White House Budget Summary: Obama’s “One Percent” Solution

According to the Congressional Budget Office’s most recent baselines, the federal government will spend a total of $6.87 trillion on Medicare and $4.36 trillion on Medicaid over the next ten years – that’s $11.2 trillion total, not even counting additional state spending on Medicaid.  Yet President Obama’s budget, released today, contains net deficit savings of only $152 billion from health care programs.  That’s a total savings of only 1.35 percent of the trillions the federal government will spend on health care in the coming decade.  Sadly, it’s another sign the President isn’t serious about real budget and deficit reform.

Overall, the budget:

  • Proposes a total of $401 billion in savings, yet calls for $249 billion in unpaid-for spending due to the Medicare physician reimbursement “doc fix” – thus resulting in only $152 billion in net deficit savings. (The $249 billion presumes a ten year freeze of Medicare physician payments; however, the budget does NOT propose ways to pay for this new spending.)
  • Proposes few structural reforms to Medicare; those that are included – weak as they are – are not scheduled to take effect until 2017, well after President Obama leaves office.  If the proposals are so sound, why the delay?
  • Requests a more than 50% increase – totaling $1.4 billion – for program management at the Centers for Medicare and Medicaid Services, of which the vast majority would be used to implement Obamacare.
  • Includes mandatory proposals in the budget that largely track last year’s budget and the President’s September 2011 deficit proposal to Congress, with a few exceptions.  The largest difference between this year’s budget and the prior submissions is a massive increase in savings from reductions to nursing and rehabilitation facilities – $79 billion, compared to a $32.5 billion estimated impact in September 2011.

A full summary follows below.  We will have further information on the budget in the coming days.

Discretionary Spending

When compared to Fiscal Year 2013 appropriated amounts, the budget calls for the following changes in discretionary spending by major HHS divisions (tabulated by budget authority):

  • $37 million (1.5%) increase for the Food and Drug Administration (not including $770 million in increased user fees);
  • $435 million (4.9%) increase for the Health Services and Resources Administration;
  • $97 million (2.2%) increase for the Indian Health Service;
  • $344 million (5.7%) increase for the Centers for Disease Control;
  • $274 million (0.9%) increase for the National Institutes of Health; and
  • $1.4 billion (52.9%) increase for the discretionary portion of the Centers for Medicare and Medicaid Services program management account.

With regard to the above numbers for CDC and HRSA, note that these are discretionary numbers only.  The Administration’s budget also would allocate an additional $1 billion mandatory spending from the Prevention and Public Health “slush fund” created in Obamacare, further increasing spending levels.  For instance, CDC spending would be increased by an additional $755 million.

Obamacare Implementation Funding and Personnel:  As previously noted, the budget includes more than $1.4 billion in discretionary spending increases for the Centers for Medicare and Medicaid Services, which the HHS Budget in Brief claims would be used to “continue implementing key provisions of [Obamacare].”  This funding would finance 712 new bureaucrats within CMS when compared to last fiscal year – a massive increase when compared to a request of 256 new FTEs in last year’s budget proposal.  Overall, the HHS budget proposes an increase of 1,311 full-time equivalent positions within the bureaucracy compared to projections for the current fiscal cycle, and an increase of 3,327 bureaucrats compared to last fiscal year.

The budget includes specific requests related to Obamacare totaling over $2 billion, including:

  • $803.5 million for “CMS activities to support [Exchanges] in FY 2014,” including funding for the federally-funded Exchange, for which the health law itself did not appropriate funding;
  • $837 million for “beneficiary education and outreach activities through the National Medicare Education program and consumer support…including $554 million for the [Exchanges];”
  • $519 million for “general IT systems and other support,” including funding for the federal Exchange;
  • $3.8 million for updates to healthcare.gov;
  • $18.4 million to oversee the medical loss ratio regulations; and
  • $24 million for administrative activities in Medicaid related to “implement[ing] new responsibilities” under Obamacare.

Exchange Funding:  The budget envisions HHS spending $1.5 billion on Exchange grants in 2013.  That’s an increase of over $300 million compared to last year’s estimate of fiscal year 2013 spending – despite the fact that most states have chosen not to create their own Exchanges.  The budget anticipates a further $2.1 billion in spending on Exchange grants in fiscal year 2014.  The health care law provides the Secretary with an unlimited amount of budget authority to fund state Exchange grants through 2015.  However, other reports have noted that the Secretary does NOT have authority to use these funds to construct a federal Exchange.

Abstinence Education Funding:  The budget proposes eliminating the abstinence education funding program, and converting those funds into a new pregnancy prevention program.

Medicare Proposals (Total savings of $359.9 Billion, including interactions)

Bad Debts:  Reduces bad debt payments to providers – for unpaid cost-sharing owed by beneficiaries – from 65 percent down to 25 percent over three years, beginning in 2014.  The Simpson-Bowles Commission made similar recommendations in its final report.  Saves $25.5 billion.

Medical Education Payments:  Reduces the Indirect Medical Education adjustment paid to teaching hospitals beginning in 2014, saving $11 billion.  Previous studies by the Medicare Payment Advisory Committee (MedPAC) have indicated that IME payments to teaching hospitals may be greater than the actual costs the hospitals incur.

Rural Payments:  Reduces critical access hospital payments from 101% of costs to 100% of costs, saving $1.4 billion, and prohibits hospitals fewer than 10 miles away from the nearest hospital from receiving a critical access hospital designation, saving $700 million.

Anti-Fraud Provisions:  Assumes $400 million in savings from various anti-fraud provisions, including limiting the discharge of debt in bankruptcy proceedings associated with fraudulent activities.

Imaging:  Reduces imaging payments by assuming a higher level of utilization for certain types of equipment, saving $400 million.  Imposes prior authorization requirements for advanced imaging; no savings are assumed, a change from the September 2011 deficit proposal, which said prior authorization would save $900 million.

Pharmaceutical Price Controls:  Expands Medicaid price controls to dual eligible and low-income subsidy beneficiaries participating in Part D, saving $123.2 billion according to OMB.  Some have expressed concerns that further expanding government-imposed price controls to prescription drugs could harm innovation and the release of new therapies that could help cure diseases.

Medicare Drug Discounts:  Proposes accelerating the “doughnut hole” drug discount plan included in PPACA, filling in the “doughnut hole” completely by 2015.  While the budget claims this proposal will save $11.2 billion over ten years, some may be concerned that – by raising drug spending, and eliminating incentives for seniors to choose generic pharmaceuticals over brand name drugs, this provision will actually INCREASE Medicare spending, consistent with prior CBO estimates at the time of PPACA’s passage.

Post-Acute Care:  Reduces various acute-care payment updates (details not specified) and equalizes payment rates between skilled nursing facilities and inpatient rehabilitation facilities, saving $79 billion – a significant increase compared to the $56.7 billion in last year’s budget and the $32.5 billion in proposed savings under the President’s September 2011 deficit proposal.  Equalizes payments between IRFs and SNFs for certain conditions, saving $2 billion.  Adjusts payments to inpatient rehabilitation facilities and skilled nursing facilities to account for unnecessary hospital readmissions and encourage appropriate care, saving a total of $4.7 billion.  Restructures post-acute care reimbursements through the use of bundled payments, saving $8.2 billion.

Physician Payment:  Includes language extending accountability standards to physicians who self-refer for radiation therapy, therapy services, and advanced imaging services, saving $6.1 billion.  Makes adjustments to clinical laboratory payments, designed to align Medicare with private payment rates, saving $9.5 billion.  Expands availability of Medicare data for performance and quality improvement; no savings assumed.

Medicare Drugs:  Reduces payment of physician administered drugs from 106 percent of average sales price to 103 percent of average sales price.  Some may note reports that similar payment reductions, implemented as part of the sequester, have caused some cancer clinics to limit their Medicare patient load.  By including a similar proposal in his budget, President Obama has effectively endorsed these policies.  Saves $4.5 billion.

Medicare Advantage:  Resurrects a prior-year proposal to increase Medicare Advantage coding intensity adjustments; this provision would have the effect of reducing MA plan payments, based on an assumption that MA enrollees are healthier on average than those in government-run Medicare.  Saves $15.3 billion over ten years.  Also proposes $4.1 billion in additional savings by aligning employer group waiver plan payments with average MA plan bids.

Additional Means Testing:  Increases means tested premiums under Parts B and D by five percentage points, beginning in 2017.  Freezes the income thresholds at which means testing applies until 25 percent of beneficiaries are subject to such premiums.  Saves $50 billion over ten years, and presumably more thereafter, as additional seniors would hit the means testing threshold, subjecting them to higher premiums.

Medicare Deductible Increase:  Increases Medicare Part B deductible by $25 in 2017, 2019, and 2021 – but for new beneficiaries only; “current beneficiaries or near retirees [not defined] would not be subject to the revised deductible.”  Saves $3.3 billion.

Home Health Co-Payment:  Beginning in 2017, introduces a home health co-payment of $100 per episode for new beneficiaries only, in cases where an episode lasts five or more visits and is NOT proceeded by a hospital stay.  MedPAC has previously recommended introducing home health co-payments as a way to ensure appropriate utilization.  Saves $730 million.

Medigap Surcharge:  Imposes a Part B premium surcharge equal to about 15 percent of the average Medigap premium – or about 30 percent of the Part B premium – for seniors with Medigap supplemental insurance that provides first dollar coverage.  Applies beginning in 2017 to new beneficiaries only.  A study commissioned by MedPAC previously concluded that first dollar Medigap coverage induces beneficiaries to consume more medical services, thus increasing costs for the Medicare program and federal taxpayers.  Saves $2.9 billion.

Generic Drug Incentives:  Proposes increasing co-payments for certain brand-name drugs for beneficiaries receiving the Part D low-income subsidy, while reducing co-payments for relevant generic drugs by 15 percent, in an attempt to increase generic usage among low-income seniors currently insulated from much of the financial impact of their purchasing decisions.  Saves $6.7 billion, according to OMB.

Lower Caps on Medicare Spending:  Section 3403 of the health care law established an Independent Payment Advisory Board tasked with limiting Medicare spending to the growth of the economy plus one percentage point (GDP+1) in 2018 and succeeding years.  The White House proposal would reduce this target to GDP+0.5 percent.  The Medicare actuary has previously written that the spending adjustments contemplated by IPAB and the health care law “are unlikely to be sustainable on a permanent annual basis” and “very challenging” – problems that would be exacerbated by utilizing a slower target rate for Medicare spending growth.  According to the budget, this proposal would save $4.1 billion, mainly in 2023.

Medicaid and Other Health Proposals (Total savings of $41.1 Billion)

Limit Durable Medical Equipment Reimbursement:  Caps Medicaid reimbursements for durable medical equipment (DME) at Medicare rates, beginning in 2014.  The health care law extended and expanded a previous Medicare competitive bidding demonstration project included in the Medicare Modernization Act, resulting in savings to the Medicare program.  This proposal, by capping Medicaid reimbursements for DME at Medicare levels, would attempt to extend those savings to the Medicaid program.  Saves $4.5 billion over ten years.

Rebase Medicaid Disproportionate Share Hospital Payments:  Proposes beginning DSH payment reductions in 2015 instead of 2014, and “to determine future state DSH allotments based on states’ actual DSH allotments as reduced” by PPACA.  Saves $3.6 billion, all in fiscal 2023.

Medicaid Anti-Fraud Savings:  Assumes $3.7 billion in savings from a variety of Medicaid anti-fraud provisions.  Included in this amount are proposals that would remove exceptions to the requirement that Medicaid must reject payments when another party is liable for a medical claim.  A separate proposal related to the tracking of pharmaceutical price controls would save $8.8 billion.

Transitional Medical Assistance/QI Program:  Provides for temporary extensions of the Transitional Medical Assistance program, which provides Medicaid benefits for low-income families transitioning from welfare to work, along with the Qualifying Individual program, which provides assistance to low-income seniors in paying Medicare premiums.  The extensions cost $1.1 billion and $590 million, respectively.

“Pay-for-Delay:”  Prohibits brand-name pharmaceutical manufacturers from entering into arrangements that would delay the availability of new generic drugs. Some Members have previously expressed concerns that these provisions would harm innovation, and actually impede the incentives to generic manufacturers to bring cost-saving generic drugs on the market.  OMB scores this proposal as saving $11 billion.

Follow-on Biologics:  Reduces to seven years the period of exclusivity for follow-on biologics.  Current law provides for a twelve-year period of exclusivity, based upon an amendment to the health care law that was adopted on a bipartisan basis in both the House and Senate (one of the few substantive bipartisan amendments adopted).  Some Members have expressed concern that reducing the period of exclusivity would harm innovation and discourage companies from developing life-saving treatments.  OMB scores this proposal as saving $3.3 billion.

State Waivers:  Accelerates from 2017 to 2014 the date under which states can submit request for waivers of SOME of the health care law’s requirements to HHS.  While supposedly designed to increase flexibility, even liberal commentators have agreed that under the law’s state waiver programcritics of Obama’s proposal have a point: It wouldn’t allow to enact the sorts of health care reforms they would prefer” and thatconservatives can’t do any better – at least not under these rules.”  No cost is assumed; however, in its re-estimate of the President’s budget last year, CBO scored this proposal as costing $4.5 billion.

Implementation “Slush Fund:”  Proposes $400 million in new spending for HHS to implement the proposals listed above.

FEHB Contracting:  Similar to last year’s budget, proposes streamlining pharmacy benefit contracting within the Federal Employee Health Benefits program, by centralizing pharmaceutical benefit contracting within the Office of Personnel Management (OPM), saving $1.6 billion.  However, this year’s budget goes further in restructuring FEHBP – OPM would also be empowered to modernize benefit designs (savings of $264 million); create a “self-plus-one” benefit option for federal employees and extend benefits to domestic partners (total savings of $5.2 billion, despite the costs inherent in the latter option); and adjust premium levels based on tobacco usage and/or participation in wellness programs (savings of $1.3 billion).  Some individuals, noting that OPM is also empowered to create “multi-state plans” as part of the health care overhaul, may be concerned that these provisions could be part of a larger plan to make OPM the head of a de facto government-run health plan.

Other Health Care Proposal of Note

Tax Credit:  The Treasury Green Book proposes expanding the small business health insurance tax credit included in the health care law.   Specifically, the budget would expand the number of employers eligible for the credit to include all employers with up to 50 full-time workers; firms with under 20 workers would be eligible for the full credit.  (Currently those levels are 25 and 10 full-time employees, respectively.)  The budget also changes the coordination of the two phase-outs based on a firm’s average wage and number of employees, with the changes designed to make more companies eligible for a larger credit.  The changes would begin in the current calendar and tax year (i.e., 2013).  According to OMB, these changes would cost $10.4 billion over ten years – down from last year’s estimate of $14 billion over ten years.  Many may view this proposal as a tacit admission that the credit included in the law was a failure, because its limited reach and complicated nature – firms must fill out seven worksheets to determine their eligibility – have deterred American job creators from receiving this subsidy.  Moreover, the reduced score in this year’s budget compared to last year’s implies that even this expansion of the credit will have a less robust impact than originally anticipated.

White House Budget Summary

Overall, the budget:

  • Proposes $362 billion in savings, yet calls for $429 billion in unpaid-for spending due to the Medicare physician reimbursement “doc fix” – thus resulting in a net increase in the deficit. (The $429 billion presumes a ten year freeze of Medicare physician payments; however, the budget does NOT propose ways to pay for this new spending.)
  • Proposes few structural reforms to Medicare; those that are included – weak as they are – are not scheduled to take effect until 2017, well after President Obama leaves office.  If the proposals are so sound, why the delay?
  • Requests just over $1 billion for program management at the Centers for Medicare and Medicaid Services, of which the vast majority – $864 million – would be used to implement the health care law.
  • Requests more than half a billion dollars for comparative effectiveness research, which many may be concerned could result in government bureaucrats imposing cost-based limits on treatments.
  • Includes mandatory proposals in the budget that largely track the September deficit proposal to Congress, with a few exceptions.  The budget does NOT include proposals to reduce Medicare frontier state payments, even though this policy was included in the September proposal.  The budget also does not include recovery provisions regarding Medicare Advantage payments to insurers; however, the Administration has indicated they intend to implement this provision administratively.
  • Does not include a proposal relating to Medicaid eligibility levels included in the September submission, as that proposal was enacted into law in November (P.L. 112-56).

 

Discretionary Spending

When compared to Fiscal Year 2012 appropriated amounts, the budget calls for the following changes in discretionary spending by major HHS divisions (tabulated by budget authority):

  • $12 million (0.5%) increase for the Food and Drug Administration – along with a separate proposed $643 million increase in FDA user fees;
  • $138 million (2.2%) decrease for the Health Services and Resources Administration;
  • $116 million (2.7%) increase for the Indian Health Service;
  • $664 million (11.5%) decrease for the Centers for Disease Control;
  • No net change in funding for the National Institutes of Health;
  • $1 billion (26.2%) increase for the discretionary portion of the Centers for Medicare and Medicaid Services program management account; and
  • $29 million (5.0%) increase for the discretionary Health Care Fraud and Abuse Control fund.

With regard to the above numbers for CDC and HRSA, note that these are discretionary numbers only.  The Administration’s budget also would allocate additional $1.25 billion in mandatory spending from the new Prevention and Public Health “slush fund” created in the health care law, likely eliminating any real budgetary savings (despite the appearance of same above).

Other Health Care Points of Note

Tax Credit:  The Treasury Green Book proposes expanding the small business health insurance tax credit included in the health care law.   Specifically, the budget would expand the number of employers eligible for the credit to include all employers with up to 50 full-time workers; firms with under 20 workers would be eligible for the full credit.  (Currently those levels are 25 and 10 full-time employees, respectively.)  The budget also changes the coordination of the two phase-outs based on a firm’s average wage and number of employees, with the changes designed to make more companies eligible for a larger credit.  According to OMB, these changes would cost $14 billion over ten years.  Many may view this proposal as a tacit admission that the credit included in the law was a failure, because its limited reach and complicated nature – firms must fill out seven worksheets to determine their eligibility – have deterred American job creators from receiving this subsidy.

Comparative Effectiveness Research:  The budget proposes a total of $599 million in funding for comparative effectiveness research.  Only $78 million of this money comes from existing funds included in the health care law – meaning the Administration has proposed discretionary spending of more than $500 million on comparative effectiveness research.  Some have previously expressed concerns that this research could be used to restrict access to treatments perceived as too costly by federal bureaucrats.  It is also worth noting that this new $520 million in research funding would NOT be subject to the anti-rationing provisions included in the health care law.  Section 218 of this year’s omnibus appropriations measure included a prohibition on HHS using funds to engage in cost-effectiveness research, a provision which this budget request would presumably seek to overturn.

Obamacare Implementation Funding and Personnel:  As previously noted, the budget includes more than $1 billion in discretionary spending increases for the Centers for Medicare and Medicaid Services, which the HHS Budget in Brief claims would be used to “continue implementing [Obamacare], including Exchanges.”  This funding would finance 256 new bureaucrats within CMS, many of whom would likely be used to implement the law.  Overall, the HHS budget proposes an increase of 1,393 full-time equivalent positions within the bureaucracy.

Specific details of the $1 billion in implementation funding include:

  • $290 million for “consumer support in the private marketplace;”
  • $549 million for “general IT systems and other support,” including funding for the federally-funded Exchange, for which the health law itself did not appropriate funding;
  • $18 million for updates to healthcare.gov;
  • $15 million to oversee the medical loss ratio regulations; and
  • $30 million for consumer assistance grants.

Exchange Funding:  The budget envisions HHS spending $1.1 billion on Exchange grants in 2013, a $180 million increase over the current fiscal year.  The health care law provides the Secretary with an unlimited amount of budget authority to fund state Exchange grants through 2015.  However, other reports have noted that the Secretary does NOT have authority to use these funds to construct a federal Exchange, in the event some states choose not to implement their own state-based Exchanges.

Abstinence Education Funding:  The budget proposes eliminating the abstinence education funding program, and converting those funds into a new pregnancy prevention program.

Medicare Proposals (Total savings of $292.2 Billion)

Bad Debts:  Reduces bad debt payments to providers – for unpaid cost-sharing owed by beneficiaries – from 70 percent down to 25 percent over three years, beginning in 2013.  The Fiscal Commission had made similar recommendations in its final report.  Saves $35.9 billion.

Medical Education Payments:  Reduces the Indirect Medical Education adjustment paid to teaching hospitals by 10 percent beginning in 2014, saving $9.7 billion.  Previous studies by the Medicare Payment Advisory Committee (MedPAC) have indicated that IME payments to teaching hospitals may be greater than the actual costs the hospitals incur.

Rural Payments:  Reduces critical access hospital payments from 101% of costs to 100% of costs, saving $1.4 billion, and prohibits hospitals fewer than 10 miles away from the nearest hospital from receiving a critical access hospital designation, saving $590 million.  The budget does NOT include a proposal to end add-on payments for providers in frontier states, which was included in the President’s September deficit proposal.

Post-Acute Care:  Reduces various acute-care payment updates (details not specified) during the years 2013 through 2022, saving $56.7 billion – a significant increase compared to the $32.5 billion in savings under the President’s September deficit proposal.  Equalizes payment rates between skilled nursing facilities and inpatient rehabilitation facilities, saving $2 billion.  Increases the minimum percentage of inpatient rehabilitation facility patients that require intensive rehabilitation from 60 percent to 75 percent, saving $2.3 billion.  Reduces skilled nursing facility payments by up to 3%, beginning in 2015, for preventable readmissions, saving $2 billion.

Pharmaceutical Price Controls:  Expands Medicaid price controls to dual eligible and low-income subsidy beneficiaries participating in Part D, saving $155.6 billion according to OMB.  Some have expressed concerns that further expanding government-imposed price controls to prescription drugs could harm innovation and the release of new therapies that could help cure diseases.

Anti-Fraud Provisions:  Assumes $450 million in savings from various anti-fraud provisions, including limiting the discharge of debt in bankruptcy proceedings associated with fraudulent activities.

EHR Penalties:  Re-directs Medicare reimbursement penalties against physicians who do not engage in electronic prescribing beginning in 2020 back into the Medicare program.  The “stimulus” legislation that enacted the health IT provisions had originally required that penalties to providers be placed into the Medicare Improvement Fund; the budget would instead re-direct those revenues into the general fund, to finance the “doc fix” and related provisions.  OMB now scores this proposal as saving $590 million; when included in last year’s budget back in February, these changes were scored as saving $3.2 billion.

Imaging:  Reduces imaging payments by assuming a higher level of utilization for certain types of equipment, saving $400 million.  Also imposes prior authorization requirements for advanced imaging; no savings are assumed, a change from the September deficit proposal, which said prior authorization would save $900 million.

Additional Means Testing:  Increases means tested premiums under Parts B and D by 15%, beginning in 2017.  Freezes the income thresholds at which means testing applies until 25 percent of beneficiaries are subject to such premiums.  Saves $27.6 billion over ten years, and presumably more thereafter, as additional seniors would hit the means testing threshold, subject them to higher premiums.

Medicare Deductible Increase:  Increases Medicare Part B deductible by $25 in 2017, 2019, and 2021 – but for new beneficiaries only; “current beneficiaries or near retirees [not defined] would not be subject to the revised deductible.”  Saves $2 billion.

Home Health Co-Payment:  Beginning in 2017, introduces a home health co-payment of $100 per episode for new beneficiaries only, in cases where an episode lasts five or more visits and is NOT proceeded by a hospital stay.  MedPAC has previously recommended introducing home health co-payments as a way to ensure appropriate utilization.  Saves $350 million.

Medigap Surcharge:  Imposes a Part B premium surcharge equal to about 15 percent of the average Medigap premium – or about 30 percent of the Part B premium – for seniors with Medigap supplemental insurance that provides first dollar coverage.  Applies beginning in 2017 to new beneficiaries only.  A study commissioned by MedPAC previously concluded that first dollar Medigap coverage induces beneficiaries to consume more medical services, thus increasing costs for the Medicare program and federal taxpayers.  Saves $2.5 billion.

Lower Caps on Medicare Spending:  Section 3403 of the health care law established an Independent Payment Advisory Board tasked with limiting Medicare spending to the growth of the economy plus one percentage point (GDP+1) in 2018 and succeeding years.  The White House proposal would reduce this target to GDP+0.5 percent.  This approach has two potential problems:

  • First, under the Congressional Budget Office’s most recent baseline, IPAB recommendations would not be triggered at all – so it’s unclear whether the new, lower target level would actually generate measurable budgetary savings.  (In August 2010, CBO concluded an IPAB with an overall cap of GDP+1 would yield $13.8 billion in savings through 2020 – not enough to make a measurable impact on a program spending $500 billion per year.)
  • Second, the Medicare actuary has previously written that the spending adjustments contemplated by IPAB and the health care law “are unlikely to be sustainable on a permanent annual basis” and “very challenging” – problems that would be exacerbated by utilizing a slower target rate for Medicare spending growth.

According to the budget, this proposal would NOT achieve additional deficit savings.

Medicaid and Other Health Proposals (Total savings of $70.4 Billion)

Medicaid Provider Taxes:  Reduces limits on Medicaid provider tax thresholds, beginning in 2015; the tax threshold would be reduced over a three year period, to 3.5 percent in 2017 and future years.  State provider taxes are a financing method whereby states impose taxes on medical providers, and use these provider tax revenues to obtain additional federal Medicaid matching funds, thereby increasing the federal share of Medicaid expenses paid while decreasing the state share of expenses.  The Tax Relief and Health Care Act of 2006, enacted by a Republican Congress, capped the level of Medicaid provider taxes, and the Bush Administration proposed additional rules to reform Medicaid funding rules – rules that were blocked by the Democrat-run 110th Congress.  However, there is bipartisan support for addressing ways in which states attempt to “game” the Medicaid system, through provider taxes and other related methods, to obtain unwarranted federal matching funds – the liberal Center for Budget and Policy Priorities previously wrote about a series of “Rube Goldberg-like accounting arrangements” that “do not improve the quality of health care provided” and “frequently operate in a manner that siphons extra federal money to state coffers without affecting the provision of health care.”  This issue was also addressed in the fiscal commission’s report, although the commission exceeded the budget proposals by suggesting that Congress enact legislation “restricting and eventually eliminating” provider taxes, saving $44 billion.  OMB scores this proposal as saving $21.8 billion.

Blended Rate:  Proposes “replac[ing]…complicated federal matching formulas” in Medicaid “with a single matching rate specific to each state that automatically increases if a recession forces enrollment and state costs to rise.”  Details are unclear, but the Administration claims $17.9 billion in savings from this proposal – much less than the $100 billion figure bandied about in previous reports last summer.  It is also worth noting that the proposal could actually INCREASE the deficit, if a prolonged recession triggers the automatic increases in the federal Medicaid match referenced in the proposal.  On a related note, the budget once again ignores the governors’ multiple requests for flexibility from the mandates included in the health care law – unfunded mandates on states totaling at least $118 billion.

Transitional Medical Assistance/QI Program:  Provides for temporary extensions of the Transitional Medical Assistance program, which provides Medicaid benefits for low-income families transitioning from welfare to work, along with the Qualifying Individual program, which provides assistance to low-income seniors in paying Medicare premiums.  The extensions cost $815 million and $1.7 billion, respectively.

Limit Durable Medical Equipment Reimbursement:  Caps Medicaid reimbursements for durable medical equipment (DME) at Medicare rates, beginning in 2013.  The health care law extended and expanded a previous Medicare competitive bidding demonstration project included in the Medicare Modernization Act, resulting in savings to the Medicare program.  This proposal, by capping Medicaid reimbursements for DME at Medicare levels, would attempt to extend those savings to the Medicaid program.  OMB now scores this proposal as saving $3 billion; when included in the President’s budget last year, these changes were scored as saving $6.4 billion.

Rebase Medicaid Disproportionate Share Hospital Payments:  In 2021 and 2022, reallocates Medicaid DSH payments to hospitals treating low-income patients, based on states’ actual 2020 allotments (as amended and reduced by the health care law).  Saves $8.3 billion.

Medicaid Anti-Fraud Savings:  Assumes $3.2 billion in savings from a variety of Medicaid anti-fraud provisions, largely through tracking and enforcement of various provisions related to pharmaceuticals.  Included in this amount are proposals that would remove exceptions to the requirement that Medicaid must reject payments when another party is liable for a medical claim.

Flexibility on Benchmark Plans:  Proposes some new flexibility for states to require Medicaid “benchmark” plan coverage for non-elderly, non-disabled adults – but ONLY those with incomes above 133 percent of the federal poverty level (i.e., NOT the new Medicaid population obtaining coverage under the health care law).  No savings assumed.

“Pay-for-Delay:”  Prohibits brand-name pharmaceutical manufacturers from entering into arrangements that would delay the availability of new generic drugs.  Some Members have previously expressed concerns that these provisions would harm innovation, and actually impede the incentives to generic manufacturers to bring cost-saving generic drugs on the market.  OMB scores this proposal as saving $11 billion.

Follow-on Biologics:  Reduces to seven years the period of exclusivity for follow-on biologics.  Current law provides for a twelve-year period of exclusivity, based upon an amendment to the health care law that was adopted on a bipartisan basis in both the House and Senate (one of the few substantive bipartisan amendments adopted).  Some Members have expressed concern that reducing the period of exclusivity would harm innovation and discourage companies from developing life-saving treatments.  OMB scores this proposal as saving $3.8 billion.

FEHB Contracting:  Proposes streamlining pharmacy benefit contracting within the Federal Employee Health Benefits program, by centralizing pharmaceutical benefit contracting within the Office of Personnel Management (OPM).  Some individuals, noting that OPM is also empowered to create “multi-state plans” as part of the health care overhaul, may be concerned that these provisions could be part of a larger plan to make OPM the head of a de facto government-run health plan.  OMB scores this proposal as saving $1.7 billion.

Prevention “Slush Fund:”  Reduces spending by $4 billion on the Prevention and Public Health Fund created in the health care law.  Some Members have previously expressed concern that this fund would be used to fund projects like jungle gyms and bike paths, questionable priorities for the use of federal taxpayer dollars in a time of trillion-dollar deficits.

State Waivers:  Accelerates from 2017 to 2014 the date under which states can submit request for waivers of SOME of the health care law’s requirements to HHS.  While supposedly designed to increase flexibility, even liberal commentators have agreed that under the law’s state waiver programcritics of Obama’s proposal have a point: It wouldn’t allow to enact the sorts of health care reforms they would prefer” and thatconservatives can’t do any better – at least not under these rules.”  The proposal states that “the Administration is committed to the budget neutrality of these waivers;” however, the plan allocates $4 billion in new spending “to account for the possibility that CBO will estimate costs for this proposal.”

Implementation “Slush Fund:”  Proposes $400 million in new spending for HHS to implement the proposals listed above.

The President’s Shrinking Entitlement Savings

The President’s deficit proposal released this morning claims to achieve $320 billion in deficit savings.  As we’ve previously noted, given the size of our entitlement programs, that’s a comparatively insignificant amount – barely enough to finance a long-term “doc fix,” let alone make Medicare and Medicaid solvent for the long term.  But what’s interesting is how the size of the health care savings put forward by the President has actually SHRUNK over time.  The White House’s April “deficit framework” (i.e., a speech) claimed to achieve $340 billion in savings – $20 billion MORE than this morning’s proposal.

So what exactly prompted the President to LOWER his sights for entitlement savings over the last five months?  Was it the unprecedented downgrade of America’s debt rating?  The stock market swoon that quickly followed?  The chaos in Europe as that continent struggles to achieve fiscal discipline and avert a sovereign default crisis?  Or was it the event that happens on the Tuesday after the first Monday in November every fourth year?  You be the judge…

All that said, a detailed summary of the President’s (new) proposal follows below.  Keep in mind that Administration/OMB estimates may vary significantly from CBO scores, so remember that your budgetary mileage may vary.  (All scores are over a ten-year period unless otherwise indicated.)

 

Medicare Proposals (Total savings of $248 Billion)

Bad Debts:  Reduces bad debt payments to providers – for unpaid cost-sharing owed by beneficiaries – from 70 percent down to 25 percent over three years, beginning in 2013.  The Fiscal Commission had made similar recommendations in its final report.  Saves $20.2 billion.

Medical Education Payments:  Reduces the Indirect Medical Education adjustment paid to teaching hospitals by 10 percent beginning in 2013, saving $9.1 billion.  Previous studies by the Medicare Payment Advisory Committee (MedPAC) have indicated that IME payments to teaching hospitals may be greater than the actual costs the hospitals incur.

Rural Payments:  Ends add-on payments for providers in frontier states, saving $2.1 billion.  Reduces critical access hospital payments from 101% of costs to 100% of costs, saving $1 billion, and prohibits hospitals fewer than 10 miles away from the nearest hospital from receiving a critical access hospital designation, saving $3 billion.

Post-Acute Care:  Reduces various acute-care payment updates (details not specified) during the years 2014 through 2021, saving $32.5 billion.  Equalizes payment rates between skilled nursing facilities and inpatient rehabilitation facilities, saving $4.5 billion.  Increases the minimum percentage of inpatient rehabilitation facility patients that require intensive rehabilitation from 60 percent to 75 percent, saving $2.6 billion.  Reduces skilled nursing facility payments by up to 3%, beginning in 2015, for preventable readmissions, saving $2 billion.

Pharmaceutical Price Controls:  Expands Medicaid price controls to dual eligible and low-income subsidy beneficiaries participating in Part D, saving $135 billion according to OMB.  However, according to the Congressional Budget Office’s March 2011 Budget Options (Option 25), this proposal would generate smaller savings ($112 billion).  Some have expressed concerns that further expanding government-imposed price controls to prescription drugs could harm innovation and the release of new therapies that could help cure diseases.

MA Repayment Provisions:  Recovers payments to insurers participating in the Medicare Advantage (MA) program.  MA plans are currently paid on a prospective basis, with those payments adjusted according to the severity of beneficiaries’ ill health.  Some sample audits have discovered instances where plans could not retrospectively produce the necessary documentation to warrant the prospective coding adjustment that some beneficiaries received.  The deficit plan would apply this adjustment, currently contemplated for some beneficiaries based on the sample audit, to ALL beneficiaries.  OMB now scores this proposal as saving $2.3 billion; when included in the President’s budget back in February, these changes were scored as saving $6.2 billion.

Anti-Fraud Provisions:  Assumes $600 million in savings from various anti-fraud provisions, including limiting the discharge of debt in bankruptcy proceedings associated with fraudulent activities.

EHR Penalties:  Re-directs Medicare reimbursement penalties against physicians who do not engage in electronic prescribing beginning in 2020 back into the Medicare program.  The “stimulus” legislation that enacted the health IT provisions had originally required that penalties to providers be placed into the Medicare Improvement Fund; the budget would instead re-direct those revenues into the general fund, to finance the “doc fix” and related provisions.  OMB now scores this proposal as saving $500 million; when included in the President’s budget back in February, these changes were scored as saving $3.2 billion.

Imaging:  Reduces imaging payments by assuming a higher level of utilization for certain types of equipment, saving $400 million.  Also imposes prior authorization requirements for advanced imaging, saving $900 million.

Additional Means Testing:  Increases means tested premiums under Parts B and D by 15%, beginning in 2017.  Freezes the income thresholds at which means testing applies until 25 percent of beneficiaries are subject to such premiums.  Saves $20 billion over ten years, and presumably more thereafter, as additional seniors would hit the means testing threshold, subject them to higher premiums.

Medicare Deductible Increase:  Increases Medicare Part B deductible by $25 in 2017, 2019, and 2021 – but for new beneficiaries only; “current beneficiaries or near retirees [not defined] would not be subject to the revised deductible.”  Saves $1 billion.

Home Health Co-Payment:  Introduces a home health co-payment of $100 per episode for new beneficiaries only, in cases where an episode lasts five or more visits and is NOT proceeded by a hospital stay.  MedPAC has previously recommended introducing home health co-payments as a way to ensure appropriate utilization.  Saves $400 million.

Medigap Surcharge:  Imposes a Part B premium surcharge equal to about 15 percent of the average Medigap premium – or about 30 percent of the Part B premium – for seniors with Medigap supplemental insurance that provides first dollar coverage.  Applies beginning in 2017 to new beneficiaries only.  A study commissioned by MedPAC previously concluded that first dollar Medigap coverage induces beneficiaries to consume more medical services, thus increasing costs for the Medicare program and federal taxpayers.  Saves $2.5 billion.

Lower Caps on Medicare Spending:  Section 3403 of the health care law established an Independent Payment Advisory Board tasked with limiting Medicare spending to the growth of the economy plus one percentage point (GDP+1) in 2018 and succeeding years.  The White House proposal would reduce this target to GDP+0.5 percent.  This approach has two potential problems:

  • First, under the Congressional Budget Office’s most recent baseline, IPAB recommendations would not be triggered at all – so it’s unclear whether the new, lower target level would actually generate measurable budgetary savings.  (In August 2010, CBO concluded an IPAB with an overall cap of GDP+1 would yield $13.8 billion in savings through 2020 – not enough to make a measurable impact on a program spending $500 billion per year.)
  • Second, the Medicare actuary has previously written that the spending adjustments contemplated by IPAB and the health care law “are unlikely to be sustainable on a permanent annual basis” and “very challenging” – problems that would be exacerbated by utilizing a slower target rate for Medicare spending growth.

According to the Administration document, this proposal would NOT achieve additional deficit savings.

Medicaid and Other Health Proposals (Total savings of $72 Billion)

Medicaid Provider Taxes:  Reduces limits on Medicaid provider tax thresholds, beginning in 2015; the tax threshold would be reduced over a three year period, to 3.5 percent in 2017 and future years.  State provider taxes are a financing method whereby states impose taxes on medical providers, and use these provider tax revenues to obtain additional federal Medicaid matching funds, thereby increasing the federal share of Medicaid expenses paid while decreasing the state share of expenses.  The Tax Relief and Health Care Act of 2006, enacted by a Republican Congress, capped the level of Medicaid provider taxes, and the Bush Administration proposed additional rules to reform Medicaid funding rules – rules that were blocked by the Democrat-run 110th Congress.  However, there is bipartisan support for addressing ways in which states attempt to “game” the Medicaid system, through provider taxes and other related methods, to obtain unwarranted federal matching funds – the liberal Center for Budget and Policy Priorities previously wrote about a series of “Rube Goldberg-like accounting arrangements” that “do not improve the quality of health care provided” and “frequently operate in a manner that siphons extra federal money to state coffers without affecting the provision of health care.”  This issue was also addressed in the fiscal commission’s report, although the commission exceeded the budget proposals by suggesting that Congress enact legislation “restricting and eventually eliminating” provider taxes, saving $44 billion.  OMB now scores this proposal as saving $26.3 billion; when included in the President’s budget back in February, these changes were scored as saving $18.4 billion.

Blended Rate:  Proposes “replac[ing]…complicated federal matching formulas” in Medicaid “with a single matching rate specific to each state that automatically increases if a recession forces enrollment and state costs to rise.”  Details are unclear, but the Administration claims $14.9 billion in savings from this proposal – much less than the $100 billion figure bandied about in previous reports this summer.  It is also worth noting that the proposal could actually INCREASE the deficit, if a prolonged recession triggers the automatic increases in the federal Medicaid match referenced in the proposal.  On a related note, the deficit plan once again ignored the governors’ multiple requests for flexibility from the mandates included in the health care law – unfunded mandates on states totaling at least $118 billion.

Limit Durable Medical Equipment Reimbursement:  Caps Medicaid reimbursements for durable medical equipment (DME) at Medicare rates, beginning in 2013.  The health care law extended and expanded a previous Medicare competitive bidding demonstration project included in the Medicare Modernization Act, resulting in savings to the Medicare program.  This proposal, by capping Medicaid reimbursements for DME at Medicare levels, would attempt to extend those savings to the Medicaid program.  OMB now scores this proposal as saving $4.2 billion; when included in the President’s budget back in February, these changes were scored as saving $6.4 billion.

Third Party Liability:  Removes exceptions to the requirement that Medicaid must reject payments when another party is liable for a medical claim, saving $1.3 billion.

Rebase Medicaid Disproportionate Share Hospital Payments:  In 2021, reallocates Medicaid DSH payments to hospitals treating low-income patients, based on states’ actual 2020 allotments (as amended and reduced by the health care law).  Saves $4.1 billion.

Medicaid Anti-Fraud Savings:  Assumes $110 million in savings from a variety of Medicaid anti-fraud provisions, largely through tracking and enforcement of various provisions related to pharmaceuticals.

Amend MAGI Definition:  Amends the health care law to include Social Security benefits in the new definition of Modified Adjusted Gross Income used to determine eligibility for Medicaid benefits.  As previously reported, this “glitch” in the law would make millions of early retirees – who receive a large portion of their income from Social Security – eligible for free taxpayer-funded benefits, and would discourage work by providing greater subsidies to those relying on Social Security, as opposed to wage earnings, for their income.  Saves $14.6 billion.

Flexibility on Benchmark Plans:  Proposes some new flexibility for states to require Medicaid “benchmark” plan coverage for non-elderly, non-disabled adults – but ONLY those with incomes above 133 percent of the federal poverty level (i.e., NOT the new Medicaid population obtaining coverage under the health care law).  No savings assumed.

“Pay-for-Delay:”  Prohibits brand-name pharmaceutical manufacturers from entering into arrangements that would delay the availability of new generic drugs.  Some Members have previously expressed concerns that these provisions would harm innovation, and actually impede the incentives to generic manufacturers to bring cost-saving generic drugs on the market.  OMB now scores this proposal as saving $2.7 billion; when included in the President’s budget back in February, these changes were scored as saving $8.8 billion.

Follow-on Biologics:  Reduces to seven years the period of exclusivity for follow-on biologics.  Current law provides for a twelve-year period of exclusivity, based upon an amendment to the health care law that was adopted on a bipartisan basis in both the House and Senate (one of the few substantive bipartisan amendments adopted).  Some Members have expressed concern that reducing the period of exclusivity would harm innovation and discourage companies from developing life-saving treatments.  OMB now scores this proposal as saving $3.5 billion; when included in the President’s budget back in February, these changes were scored as saving $2.3 billion.

FEHB Contracting:  Proposes streamlining pharmacy benefit contracting within the Federal Employee Health Benefits program, by centralizing pharmaceutical benefit contracting within the Office of Personnel Management (OPM).  Some individuals, noting that OPM is also empowered to create “multi-state plans” as part of the health care overhaul, may be concerned that these provisions could be part of a larger plan to make OPM the head of a de facto government-run health plan.  OMB now scores this proposal as saving $1.6 billion; when included in the President’s budget back in February, these changes were scored as saving $1.8 billion.

Prevention “Slush Fund:”  Reduces spending by $3.5 billion on the Prevention and Public Health Fund created in the health care law.  Some Members have previously expressed concern that this fund would be used to fund projects like jungle gyms and bike paths, questionable priorities for the use of federal taxpayer dollars in a time of trillion-dollar deficits.

State Waivers:  Accelerates from 2017 to 2014 the date under which states can submit request for waivers of SOME of the health care law’s requirements to HHS.  While supposedly designed to increase flexibility, even liberal commentators have agreed that under the law’s state waiver programcritics of Obama’s proposal have a point: It wouldn’t allow to enact the sorts of health care reforms they would prefer” and thatconservatives can’t do any better – at least not under these rules.”  The proposal states that “the Administration is committed to the budget neutrality of these waivers;” however, the plan allocates $4 billion in new spending “to account for the possibility that CBO will estimate costs for this proposal.”

Implementation “Slush Fund:”  Proposes $400 million in new spending for HHS to implement the proposals listed above.

Updated Summary of President’s Budget Proposals

Apologies for sending a further e-mail, but this revised (hopefully final) summary reflects documents that weren’t available when I sent out my first summary document around lunchtime.  Specifically, the below reflects the Administration’s justifications for reductions and terminations, the HHS Budget in Brief, and the Treasury’s Green Book proposals.

Below is a summary of the changes included in the President’s budget proposal.  As previously indicated, the budget includes $62 billion in mandatory health care savings that would pay for approximately two years of a Medicare “doc fix.”  (However, the budget does NOT specify offsets for the $315.4 billion cost of a “doc fix” beyond 2013.) The $62 billion in savings comes from a “grab bag” of relatively minor tweaks to entitlement spending – the largest of which are $18.4 billion in savings from a reduction in Medicaid provider taxes and $12.9 billion in savings from the pharmaceutical industry, including a shorter exclusivity period for follow-on biologics and provisions to end so-called “pay-for-delay” arrangements.

I’ve also included discretionary request amounts for major HHS divisions below.  These numbers have been updated, and reflect the budget authority proposals included in the HHS Budget in Brief document.  (Some of these numbers are slightly different from the OMB budget document, but it’s not fully clear why – and unfortunately HHS staff weren’t particularly enlightening on this technical detail during their budget briefing.)  Of particular note is the more than $1 billion, 30% increase in the Centers for Medicare and Medicaid Services discretionary program management account – which likely reflects money needed to implement the health care law.  (Remember when Democrats attempted to refute the CBO letter indicating the law would lead to $115 billion in discretionary appropriations?  This 30% increase is a down payment on that $115 billion total…)  Since it’s drawn some attention, I’ll also point out that the Administration proposed eliminating the Graduate Medical Education program for children’s hospitals, which is a discretionary $318 million program run through HRSA. (For more details, see page 16 of the terminations document.)

I didn’t include it in the below summary, but page 97 of the Treasury Green Book “would repeal the additional [1099] information reporting requirements imposed by” the health care law.  However, the Treasury document scores this proposal as costing only $9.2 billion over ten years – far less than the $19 billion cost the Joint Committee on Taxation has previously assigned to 1099 repeal – so it’s unclear whether this discrepancy is a result of the differences in OMB and JCT scoring models, or whether there’s some other explanation.

A final note: Please keep in mind that these proposals were scored by the Office of Management and Budget, not CBO; the specific details on the scoring may change slightly when CBO issues its re-estimate of the budget in a few weeks.  (All numbers in my summary represent 10-year totals, except for the section on discretionary appropriations.)

 

Mandatory Spending

Medicare “Doc Fix”:  Freezes Medicare physician payments under the sustainable growth rate (SGR) mechanism, preventing a scheduled cut of more than 25 percent scheduled to take effect in January 2012.  Total cost of the provision is $369.8 billion over ten years – $54.4 billion in 2012 and 2013, and $315.4 billion in 2014 and succeeding years.  While the cost of the two-year fix is paid for, the $315.4 billion extension beyond 2014 is not – the budget summary tables include a line marked “offsets,” but none are specified in the document.  (Details of the $62.2 billion in pay-fors that would fund a two year fix are listed below.)  Note also that this year’s proposal calls for a ten-year freeze on physician payments; last year’s budget document assumed a 1 percent per year increase, likely explaining its higher cost ($371 billion last year vs. $369.8 billion this year).

Tricare for Life:  Assumes $530 million in new Medicare spending associated with a proposal to shift Uniformed Services Family Health Plan enrollees into Tricare for Life and Medicare.

Transitional Medical Assistance/QI Program:  Provides for temporary, nine-month extensions of the Transitional Medical Assistance program, which provides Medicaid benefits for low-income families transitioning from welfare to work, along with the Qualifying Individual program, which provides assistance to low-income seniors in paying Medicare premiums.  The extensions cost $665 million and $495 million, respectively.

Liability Reform:  The Justice Department portion of the budget calls for $250 million in new mandatory spending – $100 million in fiscal year 2012, followed by $50 million in 2013 through 2015, to “provide incentives for state medical malpractice reform.”  Specific details are unclear, but an article on this issue can be found here.

Discretionary Spending

When compared to Fiscal Year 2010 appropriated amounts, the budget calls for the following changes in discretionary spending by major HHS divisions (tabulated by budget authority):

  • $380 million (13.8%) increase for the Food and Drug Administration;
  • $684 million (9.1%) decrease for the Health Services and Resources Administration;
  • $572 million (14.1%) increase for the Indian Health Service;
  • $580 million (9.0%) decrease for the Centers for Disease Control;
  • $745 million (2.4%) increase for the National Institutes of Health;
  • $1.029 billion (30.6%) increase for the Centers for Medicare and Medicaid Services program management account; and
  • $270 million (86.8%) increase for the discretionary Health Care Fraud and Abuse Control fund.

With regard to the above numbers for CDC and HRSA, note that these are discretionary numbers only.  The Administration’s budget also would allocate $1 billion in mandatory spending from the new Prevention and Public Health “slush fund” created in the health care law, likely eliminating any real budgetary savings (despite the appearance of same in the table referred to above).

Detail to Fund Two Year “Doc Fix” (Total savings of $62.2 billion)

Program Integrity Provisions (Total savings of $32.3 billion)

Medicaid Provider Taxes:  Reduces limits on Medicaid provider tax thresholds, beginning in 2015; the tax threshold would be reduced over a three year period, to 3.5 percent in 2017 and future years.  State provider taxes are a financing method whereby states impose taxes on medical providers, and use these provider tax revenues to obtain additional federal Medicaid matching funds, thereby increasing the federal share of Medicaid expenses paid while decreasing the state share of expenses.  The Tax Relief and Health Care Act of 2006, enacted by a Republican Congress, capped the level of Medicaid provider taxes, and the Bush Administration proposed additional rules to reform Medicaid funding rules – rules that were blocked by the Democrat-run 110th Congress.  However, there is bipartisan support for addressing ways in which states attempt to “game” the Medicaid system, through provider taxes and other related methods, to obtain unwarranted federal matching funds – the liberal Center for Budget and Policy Priorities previously wrote about a series of “Rube Goldberg-like accounting arrangements” that “do not improve the quality of health care provided” and “frequently operate in a manner that siphons extra federal money to state coffers without affecting the provision of health care.”  This issue was also addressed in the fiscal commission’s report, although the commission exceeded the budget proposals by suggesting that Congress enact legislation “restricting and eventually eliminating” provider taxes, saving $44 billion.  As proposed in the budget, the above provisions would save $18.4 billion.

Medicaid Third-Party Liability:  Strengthens third-party liability provisions allowing Medicaid to recover costs from other insurers, saving $1.6 billion.

High-Risk Products:  Requires states to track high prescribers and utilizers of prescription drugs within Medicaid, saving $3.5 billion. Also creates a system to validate orders for high-risk products and services (e.g., imaging services, DME, home health, etc.), saving an additional $1.8 billion.

MA Repayment Provisions:  Recovers payments to insurers participating in the Medicare Advantage (MA) program.  MA plans are currently paid on a prospective basis, with those payments adjusted according to the severity of beneficiaries’ ill health.  Some sample audits have discovered instances where plans could not retrospectively produce the necessary documentation to warrant the prospective coding adjustment that some beneficiaries received.  The budget would apply this adjustment, currently contemplated for some beneficiaries based on the sample audit, to ALL beneficiaries.  The budget scores this proposal as saving $6.2 billion.

Other Provisions:  Also included in the program integrity section are proposals that would:

  • Require manufacturers to repay states in cases of improper reporting (savings of $125 million);
  • Allow civil monetary penalties for providers who do not update enrollment information (savings of $80 million);
  • Permit the exclusion of officials affiliated with sanctioned entities from participating in health care programs (savings of $50 million);
  • Require prepayment review for all power wheelchairs (savings of $240 million);
  • Use up to 25 percent of Recovery Audit Contractor recoveries to implement anti-fraud actions (savings of $230 million);
  • Provide flexibility to HHS/CMS in using predictive modeling to recover improper and/or fraudulent payments (savings of $100 million); and
  • Limit debt discharges in bankruptcy proceedings associated with fraudulent activity (savings of $150 million).

Provisions without Scoreable Savings:  Included on this list are proposals to:

  • Enforce Medicaid drug price rebate agreements;
  • Increase penalties on drug manufacturers for fraudulent non-compliance with Medicaid drug price rebate agreements;
  • Require drugs to be listed with the FDA in order to be reimbursed under the Medicaid program
  • Prohibit federal funds from being used as a state’s share of Medicaid/SCHIP spending unless specifically authorized;
  • Increase scrutiny of providers receiving Medicare reimbursement through higher-risk banking arrangements;
  • Study the feasibility of using universal product numbers in Medicare to improve payment accuracy; and
  • Strengthen penalties for illegal distribution of Medicare, Medicaid, and SCHIP identity and billing information

Medicaid Provisions (Total savings of $10.6 billion)

Limit Durable Medical Equipment Reimbursement:  Caps Medicaid reimbursements for durable medical equipment (DME) at Medicare rates.  The health care law extended and expanded a previous Medicare competitive bidding demonstration project included in the Medicare Modernization Act, resulting in savings to the Medicare program.  This proposal, by capping Medicaid reimbursements for DME at Medicare levels, would attempt to extend those savings to the Medicaid program.  Saves $6.4 billion.

Rebase Medicaid Disproportionate Share Hospital Payments:  In 2021, reallocates Medicaid DSH payments to hospitals treating low-income patients, based on states’ actual 2020 allotments (as amended and reduced by the health care law).  Saves $4.2 billion.

Medicare Provisions (Total savings of $6.5 billion)

Quality Improvement Organizations:  Includes several provisions regarding the Quality Improvement Organization (QIO) program within Medicare.  Proposals would require QIO contracts to be determined on a geographic basis to maximize efficiency (savings of $2.2 billion), eliminate conflicts of interest between QIOs’ activities on beneficiary protection and quality improvement (savings of $710 million), expand the eligible pool of QIO contractors (savings of $170 million), extend QIO contract from three to five years (savings of $160 million), and align QIO contract terminations with federal regulations (no savings scored).  Provisions would save $3.1 billion total.

Health IT Penalties:  Re-directs Medicare reimbursement penalties against physicians who do not engage in electronic prescribing beginning in 2020 back into the Medicare program.  The “stimulus” legislation that enacted the health IT provisions had originally required that penalties to providers be placed into the Medicare Improvement Fund; the budget would instead re-direct those revenues into the general fund, to finance the “doc fix” and related provisions.  Estimated savings of $3.2 billion.

Pharmaceutical Provisions (Total savings of $12.9 billion)

Follow-on Biologics:  Reduces to seven years the period of exclusivity for follow-on biologics.  Current law provides for a twelve-year period of exclusivity, based upon an amendment to the health care law that was adopted on a bipartisan basis in both the House and Senate (one of the few substantive bipartisan amendments adopted).  Some Members have expressed concern that reducing the period of exclusivity would harm innovation and discourage companies from developing life-saving treatments.  Saves $2.3 billion over ten years.

“Pay-for-Delay:”  Prohibits brand-name pharmaceutical manufacturers from entering into arrangements that would delay the availability of new generic drugs.  Some Members have previously expressed concerns that these provisions would harm innovation, and actually impede the incentives to generic manufacturers to bring cost-saving generic drugs on the market.  Saves $8.8 billion over ten years.

FEHB Contracting:  Proposes streamlining pharmacy benefit contracting within the Federal Employee Health Benefits program, by centralizing pharmaceutical benefit contracting within the Office of Personnel Management (OPM).  Some individuals, noting that OPM is also empowered to create “multi-state plans” as part of the health care overhaul, may be concerned that these provisions could be part of a larger plan to make OPM the head of a de facto government-run health plan.  Saves $1.8 billion.

A Revised Review of Deficit Reduction Plans

Wanted to follow up my earlier missive this week with a preliminary analysis of the co-chairs’ revised plan.  In general, when compared to the first draft, the revised plan adds the CLASS Act to the list of entitlement programs that must be reformed or repealed, strikes caps on non-economic damages (while retaining other liability reforms), and includes sundry other savings proposals to finance CLASS Act repeal and lower estimated savings from liability reform.  The plan also goes further in reforming – and ultimately repealing – the employee tax exclusion for employer-provided health insurance, echoing some of the proposals made by the Rivlin-Domenici Bipartisan Policy Center plan.  Details of the plan include:

Sustainable Growth Rate:  The plan largely retains the earlier draft’s proposals to pay for a long-term fix to the Medicare physician reimbursement formula though savings elsewhere within Medicare – coupled with the development of a new formula that “encourages care coordination across multiple providers…and pays doctors based on quality instead of quantity of services.”  The final plan provides a bit more specific detail than the draft, proposing a freeze in physician payment levels through 2013 and a one percent cut in 2014.  The final plan also heavily criticizes the SGR mechanism, noting that current budget projections rely on “large phantom savings from a scheduled 23 percent cut in Medicare physician payments that will never occur.”

CLASS Act:  This program – which was not addressed at all in the draft document – is criticized in the report as fiscally dubious: “it is viewed by many experts as financially unsound,” because of the significant adverse selection risks inherent in a voluntary long-term care program.  The report’s conclusion: “Absent reform, the program is therefore likely to require large general revenue transfers or else collapse under its own weight.  [Therefore the] Commission advises the CLASS Act be reformed in a way that makes it credibly sustainable over the long term.  To the extent this is not possible, we advise it be repealed.”  Additional savings to fund the repeal (because the CLASS Act will collect premiums that technically reduce the deficit in its first several years) are suggested in the final report, as outlined below.

Liability Reform:  The final report does recommend reforms on 1) collateral source damages (meaning outside benefits like worker’s comp should be considered when awarding damages), 2) a uniform statute of limitations, 3) joint-and-several liability (defendants only responsible for the portion of damages directly correlating to their share of responsibility), 4) specialized health courts, and 5) safe harbors for providers following best practices.  The plan however does NOT propose a cap on non-economic damages, instead recommending “that Congress consider this approach and evaluate its impact.”  Because the damage caps were removed from the final plan, the estimated deficit reduction under this proposal falls to $17 billion, as opposed to more than $60 billion under the draft proposal.

Employee Tax Exclusion for Employer-Provided Health Insurance:  The tax section of the final plan goes further than the draft, proposing to cap the value of the exclusion at the 75th percentile of premium levels, beginning in 2014.  The cap would NOT be adjusted for inflation after 2018, and the newly capped exclusion would be phased out (the specific details of which are unclear) by 2038.  In exchange, the value of the “Cadillac tax” included in the health care law for years beginning in 2018 would be reduced from 40% to 12%; it is unclear how the “Cadillac” tax would interact with the newly capped exclusion under the proposal.  As part of this tax reform proposal, the existing brackets would be rolled into three brackets, of 12%, 22%, and 28%.  Also of note: The revised plan increases the amount of net revenues devoted to deficit reduction (i.e., net tax increases) from $80 billion per year in the draft plan to $80 billion in 2015 and $180 billion in 2020.

Other Savings Proposals:  To fund SGR reform and CLASS Act repeal, the plan includes a series of savings proposals, many of which appeared in the earlier draft plan (all scores cited are total savings through 2020):

  • Increase in Medicare anti-fraud funding and authority: Not included in the initial draft; saves $9 billion.
  • Reform to Medicare cost-sharing, along with restrictions to supplemental insurance: The final plan takes the initial proposal (a version of CBO’s Budget Option 83) and extends proposed restrictions on first-dollar cost-sharing in Medigap plans to ALL forms of Medicare supplemental coverage, including Tricare for Life, FEHB retirees, and retirees in private employer-sponsored coverage.  The modification saves an additional $38 billion, for a total of $148 billion over ten years.
  • Part D drug rebates:  Similar to the draft plan, the revised version would extend Medicaid pharmaceutical rebates to Part D beneficiaries; however, for reasons that are unclear, the revised plan predicts smaller savings ($49 billion compared to $59 billion in the draft version).
  • Graduate Medical Education:  Reduces both graduate medical education (GME) and indirect medical education (IME) payments to hospitals, saving a total of $60 billion (compared to $54 billion in the draft plan).
  • Medicare bad debt:  The final plan would phase out over time Medicare payments to hospitals for unpaid cost-sharing owed by beneficiaries, saving $23 billion (compared to $15 billion in the draft plan).
  • Home health:  The plan accelerates savings proposals included in the health care law by beginning productivity adjustments for home health agencies in 2013, and phases in rebasing of the home health prospective payment system by 2015 (instead of 2017 under current law), saving $9 billion through 2020. (The draft plan proposed accelerating Medicare Advantage and DSH cuts in addition to home health reductions, but the final plan omitted MA and DSH provisions.)
  • Medicaid provider taxes:  The plan criticizes as a “tax gimmick” states that utilize provider taxes to receive additional Medicaid federal matching funds, and proposes “restricting and eventually eliminating this practice,” saving $44 billion (down from $49 billion in the draft).
  • Medicaid managed care:  Proposes “giving Medicaid full responsibility for providing health coverage for dual eligibles and requiring that they be enrolled in managed care,” saving $12 billion (compared to $11 billion in the draft).
  • Medicaid administrative costs:  Eliminates federal funding of Medicaid administrative costs “that are duplicative of funds originally included in the Temporary Assistance for Needy Families (TANF) block grants,” saving $2 billion (down from $17 billion in the draft).
  • FEHB premium support:  Rather than increasing cost-sharing for federal retirees, as the draft proposed, the final plan “recommends transforming the Federal Employees Health Benefits program into a defined contribution premium support plan that offers federal employees a fixed subsidy that grows by no more than GDP plus one percent each year.”  This proposal mirrors the premium support systems that the Rivlin-Ryan and Rivlin-Domenici plans suggested could be applied to Medicare – and the final Simpson-Bowles proposal suggests using the FEHB as a test model for premium support, including a “rigorous external review process to study the outcomes,” with an eye toward a possible premium support program for Medicare.

Other Short-Term Policies:  The final plan also includes a few proposals that do not have a cost/deficit impact.  First, the plan proposes extending the reach of the Independent Payment Advisory Board (IPAB) created in the health care law to all providers, removing the temporary exemptions for some providers included in the law.  The plan also encourages the acceleration of state Medicaid waivers and payment reform options within Medicare, including accountable care organizations.

Long-Term Savings:  The final proposal largely tracks the earlier draft plan’s concept of adopting a cap for all federal health care spending (including Exchange subsidies, Medicare, Medicaid, SCHIP, and the employee health insurance tax exclusion) equal to GDP growth plus one percent from 2020 forward.  The plan also suggests – but does not officially recommend – additional options should spending exceed the targets, including premium support proposals for Medicare, “giving CMS authority to be a more active purchaser of health care services using coverage and reimbursement policy to encourage higher value services,” extending IPAB’s scope beyond Medicare, converting the federal share of Medicaid into a block grant, raising the Medicare retirement age, a “robust” government-run health plan in Exchanges, or an all-payer system for health care.

Health Care Law:  Finally, an interesting passage in the report notes the divergence of opinion among commission members about the new health care law:

Some Commission members believe that the reforms enacted as part of ACA will “bend the curve” of health spending and control long-term cost growth.  Other Commission members believe that the coverage expansions in the bill will fuel more rapid spending growth and that the Medicare savings are not sustainable.  The Commission as a whole does not take a position on which view is correct, but we agree that Congress and the President must be vigilant in keeping health care spending under control and should take further actions if the growth in spending continues at current rates.

A Review of Deficit Reduction Plans

This Wednesday’s deadline for the fiscal commission to report a deficit reduction plan provides an opportunity to examine the health care components of the three proposals that have been released thus far:

  1. The Simpson-Bowles plan, named for the co-chairs of the fiscal commission, who released their own draft recommendations just after the midterm election;
  2. The Rivlin-Domenici plan, named for former CBO Director Alice Rivlin and former Senate Budget Committee Chairman Pete Domenici (R-NM), who released their own proposal as chairs of an independent commission operating under the aegis of the Bipartisan Policy Center; and
  3. The Rivlin-Ryan plan, which Alice Rivlin and House Budget Committee Ranking Member Paul Ryan released as an alternative to the Simpson-Bowles proposal, as both Dr. Rivlin and Rep. Ryan also sit on the fiscal commission.

CBO has conducted a preliminary analysis of the Rivlin-Ryan plan (the above link includes both the plan’s summary and score), and the Simpson-Bowles plan incorporates CBO scoring estimates where available.  However, it is unclear where and how the Rilvin-Domenici plan received the scores cited for its proposals.  The timing of the plans also varies; the Rivlin-Domenici plan postpones implementation of its plan until 2012, when the authors believe the economy will be better able to sustain a major deficit reduction effort.

The following analysis examines the similarities and differences of the three plans’ health care components in both the short term and the long term.  Keep in mind however that these are DRAFT proposals, which may a) change and b) be missing significant details affecting their impact.  Note also that the summary below is not intended to serve as an endorsement or repudiation of the proposals, either in general terms or in their specifics.

Short-Term Savings

Liability Reform:  All three plans propose liability reforms, including a cap on non-economic damages.  The Rivlin-Ryan and Simpson-Bowles plans both rely on specifications outlined in CBO’s October 2009 letter to Sen. Hatch; both presume about $60 billion in savings from this approach.  The Rivlin-Domenici plan is less clear on its specifics, but discusses “a strong financial incentive to states, such as avoiding a cut in their Medicaid matching rate, to enact caps on non-economic and punitive damages.”  Rivlin-Domenici also proposes grants to states to pilot new approaches, such as health courts; overall, the plan estimates $48 billion in savings from 2012 through 2020.

Prescription Drug Rebates:  Both the Simpson-Bowles and Rivlin-Domenici plans would apply Medicaid prescription drug rebates to the Medicare Part D program.  The Simpson-Bowles plan estimates such a change would save $59 billion from 2011 through 2020, whereas the Rivlin-Domenici plan estimates this change would save $100 billion from 2012 through 2018.  The disparity in the projected scores is unclear, as both imply they would extend the rebates to all single-source drugs (i.e., those without a generic competitor) in the Part D marketplace.  The Rivlin-Ryan plan has no similar provision.

Changes to Medicare Benefit:  All three plans propose to re-structure the Medicare benefit to provide a unified deductible for Parts A and B, along with a catastrophic cap on beneficiary cost-sharing.  The Rivlin-Ryan and Simspon-Bowles plans are largely similar, and echo an earlier estimate made in CBO’s December 2008 Budget Options document (Option 83), which provided for a unified deductible for Parts A and B combined, a catastrophic cap on beneficiary cost-sharing, and new limits on first-dollar coverage by Medigap supplemental insurance (which many economists believe encourages patients to over-consume care).  Conversely, the Rivlin-Domenici proposal provides fewer specifics, does not mention a statutory restriction on Medigap first-dollar coverage, and generates smaller savings (an estimated $14 billion from 2012 through 2018, as opposed to more than $100 billion from the Rivlin-Ryan and Simpson-Bowles proposals).

Medicare Premiums:  The Rivlin-Domenici plan would increase the beneficiary share of Medicare Part B premiums from 25 percent to 35 percent, phased in over a five-year period, raising $123 billion from 2012 through 2018. (When Medicare was first established, seniors paid 50 percent of the cost of Part B program benefits; that percentage was later reduced, and has been at 25 percent since 1997.)  The Rivlin-Ryan and Simpson-Bowles plans have no similar provision.

“Doc Fix:  The Simpson-Bowles plan uses the changes discussed above (i.e., liability reform, Part D rebates, and Medicare cost-sharing), along with an additional change in Medicare physician reimbursement, to pay for a permanent “doc fix” to the sustainable growth rate (SGR) formula.  The Simpson-Bowles plan would generate the final $24 billion in savings necessary to finance a permanent “doc fix” by establishing a new value-based reimbursement system for physician reimbursement, beginning in 2015.

The introduction to the Rivlin-Domenici plan notes that it “accommodates a permanent fix” to the SGR, but the plan itself does not include specifics on how this would be achieved, nor what formula would replace the current SGR mechanism.  Likewise, the Rivlin-Ryan plan does not directly address the SGR; however, the long-term restructuring in Medicare it proposes means the issue of Medicare physician reimbursement would become a moot point over several decades.  (See below for additional details.)

Other Provisions:  The Rivlin-Domenici plan would impose an excise tax of one cent per ounce on sugar-sweetened beverages; the tax would apply beginning in 2012 and would be indexed to inflation after 2018. (This proposal was included in Option 106 of CBO’s December 2008 Budget Options paper.)  The plan estimates this option would raise $156 billion from 2012 through 2020.

The Rivlin-Domenici plan also proposes bundling diagnosis related group (DRG) payments to include post-acute care services in a way that allows hospitals to retain 20 percent of the projected savings, with the federal government recapturing 80 percent of the savings for a total deficit reduction of $5 billion from 2012 through 2018.  Finally, the Rivlin-Domenici plan proposes $5 billion in savings from 2012 through 2018 by removing barriers to enroll low-income dual eligible beneficiaries in managed care programs.

The Simpson-Bowles plan includes a laundry list of possible short-term savings (see Slide 35 of the plan for illustrative savings proposals) in addition to the savings provisions outlined above that would fund a long-term “doc fix.”  Most of the additional short-term savings proposed would come from additional reimbursement reductions (e.g., an acceleration of the DSH and home health reductions in the health care law, and reductions in spending on graduate medical education), or from proposals to increase cost-sharing (e.g., higher Medicaid co-pays, higher cost-sharing for retirees in Tricare for Life and FEHB).

Long-Term Restructuring

Employee Exclusion for Group Health Insurance:  In its discussion of tax reform, the Simpson-Bowles plan raises the possibility of capping or eliminating the current employee exclusion for employer-provided health insurance.  (The Associated Press wrote about this issue over the weekend.)  One possible option would eliminate the exclusion as part of a plan to lower income tax rates to three brackets of 8%, 14%, and 23%; however, this proposal presumes a net $80 billion per year in increased revenue per year to reduce the deficit.  The plan invokes as another option a proposal by Sens. Gregg and Wyden to cap the exclusion at the value of the FEHBP Blue Cross standard option plan, which would allow for three income tax rates of 15%, 25%, and 35%, along with a near-tripling of the standard deduction.  Separately, the Simpson-Bowles plan also proposes repealing the payroll tax exclusion for employer-provided health insurance as one potential option to extend Social Security’s solvency.

The Rivlin-Domenici plan would cap the exclusion beginning in 2018, at the same level at which the “Cadillac tax” on high-cost plans is scheduled to take effect in that year.  However, the proposal would go further than the “Cadillac tax” (which would be repealed) by phasing out the income and payroll tax exclusion entirely between 2018 and 2028.  (This proposal would also prohibit new tax deductible contributions to Health Savings Accounts, on the grounds that health care spending would no longer receive a tax preference under any form.)  Notably, the Rivlin-Domenici plan accepts that some employers might stop offering coverage from this change to the tax code, and projects some higher federal spending on Exchange insurance subsidies as a result; however, if more employers drop coverage than the authors’ model predicts, the revenue gain from this provision could be entirely outweighed by the scope of new federal spending on insurance subsidies.

Although Rep. Ryan has previously issued his “Roadmap” proposal that would repeal the employee exclusion, the Rivlin-Ryan plan does NOT address this issue.

Medicare:  The Rivlin-Domenici program would turn Medicare into a premium support program beginning in 2018.  Increases in federal spending levels would be capped at a rate equal to the average GDP growth over five years plus one percentage point.  Seniors would still be automatically enrolled in traditional (i.e., government-run) Medicare, but if spending exceeded the prescribed federal limits, seniors would pay the difference in the form of higher premiums.  Seniors could also choose plans on a Medicare Exchange (similar to today’s Medicare Advantage), with the hope that such plans “can offer beneficiaries relief from rising Medicare premiums.”

The Rivlin-Ryan proposal would turn Medicare into a voucher program beginning in 2021.  (Both the Rivlin-Domenici premium support program and the Rivlin-Ryan voucher program would convert Medicare into a defined benefit, whereby the federal contribution toward beneficiaries would be capped; the prime difference is that the premium support program would maintain traditional government-run Medicare as one option for beneficiaries to choose from with their premium dollars, whereas the Rivlin-Ryan plan would give new enrollees a choice of only private plans from which to purchase coverage.)  The amount of the voucher would increase annually at the rate of GDP growth per capita plus one percentage point – the same level as the overall cap in Medicare spending included in the health care law as part of the new IPAB.  Low-income dual eligible beneficiaries would receive an additional medical savings account contribution (to use for health expenses) in lieu of Medicaid assistance; the federal contribution to that account would also grow by GDP per capita plus one percent.

The Rivlin-Ryan plan would NOT affect seniors currently in Medicare, or those within 10 years of retirement, except for the changes in cost-sharing described in the short-term changes above.  However, for individuals under age 55, the plan would also raise the age of eligibility by two months per year, beginning in 2021, until it reached 67 by 2032.

While the Rivlin-Domenici and Rivlin-Ryan plans restructure the Medicare benefit for new enrollees to achieve long-term savings, the Simpson-Bowles plan largely relies on the health care law’s new Independent Payment Advisory Board (IPAB) to set spending targets and propose additional savings.  The Simpson-Bowles plan suggests strengthening the IPAB’s spending targets, extending the IPAB’s reach to health insurance plans in the Exchange, and allowing the IPAB to recommend changes to benefit design and cost-sharing.  The plan also suggests setting a global budget for all federal health spending (i.e., Medicare, Medicaid, exchange subsidies, etc.), and capping the growth of this global budget at GDP plus one percent – the same level that IPAB capped spending in Medicare.  If costs exceed the target, additional steps could be taken to reduce spending, including an increase in premiums and cost-sharing or a premium support option for Medicare.  The plan also suggests overhauling the fee-for-service reimbursement system, or establishing an all-payer model of reimbursement (in which all insurance carriers pay providers the same rate) if spending targets are not met.

Medicaid:  The Rivlin-Domenici plan suggests that in future, Medicaid’s excess cost growth should be reduced by one percentage point annually.  The plan implies some type of negotiation between states and the federal government over which services in the existing Medicaid program that the state should assume and fund and which services the federal government should assume and fund.  While specifics remain sparse, the overriding principle involves de-linking Medicaid financing from the open-ended federal matching relationship as a way to reduce future cost growth by one percentage point per year.

The Rivlin-Ryan plan converts the existing Medicaid program into a block grant to the states, beginning in 2013.  The size of the federal block grant would increase to reflect growth in the Medicaid population, as well as growth in GDP plus one percent.  The costs of the new Medicaid expansion would be covered according to current law through 2020; in 2021 and succeeding years, the Medicaid expansion would be rolled into the block grant.

The Simpson-Bowles plan includes conversion of Medicaid into a block grant as one option to generate additional savings; however, it does not explicitly advocate this course of action.

CLASS Act:  The Rivlin-Ryan plan would repeal the CLASS Act.  The Rivlin-Domenici and Simpson-Bowles plans do not discuss any changes to this program.  This is the ONLY provision in the three deficit reduction plans that proposes elimination of any part of the health care law’s new entitlements.

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

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

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

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

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

Summary

Division A—Affordable Health Care Choices

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

Immediate Reforms

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

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

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

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

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

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

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

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

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

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

Coverage Expansions and Regulations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Government-Run Health Plan: The bill requires the Department of Health and Human Services to establish a “public health insurance option” that “shall only be made available through the Health Insurance Exchange.” The bill states the plan shall comply with requirements related to other Exchange plans, and offer basic, enhanced, and premium plan options. However, the bill does not limit the number of government-run plans nor does it give the Exchange the authority to reject, sanction, or terminate the government-run plan; therefore, some Members may be concerned that the bill’s headings regarding a “level playing field” belie the reality of the plain text.

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

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

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

While the Secretary would be required to “negotiate” reimbursement rates with doctors and hospitals, nothing in the bill prohibits the Secretary from using such negotiation to impose Medicare reimbursement levels on providers as part of a government-imposed “negotiation.” Should such a scenario occur, the Lewin Group has estimated that as many as 114 million individuals could lose access to their current coverage under a government-run plan—and that a government-run plan reimbursing at Medicare rates would actually result in a net $16,207 decrease in reimbursements per physician per year, even after accounting for the newly insured.

The bill requires Medicare providers, including physicians, to participate in the government-run plan unless they opt-out of said participation, and provides that all providers who accept the government-run plan’s reimbursement rates shall be considered “preferred physicians”—regardless of their quality or expertise—and creates a new category of “participating, non-preferred physicians” who agree to abide by balance billing requirements similar to those in Medicare. Other providers may participate in the government-run plan only if they agree to accept the plan’s reimbursement rates as payment in full. Some Members may be concerned that these provisions would therefore compel providers to accept lower reimbursements by the government-run plan in order to garner the government’s approval.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax Increases

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

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

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

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

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

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

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

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

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

Division B—Medicare and Medicaid Provisions

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

Medicare Provisions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Medicaid and SCHIP Provisions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Division C—Public Health

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Division D—Indian Health Service

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

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

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

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

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

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

Cost and Other Concerns

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Legislative Bulletin: H.R. 3200, House Democrats’ Government Takeover of Health Care

On July 14, 2009, the Chairmen of the three House Committees with jurisdiction over health care legislation—Education and Labor Chairman George Miller (D-CA), Energy and Commerce Chairman Henry Waxman (D-CA), and Ways and Means Committee Chairman Charlie Rangel (D-NY)—introduced H.R. 3200 as a revised version of the “discussion draft” first publicly released on June 19. On July 17, the Ways and Means Committee approved the bill by a 23-18 vote, and the Education and Labor Committee approved the bill by a 26-22 vote. The Energy and Commerce Committee approved its version of the legislation on July 31 by a 31-28 margin.

The summary and analysis below refers solely to the bill as introduced. The Rules Committee will merge the respective bills, and their amendments approved in Committee, for the House to consider one piece of legislation on the floor.

Summary

Division A—Affordable Health Care Choices

This division would create a new entitlement—a government-run health plan causing as many as 120 million Americans to lose their current coverage—intended to provide all Americans with “affordable” health insurance. The bill also imposes new mandates and regulations on individual and employer-sponsored health insurance, while raising taxes on businesses who do not offer coverage and individuals who do not purchase coverage meeting federal bureaucrats’ standards. Details of the division include:

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

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

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

Insurance Restrictions: The bill would require both insurance carriers and employer health plans to accept all applicants without conditions, regardless of the applicant’s health status. The bill also does not clearly permit carriers from restricting guaranteed issue enrollment to certain open enrollment periods—meaning that individuals could be eligible to enroll immediately after suffering a major (and costly) adverse health event.

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

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

The bill also requires health insurance plans to “meet such standards respecting provider networks as the Commissioner may establish”—which some Members may construe as allowing bureaucrats to regulate access to doctors and reject any (or all) private health insurance offering on the grounds that its network access is insufficient. Conversely, the government-run plan is significantly advantaged because it would be automatically approved within the Exchange without subjecting its provider networks to scrutiny.

Price Controls: The bill requires plans spending less than an “acceptable” percentage of their premium revenue on medical claims—as determined by federal bureaucrats in the Department of Health and Human Services—to offer refunds to enrollees. This provision would take effect in 2011, ahead of the other major reforms scheduled to be implemented beginning in 2013. Some Members may view this provision as a government-imposed price control, one that could be viewed as ignoring the advice of White House advisor Ezekiel Emanuel, who wrote that “some administrative [i.e. non-claims] costs are not only necessary but beneficial.” Some Members may also be concerned that such price controls, by requiring plans to pay out most of their premiums in medical claims, would give carriers a strong (and perverse) disincentive not to improve the health of their enrollees through prevention and wellness initiatives—as doing so would reduce the percentage of spending paid on actual claims below the bureaucrat-acceptable limits.

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

Annual cost-sharing would be limited to $5,000 per individual or $10,000 per family, with limits indexed to general inflation (i.e. not medical inflation) annually. Benefits must cover 70 percent of total health expenses regardless of the cost sharing. Services mandated fall into ten categories: hospitalization; outpatient hospital and clinic services; physician services; durable medical equipment; prescription drugs; rehabilitative and habilitative services; mental health services; preventive services; maternity benefits; and well child care “for children under 21 years of age.”

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

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

Some Members may be concerned with federal bureaucrats having undue influence on the definition of insurance for purposes of the individual mandate. Members may also be concerned that the Committee could evolve into the type of Federal Health Board envisioned by former Senator Tom Daschle, who conceived that such an entity could dictate requirements that private health plans reject certain clinically effective treatments on cost grounds. Finally, some Members may be concerned that the Committee could be used as a venue to require all Americans to obtain health insurance coverage of abortion procedures—a finding by unelected bureaucrats that would significantly increase the number of abortions performed nationwide.

Additional Requirements: The bill would impose other requirements on insurance companies, including uniform marketing standards, grievance and appeals processes (both internal and external), transparency, and prompt claims payment—all of which would be subject to review by the new bureaucracy established through the Commissioner’s office. The bill also requires insurers to make disclosures on plan documents in “plain language”—and directs the new federal Commissioner “to develop and issue guidance on best practices of plain language writing.”

Effective in July 2010, the bill would prohibit carriers from rescinding insurance policies except in cases with “clear and convincing evidence of fraud,” and would require mandatory external review in cases where carriers seek to cancel policies. The bill also includes language requiring the Secretary to undertake a program of administrative simplification designed to ensure the rapid processing of claims and other related data.

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

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

Pre-Emption: The bill makes clear that its additional mandates and regulations “do not supersede any requirements” under existing law, “except insofar as such requirements prevent the application of a requirement” in the bill. The bill also makes clear that existing State private rights of action would apply to plans as currently permitted under existing law. Some Members may be concerned that these additional mandates, and the duplicative layers of regulation they create, would raise costs and encourage additional employers to drop their existing coverage offerings.

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

Reinsurance for Pre-Medicare Retirees: The bill would finance reinsurance payments to employers (including multiemployer and other union plans) who offer coverage to retired workers aged 55 to 64 who are not eligible for Medicare. The Trust Fund would pay 80 percent of claim costs for all retiree claims exceeding $15,000, subject to a maximum of $90,000; payments must be used to reduce overall insurance premiums and “shall not be used for administrative costs or profit increases.” Some Members may be concerned that such reinsurance programs, by providing federal reimbursement of high-cost claims, would serve as a disincentive for employers to monitor the health status of their enrollees. The language establishing the Retiree Reserve Trust Fund states that the $10 billion in expenditures for reinsurance “shall not be taken into account” for budgetary purposes—which many Members may view as a budgetary gimmick designed to mask the overall bill’s true costs.

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

Employers with 10 or fewer employees would be permitted to join the Exchange in its first year, with employers with 11-20 employees permitted to join in its second year. Larger employers might be eligible to join in the third year, if permitted to do so by the Commissioner.

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

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

State Benefit Mandates: State benefit mandates would continue to apply to plans offered through the Exchange—but only if the State agrees to reimburse the Exchange for the increase in low-income subsidies provided to individuals as a result of an increase in the basic premium rate attributable to the benefit mandates. Some Members may note that Democrat Members repeatedly criticized Republicans for overriding State mandates during debate in previous Congresses on the introduction of Association Health Plans.

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

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

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

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

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

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

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

Government-Run Health Plans: The bill requires the Department of Health and Human Services to establish a “public health insurance option” that “shall only be made available through the Health Insurance Exchange.” The bill states the plan shall comply with requirements related to other Exchange plans, and offer basic, enhanced, and premium plan options. However, the bill does not limit the number of government-run plans nor does it give the Exchange the authority to reject, sanction, or terminate the government-run plan; therefore, some Members may be concerned that the bill’s headings regarding a “level playing field” belie the reality of the plain text.

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

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

The bill provides that the government-run plan shall pay Medicare rates for at least its first three years of operation. Physicians also participating in Medicare as well as the government-run plan shall receive a 5 percent bonus for its first three years; reimbursement rates for pharmaceuticals within the government-run plan would be “negotiated” by the Secretary—a provision which, with respect to Medicare Part D, the Congressional Budget Office has stated would not result in any appreciable savings when compared to negotiations undertaken by private health plans.

While the bill states that the Secretary “may utilize innovative payment mechanisms” to improve health outcomes and achieve other objectives, it also states that the Secretary must set payment rates “consistent with” provisions pointing to Medicare payment rates as the benchmark. Given estimates from the Lewin Group that as many as 114 million individuals could lose access to their current coverage under a government-run plan—and that a government-run plan reimbursing at the rates contemplated by the legislation would actually result in a net $16,207 decrease in reimbursements per physician per year, even after accounting for the newly insured—many Members may oppose any effort to include a government-run plan in any health reform legislation.

The bill requires Medicare providers, including physicians, to participate in the government-run plan unless they opt-out of said participation, and provides that all providers who accept the government-run plan’s reimbursement rates shall be considered “preferred physicians”—regardless of their quality or expertise—and creates a new category of “participating, non-preferred physicians” who agree to abide by balance billing requirements similar to those in Medicare. Other providers may participate in the government-run plan only if they agree to accept the plan’s reimbursement rates as payment in full. Some Members may be concerned that these provisions would therefore compel providers to accept Medicare-level reimbursements, which the Congressional Budget Office has noted are 20-30 percent below private health insurance payment levels.

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

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

“Low-Income” Subsidies: The bill provides for “affordability credits” through the Exchange—and only through the Exchange, again putting employer health plans at a disadvantage. Subsidies could be used only for basic plans in the first two years, and all plans thereafter. Individuals with access to employer-sponsored insurance whose group premium costs would exceed 11 percent of adjusted gross income would be eligible for subsidies.

The bill provides that the Commissioner may authorize State Medicaid agencies—as well as other “public entit[ies]” to make determinations of eligibility for subsidies, and exempts the subsidy regime from the five-year waiting period on federal benefits established as part of the 1996 welfare reform law (P.L. 104-193). Some Members may be concerned that, despite the bill’s purported prohibition on payments to immigrants not lawfully present, the first provision could enable State agencies—who have no financial incentive not to enroll undocumented workers in a federal subsidy program—to permit non-eligible individuals, including those unlawfully present, to qualify for health care subsidies, and that the second would give individuals a strong incentive to emigrate to the United States in order to obtain free federal welfare benefits.

Premium subsidies provided would be determined on a six-tier sliding scale, such that individuals with incomes under 133 percent of the Federal Poverty Level (FPL, $29,327 for a family of four in 2009) would be expected to pay 1.5 percent of their income, while individuals with incomes at 400 percent FPL ($88,200 for a family of four) would be expected to pay 11 percent of their income. Subsidies would be capped at the average premium for the three lowest-cost basic plans. Members may also note that as subsidies would be based on adjusted gross income, individuals with total incomes well in excess of the AGI threshold could qualify for subsidies—such that a family of four with $100,000 of total earnings could qualify for subsidies if $12,000 of that income was placed in a 401(k) plan and therefore not counted for purposes of calculating the AGI limits.

The bill further provides for cost-sharing subsidies, such that individuals with incomes under 133 percent FPL would be covered for 97 percent of expenses, while individuals with incomes at 400 percent FPL would have a basic plan covering 70 percent (the statutory minimum). Some Members may be concerned that these rich benefit packages, in addition to raising subsidy costs for the federal government, would insulate plan participants from the effects of higher health spending, resulting in an increase in overall health costs—exactly the opposite of the bill’s purported purpose.

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

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

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

The bill includes a limited exemption for small businesses from the employer mandate—those with total payroll under $250,000 annually would be exempt, and those with payrolls of between $250,000 and $400,000 would be subjected to lower tax penalties (2-6 percent, as opposed to 8 percent for firms with payrolls over $400,000). However, as these limits are not indexed for inflation, the threshold amounts would likely become increasingly irrelevant over time, as virtually all employers would be subjected to the 8 percent payroll tax.

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

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

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

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

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

Tax Increases

Tax on Small Businesses: The bill imposes a new “surtax” on individuals with incomes over $350,000, that would ultimately raise rates by 2 percent on individuals with incomes between $350,000-$500,000, 3 percent on individuals with incomes between $500,000-$1,000,000, and 5.4 percent on individuals with incomes over $1 million. The tax would apply beginning in 2011. The bill provides that the first two “surtax” levels would remain at 1 and 1.5 percent (instead of 2 and 3 percent, respectively) if the Office of Management and Budget certifies in 2012 that at least $675 billion in federal health reform savings would occur as a result of the bill’s passage. The Joint Committee on Taxation estimates that such provisions would raise taxes by $544 billion over ten years. As more than half of all high-income filers are small businesses, many Members may be concerned that this provision would cripple small businesses and destroy jobs during a deep recession. Members may also be concerned that the “federal health reform savings” would never materialize, particularly during the short time window available prior to such certification—resulting not only in higher federal spending, but additional job-crushing taxes on small businesses.

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

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

Economic Substance: The bill codifies the economic substance doctrine—which is used to prohibit tax benefits on transactions that are deemed to lack “economic substance.” The bill states that a transaction has economic substance only if the transaction changes the taxpayer’s “economic position” in “a meaningful way” and the taxpayer has a “substantial purpose” for entering into the transaction. In addition, the bill would impose a 20 percent penalty on understatements attributable to a transaction lacking economic substance (40 percent in cases where certain facts are not disclosed). Some Members may be concerned that this provision would impose new burdens of proof and new liability penalties on taxpayers for making routine business decisions related to taxes. JCT scores this provision as raising $3.6 billion over ten years.

Division B—Medicare and Medicaid Provisions

This division contains a significant expansion of Medicaid, fully paid for by the federal government, provisions to increase Medicare physician reimbursements without offsets, cuts to Medicare Advantage plans that would cause millions of seniors to lose their current plans, and other expansions of the Medicare and Medicaid programs. Details of the division include:

Medicare Provisions

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

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

Physician Payment Provisions: The bill provides for an increase in Medicare physician reimbursements for 2010 equal to the increase in medical inflation, and recalibrates the Sustainable Growth Rate (SGR) mechanism such that year 2009 physician expenditures shall be used as the new baseline for computing whether total physician payments exceed the SGR targets. The bill also exempts physician-administered drugs from the SGR formula and establishes two separate conversion factors—one for evaluation and management services, including primary care and preventive services, and one for all other services provided. Thus evaluation and management services and all other specialist services would receive different annual payment rates, based on the growth of each service over time; the former would also receive a higher conversion factor under the bill—GDP growth plus two percent for evaluation and management services, as opposed to GDP growth plus one percent for all other services.

The bill provides for bonus payments of 5 percent for physicians participating in counties within the lowest 5 percent of total Medicare spending for 2011 and 2012, extends incentive payments under the Physician Quality Reporting Initiative through 2011 and 2012, and requires ambulatory surgical centers to submit cost and quality data to CMS. The bill reduces market basket updates for outpatient hospitals, ambulance services, laboratory services, and durable medical equipment not subject to competitive bidding to reflect productivity gains in the overall economy, increases the presumed utilization of imaging equipment—so as to reduce overall payment levels for imaging services—includes provisions regarding oxygen suppliers and bond requirements for durable medical equipment, and draws down existing funds in the Medicare Improvement Fund.

Hospital Re-Admissions: The bill reduces payments to hospitals with higher-than-expected re-admission rates based on their overall case mix, excluding planned or unrelated re-admissions. The provision could reduce overall hospital payments by no more than 1 percent in 2012 and 5 percent in 2015 and subsequent years. Hospitals receiving more than $10 million in DSH funds annually would receive a 5 percent increase in their DSH payments to provide for transitional services for patients post-discharge. The bill provides for payment reductions in up to 1 percent for post-acute care providers (i.e. skilled nursing facilities, inpatient rehabilitation facilities, home health agencies, and long-term care hospitals) in instances where beneficiaries were readmitted within 30 days after discharge, and creates a pilot program for bundling post-acute care services.

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

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

Geographic Adjustment Factors: The bill requires an Institute of Medicine study regarding the accuracy of Medicare geographic adjustment factors, as well as directions to the Secretary to revise geographic adjustment factors for Medicare payment systems in a way that would not result in an overall reduction in payment rates.

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

Even though no other Medicare provider is paid on the basis of quality, the bill provides for a quality improvement adjustment for MA plans of up to 3 percent, along with an additional one percent increase for improved quality plans, based on re-admission rates, prevention quality, and other related measures. Incentive payments would be available to the top quintile of plans, and the top quintile of most improved plans. However, the Secretary may disqualify plans as not highly ranked, irrespective of their quantitative performance, “if the Secretary has identified deficiencies in the plan’s compliance.” The bill also requires CMS to make annual adjustments to MA plan payments to reflect differences in coding patterns between MA plans and government-run Medicare, and eliminates the three month open-enrollment period for Medicare Advantage plans, confining changes in enrollment to the period between November 1 and December 15. The bill extends reasonable cost contract provisions through 2012, and limits CMS’ waiver authority for employer group MA plans unless 90 percent of enrollees reside in a county in which the MA organization offers an eligible plan.

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

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

Part D Provisions: The bill extends price controls, via Medicaid drug rebates, to all dually eligible beneficiaries participating in both Medicare and Medicaid, and requires that such rebates be deposited into a new account to finance the elimination of the Part D “doughnut hole” as described below. Some Members may be concerned that expanding prescription drug price controls into the only part of Medicare that consistently comes in under budget would constitute the further intrusion of government into the health care marketplace, and do so in a way that harms the introduction of new breakthrough drugs and treatments. Some Members may also note that CBO has previously stated that an expansion of the Medicaid drug rebate to Medicare would result in drug companies raising private-sector prices—potentially resulting in higher prices for many Americans.

The bill slowly phases in prescription drug coverage in the Medicare Part D “doughnut hole,” by increasing the initial coverage limit and decreasing the annual out-of-pocket maximum; the transition phases in starting in 2011, but would only be 55 percent complete in 2019 (i.e. ten years from now). Some Members may believe this provision constitutes a budgetary gimmick designed to mask the full cost of filling in the doughnut hole by extending such costs well outside the ten-year budgetary window.

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

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

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

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

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

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

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

Accountable Care Organizations: The bill establishes a pilot program to create accountable care organizations (ACOs) designed to improve coordination of care and improve system efficiencies. ACOs would include a group of physicians, including a sufficient number of primary care physicians, and could also include hospitals and other providers. ACOs would be eligible to receive a portion (as determined by CMS) of the savings from a reduction in projected spending under Parts A, B, and D for beneficiaries enrolled in the ACO. ACOs would also be permitted to receive their payments on a partially-captitated basis, as determined by CMS. The Secretary may make the pilot program permanent, provided that the CMS Chief Actuary certifies that the program would reduce Medicare spending.

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

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

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

Comparative Effectiveness Research: The legislation includes language regarding the comparative effectiveness of various medical services and treatment options. The bill would establish another government center for comparative effectiveness research to gauge the effectiveness of medical treatments, a commission of federal bureaucrats and others to set priorities, and a trust fund in the U.S. Treasury to support the research. The trust fund’s research would be financed by transfers from the cash-strapped Medicare Trust Funds, along with new taxes on insurance plans imposed on a per capita basis. While the bill includes a prohibition on the Center using its research to mandate treatment options, some Members may be concerned that the bill includes no prohibition on other agencies (i.e. the Centers for Medicare and Medicaid Services) using comparative effectiveness research—including cost-effectiveness research—to make coverage and/or reimbursement decisions, which could lead to government rationing of life-saving drugs, therapies, and treatments.

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

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

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

The bill creates a standardized complaint form for facilities and imposes requirements on States to maintain complaint processes that employees, patients, and patients’ friends and family members are not retaliated against for lodging a complaint. The bill extends federal whistleblower protections to any current or former employee of a facility regarding good faith complaints made about that facility and permits victims of discrimination to pursue action against the facility in United States district court. The bill permits successful whistleblower plaintiffs to receive damages as well as “reasonable attorney and expert witness fees,” and prohibits any contractual arrangement from waiving or infringing upon whistleblowers’ rights. Some Members could be concerned that these provisions would constitute an invitation to lawsuits against nursing home facilities, the cost of which could significantly hinder the facility’s ability to provide quality patient care.

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

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

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

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

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

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

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

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

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

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

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

Medicaid and SCHIP Provisions

Medicaid Expansion: The bill expands Medicaid to all individuals—including non-disabled, childless adults not currently eligible for benefits—with incomes below 133 percent FPL ($29,326 for a family of four). New populations made eligible for Medicaid benefits under this provision would have their benefits fully financed by the federal government—an unprecedented change in the shared responsibility structure of the Medicaid program.

Many Members may be concerned by both the cost and scope of this unprecedented expansion of Medicaid to millions more Americans. Some Members may believe the 100 percent federal match would provide a strong disincentive for States to take appropriate action to control costs, as well as fraud and abuse, in their Medicaid programs. Members may also note that a plurality of individuals (44 percent) with incomes between one and two times the poverty level have private health insurance; expanding Medicaid to 133 percent FPL would provide a strong incentive for the employers of these individuals to drop their current coverage so they can instead enroll in the government-run plan. Moreover, given Medicaid’s history of poor beneficiary access to care, some Members may believe that Medicaid itself needs fundamental reform—and beneficiaries need the choice of access to quality private coverage rather than a government-run plan.

Medicaid/Exchange Interactions: The bill requires States to accept and enroll individuals documented by the Exchange as having incomes under 133 percent FPL. The bill also excludes any payments related to erroneous eligibility determinations for Exchange plans from States’ Medicaid error rates—which some Members may be concerned could encourage States to enroll beneficiaries not eligible for benefits.

In general, the bill would require currently eligible Medicaid beneficiaries to remain in the government-run Medicaid program, while giving newly eligible beneficiaries in expansion populations the choice of government-run Medicaid or coverage through Exchange plans. Some Members may be concerned that these provisions would result in significant disparities among low-income beneficiaries; while some would be “locked in” to government-run Medicaid, others would be permitted a choice (albeit a choice narrowly defined by bureaucratic standards) of coverage options in the Exchange—based largely on arbitrary factors.

The bill imposes maintenance of effort requirements on States, prohibiting the voters or elected leaders of a State from reducing eligibility levels in that State’s Medicaid and SCHIP programs after the bill’s enactment. Some Members may be concerned that these restrictions—which Tennessee Democrat Gov. Phil Bredesen termed “the mother of all unfunded mandates” on States—and could prompt a scenario envisioned by the head of Washington State’s Medicaid program, whereby States facing severe financial distress may say, “‘I have to get out of the Medicaid program altogether.’”

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

Preventive Services: The bill requires Medicaid to cover certain preventive services, as well as recommended vaccines. The bill also permits Medicaid coverage of tobacco cessation programs, as well as optional coverage of nurse home visitation services.

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

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

Access to Services: The bill increases reimbursements to Medicaid primary care providers so that all such providers would be paid at Medicare rates by 2012—with the cost of such increased reimbursements fully paid for by the federal government. Some Members could be concerned this provision would result in States shifting more and more health care bills towards primary care services paid for by federal taxpayers at a higher rate. The bill requires the Secretary to establish a medical home pilot program for Medicaid, similar to the Medicare program described above, and provides $1.2 billion to finance additional federal costs over the five-year period of the project.

The bill gives States the option to cover “ambulatory services that are offered at a freestanding birth center,” defined as any non-hospital location “where childbirth is planned to occur away from the pregnant woman’s residence,” as well as certain low-income HIV positive individuals at an enhanced federal match. The bill extends for two additional years the Transitional Medical Assistance (TMA) program that provides Medicaid benefits for low-income families transitioning from welfare to work. Traditionally, the TMA provisions have been coupled with an extension of Title V abstinence education funding during the passage of health care bills. However, the Title V funds were excluded from the bill language, and therefore expired on July 1, 2009. Some Members may be concerned at the removal of the Title V abstinence education funding and the potential end of this program.

The bill requires that stand-alone SCHIP programs must implement 12-month continuous eligibility programs. Some Members may be concerned that these provisions, in restricting State flexibility, would allow individuals to continue to receive federally-financed benefits long after they became ineligible.

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

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

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

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

Division C—Public Health

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

New Mandatory Spending: The bill appropriates $88.7 billion in new mandatory spending over ten years for a “Public Health Investment Fund,” of which $35.3 billion is dedicated to a “Prevention and Wellness Trust.” This increase in mandatory spending is intended to fund programs established in the bill, as well as other programs in the Public Health Service Act. Moreover, the language establishing the trust funds states that the nearly $90 billion in expenditures “shall not be taken into account” for budgetary purposes—which many Members may view as a budgetary gimmick designed to mask the bill’s true costs.

Community Health Centers: The bill authorizes an additional $38.8 billion from the Public Health Investment Fund for grants to community health centers—funding over and above the significant increase provided in the $13.3 billion, five-year reauthorization that passed just last year (P.L. 110-355). Some Members may be concerned by the significant increase in authorization levels given the federal government’s expected deficit of nearly $2 trillion this year.

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

The bill would award grants to hospitals and other entities to plan, develop, or operate training programs and provide financial assistance to students with respect to certain medical specialties, including primary care physicians and dentistry, and increase student loan limits for nursing students and faculty. The bill would further award grants to health professions schools for the training of, and/or financial assistance to, medical residents training in community-based settings, public health professionals, and graduate medical residents in preventive medicine specialties. The bill would make certain modifications to existing programs for diversity centers and increase loan repayment limits for such programs by $15,000 (plus a new inflation adjustment) per year. The bill amends provisions relating to grants for cultural and linguistic competence training and authorizes new grants for interdisciplinary training designed to reduce health disparities and to support the operation of school-based health clinics.

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

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

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

Expanded Price Controls: The bill expands participation in the 340B program, which reduces the price paid for outpatient pharmaceuticals purchased by certain entities. Specifically, the bill expands the program to children’s hospitals, critical access hospitals, rural referral centers, and sole community hospitals, while also extending the price control mechanism to inpatient drugs used by such hospitals and facilities. Some Members may be concerned that this language, by extending the scope of price controls on pharmaceutical products, represents a further intrusion of government price controls into the marketplace—and one that could result in loss of access to potentially life-saving treatments, by reducing companies’ incentive to develop new products. In addition, the bill would also create a National Medical Device Registry “to facilitate analysis of post-market safety and outcomes data.”

Cost and Other Concerns

On July 17, the Congressional Budget Office released a preliminary score for certain provisions in the bill—with the noteworthy caveat that with respect to the cost of proposed coverage expansions and insurance reforms, the estimates “is based on specifications provided by committee staff, rather than on a detailed analysis of the legislative language.” As a result, CBO noted that “our review of that language could have a significant effect on our analysis.”

Cost: The House Democrat legislation would increase the federal deficit by approximately $239 billion over ten years, according to CBO’s estimate. This deficit spending would be on top of record annual deficits projected to top $1.8 trillion this year alone. Most notably, CBO Director Elmendorf—speaking at a July 15 Energy and Commerce Committee briefing on the bill as introduced—admitted to Members that the Democrat bill would essentially have no impact on the long-term growth of health care costs—the legislation’s purported goal. Many members may be concerned that spending at least $1.6 trillion to finance a government takeover of health care would not only not help the growth in health costs, but—by creating massive and unsustainable new entitlements—would also make the federal budget situation much worse.

More specifically, CBO estimates that the selected provisions would result in at least $1.6 trillion in federal spending during the 2010-2019 period, including $1.28 trillion to finance coverage expansions—$438 billion for the Medicaid expansions, $773 billion for “low-income” subsidies, $53 billion for small business tax credits, and $15 billion in interactions relating to tax revenues (resulting from changes in employer-sponsored coverage).

Other savings would come from reductions within the Medicare program, of which the biggest are cuts to Medicare Advantage plans (net cut of $162.2 billion), reductions in productivity adjustments to certain market-basket updates for hospitals and other providers (total of $141.7 billion), skilled nursing facility payment reductions (total of $32 billion), various reductions to home health providers (total of $56.8 billion), and reduction in imaging payments ($4.3 billion).

While the net savings from expansion of drug price controls—extending the 340B program to cover inpatient drugs and the Medicaid drug rebate to include dual eligibles in Part D—would save $48 billion over ten years, the CBO scoring table indicates that the cost of eliminating the “doughnut hole” for the Part D benefit—which is phased in over many years, and does not take full effect until well after the 2019 end of the budgetary scoring window—would in time exceed any savings from the discounts provided by the pharmaceutical industry.

Tax Increases: Offsetting payments would include $29 billion in taxes on individuals not complying with the mandate to purchase coverage, as well as a total of $208 billion in taxes and payments by businesses associated with the “pay-or-play” mandate. Members may note that the tax from the insurance mandate would apply on individuals with incomes under $250,000, thus breaking a central promise of then-Senator Obama’s presidential campaign.

The Joint Committee on Taxation notes that the bill provisions would increase federal revenues by $581 billion over ten years—over and above the $237 billion in tax increases related to the individual and employer mandates noted above—for a total of $820 billion in tax increases over ten years. JCT found that the “surtax” would raise nearly $544 billion, the worldwide interest implementation delay would raise $26.1 billion, the treaty withholding provisions would raise $7.5 billion, and the codification of the economic substance doctrine would raise $3.6 billion. Finally, the tax on health benefits used to finance the Comparative Effectiveness Research Trust Fund would raise $2 billion over ten years.

Out-Year Spending: The score indicates that of the nearly $1.28 trillion in spending for coverage expansions under the specifications examined by CBO, only $8 billion—or only 0.6%—of such spending would occur during the first three years following implementation. Moreover, the bill in its final year would spend a total of $254 billion to finance coverage expansions. As a result, the Democrat bill faces large—and growing—annual deficits in each of the last six years of the budgetary window; according to CBO, deficits will rise from $5 billion in Fiscal Year 2014 to $65 billion in 2019. Moreover, the more than half a trillion in proposed tax increases would take effect in 2011, while the coverage expansions would not take effect until 2013. In other words, the Democrat bill spends so much, it needs eight years of higher taxes to finance six years of spending—and even then cannot come into proper balance without relying on budgetary gimmicks.

OMB Director Orszag, testifying before the House Budget Committee in June, asserted that the White House would not support legislation that was not balanced in the long-term—and further stated that the Administration would not support legislation that increased the deficit in the tenth and final year of the budgetary window. Even taking into account Democrat budgetary gimmicks, H.R. 3200 fails that test—as the bill’s $65 billion deficit in 2019 is nearly double the $38 billion cost of physician payment reform (which would be moved into the budgetary baseline under Democrats’ “fuzzy math.”)

Budgetary Gimmicks: As noted above, the bill includes several provisions—some of which are not reflected in the CBO score—to mask its true cost. Most egregiously, the bill includes directed scoring provisions ordering CBO not to score nearly $100 billion in spending included in the plain text of the bill regarding the retiree reinsurance and public health investment funds. The bill also makes several changes designed to lower the bill’s apparent cost—for instance, reducing a permanent extension of the qualifying individual program to a two-year extension, and by moving most of the cost of filling in the Part D “doughnut hole” to outside the ten-year budget window.

Some Democrats claim their legislation is “deficit-neutral” by excluding the cost of reforming the Sustainable Growth Rate (SGR) mechanism for Medicare physician payments—the total cost of which stands at $285 billion over ten years, according to CBO. While Members may support reform of the SGR mechanism, many Members may oppose what amounts to an obvious attempt to incorporate a permanent “doc fix” into the baseline—a gimmick designed solely to hide the apparent cost of health “reform.”

Between the $285 billion unpaid-for cost of reforming physician reimbursements, the nearly $100 billion in “phantom” new entitlements created, and the collective interest on the debt necessary to finance these unfunded obligations, the Democrat legislation contains approximately a half-trillion dollars in additional deficit spending within the ten-year budget window—and CBO has already admitted that the long-term outlook for federal spending under the bill would be even worse.

Coverage: The score also claims that the number of uninsured individuals would be reduced to 17 million by the end of the ten-year budgetary window, a reduction of 37 million in 2019 when compared to current law. Approximately 30 million individuals would purchase their health insurance from the Exchange, including more than 6 million individuals who would lose their current private health coverage purchased on the individual market and enroll in the government-run Exchange.

The CBO score asserts that employer-based coverage would increase slightly, due to the individual and employer mandates. However, CBO also notes that because the government-run plan reimburses at Medicare rates, its costs would be approximately 10 percent lower than other forms of coverage. Particularly as the Lewin Group has indicated that a government-run plan would cause up to 114 million Americans to lose their current coverage, some Members may question CBO’s apparent assumption that employers would not choose to drop their health plans to enroll their workers in a government-run plan with purportedly lower costs than existing coverage.

Undocumented Individuals: The CBO score notes that the specifications examined would extend coverage to 94 percent of the total population, and 97 percent of the population excluding unauthorized immigrants. However, the score goes on to note that of the 17 million individuals remaining uninsured, “nearly half”—or about 8 million—would be undocumented immigrants. Given that most estimates have placed the total undocumented population at approximately 12 million nationwide, some Members may question whether this statement presumes that some undocumented immigrants would obtain health insurance—including health insurance funded by federal subsidies.

Legislative Bulletin: Changes Made in H.R. 3200

On July 14, 2009, the Chairmen of the three House Committees with jurisdiction over health care legislation—Education and Labor Chairman George Miller (D-CA), Energy and Commerce Chairman Henry Waxman (D-CA), and Ways and Means Committee Chairman Charlie Rangel (D-NY)—introduced H.R. 3200, “America’s Affordable Health Choices Act.” The legislation is a revised version of the “discussion draft” first publicly released on June 19. The Chairmen announced their intent to commence markups in their respective Committees beginning on July 16, with an eye toward floor action before the August recess.

Executive Summary: The introduced bill sets the tone for a Washington takeover of the health care system—one defined by federal regulation, mandates, myriad new programs, and higher federal spending. The bill would ensure the heavy hand of federal bureaucrats over the United States health care system, levying costly new taxes on individuals and businesses who do not comply. Many Members may question how additional federal mandates and bureaucratic diktats raising costs appreciably for all Americans would make health care more “affordable.” Many Members may also be concerned that the bill’s provisions—only partially masked by budgetary gimmicks and “smoke-and-mirrors” accounting—cost well over $1 trillion, financed largely by significant job-killing tax increases imposed on small businesses during a recession.

Highlights of major provisions likely to cause Member concern include:

  • Creation of a government-run health plan that experts say would result in 114 million Americans losing their current coverage—a clear violation of any pledge to allow individuals to keep their current health plan;
  • More than half a trillion dollars in tax increases on certain income filers, a majority of whom are small businesses—and $820 billion in tax increases overall;
  • Insurance regulations that would raise costs for nearly all Americans, particularly young Americans, and confine choice of plans to those approved by a board of bureaucrats;
  • New price controls on health insurance companies that provide perverse incentives to keep individuals sick rather than managing chronic disease, while impeding patient access to important services just because those services do not provide a direct clinical benefit;
  • Additional federal mandates that would significantly erode the flexibility currently provided to employers—and could result in firms dropping coverage;
  • Massive expansion of Medicaid—fully paid for by the federal government—to all individuals with incomes below 133 percent of the Federal Poverty Level ($29,326 for a family of four), replacing the existing private health coverage of millions with taxpayer-funded health care;
  • Language opening employers operating group health plans to State law remedies and private causes of action—subjecting employers to review by 50 different State court rulings, thereby raising costs and encouraging more employers to drop their current health plans;
  • Establishment of bureaucrat-run health Exchange that would abolish the private health insurance market outside the Exchange—and could evolve into a single-payer approach due to the Exchange’s ability to cannibalize existing employer plans;
  • Creation of a new government board, the “Health Benefits Advisory Committee,” that would empower federal bureaucrats to impose new mandates—including a mandate to obtain and provide abortion coverage—on individuals and insurance carriers;
  • Taxation of individuals who do not purchase a level of health coverage that meets the diktats of a board of bureaucrats—including those who cannot afford the coverage options provided;
  • New, job-killing taxes—over $200 billion worth—on employers who cannot afford to provide their workers health insurance, which could result in up to 4.7 million employees losing their jobs;
  • Penalties as high as $500,000 on employers who make honest mistakes when filing paperwork with the government health board—which would likely dissuade businesses from continuing to provide coverage, increasing the amount of health care provided through the bureaucrat-run Exchange;
  • “Low-income” health insurance subsidies to a family of four making up to $88,200;
  • Arbitrary and harmful cuts to popular Medicare Advantage plans that would result in millions of seniors losing their current health coverage; and
  • Expanded price controls on pharmaceutical products that would discourage companies from producing life-saving breakthrough treatments.

Preliminary Scores: On July 14, the Congressional Budget Office released a preliminary score for certain provisions in the bill—with the noteworthy caveat that “those estimates are based on specifications provided by the tri-committee group rather than an analysis of the language released today.” As a result, CBO notes that “our review of that language could have a significant effect on our analysis.”

It is also unclear precisely which provisions in the bill were and were not included in the CBO score. The score generally includes the cost impact of low-income subsidies, new insurance regulations, and penalties on individuals not purchasing and employers not offering “acceptable” coverage. However, the Medicare provisions in the discussion draft received a separate preliminary score released last week—but these provisions changed significantly when compared to the discussion draft, and are not included in the score released yesterday. Moreover, while some of the Medicaid changes were included in the specifications which CBO reviewed when preparing its preliminary score, it is unclear whether the score includes all the bill’s Medicaid provisions, or only the ones highlighted in the specifications.

Cost: With the above caveats, CBO estimates that the selected provisions would result in nearly $1.28 trillion in federal spending during the 2010-2019 period—$438 billion for the Medicaid expansions, $773 billion for “low-income” subsidies, $53 billion for small business tax credits, and $15 billion in interactions relating to tax revenues (resulting from changes in employer-sponsored coverage). Offsetting payments would include $29 billion in taxes on individuals not complying with the mandate to purchase coverage, as well as a total of $208 billion in taxes and payments by businesses associated with the “pay-or-play” mandate.

Most notably, CBO Director Elmendorf—speaking at a July 15 Energy and Commerce Committee briefing on the bill as introduced—admitted to Members that the Democrat bill would essentially have no impact on the long-term growth of health care costs—the legislation’s purported goal. Many members may be concerned that spending nearly $1.3 trillion to finance a government takeover of health care would not only not help the growth in health costs, but—by creating massive and unsustainable new entitlements—would also make the federal budget situation much worse.

Tax Increases: The Joint Committee on Taxation notes that the bill provisions would increase federal revenues by $583 billion over ten years—over and above the $237 billion in tax increases related to the individual and employer mandates noted above—for a total of $820 billion in tax increases over ten years. JCT found that the “surtax” would raise nearly $544 billion, the worldwide interest implementation delay would raise $26.1 billion, the treaty withholding provisions would raise $7.5 billion, and the codification of the economic substance doctrine would raise $3.6 billion. Finally, the tax on health benefits used to finance the Comparative Effectiveness Research Trust Fund would raise $2 billion over ten years.

Out-Year Spending: The score clearly indicates that of the nearly $1.28 trillion in spending under the specifications examined by CBO, only $8 billion—or only 0.6%—of such spending would occur during the first three years following implementation. Moreover, the bill in its final year would spend a total of $254 billion to finance coverage expansions. Thus the true cost of ten years’ worth of spending once the bill is fully implemented would likely exceed $2 trillion.

Budgetary Gimmicks: As noted above, the bill includes several provisions—some of which are not reflected in the CBO score—to mask its true cost. Most egregiously, the bill includes directed scoring provisions instructing CBO not to score the nearly $100 billion in spending included in the plain text of the bill regarding the retiree reinsurance and the public health investment fund. The bill also makes changes designed to lower the bill’s apparent cost—for instance, reducing a permanent extension of the qualifying individual program to a two-year extension.

Coverage: The score also claims that the number of uninsured individuals would be reduced to 17 million by the end of the ten-year budgetary window, a reduction of 37 million in 2019 when compared to current law. Approximately 30 million individuals would purchase their health insurance from the Exchange, including more than 6 million individuals who would lose their current private health coverage purchased on the individual market and enroll in the government-run Exchange.

The CBO score asserts that employer-based coverage would increase slightly, due to the individual and employer mandates. However, CBO also notes that because the government-run plan reimburses at Medicare rates, its costs would be approximately 10 percent lower than other forms of coverage. Particularly as the Lewin Group has indicated that a government-run plan would cause up to 114 million Americans to lose their current coverage, some Members may question CBO’s apparent assumption that employers would not choose to drop their health plans to enroll their workers in a government-run plan with purportedly lower costs than existing coverage.

Undocumented Individuals: The CBO score notes that the specifications examined would extend coverage to 94 percent of the total population, and 97 percent of the population excluding unauthorized immigrants. However, the score goes on to note that of the 17 million individuals remaining uninsured, “nearly half”—or about 8 million—would be undocumented immigrants. Given that most estimates have placed the total undocumented population at approximately 12 million nationwide, some Members may question whether this statement presumes that some undocumented immigrants would obtain health insurance—including health insurance funded by federal subsidies.

Summary of Changes Made: The bill as introduced adds 156 pages of text to the 852 page discussion draft, as well as hundreds of billions of dollars of new tax increases on individuals and small businesses. However, the bill does not substantially alter the creation of a government-run health plan that would cause 114 million Americans to lose their current coverage according to non-partisan actuaries at the Lewin Group. Nor does the bill achieve its purported goal of making health care more affordable—as the legislation’s mandates, bureaucracies, and regulations are likely to increase costs, not lower them. Highlights of changes made when compared to the discussion draft include:

Coverage Provisions

Insurance Regulations

  • Bans the sale of individual market health plans outside the Exchange—while the prior draft stated that coverage purchased on the private market would not qualify as “acceptable” coverage for purposes of the federal mandate (effectively a de facto prohibition, as few would buy such plans), the bill as introduced says that private health coverage “may only be offered” as part of the bureaucrat-run Exchange.
  • Strikes language stating that the Health Benefits Advisory Committee should “ensure that essential benefits coverage does not lead to rationing of health care.” Some Members may view this change as an admission by Democrats that the bureaucrats on the Advisory Committee—and the new government-run health plan—would therefore deny access to life-saving services and treatments on cost grounds.
  • Requires insurers to make disclosures on plan documents in “plain language”—and requires the Commissioner “to develop and issue guidance on best practices of plain language writing.”
  • Requires the Commissioner to conduct audits of health benefits plans in conjunction with States—a provision which some Members may be concerned could lead to overlapping and duplicative requirements on private businesses.
  • Establishes whistleblower protections against employees who file complaints regarding actual or potential violations of the Act’s provisions, and permits employees to bring actions for damages under provisions in the Consumer Product Safety Act.
  • Includes severability language regarding constitutionality, namely, that if some provisions—such as the individual mandate—are struck down as unconstitutional, the entire bill shall not be struck down on constitutional grounds.
  • Imposes price controls on insurance companies effective in 2011. Specifically, the bill requires carriers who do not meet a medical loss ratio—that is, the percentage of premiums paid back in medical claims—“specified by the Secretary,” those companies will be forced to pay “rebates” back to patients. Some Members may be concerned first at the prospect of imposing price controls on private enterprises, and second by the blanket authority given to federal bureaucrats to do so.
  • Prohibits carriers from rescinding insurance policies effective October 1, 2010, except in cases of “clear and convincing evidence of fraud” on the part of the applicant.
  • Includes specifications for a reinsurance program for early retirees, including a $10 billion Retiree Reserve Trust Fund to finance reinsurance payments to employers (including multiemployer and other union plans) who offer coverage to retired workers aged 55 to 64 who are not eligible for Medicare. The Trust Fund would pay 80 percent of claim costs for all retiree claims exceeding $15,000, subject to a maximum of $90,000; payments must be used to reduce overall insurance premiums and “shall not be used for administrative costs or profit increases.” Some Members may be concerned that such reinsurance programs, by providing federal reimbursement of high-cost claims, would serve as a disincentive for employers to monitor the health status of their enrollees. Some Members may also be concerned that the bill language includes scoring provisions directing the Congressional Budget Office to consider this $10 billion new entitlement “off-budget”—a gimmick intended to hide the true cost of the bill’s provisions.

Insurance Exchange

  • Clarifies that new Medicaid beneficiaries may enroll in Exchange plans, but may not enroll in Medicaid while in an Exchange plan.
  • Inserts a prohibition on private insurance carriers from “us[ing] coercive practices to force providers not to contract with other entities” offering coverage through the Exchange. However, the bill places no such prohibitions on the government-run plan, thus permitting the Department of Health and Human Services to use its authority to set conditions of participation in a way that would undercut private insurance plans and effectively drive them out of business.
  • Includes language requiring participants in Exchange plans to pay premiums directly to the plans themselves, and not through the Exchange. Some Members may view this provision as being inserted because the Congressional Budget Office would score premiums to insurance carriers routed through governmental entities (i.e. Exchanges) as part of the federal budget—and therefore an attempt to mask the true nature of the government takeover of health care the legislation contemplates.
  • Limits the Medicaid eligibility of a newborn not covered under acceptable coverage to 60 days.

Government-Run Health Plan

  • Appropriates $2 billion—as well as 90 days worth of premiums as “reserves”—for the government-run health plan, with repayment—not including interest—to be made over a 10-year period.
  • Directs that the reimbursement rates set by the Secretary beginning in the fourth year of the government-run plan’s operation must be consistent with the bill’s language linking payment to Medicare rates and “shall not be set at levels expected to increase overall medical costs” when compared to Medicare rates.
  • Requires Medicare providers, including physicians, to participate in the government-run plan unless they opt-out of said participation.
  • Provides that all providers who accept the government-run plan’s reimbursement rates shall be considered “preferred physicians”—regardless of their quality or expertise—and creates a new category of “participating, non-preferred physicians” who agree to abide by balance billing requirements similar to those in Medicare. Other providers may participate in the government-run plan only if they agree to accept the plan’s reimbursement rates as payment in full.

Insurance Subsidies

  • Allows the Commissioner to delegate to other “public entit[ies]” the task of determining eligibility for “low-income” subsidies. Some Members may be concerned that this broad blanket authority could result in easier access to federally-financed benefits for non-eligible individuals.
  • Eliminates a provision permitting individuals with an offer of employer-sponsored coverage to decline that coverage and enroll in an Exchange plan, unless the annual cost of that plan exceeds 11 percent of family income.
  • Modifies the schedule for “low-income” subsidies, such that premiums and total cost-sharing shall not exceed 1.5 percent of income (up from 1 percent) for individuals with income below 133 percent of the federal poverty level ($29,327 for a family of four) and 10 percent of income for individuals below 400 percent FPL.

Individual and Employer Mandates

  • Requires that employers offering “acceptable” coverage for purposes of the federal mandate automatically enroll their employees in the lowest-cost plan, with employees able to opt-out of their group plan.
  • Benchmarks the minimum contribution required by employers for purposes of the federal mandate (72.5 percent for individual coverage, 65 percent for family coverage) to the lowest-cost plan offered by the employer.
  • Prohibits “any contribution on behalf of an employee for which there is a corresponding reduction in the compensation of the employee” from qualifying as an employer contribution for purposes of the individual mandate. Some Members may be concerned that this provision would prohibit firms from adjusting their compensation practices to comply with the bill’s massive unfunded mandates—and in so doing, could have the perverse effect of encouraging firms to lay off workers rather than absorb the costs associated with the mandate.
  • Adjusts the impact of the “pay-or-play” mandate to include a tax on non-compliant firms of 8 percent of average wages in a manner that allows for aggregation of total employee costs.
  • Exempts small businesses with total annual wages less than $250,000 from the mandate, and subjects small businesses with wages under $400,000 to lower tax increases in a range of 2-6 percent. Some Members may be concerned that these limits—which are not linked for inflation—would create perverse incentives at the margins for businesses not to hire workers, or increase salaries, for fear of being subjected to additional taxes.
  • Increases the tax for non-compliance with the individual mandate from 2 percent to 2.5 percent. Members may note that the bill does not limit this tax increase to individuals with incomes over $250,000, thus violating a central tenet of then-Senator Obama’s campaign platform.
  • Lowers the limit on “highly-compensated individuals” ineligible for the small business tax credit from $125,000 to $80,000. Some Members may question how an individual making $80,000 would have qualify as “highly-compensated” for purposes of the small business tax credit, but—if in a family of four—would be eligible for “low-income” subsidies available to families with incomes under $88,200 per year.

Tax Increases

  • Imposes a new “surtax” on individuals with incomes over $350,000, that would ultimately raise rates by 2 percent on individuals with incomes between $350,000-$500,000, 3 percent on individuals with incomes between $500,000-$1,000,000, and 5.4 percent on individuals with incomes over $1 million. The tax would apply beginning in 2011. The bill provides that the first two “surtax” levels would remain at 1 and 1.5 percent (instead of 2 and 3 percent, respectively) if the Office of Management and Budget certifies in 2012 that at least $675 billion in federal health reform savings would occur as a result of the bill’s passage. The Joint Committee on Taxation estimates that such provisions would raise taxes by $544 billion over ten years. As more than half of all high-income filers are small businesses, many Members may be concerned that this provision would cripple small businesses and destroy jobs during a deep recession. Members may also be concerned that the “federal health reform savings” would never materialize, particularly during the short time window available prior to such certification—resulting not only in higher federal spending, but additional job-crushing taxes on small businesses.
  • Delays for an additional ten years the application of worldwide interest allocation provisions first enacted into law (but never implemented) in 2004, which JCT estimates would raise $26.1 billion over ten years. Some Members may be concerned that, in addition to increasing taxes on businesses during a recession, further extension of these provisions would create undue uncertainty for many firms in an uncertain enough economic climate.
  • Limits the treaty benefits for certain deductible payments made by members of multinational entities in the U.S. that are controlled by foreign parent corporations in nations that hold tax treaties with the U.S. The bill prohibits certain previously negotiated taxes reductions on payments to foreign affiliates under current tax treaties. Some Members may be concerned that this provision would violate previously negotiated treaties and impose higher taxes on foreign companies with affiliates that create jobs in the U.S. Some Members may also be concerned this provision could harm U.S. business by spurring retaliatory acts from foreign companies. JCT scores this provision as raising $7.5 billion over ten years.
  • Codifies the economic substance doctrine—which is used to prohibit tax benefits on transactions that are deemed to lack “economic substance.” The bill states that a transaction has economic substance only if the transaction changes the taxpayer’s “economic position” in “a meaningful way” and the taxpayer has a “substantial purpose” for entering into the transaction. In addition, the bill would impose a 20% penalty on understatements attributable to a transaction lacking economic substance (40% in cases where certain facts are not disclosed). Some Members may be concerned that this provision would impose new burdens of proof and new liability penalties on taxpayers for making business decisions related to taxes. JCT scores this provision as raising $3.6 billion over ten years.

Medicare Provisions

Traditional Medicare

  • Makes adjustments to skilled nursing facility payment rates for non-therapy ancillary services, and instructs the Secretary to make adjustments to the case mix classification system.
  • Beginning in 2017, directs the Secretary to reduce disproportionate share hospital (DSH) payments to hospitals by up to 50 percent if there is a reduction in the number of uninsured by 8 percentage points during the 2012-14 period.
  • Extends reductions in productivity adjustments (resulting in a net decrease in reimbursements) to ambulance services, ambulatory surgical centers, laboratory services, and durable medical equipment not subject to competitive bidding.
  • Eliminates a proposed two-year extension of a payment rule for certain therapeutic radiopharmaceuticals—as the Centers for Medicare and Medicaid Services has proposed regulations addressing this issue. Some Members may view this change as a budgetary gimmick intended to shift the costs for such a proposal outside the legislative arena.
  • Waives a surety bond requirement for certain durable medical equipment providers, and requires oxygen suppliers to continue to provide supplies during the useful lifetime of the oxygen equipment. Exempts certain pharmacies from accreditation requirements for the sale of diabetic testing strips.
  • Delays by one year (from 2011 to 2012) implementation of provisions reducing payments to hospitals with high re-admission rates, and makes other changes.
  • Requires conversion of a post-acute care bundling demonstration program into a pilot program available to all providers, provided such a program would result in overall reductions in Medicare spending.
  • Requires revisions to geographic adjustment factors for Medicare payment systems in a way that would not result in an overall reduction in payment rates.

Medicare Advantage

  • Requires risk adjustment for purposes of determining quality bonus payments to Medicare Advantage plans, and permits the Secretary to disqualify plans as not highly ranked, irrespective of their quantitative performance, “if the Secretary has identified deficiencies in the plan’s compliance.”
  • Eliminates the three month open-enrollment period for Medicare Advantage plans, confining changes in enrollment to the period between November 1 and December 15.
  • Extends Secretarial authority to reject Part D prescription drug plans for any reason. Some Members may be concerned that this provision—like similar provisions applicable to Medicare Advantage plans included in the initial draft—would provide federal bureaucrats with the power to reject any or all private health plans for arbitrary reasons—including an ideological objective to consolidate enrollment in a single government-run plan.
  • Eliminates an extension of fully integrated Special Needs Plans.

Medicare Part D

  • Reduces the scope of the proposed extension of the Medicaid drug rebate program to dual eligible benefits only—whereas the discussion draft proposed a broader universe of all low-income subsidy individuals—and specifically directs that revenues from said rebates be deposited into a fund intended to finance the gradual elimination of the “doughnut hole.”
  • Requires drug manufacturers, as a condition of participation in Part D, to sign a “discount agreement” providing discounts of 50 percent to beneficiaries in the “doughnut hole” prior to its elimination. Given the ostensibly voluntary nature of the agreement with pharmaceutical manufacturers that led to this provision, some Members may question why the bill links participation in the Part D program to these “voluntary” discounts—one that amounts to a form of price control.

Other Medicare-Related Provisions

  • Limits a new expansion of low-income subsidies to all subsidy-eligible individuals to two years (2010 and 2011). Some Members may view this provision as a budgetary gimmick designed to mask the bill’s true cost.
  • Eliminates provisions providing for automatic re-enrollment in the low-income subsidy program.
  • Eliminates the Part B “hold harmless” provision, as well as provisions requiring guaranteed issue of certain Medigap supplemental policies.
  • Modifies the accountable care organization (ACO) pilot program to allow for other physician organization models, and for non-Medicare participating physicians to be included in the ACO.
  • Modifies primary care incentives to include nurse practitioners and physician assistants, and makes obstetricians and gynecologists similarly eligible for bonus payments.
  • Amends the Comparative Effectiveness Research Commission—which guides the activities of the Comparative Effectiveness Research Center established in the bill—to require that at least nine of its members be practicing physicians
  • Includes an additional $300 million in start-up funding for comparative effectiveness research, and makes changes to the tax on health benefits created to finance such research.
  • Requires hospitals and ambulatory surgical centers participating in Medicare or Medicaid to submit public reports on hospital-acquired infections to the Centers for Disease Control.
  • Increases anti-fraud funding by $100 million per year, beginning in 2011, and makes other changes to anti-fraud provisions.

Medicaid and SCHIP Provisions

  • Requires that States demonstrate the adequacy of their provider networks before requiring beneficiary enrollment in managed care organizations.
  • Removes asset tests from certain Medicaid eligibility categories.
  • Provides for total $10 billion reduction in Medicaid disproportionate share hospital (DSH) payments–$1.5 billion in Fiscal Year 2017, $2.5 billion in 2018, and $6 billion in 2019—in a manner that reflects States’ increase in insurance coverage rates.
  • Reduces Medicaid matching rate for preventive services from an enhanced match rate to the existing federal match, and strikes provisions eliminating cost-sharing for preventive services.
  • Reduces the federal match for nurse home visitation services from the enhanced federal match level to the regular Medicaid matching rate.
  • Strikes provision requiring States to cover Medicaid health services provided in school-based clinics.
  • Strikes provision providing enhanced federal match for electronic eligibility systems.
  • Requires stand-alone SCHIP programs to implement a 12-month continuous eligibility option for low-income children in families with incomes less than twice the federal poverty line.
  • Requires drug manufacturers to direct Medicaid rebates for enrollees in Medicaid managed care organizations to State Medicaid agencies rather than the managed care organizations.
  • Allows the Secretary to impose price controls on Medicaid managed care organizations in the form of medical loss ratios that exceed the discussion draft’s statutory minimum of 85 percent. Some Members may be concerned both at the prospect of extending price controls to private enterprise, and by the Secretary’s blanket authority to make arbitrary determinations regarding same.
  • Reduces the extension of the Qualifying Individual program—which was made permanent in the discussion draft—to two years. Some Members may view this provision as a budgetary gimmick designed to mask the true cost of the legislation.
  • Reduces size of new mandatory spending on nurse home visitation programs from $1.75 billion to $750 million during Fiscal Years 2010 through 2014.

Public Health Provisions

  • Increases spending on a new Public Health Investment Fund from $33.7 billion over five years to $88.7 billion over ten years—a 263 percent increase in funding from the discussion draft. Also includes provisions directing the Congressional Budget Office to consider such funding “off-budget”—which many Members may view as a gimmick designed to mask the true cost of the bill’s spending.
  • Increases authorization levels for community health centers from $12 billion over five years in the discussion draft to $38.8 billion over ten years.
  • Inserts a new grant program for training of medical residents in community-based settings.
  • Increases funding for the Prevention and Wellness Trust from $15.2 billion over five years to $35.3 billion over ten, and includes ten-year authorizations (through Fiscal Year 2019) for other prevention and public health programs.
  • Extends discounts provided in the 340B program for certain hospitals and providers to inpatient drugs. Some Members may be concerned that this provision would amount to an expansion of federal price controls within the pharmaceutical industry.
  • Creates new grant program to finance operation of school-based health clinics.
  • Establishes national medical device registry to analyze post-market safety and outcomes data.

Legislative Bulletin: House Democrats’ Discussion Draft: A Government Takeover of Health Care

On June 19, 2009, the Chairmen of the three House Committees with jurisdiction over health care legislation—Education and Labor Chairman George Miller (D-CA), Energy and Commerce Chairman Henry Waxman (D-CA), and Ways and Means Committee Chairman Charlie Rangel (D-NY)—introduced a joint “discussion draft” of health reform legislation.  The Chairmen announced their intent to commence hearings in their respective Committees beginning June 23; mark-ups and floor action are likely for the July work period.

Summary: As released, the discussion draft contains three divisions and a total of 18 titles.  However, as previously noted, most of the provisions necessary to pay for the bill—including additional tax increases beyond the tax penalties included in the draft—have yet to be released.

Division A—Affordable Health Care Choices

This division would create a new entitlement—a government-run health plan causing as many as 120 million Americans to lose their current coverage—intended to provide all Americans with “affordable” health insurance.  The bill also imposes new mandates and regulations on individual and employer-sponsored health insurance, while raising taxes on businesses who do not offer coverage and individuals who do not purchase coverage meeting federal bureaucrats’ standards.  Details of the division include:

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

Insurance purchased on the individual market after the bill’s effective date would not be considered “acceptable coverage” for purpose of compliance with federal mandates.  These plans would also be prohibited from enrolling new members, ensuring that their risk pools can only get sicker and older, increasing the cost of coverage under the plan.  Some Members may be concerned that this provision would constitute an effective abolition of the private market for health insurance, requiring all coverage to be purchased through the bureaucrat-run Exchange.

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

Insurance Restrictions:  The bill would require both insurance carriers and employer health plans to accept all applicants without conditions, regardless of the applicant’s health status.  The bill also does not clearly permit carriers from restricting guaranteed issue enrollment to certain open enrollment periods—meaning that individuals could be eligible to enroll immediately after suffering a major (and costly) adverse health event.

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

The bill requires plans to comply with new standards ending “discrimination in health benefits or benefit structures” for applicable plans, “to the extent that such standards are not inconsistent with” existing law requirements under the Employee Retirement Income Security Act (ERISA) governing group health coverage.  Some Members may view these confusing—and apparently conflicting—provisions as an invitation for costly lawsuits regarding perceived discrimination that will do little to improve Americans’ health—and much to raise health costs.

The bill also requires health insurance plans to “meet such standards respecting provider networks as the Commissioner may establish”—which some Members may construe as allowing bureaucrats to regulate access to doctors and reject any (or all) private health insurance offering on the grounds that its network access is insufficient.  Conversely, the government-run plan is significantly advantaged because, unlike private plans, it would not be required to form provider networks.

Price Controls:  The bill requires plans spending less than 85 percent of their premium revenue on medical claims to offer refunds to enrollees.  Some Members may view this provision as a government-imposed price control, one that could be viewed as ignoring the advice of White House advisor Ezekiel Emanuel, who wrote that “some administrative [i.e. non-claims] costs are not only necessary but beneficial.”  Some Members may also be concerned that such price controls, by requiring plans to pay out most of their premiums in medical claims, would give carriers a strong (and perverse) disincentive not to improve the health of their enrollees—as doing so would reduce the percentage of spending paid on actual claims below the bureaucrat-acceptable limits.

Benefits Package:  The bill prohibits all qualified plans from imposing cost-sharing on preventive services, as well as annual or lifetime limits on benefits.  As more than half of all individuals currently enrolled in group health plans have some form of lifetime maximum on their benefits, some Members may be concerned that these additional mandates would increase costs and discourage the take-up for insurance.  Some Members may also be concerned that the bill’s provisions encouraging “only co-payments and not co-insurance,” by insulating individuals from the price of their health care, would raise overall health costs—exactly the opposite of the legislation’s supposed purpose.

Annual cost-sharing would be limited to $5,000 per individual or $10,000 per family, with limits indexed to general inflation (i.e. not medical inflation) annually.  Benefits must cover 70 percent of total health expenses regardless of the cost sharing.  Services mandated fall into ten categories: hospitalization; outpatient hospital and clinic services; physician services; durable medical equipment; prescription drugs; rehabilitative and habilitative services; mental health services; preventive services; maternity benefits; and well child care “for children under 21 years of age.”

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

Some Members may be concerned that the Committee would result in federal bureaucrats having undue influence on the definition of insurance for purposes of the individual mandate. Members may also be concerned that the Committee could evolve into the type of Federal Health Board envisioned by former Senator Tom Daschle, who conceived that such an entity could dictate requirements that private health plans reject certain clinically effective treatments on cost grounds. Finally, some Members may be concerned that the Committee could be used as a venue to require all Americans to obtain health insurance coverage of abortion procedures—a finding by unelected bureaucrats that would significantly increase the number of abortions performed nationwide.

Additional Requirements:  The bill would impose other requirements on insurance companies, including uniform marketing standards, grievance and appeals processes (both internal and external), transparency, and prompt claims payment—all of which would be subject to review by the new bureaucracy established through the Commissioner’s office.

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

Pre-Emption:  The bill makes clear that its additional mandates and regulations “do not supersede any requirements” under existing law, “except insofar as such requirements prevent the application of a requirement” in the bill.  The bill also makes clear that existing State private rights of action would apply to plans as currently permitted under existing law.  Some Members may be concerned that these additional mandates, and the duplicative layers of regulation they create, would raise costs and encourage additional employers to drop their existing coverage offerings.

Creation of Exchange:  The bill creates within the federal government a nationwide Health Insurance Exchange.  Uninsured individuals would be eligible to purchase an Exchange plan, as would those whose existing employer coverage is deemed “insufficient” by the federal government.  Once deemed eligible to enroll in the Exchange, individuals would be permitted to remain in the Exchange until becoming Medicare-eligible—a provision that would likely result in a significant movement of individuals into the bureaucrat-run Exchange over time.

After the fifth year, employees in all businesses could enroll in Exchange plans, and employers would be required to pay an 8 percent payroll tax (described in detail below) to finance their employees’ Exchange policies—even if the firm offers coverage of its own.  Many Members may be concerned that these provisions could result in a “death spiral” for employer-based insurance—employers being left with older and sicker individuals while simultaneously paying taxes on other individuals to finance their Exchange coverage—that would lead to the effective death of privately provided insurance coverage and a de facto single-payer system through the bureaucrat-run Exchange.

Employers with 10 or fewer employees would be permitted to join the Exchange in its first year, with employers with 11-20 employees permitted to join in its second year.  Larger employers might be eligible to join in the third year, if permitted to do so by the Commissioner.  States may transition their Medicaid populations to the Exchange—with appropriate supplemental wrap-around coverage—after five years.

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

The bill creates an Office of the Inspector General for the Exchange to “protect the integrity of the Health Insurance Exchange”—however, such office “shall terminate five years after the date of the enactment of this Act,” opening the Exchange up to massive fraud and abuse.

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

State Benefit Mandates:  State benefit mandates would continue to apply to plans offered through the Exchange—but only if the State agrees to reimburse the Exchange for the increase in low-income subsidies provided to individuals as a result of an increase in the basic premium rate attributable to the benefit mandates.  Some Members may note that Democrat Members repeatedly criticized Republicans for overriding State mandates during debate in previous Congresses on the introduction of Association Health Plans.

Requirements on Exchange Plans:  The bill requires plans offered in the Exchange to be State-licensed; plans shall also “contract with essential community providers, as provided for by the Commissioner” and “provide for culturally and linguistically appropriate services and communications.”  The bill gives the Commissioner the power to reduce out-of-network co-payments if the Commissioner determines a plan’s network is inadequate, turning the plan into a fragmented and archaic fee-for-service delivery model that does nothing to coordinate care.  The Commissioner also has authority to impose monetary sanctions, prohibit plans from enrolling new individuals, or terminate contracts.

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

Newborns born in the United States who are “not otherwise covered under acceptable coverage” shall automatically be enrolled in Medicaid; SCHIP eligible children shall be enrolled through the Exchange.  The bill provides for Medicaid-eligible individuals to join the Exchange; beneficiaries failing to choose an Exchange plan will be enrolled in Medicaid.

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

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

Government-Run Health Plans:  The bill requires the Department of Health and Human Services to establish a “public health insurance option” that “shall only be made available through the Health Insurance Exchange.”  The bill States the plan shall comply with requirements related to other Exchange plans, and offer basic, enhanced, and premium plan options.  However, the bill does not limit the number of government-run plans nor does it give the Exchange the authority to reject, sanction, or terminate the government-run plan; therefore, some Members may be concerned that the bill’s headings regarding a “level playing field” belie the reality of the plain text.

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

The bill gives the government-run health plans unlimited taxpayer “start-up funds” from the Treasury, and requires the Secretary to establish premium rates that can fully finance the cost of benefits, administrative costs, and “an appropriate amount for a contingency margin” as developed by the Secretary.  Some Members may be concerned that this provision would allow a health plan CEO (i.e. the Secretary) to determine the plan’s own capital reserve requirements, which could be significantly less than those imposed on private insurance carriers under State law, and question why Democrats who criticized banks for maintaining insufficient reserves are now permitting a government-run health plan to do the exact same thing—unless their motive is to give the government-run health plan a built-in bias.

The bill provides that the government-run plan shall pay Medicare rates for at least its first three years of operation.  Physicians also participating in Medicare as well as the government-run plan shall receive a 5 percent bonus for its first three years; reimbursement rates for pharmaceuticals within the government-run plan would be “negotiated” by the Secretary—a provision which, with respect to Medicare Part D, the Congressional Budget Office has stated would not result in any appreciable savings when compared to negotiations undertaken by private health plans.

While the bill States that the Secretary “may utilize innovative payment mechanisms” to improve health outcomes and achieve other objectives, it also States that the Secretary must set payment rates “consistent with” provisions pointing to Medicare payment rates as the benchmark.  Given estimates from the Lewin Group that as many as 120 million individuals could lose access to their current coverage under a government-run plan—and that a government-run plan reimbursing at the rates contemplated by the legislation would actually result in a net $70 billion decrease in provider reimbursements, even after accounting for the newly insured—many Members may oppose any effort to include a government-run plan in any health reform legislation.

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

The bill prohibits providers from “balance billing,” noting that “the provider may not impose charges for such items or services…that exceed the charges that may be made for such services” under Medicare.  Some Members may be concerned that these provisions would therefore compel providers to accept Medicare-level reimbursements, which the Congressional Budget Office has noted are 20-30 percent below private health insurance payment levels.

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

“Low-Income” Subsidies:  The bill provides for “affordability credits” through the Exchange—and only through the Exchange, again putting employer health plans at a disadvantage.  Subsidies could be used only for basic plans in the first two years, and all plans thereafter.  In the first five years, individuals with employer-sponsored insurance (so long as the coverage meets minimum standards) could not accept subsidies; after the first year, individuals whose group premium costs would exceed 10 percent of adjusted gross income would then be eligible.

The bill provides that the Commissioner may authorize State Medicaid agencies to make determinations of eligibility for subsidies, and exempts the subsidy regime from the five-year waiting period on federal benefits established as part of the 1996 welfare reform law (P.L. 104-193).  Some Members may be concerned that, despite the bill’s purported prohibition on payments to immigrants not lawfully present, the first provision could enable State agencies—who have no financial incentive not to enroll undocumented workers in a federal subsidy program—to permit those unlawfully present to qualify for health care subsidies, and that the second would give individuals a strong incentive to emigrate to the United States in order to obtain free federal welfare benefits.

Premium subsidies provided would be linked to income levels on a sliding scale, such that individuals with incomes under 133 percent of the Federal Poverty Level (FPL, $29,327 for a family of four in 2009) would be expected to pay one percent of their income, while individuals with incomes at 400 percent FPL ($88,200 for a family of four) would be expected to pay ten percent of their income.  Subsidies would be capped at the average premium for the three lowest-cost basic plans.

The bill further provides for six tiers of cost-sharing subsidies, such that individuals with incomes under 133 percent FPL would pay no more than $250 per individual and $500 per family (amounts indexed annually to general inflation—not medical inflation) per year in cost-sharing, while individuals with incomes at 400 percent FPL would pay the statutory maximum cost-sharing of $5,000 per individual and $10,000 per family for basic coverage.  Cost-sharing amounts would also be reduced through subsidies, such that individuals with incomes under 133 percent FPL would cover 98 percent of expenses, while individuals with incomes at 400 percent FPL would have a basic plan covering 70 percent (the statutory minimum).  Some Members may be concerned that these rich benefit packages, in addition to raising subsidy costs for the federal government, will insulate plan participants from the effects of higher health spending, resulting in an increase in overall health costs—exactly the opposite of the bill’s intended purpose.

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

“Pay-or-Play” Mandate on Employers:  In order to meet acceptable coverage standards, the bill requires that employers offer coverage, and contribute to such coverage at least 72.5 percent of the cost of a basic individual policy—as defined by the bureaucrats on the Health Benefits Advisory Council—and at least 65 percent of the cost of a basic family policy, for full-time employees.  The bill further extends the employer mandate to part-time employees, with contribution levels to be determined by the Commissioner.

Employers must comply with the mandate by “paying” a tax of 8 percent of wages paid in lieu of “playing” by offering benefits that meet the criteria above.  In addition, beginning in the Exchange’s fifth year, employers whose workers choose to purchase coverage through the Exchange would be forced to pay the 8 percent tax to finance their workers’ Exchange policy—even if they provide coverage to their employees.  The bill notes that small businesses would be exempt from the payroll tax, but provides no details on the policy—as the section is noted in brackets.

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

Some Members may be concerned that the bill would impose added costs on businesses with respect to both their payroll and administrative overhead.  Given that an economic model developed by Council of Economic Advisors Chair Christina Romer found that an employer mandate could result in the loss of 4.7 million jobs, some Members may oppose any effort to impose new taxes on businesses, particularly during a recession.  Some Members may find the small business exemption insufficient—no matter at what level it would be set—since the threshold level could always be modified in the future to finance shortfalls in the government-run plans, and result in negative effects at the margins (e.g. a restaurant owner with 10 employees not hiring an additional one if the new worker would eliminate his small business exemption and subject him to an 8 percent payroll tax).  Some Members may also be concerned that the bill’s mandates—coupled with a potential new $500,000 tax on small businesses for even unintentional deviations from federal bureaucratic diktats—would effectively encourage employers to drop their existing coverage due to fear of inadvertent penalties, resulting in more individuals losing access to their current plans and being forced into the government-run health plan.

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

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

Small Business Tax Credit:  The bill provides a health insurance tax credit for small businesses, equal to 50 percent of the cost of coverage for firms where the average employee compensation is less than $20,000, establishing a perverse incentive to keep wages low.  Firms with 10 or fewer employees are eligible for the full credit, which phases out entirely for firms with more than 25 workers.  Individuals with incomes of over $125,000 do not count for purposes of determining the credit amount.

Immediate Actions:  Within one year of its enactment, the bill requires the Secretary to establish standardized claims forms, operating rules for health care transactions, and other administrative simplifications—as well as instituting price controls on insurance companies.  Some Members may be concerned that these provisions further confirm the nature of the government takeover of health insurance under the bill—and further question whether any bureaucrat-led effort to simplify administration will prove effective.

Finally, the bill also instructs the Secretary to establish several new programs, including a reinsurance fund to cover a portion of employer-covered health costs for early retirees and a preventive care visit card designed to encourage the use of preventive services.  The draft notes that details of these additional programs—including their costs—are “to be specified later.”

Division B—Medicare and Medicaid Provisions

This division contains a significant expansion of Medicaid, fully paid for by the federal government, provisions to increase Medicare physician reimbursements without offsets, cuts to Medicare Advantage plans that would cause millions of seniors to lose their current plans, and other expansions of the Medicare and Medicaid programs.  Details of the division include:

Medicare Provisions

Part A Market Basket Updates:  The bill freezes skilled nursing facility and inpatient rehabilitation facility payment rates for 2010.  The bill also incorporates an Administration proposal to reduce market basket updates to reflect productivity gains made throughout the entire economy, effective in 2010.  The bill permits the Centers for Medicare and Medicaid Services (CMS) to recalibrate and adjust the case mix factor for skilled nursing facility payments, and revise the payment system for non-therapy ancillary services at same.  The bill requires a study of Medicare Disproportionate Share Hospital (DSH) payments’ effectiveness on reducing the number of uninsured individuals.

Physician Payment Provisions:  The bill provides for an increase in Medicare physician reimbursements for 2010 equal to the increase in medical inflation, and recalibrates the Sustainable Growth Rate (SGR) mechanism such that year 2009 physician expenditures shall be used as the new baseline for computing whether total physician payments exceed the SGR targets.  The bill also exempts physician-administered drugs from the SGR formula, and establishes two separate conversion factors—one for evaluation and management services, including primary care and preventive services, and one for all other services provided.  Thus evaluation and management services and all other specialist services will receive different annual payment rates, based on the growth of each service over time; the former will also receive a higher conversion factor under the bill—GDP growth plus two percent for evaluation and management services, as opposed to GDP growth plus one percent for all other services.

The bill provides for bonus payments of 5 percent for physicians participating in counties within the lowest 5 percent of total Medicare spending for 2011 and 2012, extends incentive payments under the Physician Quality Reporting Initiative through 2011 and 2012, and requires ambulatory surgical centers to submit cost and quality data to CMS.  The bill reduces market basket updates for dialysis providers and inpatient hospitals to reflect productivity gains in the overall economy, increases the presumed utilization of imaging equipment—so as to reduce overall payment levels for imaging services—and draws down existing funds in the Medicare Improvement Fund.

Hospital Re-Admissions:  The bill reduces payments to hospitals with higher-than-expected re-admission rates based on their overall case mix, excluding planned or unrelated re-admissions.  The provision could reduce overall hospital payments by no more than 1 percent in 2011 and 5 percent in 2014 and subsequent years.  Hospitals receiving more than $10 million in DSH funds annually would receive a 5 percent increase in their DSH payments to provide for transitional services for patients post-discharge.  The bill provides for payment reductions in up to 1 percent for post-acute care providers (i.e. skilled nursing facilities, inpatient rehabilitation facilities, home health agencies, and long-term care hospitals) in instances where beneficiaries were readmitted within 30 days after discharge.

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

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

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

Even though no other Medicare provider is paid on the basis of quality, the bill provides for a quality improvement adjustment for MA plans of up to 3 percent, along with an additional one percent increase for improved quality plans, based on re-admission rates, prevention quality, and other related measures.  Incentive payments will be available to the top quintile of plans, and the top quintile of most improved plans.  The bill also requires CMS to make annual adjustments to MA plan payments to reflect differences in coding patterns between MA plans and government-run Medicare.  The bill extends reasonable cost contract provisions through 2012, and limits CMS’ waiver authority for employer group MA plans unless 90 percent of enrollees reside in a county in which the MA organization offers an eligible plan.

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

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

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

The bill slowly phases in prescription drug coverage in the Medicare Part D “doughnut hole,” by increasing the initial coverage limit and decreasing the annual out-of-pocket maximum; the transition phases in starting in 2011, but would only be 55 percent complete in 2019 (i.e. ten years from now).  Some Members may believe this provision constitutes a budgetary gimmick designed to mask the full cost of filling in the doughnut hole by extending such costs well outside the ten-year budgetary window.

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

Other Provisions:  The bill extends certain hospital re-classifications for two years, as well as a two-year extension of certain ambulance provisions and the therapy caps exceptions process.  The bill also expands the Medicare entitlement to include coverage of immunosuppressive drugs for end-stage renal disease patients no longer eligible for Medicare benefits due to a kidney transplant, and expands the definition of physician services to include consultations regarding end-of-life decision-making.

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

The bill applies the low-income subsidy asset tests to the Medicare Savings Program, and eliminates all cost-sharing for dual eligible beneficiaries receiving home and community-based services who would otherwise be institutionalized in a nursing home.  The bill also permits individuals to self-certify their asset eligibility for low-income subsidy programs, to remain automatically eligible to remain in such programs, and to obtain reimbursement from plans for cost-sharing retroactive to the date of purported eligibility for subsidies—provisions that could serve as an invitation for fraudulent activity.

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

Language Services:  The bill requires a study by CMS regarding language communication and “ways that Medicare should develop payment systems for language services,” and authorizes a demonstration project of at least 24 grants of no more than $500,000 to providers to expand language communication and interpretation services.  As the Medicare Part A Trust Fund is scheduled to be exhausted in 2017, some Members may question the wisdom of these expenditures given the program’s financial difficulties.

Part B Premium Hold-Harmless:  The bill modifies the hold-harmless provision with respect to Part B premium determinations.  Under current law, the annual increase in the Part B premium cannot exceed the annual cost-of-living adjustment (COLA) provided through Social Security.  In years where there is no Social Security COLA—expected to be the case for the years 2010 through 2012—the total increase in Part B spending must be paid for by three groups: 1) new Medicare enrollees (who by definition are not subject to hold-harmless provisions); 2) high-income individuals subject to increased premiums under the Part B means test; and 3) State Medicaid programs paying on behalf of their dual eligible beneficiaries.  The bill provides that for 2010 only, these three categories of beneficiaries would have to pay the increase in Part B premiums—but would not have their premiums doubly increased to offset the premium increases other beneficiaries would have paid but for application of the hold-harmless provision.

Accountable Care Organizations:  The bill establishes a pilot program to create accountable care organizations (ACOs) designed to improve coordination of care and improve system efficiencies.  ACOs would include a group of physicians, including a sufficient number of primary care physicians, and could also include hospitals.  ACOs would be eligible to receive a portion (as determined by CMS) of the savings from a reduction in projected spending under Parts A and B (and, as CMS may determine, Part D) for beneficiaries enrolled in the ACO.  ACOs would also be permitted to receive their payments on a partially-captitated basis, as determined by CMS.  The Secretary may make the pilot program permanent, provided that the CMS Chief Actuary certifies that the program would reduce Medicare spending.

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

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

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

Comparative Effectiveness Research:  The legislation includes language regarding the comparative effectiveness of various medical services and treatment options.  The bill would establish another government center for comparative effectiveness research to gauge the effectiveness of medical treatments, a commission of federal bureaucrats and others to set priorities, and a trust fund in the U.S. Treasury to support the research.  The trust fund’s research would be financed by transfers from the cash-strapped Medicare Trust Funds, along with new taxes on insurance plans imposed on a per capita basis.  While the bill includes a prohibition on the Center using its research to mandate treatment options, some Members may be concerned that the bill includes no prohibition on other agencies (i.e. the Centers for Medicare and Medicaid Services) using comparative effectiveness research—including cost-effectiveness research—to make coverage and/or reimbursement decisions, which could lead to government rationing of life-saving drugs, therapies, and treatments.

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

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

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

The bill creates a standardized complaint form for facilities, and imposes requirements on States to maintain complaint processes that employees, patients, and patients’ friends and family members are not retaliated against for lodging a complaint.  The bill extends federal whistleblower protections to any current or former employee of a facility regarding good faith complaints made about that facility, and permits victims of discrimination to pursue action against the facility in United States district court.  The bill permits successful whistleblower plaintiffs to receive damages as well as “reasonable attorney and expert witness fees,” and prohibits any contractual arrangement from waiving or infringing upon whistleblowers’ rights.  Some Members may be concerned that these provisions would constitute an invitation to lawsuits against nursing home facilities, the cost of which could significantly hinder the facility’s ability to provide quality patient care.

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

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

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

Disclosure of Physician Relationships:  The bill imposes new reporting requirements on drug and device manufacturers and distributors to disclose their financial relationships with physicians and other health care providers.  Specifically, manufacturers and distributors would be required to disclose the details behind any “transfer of value directly, indirectly, or through an agent,” with some limited exceptions.  A “transfer of value” includes any drug sample, gift, travel, honoraria, educational funding or consulting fees, stocks, or other ownership interest.  The bill establishes a new federal standard without regard to State laws—allowing States to exceed the federal standard.

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

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

Tax Increase on Pharmaceutical Companies:  The bill prohibits drug and medical device companies from deducting as a regular business expense “any expenditure relating to the advertising, promoting, or marketing (in any medium) of any covered drug, device, or medical supply” if the business has any penalty imposed on it with respect to the relationship transparency disclosures referenced above.  Some Members may be concerned by the prospect of imposing taxes on companies who exercise their First Amendment rights to advertise legal and approved products, notwithstanding any penalties imposed for violations, however slight, of the disclosure regime.

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

Anti-Fraud Provisions:  The bill increases penalties imposed on plans offering coverage through MA, Medicaid, or Part D related to knowing mis-representation of facts “in any application to participate or enroll” in federal programs.  The bill also makes eligible for penalties the knowing submission of false claims data, a failure to grant timely access to inspector general audits or investigations, submission of claims when an individual is excluded from program participation.  The bill provisions state that MA or Part D plans providing false information to CMS can be fined three times the amount of the revenues obtained as a result of such mis-representation.

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

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

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

The bill extends an existing gainsharing demonstration project, and provides for new grants to States to support home visitation programs for families with children and families expecting children.  The visitation program would be similar to the capped allotment funding mechanism used in SCHIP; federal funding would total $1.75 billion in the first five years, and State allotments would be determined on the basis of each State’s relative proportion of children in families below 200 percent FPL.  The federal government would provide matching reimbursement rate, starting at 85 percent in 2010 before falling to 75 percent in 2012.  At a time when existing entitlements are fiscally unsustainable, some Members may question the wisdom of establishing yet another federal entitlement—this one a new home visitation program to teach parents “skills to interact with their child.”

Medicaid and SCHIP Provisions

Medicaid ExpansionThe bill expands Medicaid to all individuals—including non-disabled, childless adults not currently eligible for benefits—with incomes below 133 percent FPL ($29,326 for a family of four).  New populations made eligible for Medicaid benefits under this provision would have their benefits fully financed by the federal government—an unprecedented change in the shared responsibility structure of the Medicaid program.

Many Members may be concerned by both the cost and scope of this unprecedented expansion of Medicaid to millions more Americans.  Some Members may believe the 100 percent federal match would provide a strong disincentive for States to take appropriate action to control costs, as well as fraud and abuse, in their Medicaid programs.  Members may also note that a plurality of individuals (44 percent) with incomes between one and two times the poverty level have private health insurance; expanding Medicaid to 133 percent FPL would provide a strong incentive for these individuals or their employers to drop their current coverage so they can instead enroll in the government-run plan.  Moreover, given Medicaid’s history of poor beneficiary access to care, some Members may believe that Medicaid itself needs fundamental reform—and beneficiaries need the choice of access to quality private coverage rather than a government-run plan.

Medicaid/Exchange Interactions:  The bill requires States to accept and enroll individuals documented by the Exchange as having incomes under 133 percent FPL, and requires States to finance their portion of wrap-around benefits (at existing federal matching rates) for Medicaid beneficiaries enrolled in Exchange plans.  However, States with above-average reductions in the number of uninsured shall have their matching percentage reduced by half.  The bill also excludes any payments related to erroneous eligibility determinations for Exchange plans from States’ Medicaid error rates—which some Members may be concerned could encourage States to enroll beneficiaries not eligible for benefits.

The bill imposes maintenance of effort requirements on States, prohibiting the voters or elected leaders of a State from reducing eligibility levels in the State’s Medicaid and SCHIP programs after the bill’s enactment.  The bill also requires a study of Medicaid Disproportionate Share Hospital (DSH) payments’ effectiveness on reducing the number of uninsured individuals.

Preventive Services:  The bill requires Medicaid to cover certain preventive services, as well as recommended vaccines, and eliminates cost-sharing for same.  The bill also permits Medicaid coverage of tobacco cessation programs, as well as optional coverage of nurse home visitation services, with the latter being reimbursed at an enhanced matching rate.  While supporting the use of preventive services, some Members may be concerned that the broad waiver of cost-sharing requirements could result in beneficiaries over-consuming services not directly beneficial to their health needs.

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

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

Access to Services:  The bill requires States to provide Medicaid reimbursement for services provided through school-based health clinics, and increases reimbursements to Medicaid primary care providers so that all such providers would be paid at Medicare rates by 2012—with the cost of such increased reimbursements fully paid for by the federal government.  Beginning in 2013, the full cost of all Medicaid primary care reimbursements would be fully paid for by the federal government—which many Members could be concerned would lead to skyrocketing federal costs, as States would have a strong financial incentive to shift more and more health care bills towards primary care services fully paid for by federal taxpayers.  The bill requires the Secretary to establish a medical home pilot program for Medicaid, similar to the Medicare program described above, and provides $1.2 billion to finance additional federal costs over the five-year period of the project.

The bill gives States the option to cover “ambulatory services that are offered at a freestanding birth center,” defined as any non-hospital location “where childbirth is planned to occur away from the pregnant woman’s residence,” as well as certain low-income HIV positive individuals at an enhanced federal match.  The bill extends for two additional years the Transitional Medical Assistance (TMA) program that provides Medicaid benefits for low-income families transitioning from welfare to work.  Traditionally, the TMA provisions have been coupled with an extension of Title V abstinence education funding during the passage of health care bills.  However, the Title V funds were excluded from the bill language, and will expire on July 1, 2009 absent further action.  Some Members may be concerned at the removal of the Title V abstinence education funding and the potential end of this program.

The bill provides an enhanced federal match of up to 90 percent for State spending on new electronic eligibility system, which must access eligibility databases for other federal programs, including Head Start, food stamps, SCHIP, and the federal school lunch program.  Some Members may be concerned that these provisions could result in undocumented aliens and other unqualified individuals receiving access to taxpayer-funded Medicaid benefits.

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

Other Provisions:  The bill provides circumstances under which States can submit reimbursement claims for graduate medical education—a service that has never before been recognized as subject to reimbursement under the original Medicaid statute.  The bill also grants CMS the authority to reject payment for certain “never events” resulting from medical errors and other “health care acquired conditions.”  The bill requires providers to adopt waste, fraud, and abuse programs, and makes permanent the Qualifying Individual program, which provides assistance through Medicaid for low-income seniors in paying their Medicare premiums.  Some Members may be concerned that the bill also regulates medical loss ratios for Medicaid managed care organizations—adding a government-imposed price control, and one that the Government Accountability Office has admitted is entirely arbitrary.

Division C—Public Health

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

New Mandatory Spending:  The bill appropriates $33.7 billion in new mandatory spending for a “Public Health Investment Fund,” of which $15.2 billion is dedicated to a “Prevention and Wellness Trust.”  This increase in mandatory spending over five fiscal years is intended to fund programs established in the bill, as well as other programs in the Public Health Service Act.

Community Health Centers:  The bill authorizes an additional $12 billion from the Public Health Investment Fund for grants to community health centers—funding over and above the significant increase provided in the $13.3 billion, five-year reauthorization that passed just last year (P.L. 110-355).  Some Members may be concerned by the significant increase in authorization levels given the federal government’s expected deficit of nearly $2 trillion this year.

Workforce Provisions:  The bill would increase maximum loan repayment levels for participants in the National Health Service Corps from $35,000 to $50,000 per year, further adjusted for inflation, and authorizes an additional $1.5 billion in appropriations for loan repayments.  The bill also creates a new program for primary care in addition to the existing National Health Service Corps, which would fund tax-free scholarships of up to half the annual cost of tuition in exchange for each year of service by an individual in an underserved area; a loan forgiveness program would further subsidize tuition costs.

The bill would award grants to hospitals and other entities to plan, develop, or operate training programs and provide financial assistance to students with respect to certain medical specialties, including primary care physicians and dentistry, and increase student loan limits for nursing students and faculty.  The bill further would award grants to health professions schools for the training of, and/or financial assistance to, public health professionals and graduate medical residents in preventive medicine specialties.  The bill would make certain modifications to existing programs for diversity centers, and increase loan repayment limits for such programs by $10,000 per year.  The bill amends provisions relating to grants for cultural and linguistic competence training, and authorizes new grants for interdisciplinary training designed to reduce health disparities.

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

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

Finally, the bill would create an Advisory Committee on Health Workforce Evaluation and Analysis, as well as a National Center for Health Workforce Analysis.  Some Members may question the necessity and wisdom of establishing new bureaucracies to attempt to analyze and manage the health workforce.

Expanded Price Controls:  The bill expands participation in the 340B program, which reduces the price paid for outpatient pharmaceuticals purchased by certain entities.  Specifically, the bill expands the program to children’s hospitals, critical access hospitals, rural referral centers, and sole community hospitals, while also extending the price control mechanism to inpatient drugs used by such hospitals and facilities.  Some Members may be concerned that this language, by extending the scope of price controls on pharmaceutical products, represents a further intrusion of government into the marketplace—and one that could result in loss of access to potentially life-saving treatments, by reducing companies’ incentive to develop new products.

Cost: A formal CBO score is not yet available.  However, one of the bill’s central provisions—“low-income” subsidies for families making more than $88,000 per year—echoes the initial proposal prepared by Senate Finance Committee Chairman Baucus, which press coverage widely reported was estimated by CBO to cost $1.6 trillion over ten years.  Coupled with a more generous Medicaid expansion and physician reimbursement provisions—which the Democrat majority reportedly does not intend to pay for—and the cost of the bill should easily exceed the $1 trillion estimate publicly cited by Ways and Means Committee Chairman Rangel—and likely could double that number.