more than doubled since 2013, due to Obamacare’s regulatory mandates. AHPs would allow workers to circumvent state benefit mandates through ERISA’s federal pre-emption of state laws; self-insured AHPs would also gain exemption from several federal Obamacare mandates, as outlined above. Because virtually all of Obamacare’s mandated benefits do not apply to short-term plans, these would obtain the most regulatory relief.
  • Allow more small businesses to subsidize workers’ coverage—either through Association Health Plans, or by making contributions to HRAs, and allowing employees to use those pre-tax dollars to buy the health coverage of their choosing on the individual market.

When Will the Changes Occur?

The Executive Order directed the Departments to announce regulatory changes within 60-120 days; the Departments could of course move faster than that. If the Departments decide to release interim final rules—that is, rules that take effect prior to a notice-and-comment period—or sub-regulatory guidance, the changes could take effect prior to the 2018 plan year.

However, any changes that go through the usual regulatory process—agencies issuing proposed rules, followed by a notice-and-comment period, prior to the rules taking effect—likely would not take effect until the 2019 plan year. While the Executive Order directed the agencies to “consider and evaluate public comment on any regulations proposed” pursuant to the Order, it did not specify whether the Departments must evaluate said comments before the regulations take effect.

Does the Order Represent a Regulatory Overreach?

However, with respect to Association Health Plans, some conservatives may take a more nuanced view. Conservatives generally support allowing individuals to purchase insurance across state lines, believing that such freedom would allow consumers to buy the plans that best suit their interests.

However, AHPs accomplish this goal not through Congress’ Commerce Clause power—i.e., explicitly allowing, for instance, an individual in Maryland to buy a policy regulated in Virginia—but instead through federal pre-emption—individuals in Maryland and Virginia buying policies regulated by Washington, albeit in a less onerous manner than Obamacare’s Exchange plans. As with medical liability reform, therefore, some conservatives may support a state-based approach to achieve regulatory relief for consumers, rather than an expanded role for the federal government.

Finally, if President Trump wants to overturn his predecessor’s history of executive unilateralism, he should cease funding cost-sharing reduction payments to health insurers. The Obama Administration’s unilateral funding of these payments without an appropriation from Congress brought a sharp rebuke from a federal judge, who called the action unconstitutional. If President Trump wants to end executive overreach, he should abide by the ruling, and halt the unilateral payments to insurers.

This post was originally published at The Federalist.

The CLASS Act’s Untold Story

A PDF copy of this report is available on Sen. John Thune’s website.


The Patient Protection and Affordable Care Act (PPACA), the Obama administration’s keystone health care legislation, established a new long-term care insurance entitlement known as the Community Living Assistance Services and Supports (CLASS) Act.1 Documents uncovered through a bicameral congressional investigation show that well before the law’s passage, warning flags were raised within the Department of Health and Human Services (HHS) about the CLASS program’s sustainability in the long-term. The documents also describe the extent to which the Administration may shift costs and administrative burdens for the program onto states and employers.

The CLASS Act created an optional, government-backed, long-term care insurance program that would pay a daily or monthly benefit to enrolled subscribers if they become unable to perform activities of daily living, such as dressing, meal preparation, and personal grooming. Because the program requires a five-year vesting period before subscribers can collect any benefits, the Congressional Budget Office (CBO) calculated that in the first 10 years of the program, the CLASS Act would account for $70 billion in deficit reduction. This calculation was based on the premise that during the initial years of the program, it will take in more revenue in premiums than it pays out in benefits, including the first five years of the program in which no benefits are paid at all.

This $70 billion in CBO-scored “savings” was crucial to garnering support for passage of the health care law. CBO did not make public any estimates on what would happen as the population of subscribers to the program age and the CLASS Act requires increasing amounts of money to be paid out in benefits.

It is now widely acknowledged that the alleged savings from the CLASS Act are illusory. The month after PPACA passed, Rick Foster, Chief Actuary of HHS’ Centers for Medicare and Medicaid Services (CMS), released a report indicating that the CLASS Act was not fiscally sound.2 The chief actuary is a non-partisan, high-ranking official in CMS whose estimates are critical in understanding current health care law and proposed changes to the law.

Senate Budget Committee Chairman Kent Conrad, a supporter of the PPACA legislation, publicly called the CLASS program “a Ponzi scheme of the first order, the kind of thing Bernie Madoff would be proud of.”3 In testimony before Congress, HHS Secretary Kathleen Sebelius conceded that the CLASS program is “totally unsustainable” in its current form.4

But these concessions came long after PPACA had been signed into law. As a result of this investigation, it is now clear that some officials inside HHS warned for months before passage that the CLASS program would be a fiscal disaster. Within HHS the program was repeatedly referred to as “a recipe for disaster” with “terminal problems.” As this report will show, the chief actuary stated on numerous occasions that the program was not fiscally sustainable and would result in what he referred to as an “insurance death spiral.”

According to emails and other documents obtained pursuant to this investigation, senior leadership of HHS and Democratic staff in the Senate and House reviewed these warnings but did not change the law and did not inform the public of the doubts about the CLASS Act. Instead, the officials continued to claim that the program would be sound, sustainable, and actually produce budget savings that could help pay for other parts of the health care law.

While there has been little public discussion of the costs PPACA imposes on employers and states, this investigation revealed for the first time the extent to which HHS both anticipated these costs and yet tried to impose even more burdens. The documents we have obtained demonstrate that officials at HHS knew that the CLASS Act would saddle employers and states with, at minimum, a heavy administrative burden. The emails also reveal discussions inside HHS about combating low participation in the program by requiring employers to participate. HHS anticipated this mandate could be imposed at some future date, and it is possible they will still attempt to impose such a mandate through regulation.

The documents that were produced as part of this investigation were reviewed and analyzed by a working group of Republicans in both houses of Congress. This report is the product of our joint investigatory research and analysis.

Internal HHS Documents Questioned Fiscal Viability of CLASS

While PPACA established the long-term care program, it left many of the important details about the CLASS Act to be decided by HHS through regulation. HHS is required to issue those regulations by October 1, 2012. Until HHS issues those regulations, the public does not know how much subscribers will have to pay in premiums to enroll in the program, what benefits they will receive if they become disabled, or what level of disability will trigger the benefits.

When balancing premiums collected against benefits paid, internal HHS documents show that regulators have long been concerned about the problem of “adverse selection.” If CLASS suffers from adverse selection (also called “anti-selection”), a high proportion of people with long-term care needs enroll in the program and initial premiums will need to be very high to cover costs. Those high premiums will encourage healthy people to drop out of the program, causing premiums to rise again for the sicker individuals who remain. This could result in what is called a premium “death spiral” and massive taxpayer losses.

Internal emails from HHS and CMS show a number of officials raised alarm about the sustainability of the CLASS Act program. Between May and September of 2009, the CMS chief actuary repeatedly stated his concerns to CMS leadership. It appears from the documents that he was later cut out of the discussions regarding the CLASS Act. CMS and Democratic staff on the Senate Committee on Health, Education, Labor and Pensions (HELP) instead turned to CBO, which produced more favorable estimates than the chief actuary. But others within HHS continued to question the viability of the CLASS Act. What follows is a timeline of how these discussions progressed.

May 2009
The Chief Actuary Predicted “Insurance Death Spiral”

The CMS chief actuary first analyzed the adverse selection problem in a May 19, 2009, email. (See Exhibit A.) Commenting on a draft legislative proposal from Senator Kennedy’s office, the chief actuary said, “let me offer a few preliminary comments:

I didn’t see any provision for a Federal subsidy of this program; in other words, the intention appears to be that it would be financed solely through participant premiums and interest earnings. Nonsubsidized, voluntary insurance programs generally involve substantial “antiselection” by those who choose to participate. As summarized below, this could be a terminal problem for this proposal.5

The program is intended to be “actuarially sound,” but at first glance this goal may be impossible. Due to the limited scope of the insurance coverage, the voluntary CLASS plan would probably not attract many participants other than individuals who already meet the criteria to qualify as beneficiaries. While the 5-year “vesting period” would allow the fund to accumulate a modest level of assets, all such assets could be used just to meet benefit payments due in the first few months of the 6th year.

The resulting substantial premium increases required to prevent fund exhaustion would likely reduce the number of participants, and a classic “assessment spiral” or “insurance death spiral” would ensue.

Alternatively, suppose that a significant number of people without any limitations in [activities of daily living] could be persuaded to participate in the program. How many people would be needed to cover the benefit costs for those qualifying as beneficiaries? For the sake of illustration, suppose 10 million people qualify for benefits of $50 per day (annual cost of $182.5 billion). About 234 million people, paying premiums of $65 per month, would be needed to cover this cost (ignoring administrative expenses). The size of the U.S. population aged 20 and over is about 225 million, and about 165 million of these are employed. This rough—but probably not unrealistic—example further calls into question the feasibility of the maximum financing versus the minimum benefits.

The problem identified by chief actuary at the earliest stages of the bill’s consideration remained in the legislation through subsequent drafts. The chief actuary’s concern was that it would not be possible to attract enough people to the program to maintain it as a self-funding program.

The chief actuary’s email does not include the text of the draft language from Senator Kennedy’s office, but it appears from the premium and benefit example used that the first draft of the statutory language may have required $50 a day in benefits and/or premiums of $65 per month. The final version of the CLASS Act gives the Secretary of HHS discretion to set the premiums and benefit levels as long as premiums allow the program to be fiscally sound over 75 years and benefits are at least $50 per day.

June – July 2009
The Administration Supported the CLASS Act Based on Budgetary Gimmicks, Not Long-Term Actuarial Analysis

In the summer of 2009, a series of email exchanges between the chief actuary and the CMS Office of Legislative Affairs show that support for the long-term care program was growing within the Obama administration and among Democrats in Congress, while the chief actuary’s concerns were becoming more emphatic. Despite these concerns,
supporters of the CLASS Act continued to rely on budgetary gimmicks and flawed modeling.

On June 29th, a staffer in the CMS Office of Legislative Affairs forwarded a news story to the chief actuary that discussed how the CLASS Act allegedly would save money. The email noted, “Bottom line, the CLASS Act was scored by CBO with a savings of $58 billion over 10 years, including a $2.5 billion savings in Medicaid.” A follow up email from CMS Legislative Affairs on July 8 said, “the Administration is now officially on record supporting the CLASS Act.” (See Exhibit B.)

The chief actuary responded with a critique of two studies that had been offered in support of the insurance program:

I’ve finished reviewing the two studies provided by Sen. Kennedy’s staff regarding the CLASS proposal. I’m sorry to report that I remain very doubtful that this proposal is sustainable at the specified premium and benefit amounts.

The actuarial study conducted for AARP assumed participation rates based on a portion (40% to 100%) of current rates for 401(k) plans. In practice, I think current experience for participation in employer based long-term care plans would be much more applicable, and such participation is far lower than for 401(k)’s (for fairly obvious reasons). The AARP study emphasized the sensitivity of premium levels to the number of healthy participants. Although the actuaries didn’t model a plan with participation in the few-percentage range, I strongly suspect that the resulting premiums would be so large as to further diminish the number of participants and to fail to achieve the critical mass of participants in average health needed to cover the selection and subsidy costs.

All the analysis in the Moran study is based on an assumption that the CLASS program would be mandatory. The results look legitimate for such a program, but they are not applicable to the voluntary plan proposed for CLASS.

I haven’t been able to talk to CBO yet regarding their participation assumptions. Unless they have a compelling reason to expect greater-than-[long-term care] levels of participation, however, I can’t see how there would be enough workers participating to cover the selection costs for those with existing [activities of daily living] limitations plus the costs for the internal subsidies for students and low-income persons. Thirty-six years of actuarial experience lead me to believe that this program would collapse in short order and require significant federal subsidies to continue. (See Exhibit B.)

The comments by the chief actuary demonstrate that any reduction in the federal budget deficit identified by CBO would be a function of budgetary time-shifting rather than true savings. While programs like Social Security are often analyzed on a 75-year basis of long-term actuarial solvency, congressional rules require CBO to analyze legislative proposals, like the CLASS Act, over a 10-year budget window.

But the CLASS program likely will not even begin collecting premiums until 2013, and five years of participation are required before subscribers are vested in CLASS, so the program is not likely to begin paying out any benefits until 2018. CLASS was therefore scored as a revenue raiser. Using this budget gimmick, the true costs of the program— the subsequent benefit payments—were essentially ignored, because only a few years of benefit payments were within the official 10-year CBO scoring window of 2010-2019.

CLASS Supporters Relied on Flawed Modeling

The internal documents show that advocates of the CLASS program relied on strikingly unrealistic participation estimates. One study noted above, commissioned by AARP and dated March 3, 2008, assumed nearly 50 million Americans would join the program, a level well above current participation in private long-term care insurance. The second, by the Moran Group, assumed participation would be mandatory for everyone.6

As the chief actuary pointed out, those are completely invalid assumptions on which to base estimates of a long-term care insurance program. CBO’s own estimate also assumed participation rates that were higher than long-term care insurance currently has, and higher than the chief actuary believed could plausibly be expected. By relying on unrealistic estimates of how many people would participate in the CLASS program, its supporters masked the program’s underlying viability problems.

Even with these unrealistic assumptions, the AARP-commissioned analysis also concluded that the program’s design flaws “will ultimately lead to … an unsustainable situation with respect to the premiums.” (See Exhibit C.) Emails between Obama administration officials and congressional staff show that AARP, which publicly supported PPACA, has refused to release the entire study. (See Exhibit D.)

To further rebut the AARP and Moran studies, the chief actuary also forwarded to CMS Legislative Affairs staff a report by the American Academy of Actuaries and the Society of Actuaries that substantiated his concerns about the long-term viability of the proposed CLASS program. (See Exhibit E.) The American Academy of Actuaries provided their report to the Senate HELP Committee on July 22, 2009. (See Exhibit E.)

August – September 2009
CMS and Senate HELP Democrats Ignored Warnings about Actuarial Soundness and Pressed Forward with CLASS as a New Entitlement

The chief actuary remained concerned about the soundness of the CLASS program throughout the summer of 2009, and he sought to ensure that his concerns were communicated to the senior people working on health care reform inside HHS as well as the chief architects of the program in Senator Kennedy’s office. On August 14, 2009, the chief actuary sent another email to the CMS Office of Legislative Affairs in which he said:

As you know, I continue to be convinced that the CLASS proposal is not ‘actuarially sound,’ despite Sen. Kennedy’s staff’s good intentions. I assume you’ve conveyed these concerns to the staff but, if not, let me know and we can express the concerns in a memo.

The Office of Legislative Affairs responded, “Yes, both Amy and the HHS Office of Health Reform have been in communication with [a senior democrat staff member] of the HELP Committee relaying your concerns about the actuarial soundness of the CLASS Act.” (See Exhibit F.)

A few weeks later, on August 24, 2009, the chief actuary again asked CMS to consider the American Academy of Actuaries report questioning the CLASS Act’s viability. (See Exhibit B.)

HHS Officials Effectively Silenced the Chief Actuary and Stopped Soliciting His Input

After receiving consistent negative information from the chief actuary about the financial viability of the program, Senator Kennedy’s staff moved to cut out the chief critic of the CLASS Act within HHS from providing any further analysis of the bill. On September 10, 2009, the Director of Policy Analysis in the Immediate Office of the Secretary of HHS emailed the Deputy Assistant Secretary for Planning and Evaluation saying, [a senior democrat staff member] “got back to me, and decided she does not think she needs additional work on the actuarial side.” (See Exhibit G.)

An email the following week, September 16, reiterated Democrats’ position: [a senior democrat staff member] “at HELP has done a lot of work changing the program and per CBO it is now actuarially sound.” (See Exhibit H.) There had been a clear shift from relying on the chief actuary’s 36 years of experience in favor of the flawed 10-year timeframe of CBO.

Despite the shift, the chief actuary continued to be involved in discussions as late as September 23, 2009, when he attended a meeting with CBO in which the structure and cost of the CLASS Act were discussed. (See Exhibit I.) After this date, there were apparently no other email communications from the chief actuary regarding the CLASS Act. There is no indication in the documents that the drafters of the legislation in Congress or HHS ever again sought the chief actuary’s opinion on the program before the law was enacted. However, his questions about the sustainability of the program continued to be raised in published actuarial reports.7

CBO Produced Long-Term Analyses of CLASS; Models Have Yet to Be Made Public

At the same time CLASS supporters began to marginalize the warnings from the chief actuary about the long-term viability of the program, Democratic staff on the Senate HELP Committee worked with CBO to come up with an alternative model to analyze CLASS. On September 9, 2009, an HHS official e-mailed that HELP staff “had CBO do lots and lots of runs out to 50 years to ascertain solvency. [The HELP staff member] is going to send to me to forward on.” (See Exhibit J.)

Congress relies on CBO to estimate the economic impact of proposed laws and in this role it is vital that CBO’s models be completely transparent. The formulas, algorithms and assumptions should be explicitly defined so that Congress and the public can fully understand the basis for their estimates. Yet two years after it was providing analyses to HELP Committee staff, CBO has declined to disclose the models it developed to analyze the CLASS program’s long-term solvency. CBO staff now say that they do not have the capacity to analyze the CLASS Act’s long-term solvency, despite apparently undertaking that analysis for congressional Democrats before the bill’s passage.

On August 15, 2011, HHS did provide an analysis by CBO that congressional staff gave to CMS in September 2009. That analysis is one page of a spreadsheet projecting net premium collections of $59 billion through 2019 – a 10-year budget estimate, not the 50-year solvency estimates referred to by Senate HELP Committee staff. The document does not disclose what participation rates it assumed or how it established the assumed $65 premium rate. (See Exhibit K.)

September – December 2009
HHS’ Office of the Assistant Secretary for Planning and Evaluation Began To Question CLASS but Also Was Ignored

Despite the chief actuary’s email silence after September, others within HHS began to raise red flags about the soundness of the CLASS program. On September 25, 2009, just two days after the CBO meeting with the chief actuary, the Office of the Assistant Secretary for Planning and Evaluation (ASPE) prepared talking points for the CLASS program, including the concern that the program “is still likely to create severe adverse selection problems.” (See Exhibit L.)

On October 22, 2009, ASPE again questioned the viability of the program. One staffer wrote in an email:

You can get a policy through the [Federal Long-Term Care Insurance Program] (albeit underwritten) with a higher benefit, better inflation protection, and lower premium [than CLASS]. I don’t see any reason why anyone would opt for CLASS if they could pass the underwriting. And if you couldn’t make it through underwriting, you could simply enroll in CLASS to cover some of your current or likely future [long-term care] costs. Seems like a recipe for disaster to me… (See Exhibit M.)

This staffer also said: “I can’t imagine that CLASS would not have high levels of adverse selection given the significantly higher premiums compared to similar policies in the private market.” (See Exhibit M.)

HHS Officials’ Public and Private Statements on CLASS Solvency Conflict

During this entire time, public statements by HHS officials gave no hint of the internal concerns voiced within the agency. On October 20, 2009, Richard Frank, Deputy Assistant Secretary for Planning and Evaluation at HHS, gave a public speech at a Kaiser Family Foundation event in which he said:

We’ve, in the department, have modeled this extensively, perhaps more extensively than anybody would want to hear about [laughter] and we’re entirely persuaded that reasonable premiums, solid participation rates, and financial solvency over the 75-year period can be maintained. So it is, on this basis, that the administration supports it that the bill continues to sort of meet the standards of being able to stand on its own financial feet.8

It was around this same time that internal email from Frank’s staff indicated the nonpublic opinion that prospects for the program’s solvency looked more like “a recipe for disaster.”

Figures from the Social Security Chief Actuary Also Lead to Questions of Anti-Selection Problems within CLASS

HHS staff acknowledged that CLASS premiums would need to be less than $100 for the program to be viable. On November 27, 2009, an ASPE staffer commented, “I suspect that these changes would decrease the premium to well under $100, which seems to be the consensus threshold needed to get decent participation and avoid catastrophic adverse selection.” (See Exhibit N.)

But on December 8, ASPE analyzed Social Security Chief Actuary Steve Goss’ actuarial report and noted that estimated monthly premiums were approximately $177 per month (if a certain reenrollment loophole were not closed) or $140 per month (if the loophole were closed). They also noted that after five years, premiums could increase to $332.53 per month. The office concluded its analysis by noting that adverse selection was a serious threat to the program’s viability. (See Exhibit O.)

HHS Officials Question CLASS, but Their Concerns are not Addressed in the Legislation

On December 1, 2009, ASPE had prepared technical comments on the CLASS Act, in which, even before its analysis of the Social Security data, the Office pointed out:

Unlike most private insurance that reimburses policy holders for long-term care expenses, the CLASS benefit is a lifetime cash payment paid daily or weekly once a person meets the eligibility criteria of the program. … The end result could be severe adverse selection that would in turn threaten the long-run solvency of the program. (See Exhibit P.)

The technical comments also included several recommendations from the American Academy of Actuaries to increase the solvency of the program. These included adding a waiting period before benefits kick in; reducing the benefit from lifetime to a fixed number of years; using an established list of activities of daily living to determine the trigger for benefits; and moving from a daily cash benefit to one that makes reimbursements based on services used.

None of those recommendations were adopted in the final language of the bill, and the concerns expressed by ASPE were not addressed or shared with the public.

January 2010
HHS Officials Privately Conceded CLASS May Be Unsustainable, but Failed to Disclose Their Concerns Publicly

In January 2010, HHS staff prepared a list of suggested technical corrections to the CLASS Act that the Department wanted included as the House and Senate reconciled their separate versions of health care reform. However, for both political and procedural reasons, the House was forced to accept the version of health reform – and the CLASS Act – adopted by the Senate on December 24, 2009, and none of the corrections were made.

Chief among the corrections the Department wanted to make was a so-called “failsafe,” which HHS staff described this way:

In the current bills, the Secretary can alter the premiums in response to threats to financial stability of the CLASS program. However, it is possible the authority in the bill to modify premiums will not be sufficient to ensure the program is sustainable. The failsafe provision gives the Secretary authority to alter earnings and vesting provisions of the CLASS Act to further decrease adverse selection and maintain long-run stability. (See Exhibit Q.)

The documents reveal HHS’ concern that the CLASS program as written in the Senate bill – and the version signed into law – would become fiscally unsustainable. Yet at no point between the date of the document – January 4, 2010 – and the day the House voted to pass the Senate health bill – March 21, 2010 – did Secretary Sebelius or any other HHS official publicly air the Department’s concerns that the CLASS program as drafted could be unsustainable.

It appears that the significant fiscal concerns surrounding CLASS may have been silenced within the Department for political reasons and the fear that publicly discussing concerns about CLASS’ sustainability could have jeopardized the bill’s passage in the House.

The technical comments on the January 2010 document raise additional contradictions between HHS’ public and private statements. Throughout 2011, Secretary Sebelius and other HHS officials have repeatedly expressed – and have testified before Congress about – their belief that the CLASS Act legislation gives them the authority they need to construct the program in a fiscally sustainable manner.9 This public assurance stands in marked contrast with the internal corrections document asserting that it is possible the Department’s authority “will not be sufficient to ensure the program is sustainable.”

CLASS May Leave Employers On the Hook for a Failed Entitlement

Even before PPACA became law, HHS and the law’s drafters began to look for ways to pass the costs on to other parties. While it was clear that some of the future projected shortfalls in the program would add to the federal budget deficit and be borne by American taxpayers, other costs would be shifted to employers and the states. The documents show a consistent effort by HHS to impose unfunded mandates on others, so that the cost of some of the questionable decisions made by the law’s drafters would not fall on the federal government.

Employer Participation Creates Compliance and Administrative Burdens

To participate in CLASS, subscribers would pay a yet-to-be-determined premium each month that would be deposited into a trust fund established by the Secretary of the Treasury for the purpose of paying cash benefits to eligible claims. Premiums would be collected either through voluntary employer payroll withholding or by a mechanism determined by the Secretary for those who are self-employed, have more than one employer, or have an employer that does not participate in the automatic enrollment process.

The critical mechanics of how an employer would withhold CLASS program premiums from employees’ paychecks and then transfer those premiums to the U.S. Treasury could place a significant compliance and administrative burden on employers. The complexity and cost of any new payroll deduction and enrollment process could be substantial, especially for small employers.

Documents show that HHS knew of the program’s administrative burden on employers and pressed forward anyway. In the HHS ASPE office’s technical comments on the draft CLASS Act legislation from December 1, 2009, the Department acknowledged:

The collection of premiums is a fiduciary responsibility that requires employers to accurately collect and transmit premiums to the government. Collecting premiums would require a nontrivial change to existing payroll systems and additional responsibilities that employers may be reluctant to take on. (See Exhibit P.)

HHS warned that employer participation in a voluntary enrollment program was likely to be low because CLASS premiums will be difficult for employers to calculate and “employee interest in CLASS may be minimal.” (See Exhibit P.)

What was more, because employers participating in the program would be taking on a fiduciary responsibility, they could be at risk of lawsuits from their workers for calculating premiums incorrectly. Because, as HHS acknowledged, calculating premiums will be “complex” and difficult to implement, such lawsuits could become commonplace. HHS appears to have understood that the prospect of litigation and significant liability might make employers less likely to want to get involved in the program.

The Forthcoming Regulations on CLASS Could Require Employers, at a Minimum, to Provide Enrollment Information

In December 2009, HHS staff discussed how to use the regulatory process to change the not-yet-passed CLASS Act in a way that would make it even more burdensome for employers. Staff were concerned that low participation by employers would lead to fewer people signing up for the program.

One email chain included a discussion about requiring employers to play a more active part in enrollment by requiring them to issue enrollment forms to employees.

A major enrollment issue that needs to be addressed is how to identify the relevant employers/employees (i.e., the self-employed, small employers, and large employers), and determine if statutory requirements are being met. The Department of Labor may be of some assistance. (See Exhibit R.)

Another email from the same month indicates that HHS tried to make last minute changes to a manager’s amendment, though the language never made it into the final version of the amendment. The Deputy Assistant Secretary for Planning and Evaluation suggested:

Employer requirements: In the current formulation of the bill, employers have complete discretion regarding whether to participate in the CLASS program and auto-enroll employees …. The provision introduced in this amendment maintains the original optional participation in autoenrollment, but adds a requirement that employers inform their employees about the CLASS program. (See Exhibit S.)

Nothing in the documents suggests that the Obama administration ever conducted an analysis to quantify how much these proposed unfunded mandates would cost employers in time and resources.

The Administration Considers New Mandates on Employers as a “Solution” to Low Participation

The concern inside HHS about potentially low participation by employers led to an even more burdensome suggestion: mandate that employers over a certain size offer enrollment to employees. As HHS explained, “One possible alternative is to move to a ‘mandated offer’ approach where employers over a certain size (e.g., 50 employees) would be required to offer enrollment.” (See Exhibit P.)

Documents show that the idea that the Administration should solve its participation problem by requiring employers to offer enrollment to employees continued to be a major theme of communications regarding implementation of the program. On December 11, 2009, a staffer in ASPE commented:

I am writing right now about whether we should integrate employers even more into the process by moving to a ‘mandated offer’ approach instead of just ‘mandated information.’ The major problem is that mandating that employers offer information about the program probably will not yield high enough participation; we need to have employers more integrated into the enrollment process and not have them drop off once they simply provide information about the program. (See Exhibit T.)

The recipient of that email responded:

I agree that there is a risk to the entire program if we don’t have a sufficiently robust outreach and educational campaign and one that is specifically targeted to employers. This employer notification mandate makes me think of Part D, whereby … insurers are required to notify their Medicare eligibles whether their prescription drug coverage is creditable. (See Exhibit T.)

In numerous other emails, HHS staff argued that employers should bear the responsibility to enroll employees. (See Exhibit R.) HHS envisioned this requirement increasing participation in the program, but the documents do not discuss the unfunded mandate that would be imposed on employers. The final version of the CLASS Act is silent on employer requirements, but it is entirely within the HHS Secretary’s discretion to impose the obligations on employers when she issues regulations for the program this fall.

Even if the Secretary does not require employer participation in the regulations to be released this fall, the email communications discussing mandatory employer participation and employer fiduciary responsibility foreshadow ways HHS could later modify the CLASS Act in a desperate attempt to make the program solvent.

CLASS Saddles States With Yet Another Mandate

In addition to the burdens placed on employers, the emails indicate that HHS believed many costs of implementation will be shouldered by the states.

HHS Knew CLASS Imposed Heavy Administrative Burdens and Unrealistic Deadlines

States will have a significant administrative role in the implementation of the CLASS program, including responsibility for establishing and helping to administer eligibility determination centers. For example, the CLASS Act requires the Secretary of HHS to establish an Eligibility Assessment System similar to the Social Security Disability Insurance (SSDI) program, to be administered by the states. That system is to be completed by January 1, 2012. The CLASS Act also requires the HHS Secretary to enter into agreements with each state’s Protection and Advocacy System, which advocate for people with disabilities, and with other groups and state agencies to provide additional counseling services.

According to several internal emails, HHS and CMS staff noted the unreasonable burdens the legislation would impose on states by requiring implementation of the Act within two years. On April 19, 2010, one email said that requiring states within two years of enactment to “designate or create entities to serve as fiscal agents for CLASS beneficiaries” would “create significant new burdens on the states.” (See Exhibit U.)

Another email from even earlier, December 18, 2009, also warned of this problem, stating that a two year deadline for states “to build the direct care workforce capacity for CLASS enrollees” is “flawed (and perhaps fatally so).” (See Exhibit V.)

HHS Underestimated Administrative Costs, Leaving States to Bear Costs of Eligibility Determinations

Even if the deadlines can be met, HHS has not released any specific estimates of how much these implementation efforts will cost or how much money the federal government will be able to offer states to help pay for the services versus how much states will have to pay on their own.

It is clear from internal HHS emails that the Department always planned to impose a number of significant administrative burdens on states. The administrative costs are expected to be significant, and HHS officials pointed out several times that cost estimates of the CLASS Act did not allocate enough money to administer the program. CLASS Act estimates only allocated three percent of premiums to run the program, while the American Academy of Actuaries recommended three percent of premiums plus five percent of benefits. (See Exhibit P and Exhibit W.)

Rather than address inadequate funding for administrative expenses, the CLASS Act imposes many administrative expenses on already-struggling states. On March 3, 2010,
when asked whether CMS analyzed implementation costs for CLASS, one CMS employee responded:

“Hate to tell you but I am almost certain that we did not do this. I really thin[k] most of the administrative costs would be in doing eligibility determinations and payments split with nursing homes and waivers, however, I think little of it is really ours versus the states.” (See Exhibit X.)

CMS Knew States Would Be Saddled With Costs But Congress Did Not Make Changes during Reconciliation

In the last few weeks before final passage of PPACA, CMS’ Office of Legislative Affairs asked staff for edits to the Senate bill that CMS deemed absolutely necessary in order to implement the Act. In a March 4, 2010, exchange, CMS specifically asked for “Not ‘nice to have’ but ‘otherwise it won’t work’” fixes. One edit provided by staff read, “require the Secretary to assume responsibility for building workforce infrastructure; otherwise, this will impose costs and burdens on states and potentially put CLASS at risk.”

CMS proposed changing the implementation date to January 2015, as “states are not uniformly equipped to perform activities related to designating existing or new entities to ensure the service infrastructure is adequate to meet the needs of beneficiaries, which will likely pose significant and potentially costly administrative challenges, particularly in light of the implementation deadline.” (See Exhibit Y.) None of these edits were included in the final version of PPACA.

Administrative Burden Likely to Get Worse Over Time

The SSDI program, on which the CLASS Act administrative structure is modeled, is experiencing significant problems in both fiscal and administrative areas. The aging of the baby boom generation has caused SSDI administrative costs to nearly double since 2000. According to a CBO report, the SSDI program will become insolvent in 2017.10 In addition, the Social Security Administration anticipates nearly 3.2 million new applicants11 for disability benefits in FY 2012. Even without those new applicants, SSDI has a huge backlog of appeals cases in which benefits have been denied. In 2007, some appeal cases had been lingering as long as 1,400 days.12

Conditions are so unstable that the Government Accountability Office (GAO) has placed federal disability programs on a High-Risk Watch List since 2003. According to GAO, “the largest disability programs – managed by the Social Security Administration, Department of Veterans Affairs, and Department of Defense – are experiencing growing workloads, creating challenges to making timely and accurate decisions.”13

As baby boomers start claiming CLASS Act benefits, program administrators can expect to see some of the problems of scale already being experienced by other federal disability programs, including rising administrative costs. However, the statute caps the program’s administrative expenses at three percent of premiums, leaving no wiggle room for states to accommodate the increased burden from an aging population. Without sufficient capital and stability from the start, it is likely the CLASS program will eventually join the other programs on GAO’s High-Risk Watch List.

The cost of administering the SSDI program state centers in 2011 was $3 billion, a cost borne exclusively by the states.14
The burdens of CLASS implementation on the states are likely to exceed that amount, because the number of CLASS beneficiaries will be significantly larger than the number of SSDI beneficiaries due to more relaxed eligibility requirements under CLASS. While HHS has not shared estimates on the costs to states to administer the CLASS Act, we feel that $3 billion per year is a conservative estimate, one that excludes additional expected start-up costs. Over the next ten years, states will be forced to bear at least $30 billion dollars for implementation of CLASS. When added on top of the mandates from the Medicaid requirements in PPACA of at least $118 billion, it is clear that states are being forced to pay the bills that Washington refuses to pay.

State Officials and Legislators Have Grave Concerns with the Solvency and Sustainability of the CLASS Act

On August 4, 2011, leaders of a key National Conference of Insurance Legislators (NCOIL) Committee expressed “grave concerns” with the CLASS Act in a letter to the HHS Secretary. The NCOIL letter asserts that the CLASS Act program “fails to apply the principles of risk management that are essential to any financially sound insurance program”. The letter went on to state, “The CLASS program risks being undercapitalized on the front end, paying more in benefits than it collects in premiums. This will drive rates up and cause adverse selection, as young and healthy consumers will not participate in the market. Also, the plan as currently configured offers little incentive for agents, brokers, and human resources professionals to encourage the enrollment needed to create a broad and stable risk pool.”15

The concerns of state legislators should be strongly heeded by HHS. Not only do states recognize that they will be on the hook for administering of the CLASS program, legislators whose policy expertise is in insurance markets recognize it is destined for failure at the expense of states, businesses, and taxpayers.



1 P.L. 111-148; P.L. 111-152

2 Foster, Richard. “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act’ As Amended.” Office of the Actuary, Centers for Medicare and Medicaid Services, April 22, 2010. https://www.cms.gov/ActuarialStudies/Downloads/PPACA_2010-04-22.pdf

3 Montgomery, Lori “Proposed Long-Term Insurance Program Raises Questions.” Washington Post, October 27, 2009. http://www.washingtonpost.com/wp-dyn/content/article/2009/10/27/AR2009102701417.html

4 Roy, Avik. “Sebelius: CLASS Act is ‘Totally Unsustainable,’ Mandate Possible,” Forbes, February, 23, 2011. http://www.forbes.com/sites/aroy/2011/02/23/sebelius-class-act-is-totally-unsustainable-mandate-possible/

5 Bold/italic emphasis throughout this report not necessarily in the original.

6 The documents provided did not include the study completed by the Moran group despite it being referenced by the chief actuary and a senior democrat staff member for the Senate Health, Education, Labor, and Pensions Committee. The senior democrat staff member referenced the Moran report on October 20, 2009 at the Kaiser Family Foundation event “The Sleeper Issue: Long-term Care and the CLASS Act,” page 78. http://www.kff.org/healthreform/upload/102009_KFF_CLASS_Act_Transcript_Final.pdf

7 Foster, Richard. “Estimated Financial Effects of the ‘America’s Affordable Health Choices Act of 2009’ (H.R. 3962), as passed by the House on November 7, 2009, November 13, 2009. http://www.cms.gov/ActuarialStudies/downloads/HR3962_2009-11-13.pdf Foster, Richard. “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act’ As Amended.” Office of the Actuary, Centers for Medicare and Medicaid Services, April 22, 2010. https://www.cms.gov/ActuarialStudies/Downloads/PPACA_2010-04-22.pdf

8 Comments made on October 20, 2009 at Kaiser Family Foundation Event. “The Sleeper Issue: Long-term Care and the CLASS Act.” Page 49-50. http://www.kff.org/healthreform/upload/102009_KFF_CLASS_Act_Transcript_Final.pdf

9 Roy, Avik. “Sebelius: CLASS Act is ‘Totally Unsustainable,’ Mandate Possible,” Forbes, February, 23, 2011 http://www.forbes.com/sites/aroy/2011/02/23/sebelius-class-act-is-totally-unsustainable-mandate-possible/  House Energy & Commerce Committee. Hearing entitled, “The Implementation and Sustainability of the New, Government-Administered Community Living Assistance Services and Supports (CLASS) Program,” March 17, 2011. http://republicans.energycommerce.house.gov/hearings/hearingdetail.aspx?NewsID=8332

10 Congressional Budget Office, “CBO’s 2011 Long-Term Projections for Social Security: Additional Information,” August 2011. http://www.cbo.gov/doc.cfm?index=12375  

11 Social Security Administration. “Annual Performance Play for Fiscal Year 2012,” page 21. http://www.socialsecurity.gov/performance/2012/APP%202012%20508%20PDF.pdf

12 Astrue, Michael, Commissioner of the Social Security Administration. Statement before the House Committee on Ways and Means, Subcommittee on Social Security and the House Committee on the Judiciary, Subcommittee on the Courts, Commercial and Administrative Law. July 11, 2011. http://www.ssa.gov/legislation/testimony_071111.html

13 Government Accountability Office. Report to Congressional Committees. “High-Risk Series: An Update.” February 2011, page 147. http://www.gao.gov/new.items/d11278.pdf

14 The 2011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Table VI.C5. http://www.ssa.gov/oact/tr/2011/tr2011.pdf

15 National Conference of Insurance Legislators. Letter to the Honorable Kathleen Sebelius. August 4, 2011. http://www.ncoil.org/Docs/2007430d.pdf

More Misinformation from the Administration

The Secretaries of Labor, HHS, and Treasury have released a joint letter to Congressional offices outlining the “benefits” of the health care law, as part of an attempt to build political support for the unpopular measure.  Several claims in the letter are however at variance with the facts, and warrant a response.

The most egregious claim in the letter is that Exchanges will “allow…individuals and small business owners to get insurance at rates comparable to those charged to large employers, reducing the premiums individuals face by 14 to 20 percent according to the Congressional Budget Office.”  That claim of lower premiums is patently FALSE.  In fact, the Congressional Budget Office found that the Senate bill would RAISE premiums by an average $2,100 per family.  The basis for the Secretaries’ allegation is that the Exchanges would reduce costs on their own; however, CBO also found that premiums would go up because individuals would be FORCED to buy richer policies.  Here’s the language from pages 9-10 of the CBO analysis:

Specifically, because of the greater actuarial value and broader scope of benefits that would be covered by new nongroup policies sold under the legislation, the average premium per person for those policies would be an estimated 27 percent to 30 percent higher than the average premium for nongroup policies under current law (with other factors held constant). The increase in actuarial value would push the average premium per person about 18 percent to 21 percent above its level under current law, before the increase in enrollees’ use of medical care resulting from lower cost sharing is considered; that induced increase, along with the greater scope of benefits, would account for the remainder of the overall difference.

In other words, the increased mandates in the bill – because Democrats and government bureaucrats believe that some Americans’ coverage is “insufficient” – would RAISE premiums.  In the same vein, it’s worth noting that page 4 of the letter celebrates as a “success” of the health law the fact that one insurer proposed a rate increase of “only” 9.8 percentWhat happened to the $2,500 reduction in premiums candidate Obama promised, such that an increase of “only” 9.8 percent is considered an accomplishment?

Other nuggets in the letter worth responding to:

  • Page 1 claims that the law is “improving the quality of care and lowering costs,” but in reality the Administration’s own actuary estimated that the bill will RAISE health costs by $310,800,000,000.
  • The letter’s second paragraph talks about the law “giving Americans more freedom in their health care choices,” but in reality the law gives Americans “freedom” by forcing them to buy a product for the first time ever – an unprecedented, and constitutionally dubious, mandate by the federal government on all Americans.
  • Page 5 of the letter claims that the law gives Medicare “improved financial solvency for an additional 12 years.”  In reality however, the Medicare actuary noted that the more than $500 billion in spending reductions “cannot be simultaneously used to finance other Federal outlays (such as the coverage expansions under the PPACA) and to extend the [Medicare] trust fund, despite the appearance of this result from the respective accounting conventions.”  Medicare’s chief actuary also went so far as to encourage individuals to ignore the estimates included in the annual trustees report, and view an alternative scenario instead, because the official estimates included unrealistic savings provisions from the health care law that the actuary believes will never take effect.

Update on 9/11 Bill Agreement

As you have probably seen, the Senate recently passed a revised version of the 9/11 bill by unanimous consent; the House may consider the measure later today. A summary of the changes made to the legislation follows below.


Health Program Changes:

  • Requires the Program Administrator to provide for the uniform collection of claims data in addition to other data on WTC-related health conditions.  Requires a study of the feasibility of consolidating data centers.
  • Prohibits Clinical Centers of Excellence from including construction or capital costs for purposes of their federal reimbursement for “fixed infrastructure costs.”  Requires a study of the adequacy of Clinical Centers of Excellence collection and submission of claims data.
  • Prohibits the Program Administrator from designating the NIOSH Director or other NIOSH officials from making determinations about the certification of diseases eligible for coverage under the WTC program.
  • Provides for a maximum cap on reimbursements for medical treatments provided – payments shall not exceed the rates established by the Office of Worker’s Compensation within the Department of Labor.
  • Requires a study of the feasibility of using existing federal purchasing programs to provide pharmaceutical benefits to individuals covered through the WTC program.
  • Requires a study of the feasibility of using Veterans Affairs facilities to provide monitoring and treatment services to WTC program participants, particularly those outside New York.
  • Shortens the period of funding from ten years to six.  Eliminates the $1.8 billion in funding for Fiscal Years 2016-2020. (Funding levels for Fiscal Years 2011-2015 remain unchanged.)  Allows unspent funds to be used in Fiscal Years 2016 and future years, but prohibits additional federal transfers in 2016 and future years.  Shortens the period of required contributions by New York City from ten years to six, consistent with the shortened period of federal funding.

Victim Compensation Fund Changes:

  • Provides that claims filed under the re-opened 9/11 Victim Compensation Fund may only be filed within “five years after the date on which such regulations are updated,” which is required within 90 days of enactment (shortened from 180 days in the bill).  The underlying bill provided for filing of claims through December 22, 2031.
  • Narrows definition of the “immediate aftermath” of the 9/11 attacks to the period between September 11, 2001, and May 30, 2002; the bill included eligibility through August 30, 2002.
  • Eliminates the ability of applicants to the 9/11 Fund to have their legal claims re-instated in court if their application proves unsuccessful.  (As background, applicants to the 9/11 Fund during the 2001-03 period were required to waive their right to pursue legal action in court.)
  • Limits spending on the 9/11 Fund to $2.775 billion, $875 million of which “shall be available to pay such claims beginning on such date” that the 9/11 Fund re-opens.  Remaining claims would be paid within one year after the end of the five year period, at which point “the Victim’s Compensation Fund shall be permanently closed.”
  • Eliminates exceptions to the 10 percent cap on attorneys fees, and gives the Special Master permission to lower fees in the event of a finding of “excessive compensation.”


  • Maintains the 2% “excise tax” on federal procurement payments provisions included in the Gillibrand substitute.
  • Includes a one-year extension — until September 30, 2015 —  of the Emergency Border Security Appropriations Act of 2010, currently set to expire in 2014, which raised fees on H1-B and L-1 visas for those companies that have more than half their U.S.-based employees on such visas.  The previous Gillibrand substitute to the 9/11 bill included this extension through 2021.
  • Strikes the extension of travel promotion fees used as a pay-for in the Gillibrand substitute.

Update and Summary on Food Safety Bill

As previously indicated, a cloture vote on the motion to proceed to the food safety bill (S. 510) is the third in a series of votes scheduled to take place beginning on Wednesday.  Timing of the vote series on Wednesday remains TBD; however, the series of votes has been structured in such a manner that if cloture on the motion to proceed to the food safety bill is successful, that vote will take precedence over the prior motions.

As you may be aware, there are three primary issues outstanding regarding the food safety bill: Sen. Tester’s amendment to exempt small farms from the legislation’s requirements; Sen. Feinstein’s proposed ban on bisphenol-A (BPA); and Sen. Coburn’s concerns regarding potential duplicative oversight and excessive spending.  Discussions continue regarding those issues, and we will keep offices informed if agreements can be reached.

Text of the updated manager’s package can be found here; the CBO score is online here.  A summary of the bill, including the changes made by the manager’s package, follows below .  We will have more information as it becomes available.



  • S. 510 is intended to respond to several food safety outbreaks in recent years by strengthening the authority of the Food and Drug Administration (FDA) and redoubling its efforts to prevent and respond to food safety concerns.
  • The legislation expands current registration and inspection authority for FDA, and re-focuses FDA’s inspection regime based on risk assessments, such that high-risk facilities will be inspected more frequently.  The bill also requires food processors to conduct a hazard analysis of their facilities and implement a plan to minimize those hazards.
  • The bill requires FDA to recognize bodies that accredit food safety laboratories domestically and third-party auditors overseas.  The bill enhances partnerships with state and local officials regarding food safety outbreaks, and establishes a framework to allow FDA to inspect foreign facilities.
  • The bill does NOT change the existing jurisdictional boundaries between FDA and the Department of Agriculture, and includes protections for farms and small businesses.
  • The bill gives the FDA the power to order mandatory food recalls, in the event that a food company cannot or does not comply with a request to recall its products voluntarily.


Title I – Prevention

Records Inspection:  Expands and clarifies FDA’s records inspection authority, such that FDA can inspect records regarding an article of food “and any other article of food that [FDA] reasonably believes is likely to be affected in a similar manner, will cause serious adverse health consequences or death to humans or animals.”

Registration:  Requires facilities to renew registration with the FDA every two years, and to agree to potential FDA inspections as a condition of such registration.  Gives the FDA Commissioner the power to suspend facilities’ registration in the event FDA determines the facility “has a reasonable probability of causing serious adverse health consequences or death.”  A suspended facility shall not be able to “introduce food into interstate or intrastate commerce in the United States.  A hearing would occur within two business days on any suspension.  If the suspension is found warranted, the facility must submit a corrective action plan before its suspension could be lifted.  The bill also states that the commissioner cannot delegate to other officials within FDA the authority to impose or revoke a suspension.

Small Entity Compliance Guides:  Requires FDA to develop plain language small entity compliance guides within 180 days of the issuance of regulations with respect to registration, hazard analysis, safe production, and recordkeeping requirements.

Hazard Analysis:  Requires facilities to analyze at least every three years their potential hazards and implement preventive controls at critical points.  Further requires facilities to monitor the effectiveness of their preventive controls, take appropriate corrective action, and maintain records for at least two years regarding verification of compliance.  The bill gives FDA the authority to waive compliance requirements in certain instances, and allows FDA to exempt facilities “engaged only in specific types of on-farm manufacturing, processing, or holding activities that the Secretary determines to be low risk.”  The language also delays implementation for smaller establishments for up to three years.

Performance Standards:  Requires FDA to review evidence on food-borne contaminants and issue guidance documents or regulations as warranted every two years.

Produce Safety:  Establishes a process to set standards for the safe production and harvesting of raw agricultural commodities (i.e. fruits and vegetables).  Requires FDA to promulgate regulations regarding the intentional adulteration of food—applying to food “for which there is a high risk of intentional contamination”—within two years, and issue compliance guidance as appropriate.  Includes delayed implementation of up to two years for smaller establishments.

Fees for Non-Compliance:  Imposes fees on facilities only in cases where a facility undergoes re-inspection to correct material non-compliance, or does not comply with a recall order and thereby forces FDA to use its own resources to perform recall activities.  Importers would be subject to fees for annual re-inspections or for participation in the voluntary qualified importer program established under title III of the bill.  Requires FDA appropriations funding to keep pace with inflation in order for fees to be collected.  The bill gives FDA the authority to lower fee levels on small businesses through a notice-and-comment process.

Safety Strategies:  Requires FDA, the Department of Agriculture, and the Department of Homeland Security to coordinate to create an agriculture and food defense strategy, focused on preparedness, detection, emergency response, and recovery.  Requires reports from FDA on building domestic preventive capacity—including analysis, surveillance, communication, and outreach—and requires FDA to issue regulations on the sanitary transportation of food within 18 months of enactment.

Food Allergies in Children:  Requires FDA to work with the Department of Education to develop voluntary guidelines to manage the risk of food allergy and anaphylaxis in schools and early childhood education programs.  Authorizes new grants of up to $50,000 over two years for local education agencies to implement the voluntary guidelines.

Dietary Ingredients and Supplements:  Requires FDA to notify the Drug Enforcement Administration if FDA believes a dietary supplement may not be safe due to the presence of anabolic steroids.

Refused Entry:  Requires FDA to notify the Department of Homeland Security, and by extension the Customs and Border Protection Agency, in all cases where FDA refuses to admit foods into the United States on the grounds that the food is unsafe.

Title II – Detection and Response

Targeted Inspections:  Requires FDA to prioritize inspection of high-risk facilities, based on a risk profile that includes the type of food being manufactured and processed, facilities’ compliance history, and other criteria.  Requires FDA to inspect high-risk facilities once in the five years after enactment, and every three years thereafter; low-risk facilities would be inspected once in the seven years after enactment, and every five years thereafter.  Foreign facility inspections would be required to double every year for five years.

Laboratory Testing:  Requires FDA to establish within two years a process to recognize organizations that accredit laboratories testing food products, and to develop and maintain model standards for accrediting bodies to use during the accreditation process.  Requires food testing for certain regulatory purposes to be conducted in federal laboratories or those accredited by an approved accrediting body, with results sent directly to FDA.  Includes reporting and other provisions designed to support early detection among laboratory facilities.

Traceback and Recordkeeping:  Establishes a series of pilot projects within nine months of enactment on “methods to rapidly and effectively identify recipients of food to prevent or mitigate a foodborne illness outbreak.”  Requires FDA to issue within two years a notice of proposed rulemaking regarding recordkeeping requirements for high-risk foods.  Permits FDA to request that farm owners “identify immediate potential recipients, other than consumers,” in the event of a foodborne illness outbreak.  Delays implementation of regulations for up to two years for smaller establishments.

Surveillance:  Directs FDA to enhance foodborne illness surveillance systems to improve collection, analysis, reporting, and usefulness of data on foodborne illnesses, and establishes a multi-stakeholder working group to provide recommendations.  Reauthorizes an existing program of food safety grants through fiscal year 2015.

Mandatory Recall Authority:  Provides FDA the authority to order recall of products if the products are adulterated or misbranded “and the use of or exposure to such article will cause serious adverse health consequences or death.”  Requires FDA to provide an opportunity for voluntary recall by the manufacturer or distributor prior to ordering a recall and provides the responsible party the opportunity to obtain a hearing within two days regarding any FDA order for a mandatory recall.  Requires federal agencies to establish and maintain a single point of contact regarding recalls, and requires FDA to take appropriate actions to publicize mandatory recalls through press releases, an internet Web site, and other similar means.  Also gives FDA authority to order the administrative detention of food products when the agency has “reason to believe” they are adulterated or misbranded.  Directs that only the commissioner has the authority to order a mandatory recall, a power that may not be delegated to other FDA employees.

State and Local Governments:  Directs FDA, working with other federal departments, to provide support to state and local governments in response to food safety outbreaks.  Requires the Department of Health and Human Services to set standards and administer training programs for state and local food safety officials.  Creates a new program of food safety centers of excellence, and amends an existing program of food safety grants to fund food safety inspections and training, with an extended authorization through fiscal year 2015.

Food Registry:  Permits FDA to require the submission of reportable food subject to recall procedures (excepting fruits and vegetables that are raw agricultural commodities).  Requires grocery stores with more than 15 locations to post information about reportable foods prominently for 14 days.

Title III – Food Imports

Foreign Supplier Verification Program:  Requires importers to undertake a risk-based foreign supplier verification program to ensure that imported food meets appropriate federal requirements and is not adulterated or misbranded.  Requires FDA to establish regulations for the foreign supplier verification program within one year of enactment.  Importers’ records relating to foreign supplier verification would be maintained for at least two years.

Voluntary Qualified Importer Program:  Directs FDA to establish within 18 months a voluntary program of “expedited review and importation” for importers.  Eligibility would be determined by FDA using a risk assessment based on such factors as the type of food being imported, the compliance history of the foreign supplier, and the compliance capacity of the country of export.

Import Certification:  Permits FDA to require as a condition of importation a certification “that the article of food complies with some or all applicable requirements” under the Food, Drug, and Cosmetic Act.  Requires FDA’s determination of certification requirements to be made based on risk assessments.  Requires notices for imported food to list any country that previously refused entry for that food.  Permits FDA to review foreign countries’ controls and standards to verify their implementation.

Foreign Government Capacity:  Requires FDA to “develop a comprehensive plan to expand the technical, scientific, and regulatory capacity” of foreign entities exporting food to the United States.  Permits FDA to inspect foreign food facilities, and requires the refusal of imported food if a registered exporter refuses entry of FDA inspectors into an overseas facility.  Directs FDA to establish a system to recognize bodies that accredit third-party auditors to certify eligible foreign food facilities meet federal compliance requirements.  Requires FDA to establish overseas offices in countries selected by FDA to “provide assistance to the appropriate governmental entities of such countries with respect to measures to provide for the safety of articles of food.”

Smuggled Food:  Requires FDA to work with the Department of Homeland Security and Customs officials to develop a strategy to identify smuggled food and prevent its entry.

Title IV – Other Provisions

Funding and Staffing:  Authorizes such sums in funding for fiscal years 2011 through 2015.  The bill also sets staffing goals of 4,000 new field staff in fiscal year 2011, and a total of 17,800 through fiscal year 2014.

Employee Protections:  Creates a new process intended to prevent employment discrimination against individuals reporting food safety violations.  The Department of Labor is directed to review and investigate complaints of such discrimination through an administrative process, subject to appeal in federal court.

Jurisdiction:  The bill notes that nothing within its contents shall be construed to alter the division of jurisdiction between the Department of Health and Human Services and the Department of Agriculture.  Likewise, the bill notes that it shall not be construed in a manner inconsistent with American obligations under the World Trade Organization and other relevant international treaties.

How Half of All Workers Will Lose Their Current Coverage

“What I’m saying is, the government is not going to make you change plans under health reform.”

— President Obama, press conference, June 23, 2009[I]

“After some period of time, most plans will relinquish their grandfathered status…”

— Obama Administration draft document, June 10, 2010[ii]


On June 14, 2010, the Departments of Labor, Treasury, and Health and Human Services issued rules regarding the ability of individuals and employees to maintain their current health coverage.[iii] These rules will cause half of all American workers to lose their current health coverage, while raising costs for individuals and businesses alike:

  • The rules outline the circumstances under which a change in plan benefits or structure would trigger loss of grandfathered status, defined as a plan in effect prior to enactment of the health care law (P.L. 111-148) on March 23, 2010. The distinction is important, and not just because of the President’s promise that individuals who like their current coverage will be able to keep it. Plans that lose their status as a grandfathered plan existing prior to the health care law’s enactment will be subjected to a series of at least 13 new federal mandates created under the law.[iv] Loss of grandfathered coverage will also mean higher premiums due to these new mandates—breaking candidate Obama’s key campaign promise, to “save a typical family up to $2,500 on premiums.”[v]
  • The rules include a mid-range estimate that 51 percent of all employees, and 66 percent of workers in small businesses, would lose grandfathered status by 2013—less than three years from now.[vi] Under the worst scenario, nearly seven in 10 workers, and four in five employees in small businesses, would lose their current coverage by 2013. Even under the best possible outcome, 15 percent of American workers, constituting tens of millions of employees and their families, will lose their current coverage in 2011—just over six months from now.[vii]
  • The rule does not give employers flexibility to modify their benefit packages while keeping their current plan’s status. Any of the following would trigger loss of such status under the new rule:
    • Any increase in percentage-based cost-sharing (e.g., co-insurance);
    • Increases in co-payments of more than $5, if such increases also exceed a certain percentage established by a bureaucratic formula; or
    • An increase of more than five percent in the employee share of premiums paid.[viii]

The rule admits the burden created by these new federal mandates, noting that 66 percent of small employers and 48 percent of large employers made at least one cost-sharing or premium change in excess of the above limits during 2009 alone.[ix]

  • The rules would also see the federal government micro-managing employers’ health benefit offerings, as employers could not eliminate benefits for particular conditions without losing their existing status.[x] This restriction would impede plans’ ability to tailor their offerings in a way that reduces costs, and effectively serves as a benefit mandate in perpetuity.
  • The intent of the rule to eliminate Americans’ existing health coverage—in violation of candidate Obama’s campaign promise—is clear. The document talks about the potential for adverse selection beginning in 2014, when the insurance exchanges and subsidies begin. Businesses with healthy workers could choose to keep their current plan, which might raise premiums for firms with sicker employees who seek to purchase coverage through the exchanges. As a result, the Departments characterized the rules as enabling “greater flexibility in early years and less over time.”[xi] In other words, the Administration wants to force businesses to drop their existing coverage and enter the government-run exchanges—so all Americans will have to pay the higher premiums as a result of the new law’s costly mandates.

Speaker Pelosi famously said, “We have to pass the bill so that you can find out what is in it.”[xii] Many American workers and businesses will be upset by what they find in these rules. Businesses struggling to control health costs will find their ability to do so limited. Violating any of the restrictive new rules would trigger even higher costs to comply with more federal mandates. This death spiral of increasing costs could cause more firms to drop their coverage entirely, placing those additional costs on the federal government’s back.

Any way you slice it—bureaucratic mandates, rising premiums, loss of coverage, an economic drag on business—the rules, and the law they are implementing, represent the furthest thing from true reform.


[i] http://www.whitehouse.gov/the_press_office/Press-Conference-by-the-President-6-23-09/

[ii] Draft interim final rule by Departments of Labor, Treasury, and Health and Human Services regarding grandfathered health insurance status, obtained June 10, 2010, http://www.posey.house.gov/UploadedFiles/HealthCareReformDraftRegulations-June-2010.pdf, p. 56. Even though the number of individuals affected by the rule remained unchanged from the internal draft to the rule as published, the sentence in question was subsequently edited, such that the published rule omitted the fact that “most” grandfathered plans would lose their status.

[iii] Interim final rule by Departments of Labor, Treasury, and Health and Human Services regarding grandfathered health insurance status, released June 14, 2010, http://www.federalregister.gov/OFRUpload/OFRData/2010-14488_PI.pdf

[iv] Draft rule, Table 1, pp. 16-18

[v] Obama for America campaign document, “Background Questions and Answers on Health Care Plan,” http://www.barackobama.com/pdf/Obama08_HealthcareFAQ.pdf

[vi] Interim final rule, Table 3, p. 54

[vii] Ibid.

[viii] The full list of benefits changes triggering loss of status can be found at pp. 34-35 of the interim final rule.

[ix] Interim final rule, p. 48

[x] Also included in the list on pp. 35-36.

[xi] Interim rule, p. 43

[xii] March 2010 speech, available at http://www.youtube.com/watch?v=hV-05TLiiLU&feature=related

Cardin Amendment (#4304) on Adult Dependent Coverage in FEHBP

Senator Cardin has offered an amendment (#4304) regarding coverage of adult dependents in the Federal Employee Health Benefits Program (FEHBP).  A vote is possible later today, as Chairman Baucus has indicated he wishes to dispose of pending amendments prior to calling up new ones.  While a CBO score is not available, this amendment may be subject to a Budget Act point of order for exceeding aggregate spending caps.
  • The amendment would expand health coverage for adult dependents in the FEHBP to all those under 26 years of age, as well as spouses of dependents.  Currently, only unmarried dependents under 22 years of age are eligible for FEHBP coverage.
  • Because the definition of dependent is defined in statute, the Office of Personnel Management, which administers FEHBP, has indicated that it cannot implement PPACA’s extension of coverage to adult dependents prior to January 1, 2011, when the expanded dependent coverage mandate in PPACA becomes effective for the FEHBP.
  • Senate Democrats – who wrote their health care legislation behind closed doors – could have included language in PPACA to address this particular concern, but chose not to do so.
  • In publishing regulations regarding the expanded mandate for adult dependent coverage, the Departments of Labor and Health and Human Services concluded that the mandate would raise premium costs for the private sector; the same calculus could apply to FEHBP premiums as well.
  • The relatively rich benefit packages in the FEHBP could result in some adult dependents declining other available sources of insurance coverage in order to stay on a plan funded by generous federal subsidies, thus raising costs to taxpayers.

UPDATE: A brief clarification to this summary of the Cardin amendment: Leg Counsel has opined that the language would NOT allow spouses of dependents to obtain benefits through FEHBP.  It would however allow married dependents to obtain FEHBP coverage (but only for themselves and not their spouses).  Sorry for any confusion.

What Do the American People Need? JOBS What Do Democrats Want to Give Them? Government-Run Health Care

President Obama’s “jobs summit,” coupled with Friday’s release of November jobs numbers, once again raise serious questions about the majority’s ineffectual attempts to combat record-high unemployment levels. For much of the past year, Democrats have focused on spending trillions on a government takeover of health care—funded by hundreds of billions of dollars in tax increases that will destroy jobs, not create them:

  • November 12, 2008: Senate Finance Committee Chairman Baucus releases his “Call to Action” white paper on health reform—which proposes taxing businesses that cannot afford to provide coverage to their workers. The previous Friday, government statistics revealed the number of long-term unemployed had risen by 10 percent in the past month alone.
  • February 26, 2009: The White House releases its budget outline with a $634 billion “reserve fund” for the uninsured. The reserve fund would receive most of its revenue from tax increases on individuals with incomes over $250,000—including small business owners. The following week, the Labor Department reported that the economy shed 651,000 jobs in February—and 2.6 million over the previous four months.
  • April 29: House and Senate Democrats approve Obama budget, including a “reserve fund” that allows Democrats to raise taxes to fund a government takeover of health care. The move came in a month where private-sector employment fell by 611,000 jobs.
  • May 12: Senate Finance Committee holds roundtable on financing health reform, where witnesses advocate raising taxes on small businesses to finance a government takeover of health care. The previous Friday, the Bureau of Labor Statistics reported the total number of unemployed workers reached 13.7 million.
  • June 7: Press reports indicate that a bill offered by the late Senate HELP Committee Chairman Ted Kennedy would raise taxes on businesses by as much as $300 billion to fund health “reform.” According to a model developed by Council of Economic Advisors Chair Christina Romer, such a proposal would destroy 4.7 million jobs. Two days earlier, the unemployment rate jumped half a percent to reach a 26-year high of 9.4 percent.
  • June 19: The House Democrat leadership unveils legislation imposing an 8 percent tax on businesses that cannot afford to fund their workers’ health coverage. The Democrat proposal for a tax on jobs was released during a month when businesses shed an additional 467,000 jobs.
  • July 17: Two House Committees approve legislation that would raise taxes on businesses that cannot afford to offer health coverage by $208 billion—along with more than half a trillion dollars in a “surtax” that would hit many small business owners. That month, the average period of workers’ unemployment exceeded 25 weeks—an all-time high.
  • September 9: President Obama’s message to a joint session of Congress criticizes companies who cannot afford to buy health coverage for their employees as “gam[ing] the system by avoiding responsibility to themselves or their employees.” That same month, the number of long-term unemployed—those out of work for at least six months—exceeded 5 million—an all-time high, and more than double the number in January 2009.
  • October 13: Senate Finance Committee Democrats approve legislation (S. 1796) imposing “fair share” taxes on employers who cannot afford to offer coverage, which the liberal Center for Budget and Policy Priorities criticized as a “tax [on firms] for hiring people from low- or moderate-income families.” That same month, the unemployment rate among youth, who are most likely to be affected by such mandates, reached 27.6 percent—also an all-time high.
  • November 7: The House passes Speaker Pelosi’s government takeover of health care (H.R. 3962), complete with more than $700 billion in job-killing tax increases that would according to an Obama Administration model demolish or destroy up to 5 million jobs. The vote took place one day after the unemployment rate jumped above 10 percent for the first time in a generation—and on the same day that the front-page of the New York Times asserted that unemployment and under-employment had reached levels not seen since the Great Depression.

The American economy remains in the midst of record-high unemployment. Yet the Democrat leadership in both chambers insists on pushing forward their government takeover of health care that would only increase job losses, while causing millions to lose their current health coverage in the process. Many may question: What are the majority’s misplaced priorities that would see them dither on stemming job losses in order to pursue a single-minded fixation with creating a new government-run health care system?

Legislative Bulletin: H.R. 3962, Speaker Pelosi’s Government Takeover of Health Care

On October 29, 2009, Speaker Pelosi and the House Democrat leadership introduced H.R. 3962, the Affordable Health Care for America Act. The legislation combines provisions in earlier versions approved by the Committees on Education and Labor, Energy and Commerce, and Ways and Means, as well as other provisions negotiated behind closed doors by the Democrat leadership. The bill is expected on the floor later this week under a likely closed rule.

Executive Summary: The bill sets the tone for a Washington takeover of the health care system—one defined by federal regulation, mandates, myriad new programs, and higher federal spending. The bill would ensure the heavy hand of federal bureaucrats over the United States health care system, levying costly new taxes on individuals and businesses who do not comply. Many Members may question how additional federal mandates and bureaucratic diktats raising costs appreciably for all Americans would make health care more “affordable.” Many Members may also be concerned that the bill’s provisions—only partially masked by budgetary gimmicks and “smoke-and-mirrors” accounting—cost nearly $1.3 trillion, financed largely by significant job-killing tax increases imposed on small businesses during a recession.

Buried within the contents of the 1,990 page bill—as well as a separate 13-page bill (H.R. 3961) that would increase the deficit by more than $200 billion—are details that will see a massive federal involvement in the health care of every American, including the following:

  • Creation of a government-run health plan that experts say would result in up to 114 million Americans losing their current coverage—a clear violation of any pledge to allow individuals to keep their current health plan;
  • Nearly half a trillion dollars in tax increases on certain income filers, a majority of whom are small businesses—and $729.5 billion in tax increases overall;
  • Insurance regulations that would raise costs for nearly all Americans, particularly young Americans, and confine choice of plans to those approved by a board of bureaucrats;
  • New price controls on health insurance companies that provide perverse incentives to keep individuals sick rather than managing chronic disease, while impeding patient access to important services just because those services do not provide a direct clinical benefit;
  • Additional federal mandates that would significantly erode the flexibility currently provided to employers—and could result in firms dropping coverage;
  • Massive expansion of Medicaid to all individuals with incomes below 150 percent of the Federal Poverty Level ($33,075 for a family of four), replacing the existing private health coverage of millions with taxpayer-funded health care—and imposing tens of billions of dollars in new unfunded mandates on States;
  • Denial of health plan choice to 15 million Americans, consigning them instead to a Medicaid program riddled with bureaucratic obstacles and poor access to care, such that its own beneficiaries do not consider it “real insurance;”
  • Language opening employers operating group health plans to State law remedies and private causes of action—subjecting employers to review by 50 different State court rulings, thereby raising costs and encouraging more employers to drop their current health plans;
  • Liability “reforms” intended to ensure trial lawyers do not have their compensation reduced, rather than meaningful changes that would reduce the cost of health care by eliminating wasteful defensive medicine practices;
  • Establishment of a bureaucrat-run health Exchange that would abolish the private market for individual insurance outside the Exchange—and could evolve into a single-payer approach due to the Exchange’s ability to cannibalize existing employer plans;
  • Creation of a new government board, the “Health Benefits Advisory Committee,” that would empower federal bureaucrats to impose new mandates on individuals and insurance carriers;
  • Taxation of individuals who do not purchase a level of health coverage that meets the diktats of a board of bureaucrats—including those who cannot afford the coverage options provided;
  • New, job-killing taxes—$135 billion worth—on employers who cannot afford to provide their workers health insurance, resulting in up to 5.5 million lost jobs, according to a model developed by President Obama’s chief economic advisor;
  • Penalties as high as $500,000 on employers who make honest mistakes when filing paperwork with the government health board—which would likely dissuade businesses from continuing to provide coverage, increasing enrollment in the bureaucrat-run Exchange;
  • “Low-income” health insurance subsidies to a family of four making up to $88,200;
  • Arbitrary and harmful cuts to popular Medicare Advantage plans that would result in millions of seniors losing their current health coverage; and
  • Expanded price controls on pharmaceutical products that would discourage companies from producing life-saving breakthrough treatments.


Division A—Affordable Health Care Choices

This division would create a new entitlement—a government-run health plan causing as many as 114 million Americans to lose their current coverage—intended to provide all Americans with “affordable” health insurance. The bill also imposes new mandates and regulations on individual and employer-sponsored health insurance, while raising taxes on businesses who do not offer coverage and individuals who do not purchase coverage meeting federal bureaucrats’ standards. Details of the division include:

Immediate Reforms

In an attempt to disguise the fact that the bill’s coverage expansions do not take effect until 2013, the bill includes several provisions intended to provide immediate benefits, including:

High-Risk Pools: The bill appropriates $5 billion for a national temporary high-risk pool program, scheduled to take effect in January 2010 and terminate at such time the Exchange is established. Eligible individuals would include those denied individual health coverage due to pre-existing conditions, as well as those eligible for guaranteed issue coverage under the Health Insurance Portability and Accountability Act (HIPAA). The bill sets benefit parameters, including a maximum premium of 125 percent of an individual health insurance policy, little variation in rates for age, and deductible and cost-sharing levels. While supporting the concept of high-risk pools, Members may question the need for a national program to supplant existing State-based risk pools—and further question the need for the bill’s new mandates and bureaucracies in the years after the Exchange is created if Democrats agree that risk pools can provide quality coverage to those with pre-existing conditions.

Price Controls: Beginning in 2010, the bill requires insurers with a ratio of total medical expenses to overall costs (i.e. a medical loss ratio), of less than 85 percent to offer rebates to beneficiaries. Some Members may view this provision as a government-imposed price control, one that could be viewed as ignoring the advice of Administration advisor Ezekiel Emanuel, who wrote that “some administrative [i.e. non-claims] costs are not only necessary but beneficial.” Some Members may also be concerned that such price controls, by requiring plans to pay out most of their premiums in medical claims, would give carriers a strong (and perverse) disincentive not to improve the health of their enrollees through prevention and wellness initiatives—as doing so would reduce the percentage of spending paid on actual claims below the bureaucrat-acceptable limits. The bill would also “require health insurance issuers to submit a justification for any premium increases” in advance.

Rescissions; Dependent Coverage: Beginning in July 2010, insurers could rescind policies “only upon clear and convincing evidence of fraud…under procedures that provide for independent, external third-party review.” Beginning in January 2010, insurers that provide dependent coverage to beneficiaries would be required to cover all dependents under age 27.

Pre-Existing Condition Exclusions: Beginning in January 2010, the bill reduces pre-existing limitation exclusions by nine months, and shortens the “look-back” window for determining such exclusions from six months before enrollment to 30 days before enrollment. While supporting efforts such as high-risk pools to allow individuals with pre-existing conditions to obtain coverage, some Members may be concerned that these provisions could raise premiums for employers, potentially prompting some to drop coverage entirely.

Other Insurance Restrictions: Beginning in January 2010, the bill prohibits domestic violence from being considered a pre-existing condition in the few States that do not already prohibit this practice, requires coverage of outpatient treatments for children’s congenital deformities, and eliminates lifetime aggregate limits on coverage. Also includes language requiring the Secretary to undertake a program of administrative simplification designed to ensure the rapid processing of claims and other related data.

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

Reinsurance for Pre-Medicare Retirees: Beginning 90 days after enactment, the bill would appropriate $10 billion to finance reinsurance payments to employers (including multiemployer and other union plans) who offer coverage to retired workers aged 55 to 64 who are not eligible for Medicare. The Trust Fund would pay 80 percent of claim costs for all retiree claims exceeding $15,000, subject to a maximum of $90,000; payments must be used to reduce overall insurance premiums or other out-of-pocket costs. Some Members may be concerned that such reinsurance programs, by providing federal reimbursement of high-cost claims, would serve as a disincentive for employers to monitor the health status of their enrollees.

Expanded Federal COBRA Mandates: Upon enactment, H.R. 3962 imposes a new unfunded mandate on businesses, by requiring an extension of COBRA coverage until such time as subsidies in the Exchange become available. As individuals electing COBRA coverage have been documented to have health costs 45 percent higher than those of active employees, this provision would raise costs for businesses—as well as premiums paid by current employees—while encouraging firms to drop coverage entirely to avoid the expanded federal mandates.

Grant Programs: Creates two new grant programs—one providing grants of up to $50,000 to offset half the cost of small employers’ wellness programs, and the second funding grants for various State-based access initiatives, including insurance Exchanges, reinsurance programs, purchasing collaboratives, and other similar strategies.

Coverage Expansions and Regulations

Abolition of Private Insurance Market: The bill imposes new regulations on all health insurance offerings, with only limited exceptions. Existing individual market policies could remain in effect—but only so long as the carrier “does not change any of its terms and conditions, including benefits and cost-sharing,” as determined by the new Health Choices Commissioner, once the bill takes effect. This provision would prohibit these plans from adding new, innovative, and breakthrough treatments as covered benefits, and would ensure that plans’ risk pools can only get older and sicker, putting these plans at a significant disadvantage to those operating under the government-run Exchange. Some Members may be concerned that this provision would effectively prohibit individuals from keeping their current coverage, as few carriers would be able to abide by these restrictions without cancelling current enrollees’ plans.

With the exception of grandfathered individual plans with the numerous restrictions imposed as outlined above, insurance purchased on the individual market “may only be offered” until the Exchange comes into effect. Some Members may be concerned by this outright abolition of the private market for individual health insurance, requiring all coverage to be purchased through the bureaucrat-run Exchange.

Employer coverage shall be considered exempt from the additional federal mandates, but only for a five year “grace period”—after which all the bill’s mandates shall apply. Some Members may be concerned first that this provision, by applying new federal mandates and regulations to employer-sponsored coverage, would increase health costs for businesses and their workers, and second that, by tying the hands of businesses, this provision would have the effect of encouraging employers to drop existing coverage, leaving their employees to join the government-run health plan.

Insurance Restrictions: The bill would require both insurance carriers and employer health plans to accept all applicants without conditions, regardless of the applicant’s health status, beginning in 2013.

In addition, carriers could vary premiums solely based upon family structure, geography, and age; insurance companies could not vary premiums by age by more than 2 to 1 (i.e., charge older individuals more than twice younger applicants). As surveys have indicated that average premiums for individuals aged 18-24 are nearly one-quarter the average premium paid by individuals aged 60-64, some Members may be concerned that the very narrow age variations would function as a significant transfer of wealth from younger to older Americans—and by raising premiums for young and healthy individuals, may discourage their purchase of insurance. Some Members, noting that the bill does not permit premiums to vary based upon benefits provided—i.e. differing cost-sharing levels—may therefore question how the bill’s regulatory regime would provide any variation from “one size fits all” offerings.

The bill requires plans to comply with to-be-developed standards ending “discrimination in health benefits or benefit structures” for applicable plans, “building from” existing law requirements under the Employee Retirement Income Security Act (ERISA) governing group health coverage. Some Members may view these additional bureaucratic provisions as an invitation for costly lawsuits regarding perceived discrimination that would do little to improve Americans’ health—and much to raise health costs.

The bill also requires health insurance plans to notify members at least 90 days in advance of any change in benefits coverage, and to “meet such standards respecting provider networks as the Commissioner may establish”—which some Members may construe as allowing bureaucrats to regulate access to doctors and reject any (or all) private health insurance offering on the grounds that its network access is insufficient. Conversely, the government-run plan is significantly advantaged because it would be automatically approved within the Exchange without subjecting its provider networks to scrutiny. Further, many may be concerned that these network adequacy provisions, when coupled with language in the bill requiring that a plan that includes abortion be made available in every region, could lead to mandates to “protect” access to abortion services (such as the establishment of abortion clinics)—or that all private employers include abortion clinics in their networks for them to be considered “adequate.”

Benefits Package: The bill prohibits all qualified plans from imposing cost-sharing on preventive services, as well as annual or lifetime limits on benefits. As more than half of all individuals currently enrolled in group health plans have some form of lifetime maximum on their benefits, some Members may be concerned that these additional mandates would increase costs and discourage the take-up for insurance. Some Members may also be concerned that the bill’s provisions insulating individuals from the price of their health care would raise overall health costs—exactly the opposite of the legislation’s supposed purpose.

Annual cost-sharing would be limited to $5,000 per individual or $10,000 per family, with limits indexed to general inflation (i.e. not medical inflation) annually. Benefits must cover 70 percent of total health expenses regardless of the cost sharing. Services mandated fall into ten categories: hospitalization; outpatient hospital and clinic services; professional services; physician-administered supplies and equipment; prescription drugs; rehabilitative and habilitative services; mental health services; preventive services; maternity benefits; well child care “for children under 21 years of age;” and durable medical equipment. The bill also requires coverage of domestic violence counseling, and includes a study to examine the inclusion of oral health in the benefits package, but prohibits mandatory coverage of abortion under any circumstance.

Benefits Committee: The bill establishes a new government health board called the “Health Benefits Advisory Committee,” chaired by the Surgeon General, to make recommendations on minimum federal benefit standards and cost-sharing levels. Up to eight of the Committee’s maximum 26 members may be federal employees, and a further nine would be Presidential appointees.

The bill eliminates language in earlier drafts stating that Committee should “ensure that essential benefits coverage does not lead to rationing of health care.” Some Members may view this change as an admission that the bureaucrats on the Advisory Committee—and the new government-run health plan—would therefore deny access to life-saving services and treatments on cost grounds.

Some Members may be concerned with federal bureaucrats having undue influence on the definition of insurance for purposes of the individual mandate. Members may also be concerned that the Committee could evolve into the type of Federal Health Board envisioned by former Senator Tom Daschle, who conceived that such an entity could dictate requirements that private health plans reject certain clinically effective treatments on cost grounds.

Additional Requirements: The bill would impose other requirements on insurance companies, including uniform marketing standards, grievance and appeals processes (both internal and external), transparency, and prompt claims payment—all of which would be subject to review by the new bureaucracy established through the Commissioner’s office. The bill also requires insurers to make disclosures on plan documents in “plain language”—and directs the new federal Commissioner “to develop and issue guidance on best practices of plain language writing.” In addition, the bill requires carriers using pharmaceutical benefit managers to provide the federal government with payment and sales information on a regular basis—proprietary information which some may be concerned would be disclosed to the public, confidentiality requirements notwithstanding.

The bill requires plans to disseminate information regarding end-of-life planning, but does not pre-empt State laws regarding advanced care planning and assisted suicide. Because laws in States like Oregon and Washington explicitly forbid the term assisted suicide, choosing instead to call euthanasia “dying with dignity,” some Members may be concerned that such States could be permitted to distribute materials about assisted suicide options.

New Bureaucracy: The bill establishes a new government agency, the “Health Choices Administration,” governed by a Commissioner. The Administration would be charged with governing the Exchange, enforcing plan standards, and distributing taxpayer-funded subsidies to purchase health insurance to anyone with incomes below four times the federal poverty level ($88,200 for a family of four). The Commissioner would be empowered to impose the same sanctions—including civil monetary penalties, suspension of enrollment of individuals in the plan, and/or suspension of credit payments to plans—granted to the Centers for Medicare and Medicaid Services with respect to Medicare Advantage plans. Some Members may be concerned that the bill’s provisions permitting federal bureaucrats to interfere in the enrollment of private individuals in ostensibly private health insurance plans confirms the over-arching nature of the government takeover of insurance contemplated in the bill.

The bill requires the Commissioner to conduct audits of health benefits plans in conjunction with States, and further authorizes the Commissioner to “recoup from qualified health benefits plans reimbursement for the costs of such examinations.” Some Members may be concerned these provisions could lead to overlapping and duplicative requirements on private businesses—as well as higher costs due to inspections by a “health care police,” which businesses themselves would have to finance.

Pre-Emption: The bill makes clear that its additional mandates and regulations “do not supersede any requirements” under existing law, “except insofar as such requirements prevent the application of a requirement” in the bill. The bill also makes clear that existing State private rights of action would apply to plans as currently permitted under existing law—and would further apply State private rights of action to all employers who purchase health coverage through the Exchange, effectively eviscerating ERISA pre-emption offered to these employers. Many may be concerned that these additional mandates, and the duplicative layers of regulation they create, would raise costs and encourage additional employers to drop their existing coverage offerings.

Whistleblower Provisions: The bill establishes whistleblower protections against employees who file complaints regarding actual or potential violations of the Act’s provisions, and permits employees to bring actions for damages under provisions in the Consumer Product Safety Act. Some Members may be concerned that these provisions would increase the number of lawsuits filed against firms by disgruntled employees, raising the cost of health care—exactly the opposite effect of the bill’s purported goal.

Lawsuits by State Attorneys General: The bill permits any State attorney general to bring civil actions in State courts on behalf of any resident of that State “for violation of any provisions of this title or regulations thereunder.” Many may be concerned that this new provision would further expand the scope of lawsuits that would raise costs, and further encourage employers to drop coverage entirely, rather than dealing with possible lawsuits filed by each of the 50 State attorneys general.

State Laws on Abortion; Conscience: Language in the bill appears to prevent State laws from being overturned and benefits plans from discriminating against health care providers because of their willingness or unwillingness to “provide, pay for, provide coverage of, or refer for abortions.” However it is unclear how federal bureaucrats might interpret these provisions. Additionally, as it is extremely likely that contraception will be mandated under the federal minimum benefits package, many may want this conscience protection expanded to include contraception in order to protect health care providers with moral objections to the provision of or referral for contraceptive coverage.

Anti-Trust Exemption: The bill repeals portions of the McCarran-Ferguson Act regarding insurance companies’ anti-trust exemption, prohibiting collusion or other monopoly conduct except in cases of sharing historical data, performing actuarial services, and gathering information to set rates. Particularly as the Congressional Budget Office found that repealing insurers’ anti-trust exemption would have no meaningful impact on insurance premiums—and could actually result in premium increases—many may be concerned by what appears to be an attempt by the Democrat majority to extract political retribution on health insurance companies for failing sufficiently to support their government takeover of health care.

Creation of Exchange: The bill creates within the federal government a nationwide Health Insurance Exchange. Uninsured individuals would be eligible to purchase an Exchange plan, as would those whose existing employer coverage is deemed “insufficient” by the federal government. Once deemed eligible to enroll in the Exchange, individuals would be permitted to remain in the Exchange until becoming Medicare-eligible—a provision that would likely result in a significant and permanent migration of individuals into the bureaucrat-run Exchange over time. New Medicaid beneficiaries may enroll in Exchange plans, but may not enroll in Medicaid while in an Exchange plan.

Employers with 25 or fewer employees would be permitted to join the Exchange in its first year, with employers with 25-50 employees permitted to join in its second year. Employers with fewer than 100 employees would be permitted to enroll in the third year, and all employers would also be eligible to join, if permitted to do so by the Commissioner. Many may note the limits on employer eligibility are significantly higher than in H.R. 3200, thus expanding the scope of the government-run Exchange.

One or more States could establish their own Exchanges, provided that no more than one Exchange operates in any State. However, the federal Commissioner would retain enforcement authority, and further could terminate the State Exchange at any time if the Commissioner determines the State “is no longer capable of carrying out such functions in accordance with the requirements of this subtitle.”

The bill would further require the Commissioner to negotiate premium levels with insurance companies, requiring the denial of “excessive premiums and premium increases” (terms undefined) and permitting the Commissioner to waive federal acquisition regulations in the process. Many may be concerned first that this provision would further increase the role of federal bureaucrats in micro-managing private insurance companies, and second would permit the Commissioner to deny all private plans access to the Exchange for the mere reason that an Administration desires to enroll all Americans in the government-run health plan.

Abortion and the Exchange: The bill would require coverage for abortion by at least one insurance plan offered in the Exchange. This mandate would be a significant expansion from current federal regulations on insurance coverage, which state that, “Health insurance benefits for abortion, except where the life of the mother would be endangered if the fetus were carried to term or where medical complications have arisen from an abortion, are not required to be paid by an employer.” While the bill would also require one plan that does not cover abortions to be offered in the Exchanges, many may be concerned that the new mandate to abortion access could in turn lead to federal actions to “protect” access to abortions—such as mandates for abortion clinics, drugs, etc.

The bill specifically permits taxpayer subsidies to flow to private health plans that include abortion, but creates an accounting scheme designed to designate private dollars as abortion dollars and public dollars as non-abortion dollars.  Specifically, these provisions claim to segregate public funds from abortion coverage and would allegedly prevent funds used on abortion from being considered when determining whether plans meet federal actuarial standards.

However, press reports have been skeptical about whether and how this accounting mechanism would prevent federal funding of abortions. The accounting scheme has likewise been rejected by pro-life organizations, which recognize it as a clear departure from long-standing federal policy against funding plans covering abortion (e.g., Federal Employee Health Benefits Program, Medicaid, SCHIP, etc.).  Many may believe that the only way to prevent fungible federal funds from subsidizing abortion coverage is to prevent plans whose beneficiaries receive federal subsidies from covering abortions. To that end, many may note that insurance plans within the FEHBP have been prohibited from offering abortion coverage since 1995, and federal employees have expressed strong satisfaction with their choice of plan options.

Exchange Benefit Standards: The bill requires the Commissioner to establish benefit standards for Exchange plans—basic (covering 70 percent of expenses), enhanced (85 percent of expenses), premium (95 percent of expenses), and premium-plus (premium coverage plus additional benefits for an enumerated supplemental premium). Cost-sharing may be permitted to vary by only 10 percent for each benefit category, such that a standard providing for a $20 co-payment would allow plans to define co-payments within a range of $18-22. Some Members may be concerned that these onerous, bureaucrat-imposed standards would hinder the introduction of innovative models to improve enrollees’ health and wellness—and by insulating individuals from the cost of health services, could raise health care costs.

State Benefit Mandates: State benefit mandates would continue to apply to plans offered through the Exchange—but only if the State agrees to reimburse the Exchange for the increase in low-income subsidies provided to individuals as a result of an increase in the basic premium rate attributable to the benefit mandates.

Requirements on Exchange Plans: The bill requires plans offered in the Exchange to be State-licensed; plans shall also be required to contract with certain provider entities and must include “culturally and linguistically appropriate services and communications.” Carriers also may not “use coercive practices to force providers not to contract with other entities” offering coverage through the Exchange. However, the bill places no such prohibitions on the government-run plan, thus permitting the Department of Health and Human Services to use its authority to set conditions of participation in a way that would undercut private insurance plans and effectively drive them out of business.

The bill gives the Commissioner the power to reduce out-of-network co-payments if the Commissioner determines a plan’s network is inadequate, turning the plan into a fragmented and archaic fee-for-service delivery model that does nothing to coordinate care. The Commissioner also has authority to impose monetary sanctions, prohibit plans from enrolling new individuals, or terminate contracts.

Enrollment: The bill requires the Commissioner to engage in outreach regarding enrollment, establish enrollment periods, and disseminate information about plan choices. The Commissioner is required to develop an auto-enrollment process for subsidy-eligible individuals who do not choose a plan. Some Members may note that nothing in the bill prohibits the Commissioner from auto-enrolling all individuals in the government-run plan—thus creating a single-payer system through bureaucratic fiat.

The bill includes language requiring participants in Exchange plans to pay premiums directly to the plans themselves, and not through the Exchange. Some Members may view this provision as being inserted because the Congressional Budget Office would score premiums to insurance carriers routed through governmental entities (i.e. Exchanges) as part of the federal budget—and therefore an attempt to mask the true nature of the government takeover of health care the legislation contemplates.

Newborns born in the United States who are “not otherwise covered under acceptable coverage” shall automatically be enrolled in Medicaid; SCHIP eligible children shall be enrolled through the Exchange. The bill provides for individuals in new Medicaid expansion populations to join the Exchange, if they so choose; beneficiaries failing to choose an Exchange plan would be enrolled in Medicaid—and existing Medicaid beneficiaries would not be given a choice to enroll in Exchange plans.

Risk Pooling: The bill requires the Commissioner to establish “a mechanism whereby there is an adjustment made of the premium amounts payable” to plans to reflect differing risk profiles in a manner that minimizes adverse selection—and allows the Commissioner to determine all of the details of this mechanism.

Trust Fund: The bill creates a Trust Fund for the Exchange, and permits “such amounts as the Commissioner determines are necessary” to be transferred from the Trust Fund to finance the Exchange’s operations. The Trust Fund would collect amounts received from taxes by individuals not complying with the individual mandate, employers failing to provide adequate health coverage, and general government appropriations. Some Members may be concerned that this open-ended source of appropriations for the bureaucrat-run Exchange would by definition constitute unfair competition against employer-provided insurance.

Interstate Compacts: Beginning in 2015, the bill permits multiple States to form “Health Care Choice Compacts” to buy health insurance across State lines, requires the Secretary and the National Association of Insurance Commissioners to develop model guidelines for same. Individuals would maintain the right to bring legal claims in their State of residence, and States would receive grants of up to $1 million annually to regulate coverage sold in secondary States. Some may note that these compact provisions would not address the issue of State benefit mandates that raise the cost of health insurance coverage—and the bill as a whole would increase the size and scope of mandates placed on plans, further raising their cost.

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

Government-Run Health Plan: The bill requires the Department of Health and Human Services to establish a “public health insurance option” that “shall only be made available through the Health Insurance Exchange.” 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 limit the number of government-run plans nor does it give the Exchange 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 only sue in State courts.

The bill gives the government-run health plans $2 billion in “start-up funds”—as well as access to 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.

While the bill includes a new provision stating that the government-run plan shall not receive “any federal funds for purposes of insolvency,” many may point to the recent examples of Fannie Mae and Freddie Mac as evidence that no government-run health plan—which experts all agree would enroll several million Americans at minimum—would ever be permitted to fail without a federal bailout.

While the Secretary would be required to “negotiate” reimbursement rates with doctors and hospitals, nothing in the bill prohibits the Secretary from using such negotiation to impose Medicare reimbursement levels on providers as part of a government-imposed “negotiation.” Should such a scenario occur, the Lewin Group has estimated 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 Medicare rates would actually result in a net $16,207 decrease in reimbursements per physician per year, even after accounting for the newly insured.

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 lower reimbursements by the government-run plan in order to garner the government’s approval.

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.

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.

Finally, the bill also permits—but does not require—Members of Congress to enroll in the government-run health plan. Many may question why a Democrat majority insistent on creating a government-run health plan causing millions of Americans to lose their current coverage is not sufficiently confident in its superiority that they would not want to commit themselves to enrolling in it.

“Low-Income” Subsidies: The bill provides for “affordability credits” through the Exchange—and only through the Exchange, again putting employer health plans at a disadvantage. Subsidies could be used only for basic plans in the first two years, but all plans thereafter. Individuals with access to employer-sponsored insurance whose group premium costs would exceed 12 percent of adjusted gross income would be eligible for subsidies.

The bill provides that the Commissioner may authorize State Medicaid agencies—as well as other “public entit[ies]”—to make determinations of eligibility for subsidies and exempts the subsidy regime from the five-year waiting period on federal benefits established as part of the 1996 welfare reform law (P.L. 104-193), giving individuals a strong incentive to emigrate to the United States in order to obtain subsidized health benefits without a waiting period. Despite the bill’s purported prohibition on payments to immigrants not lawfully present, and the insertion of a citizenship verification regime based upon that enacted in this year’s SCHIP reauthorization (P.L. 111-3), some may be concerned that the provisions as drafted would not require individuals to verify their identity when confirming eligibility for subsidies—encouraging identity fraud while still permitting undocumented immigrants and other ineligible individuals from obtaining taxpayer-subsidized benefits.

Premium subsidies provided would be determined on a six-tier sliding scale, such that individuals with incomes under 150 percent of the Federal Poverty Level (FPL, $33,075 for a family of four in 2009) would be expected to pay 1.5 percent of their income, while individuals with incomes at 400 percent FPL ($88,200 for a family of four) would be expected to pay 12 percent of their income. Subsidies would be capped at the average premium for the three lowest-cost basic plans, and would be indexed to maintain a constant percentage of total premium costs paid by the government. Members may also note that as subsidies would be based on adjusted gross income, individuals with total incomes well in excess of the AGI threshold could qualify for subsidies—such that a family of four with $100,000 of total earnings could qualify for subsidies if $12,000 of that income was placed in a 401(k) plan and therefore not counted for purposes of calculating the AGI limits.

The bill further provides for cost-sharing subsidies, such that individuals with incomes under 150 percent FPL would be covered for 97 percent of expenses, while individuals with incomes at 400 percent FPL would have a basic plan covering 70 percent (the statutory minimum). Some Members may be concerned that these rich benefit packages, in addition to raising subsidy costs for the federal government, would insulate plan participants from the effects of higher health spending, resulting in an increase in overall health costs—exactly the opposite of the bill’s purported purpose.

Income for determining subsidy levels would be verified through the Treasury Department and the Internal Revenue Service. The bill provides for self-reporting of changes in income that could affect eligibility for benefits—provisions that could invite fraud by individuals seeking to claim additional benefits.

“Pay-or-Play” Mandate on Employers: In order to meet acceptable coverage standards, the bill requires that employers offer coverage, and contribute to such coverage at least 72.5 percent of the cost of a basic individual policy—as defined by the bureaucrats on the Health Benefits Advisory Council—and at least 65 percent of the cost of a basic family policy, for full-time employees. Employers must also auto-enroll their employees in group coverage, with an appropriate opt-out mechanism, in order to comply with the mandate. The bill further extends the employer mandate to part-time employees, with contribution levels to be determined by the Commissioner, and mandates that any health care contribution “for which there is a corresponding reduction in the compensation of the employee” will not comply with the mandate—which many Members may be concerned will increase overall costs for employers, encouraging them to lay off workers.

Employers must comply with the mandate by “paying” a tax of 8 percent of wages in lieu of “playing” by offering benefits that meet the criteria above. In addition, beginning in the Exchange’s second year, employers whose workers choose to purchase coverage through the Exchange would be forced to pay the 8 percent tax to finance their workers’ Exchange policy—even if they offer other coverage to their employees.

The bill includes a limited exemption for small businesses from the employer mandate—those with total payroll under $500,000 annually would be exempt, and those with payrolls of between $500,000 and $750,000 would be subjected to lower tax penalties (2-6 percent, as opposed to 8 percent for firms with payrolls over $750,000). However, as these limits are not indexed for inflation, the threshold amounts would likely become increasingly irrelevant over time, as virtually all employers would be subjected to the 8 percent payroll tax.

The bill amends ERISA to require the Secretary of Labor to conduct regular plan audits and “conduct investigations” and audits “to discover non-compliance” with the mandate. The bill provides a further penalty of $100 per employee per day for non-compliance with the “pay-or-play” mandate—subject only to a limit of $500,000 for unintentional failures on the part of the employer.

Some Members may be concerned that the bill would impose added costs on businesses with respect to both their payroll and administrative overhead. Given that an economic model developed by Council of Economic Advisors Chair Christina Romer found that an employer mandate could result in the loss of up to 5.5 million jobs, some Members may oppose any effort to impose new taxes on businesses, particularly during a recession. Some Members may find the small business exemption insufficient—no matter at what level it would be set—since the threshold level could always be modified in the future to finance shortfalls in the government-run plans, and result in negative effects at the margins (e.g. a restaurant owner not hiring an additional worker—or increasing wages—if such actions would eliminate his small business exemption and subject him to an 8 percent payroll tax). Some Members may also be concerned that the bill’s mandates—coupled with a potential new $500,000 tax on small businesses for even unintentional deviations from federal bureaucratic diktats—would effectively encourage employers to drop their existing coverage due to fear of inadvertent penalties, resulting in more individuals losing access to their current plans and being forced into the government-run health plan.

Individual Mandate: The bill places a tax on individuals who do not purchase “acceptable health care coverage,” as defined by the bureaucratic standards in the bill. The tax would constitute 2.5 percent of adjusted gross income, up to the amount of the national average premium through the Exchange. The tax would not apply to dependent filers, non-resident aliens, individuals resident outside the United States, and those exempted on religious grounds. “Acceptable coverage” includes qualified Exchange plans, “grandfathered” individual and group health plans, Medicare and Medicaid plans, and military and veterans’ benefits.

Some Members may note that for individuals with incomes of under $100,000, the cost of complying with the mandate would be under $2,000—raising questions of how effective the mandate will be, as paying the tax would in many cases cost less than purchasing an insurance policy. Despite, or perhaps because of, this fact, some Members may be concerned that the bill language does not include a clear affordability exemption from the mandate; thus, if the many benefit mandates imposed raise premiums so as to make coverage less affordable for many Americans, they will have no choice but to pay an additional tax as their “penalty” for not being able to afford coverage. Therefore, some Members may agree with then-Senator Barack Obama, who in a February 2008 debate pointed out that in Massachusetts, the one State with an individual mandate, “there are people who are paying fines and still can’t afford [health insurance], so now they’re worse off than they were. They don’t have health insurance and they’re paying a fine.” Thus this provision would not only violate then-Senator Obama’s opposition to an individual mandate to purchase insurance—it would also violate his pledge not to raise taxes on individuals making under $250,000.

Small Business Tax Credit: The bill provides a health insurance tax credit for small businesses, equal to 50 percent of the cost of coverage for firms where the average employee compensation is less than $20,000, establishing a perverse incentive to keep wages low. Firms with 10 or fewer employees are eligible for the full credit, which phases out entirely for firms with more than 25 workers. Individuals with incomes of over $80,000 do not count for purposes of determining the credit amount. Some Members may question how an individual making $80,000 could qualify as “highly-compensated” for purposes of the small business tax credit, but—if in a family of four—would be eligible for “low-income” subsidies available to families with incomes under $88,200 per year.

Tax Increases

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

H.R. 3962 would place a cap on FSA contributions, beginning in 2012; contributions could only total $2,500 per year, subject to annual adjustments linked to the growth in general (not medical) inflation. Members may be concerned that these provisions would first raise taxes by $13.3 billion, and second—by imposing additional restrictions on health savings vehicles popular with tens of millions of Americans—undermine the promise that “If you like your current coverage, you can keep it.” At least 8 million individuals hold insurance policies eligible for HSAs, and millions more participate in FSAs. All these individuals would be subject to additional coverage restrictions—and tax increases—under this provision.

The bill also repeals the current-law tax deductibility of subsidies provided to companies offering prescription drug coverage to retirees, raising taxes by $3 billion. Many may be concerned that this provision would lead to companies dropping their current coverage as a result.

Taxes on Health Products: H.R. 3962 would impose a 2.5 percent excise tax on medical devices, beginning in 2013, raising taxes by $20 billion. Many may echo the concerns of the Congressional Budget Office, and other independent experts, who have confirmed that this tax would be passed on to consumers in the form of higher prices—and ultimately higher premiums.

Taxes on Small Businesses: The bill also imposes a new 5.4 percent “surtax” on individuals with incomes over incomes over $500,000 and families with incomes greater than $1 million. The tax would apply beginning in 2011. The Joint Committee on Taxation estimates that such provisions would raise taxes by $544 billion over ten years. As more than half of all high-income filers are small businesses, many Members may be concerned that this provision would cripple small businesses and destroy jobs during a deep recession.

Worldwide Interest: The bill delays for an additional ten years the application of worldwide interest allocation provisions first enacted into law (but never implemented) in 2004, which JCT estimates would raise $26.1 billion over ten years. Some Members may be concerned that, in addition to increasing taxes on businesses during a recession, further extension of these provisions would create undue uncertainty for many firms in an uncertain enough economic climate.

Treaty Benefits: The bill would limit the treaty benefits for certain deductible payments made by members of multinational entities in the U.S. that are controlled by foreign parent corporations in nations that hold tax treaties with the U.S. The bill prohibits certain previously negotiated tax reductions on payments to foreign affiliates under current tax treaties. Some Members may be concerned that this provision would violate previously negotiated treaties and impose higher taxes on foreign companies with affiliates that create jobs in the U.S. Some Members may also be concerned this provision could harm U.S. business by spurring retaliatory acts from foreign companies. JCT scores this provision as raising $7.5 billion over ten years.

Economic Substance: The bill codifies the economic substance doctrine—which is used to prohibit tax benefits on transactions that are deemed to lack “economic substance.” The bill states that a transaction has economic substance only if the transaction changes the taxpayer’s “economic position” in “a meaningful way” and the taxpayer has a “substantial purpose” for entering into the transaction. In addition, the bill would impose a 20 percent penalty on understatements attributable to a transaction lacking economic substance (40 percent in cases where certain facts are not disclosed). Some Members may be concerned that this provision would impose new burdens of proof and new liability penalties on taxpayers for making routine business decisions related to taxes. JCT scores this provision as raising $5.7 billion over ten years.

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

Division B—Medicare and Medicaid Provisions

This division contains a significant expansion of Medicaid, that imposes tens of billions of dollars in unfunded mandates on already-strapped States, cuts to Medicare Advantage plans that would cause millions of seniors to lose their current plans, and other expansions of the Medicare and Medicaid programs. Details of the division include:

Medicare Provisions

Part A Market Basket Updates: The bill freezes skilled nursing facility and inpatient rehabilitation facility payment rates for 2010. The bill also incorporates an Administration proposal to reduce market basket updates to reflect productivity gains made throughout the entire economy, effective in 2010 and 2011. The bill permits the Centers for Medicare and Medicaid Services (CMS) to recalibrate and adjust the case mix factor for skilled nursing facility payments and to revise and reduce the payment system for non-therapy ancillary services at same, and extends moratoria on certain hospice payment regulations through Fiscal Year 2010.

Disproportionate Share Hospital Payments: The bill requires a study of Medicare Disproportionate Share Hospital (DSH) payments’ effectiveness on reducing the number of uninsured individuals and directs the Secretary to reduce disproportionate share hospital (DSH) payments to hospitals, beginning in 2017, by up to 50 percent if there is a reduction in the number of uninsured by 8 percentage points during the 2012-14 period.

Physician Payment Provisions: The bill omits provisions addressing the Sustainable Growth Rate (SGR) mechanism for Medicare physician payments, as the Democrat majority chose instead to include those provisions in stand-alone companion legislation (H.R. 3961) that would not pay for its more than $200 billion cost. Many may view this attempt to omit costly provisions that would increase federal deficits from the main health care bill as a patently transparent budgetary gimmick.

The bill provides for feedback mechanisms for physicians to review their billing and procedure practices compared to their peers, and includes bonus payments of 5 percent for physicians participating in counties within the lowest 5 percent of total Medicare spending for 2011 and 2012, extends incentive payments under the Physician Quality Reporting Initiative through 2011 and 2012, and requires ambulatory surgical centers to submit cost and quality data to CMS. The bill reduces market basket updates for outpatient hospitals, ambulance services, laboratory services, and durable medical equipment not subject to competitive bidding to reflect productivity gains in the overall economy, increases the presumed utilization of imaging equipment—so as to reduce overall payment levels for imaging services—includes provisions regarding oxygen suppliers, bond requirements, and election to take ownership of rented durable medical equipment. The bill also establishes Medicare payment levels for follow-on biologics, equal to the average sales price plus a 6 percent dispensing fee.

Hospital Re-Admissions: The bill reduces payments to hospitals with higher-than-expected re-admission rates based on their overall case mix, excluding planned or unrelated re-admissions. The provision could reduce overall hospital payments by no more than 1 percent in 2012 and 5 percent in 2015 and subsequent years. Hospitals receiving more than 30 percent of their annual revenue from DSH funds would receive an increase in their DSH payments of up to 5 percent to provide for transitional services for patients post-discharge. The bill provides for payment reductions of up to 1 percent for post-acute care providers (i.e. skilled nursing facilities, inpatient rehabilitation facilities, home health agencies, and long-term care hospitals) in instances where beneficiaries were readmitted within 30 days after discharge, and creates a pilot program for bundling post-acute care services.

Home Health: The bill freezes home health agency payment rates in 2010, accelerates the implementation of case mix changes for 2011, so as to reduce the effect of “up-coding” or changes to classification codes, and requires CMS to re-base the entire prospective payment classification system by 2011—or reduce all home health payments by 5 percent. The bill also reduces market basket updates for home health agencies to reflect productivity gains in the overall economy.

Physician-Owned Hospitals: The bill would essentially eliminate these innovative facilities by imposing additional restrictions on so-called specialty hospitals by limiting the “whole hospital” exemption against physician self-referral. Specifically, the bill would only extend the exemption to facilities with a Medicare reimbursement arrangement in place as of January 1, 2009, such that any new specialty hospital—including those currently under development or construction—would not be eligible for the self-referral exemption. The bill would also place restrictions on the expansion of current specialty hospitals’ capacity, such that any existing specialty hospital would be unable to expand its facilities, except under limited circumstances. Given the advances which physician-owned hospitals have made in increasing quality of care and decreasing patient infection rates, some Members may be concerned that these additional restrictions may impede the development of new innovations within the health care industry.

Geographic Adjustment Factors: The bill requires an Institute of Medicine study regarding the accuracy of Medicare geographic adjustment factors, as well as directions to the Secretary to revise geographic adjustment factors for Medicare payment systems in a way that would not result in an overall reduction in payment rates. The bill provides $8 billion in funding from the Medicare Improvement Fund to provide payment increases addressing geographic disparities in reimbursement levels as recommended by the study—however, “hold harmless” provisions ensuring rural areas will only receive additional payments, and cannot have their payments decreased, apply only until 2014.

H.R. 3962 requires a second Institute of Medicine study regarding a new payment methodology regarding geographic variation in health care spending and promoting high value in health care, and requires the Institute to make recommendations by April 2011 for changes to Medicare reimbursement formulae in Parts A and B (exclusive of graduate medical education, DSH payments, and other add-ons) to reflect value in health care. The Secretary of HHS would be required to convert the report into a series of deficit-neutral proposals to change Medicare payment policies to reflect the Institute’s recommendations. The bill provides for expedited procedures for the Secretary’s report to be considered by Congress, but grants the Secretary the authority to make these proposed changes unilaterally, unless Congress passes a joint resolution of disapproval by May 31, 2012.

Many may be concerned by the prospect of unelected federal bureaucrats being given carte blanche authority to remake the Medicare system, particularly as the bill does not prohibit federal bureaucrats from denying patients access to costly but effective treatments and services. Many may view the provisions providing a Congressional vote largely irrelevant, as a two-thirds majority in both chambers would be required to overcome a near-certain veto by President Obama of a resolution disapproving his Administration’s own actions. Moreover, there is nothing in these proposals that would prohibit the respective boards of bureaucrats from reducing—or even eliminating entirely—any temporary payment increases for rural providers.

Medicare Advantage: The bill reduces Medicare Advantage (MA) payment benchmarks to traditional Medicare fee-for-service levels over a three-year period. Some Members may be concerned that this arbitrary adjustment would reduce access for millions of seniors to MA plans that have brought additional benefits—undermining Democrats’ pledge that if Americans like the coverage they have, they will be able to keep it under health reform.

Even though no other Medicare provider is paid on the basis of quality, the bill provides for a quality improvement adjustment for MA plans in low spending counties with high MA enrollment of up to 5 percent, based on re-admission rates, prevention quality, and other related measures. Incentive payments would be available to the top quintile of plans, and the top quintile of most improved plans. However, the Secretary may disqualify plans as not highly ranked, irrespective of their quantitative performance, “if the Secretary has identified deficiencies in the plan’s compliance.” The bill also requires CMS to make annual adjustments to MA plan payments to reflect differences in coding patterns between MA plans and government-run Medicare, and eliminates the three month open-enrollment period for Medicare Advantage plans, confining changes in enrollment to the period between November 1 and December 15. The bill extends reasonable cost contract provisions through 2012, and limits CMS’ waiver authority for employer group MA plans unless 90 percent of enrollees reside in a county in which the MA organization offers an eligible plan.

The bill imposes requirements on MA plans to offer cost-sharing no greater than that provided in government-run Medicare, and imposes price controls on MA plans, limiting their ability to offer innovative benefit packages. Specifically, the bill requires MA plans to report their ratio of total medical expenses to overall costs (i.e. a medical loss ratio), requires plans with a medical loss ratio of less than 85 percent to offer rebates to beneficiaries, prohibits plans with a medical loss ratio below 85 percent for three consecutive years from enrolling new beneficiaries, and excludes plans with a medical loss ratio below 85 percent for five consecutive years. Particularly as the Government Accountability Office noted in a report on this issue that “there is no definitive standard for what a medical loss ratio should be,” some Members may be concerned about this attempt by federal bureaucrats to impose arbitrary price controls on private companies. Again, this policy would encourage plans to keep seniors sick, rather than manage their chronic disease.

The bill includes language that no State shall be prohibited “from imposing civil monetary penalties, in accordance with laws and procedures of the State, against Medicare Advantage organizations, [prescription drug plan] sponsors, or agents or brokers of such organizations” for marketing violations. Some may be concerned that these provisions would encourage overzealous enforcement of laws by certain States, raising costs for businesses and ultimately for seniors enrolled in MA plans.

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

Part D Provisions: The bill extends price controls, via Medicaid drug rebates, to all Medicare beneficiaries receiving a full low-income subsidy. This provision would constitute a broader expansion of the Medicaid rebate than its application solely to existing individuals dually eligible for Medicare and Medicaid, as approximately 9 million beneficiaries with incomes under 135 percent of poverty are eligible for the full low-income subsidy. Some Members may be concerned that expanding prescription drug price controls into the only part of Medicare that consistently comes in under budget would constitute a further intrusion of government into the health care marketplace, and do so in a way that harms the introduction of new breakthrough drugs and treatments. Some Members may also note that CBO has previously stated that an expansion of the Medicaid drug rebate to Medicare would result in drug companies raising private-sector prices—potentially resulting in higher prices for many Americans.

The bill phases in prescription drug coverage in the Medicare Part D “doughnut hole,” by increasing the initial coverage limit by $500 beginning in 2010; beginning in 2011, coverage limits would increase and annual out-of-pocket maximums would decrease until the “doughnut hole” would be eliminated in 2019.

The bill also requires drug manufacturers, as a condition of participation in Part D, to sign a “discount agreement” providing discounts of 50 percent to beneficiaries in the “doughnut hole” prior to its elimination. The total price (exclusive of the discount) would be used towards determining when the beneficiary reaches the out-of-pocket maximum that triggers catastrophic coverage under the Part D benefit. Given the ostensibly voluntary nature of the agreement with pharmaceutical manufacturers that led to this provision, some Members may question why the bill links participation in the Part D program to these “voluntary” discounts—one that amounts to a form of price control.

The bill would expand current law protections against formulary changes by permitting beneficiaries to change plans whenever a plan is “materially changed…to reduce the coverage…of the drug.” Thus the bill would now allow beneficiaries to switch Part D plans whenever a plan changes its formulary that would result in higher cost-sharing requirements. Some Members may be concerned that this provision—which essentially prohibits plans from adjusting their formularies to reflect new generic drugs coming on the market mid-year—would result in higher administrative costs and lack of stability for plans.

The bill includes provisions requiring the Secretary to “negotiate” prices with pharmaceutical companies for Part D prescription drugs, while prohibiting the Secretary from establishing drug formularies. As a result, CBO scored this provision as providing no savings—because it has previously stated that the federal government can lower prices through “negotiation” only be denying patients access to certain costly drugs. Given the lack of savings associated with this provision, some may question its inclusion in the bill.

Other Provisions: The bill extends certain hospital re-classifications for two years, as well as a two-year extension of certain ambulance provisions and the therapy caps exceptions process. The bill expands the Medicare entitlement, effective in 2012, to include coverage of immunosuppressive drugs for end-stage renal disease patients no longer eligible for Medicare benefits due to a kidney transplant. The bill also establishes a demonstration program on the use of patient decision-making aids, to educate beneficiaries regarding their treatment options, and expands the definition of physician services to include voluntary consultations regarding end-of-life decision-making. Some Members may be concerned that this latter provision would result in government-paid consultations encouraging assisted suicide or other forms of euthanasia.

Expansion of Subsidy Programs: The bill expands the asset test definition for the low-income subsidy program under Part D, allows the release of tax return data for purposes of determining eligibility, and increases the maximum amount of assets permissible to $17,000 for an individual and $34,000 for couples. Some Members, noting that the asset tests were already expanded and simplified in legislation enacted last year (P.L. 110-275), may question the need for a further expansion of federal welfare benefits in the form of low-income subsidies.

The bill applies the low-income subsidy asset tests to the Medicare Savings Program—but only for 2010 and 2011, which some Members may view as a budgetary gimmick designed to mask the true cost of the bill. The bill also eliminates all cost-sharing for dual eligible beneficiaries receiving home and community-based services who would otherwise be institutionalized in a nursing home, and permits individuals to self-certify their asset eligibility for low-income subsidy programs, and to obtain reimbursement from plans for cost-sharing retroactive to the date of purported eligibility for subsidies—provisions that could serve as an invitation for fraudulent activity.

The bill eliminates current law random assignment of dual eligible beneficiaries in Part D plans, requiring CMS to develop “an intelligent assignment process…to maximize the access of such individual[s] to necessary prescription drugs while minimizing costs to such individual[s] and the program.” Some Members may question precisely how bureaucrats at CMS would be able to ascertain the best plan choice for individual seniors.

Language Services: The bill requires a study by CMS regarding language communication and “ways that Medicare should develop payment systems for language services,” and authorizes a demonstration project of at least 24 grants of no more than $500,000 to providers to expand language communication and interpretation services.

Accountable Care Organizations: The bill establishes a pilot program to create accountable care organizations (ACOs) designed to improve coordination of care and improve system efficiencies. ACOs would include a group of physicians, including a sufficient number of primary care physicians, and could also include hospitals and other providers. ACOs would be eligible to receive a portion (as determined by CMS) of the savings from a reduction in projected spending under Parts A, B, and D for beneficiaries enrolled in the ACO, provided the ACO meets annual quality targets for clinical care. ACOs would also be permitted to receive their payments on a partially-captitated basis, as determined by CMS. The Secretary may make the pilot program permanent, provided that the CMS Chief Actuary certifies that the program would reduce Medicare spending. The bill includes a similar independence at home demonstration program for chronically ill beneficiaries with multiple functional dependencies; physician and nurse practitioner teams would receive incentive payments for reducing patients’ projected Medicare spending by at least 5 percent.

Medical Home Pilot: The bill would establish a pilot program to provide medical home services for beneficiaries—with such medical home “providing first contact, continuous, and comprehensive care.” Specifically, the bill provides for monthly risk-adjusted payments for medical home services provided to sicker-than-average Medicare beneficiaries (i.e. those above the 50th percentile), as well as payments for community-based medical home services provided to beneficiaries with multiple chronic illnesses. The bill provides a total of $1.7 billion in additional funding for payments under the pilot programs. The Secretary may make the pilot programs permanent, provided that the CMS Chief Actuary certifies that the permanent program would reduce estimated Medicare spending.

Primary Care Provisions: The bill provides a 5 percent increase in reimbursements for physicians and other primary care providers beginning in 2011, and a 10 percent increase for providers practicing in underserved areas. These increases would be in addition to the overall physician reimbursement changes outlined above.

Prevention and Mental Health: The bill eliminates co-payments and cost-sharing for certain preventive services. While supporting the encouragement of preventive care, some Members may believe that a blanket waiver of all cost-sharing for a list of services would encourage unnecessary or superfluous consumption of these treatments. The bill also expands the list of Medicare covered services to include marriage, family therapist, and mental health counselor services. Some Members may be concerned that this provision could result in non-Medicare beneficiaries (i.e., spouses and family members under age 65) receiving free mental health services from the federal government.

Comparative Effectiveness Research: The legislation includes language regarding the comparative effectiveness of various medical services and treatment options. The bill would establish another government center for comparative effectiveness research to gauge the effectiveness of medical treatments, a commission of federal bureaucrats and others to set priorities, and a trust fund in the U.S. Treasury to support the research. The trust fund’s research would be financed by transfers from the cash-strapped Medicare Trust Funds, along with new taxes on insurance plans imposed on a per capita basis. While the bill includes a purportedly anti-rationing prohibition stating that the section could not “change the standards or requirements for coverage,” some Members may still be concerned that other agencies (i.e. the Centers for Medicare and Medicaid Services) will use comparative effectiveness research—including cost-effectiveness research—to make coverage and/or reimbursement decisions, which could lead to government rationing of life-saving drugs, therapies, and treatments.

Nursing Home Provisions: The bill includes nearly 100 pages of requirements and regulations with respect to nursing facilities (reimbursed through Medicaid) and skilled nursing facilities (reimbursed through Medicare) providing nursing home care, including requirements for the public disclosure of entities exercising operational and functional control of nursing facilities, as well as those who “provide management or administrative services…or accounting or financial services to the facility”—provisions which some Members may view as overly broad and likely to increase administrative costs without providing meaningful disclosure.

The bill requires facilities to have compliance and ethics programs in operation that meet standards set in federal regulations, as well as specific parameters laid out in the bill. The bill requires facilities to “use due care not to delegate substantial discretionary authority to individuals whom the organization knew, or should have known through the exercise of due diligence, had a propensity to engage in criminal, civil, and administrative violations”—broad requirements which some Members may view as potentially extending liability to an entire organization for one individual’s misdeeds.

The bill requires CMS to implement a quality assurance and performance improvement program for facilities, requires facilities to submit plans to meet best practice standards under such program, and calls for a GAO study examining the extent to which large multi-facility nursing home chains are under-capitalized and whether such conditions, if present, adversely impact care provided.

The bill creates a standardized complaint form for facilities and imposes requirements on States to maintain complaint processes, complete with various whistleblower protections. Some Members could be concerned that these provisions would constitute an invitation to lawsuits against nursing home facilities, the cost of which could significantly hinder the facility’s ability to provide quality patient care.

The bill expands an existing program of background checks for long-term care facility employees, and modifies existing penalty provisions to allow fines—imposed by CMS in the case of skilled nursing facilities and States in the case of nursing facilities—of up to $100,000, in instances where facilities’ deficiencies are “found to be a direct proximate cause of death of a resident,” and up to $3,050 per day for “any other deficiency” found not to cause “actual harm or immediate jeopardy.” Penalties for incidental, first-time infractions may be reduced if the facility self-reports the infraction and takes remedial action within ten days. The bill notes that “some portion of” the penalties collected “may be used to support activities that benefit residents.”

The bill establishes a two-year pilot program to create a national monitor to oversee “large intrastate chains of skilled nursing facilities and nursing facilities” that apply to participate in the program, requires facilities to provide at least 60 days’ notice prior to their closure, and adds dementia management and resident abuse to the list of required training courses for nurses aides working in relevant facilities.

Quality Improvement: The bill establishes a new program of national priorities for quality improvement and directs the Agency for Healthcare Research and Quality to help develop a series of quality measures that can assess patient care and outcomes in consultation with a group of stakeholders.

Disclosure of Physician Relationships: The bill imposes new reporting requirements on drug and device manufacturers and distributors to disclose their financial relationships with physicians and other health care providers. Specifically, manufacturers and distributors would be required to disclose the details behind any “transfer of value directly, indirectly, or through an agent,” with some limited exceptions. A “transfer of value” includes any drug sample, gift, travel, honoraria, educational funding or consulting fees, stocks, or other ownership interest. The bill establishes a new federal standard, but allows States to exceed the federal standard.

The bill authorizes penalties of between $1,000 and $10,000 for each instance of non-reporting, up to a maximum fine of $150,000; knowing violations of non-reporting carry penalties of between $10,000 and $100,000 for each instance, up to a maximum find of the greater of $1,000,000 or 0.1 percent of total annual revenues—which for large companies could significantly exceed $1 million. Some Members may be concerned at the significant penalties imposed for even incidental and unintentional non-compliance with the rigorous disclosure protocols established in the bill—and further question whether this disclosure would provide meaningful information to patients.

The bill further permits State Attorneys General to bring actions pursuant to this section upon notifying the Secretary about a specific case. Some Members may be concerned that this provision would result in additional lawsuits, which, coupled with the millions of dollars in potential fines above, would further raise costs for manufacturers and discourage the development and diffusion of life-saving breakthroughs.

Health Care Infections: The bill requires hospitals and ambulatory surgical centers participating in Medicare or Medicaid to submit public reports on hospital-acquired infections to the Centers for Disease Control, and requires such information to be made publicly available.

Graduate Medical Education (GME): The bill provides for the re-distribution of unused GME training slots, beginning in 2011, to hospitals, provided that no hospital shall receive more than 20 additional positions, and that all re-distributed residency positions be directed towards primary care. The bill permits activities in non-provider settings to count towards GME resident time, including participation in scholarly conferences and other educational activities.

Anti-Fraud Provisions: The bill increases funding for anti-fraud efforts by $100 million per year, and also increases penalties imposed on plans offering coverage through MA, Medicaid, or Part D related to knowingly mis-representing facts “in any application to participate or enroll” in federal programs. The bill also makes eligible for penalties the knowing submission of false claims data, a failure to grant timely access to inspector general audits or investigations, submission of claims when an individual is excluded from program participation. The bill provisions state that MA or Part D plans providing false information to CMS can be fined three times the amount of the revenues obtained as a result of such mis-representation. The bill also includes language prohibiting excluded individuals, as well as entities carrying out the directions of individuals whom such entities know to be excluded, from receiving Medicare or Medicaid reimbursements.

The bill mandates the exclusion of officers and owners of entities convicted of fraud, permits the Secretary to impose additional screening and oversight requirements—including a moratorium on enrolling new providers—given significant risk of fraudulent activity, and requires providers to disclose in applications for enrollment or renewed enrollment current or previous affiliations with providers suspended or excluded from the programs in question. The bill requires providers to adopt waste, fraud, and abuse compliance programs, subject to a $50,000 fine for non-compliance, and reduces from 36 months to 12 months the maximum lookback period for providers to submit Medicare claims.

The bill requires physicians ordering durable medical equipment (DME) or home health services to be participating physicians within the Medicare program, and requires providers to maintain and provide access to written documentation for DME and home health requests and referrals. Home health and DME services would require a face-to-face encounter with a provider prior to a physician certification of eligibility. The bill also extends the Inspector General’s subpoena authority, and requires individuals to return overpayments within 60 days of said overpayment coming to light, subject to civil penalties. The bill requires that all Medicare payments to providers be made in electronic form to insured depository institutions. Finally, the bill grants the Inspector General access to all Medicare and Medicaid claims databases, including MA and Part D contract information, and consolidates two existing data banks of information.

Medicaid and SCHIP Provisions

Medicaid Expansion: The bill expands Medicaid to all individuals—including non-disabled, childless adults not currently eligible for benefits—with incomes below 150 percent FPL ($33,075 for a family of four in 2009). The bill’s expansion of Medicaid to an estimated 15 million individuals would be fully paid for by the federal government only through 2014—thus imposing billions in unfunded mandates on States, which would be expected to pay nearly 10 percent of the cost of the expansion beginning in 2015. According to the preliminary Congressional Budget Office (CBO) score of the bill, this provision alone would require States to pay an additional $34 billion in matching funds over the next decade. However, States cannot afford their current Medicaid programs, which is why Congress included a $90 billion Medicaid bailout in the “stimulus” package—as well as an additional $23.5 billion bailout in H.R. 3962.

Many Members may be concerned by both the cost and scope of this unprecedented expansion of Medicaid to millions more Americans. Members may also note that a plurality of individuals (44 percent) with incomes between one and two times the poverty level have private health insurance; expanding Medicaid to 133 percent FPL would provide a strong incentive for the employers of these individuals to drop their current coverage so they can instead enroll in the government-run plan. Moreover, given Medicaid’s history of poor beneficiary access to care—as one Medicaid beneficiary noted, “You feel so helpless thinking, something’s wrong with this child and I can’t even get her into a doctor….When we had real insurance, we would call and come in at the drop of a hat”—some Members may believe that Medicaid itself needs fundamental reform—and beneficiaries need the choice of access to quality private coverage rather than a government-run plan.

Medicaid/Exchange Interactions: The bill requires States to accept and enroll individuals documented by the Exchange as having incomes under 150 percent FPL, and all those documented by the Exchange as being eligible for Medicaid under traditional guidelines. The bill also excludes any payments related to erroneous eligibility determinations for Exchange plans from States’ Medicaid error rates—which some Members may be concerned could encourage States to enroll beneficiaries not eligible for benefits.

In general, the bill would require currently eligible Medicaid beneficiaries—as well as expansion populations with income under 150 percent FPL—to remain in the government-run Medicaid program; such individuals would not receive affordability credits to purchase coverage on the Exchange. Some Members may be concerned that these provisions would result in significant disparities among low-income beneficiaries. Many may question the logic behind provisions that allow a family of four with $34,000 in annual income a choice (albeit a choice narrowly defined by bureaucratic standards) of health insurance options in the Exchange, while denying the same choice to a family with $1,000 less in income.

The bill imposes maintenance of effort requirements on States, prohibiting the voters or elected leaders of a State from reducing eligibility levels in that State’s Medicaid and SCHIP programs after the bill’s enactment, and prohibits States from imposing asset tests on several new categories of beneficiaries. (The bill does provide for a transition for SCHIP beneficiaries to join the Exchange once it is established, and repeals the SCHIP program at the end of Fiscal Year 2014.) Some Members may be concerned that these restrictions—which Tennessee Democrat Gov. Phil Bredesen termed “the mother of all unfunded mandates” on States—and could prompt a scenario envisioned by the head of Washington State’s Medicaid program, whereby States facing severe financial distress may say, “‘I have to get out of the Medicaid program altogether.’”

The bill also requires a study of Medicaid Disproportionate Share Hospital (DSH) payments’ effectiveness on reducing the number of uninsured individuals, and includes a total of $10 billion in Medicaid DSH payment reductions in Fiscal Years 2017-2019, based on the States that have the lowest number of uninsured patients.

Preventive Services: The bill requires Medicaid to cover certain preventive services, as well as recommended vaccines, with zero cost-sharing. While supporting the encouragement of preventive care, some Members may question whether a blanket waiver of all cost-sharing for a list of services would encourage unnecessary or superfluous consumption of these treatments. The bill also permits Medicaid coverage of tobacco cessation programs, as well as optional coverage of nurse home visitation services.

Family Planning Services: The bill includes several provisions related to family planning services. Specifically, the bill would amend the definition of a “benchmark State Medicaid plan” to require family planning services for individuals with incomes up to the highest Medicaid income threshold in each State. The bill also permits States to establish “presumptive eligibility” programs for family planning services, which would allow Medicaid-eligible entities—including Planned Parenthood clinics—temporarily to enroll individuals in the Medicaid program for up to 61 days and places no limit on the number of times an individual can be presumptively enrolled by the same entity. Under this provision, a person could be repeatedly presumptively enrolled in the Medicaid program for years without ever having to document that the individual is actually qualified to receive taxpayer-funded Medicaid benefits.

Some Members may be concerned that these changes would, by altering the definition of a benchmark plan, undermine the flexibility established in the Deficit Reduction Act to allow States to determine the design of their Medicaid plans, expanding the federal government’s role in financing family planning services. Some Members may also be concerned that the presumptive eligibility provisions would enable wealthy individuals or undocumented aliens to obtain free family planning services—and potentially other health care benefits—financed by the federal government, based solely on a presumption of possible eligibility by Planned Parenthood or other clinics.

Access to Services: The bill requires States to increase reimbursements to Medicaid primary care providers so that all such providers would be paid at Medicare rates by 2012. However, as with the expansion discussed above, States would be forced to pay nearly 10 percent of the cost of these increased payments—yet another unfunded mandate on States. The bill requires the Secretary to establish a medical home pilot program for Medicaid, similar to the Medicare program described above, and provides $1.2 billion to finance additional federal costs over the five-year period of the project.

The bill gives States the option to cover “ambulatory services that are offered at a freestanding birth center,” defined as any non-hospital location “where childbirth is planned to occur away from the pregnant woman’s residence,” and requires coverage for podiatrists and optometrists. The bill further requires States retain coverage for juveniles enrolled in Medicaid “immediately before becoming an inmate of a public institution,” and maintain such coverage after the inmate’s release “unless and until there is a determination that the individual is no longer eligible to be so enrolled.” H.R. 3962 permits States to establish Medicaid accountable care organization programs, and permits States to cover therapeutic foster care as well as certain low-income HIV positive individuals at an enhanced federal match.

The bill extends for two additional years the Transitional Medical Assistance (TMA) program that provides Medicaid benefits for low-income families transitioning from welfare to work. Traditionally, the TMA provisions have been coupled with an extension of Title V abstinence education funding during the passage of health care bills. However, the Title V funds were excluded from the bill language, and therefore expired on July 1, 2009. Some Members may be concerned by the removal of the Title V abstinence education funding and the potential end of this program.

The bill eliminates SCHIP coverage waiting periods for infants whose parents recently lost employer coverage or whose group coverage premiums exceed 10 percent of family incomes, and requires that stand-alone SCHIP programs must implement 12-month continuous eligibility programs. Some Members may be concerned that these provisions, in restricting States’ flexibility, would exacerbate the movement of individuals from private to government-run coverage and allow individuals to continue to receive federally-financed benefits long after they became ineligible. The bill also provides a State option to disregard income in order to cover under Medicaid individuals who have exhausted all private prescription drug coverage and who face costs for orphan drugs exceeding $200,000 annually.

Medicaid Pharmaceutical Price Controls: With respect to payments to pharmacists, the bill changes the federal upper reimbursement limit from 250 percent of the average manufacturer price (AMP) of the lowest therapeutic equivalent to 130 percent of the volume-weighted AMPs of all therapeutic equivalents. Manufacturers would be required to provide additional rebates for new formulations (e.g. extended-release versions) of existing drugs. The bill also increases the minimum Medicaid rebate for single-source (i.e. patented drugs) from 15.1 percent to 22.1 percent, and—for the first time—applies the rebate to drugs purchased by Medicaid managed care organizations, which already have the ability to negotiate lower prices. Some Members may be concerned that this language, by increasing the Medicaid rebate nearly 50 percent and extending the scope of its price controls, represents a further intrusion of government into the marketplace—and one that could result in loss of access to potentially life-saving treatments, by reducing companies’ incentive to develop new products. The bill also requires States to return the entire portion of such rebates back to the federal government, which many may view as a particularly onerous requirement given the other unfunded mandates imposed on States in the bill.

Extension of “Stimulus” Funding: The bill provides for an extra two quarters of increased Medicaid funding for States, covering the first two calendar quarters of 2011. The “stimulus” legislation (P.L. 111-5) provided a 6.2 percent across-the-board increase in the federal matching rate to all States, as well up to an additional 11.5 percent for States with significant increases in unemployment. Many may question the logic of providing $24 billion to extend this “stimulus” funding to States—only to impose $34 billion in unfunded mandates on these same States in the same bill.

Other Provisions: The bill provides circumstances under which States can submit reimbursement claims for graduate medical education—a service that has never before been recognized as subject to reimbursement under the original Medicaid statute. The bill provides $6 billion for a new nursing facility supplemental payment program to provide quality payments to institutions providing care under both the Medicare and Medicaid programs. The bill also grants CMS the authority to reject payment for certain “never events” resulting from medical errors and other “health care acquired conditions,” and requires that States must have hospital price transparency reporting regimes in place. The bill requires providers to adopt waste, fraud, and abuse programs, extends other anti-fraud provisions and includes a two-year extension of the Qualifying Individual program, which provides assistance through Medicaid for low-income seniors in paying their Medicare premiums. Some Members may be concerned that the bill also regulates medical loss ratios for Medicaid managed care organizations, requiring the Secretary to hold such organizations to a minimum 85 percent payout—adding a government-imposed price control, and one that the Government Accountability Office has admitted is entirely arbitrary.

The bill would repeal provisions in the Medicare Modernization Act requiring expedited procedures for the President to submit, and Congress to consider, “trigger” legislation remedying Medicare’s funding shortfalls, as well as provisions regarding a Medicare premium support demonstration project scheduled to start in 2010. At a time when the Medicare Part A Trust Fund is scheduled to be exhausted in 2017, some Members may be concerned that these changes would eliminate provisions designed to have Congress take action to remedy Medicare’s looming fiscal crisis and one possible solution (i.e. premium support).

The bill extends an existing gainsharing demonstration project, requires a new “identifiable office or program” within CMS to focus on protecting dual eligibles, and provides for new grants to States to support home visitation programs for families with children and families expecting children. The visitation program would be similar to the capped allotment funding mechanism used in SCHIP; federal funding would total $750 million in the first five years, and State allotments would be determined on the basis of each State’s relative proportion of children in families below 200 percent FPL. The federal government would provide a matching reimbursement rate, starting at 85 percent in 2010 before falling to 75 percent in 2012. At a time when existing entitlements are fiscally unsustainable, some Members may question the wisdom of establishing yet another federal entitlement—this one a new home visitation program to teach parents “skills to interact with their child.”

Innovation Center: H.R. 3962 creates a Center for Medicare and Medicaid Innovation within CMS. The Center would test new delivery models designed to improve care while reducing costs, with preliminary testing lasting no longer than seven years and subsequent expansions contingent on improving quality while reducing costs. Funding would total $350 million in Fiscal Year 2010, and $6.5 billion over ten years.

Division C—Public Health

This division of the bill would purportedly improve public health and wellness through a variety of federal programs and increased spending. While supporting the goal of better health and wellness for all Americans, some Members may be concerned by the bill’s apparent approach that additional federal spending ipso facto will improve individuals’ health. Details of the division include:

New Mandatory Spending: The bill appropriates $33.9 billion in new mandatory spending over ten years for a “Public Health Investment Fund,” of which $15.4 billion is dedicated to a “Prevention and Wellness Trust.” This increase in mandatory spending is intended to fund programs established in the bill, as well as other programs in the Public Health Service Act. However, many may note that the bill’s lower spending levels—H.R. 3200 as introduced spent $88.7 billion on public health programs—stems solely from the fact that the Democrat majority only included five fiscal years of spending in H.R. 3962, compared to ten fiscal years in the earlier version. In other words, rather than reducing actual spending levels, the majority decided to “hide” nearly $55 billion in spending under the highly tenuous assumption that once enacted, this multi-billion dollar program would simply be allowed to expire in 2014. Many may view such a tactic as a budgetary gimmick designed to mask the bill’s true costs.

Community Health Centers: The bill authorizes an additional $38.8 billion from the Public Health Investment Fund for grants to community health centers—funding over and above the significant increase provided in the $13.3 billion, five-year reauthorization that passed just last year (P.L. 110-355). Some Members may be concerned by the significant increase in authorization levels given the federal deficits approaching 10 percent of GDP. The bill also extends liability protections to volunteer practitioners at such centers.

Workforce Provisions: The bill would increase maximum loan repayment levels for participants in the National Health Service Corps from $35,000 to $50,000 per year, further adjusted for inflation, and authorizes an additional $2.9 billion in appropriations for loan repayments. The bill also creates a new program for primary care in addition to the existing National Health Service Corps, which would fund a loan forgiveness program in exchange for each year of service by an individual in an underserved area. The bill would also reduce certain student loan interest payments for participants in certain medical loan programs, which data from the Department of Health and Human Services indicates would actually reduce the number of individuals able to access such programs.

The bill would award grants to hospitals and other entities to plan, develop, or operate training programs and provide financial assistance to students with respect to certain medical specialties, including primary care physicians and dentistry, and increase student loan limits for nursing students and faculty. The bill would further award grants to health professions schools for the training of, and/or financial assistance to, medical residents training in community-based settings, public health professionals, and graduate medical residents in preventive medicine specialties. The bill would make certain modifications to existing programs for diversity centers and increase loan repayment limits for such programs by $15,000 (plus a new inflation adjustment) per year. The bill amends provisions relating to grants for cultural and linguistic competence training and authorizes new grants for interdisciplinary training designed to reduce health disparities and to support the operation of school-based health clinics. While the language in the school-based clinic program prevents the clinics themselves from providing abortions, some Members may be concerned that these federally-funded clinics could refer underage students to other entities (e.g., Planned Parenthood) for abortions.

The bill would establish a Public Health Workforce Corps with its own scholarship program to address workforce shortages. The scholarship program would include up to four years of tuition and fees, as well as a $1,269 monthly stipend during the academic year. The Corps would have a further loan forgiveness program for individuals who commit to at least two years of service, providing up to $35,000 annually in loan forgiveness to participants.

The bill would authorize grants administered by the Secretary of Labor “to create a career ladder to nursing” for “a health care entity that is jointly administered by a health care employer and a labor union” in order to fund “paid leave time and continued health coverage to incumbent workers to allow their participation” in various training programs, or “contributions to a joint labor-management training fund which administers the program involved.” Some Members may be concerned that this provision would enable labor unions to receive federal grant funds in order to train their members.

Finally, the bill would create a national wellness strategy, two new advisory boards on preventive care, an Assistant Secretary for Health Information, an Advisory Committee on Health Workforce Evaluation and Analysis, and a National Center for Health Workforce Analysis. Some Members may question the necessity and wisdom of establishing multiple new bureaucracies to attempt to analyze and manage America’s health levels along with the entire health care workforce.

Expanded Price Controls: The bill expands participation in the 340B program, which reduces the price paid for outpatient pharmaceuticals purchased by certain entities. Specifically, the bill expands the program to children’s hospitals, critical access hospitals, rural referral centers, and sole community hospitals, while also including several new reporting requirements and penalties in an attempt to ensure compliance with the regime. Some Members may be concerned that this language, by extending the scope of price controls on pharmaceutical products, represents a further intrusion of government price controls into the marketplace—and one that could result in loss of access to potentially life-saving treatments, by reducing companies’ incentive to develop new products. In addition, the bill would also create a National Medical Device Registry “to facilitate analysis of post-market safety and outcomes data” for Class III medical devices and Class II devices classified as life-sustaining.

Newly Added Bureaucracies and Programs: The bill includes at least 30 new and several reauthorized grant programs and bureaucracies added to the health “reform” bill since its introduction as H.R. 3200, some of which were considered during the Energy and Commerce Committee’s markup of the latter measure. The measures include programs running a gamut of public health issues from influenza vaccines in schools to community-based overweight and obesity prevention. While supporting healthy behaviors and improved wellness, some Members may be concerned by the majority’s apparent belief that the route to such behaviors lies largely through action by the federal government. Moreover, some may have concerns about several of the specific programs being created—including a “healthy teen initiative” on teen pregnancy, and a medical liability program that funds incentive grants to States only on condition that such States “not limit attorneys’ fees or impose caps on damages.”

Nutrition Labeling for Restaurants: The bill imposes new federal requirements on chain restaurants and vending machines to display nutrition labeling. Federal requirements would apply to chain restaurants “with 20 or more locations doing business under the same name,” and include all menu items except condiments and “temporary menu items appearing on the menu for less than 60 days per calendar year.” The bill would require restaurants to list the caloric content of menu items “adjacent to the name of the standard menu item, so as to be clearly associated” with same, and would further require “a succinct statement concerning suggested daily caloric intake, as specified by the Secretary by regulation and posted prominently on the menu and designed to enable the public to understand, in the context of a total daily diet, the significance of the caloric information that is provided on the menu.” The Secretary would be further empowered to promulgate regulations requiring additional disclosures beyond caloric content.

Vending machine operators “owning or operating 20 or more vending machines” that do not permit purchasers to review nutrition information prior to purchase “shall provide a sign in close proximity to each article of food or the selection button that includes a clear and conspicuous statement disclosing the number of calories contained in the article.” Some Members may be concerned that these requirements will increase administrative burdens for business in order to provide additional information that may or not be helpful to consumers—and may or may not in fact reflect the nutritional content of the food as actually prepared for the customer (as opposed to the food as prepared when quantifying the disclosure requirements of the “food police”).

Generics and Follow-On Biologics: The bill prohibits generic drug manufacturers from receiving “anything of value” with respect to a patent dispute with brand-name manufacturers, and prohibits generic manufacturers from agreeing to forego sales and manufacturing for any period of time in relation to a patent dispute with brand-name manufacturers. The bill also establishes a Food and Drug Administration approval process for generic biosimilars, also referred to as follow-on biologics. Grants a period of exclusivity for brand-name products of 12 years, with a six-month extension possible in cases where a manufacturer agrees to an FDA request for pediatric studies. The bill gives FDA the authority to issue general or specific guidance documents (subject to a notice-and-comment period) regarding product classifications.

New Long-Term Care Entitlement: The bill would create a new entitlement to long-term care services, financed by a new “Independence Fund” generated from beneficiary premiums. The plan would have monthly premiums developed by actuaries; late enrollees would pay age-adjusted premiums. All individuals over 18 receiving wage or self-employment income would be automatically enrolled in the program; premiums would be automatically deducted from workers’ wages. Individuals would only be able to disenroll from the program “during an annual disenrollment period.” Premiums would not increase so long as the individual remained enrolled in the program (or the program had sufficient reserves for a 20-year period of solvency).

The minimum cash benefit would be $50 per day, with amounts scaled for levels of functional ability—and benefits not subject to lifetime or aggregate limits. In the case of beneficiaries enrolled in Medicaid, the beneficiary would receive either 5 percent (for institutionalized patients) or 50 percent (for patients in home and community-based services) of the cash benefit, with the balance applied to the cost of coverage, and Medicaid providing secondary payments. Benefits would also include advocacy services and advice and assistance counseling in addition to the cash benefit.

Benefit eligibility would be determined by State Disability Determination Services (DDS) within 30 days; “an application that is pending after 45 days shall be deemed approved.” Particularly given the backlog in processing Social Security disability claims using the same DDS system—where the time necessary to process an average claim has grown to 106 days—some Members may be concerned that making all claims pending 45 days eligible for benefits would constitute a recipe for the approval of virtually all long-term care claims, including many dubious or fraudulent ones.

Many may be concerned by the concept of creating a new, expansive federal entitlement program when Medicare itself is not actuarially sound and the Medicare Hospital Insurance Trust Fund is scheduled to be insolvent by 2017. Moreover, while the new entitlement would generate revenue during the initial ten-year budgetary window—as individuals pay premiums but would not be able to collect benefits—the additional entitlement obligations would only increase federal deficit in future years. As even Democrats such as Senate Budget Committee Chairman Kent Conrad (D-ND) have called the program a “Ponzi scheme,” many may find any legislation that relies upon such a program to maintain “deficit-neutrality” fiscally irresponsible and not credible.

Division D—Indian Health Service

When introduced as H.R. 3962, the Pelosi health care bill added the provisions of H.R. 2708, the Indian Health Care Improvement Act, to the prior provisions in H.R. 3200 already considered by the three primary Committees of jurisdiction. Many may note that this procedural maneuver allows Democrats to avoid a vote—either in Committee or on the House floor—about whether or not to codify the Hyde Amendment’s prohibition on federal abortion funding for the Indian Health Service. The bill and the underlying statute it would replace include language prohibiting the Indian Health Service from using federal funds to pay for abortions only if the Hyde Amendment’s protections are renewed every year. Such an amendment passed the Senate last year—but Indian Health Service legislation was not considered by the full Energy and Commerce Committee, or on the House floor, either last Congress or this Congress due to this issue.

According to the Congressional Research Service, the Indian Health Service (IHS) provides services to about 1.8 million members of the 562 federally recognized American Indian and Alaska Native tribes. Health services are available within 161 local service areas in largely rural communities, along with 34 urban Indian health projects; services can be delivered by the IHS directly, or by tribes and tribal organizations through self-determination compacts. Though estimates vary, at least 1.4 million individuals received service at IHS facilities in 2006. Funding sources for the Service include federal appropriations for IHS health services ($2.97 billion in Fiscal Year 2008), facilities ($374.6 million, and a special diabetes program ($150 million), along with collections from Medicare, Medicaid, and private insurance ($786 million). In Fiscal Year 2008, the program received a total of $4.28 in funding.

Program Reauthorization: The bill reauthorizes and rewrites the Indian Health Care Improvement Act, in all cases authorizing “such sums” as may be necessary to fund the Service. In addition to reauthorizing and creating a range of health professionals grant programs, the bill greatly expands the definition of “health promotion” and “disease prevention” to broaden the range of services provided by the Service. The bill also broadens provisions on diabetes prevention and control, adds oral health to the list of Indian school health education programs, and expands provision of hospice care and home- and community-based services. The bill contains new diabetes screening requirements, and amends certain construction requirements. Notably, the bill expands Davis-Bacon prevailing wage restrictions—applying them to facilities constructed by tribes using IHS funds, in addition to those constructed by the IHS itself. Some Members may be concerned that these provisions would increase costs to the federal government.

The bill reauthorizes urban Indian health programs, which provide services not only to members of federally recognized tribes, but also to members of State recognized tribes, members of tribes with federal recognition revoked after 1940, non-member descendants of tribes, and other individuals considered to be Indian by the Departments of Interior and HHS. Some Members may be concerned that providing these services outside of membership in a federally recognized tribe may constitute the provision of racially-based services, which may violate the Constitution’s equal protection standards. In reauthorizing programs on Indian mental health services, the bill includes a new program for sexual abuse prevention that provides funding to treat “perpetrators of sexual abuse who are Indian or members of an Indian tribe.” Some may be concerned at the use of federal taxpayer dollars to support sexual predators.

Funding: The bill provides that 100 percent of reimbursements paid to the IHS from Medicare or Medicaid must be returned to the service unit that provided the service—up from a current-law requirement of 80 percent—and permits tribal health programs to bill SCHIP directly for reimbursement (currently such programs can only bill Medicare and Medicaid directly). The bill expands existing outreach grants to include SCHIP enrollment outreach activities, and includes a new provision allowing tribes to use federal funds to purchase health insurance coverage—except that such coverage may not include a high-deductible plan or HSA. The bill also includes new provisions regarding guidelines for sharing veterans and Defense Department health facilities and treatments, and codifies a current regulatory ruling that the Service shall function as a “payor of last resort” in all cases. The bill includes a study examining whether the Navajo Nation should be considered a State for purposes of receiving reimbursements and federal matching funds under the Medicaid program.

Finally, the bill expands Medicaid, Medicare, and SCHIP reimbursement criteria to make all Indian health programs subject for payment—broadening eligibility beyond the current-law definition limited to IHS facilities—makes other definitional changes, and adds provisions to increase enrollment in SCHIP by exempting Indian outreach activities from the 10 percent cap on federal expenditures for outreach activities.

Cost and Other Concerns

Cost: According to the Congressional Budget Office’s preliminary score, H.R. 3962 would spend nearly $1.3 trillion over its first ten years. More specifically, CBO estimates that the bill would spend $1.055 trillion to finance coverage expansions—$425 billion for the Medicaid expansions, $605 billion for “low-income” subsidies, and $25 billion for small business tax credits. Democrats’ lower $894 billion number conveniently includes offsetting revenue from more than $150 billion in tax increases (only a portion of the $729.5 billion in total tax increases)—$33 billion from individuals who do not purchase government-forced health coverage and $135 billion from employers that do not offer government-forced insurance.

The more than $1 trillion in spending on coverage expansions does not even include additional federal spending included in the legislation—including extension of Medicaid “stimulus” funding to the States, a new reinsurance program for retirees, and a $34 billion trust fund for public health—that totals $224.5 billion. When combined with the cost of the coverage expansions, total spending under the bill actually approaches $1.3 trillion.

Both in its score of H.R. 3962 and in a separate document comparing it to the Senate Finance Committee bill (S. 1796), CBO notes that over both a 10 and 20-year period, H.R. 3962 “would increase both federal outlays for health care and the federal budgetary commitment to health care, relative to the amounts under current law.” Many members may be concerned that spending at least $1.3 trillion to finance a government takeover of health care would not only not help the growth in health costs, but—by creating massive and unsustainable new entitlements—would also make the federal budget situation much worse.

Savings would come from reductions within the Medicare program, of which the biggest are cuts to Medicare Advantage plans (net cut of $170 billion), reductions in adjustments to certain market-basket updates for hospitals and other providers (total of $143.6 billion), skilled nursing facility payment reductions (total of $23.9 billion), various reductions to home health providers (total of $56.7 billion), and reduction in imaging payments ($3 billion).

Tax Increases: Offsetting payments include $33 billion in taxes on individuals not complying with the mandate to purchase coverage, as well as a total of $135 billion in taxes and payments by businesses associated with the “pay-or-play” mandate. Members may note that the tax from the insurance mandate would apply on individuals with incomes under $250,000, thus breaking a central promise of then-Senator Obama’s presidential campaign.

The Joint Committee on Taxation notes that the bill provisions would increase federal revenues by $561.5 billion over ten years—over and above the $168 billion in tax increases related to the individual and employer mandates noted above—for a total of $729.5 billion in tax increases over ten years. JCT found that the “surtax” would raise $460.5 billion, corporate reporting would raise $17.1 billion, the worldwide interest implementation delay would raise $26.1 billion, the treaty withholding provisions would raise $7.5 billion, and the codification of the economic substance doctrine would raise $5.7 billion. Taxes on Health Savings Accounts (HSAs) and other similar savings vehicles would raise $19.6 billion, while provisions relating to retiree drug subsidies would raise taxes by $3 billion. An excise tax on medical devices—which experts agree would be passed on to customers in the form of higher prices and insurance premiums—would raise taxes by $20 billion. Finally, the tax on health benefits used to finance the Comparative Effectiveness Research Trust Fund would raise $2 billion over ten years.

Out-Year Spending: The score indicates that of the nearly $1.055 trillion in spending for coverage expansions under the specifications examined by CBO, only $7 billion—or only 0.7%—of such spending would occur during the first three years following implementation. Moreover, the bill in its final year would spend a total of $208 billion to finance coverage expansions. In other words, the Democrat bill spends so much, it needs eight years of higher taxes to finance six years of spending—and even then cannot come into proper balance without relying on budgetary gimmicks.

Budgetary Gimmicks: While the CBO score claims H.R. 3962 would reduce the deficit by $104 billion in its first ten years, Democrats achieved that “deficit-neutral” solely by excluding the cost of reforming the Sustainable Growth Rate (SGR) mechanism for Medicare physician payments—the total cost of which stands at $285 billion over ten years, according to CBO—from this bill, and including it instead in a separate companion bill (H.R. 3961) that is not paid for. While Members may support reform of the SGR mechanism, many may oppose what amounts to an obvious attempt to incorporate a permanent “doc fix” into the baseline—a gimmick designed solely to hide the apparent cost of health “reform.”

OMB Director Orszag, testifying before the House Budget Committee in June, asserted that the White House would not support legislation that was not balanced in the long-term—and further stated that the Administration would not support legislation that increased the deficit in the tenth and final year of the budgetary window. After taking into account Democrat budgetary gimmicks, H.R. 3962 fails that test—as the bill’s purported $10 billion surplus in 2019 is more than outweighed by the $38 billion cost of physician payment reform.

The Pelosi bill also relies on more than $70 billion in revenue from a new program for long-term care services. As the long-term care program requires individuals to contribute five years’ worth of premiums before becoming eligible for benefits, the program would find its revenue over the first ten years diverted to finance other spending in Democrats’ health care “reform.” However, as even Democrats, such as Senate Budget Committee Chairman Kent Conrad (D-ND), have called the program a “Ponzi scheme,” many may find any legislation that relies upon such a program to maintain “deficit-neutrality” fiscally irresponsible and not credible.

Coverage: The score also claims that the number of uninsured individuals would be reduced to 18 million by the end of the ten-year budgetary window, a reduction of 36 million in 2019 when compared to current law projections. Approximately 21 million individuals would purchase their health insurance from the Exchange, including more than 6 million individuals who would lose their current private health coverage purchased on the individual market and enroll in the government-run Exchange.

The CBO score asserts that employer-based coverage would increase slightly, due to the individual and employer mandates. However, the bill permits the government-run health plan in H.R. 3962 to reimburse providers at Medicare rates, which are 20-25 percent lower than private insurance rates—thus permitting the government plan to undercut private insurers. Particularly as the Lewin Group has indicated that under such a scenario, a government-run plan would cause up to 114 million Americans to lose their current coverage, some Members may question CBO’s apparent assumption that employers would not choose to drop their health plans to enroll their workers in a government-run plan with purportedly lower costs than existing coverage.

Undocumented Individuals: The CBO score notes that the specifications examined would extend coverage to 94 percent of the total population, and 96 percent of the population excluding unauthorized immigrants. However, the score goes on to note that of the 18 million individuals remaining uninsured, “one third”—or about 6 million—would be undocumented immigrants. Given that most estimates have placed the total undocumented population at approximately 10-12 million nationwide, some Members may question whether this statement presumes that some undocumented immigrants would obtain health insurance—including health insurance funded by federal subsidies.

It is also worth noting that in its preliminary score of H.R. 3200, CBO found that in 2019 there would be “about 17 million nonelderly residents uninsured (nearly half of whom would be unauthorized immigrants).” In other words, the number of projected uninsured who are also undocumented immigrants declined from about 8 million under H.R. 3200 to 6 million under the latest Pelosi bill. Many may question what changes in the Pelosi legislation resulted in 2 million undocumented immigrants suddenly obtaining health coverage.