Testimony on Risk Corridors and the Judgment Fund

A PDF of this testimony is available at the House Judiciary Committee website.

Testimony before the House Judiciary

Subcommittee on the Constitution and Civil Justice

 

Hearing on “Oversight of the Judgment Fund”

March 2, 2017

 

Chairman King, Ranking Member Cohen, and Members of the Subcommittee:

Good morning, and thank you for inviting me to testify. My name is Chris Jacobs, and I am the Founder of Juniper Research Group, a policy and research consulting firm based in Washington. Much of my firm’s work focuses on health care policy, a field in which I have worked for over a decade—including more than six years on Capitol Hill. Given my background and work in health care, I have been asked to testify on the use of the Judgment Fund as it pertains to one particular area: Namely, the ongoing litigation regarding risk corridor payments to insurers under Section 1342 of the Patient Protection and Affordable Care Act (PPACA).

The risk corridor lawsuits provide a good example of a problematic use of the Judgment Fund, and not just due to the sums involved—literally billions of dollars in taxpayer funds are at issue. Any judgments paid out to insurers via the Judgment Fund would undermine the appropriations authority of Congress, in two respects. First, Congress never explicitly appropriated funds to the risk corridor program—either in PPACA or any other statute. Second, once the Obama Administration sent signals indicating a potential desire to use taxpayer dollars to fund risk corridors, notwithstanding the lack of an explicit appropriation, Congress went further, and enacted an express prohibition on such taxpayer funding. Utilizing the Judgment Fund to appropriate through the back door what Congress prohibited through the front door would represent an encroachment by the judiciary and executive on Congress’ foremost legislative power—the “power of the purse.”

Though past precedents and opinions by the Congressional Research Service, Government Accountability Office, and Justice Department Office of Legal Counsel should provide ample justification for the Court of Appeals for the Federal Circuit to deny the risk corridor claims made by insurers when it considers pending appeals of their cases, Congress can take additional action to clarify its prerogatives in this sphere. Specifically, Congress could act to clarify in the risk corridor case, and in any other similar case, that it has “otherwise provided for” funding within the meaning of the Judgment Fund when it has limited or restricted expenditures of funds.

 

Background on Risk Corridors

PPACA created risk corridors as one of three programs (the others being reinsurance and risk adjustment) designed to stabilize insurance markets in conjunction with the law’s major changes to the individual marketplace.  Section 1342 of the law established risk corridors for three years—calendar years 2014, 2015, and 2016. It further prescribed that insurers suffering losses during those years would have a portion of those losses reimbursed, while insurers achieving financial gains during those years would cede a portion of those profits.[1]

Notably, however, the statute did not provide an explicit appropriation for the risk corridor program—either in Section 1342 or elsewhere. While the law directs the Secretary of Health and Human Services (HHS) to establish a risk corridor program,[2] and make payments to insurers,[3] it does not provide a source for those payments.

 

History of Risk Corridor Appropriations

The lack of an explicit appropriation for risk corridors was not an unintentional oversight by Congress. The Senate Health, Education, Labor, and Pensions (HELP) Committee included an explicit appropriation for risk corridors in its health care legislation marked up in 2009.[4] Conversely, the Senate Finance Committee’s version of the legislation—the precursor to PPACA—included no appropriation for risk corridors.[5] When merging the HELP and Finance Committee bills, Senators relied upon the Finance Committee’s version of the risk corridor language—the version with no explicit appropriation.

Likewise, the Medicare Modernization Act’s risk corridor program for the Part D prescription drug benefit included an explicit appropriation from the Medicare Prescription Drug Account, an account created by the law as an offshoot of the Medicare Supplementary Medical Insurance Trust Fund.[6] While PPACA specifically states that its risk corridor program “shall be based on the program for regional participating provider organizations under” Medicare Part D, unlike that program, it does not include an appropriation for its operations.[7]

As the Exchanges began operations in 2014, Congress, noting the lack of an express appropriation for risk corridors in PPACA, questioned the source of the statutory authority for HHS to spend money on the program. On February 7, 2014, then-House Energy and Commerce Committee Chairman Fred Upton (R-MI) and then-Senate Budget Committee Ranking Member Jeff Sessions (R-AL) wrote to Comptroller General Gene Dodaro requesting a legal opinion from the Government Accountability Office (GAO) about the availability of an appropriation for the risk corridors program.[8]

In response to inquiries from GAO, HHS replied with a letter stating the Department’s opinion that, while risk corridors did not receive an explicit appropriation in PPACA, the statute requires the Department to establish, manage, and make payments to insurers as part of the risk corridor program. Because risk corridors provide special benefits to insurers by stabilizing the marketplace, HHS argued, risk corridor payments amount to user fees, and the Department could utilize an existing appropriation—the Centers for Medicare and Medicaid Services’ (CMS) Program Management account—to make payments.[9] GAO ultimately accepted the Department’s reasoning, stating the Department had appropriation authority under the existing appropriation for the CMS Program Management account to spend user fees.[10]

The GAO ruling came after Health and Human Services had sent a series of mixed messages regarding the implementation of the risk corridor program. In March 2013, the Department released a final rule noting that “the risk corridors program is not statutorily required to be budget neutral. Regardless of the balance of payments and receipts, HHS will remit payments as required under Section 1342 of” PPACA.[11] However, one year later, on March 11, 2014, HHS reversed its position, announcing the Department’s intent to implement the risk corridor program in a three-year, budget-neutral manner.[12]

Subsequent to the GAO ruling, and possibly in response to the varying statements from HHS, Congress enacted in December 2014 appropriations language prohibiting any transfers to the CMS Program Management account to fund shortfalls in the risk corridor program.[13] The explanatory statement of managers accompanying the legislation, noting the March 2014 statement by HHS pledging to implement risk corridors in a budget neutral manner, stated that Congress added the new statutory language “to prevent the CMS Program Management account from being used to support risk corridor payments.”[14] This language was again included in appropriations legislation in December 2015, and remains in effect today.[15]

 

Losses Lead to Lawsuits

The risk corridor program has incurred significant losses for 2014 and 2015. On October 1, 2015, CMS revealed that insurers paid $387 million into the program, but requested $2.87 billion. As a result of both these losses and the statutory prohibition on the use of additional taxpayer funds, insurers making claims for 2014 received only 12.6 cents on the dollar for their claims that year.[16]

Risk corridor losses continued into 2015. Last September, without disclosing specific dollar amounts, CMS revealed that “all 2015 benefit year collections [i.e., payments into the risk corridor program] will be used towards remaining 2014 benefit year risk corridors payments, and no funds will be available at this time for 2015 benefit year risk corridors payments.”[17]

In November, CMS revealed that risk corridor losses for 2015 increased when compared to 2014. Insurers requested a total of $5.9 billion from the program, while paying only $95 million into risk corridors—all of which went to pay some of the remaining 2014 claims.[18] To date risk corridors face a combined $8.3 billion shortfall for 2014 and 2015—approximately $2.4 billion in unpaid 2014 claims, plus the full $5.9 billion in unpaid 2015 claims. Once losses for 2016 are added in, total losses for the program’s three-year duration will very likely exceed $10 billion, and could exceed $15 billion.

Due to the risk corridor program losses, several insurers have filed suit in the Court of Federal Claims, seeking payment via the Judgment Fund of outstanding risk corridor claims they allege are owed. Thus far, two cases have proceeded to judgment. On November 10, 2016, Judge Charles Lettow dismissed all claims filed by Land of Lincoln Mutual Health Insurance Company, an insurance co-operative created by PPACA that shut down operations in July 2016.[19] Notably, Judge Lettow did not dismiss the case for lack of ripeness, but on the merits of the case themselves. He considered HHS’ decision to implement the program in a budget-neutral manner reasonable, using the tests in Chevron v. Natural Resources Defense Council, and concluded that neither an explicit nor implicit contract existed between HHS and Land of Lincoln.[20]

Conversely, on February 9, 2017, Judge Thomas Wheeler granted summary judgment in favor of Moda Health Plan, an Oregon health insurer, on its risk corridor claims.[21] Judge Wheeler held that PPACA “requires annual payments to insurers, and that Congress did not design the risk corridors program to be budget-neutral. The Government is therefore liable for Moda’s full risk corridors payments” under the law.[22] And, contra Judge Lettow, Judge Wheeler concluded that an implied contract existed between HHS and Moda, which also granted the insurer right to payment.[23]

 

Congress “Otherwise Provided For” Risk Corridor Claims

The question of whether or not insurers have a lawful claim on the United States government is separate and distinct from the question of whether or not the Judgment Fund can be utilized to pay those claims. CMS, on behalf of the Department of Health and Human Services, has made clear its views regarding the former question. In announcing its results for risk corridors for 2015, the agency stated that the unpaid balances for each year represented “an obligation of the United States Government for which full payment is required,” and that “HHS will explore other sources of funding for risk corridors payments, subject to the availability of appropriations. This includes working with Congress on the necessary funding for outstanding risk corridors payments.”[24]

But because insurers seek risk corridor payments from the Judgment Fund, that fund’s permanent appropriation is available only in cases where payment is “not otherwise provided for” by Congress.[25] GAO, in its Principles of Federal Appropriations Law, describes such circumstances in detail:

Payment is otherwise provided for when another appropriation or fund is legally available to satisfy the judgment….Whether payment is otherwise provided for is a question of legal availability rather than actual funding status. In other words, if payment of a particular judgment is otherwise provided for as a matter of law, the fact that the defendant agency has insufficient funds at that particular time does not operate to make the Judgment Fund available. The agency’s only recourse in this situation is to seek additional appropriations from Congress, as it would have to do in any other deficiency situation.[26]

In this circumstance, GAO ruled in September 2014 that payments from insurers for risk corridors represented “user fees” that could be retained in the CMS Program Management account, and spent from same using existing appropriation authority. However, the prohibition on transferring taxpayer dollars to supplement those user fees prevents CMS from spending any additional funds on risk corridor claims other than those paid into the program by insurers themselves.

Given the fact pattern in this case, the non-partisan Congressional Research Service concluded that the Judgment Fund may not be available to insurers:

Based on the existence of an appropriation for the risk corridor payments, it appears that Congress would have “otherwise provided for” any judgments awarding payments under that program to a plaintiff. As a result, the Judgment Fund would not appear to be available to pay for such judgments under current law. This would appear to be the case even if the amounts available in the “Program Management” account had been exhausted. In such a circumstance, it appears that any payment to satisfy a judgment secured by plaintiffs seeking recovery of damages owed under the risk corridors program would need to wait until such funds were made available by Congress.[27]

Because the appropriations power rightly lies with Congress, the Judgment Fund cannot supersede the legislature’s decision regarding a program’s funding, or lack of funding. Congress chose not to provide the risk corridor program with an explicit appropriation; it further chose explicitly to prohibit transfers of taxpayer funds into the program. To allow the Judgment Fund to pay insurers’ risk corridor claims would be to utilize an appropriation after Congress has explicitly declined to do so.

The Justice Department’s Office of Legal Counsel (OLC) has previously upheld the same principle that an agency’s inability to fund judgments does not automatically open the Judgment Fund up to claims:

The Judgment Fund does not become available simply because an agency may have insufficient funds at a particular time to pay a judgment. If the agency lacks sufficient funds to pay a judgment, but possesses statutory authority to make the payment, its recourse is to seek funds from Congress. Thus, if another appropriation or fund is legally available to pay a judgment or settlement, payment is “otherwise provided for” and the Judgment Fund is not available.[28]

The OLC memo reinforces the opinions of both CRS and the GAO: The Judgment Fund is a payer of last resort, rather than a payer of first instance. Where Congress has provided another source of funding, the Judgment Fund should not be utilized to pay judgments or settlements. Congress’ directives in setting limits on appropriations to the risk corridor program make clear that it has “otherwise provided for” risk corridor claims—therefore, the Judgment Fund should not apply.

 

Judgment Fund Settlements

Even though past precedent suggests the Judgment Fund should not apply to the risk corridor cases, a position echoed by at least one judge’s ruling on the matter, the Obama Administration prior to leaving office showed a strong desire to settle insurer lawsuits seeking payment for risk corridor claims using Judgment Fund dollars. In its September 9, 2016 memo declaring risk corridor claims an obligation of the United States government, CMS also acknowledged the pending cases regarding risk corridors, and stated that “we are open to discussing resolution of those claims. We are willing to begin such discussions at any time.”[29] That language not only solicited insurers suing over risk corridors to seek settlements from the Administration, it also served as an open invitation for other insurers not currently suing the United States to do so—in the hope of achieving a settlement from the executive.

Contemporaneous press reports last fall indicated that the Obama Administration sought to use the Judgment Fund as the source of funding to pay out risk corridor claims. Specifically, the Washington Post reported advanced stages of negotiations regarding a settlement of over $2.5 billion—many times more than the $18 million in successful Judgment Fund claims made against HHS in the past decade—with over 175 insurers, paid using the Judgment Fund “to get around a recent congressional ban on the use of Health and Human Services money to pay the insurers.”[30]

When testifying before a House Energy and Commerce subcommittee hearing on September 14, 2016, then-CMS Acting Administrator Andy Slavitt declined to state the potential source of funds for the settlements his agency had referenced in the memo released the preceding week.[31] Subsequent to that hearing, Energy and Commerce requested additional documents and details from CMS regarding the matter; that request is still pending.[32]

Even prior to this past fall, the Obama Administration showed a strong inclination to accommodate insurer requests for additional taxpayer funds. A 2014 House Oversight and Government Reform Committee investigative report revealed significant lobbying by insurers regarding both PPACA’s risk corridors and reinsurance programs.[33] Specifically, contacts by insurance industry executives to White House Senior Advisor Valerie Jarrett during the spring of 2014 asking for more generous terms for the risk corridor program yielded changes to the program formula—raising the profit floor from three percent to five percent—in ways that increased payments to insurers, and obligations to the federal government.[34]

Regardless of the Administration’s desire to accommodate insurers, as evidenced by its prior behavior regarding risk corridors, past precedent indicates that the Judgment Fund should not be accessible to pay either claims or settlements regarding risk corridors. A prior OLC memo indicates that “the appropriate source of funds for a settled case is identical to the appropriate source of funds should a judgment in that case be entered against the government.”[35] If a judgment cannot come from the Judgment Fund—and CRS, in noting that Congress has “otherwise provided for” risk corridor claims, believes it cannot—then neither can a settlement come from the Fund.

Given these developments, in October 2016 the Office of the House Counsel, using authority previously granted by the House, moved to file an amicus curiae brief in one of the risk corridor cases, that filed by Health Republic.[36] The House filing, which made arguments on the merits of the case that the Justice Department had not raised, did so precisely to protect Congress’ institutional prerogative and appropriations power—a power Congress expressed first when failing to fund risk corridors in the first place, and a second, more emphatic time when imposing additional restrictions on taxpayer funding to risk corridors.[37] The House filing made clear its stake in the risk corridor dispute:

Allegedly in light of a non-existent ‘litigation risk,’ HHS recently took the extraordinary step of urging insurers to enter into settlement agreements with the United States in order to receive payment on their meritless claims. In other words, HHS is trying to force the U.S. Treasury to disburse billions of dollars of taxpayer funds to insurance companies, even though DOJ [Department of Justice] has convincingly demonstrated that HHS has no legal obligation (and no legal right) to pay these sums. The House strongly disagrees with this scheme to subvert Congressional intent by engineering a massive giveaway of taxpayer money.[38]

The amicus filing illustrates the way in which the executive can through settlements—or, for that matter, failing vigorously to defend a suit against the United States—undermine the intent of Congress by utilizing the Judgment Fund appropriation to finance payments the legislature has otherwise denied.

 

Conclusion

Both the statute and existing past precedent warrant the dismissal of the risk corridor claims by the Court of Appeals for the Federal Circuit. Congress spoke clearly on the issue of risk corridor funding twice: First when failing to provide an explicit appropriation in PPACA itself; and second when enacting an explicit prohibition on taxpayer funding. Opinions from Congressional Research Service, Government Accountability Office, and Office of Legal Counsel all support the belief that, in taking these actions, Congress has “otherwise provided for” risk corridor funding, therefore prohibiting the use of the Judgment Fund. It defies belief that, having explicitly prohibited the use of taxpayer dollars through one avenue (the CMS Program Management account), the federal government should pay billions of dollars in claims to insurers via the back door route of the Judgment Fund.

However, in the interests of good government, Congress may wish to clarify that, in both the risk corridor cases and any similar case, lawmakers enacting a limitation or restriction on the use of funds should constitute “otherwise provid[ing] for” that program as it relates to the Judgment Fund. Such legislation would codify current practice and precedent, and preserve Congress’ appropriations power by preventing the executive and/or the courts from awarding judgments or settlements using the Judgment Fund where Congress has clearly spoken.

Thank you for the opportunity to testify this morning. I look forward to your questions.

 

 

[1] Under the formulae established in Section 1342(b) of the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148), plans with profit margins between 3 percent and 8 percent pay half their profit margins between those two points into the risk corridor program, while plans with profit margins exceeding 8 percent pay in 2.5 percent of profits (half of their profits between 3 percent and 8 percent), plus 80 percent of any profit above 8 percent. Payments out to insurers work in the inverse manner—insurers with losses below 3 percent absorb the entire loss; those with losses of between 3 and 8 percent will have half their losses over 3 percent repaid; and those with losses exceeding 8 percent will receive 2.5 percent (half of their losses between 3 and 8 percent), plus 80 percent of all losses exceeding 8 percent. 42 U.S.C. 18062(b).

[2] Section 1342(a) of PPACA, 42 U.S.C. 18062(a).

[3] Section 1342(b) of PPACA, 42 U.S.C. 18062(b).

[4] Section 3106 of the Affordable Health Choices Act (S. 1679, 111th Congress), as reported by the Senate HELP Committee, established the Community Health Insurance Option. Section 3106(c)(1)(A) created a Health Benefit Plan Start-Up Fund “to provide loans for the initial operations of a Community Health Insurance Option.” Section 3106(c)(1)(B) appropriated “out of any moneys in the Treasury not otherwise appropriated an amount necessary as requested by the Secretary of Health and Human Services to,” among other things, “make payments under” the risk corridor program created in Section 3106(c)(3).

[5] Section 2214 of America’s Healthy Future Act (S. 1796, 111th Congress), as reported by the Senate Finance Committee, created a risk corridor program substantially similar to (except for date changes) that created in PPACA. Section 2214 did not include an appropriation for risk corridors.

[6] Section 101(a) of the Medicare Modernization Act (P.L. 108-173) created a program of risk corridors at Section 1860D—15(e) of the Social Security Act, 42 U.S.C. 1395w—115(e). Section 101(a) of the MMA also created a Medicare Prescription Drug Account within the Medicare Supplementary Medical Insurance Trust Fund at Section 1860D—16 of the Social Security Act, 42 U.S.C. 1395w—116. Section 1860D—16(c)(3) of the Social Security Act, 42 U.S.C. 1395w—116(c)(3), “authorized to be appropriated, out of any moneys of the Treasury not otherwise appropriated,” amounts necessary to fund the Account. Section 1860D—16(b)(1)(B), 42 U.S.C. 1395w—116(b)(1)(B), authorized the use of Account funds to make payments under Section 1860D—15, the section which established the Part D risk corridor program.

[7] Section 1342(a) of PPACA, 42 U.S.C. 18062(a).

[8] Letter from House Energy and Commerce Committee Chairman Fred Upton and Senate Budget Committee Ranking Member Jeff Sessions to Comptroller General Gene Dodaro, February 7, 2014.

[9] Letter from Department of Health and Human Services General Counsel William Schultz to Government Accountability Office Assistant General Counsel Julie Matta, May 20, 2014.

[10] Government Accountability Office legal decision B-325630, Department of Health and Human Services—Risk Corridor Program, September 30, 2014, http://www.gao.gov/assets/670/666299.pdf.

[11] Department of Health and Human Services, final rule on “Notice of Benefit and Payment Parameters for 2014,” Federal Register March 11, 2013, https://www.gpo.gov/fdsys/pkg/FR-2013-03-11/pdf/2013-04902.pdf, p. 15473.

[12] Department of Health and Human Services, final rule on “Notice of Benefit and Payment Parameters for 2015,” Federal Register March 11, 2014, https://www.gpo.gov/fdsys/pkg/FR-2014-03-11/pdf/2014-05052.pdf, p. 13829.

[13] Consolidated and Further Continuing Appropriations Act, 2015, P.L. 113-235, Division G, Title II, Section 227.

[14] Explanatory Statement of Managers regarding Consolidated and Further Continuing Appropriations Act, 2015, Congressional Record December 11, 2014, p. H9838.

[15] Consolidated Appropriations Act, 2016, P.L. 114-113, Division H, Title II, Section 225.

[16] Centers for Medicare and Medicaid Services, memorandum regarding “Risk Corridors Proration Rate for 2014,” October 1, 2015, https://www.cms.gov/CCIIO/Programs-and-Initiatives/Premium-Stabilization-Programs/Downloads/RiskCorridorsPaymentProrationRatefor2014.pdf.

[17] Centers for Medicare and Medicaid Services, memorandum regarding “Risk Corridors Payments for 2015,” September 9, 2016, https://www.cms.gov/CCIIO/Programs-and-Initiatives/Premium-Stabilization-Programs/Downloads/Risk-Corridors-for-2015-FINAL.PDF.

[18] Centers for Medicare and Medicaid Services, memorandum regarding “Risk Corridors Payment and Charge Amounts for the 2015 Benefit Year,” https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/2015-RC-Issuer-level-Report-11-18-16-FINAL-v2.pdf.

[19] Land of Lincoln Mutual Health Insurance Company v. United States, Court of Federal Claims No. 16-744C, ruling of Judge Charles Lettow, November 10, 2016, https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2016cv0744-47-0.

[20] Ibid.

[21] Moda Health Plan v. United States, Court of Federal Claims No. 16-649C, ruling of Judge Thomas Wheeler, February 9, 2017, https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2016cv0649-23-0.

[22] Ibid., p. 2.

[23] Ibid., pp. 34-39.

[24] CMS, “Risk Corridors Payments for 2015.”

[25] 31 U.S.C. 1304(a)(1).

[26] Government Accountability Office, 3 Principles of Federal Appropriations Law 14-39, http://www.gao.gov/assets/210/203470.pdf.

[27] Congressional Research Service, memo to Sen. Marco Rubio on the risk corridor program, January 5, 2016, http://www.rubio.senate.gov/public/_cache/files/1dc92ef8-c340-4cfd-95c0-67369a557f1e/2AA5EF8F125279800BFABC8B8BA37072.05.24.2016-crs-rubio-memo-risk-corridors-1-5-16-1-redacted.pdf.

[28] Justice Department Office of Legal Counsel, “Appropriate Source for Payment of Judgment and Settlements in United States v. Winstar Corp.,” July 22, 1998, Opinions of the Office of Legal Counsel in Volume 22, https://www.justice.gov/sites/default/files/olc/opinions/1998/07/31/op-olc-v022-p0141.pdf, p. 153.

[29] CMS, “Risk Corridors Payments for 2015.”

[30] Amy Goldstein, “Obama Administration May Use Obscure Fund to Pay Billions to ACA Insurers,” Washington Post September 29, 2016, https://www.washingtonpost.com/national/health-science/obama-administration-may-use-obscure-fund-to-pay-billions-to-aca-insurers/2016/09/29/64a22ea4-81bc-11e6-b002-307601806392_story.html?utm_term=.361888177f81.

[31] Testimony of CMS Acting Administrator Andy Slavitt before House Energy and Commerce Health Subcommittee Hearing on “The Affordable Care Act on Shaky Ground: Outlook and Oversight,” September 14, 2016, http://docs.house.gov/meetings/IF/IF02/20160914/105306/HHRG-114-IF02-Transcript-20160914.pdf, pp. 84-89.

[32] Letter from House Energy and Commerce Committee Chairman Fred Upton et al. to Health and Human Services Secretary Sylvia Burwell regarding risk corridor settlements, September 20, 2016, https://energycommerce.house.gov/news-center/letters/letter-hhs-regarding-risk-corridors-program.

[33] House Oversight and Government Reform Committee, staff report on “Obamacare’s Taxpayer Bailout of Health Insurers and the White House’s Involvement to Increase Bailout Size,” July 28, 2014, http://oversight.house.gov/wp-content/uploads/2014/07/WH-Involvement-in-ObamaCare-Taxpayer-Bailout-with-Appendix.pdf.

[34] Ibid., pp. 22-29.

[35] OLC, “Appropriate Source of Payment,” p. 141.

[36] H.Res. 676 of the 113th Congress gave the Speaker the authority “to initiate or intervene in one or more civil actions on behalf of the House…regarding the failure of the President, the head of any department or agency, or any other officer or employee of the executive branch, to act in a manner consistent with that official’s duties under the Constitution and the laws of the United States with respect to implementation of any provision of” PPACA. Section 2(f)(2)(C) of H.Res. 5, the opening day rules package for the 114th Congress, extended this authority for the duration of the 114th Congress.

[37] Motion for Leave to File Amicus Curiae on behalf of the United States House of Representatives, Health Republic Insurance Company v. United States, October 14, 2016, http://www.speaker.gov/sites/speaker.house.gov/files/documents/2016.10.13%20-%20Motion%20-%20Amicus%20Brief.pdf?Source=GovD.

[38] Ibid., p. 2.

Risk Corridors: The Obama Administration at War with Itself?

Ferrets in a sack might prove an apt description of the internal infighting plaguing the Obama Administration regarding risk corridors. Last week, sources — whether within the Administration, amongst the insurer community, or both — wanted to portray a multi-billion dollar Judgment Fund settlement with insurers as a fait accompli, telling the Washington Post an agreement could be reached within two weeks.

But in two separate motions filed late last Friday regarding pending lawsuits, lawyers for the Department of Justice pulled a Lee Corso: “Not so fast, my friend!” The filings stated repeated claims made in a related lawsuit this summer that the case made by insurers is not yet ripe for adjudication in court. However, in a new development, Justice also alleged that insurers had no claim to make in court at all:

Third, Count I fails on the merits. Section 1342 [of Obamacare] does not require HHS to make risk corridors payments beyond those funded from collections. And even if that intent were unclear when the Affordable Care Act was enacted in 2010, Congress removed any ambiguity when it enacted annual appropriations laws for fiscal years 2015 and 2016 that prohibited HHS from paying risk corridors amounts from appropriated funds other than collections.

Here are four things you need to know about the latest risk corridor developments:

  • DOJ vs. CMS? Whereas the Centers for Medicare and Medicaid Services stated in a September 9 document that it considered unpaid risk corridor claims “an obligation of the United States government for which full payment is required,” the Justice Department has now argued before two separate district court judges that no additional payment is required — not now, and not ever. In testifying before Congress last month, both Acting Administrator Slavitt and his Chief of Staff separately claimed that the Justice Department were consulted before CMS issued its September 9 memo. While last week’s Post article claimed that “Justice officials have privately told several health plans” they want to settle claims on insurers’ terms as quickly (and as quietly) as possible, the filings show that at least some Justice officials have no intention of “tanking” the government’s case for political reasons.
  • Political Appointees vs. Career Civil Servants: Two congressional reports provide some clues to the possible divides within the Administration. A 2014 House Oversight Committee investigative report showed how insurers immediately contacted Valerie Jarrett and other political appointees seeking increased risk corridor payments when insurers’ enrollees started skewing older and sicker than expected. And a report by two House committees earlier this year showed how political appointees have put the proverbial screws to uncooperative civil servants, threatening those civil servants if they exercised their statutory rights to provide information to Congress regarding a related program of Obamacare cost-sharing subsidies. The mixed messages regarding the risk corridor suits could represent a similar divide — political appointees want to pay the claims before President Obama leaves office, whereas career civil servants are focused on the heretofore novel notion of actually enforcing the law as written.
  • Andy Slavitt, Bailout King? During his own testimony before the House Energy and Commerce Committee last month, CMS head Andy Slavitt made absolutely no attempt to argue the points Justice made in its filings — namely, that Congress has made its intent regarding risk corridors crystal clear, and that insurers are not owed any money. In this context, it is worth noting: 1) Administrator Slavitt’s at least $4.8 million in stock compensation from a unit of UnitedHealthGroup — the nation’s largest insurer; 2) the special ethics waiver he had to receive from the Obama Administration to make policy decisions impacting his former employer; and 3) the fact that Mr. Slavitt will likely require new employment in three months. Could Administrator Slavitt be attempting to help his once — and perhaps future — employers in the insurance industry…?
  • Constitutional “Takings,” Redefined: In one of the court cases, filed by Blue Cross Blue Shield of North Carolina, the Justice Department responded to claims that the risk corridor non-payment represent a Fifth Amendment violation on the part of the federal government. This Blue Cross insurer has argued — apparently with a straight face — that the federal government NOT giving it a multi-billion dollar, taxpayer-funded risk corridor payment represents a “taking” that violates its constitutional rights. To repeat: Blue Cross alleges it has a constitutional right to a multi-billion dollar bailout — even though the Justice Department notes that there is no contractual right to payment under the risk corridor program at all.

Explaining the Two Risk Corridor Bailouts

It never rains that it doesn’t pour. Even as nonpartisan experts at the Government Accountability Office concluded that the Obama administration broke the law with Obamacare’s reinsurance program, the Washington Post reported the administration could within weeks pay out a massive settlement to insurers through another Obamacare slush fund—this one, risk corridors.

The Post article quoted Republicans criticizing risk corridor “bailouts.” But in reality, the Obama administration itself has admitted using risk corridors as a bailout mechanism—trying to pay insurers to offset the costs of unilateral policy changes made to get President Obama out of a political jam. These two interlinked bailouts—one political, the other financial—explain this administration’s rush to pay off insurers on its way out the door.

Let’s Go Back to 2013

To fix the problem, the Centers for Medicare and Medicaid Services (CMS) tried a stopgap solution. Essentially, CMS said it would ignore the law’s requirements, and allow people to keep their prior coverage—albeit temporarily. States and insurers could allow individuals who purchased coverage after the law’s enactment, but before October 2013, to keep their plan for a few more months (later extended until December 2017). The final paragraph of CMS’ November 14, 2013 announcement of this policy included an important message:

Though this transitional policy was not anticipated by health insurance issuers when setting rates for 2014, the risk corridor program should help ameliorate unanticipated changes in premium revenue. We intend to explore ways to modify the risk corridor program final rules to provide additional assistance.

CMS offered insurers a quid pro quo: If you let Americans keep their existing plan a little longer—getting the administration out of the political controversy President Obama’s repeated falsehoods had caused—we’ll turn on the bailout taps on the back end to make you whole. You scratch my back…

I’ll Pay You Tax Dollars to Play

But this arrangement created several problems. First, CMS cannot decide that it just doesn’t feel like enforcing the law. In a paper analyzing the administration’s implementation of Obamacare, University of Michigan professor Nicholas Bagley called the non-enforcement of the law’s provisions “bald efforts to avoid unwanted consequences associated with full implementation of” the law. He argued the administration’s inaction abdicated the president’s constitutional obligation to “take care that the laws be faithfully executed:”

The Administration thus used the public pronouncements of its non-enforcement policies to encourage the regulated community to disregard provisions of [the law]. Prospectively licensing large groups of people to violate a congressional statute for policy reasons is inimical to the Take Care clause.

That law-breaking brought with it major financial implications. While healthy individuals kept their existing plans and stayed out of the Obamacare risk pool, sicker individuals signed up in droves. Because the Obama administration unilaterally—and unlawfully—changed the rules after the exchanges had opened, insurers found they had substantially under-priced their products. A 2014 House Oversight Committee report found major impacts after the administration announced the “like your plan” fix:

Insurers immediately started lobbying for additional risk corridor payments, meeting with and e-mailing Valerie Jarrett the day after the Administration’s announcement;

Insurers actually enrolled many fewer young people, and many more older people, than their original estimates made before the Exchanges opened for business on October 1, 2013—consistent with other contemporaneous news reports and industry analyses; and

‘One insurer told the Committee that it expects greater risk corridor receipts because of a sicker risk pool than it anticipated on October 1, 2013 due, in part, to the President’s transitional policy.’

All these developments are entirely consistent with CMS’ November 2013 bulletin announcing the arrangement. CMS pledged to use risk corridors to make insurers whole because it knew insurers would suffer losses as a result of the administration’s unilateral—and illegal—“like your plan” fix.

How About You Pay for Me to Break the Law

To sum up: The administration conjured a political bailout. It pledged not to enforce the law, so people could keep their plans, and President Obama could get off the hook for misleading the American people. This necessitated a financial bailout through risk corridors. Actuaries can debate how much of the unpaid risk corridor claims stem from this specific policy change, but there can be no doubt that the “like your plan” fix increased those claims. CMS itself admitted as much when announcing the policy.

Ironically, Bagley admits the first bailout, but denies the second. His paper concedes the “like your plan” violated the law, and the president’s constitutional duties, largely for political reasons. But he believes the administration can, and should, pay outstanding risk corridor claims using the Judgment Fund. All of this raises an interesting question: Why should the executive be allowed to break the law, abdicate its constitutional obligations, and then force Congress—and ultimately taxpayers—to pay the tab for the financial consequences of that lawbreaking?

The answer is simple: It shouldn’t. While insurers stand in the middle of this tug-of-war, they could have acted differently when President Obama announced his “like your plan” fix. They could have cancelled all pre-Obamacare plans regardless of the president’s announced policy, demanded the opportunity to adjust their premium rates in response, pulled off the exchanges altogether, taken legal action against the administration—or all of the above. They chose instead to complain behind closed doors, get their lobbying machine to work, and hope to cut yet another backroom deal to save their bacon.

But there are two political parties, and two branches of government. To say that Congress should have to write bailout checks to insurers as a result of the executive’s lawbreaking quite literally adds injury—to taxpayers, to the legislative power of the purse, and to the separation of powers—to insult. Any judges to whom the administration will try to bless a risk corridor settlement with insurers should ask many questions about the linked bailouts motivating this corrupt bargain.

This post was originally published at The Federalist.

Morning Bell: The Obamacare Scams Are Already Starting

Heritage warned that the new Obamacare insurance exchanges could threaten your privacy—and it’s already happening, before the exchanges are even open.

In a new report, the House Oversight and Government Reform Committee presented these shocking findings:

there are already numerous reports of scam artists posing as Navigators and Assisters to take advantage of people’s confusion about ObamaCare. According to recent news reports, scam artists are calling individuals and asking for information to sign them up for their “ObamaCare card,” are asking seniors for their personal information to verify their Medicare and Social Security status and are going door-to-door threatening people with prison time if they do not sign up on the spot. The Administration is keenly aware of these reports and concerns, but has thus far failed to take appropriate measures.

Even when it’s not malicious, the new Obamacare system—employing “navigators” who aren’t run through background checks or adequately trained—opens up a host of opportunities for identity theft. Last week, an employee of Minnesota’s insurance exchange (MNsure) emailed out the names and Social Security numbers of 2,400 insurance agents. The insurance broker who received the email said, “If this is happening now, how can clients of MNsure be confident their data is safe?”

Indeed.

The Oversight Committee reports that the exchange system thus far is a combination of shoddy planning and bad incentives. Navigators, who are supposed to help people sign up for the exchanges, are allowed to be paid based on the number of people they enroll in Obamacare.

California’s insurance commissioner—a Democrat and strong supporter of Obamacare—raised concerns that navigators would put consumers at risk for scams: “We can have a real disaster on our hands.”

The exchanges don’t open for business until October 1, but Obamacare has already led to the release of highly sensitive personal information for thousands—and the lack of planning makes it ripe for scams. Nothing about this law is working the way it was advertised, which is why the House is voting today to defund Obamacare (while still funding normal government functions). Next week, Senators will have a chance to do the same—protect their constituents from the ravages of Obamacare.

This post was originally published at The Daily Signal.

Morning Bell: Obamacare, Simplified

With open enrollment in Obamacare’s exchanges set to start in fewer than three months, the law’s supporters are attempting to change the subject from Obamacare’s many delays and glitches. Instead, they’re mounting a campaign to sell the unpopular measure to the public.

President Obama yesterday gave a speech on Obamacare, trying to justify the fact that premiums continue to rise, violating his 2008 campaign promise to lower them by $2,500 per family per year. The Kaiser Family Foundation even released a video that attempts to simplify and explain the 2,700-page measure.

But there’s another helpful chart that shows how Obamacare will work, and it’s taken from an official report released by government auditors. Click on the image below to see how the Treasury’s inspector general for tax administration explained the Obamacare enrollment process, in testimony before the House Oversight Committee on Wednesday:

President Obama's Plan to "Simplify" Your Health Care

The process for determining subsidy eligibility could require 21 different steps, involving at least five separate entities—the Social Security Administration, the Department of Homeland Security, the Department of Health and Human Services, the Internal Revenue Service, and state exchanges—and utilizing a process called the Income and Family Size Verification Project.

Given this bureaucratic nightmare, it’s little wonder that another report from government auditors released last month said that “critical” deadlines to create the Obamacare exchanges had been missed. Nor should any be surprised that yesterday, Treasury’s inspector general for tax administration testified it “is concerned that the potential for refund fraud and related schemes could increase” due to Obamacare.

Yet the Obama Administration believes spending more money will solve the problem. Just for the IRS implementation of Obamacare, the Administration requested $439.6 million for nearly 2,000 bureaucrats.

Obama yesterday attempted to portray Obamacare as defending Americans from insurance companies. But who will defend the American people from Obamacare? The law’s confusing maze of programs, regulations, and processes brings to mind Ronald Reagan’s famous maxim that “the nine most terrifying words in the English language are ‘I’m from the government, and I’m here to help.’”

If a picture is normally worth a thousand words, the Obamacare chart above should be worth trillions. Because Congress—seeing that Obamacare is not just too big to fail, but too big to succeed—should refuse to spend a single dime implementing this behemoth of a health care law.

This post was originally published at The Daily Signal.

Q: “Will Obamacare Encourage Fraud?” A: “I’ll Have to Think About That…”

As we learn more each day about what Obamacare will bring, a video that recently became available reveals another frightening turn. The federal government already struggles with fraud in many major programs such as Medicare and Social Security. What about the forthcoming Obamacare insurance exchanges?

Obamacare includes a “navigator” program of individuals paid by the government to encourage people to sign up for the exchanges.

A House Oversight Committee hearing from May 21 produced the following exchange with Gary Cohen, the director of the federal center charged with implementing health insurance exchanges under Obamacare:

Representative Paul Gosar: What will a navigator or assister do if an individual reports they are paid under the table?

[Long pause]

Gary Cohen: That’s a good question. I’ll have to think about that, and talk to folks.

That’s not the only good question about the navigator program; the House Oversight Committee sent a letter asking more questions. The Department of Health and Human Services has allocated $54 million to this Obamacare “outreach” effort, and yet the Administration has not answered basic questions, like whether navigators would have to pass a criminal background check. The video demonstrates that Obamacare navigators could end up encouraging tax fraud by failing to report individuals who are paid under the table.

In March 2010, Speaker Nancy Pelosi famously said we had to pass the bill to find out what’s in it. Apparently, three years later, even the people in charge of implementing Obamacare still don’t know what’s in the law, and how it will—or won’t—work.

This post was originally published at The Daily Signal.

Rep. Stearns Op-Ed: Medicaid for Millionaires

“We shouldn’t have to do that, because they should know better.”

So said President Obama in explaining why the Treasury—quite rightly—forced Citigroup to cancel the purchase of a $50 million corporate jet after the banking firm accepted tens of billions in federal bailout dollars. But he could well have been talking about his Democratic colleagues in Congress, who seem perfectly willing to give the former executives of these firms generous federal health benefits—even though they too should know better.

Consider the case of Henry Waxman, a Democrat who has represented Beverly Hills in Congress for over 30 years. Last fall, as Chairman of the Oversight and Government Reform Committee, he led hearings on the financial crisis, and criticized companies for taking “massive risk. When the bottom fell out, senior management walked away with millions of dollars, while shareholders and taxpayers lost billions.”

Fast forward to this year and a new Congress, where Mr. Waxman assumed the Chairmanship of the Energy and Commerce Committee, on which I sit. As Chairman, Waxman wrote major health-related sections of the economic “stimulus” legislation which Congress is currently considering. The proposal Mr. Waxman presented to the Committee spent more than $100 billion on various health spending projects, and created two new federal entitlements—one expanding Medicaid to individuals receiving unemployment compensation, and the second providing subsidies to individuals who choose continuation coverage from their former employers.

But for the new entitlements, there was a massive loophole. Because the bill explicitly prohibited income or asset tests from being applied to people receiving the new health care entitlements, anyone who recently lost their job—including the former CEOs who Mr. Waxman said last fall “walked away with millions”—could receive free or subsidized health care courtesy of federal taxpayers. At a time when all Americans are struggling to make ends meet, I viewed these uncapped subsidies as a poor use of taxpayers’ hard-earned money—and an unnecessary expansion of government to boot.

So when our Committee met to consider the “stimulus” legislation, I offered an amendment to the legislation to make sure that individuals with income over $1 million who elected continuation coverage from their former employers would not receive federal subsidies to pay for that coverage. Chairman Waxman accepted my amendment, and said he would “try to find a way to structure” the subsidies so that wealthy executives wouldn’t be eligible for subsidies they really shouldn’t need.

But several days later, when Democrat leaders introduced the version of the “stimulus” legislation that the House was actually going to vote on, my amendment was stricken from the bill. The omission wasn’t because a cap on the federal health subsidies was unworkable—Congressional tax advisers told a Senate committee an income-based cap was feasible to implement. No one was able to give me a straight answer as to why my amendment wasn’t included in the final bill—Speaker Pelosi actually put out a press release saying my amendment had been accepted as part of the “bipartisan” debate, when in reality my amendment and those of two of my other Republican colleagues had been unceremoniously dumped behind closed doors.

This incident raises a couple of key questions—one procedural, the other political. First, how bipartisan is it to accept an amendment one week, only to remove it without explanation or cause the next? Second, now that they control Congress and the White House, are Democrats so insistent on expanding the federal government’s role in health care that they want to provide subsidized coverage to the same fired executives they have so recently blamed for causing our current economic crisis?

In the end, the final “stimulus” product included an income cap so that taxpayers’ funds won’t be to subsidize the health insurance of Bernie Madoff and other similar characters. But it begs the same point President Obama raised when talking about Citigroup’s desire for a new corporate jet: We shouldn’t have to tell Democrats not to give federal health benefits to millionaires—because they should know better.

This post was originally published at RedState.

Certificate of Need Programs

History and Background:  In the 1960s, some health care policy makers began to believe that an excess supply of providers was having an inflationary impact on the price of health care.  As a result, several states, beginning with New York in 1964, enacted “certificate of need” (CON) laws giving state agencies the power to evaluate whether a new hospital or nursing home facility was needed prior to its construction.  Prompted in part by support from the American Hospital Association, 20 states enacted certificate of need laws by 1975.[1]

In January 1975, President Ford signed into law the National Health Planning and Resources Development Act (P.L. 93-641), originally sponsored by Sen. Ted Kennedy (D-MA).  The Act provided incentives for states to enact approval mechanisms prior to the construction of major facilities. As a result, by 1980 all states but Louisiana had established CON programs.[2]  However, Congress enacted legislation (P.L. 99-660) repealing the federal law in November 1986, which in time led 14 states to abolish their certificate of need programs.  Nevertheless, 36 states and the District of Columbia maintain some form of restriction on the construction of new medical facilities absent a determination of necessity.

Changes within the Hospital Industry:  In the more than four decades since the first certificate of need program was established, the hospital industry has undergone numerous changes and consolidations that may be seen as undermining the original rationale for the certificate of need mechanism.  At the time certificate of need laws were enacted, most hospitals received cost-based reimbursement for services from both the federal government and private insurers.  This payment mechanism, when coupled with a perceived lack of incentives for consumers to become cost-conscious about their health care expenditures, led policy-makers to impose external restrictions on providers’ growth (in an attempt to slow the growth of health expenditures) due to a belief that they would fail to compete on price grounds.[3]  However, the intervening decades have seen a move away from cost-based reimbursement and toward prospective payment for procedures, along with greater incentives—higher deductibles, Health Savings Accounts, co-insurance, etc.—for consumers to demonstrate price sensitivity in health care.  Thus the economic conditions which led regulators to impose certificate of need restrictions have changed appreciably for both consumers and providers, which may prompt a re-evaluation of their usefulness and efficacy.

In addition, a wave of consolidation within the hospital sector has attracted the attention of antitrust regulators, who have examined the impact of hospital mergers on health care.  As of 2001, nearly 54% of hospitals nationwide had joined a larger hospital system, with a further 12.7% working in looser affiliations.  Combined, two-thirds of hospitals nationwide (66.7%) participated in some form of network or system affiliation—more than double the 31% two decades previously, in 1979.[4]

In 2004, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) conducted a series of fact-finding hearings that culminated in a joint study analyzing the antitrust implications of health care policy, which featured several chapters specifically devoted to the changes within the hospital industry.[5]  Reports submitted to the panel cited the “extensive consolidation” within the health care industry, “at times creating virtual monopolies in geographic submarkets” that allowed hospitals to “exert greater leverage in managed care contract negotiations” while pressuring physicians to join a particular system.[6]  Other witnesses noted the way in which hospital systems attempt to include at least one “must have” hospital in each geographic market, which will allow the system to demand price increases.[7]

Both the FTC-DOJ report and other independent studies have noted the link between high levels of consolidation within the hospital industry and higher prices.  Best estimates indicate that hospital mergers tend to increase prices from 5-40%—while also resulting in decreases in quality.[8]  A National Bureau of Economic Research working paper found that, by resulting in a loss of consumer surplus of $42.2 billion over a decade (most of which went to providers), hospital mergers had the net effect of raising insurance premiums 3-5%, thus increasing the number of uninsured by almost 5.5 million life-years from 1990 through 2003.[9]

Effect of CON on Competition, Price, and Quality:  Conservatives who believe in free markets may not object to consolidation within the hospital industry, or any other industry, provided that no other external factor interferes with the operation of the economic market.  However, if the market has been distorted through public policy actions by legislators—as in the case of the 36 states and the District of Columbia with certificate of need laws—some conservatives may view such laws with caution, due to the potential negative implications which a state-granted oligopoly for existing providers may have on the ability of new entrants to improve the health care marketplace through innovative practices and techniques.

The same FTC-DOJ report that noted the correlation between hospital consolidation and rising prices also criticized the state certificate of need model as anticompetitive and not in consumers’ best interest.  Witnesses testified that the barriers to entry presented by certificate of need requirements impeded rapid implementation of new health care technologies, with significant adverse effects on overall health care spending—rising prices due to more limited access to care, and/or re-directing spending to other areas of health care (i.e. a restriction on development of new beds leading to increased investment in radiological or other equipment).[10]  The report concluded:

The Agencies believe that CON programs are generally not successful in containing health care costs and that they can pose anticompetitive risks….CON programs risk entrenching oligopolists and eroding consumer welfare.  The aim of controlling costs is laudable, but there appear to be other, more effective means of achieving this goal that do not pose anticompetitive risks.[11]

Because of the “serious competitive concerns” that outweighed the purported benefits, the agencies advised states to re-evaluate whether their certificate of need programs in fact serve the public good.

In addition to the impact of certificate of need programs on price and market penetration, the stubbornly high rates of medical errors and hospital-acquired infections may be symptomatic of quality control difficulties rooted in a lack of competition.  The 1999 Institute of Medicine study To Err Is Human estimated that between 44,000 and 98,000 Americans die annually in hospitals due to preventable medical errors, creating a total economic cost of as much as $29 billion, and a November 2006 report utilizing data from a new infection-reporting regime in Pennsylvania found 19,154 cases of hospital-acquired infections in 2005 alone, representing an infection incident rate of more than 1 in 100 hospitalizations.[12]  With consolidation having eroded the breadth of competing hospitals in some markets, and state certificate of need programs presenting a significant barrier for potential new entrants, the prime driver of quality improvement within the hospital sector may be fear of litigation—a process which some conservatives may find economically inefficient and poor public policy.

The impact of certificate of need programs on quality improvements was illustrated in data from an October 2003 Government Accountability Office (GAO) study examining physician-owned specialty hospitals.  According to GAO, 83% of all specialty hospitals—and all specialty hospitals then under development—were located in states without certificate of need requirements.[13]  The FTC-DOJ study also cited the example of a Florida law enacted in 2003, which barred single-practice specialty hospitals while simultaneously eliminating certificate of need requirements for various cardiac programs at general hospitals.[14]  Some conservatives may therefore be concerned first that the innovation and quality improvements which physician-owned specialty hospitals have introduced are being denied to residents in many states due to certificate of need restrictions, and second that this archaic and bureaucratic mechanism has become a political football that existing facilities attempt to manipulate in order to maintain existing oligopolies.[15]

Security Impact:  The September 11 attacks and subsequent concerns regarding incidents of mass terrorism, bioterrorism, or pandemic outbreaks have raised the prominence of the need for “surge capacity” in the event of a major public health disaster.  Although such surge capacity need not be located within the confines of a hospital, specialized medical centers may play a significant role in any response to a large-scale incident.

On May 5 and 7, 2008, the House Committee on Oversight and Government Reform held hearings regarding a potential lack of hospital surge capacity.[16]  Chairman Henry Waxman (D-CA) attempted to assert that the implementation of several proposed Medicaid anti-fraud regulations would compel hospitals to reduce or eliminate trauma centers whose services would be needed in the event of a major terror incident.  In response, Secretary of Health and Human Services Mike Leavitt noted that the need for proper public health capacity to respond to terrorist incidents should not impede the Administration from enacting reasonable controls to ensure that the Medicaid program meets its statutory goal of providing health care to low-income individuals, as opposed to serving as a bioterror response agency.

In addition to agreeing with the Secretary’s assertion that the distinction between public health preparedness and implementation of Medicaid anti-fraud regulations saving $42 billion over a decade is a false dichotomy, some conservatives may also believe that a better way to increase “surge capacity” in 36 states and the District of Columbia would involve a repeal of certificate of need restrictions.  Rather than maintaining bureaucratic regulations that prevent construction of health care facilities of critical importance in a mass-casualty incident—or jeopardizing existing physician-owned trauma centers by enacting new restrictions on physician ownership, as House Democrats have proposed—conservatives may believe that a better alternative would allow free markets to innovate and create new medical centers should capacity for trauma units or other segments of care be lacking in a particular market.

Conclusion:  Proposals to expand the government’s role in health care have frequently been criticized by conservatives as the first step towards rationed care.  However, some conservatives may use the certificate of need model to argue that 36 states and the District of Columbia already ration health care, by limiting the ability of new entrants to provide medical services to their citizens.  For instance, the recent decision of the Michigan Certificate of Need Commission to limit the number of new radiation facilities in the state may have an adverse impact on cancer patients seeking access to a novel form of treatment.[17]

With a McKinsey group study noting that hospitals account for 50% of the excess spending in American health care relative to other countries, some conservatives may argue that the hospital industry in particular warrants the additional innovation and reduced costs which new entrants can provide.[18]  Congress itself recognized this fact in 1980 by passing legislation (P.L. 96-499) making ambulatory surgery centers (ASCs) eligible for Medicare reimbursement, believing that new ASCs could perform certain medical procedures more cost-effectively than general hospitals.[19]  Yet the exhaustive FTC-DOJ study, as well as related literature, have documented the ways in which state-based certificate of need laws have undermined market-based efforts at cost control—by resulting in less competition, higher prices, and a diminished emphasis on quality that new market entrants can elicit.  In addition, the changed environment of a post-9/11 world raises questions as to whether states with certificate of need programs are denying to their citizens facilities that could be of critical importance in a public health crisis.  Viewed from these perspectives, the certificate of need model may look less like an effective mechanism to contain the growth of health care costs than an outdated shibboleth that ultimately harms the citizens whom it was designed to protect.

Some conservatives may believe that the nearly 100,000 deaths annually due to preventable medical errors constitute proof positive that the certificate of need model should be permanently dismantled, and that the billions of dollars in hospital expenditures made by the federal government may warrant a federal role in persuading recalcitrant states to do so.  This fiscal year alone, the federal government will spend at least $27.1 billion on payments to hospitals not directly attributable to patient care—including Medicare and Medicaid disproportionate share hospital payments, and graduate and indirect medical education costs.[20]  Some conservatives may therefore support policies intended to link some or all of these payments to states’ repeal of certificate of need laws, in the belief that the abolition of such measures will improve competition, drive down prices, and enhance the quality of health care nationwide.

 

[1] “Certificate of Need State Laws 2008,” (Washington, DC, National Council of State Legislatures, updated May 8, 2008), available online at http://www.ncsl.org/programs/health/cert-need.htm (accessed May 11, 2008).

[2] Cited in Improving Health Care: A Dose of Competition (Washington, DC, Department of Justice and Federal Trade Commission Joint Report, July 2004), available online at http://www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf (accessed May 11, 2008), p. 301.

[3] Ibid., pp. 302-303.

[4] Ibid., pp. 133-134.

[5] Background information, agendas, and transcripts for the hearings can be found online at http://www.ftc.gov/bc/healthcare/research/healthcarehearing.htm (accessed May 12, 2008).

[6] Cara Lesser and Paul Ginsburg, “Back to the Future?: New Cost and Access Challenges Emerge,” (Washington, DC, Center for Studying Health System Change Issue Brief No. 35, February 2001), available online at http://www.hschange.com/CONTENT/295/ (accessed May 11, 2008).

[7] Cited in Dose of Competition, p. 138.

[8] William Vogt and Robert Town, “How Has Hospital Consolidation Affected the Price and Quality of Hospital  Care?” (Princeton, NJ, Robert Wood Johnson Foundation Research Synthesis Project No. 9, February 2006), available online at http://www.rwjf.org/pr/synthesis/reports_and_briefs/pdf/no9_researchreport.pdf (accessed May 12, 2008), pp. 8-10.

[9] Robert Town et al., “The Welfare Consequences of Hospital Mergers,” (Cambridge, MA, National Bureau of Economic Research Working Paper 12244), available online at http://www.nber.org/papers/w12244.pdf?new_window=1 (accessed May 13, 2008), Tables 8-10, pp. 48-50.

[10] See ibid., pp. 301-306.

[11] Ibid., p. 306.

[12] Institute of Medicine, To Err Is Human: Building a Safer Health System, summary available online at http://www.iom.edu/Object.File/Master/4/117/ToErr-8pager.pdf (accessed March 1, 2008); Pennsylvania Health Care Cost Containment Council, Hospital Acquired Infections in Pennsylvania, available online at http://www.phc4.org/reports/hai/05/docs/hai2005report.pdf (accessed March 1, 2008).

[13] “Specialty Hospitals: Geographic Location, Services Provided, and Financial Performance,” (Washington, Government Accountability Office, Report GAO-04-167), available online at http://www.gao.gov/new.items/d04167.pdf (accessed May 11, 2008), pp. 20-21.

[14] Cited in Dose of Competition, p. 146, note 116.

[15] The Center for Responsive Politics notes that from 1998 through March 2008, the hospital and nursing home industry spent more than $610 million on federal lobbying alone, placing it ninth among 121 industry categories.  Data available online at http://www.opensecrets.org/lobby/top.php?indexType=i (accessed May 12, 2008).

[16] Information about the hearings can be found at http://oversight.house.gov/story.asp?ID=1929 (accessed May 10, 2008).

[17] Andrew Pollack, “States Limit Costly Sites for Cancer Radiation,” New York Times May 1, 2008, available online at http://www.nytimes.com/2008/05/01/technology/01proton.html?_r=2&adxnnl=1&8br=&oref=slogin&adxnnlx=1210543656-RJG4oNSF434Dh4b52KfeFA&pagewanted=print (accessed May 11, 2008).

[18] Cited in Regina Herzlinger, Who Killed Health Care? America’s $2 Trillion Medical Problem—and the Consumer Driven Cure (New York, McGraw-Hill, 2007), p. 62.

[19] Cited in Dose of Competition, p. 148.

[20] Congressional Budget Office March 2008 baselines for Medicare and Medicaid, available online at http://www.cbo.gov/budget/factsheets/2008b/medicare.pdf and http://www.cbo.gov/budget/factsheets/2008b/medicaidBaseline.pdf, respectively  (accessed May 12, 2008).