Single Payer’s Road to Rationing

The reintroduction of Democrats’ single-payer legislation has some families contemplating what total government control of the health-care sector would mean for them. Contrary to the rhetoric coming from liberals, some of the families most affected by a single-payer system want nothing to do with this brave new health care world.

As this father realizes, giving bureaucrats the power to deny access to health care could have devastating consequences for some of the most vulnerable Americans.

Determining the ‘Appropriate’ Use of Medical Resources

To summarize the Twitter thread: The father in question has a 12-year-old son with a rare and severe heart condition. Last week, the son received an implantable cardioverter defibrillator to help control cardiac function.

But because the defibrillator is expensive and cardiologists were implanting the device “off-label”—the device isn’t formally approved for use in children, because few children need such a device in the first place—the father feared that, under a single-payer system, future children in his son’s situation wouldn’t get access to the defibrillator needed to keep them alive.

The father has reason to worry. He cited a 2009 article written by Zeke Emanuel—brother of Rahm, and an advisor in the Obama administration during the debate on Obamacare—which included the following chart:

The chart illustrates the “age-based priority for receiving scarce medical interventions under the complete lives system”—the topic of Emanuel’s article. If a picture is worth a thousand words, then this chart sure speaks volumes.

Also consider some of Emanuel’s quotes from the same article, in which he articulates the principles behind the allocation of scarce medical resources:

Adolescents have received substantial education and parental care, investments that will be wasted without a complete life. Infants, by contrast, have not yet received these investments.
The complete lives system discriminates against older people….[However,] age, like income, is a ‘non-medical criterion’ inappropriate for allocation of medical resources.

If those quotes do not give one pause, consider another quote by Zeke Emanuel, this one from a 1996 work: “[Health care] services provided to individuals who are irreversibly prevented from being or becoming participating citizens are not basic and should not be guaranteed. An obvious example is not guaranteeing health services to patients with dementia.” When that quote resurfaced during the debate on Obamacare in 2009, Emanuel attempted to claim he never advocated for this position—but he wrote the words nonetheless.

The Flaw in Centralized Decision-Making

The father in his Twitter thread hit on this very point. Medical device companies have not received Food and Drug Administration approval to implant defibrillators in children in part because so few children need them to begin with, making it difficult to compile the data necessary to prove the devices safe and effective in young people.

Likewise, most clinical trials have historically under-represented women and minorities. The more limited data make it difficult to determine whether a drug or device works better, worse, or the same for these important sub-populations. But if a one-size-fits-all system makes decisions based upon average circumstances, these under-represented groups could suffer.

To put it another way: A single-payer health care system could deny access to a drug or treatment deemed ineffective, based on the results of a clinical trial comprised largely of white males. The system may not even recognize that that same drug or treatment works well for African-American females, let alone adjust its policies in response to such evidence.

A ‘Difficult Democratic Conversation’

The chronically ill and those toward the end of their lives are accounting for potentially 80 percent of the total health care bill out here….There is going to have to be a conversation that is guided by doctors, scientists, ethicists. And then there is going to have to be a very difficult democratic conversation that takes place.

Some would argue that Obama’s mere suggestion of such a conversation hints at his obvious conclusion from it. Instead of having a “difficult democratic conversation” about ways for government bureaucrats deny patients care, such a conversation should center around not giving bureaucrats the right to do so in the first place.

This post was originally published at The Federalist.

The Sordid History of the FDA’s Menthol Decision

Late last week, The New York Times reported that the Food and Drug Administration (FDA) will issue a regulation proposing a ban on menthol flavoring in cigarettes, potentially this week. This represents merely the latest development in a long and winding history of the mint-flavored additive lasting nearly a decade.

The Times report quoted FDA Commissioner Scott Gottlieb saying “it was a mistake for the agency to back away on menthol” regulation. Depending upon one’s perspective, the “menthol loophole” either represents a reasonable example of legislative compromise, or policymakers in both the legislative and executive branches valuing African-American lives less dearly than the lives of other Americans.

A Troubled Legislative History

Beginning 3 months after the date of enactment of the Family Smoking Prevention and Tobacco Control Act, a cigarette or any of its component parts (including the tobacco, filter, or paper) shall not contain, as a constituent (including a smoke constituent) or additive, an artificial or natural flavor (other than tobacco or menthol) or an herb or spice, including strawberry, grape, orange, clove, cinnamon, pineapple, vanilla, coconut, licorice, cocoa, chocolate, cherry, or coffee, that is a characterizing flavor of the tobacco product or tobacco smoke.

That language created two policy problems. First, as I noted in my summary of the bill at the time, because the bill banned other cigarette flavors manufactured overseas, while permitting menthol-flavored cigarettes manufactured domestically, the law would likely result in World Trade Organization (WTO) complaints for unfair trade practices. Indeed, Indonesia, which manufactures clove cigarettes, filed just such a complaint following the law’s passage—and won its case at the WTO.

The Times alluded to the other complication presented by the “menthol loophole” in its article this week: “According to the N.A.A.C.P.’s Youth Against Menthol campaign, about 85 percent of African-American smokers aged 12 and up smoke menthol cigarettes, compared with 29 percent of white smokers, which the organization calls a result of decades of culturally tailored tobacco company promotion.”

That “decades of culturally tailored tobacco company promotion” also included contributions to organizations like the NAACP and the Congressional Black Caucus Foundation. Industry documents released as part of the 1998 master settlement agreement demonstrated that “the tobacco industry established relationships with virtually every African-American leadership organization”—both to increase tobacco use, and to head off tobacco control efforts.

The FDA Looked the Other Way

Despite the condemnation from the HHS secretaries for its double standards against African-Americans, the bill passed as written in 2009. In an irony of ironies, the first African-American president signed it into law in June that year.

While it did not ban menthol outright, the legislation required a study on its effects, and gave the FDA the authority to ban the additive. Despite occasional rumors that FDA might outlaw menthol—and appeals from the African-American community for a ban—the Obama administration did not take action on the matter.

As a small government conservative, I question the value of establishing and maintaining an FDA bureaucracy to regulate an inherently unhealthful product. I by no means condone the decades of deception the tobacco industry used to sell their products.

This post was originally published at The Federalist.

Will Disclosing Prescription Drug Prices in TV Ads Make Any Difference?

Why did the Trump administration last Monday propose requiring pharmaceutical companies to disclose their prices in television advertisements? A cynic might believe the rule comes at least in part because the drug industry opposes it.

Now, I carry no water for Big Pharma. For instance, I opposed their effort earlier this year to repeal an important restraint on Medicare spending. But this particular element of the administration’s drug pricing plan appears to work in a similar manner as some of the president’s tweets—to dominate headlines through rhetoric, rather than through substantive policy changes.

Applies Only to Television

The rule “seek[s] comment as to whether we should apply this regulation to other media formats,” but admits that the administration initially “concluded that the purpose of this regulation is best served by limiting the requirements” to television. However, five companies alone accounted for more than half of all drug advertisements in the past year. Among those five companies, the advertisements promoted 19 pharmaceuticals—meaning that new disclosure regime would apply to very few drugs.

If the “purpose of this regulation” is to affect pharmaceutical pricing, then confining disclosures only to television advertisements would by definition have a limited impact. If, however, the “purpose of this regulation” is primarily political—to force drug companies into a prolonged and public legal fight on First Amendment grounds, or to allow the administration to point to disclosures in the most prominent form of media to say, “We’re doing something on drug costs!”—then the rule will accomplish its purpose.

Rule Lacks Data to Support Its Theory

On three separate occasions, in the rule’s Regulatory Impact Analysis—the portion of the rule intended to demonstrate that the regulation’s benefits outweigh its costs—the administration admits it has very few hard facts: “We lack data to quantify these effects, and seek public comment on these impacts.”

It could encourage people to consume more expensive medicines (particularly if their insurance pays for it), because individuals may think costlier drugs are “better.” Or it could discourage companies from advertising on television at all, which could reduce drug consumption and affect people’s health (or reduce health spending while having no effect on individuals’ health).

Conservative think-tanks skewered several Obamacare rules released in 2010 for the poor quality and unreasonable assumptions in their Regulatory Impact Analyses. Although released by a different administration of a different party, this proposed regulation looks little different.

Contradictions on Forced Speech?

Finally, the rule refers on several occasions to the Supreme Court’s ruling earlier this year in a case involving California crisis pregnancy centers. That case, National Institute of Family and Life Advocates v. Becerra, overturned a California state law requiring reproductive health clinics, including pro-life crisis pregnancy centers, to provide information on abortion to patients.

The need for that distinction arises because the pharmaceutical industry will likely challenge the rule on First Amendment grounds as an infringement on their free speech rights. However, a pro-life administration attempting to force drug companies to disclose pricing information, while protecting crisis pregnancy centers from other forced disclosures, presents some interesting political optics.

A Political ‘Shiny Object’

Ironically enough, most of the administration’s actions regarding its prescription drug pricing platform have proven effective. Food and Drug Administration Commissioner Scott Gottlieb has helped speed the approval of generic drugs to market, particularly in cases where no other competitors exist, to help stabilize the marketplace.

Other proposals to change incentives within Medicare and Medicaid also could bring down prices. These proposals won’t have an immediate effect—as would Democratic blunt-force proposals to expand price controls—but collectively, they will have an impact over time.

This administration can do better than that. Indeed, they already have. They should leave the political stunts to the president’s Twitter account, and get back to work on more important, and more substantive, proposals.

This post was originally published at The Federalist.

What You Need to Know about President Trump’s Drug Pricing Plan

On Friday, President Trump gave a Rose Garden speech outlining his plan, entitled “America’s Patients First,” to combat rising drug prices. The plan incorporates policy ideas included in the president’s budget earlier this year, new proposals, and additional topics for discussion that could turn into more specific ideas in the future.

What’s the Problem?

Surveys suggest public frustration with the cost of prescription drugs. While such costs represent a small fraction of overall spending on health care, several dynamics help the prescription drug issue gain disproportionate attention. First, in any given year, more Americans incur drug costs than hospital costs. Whereas only 7.3 percent of Americans had an inpatient hospitalization in 2013, more than three in five (60.7 percent) had prescription drug expenses.

With more Americans incurring drug costs, and paying a larger percentage of drug costs directly from their pockets, the issue has taken on greater prominence. The rise of coinsurance (i.e., paying a percentage of drug costs, rather than having those costs capped at a set dollar amount) for pricey specialty drugs exacerbates this dynamic.

What Are the Proposed Solutions?

In general, ways to address drug prices fall into three large buckets.

Controlling costs through competition: These solutions would involve bringing down price levels by encouraging generic competition, or substituting one type of drug for another.

Shifting costs: These solutions would alter who pays for drugs among insurers, pharmaceutical benefit managers (PBMs), or consumers. While they may make drugs more “affordable” for consumers, they will not change overall spending levels. In fact, if done poorly, these types of proposals could actually increase overall spending, by encouraging individuals to increase their consumption of costly brand-name drugs.

Drug company and PBM stocks went up Friday following the blueprint’s release, largely because the plan eschews actions in the second bucket. The president’s plan includes a few tweaks to the system of “rebates” (de facto price controls) the Medicaid program uses, but includes none of the major Democratic proposals to use blunt government action to drive down prices.

In fact, the plan criticizes foreign price controls, attacking the “global freeloading” by which other countries gain the research and development benefits of the pharmaceutical industry without paying their “fair share” of those R&D costs. While the plan frequently mentions the disproportionate share of costs American consumers pay, it includes few specific proposals to rebalance these costs to other countries. It also remains unclear whether, if successfully implemented, any such rebalancing would successfully lower prices in the United States.

Other competitive proposals include giving Medicare Part D plans more flexibility to adjust their formularies mid-year to respond to changes in the generic drug marketplace, and prohibiting Part D plans from including “gag clauses.” These clauses prohibit pharmacies from telling consumers that they would actually save money by paying cash for certain drugs, rather than using their insurance.

In the cost-shifting bucket lie several of the proposals incorporated into the president’s budget. For instance, a cap on out-of-pocket expenses for the Medicare Part D prescription drug benefit would provide important relief to seniors with very high annual drug costs. However, to the extent that such a proposal would encourage seniors to over-consume drugs, or purchase more costly brand-name drugs, once they reach such a cap, this proposal could also increase overall Part D spending.

In a similar vein lie proposals about PBMs passing drug rebates directly to consumers at the point of sale. In most cases, PBMs had previously passed on those savings indirectly to insurers in the form of lower premiums. Giving rebates directly to consumers—a practice some insurers have begun to adopt—would provide relief to those with high out-of-pocket costs, but could raise premiums overall, particularly for those with relatively low prescription spending.

What’s Next?

The plan raises more questions than it answers—quite literally. The last and longest section of the blueprint includes 136 separate questions about how the administration should structure and implement some of the proposals discussed in the document.

Some proposals, while eye-catching, seem ill-advised. For instance, the proposal to “evaluate the inclusion of list prices in direct-to-consumer advertising” raises potential First Amendment concerns—government dictating the content of drugmakers’ communications with patients. Moreover, with many Americans viewing health care as a superior good, some consumers may view a more expensive product as “better” than its alternative. In that case this proposal, if ever implemented, could have the opposite of its intended effect, encouraging people to consume more expensive drugs.

The plan did not include the heavy-handed approaches to the prescription drug issue—Medicare price “negotiation” and drug reimportation—that Democrats favor, and that President Trump endorsed in his 2016 campaign. The document also makes clear the iterative nature of the process, with additional proposals likely coming after feedback from industry and others.

But to the extent that Washington has become consumed by the midterm elections fewer than six months away, the high-profile event Friday allowed Republicans and the president to say they have a plan to bring down drug prices—an important political objective in and of itself.

This post was originally published at The Federalist.

Summary of Fiscal Year 2018 Budget

Late Monday afternoon, a document briefly appeared on the Department of Health and Human Services website as the Fiscal Year 2018 Budget in Brief. It’s unclear whether the document was a draft of the HHS budget, or merely a case of a staffer posting the official document online too early (our money would be on the latter). It also must be noted that other budget materials—the White House/Office of Management and Budget document, as well as supplemental materials from the Treasury and others—provide more detail and information not present solely within the HHS budget.

That said, based on the review of the document posted, the health budget seems in many respects functionally incoherent:

  • It proposes significant entitlement savings from Medicaid, over and above those included in Obamacare repeal, while proposing no direct savings from Medicare—a program that will spend more than $9 trillion in the coming decade, and which faces insolvency by 2028;
  • It grants states more flexibility with regards to Medicaid reform, while with respect to medical liability reform, it prescribes a solution from Washington—one that conservatives have argued is inconsistent with Tenth Amendment principles; and
  • It assumes $250 billion in savings from Obamacare repeal—more than the most recent estimate of the House legislation—a “magic asterisk” not likely to be achieved, but one on which the budget relies in order to achieve balance within a decade.

A summary of the document follows below.  We will have further information on the budget in the coming days, as more materials get released.

Discretionary Spending
While press reports in recent days have focused on the amount of “cuts” proposed in the President’s budget, it’s worth noting the HHS budget’s overall spending levels. When it comes to budget authority, the budget would spend $1.113 trillion in Fiscal Year 2018, which is a 1.24% reduction compared to the $1.127 trillion preliminary number for the current fiscal year, and a 0.54% reduction compared to the $1.119 trillion for Fiscal Year 2016.

Furthermore, the HHS budget actually increases the number of full-time equivalents (FTEs) within the Department—from 77,499 in FY16, to 79,505 in FY17, to 80,027 in FY18.

When compared to Fiscal Year 2017 amounts, the budget calls for the following changes in discretionary spending by major HHS divisions (tabulated by budget authority):

  • $850 million (31.0%) reduction for the Food and Drug Administration, as the Administration proposes increasing FDA user fees to compensate for reductions in taxpayer funding;
  • $449 million (4.2%) reduction for the Health Services and Resources Administration;
  • $55 million (1.1%) reduction for the Indian Health Service;
  • $1.3 billion (17.2%) reduction for the Centers for Disease Control;
  • $5.78 billion (18.2%) reduction for the National Institutes of Health;
  • $385 million (9.3%) reduction for the Substance Abuse and Mental Health Services Administration; and
  • $379 million (9.6%) reduction for the discretionary portion of the Centers for Medicare and Medicaid Services program management account.

Food and Drug Administration:  As noted above, the budget envisions a “recalibration” of how to pay for FDA pre-market review activities. Specifically, the budget would increase industry user fees “to fund 100 percent of cost for pre-market review and approval activities” for brand and generic prescription drugs and medical devices.

Medicare Proposals (Total savings of $22.6 Billion, including interactions)

Medicare Appeals:  Proposes new mandatory spending of $127 million in Fiscal 2018, and $1.27 billion over a decade, to address the pending backlog of Medicare appeals.

IPAB Repeal:  Repeals Obamacare’s Independent Payment Advisory Board (IPAB), at a cost of $7.6 billion over a decade. While opposing Obamacare’s notion that a board of unelected bureaucrats should be empowered to make rulings lowering Medicare spending nationwide, some conservatives may also oppose efforts to repeal a spending constraint on our nation’s largest health care entitlement without any similar efforts to control the program’s large (and growing) outlays.

Liability Reform:  Achieves Medicare savings of $31.4 billion from medical liability reforms. The reforms would impose caps on non-economic damages, provide safe harbors for physicians based on following clinical guidelines, allow for the creation of health courts, provide for a three-year statute of limitations, eliminate joint and several liability, allow courts to modify contingency arrangements, and provide for periodic payments for large jury awards.

The proposal would yield total savings of $55 billion overall. The largest share of $31.4 billion would come from Medicare—in part because a portion of physician fees are based on medical liability insurance payments. Medicaid savings would total $399 million. Much of the remaining $23.2 billion would come from revenue interactions with the current exclusion from employer-provided health insurance—i.e., a lowering of health insurance costs and premiums resulting in workers receiving slightly less of their compensation as pre-tax health benefits, and slightly more of their compensation as after-tax cash wages.

While supporting the concept of liability reform generally, some conservatives may be concerned that the budget’s proposals violate the principles of federalism. States can enact liability reforms on their own—and many states like Texas have done so, without any mandates from Washington. Some conservatives may therefore view this proposal as an example of “big government conservatism” inconsistent with the Tenth Amendment.

Medicaid and Other Health Proposals (Total savings of $627 Billion)

The HHS document notes that “the budget includes a net savings to Medicaid of $627 billion over 10 years, not including additional savings to Medicaid as a result of the Administration’s plan to repeal and replace Obamacare.”

Medicaid Reform:  Assumes $610 billion in savings (again, over and above Obamacare repeal) from Medicaid reform, giving states the choice between a per capita cap or a block grant beginning in 2020. The document specifically notes that this proposal will allow states to promote solutions that encourage work and promote personal responsibility.

State Children’s Health Insurance Program:  Assumes a two-year reauthorization of the State Children’s Health Insurance Program (SCHIP). The budget also proposes eliminating two Obamacare-related provisions—the increase in the enhanced federal match rate for SCHIP, and the maintenance of effort requirements imposed on states—in both cases at the end of the current fiscal year.

The budget would cap the level at which states could receive the enhanced federal SCHIP match at 250 percent of the federal poverty level ($61,500 for a family of four in 2017). Some conservatives would argue that this provision is one way to ensure federal funds are directed towards the vulnerable populations that need them most; guidance issued by the Bush Administration in 2007 provides other examples of potential policies to include.

Finally, the budget also proposes undoing an Obamacare change that required states to transition certain children off of SCHIP and into expanded Medicaid, allowing states to re-enroll these children into SCHIP.

On net, the SCHIP extension would save the federal government $5.8 billion over ten years, reflecting new costs to the SCHIP program ($13.9 billion), savings to Medicaid ($16.7 billion), and savings to other federal health programs ($3 billion).

Liability Reform:  As noted above, the budget assumes an additional $399 million in Medicaid savings from enacting liability reform.

Repeal of Obamacare
The budget assumes a net of $250 billion in savings from an Obamacare repeal/replace measure, savings accruing to both HHS and Treasury. Some conservatives, noting that the most recent score of Obamacare legislation showed a net savings of only $150 billion—with more new spending added since then—may question whether or not this assumption is realistic.

After Repeal of Obamacare: Moving to Patient-Centered, Market-Based Health Care

A PDF of this Backgrounder is available on the Heritage Foundation website.

For a better life, Americans need a health care system that they, not the government, control. Consumers should have the ability to choose how to meet their health insurance needs in a free market for insurance. Taxpayers should benefit from a more efficient and affordable system for helping those who need health care but cannot afford it. Above all, patients, with their doctors, should make their own health care decisions free from government interference.

The important first step is to repeal the Obamacare statute that puts the government in charge of health care. The second step is to let the country move to a patient-centered, market-based system that focuses on citizens and not on the government.

Principles for Reform

To allow Americans to reclaim control of their own health care and benefit from competition in a free market for insurance and health care, Congress should repeal the Obamacare statute and enact patient-centered, market-based reforms based on five principles:

  • Choose, control, and carry your own health insurance;
  • Let free markets provide the insurance and health care services that people want;
  • Encourage employers to provide a portable health insurance benefit to employees;
  • Assist those who need help through civil society, the free market, and the states; and
  • Protect the right of conscience and unborn children.

The Patient Protection and Affordable Care Act (Obamacare) moves health care in the wrong direction. It puts government, not patients, in charge of individual health care decisions. Moreover, it fails to meet the promises laid out by President Barack Obama. With each passing day, it becomes clearer that Obamacare will not reduce premiums for average American families, bend the cost curve in health care spending, or bring down the deficit. For these reasons, among others, Obamacare must be repealed.

However, a return to the status quo before Obamacare is not the final step. Policymakers should pursue reforms based on five basic principles. Adopting such reforms would move American health care in the right direction: toward a patient-centered, market-based health care system.

Principle #1: Choose, control, and carry your own health insurance.

True health reform should promote personal ownership of health insurance. While Obamacare uses government-run insurance exchanges to limit individual choice, real reforms would focus on encouraging Americans to purchase insurance policies that they can take with them from job to job and into retirement in a competitive, free market. Policymakers should enact several key changes for this culture of personal health care ownership to take root.

Portability. Most Americans obtain coverage through their place of work. This allows employers to provide tax-free health benefits to their employees, while individuals purchasing health insurance on their own must use after-tax dollars. As a result, most individuals with private health insurance obtain that coverage from their employer.[1]

Rather than following Obamacare’s example of forcing Americans into government-run health insurance exchanges, true patient-centered reform of health care would make insurance more portable. Individuals should be able to purchase an insurance policy when they are young and carry that policy with them throughout their working lives into retirement.

Equal Tax Relief. While Obamacare alters the tax treatment of health insurance, it does so in a way that increases burdens on taxpayers. Its 40 percent tax on so-called Cadillac health insurance plans is but one of 18 separate tax increases included in the law,[2] which, according to the Congressional Budget Office and the Joint Committee on Taxation, will raise $771 billion in revenue from 2013 to 2022.[3]

A better approach would equalize the tax treatment of health insurance without raising new revenues. The Heritage Foundation has previously proposed replacing the existing deduction for employer-provided health coverage with a flat tax credit that individuals could use to purchase a health insurance policy of their own.[4] Another idea, first proposed by then-President George W. Bush, would give all Americans purchasing health coverage—whether through an employer or on their own—the same standard deduction for health insurance.[5] Both proposals assume revenue neutrality over 10 years. Unlike Obamacare, they do not propose using reform to increase net tax revenues.

Both of these proposals would accomplish two important objectives.

First, they would equalize the tax treatment between health coverage provided through an employer and health coverage purchased by an individual. Providing equal tax treatment would remove a major obstacle that discourages individuals from buying and holding their own health insurance policy for years and taking that coverage from job to job. Tax equity would also encourage firms either to provide direct contributions toward their workers’ health coverage or to increase wages in place of health benefits.

Second, limiting the amount of the tax benefit provided, either with a tax credit or with a standard deduction, would encourage individuals to become smarter purchasers of health insurance coverage. Studies have demonstrated that the current uncapped tax benefit for employer-provided health insurance encourages firms to offer richer health plans and individuals to overconsume health care. According to the Congressional Budget Office, reforming the tax treatment of health insurance “would provide stronger incentives for enrollees to weigh the expected benefits and costs of policies” when buying insurance, thus helping to reduce costs.[6]

Choice of Providers. Through its new system of government control, Obamacare restricts choice and access for many patients. The nonpartisan Medicare actuary concluded that the Medicare reimbursement reductions in Obamacare could make 40 percent of all hospitals unprofitable in the long term, thus restricting beneficiary access to care.[7] Moreover, preliminary reports suggest that Obamacare’s insurance exchanges will feature limited provider networks in an attempt to mitigate premium increases for individuals purchasing exchange coverage.[8]

The most important element of any health care system is the trusted relationship between doctor and patient. Any system of truly patient-centered health care should work to preserve those important bonds and to repair the damage to those bonds caused by Obamacare.

Encouraging Personal Savings. Since their creation in 2004, health savings accounts (HSAs) have become a popular way for millions of families to build savings for needed health care expenses. HSA plans combine a health insurance option featuring a slightly higher deductible—but catastrophic protection in the event of significant medical expenses—with a tax-free savings account. As one of several new consumer-driven health options, HSAs encourage patients to take control of their own health care, providing financial incentives for consumers to serve as wise health care purchasers.

Over the past several years, millions of families have taken advantage of the innovative tools that HSA plans offer. The number of people enrolled in HSA-eligible policies has skyrocketed from 1 million in March 2005 to 15.5 million in January 2013.[9] Numerous studies have also shown that individuals with HSA plans have used tools provided by their health insurer to become more involved with their health care—for example, by using online support tools, inquiring about provider cost and quality, and seeking preventive care.[10] As a result, individuals had saved at least $12.4 billion in their HSAs by the end of 2011.[11]

However, HSA holders still face obstacles to building their personal savings. For instance, under current law, funds contributed to an HSA may not be used to pay for insurance premiums, except under very limited circumstances.[12] Changing this restriction and increasing HSA contribution limits would enhance both personal savings and personal ownership of health insurance.

Coverage for Pre-Existing Conditions. The problem of providing access to individuals with pre-existing conditions, while very real, did not necessitate the massive changes in America’s health care system included in Obamacare. In 2011, the Obama Administration suggested that as many as 129 million Americans with pre-existing conditions were “at risk” and “could be denied coverage” without Obamacare’s massive changes in America’s insurance markets.[13]

That claim was wildly untrue. Under prior law, individuals with employer-sponsored coverage (90 percent of the private market) could not be subjected to pre-existing condition exclusions.[14] In fact, prior to Obamacare, the number of individuals with pre-existing conditions who truly could not obtain health coverage was vastly smaller, and the problem existed only in the individual market. It is therefore not surprising that, according to the most recent data, only an estimated 134,708 individuals have enrolled in the supplemental federal high-risk pool program since it was created under Obamacare to cover individuals with pre-existing conditions[15]—still less than the 200,000 individuals originally projected to enroll.[16]

States could use a variety of approaches to provide coverage to individuals who are unable to purchase insurance. For instance, 35 states already operate high-risk pools with a collective current enrollment of 227,000 individuals to ensure access to coverage for individuals with pre-existing conditions.[17] Alternatively, states could establish reinsurance or risk transfer mechanisms under which insurance companies would reimburse each other for the cost of treating individuals with high medical expenses without added funding from state or federal taxpayers. Either approach would be far preferable to the massive amounts of regulation, taxation, and government spending under Obamacare.

Principle #2: Let free markets provide the insurance and health care services that people want.

Many individuals have already learned that, due in part to Obamacare, with its government-run health exchanges, new bureaucracies, and other forms of government control, they will not be able to retain their current health insurance.[18] There is a better way, and it involves providing more choice through market incentives rather than undermining markets through centralized bureaucracy.

Cross-State Purchasing. Currently, state insurance markets suffer from two flaws: Many markets are uncompetitive, with up to 70 percent of metropolitan areas considered “highly concentrated,”[19] and costly benefit mandates raise health insurance premiums. A prior Heritage Foundation analysis found that each benefit mandate raises costs by an average of approximately $0.75 per month.[20] Another study found that states have imposed a total of 2,271 benefit mandates—or approximately 45 per state.[21] Taken together, these two studies suggest that the cumulative effect of these mandates could raise premiums by $20–$40 per month, or hundreds of dollars per year.

Congress can help to mitigate these problems by removing federal barriers to interstate commerce in health insurance products. Individuals should have the ability to purchase insurance products across state lines, choosing the health plan that best meets their needs regardless of the location of its issuer.

Pooling Mechanisms. Another way to improve patient choice and make insurance markets more competitive would involve new purchasing arrangements and pooling mechanisms. Small businesses, individual membership associations, religious groups, and fraternal organizations should be able to sell health insurance policies through new group purchasing arrangements. The federal government’s role should be to remove the barriers to such arrangements.

By extending the benefits of group coverage beyond the place of work, these new purchasing arrangements would also encourage portability of health insurance coverage. These reforms would allow individuals to obtain their health plan from a trusted source—one with which they would be likely to have a longer association than they have with their employer—thereby creating a form of health coverage that Americans could truly own.

Medicare Private Contracting. Seniors could also benefit from patient-centered Medicare reforms, one of which should help to restore the doctor–patient relationship. Congress should eliminate the anti-competitive restrictions that prevent doctors and patients from contracting privately for medical services outside of traditional Medicare.[22] Congress can also restructure the Medicare benefit, modernizing the design of a program that has remained largely unchanged since its creation nearly 50 years ago.[23] These changes would enhance patient choice while preserving the program’s solvency for future generations of Americans.

Medicare Reform. Regrettably, Obamacare imposes many its most harmful effects on senior citizens.[24] According to the Medicare actuary, the Medicare reimbursement reductions in Obamacare will make 15 percent of all hospitals unprofitable within the decade and 40 percent unprofitable by 2050.[25] As a result, seniors may face significant obstacles to obtaining health care in the future.

There is a better way. Specifically, Congress should provide seniors with a generous subsidy to purchase a Medicare plan of their choosing. Seniors who choose a plan costing less than the subsidy would pay less, while seniors who choose a plan costing more than the subsidy would pay the difference in price.[26 ]

Consumer Choice and Competition. As part of its system of government control, Obamacare hinders patients’ ability to choose their own health plan. One survey found that the mandates and requirements in the law mean that more than half of all insurance policies purchased directly by individuals will not qualify as “government-approved” under Obamacare.[27] As a result, many Americans are finding that they will not be able to keep the health plan they have and like[28]—despite President Obama’s repeated promises.[29]

True patient-centered reform would bolster HSAs and other consumer-directed health products—such as health reimbursement arrangements and flexible spending accounts—that have the ability to transform American health care. One study published in the prestigious journal Health Affairs in 2012 found that expanding market penetration of consumer-driven health plans from 13 percent to 50 percent of all employers could reduce health costs by as much as $73.6 billion per year—a reduction in health spending of 9.1 percent.[30]

In other words, expanding consumer choice and competition could reduce health care costs and spending—the opposite of Obamacare, which restricts consumer choice and increases health costs and spending.

Principle #3: Encourage employers to provide a portable health insurance benefit.

Because most Americans traditionally have received health insurance from their employers, many individuals have few, if any, choices when selecting a health plan. According to the broadest survey of employer plans, nearly nine in 10 firms (87 percent) offer only one plan type, and only 2 percent offer three or more plan types.[31] As a result, employees have only a very limited ability to choose the plan that best meets their needs.

Defined Contribution. An ideal solution would convert the traditional system of employer-provided health insurance from a defined benefit model to a defined contribution model. Rather than providing health insurance directly, employers instead would offer cash contributions to their workers, enabling them to buy the plans of their own choosing. Combined with changes in the tax treatment of health insurance and regulatory improvements to enhance portability, moving to a defined contribution model for health insurance would allow workers to buy a health insurance policy in their youth and take that policy with them from job to job into retirement. These changes would also enable workers and families to negotiate contributions from multiple employers rather than having just one employer foot the bill.

Principle #4: Assist those who need help through civil society, the free market, and states.

While some health reforms—such as changing the tax treatment of health insurance and reforming the Medicare program—remain fully within the purview of the federal government, states also play a critical role in enacting reforms that can lower costs, improve access to care, and modernize state Medicaid programs. By serving as the “laboratories of democracy,” states can provide examples for other states—and the federal government—to follow. Because many state-based reforms do not rely on Washington’s involvement or approval, states can move ahead with innovative market-based solutions even as federal bureaucrats attempt to implement Obamacare’s government-centric approach.

State Innovation. If given proper time and space by an all-too-intrusive federal government, states can act on their own to open their insurance markets. A few states have already acted to open their insurance markets. In 2011, Georgia enacted legislation allowing interstate purchasing of health insurance, and Maine passed legislation allowing carriers from other New England states to offer insurance products to its citizens.[32] Just before Obamacare was enacted in 2010, Wyoming acted to permit out-of-state insurers to offer products.[33] While it may take some time before a critical mass of states creates a true interstate market for insurance, these nascent efforts demonstrate the nationwide interest in expanding health insurance choice and competition.

Medicaid Premium Assistance. Among various forms of health coverage, the Medicaid program is known for its poor quality and outcomes for patients. Numerous studies have found that Medicaid patients suffer worse outcomes than other patients suffer.[34] A recent study from Oregon concluded that after two years, patients in Medicaid did not achieve measurable health benefits from their insurance coverage.[35] Even participants—recognizing that many physicians, because of the program’s low reimbursement rates, will not treat Medicaid patients—complain that the program is not “real insurance.”[36]

Obamacare makes Medicaid’s problems worse, consigning millions more Americans to this poor government-run program. True reform would instead subsidize private health insurance for low-income Medicaid beneficiaries. The Heritage Foundation has previously promoted such a solution as part of its comprehensive reform of the Medicaid program.[37] Congress should take steps to encourage states to provide premium assistance. Such programs would promote health care ownership and provide beneficiaries with better access to care than the traditional Medicaid program does.

Medicaid Reforms. Despite the looming presence of Obamacare, states should continue wherever possible to seek opportunities to reform their Medicaid programs, moving toward more personalized care and including strong incentives for personal responsibility. States can also seek additional flexibility from Washington to modernize care; many governors have already made such requests.[38]

Congress also should act to reform and modernize Medicaid. Efforts in this vein would include comprehensive reforms—such as a block grant or per capita spending caps—that trade additional flexibility for states in exchange for a fixed spending allotment from Washington.[39] Other reforms could incentivize and subsidize Medicaid beneficiaries to move to private insurance policies that they can own and keep. All of these reforms would focus on modernizing Medicaid to provide better quality care, reduce costs, and promote personal responsibility and ownership.

Reducing Fraud. Regrettably, many government health programs are riddled with fraud. Some estimates suggest that as much as $60 billion in Medicare spending may involve fraud.[40] Similar problems plague many state Medicaid programs. A 2005 New York Times exposé on Medicaid fraud quoted James Mehmet, a former chief investigator in New York State, as saying that 10 percent of the state’s Medicaid spending constituted outright fraud, with another 20 percent to 30 percent comprising “unnecessary spending that might not be criminal.” Overall, Mehmet estimated that “questionable” Medicaid spending totaled $18 billion in New York State alone.[41]

Congress and the states should do more to crack down on the waste, fraud, and abuse that plague America’s health entitlements. Reforms should end the current “pay and chase” model, under which investigators must attempt to track down fraudulent claims and providers after they have already received reimbursement. Other solutions would enhance penalties for those who engage in fraudulent activity—for instance, buying or selling personal patient information, which is often used to perpetrate fraud schemes. These and other reforms would save taxpayer dollars, helping to preserve Medicare and Medicaid for future generations.

Removing Barriers to Care. With studies indicating that America faces a doctor shortage in future years, policymakers should focus on removing barriers that discourage institutions from assisting those who need health care.[42] Regrettably, America’s litigious culture has resulted in the widespread practice of defensive medicine by doctors and other health practitioners. In response, some states have changed their medical liability laws to discourage frivolous lawsuits, prompting doctors to move to those states to practice medicine. Were other states to adopt such reforms, this would encourage doctors—a majority of whom believe the practice of medicine is in jeopardy[43]—to remain in practice and would encourage students to join the profession.

In addition, reforms that improve the liability system could reduce the prevalence of defensive medicine practices and thereby help to reduce health costs. One government estimate found that reasonable limits on non-economic damages could reduce total health spending by as much as $126 billion per year by reducing the amount of defensive medicine practiced by physicians.[44] More recently, the Congressional Budget Office concluded that enacting comprehensive liability reform would reduce health care spending by tens of billions of dollars per year, reducing the federal budget deficit by tens of billions over the next decade.[45]

To help to eliminate barriers to care and reduce health costs, states should reform their liability systems, capping non-economic damages and taking other steps to reduce the incidence of frivolous lawsuits and ensure proper legal protections for health care providers.[46] However, because liability reform and torts in general are properly a state issue, Congress should not impose liability reforms except where the federal government has a clear, constitutionally based federal interest. Examples might include liability reforms with respect to medical products approved by the federal Food and Drug Administration or when the federal government is a payer of health care services, as it is with Medicare and Medicaid.[47]

Reforming Scope-of-Practice and Certificate of Need. State governments control the licensure of both medical professionals and medical practices. By removing artificial obstacles that restrict the supply of medical providers, states can expand access to health services across populations while unleashing new competition that can work to reduce costs.

States can reform their health care systems by re-examining scope-of-practice laws, which frequently limit the ability of nurse practitioners and other health professionals to care for patients. In 2010, the Institute of Medicine concluded that “state regulations often restrict the ability of nurses to provide care legally” and that policymakers should remove “barriers that limit the ability of nurses to practice to the full extent of their education, training, and competence.”[48] Many states have begun to reform their scope-of-practice laws to allow physician assistants, nurse practitioners, and others to treat more patients even as entrenched interests have fought to preserve their preferential treatment.[49] States should follow the recommendations of the Institute of Medicine in reforming their scope-of-practice laws to allow all medical professionals to practice to the full extent of their training.

A total of 36 states also impose certificate-of-need requirements, which impede the introduction of new hospitals and medical facilities. These laws require organizations seeking to build new medical facilities to obtain a certificate from a state board that the facility is “needed” in a particular area.[50] As with scope-of-practice requirements, reforming or eliminating certificate-of-need restrictions would encourage the development of new medical facilities, expanding access to care and giving patients more choices.

Principle #5: Protect the right of conscience and unborn children.

Government should not compel individuals to undertake actions that violate their deeply held religious beliefs. Regrettably, Obamacare imposes just such a requirement on Americans, forcing many employers to offer, and individuals to purchase, health coverage that violates the core tenets of their faith regarding the protection of life.[51]

Congress should ensure that individuals never again are required to violate their religious beliefs to meet a government diktat.

Rights of Conscience. Congress should protect the rights of consumers, insurers, employers, and medical personnel to refrain from facilitating, participating in, funding, or providing services contrary to their consciences or the tenets of their religious faith. Enacting these protections would prevent Americans from facing the moral dilemma presented by Obamacare, which has forced individuals, employers, and religious organizations to choose between violating the law and violating their faith or consciences.

Permanent Prohibition on Taxpayer-Funded Abortion. Congress should make permanent in law the existing annually enacted prohibitions on the use of federal taxpayer funds to finance abortions or health insurance coverage that includes elective abortions. These protections, enacted as the “Hyde Amendment” every year since 1976, prevent the use of taxpayer dollars to fund elective abortions.[52] After nearly 40 years of renewing these protections on an annual basis, Congress should finally make them permanent in law.

A New Vision for Health Reform

Obamacare moves American health care in the wrong direction. Not only does the law raise health costs rather than lowering them, but it creates new bureaucracies that will erode the doctor–patient relationship.[53] The trillions of dollars in new spending for Obamacare will place a massive fiscal burden on future generations of taxpayers.[54] For these reasons and more, Congress should repeal the law in its entirety.

Once this has been done, policymakers should then advance health reforms that move toward patient-centered, market-based health care. Such reforms would promote personal choice and ownership of health insurance; enable the free market to respond to consumer demands; encourage portability of coverage for workers; help civil society, the free markets, and the states to assist those in need; and protect the rights of faith, conscience, and life.

 

 


[1] According to the most recent census data, 86.2 percent of Americans with private health insurance coverage obtained that coverage through an employer. Carmen DeNavas-Walt, Bernadette D. Proctor, and Jessica C. Smith, Income, Poverty, and Health Insurance Coverage in the United States: 2011, U.S. Census Bureau, September 2012, p. 65, Table C-1, http://www.census.gov/prod/2012pubs/p60-243.pdf (accessed September 20, 2013).

[2] Alyene Senger, “Obamacare’s Impact on Today’s and Tomorrow’s Taxpayers: An Update,” Heritage Foundation Issue Brief No. 4022, August 21, 2013, http://www.heritage.org/research/reports/2013/08/obamacares-impact-on-todays-and-tomorrows-taxpayers-an-update.

[3] Joint Committee on Taxation, “Estimated Revenue Effects of a Proposal to Repeal Certain Tax Provisions Contained in the ‘Affordable Care Act (“ACA”)’,” June 15, 2012, and Congressional Budget Office, “Table 2: CBO’s May 2013 Estimate of the Budgetary Effects of the Insurance Coverage Provisions Contained in the Affordable Care Act,” http://www.cbo.gov/sites/default/files/cbofiles/attachments/44190_EffectsAffordableCareActHealthInsuranceCoverage_2.pdf. The total amount of tax revenue collected from the individual mandate, employer mandate, and 40 percent excise tax on high-cost health plans comes from the CBO’s May 2013 estimate. For all other taxes, the amount of tax revenue totaled comes from the Joint Committee on Taxation’s June 2012 estimation.

[4] Nina Owcharenko, “Saving the American Dream: A Blueprint for Putting Patients First,” Heritage Foundation Issue Brief No. 3628, June 6, 2012, http://www.heritage.org/research/reports/2012/06/saving-the-american-dream-a-blueprint-for-putting-patients-first.

[5] The White House, “Affordable, Accessible, and Flexible Health Coverage,” 2007, http://georgewbush-whitehouse.archives.gov/stateoftheunion/2007/initiatives/healthcare.html (accessed September 20, 2013). Recently, the House Republican Study Committee included a standard deduction in its proposal for health reform. See U.S. House of Representatives, Republican Study Committee, “The American Health Care Reform Act,” September 18, 2013, http://rsc.scalise.house.gov/solutions/rsc-betterway.htm (accessed September 25, 2013).

[6] Congressional Budget Office, Key Issues in Analyzing Major Health Insurance Proposals, December 2008, pp. 84–87, http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/99xx/doc9924/12-18-keyissues.pdf (accessed September 20, 2013).

[7] John D. Shatto and M. Kent Clemens, “Projected Medicare Expenditures Under Illustrative Scenarios with Alternative Payment Updates to Medicare Providers,” Centers for Medicare and Medicaid Services, Office of the Actuary, May 31, 2013, pp. 8–10, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/2013TRAlternativeScenario.pdf (accessed September 20, 2013).

[8] Anna Wilde Mathews, “Many Health Insurers to Limit Choices of Doctors, Hospitals,” The Wall Street Journal, August 15, 2013, http://online.wsj.com/article/SB10001424127887323446404579010800462478682.html (accessed September 20, 2013; subscription required).

[9] America’s Health Insurance Plans, Center for Policy and Research, “January 2013 Census Shows 15.5 Million People Covered by Health Savings Account/High-Deductible Health Plans (HSA/HDHPs),” June 2013, http://www.ahip.org/HSACensus2013PDF/ (accessed September 20, 2013).

[10] America’s Health Insurance Plans, Center for Policy and Research, “Health Savings Accounts and Account-Based Health Plans: Research Highlights,” July 2012, http://www.ahip.org/HSAHighlightsReport072012/ (accessed September 20, 2013).

[11] Devenir, “Health Savings Accounts Surpass $12.4 Billion in 2011,” January 31, 2012, http://www.devenir.com/2012/devenir2011yearendsurvey (accessed September 20, 2013).

[12] For the definition of “qualified medical expenses,” see 26 U.S. Code § 223(d)(2). HSA funds can be used to purchase health insurance only for COBRA continuation health coverage, health insurance purchased during periods of unemployment, Medigap supplemental coverage, or long-term care insurance (within certain limits).

[13] U.S. Department of Health and Human Services, Office of Planning and Evaluation, “At Risk: Pre-Existing Conditions Could Affect 1 in 2 Americans,” November 2011, http://aspe.hhs.gov/health/reports/2012/pre-existing/index.shtml (accessed September 20, 2013).

[14] Edmund Haislmaier, “HHS Report on Obamacare’s Preexisting Conditions Impact: Say What???” The Heritage Foundation, The Foundry, January 19, 2011, http://blog.heritage.org/2011/01/19/hhs-report-on-obamacare’s-preexisting-conditions-impact-say-what/.

[15] Centers for Medicare and Medicaid Services, Center for Consumer Information and Insurance Oversight, “Covering People with Pre-Existing Conditions: Report on the Implementation and Operation of the Pre-Existing Condition Insurance Plan Program,” January 31, 2013, http://www.cms.gov/CCIIO/Resources/Files/Downloads/pcip_annual_report_01312013.pdf (accessed September 24, 2013).

[16] Douglas W. Elmendorf, letter to Senator Mike Enzi (R–WY), June 21, 2010, http://cbo.gov/sites/default/files/cbofiles/ftpdocs/115xx/doc11572/06-21-high-risk_insurance_pools.pdf (accessed September 20, 2013).

[17] National Association of State Comprehensive Health Insurance Plans, “Pool Membership—2011,” September 2012, http://naschip.org/2012/Quick%20Checks/Pool%20Membership%202011.pdf (accessed September 20, 2013).

[18] Chris Jacobs, “Obamacare: Taking Away Americans’ Health Coverage,” The Heritage Foundation, The Foundry, August 6, 2013, http://blog.heritage.org/2013/08/06/obamacare-taking-away-americans-health-coverage/.

[19] Press release, “New AMA Study Finds Anticompetitive Market Conditions Are Common Across Managed Care Plans,” American Medical Association, November 28, 2012, http://www.ama-assn.org/ama/pub/news/news/2012-11-28-study-finds-anticompetitive-market-conditions-common.page (accessed September 20, 2013).

[20] Michael J. New, “The Effect of State Regulations on Health Insurance Premiums: A Revised Analysis,” Heritage Foundation Center for Data Analysis Report No. 06-04, July 25, 2006, p. 5, http://www.heritage.org/research/reports/2006/07/the-effect-of-state-regulations-on-health-insurance-premiums-a-revised-analysis.

[21] Council for Affordable Health Insurance, “Health Insurance Mandates in the States 2012: Executive Summary,” April 9, 2013, http://www.cahi.org/cahi_contents/resources/pdf/Mandatesinthestates2012Execsumm.pdf (accessed September 24, 2013).

[22] Chris Jacobs, “Medicare’s Sustainable Growth Rate: Principles for Reform,” Heritage Foundation Backgrounder No. 2827, July 18, 2013, http://www.heritage.org/research/reports/2013/07/medicares-sustainable-growth-rate-principles-for-reform.

[23] Robert E. Moffit and Rea S. Hederman, Jr., “Medicare Savings: Five Steps to a Down Payment on Medicare Reform,” Heritage Foundation Issue Brief No. 3908, April 11, 2013, http://www.heritage.org/research/reports/2013/04/medicare-savings-5-steps-to-a-downpayment-on-structural-reform.

[24] Alyene Senger, “Obamacare’s Impact on Seniors: An Update,” Heritage Foundation Issue Brief No. 4019, August 20, 2013, http://www.heritage.org/research/reports/2013/08/obamacares-impact-on-seniors-an-update.

[25] Shatto and Clemens, “Projected Medicare Expenditures Under Illustrative Scenarios,” pp. 8–10.

[26] Owcharenko, “Saving the American Dream: A Blueprint for Putting Patients First.”

[27] Jon R. Gabel, Ryan Lore, Roland D. McDevitt, Jeremy D. Pickreign, Heidi Whitmore, Michael Slover, and Ethan Levy-Forsythe, “More Than Half of Individual Health Plans Offer Coverage That Falls Short of What Can Be Sold Through Exchanges as of 2014,” Health Affairs, May 2012, http://content.healthaffairs.org/content/early/2012/05/22/hlthaff.2011.1082 (accessed September 20, 2013; subscription required).

[28] Jacobs, “Obamacare: Taking Away Americans’ Health Coverage.”

[29] For instance, see a 2008 campaign document answering the question “Will I have to change plans?” under the Obama proposal: “No, you will not have to change plans. For those who have insurance now, nothing will change under the Obama plan—except that you will pay less.” Obama for America, “Background Questions and Answers on Health Care Plan,” 2008, http://www.scribd.com/doc/191306/barack-obama-08-healthcare-faq (accessed September 20, 2013).

[30] Amelia M. Haviland, M. Susan Marquis, Roland D. McDevitt, and Neeraj Sood, “Growth of Consumer-Directed Health Plans to One-Half of All Employer-Sponsored Insurance Could Save $57 Billion Annually,” Health Affairs, May 2012, http://content.healthaffairs.org/content/31/5/1009.abstract (accessed September 20, 2013; subscription required).

[31] Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits: 2013 Annual Survey, August 2013, p. 56, Exhibit 4.1, http://kaiserfamilyfoundation.files.wordpress.com/2013/08/8465-employer-health-benefits-20131.pdf (accessed September 23, 2013).

[32] National Council of State Legislatures, “Out-of-State Health Insurance—Allowing the Purchase (State Implementation Report),” updated September 2012, http://www.ncsl.org/issues-research/health/out-of-state-health-insurance-purchases.aspx (accessed September 23, 2013).

[33] Ibid.

[34] For a summary of many of these studies, see Kevin D. Dayaratna, “Studies Show: Medicaid Patients Have Worse Access and Outcomes than the Privately Insured,” Heritage Foundation Backgrounder No. 2740, November 7, 2012, http://www.heritage.org/research/reports/2012/11/studies-show-medicaid-patients-have-worse-access-and-outcomes-than-the-privately-insured. See also Scott Gottlieb, “Medicaid Is Worse Than No Coverage at All,” The Wall Street Journal, March 10, 2011, http://online.wsj.com/article/SB10001424052748704758904576188280858303612.html (accessed September 23, 2013).

[35] Annie Lowrey, “Study Finds Health Care Use Rises with Expanded Medicaid,” The New York Times, May 2, 2013, http://www.nytimes.com/2013/05/02/business/study-finds-health-care-use-rises-with-expanded-medicaid.html (accessed September 23, 2013).

[36] Vanessa Fuhrmans, “Note to Medicaid Patients: The Doctor Won’t See You,” The Wall Street Journal, July 19, 2007, http://online.wsj.com/article/SB118480165648770935.html (accessed September 23, 2013; subscription required).

[37] Nina Owcharenko, “Medicaid Reform: More Than a Block Grant Is Needed,” Heritage Foundation Issue Brief No. 3590, May 4, 2012, http://www.heritage.org/research/reports/2012/05/three-steps-to-medicaid-reform.

[38] Republican Governors Public Policy Committee, Health Care Task Force, “A New Medicaid: A Flexible, Innovative, and Accountable Future,” August 30, 2011, http://www.rga.org/homepage/gop-govs-release-medicaid-reform-report/ (accessed September 23, 2013).

[39] Owcharenko, “Medicaid Reform: More Than a Block Grant Is Needed.”

[40] CBS News, “Medicare Fraud: A $60 Billion Crime,” 60 Minutes, September 5, 2010, http://www.cbsnews.com/8301-18560_162-5414390.html (accessed September 23, 2013).

[41] Clifford Levy and Michael Luo, “New York Medicaid Fraud May Reach into Billions,” The New York Times, July 18, 2005, http://www.nytimes.com/2005/07/18/nyregion/18medicaid.html (accessed September 23, 2013).

[42] Nisha Nathan, “Doctor Shortage Could Cause Health Care Crash,” ABC News, November 13, 2012, http://abcnews.go.com/Health/doctor-shortage-health-care-crash/story?id=17708473 (accessed September 23, 2013).

[43] Deloitte, “Deloitte 2013 Survey of U.S. Physicians: Physician Perspectives About Health Care Reform and the Future of the Medical Profession,” 2013, p. 3, http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_chs_2013SurveyofUSPhysicians_031813.pdf (accessed September 23, 2013).

[44] U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation, “Addressing the New Health Care Crisis: Reforming the Medical Litigation System to Improve the Quality of Health Care,” March 2003, p. 16, http://aspe.hhs.gov/daltcp/reports/medliab.pdf (accessed September 23, 2013).

[45] Douglas W. Elmendorf, letter to Senator Orrin Hatch (R–UT), October 9, 2009, http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/106xx/doc10641/10-09-tort_reform.pdf (accessed September 23, 2013).

[46] Randolph W. Pate and Derek Hunter, “Code Blue: The Case for Serious State Medical Liability Reform,” Heritage Foundation Backgrounder No. 1908, January 17, 2006, http://www.heritage.org/research/reports/2006/01/code-blue-the-case-for-serious-state-medical-liability-reform.

[47] Hans von Spakovsky, “Medical Malpractice Reform: States vs. the Federal Government,” The Heritage Foundation, The Foundry, March 19, 2012, http://blog.heritage.org/2012/03/19/medical-malpractice-reform-states-vs-the-federal-government/.

[48] Institute of Medicine, “The Future of Nursing: Focus on Scope of Practice,” Report Brief, October 2010, http://www.iom.edu/~/media/Files/Report%20Files/2010/The-Future-of-Nursing/Nursing%20Scope%20of%20Practice%202010%20Brief.pdf (accessed September 23, 2013).

[49] Melinda Beck, “Battles Erupt over Filling Doctors’ Shoes,” The Wall Street Journal, February 5, 2013, http://online.wsj.com/article/SB10001424127887323644904578271872578661246.html (accessed September 23, 2013), and Melinda Beck, “Nurse Practitioners Seek Right to Treat Patients on Their Own,” The Wall Street Journal, August 15, 2013, http://online.wsj.com/article/SB10001424127887323455104579013193992224008.html (accessed September 23, 2013; subscription required).

[50] National Conference of State Legislatures, “Certificate of Need: State Laws and Programs,” updated March 2012, http://www.ncsl.org/issues-research/health/con-certificate-of-need-state-laws.aspx (accessed September 23, 2013).

[51] The Heritage Foundation “Obamacare Anti-Conscience Mandate: An Assault on the Constitution,” Fact Sheet No. 103, February 17, 2012, http://www.heritage.org/research/factsheets/2012/02/obamacare-anti-conscience-mandate-an-assault-on-the-constitution.

[52] Chuck Donovan, “Obamacare: Impact on Taxpayer Funding of Abortion,” Heritage Foundation WebMemo No. 2872, April 19, 2010, http://www.heritage.org/research/reports/2010/04/obamacare-impact-on-taxpayer-funding-of-abortion.

[53] Alyene Senger, “Obamacare’s Impact on Doctors—An Update,” Heritage Foundation Issue Brief No. 4024, August 23, 2013, http://www.heritage.org/research/reports/2013/08/obamacares-impact-on-doctors-an-update.

[54] Alyene Senger, “Obamacare’s Impact on Today’s and Tomorrow’s Taxpayers: An Update,” Heritage Foundation Issue Brief No. 4022, August 21, 2013, http://www.heritage.org/research/reports/2013/08/obamacares-impact-on-todays-and-tomorrows-taxpayers-an-update.

Defunding Obamacare

Background

• On January 1, 2014—three months into the next fiscal year—Obamacare’s new entitlements are scheduled to take effect. According to the Congressional Budget Office, the federal government will spend $48 billion in 2014—and nearly $1.8 trillion through 2023—on these new entitlement programs.

• Also on January 1, Americans will be forced by their government to buy a product—health insurance—for the first time ever. This mandate will be enforced by tax penalties administered through the Internal Revenue Service (IRS). The Obama Administration has requested over $400 million in funding, and nearly 2,000 bureaucrats, for the IRS to implement the individual mandate and 46 other statutory provisions in its remit.

• Within the Administration, the blizzard of Obamacare rules and regulations continues apace. Regulators have now written over 20,000 pages of Obamacare-related rules and notices in the Federal Register. Many of these regulations will raise the cost of insurance; the Congressional Budget Office concluded Obamacare would raise individual health insurance premiums by $2,100 per year.

Questionable Spending

• In addition to Obamacare’s new entitlements, Secretary Kathleen Sebelius has used much of the Department of Health and Human Services’ (HHS) budget as a “slush fund” for Obamacare implementation.

• Earlier this year, HHS announced it was diverting $150 million in community health center funding toward Obamacare enrollment and outreach. HHS also created “in-person assisters”—a program not authorized in Obamacare—to allow state exchanges to use more federal dollars for Obamacare enrollment efforts.

• Congressional committees recently opened investigations into HHS’s actions. Secretary Sebelius has acknowledged making calls asking outside organizations to fund a pro-Obamacare campaign run by former White House officials. And the Food and Drug Administration—which has no jurisdiction over health insurance programs—used taxpayer funding to promote Obamacare enrollment efforts.

Need for Immediate Action

• The only way for Congress to stop the new entitlements and executive branch spending abuses is to defund all Obamacare implementation efforts across the federal government.

• Full defunding of Obamacare would halt the law’s new entitlements before they start—and prevent HHS from raiding other parts of the departmental budget to promote Obamacare.

• Defunding Obamacare would also prevent the application of the law’s new regulations and 18 separate tax increases, including the tax for not complying with the individual mandate.

• While Congress cannot unilaterally repeal Obamacare, the Constitution grants Congress the ultimate “power of the purse.” If Congress chooses not to fund Obamacare activities for the upcoming fiscal year, the Obama Administration cannot act to implement the law. Congress can, and Congress should, act to defund all of Obamacare now.

This Fact Sheet was originally published by The Heritage Foundation.

Weekly Newsletter: February 23, 2009

Orszag, Liberal Groups Support Health Care Rationing

Today President Obama will host a “fiscal responsibility summit” at the White House, followed later this week by a submission to Congress of his outline for the federal budget in Fiscal Year 2010 and beyond.  Press reports indicate that health issues will predominate both events, as entitlement spending in Medicare and Medicaid will serve as a focus of the fiscal summit, and health initiatives will be given a prominent place in the President’s budget proposals.

However, some Members may take a skeptical view of comments by Office of Management and Budget Director Peter Orszag and others that health care can be reformed—and the entitlement crisis resolved—primarily through government rationing of health care goods and services.  While head of the Congressional Budget Office, Orszag prepared a report on comparative effectiveness research that advocated rationing’s beneficial effects—while alluding to its potential downsides for patients.  The December 2007 report asserted that such research “could …yield lower health care spending without having adverse effects on health.”  However, the report also admits that “patients who might benefit from more-expensive treatments might be made worse off” as a result of changes in reimbursement patterns.

Orszag’s view of health reform is shared by the left-leaning Commonwealth Fund, which last week released its own report outlining ways to generate savings within the health sector.  The largest chunk of proposed savings—$634 billion over ten years—would come from comparative effectiveness research and subsequent rationing of care.  The report asserts that “merely making information available” about the relative merits of treatments “is unlikely to produce” outcomes yielding sufficient savings—and therefore recommends that the new comparative effectiveness center help “to create financial incentives for patients and physicians to avoid high-cost treatments.”  The Fund proposes that the comparative effectiveness center—similar to the Council established in economic “stimulus” legislation signed into law last week—“make benefit and pricing recommendations to public insurance plans, including Medicare.”

While supporting the need to slow the growth of health spending, and entitlement spending in particular, some Members may be concerned by the implications of these recommendations, which would place government bureaucrats between doctors and patients, leading to denials of critical care.  Some Members may instead support alternatives that would slow the growth of health care costs through additional competition (both inside and outside Medicare), while preserving and enhancing a culture where patients and doctors—not insurance companies or government bureaucrats—determine the appropriate course of medical care.  Some Members may also support means testing for the Medicare Part D benefit—requiring Warren Buffett and George Soros to pay more for their prescription drugs—as an additional way to bring our entitlement obligations in line with projected future revenues.

The Outlook Ahead

The President’s address to Congress Tuesday night, coupled with his submission of a budget outline on Thursday, will commence a six-week period leading up to Congress’ Easter recess where health issues will remain prominent.  As indicated above, the budget may include additional provisions regarding comparative effectiveness research and rationing of health care, as well as proposed cuts to Medicare Advantage plans that have proved popular with seniors—particularly those with low incomes—in recent years.  At this time it remains unclear whether the President will use the budget submission to fulfill his statutory obligation to present Congress with Medicare funding reform legislation, as required by the “trigger” provisions inserted into the Medicare Modernization Act at the behest of House Republicans.

Hearings and other legislative activity are also likely to continue regarding comprehensive health reform; Sen. Ron Wyden (D-OR) introduced his comprehensive bill on February 5, and Senate Finance Chairman Baucus—who pledged to introduce legislation early in the 111th Congress—may follow suit in short order.  The House may also consider legislation related to food and drug safety, as well as a bill (H.R. 1108 in the 110th Congress) giving the Food and Drug Administration (FDA) the authority to regulate tobacco products, funded by “user fees” on tobacco companies.  Particularly as many Democrats have harshly criticized the FDA for lax enforcement related to food safety matters, some Members may believe now is precisely the wrong time to distract the FDA from its current mission in order to have the agency regulate the tobacco industry—and the wrong time to burden working families with the second tobacco tax increase this year, on the heels of the 62 cent tax increase used to fund the State Children’s Health Insurance Program (SCHIP) expansion.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question and Answer: Tobacco Regulation Bill

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

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

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

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

Does H.R. 1108 contain a tax increase?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is FDA competent to regulate tobacco products?

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