21st Century Health Care Options for the States

A version of this post is available on the Galen Institute website.

Across the country, state legislatures are considering whether or not to expand their existing Medicaid programs.  Last year’s Supreme Court ruling struck down the mandatory nature of Obamacare’s expansion of Medicaid to all families with incomes up to approximately $30,000 a year.  Chief Justice Roberts’ June 2012 opinion stated that the health law as originally written engaged in “economic dragooning that leaves the states with no real option but to acquiesce in the Medicaid expansion.”[1]  The Court’s opinion gave states a choice whether or not to expand their Medicaid programs to approximately 20 million new individuals,[2] a decision which states are weighing during their current legislative sessions.

The reasons why states should NOT participate in Obamacare’s Medicaid expansion are well-documented[3]: Medicaid patients have worse health outcomes than patients with other forms of insurance, and in many cases worse health outcomes than the uninsured;[4] Medicaid beneficiaries often face difficulty finding doctors who will treat them;[5] and by increasing federal spending funded by massive tax increases, a Medicaid expansion will destroy jobs rather than create them.[6]

Less well known, however, are the innovative programs states have utilized over the past several years to modernize and enhance their health sectors, expanding coverage and improving quality of care while lowering costs.  Rather than utilizing Obamacare’s top-down, government-centric approach of putting more people into a broken Medicaid program, these policy solutions seek to transform Medicaid using market incentives to create a health system that works for patients.

Recently the Centers for Medicare and Medicaid Services (CMS) issued a bulletin providing clear evidence that the Obama administration views Medicaid expansion as an all-or-nothing proposition.[7]  The Administration apparently hopes that pressure from hospitals and special interests will force state legislators to approve Obamacare’s massive Medicaid expansion.  However, as Chief Justice Roberts indicated in his opinion last June, states now have a real choice.  Based on the examples presented below, states should choose innovative, market-driven solutions, rather than Obamacare’s bureaucratic approach.

Rhode Island

States seeking to improve their health care system should closely examine Rhode Island’s successful global compact waiver for its Medicaid program.  The waiver, negotiated by then-Gov. Don Carcieri and approved by CMS in January 2009, attempts to reduce expenses by giving the state the flexibility to improve the quality of care.  The Rhode Island waiver focuses on promoting home-and-community-based services as a more affordable (and more desirable) alternative to nursing homes, on improving access to primary care through managed care enrollment, and on other similar methods to provide quality care at better cost.  In December 2011, the non-partisan Lewin Group released an analysis of the Rhode Island global compact waiver.[8]  The Lewin report provides demonstrable examples of the waiver’s policy success, saving money while simultaneously improving care:

  • Shifting nursing home services into the community saved $35.7 million during the three-year study period
  • More accurate rate setting in nursing homes saved an additional $15 million in Fiscal Year 2010 alone
  • Better care management for adults with disabilities and special needs children saved between $4.5 and $11.9 million, and
  • Enrollment in managed care significantly increased the access of adults with disabilities to physician services.

Lewin’s conclusion:

The GW [Global Waiver] initiatives and budget actions taken by Rhode Island had a positive impact on controlling Medicaid expenditures.  The actions taken to re-balance the [Long Term Care] system appear to have generated significant savings according to our estimates.   The mandatory enrollment of disabled members in care management program reduced expenditures for this population while at the same time generally resulting in improved access to physician services.  Continuing the GW initiatives already undertaken by the state and implementing the additional initiatives included in the [Global Waiver] will result in significant savings for the Rhode Island Medicaid program in future years.[9]

All this progress comes despite the Obama administration’s efforts, not because of them.  Pages 14-15 of the Lewin report note that maintenance of effort mandates imposed in Obamacare and the “stimulus” prevented Rhode Island from imposing modest premiums on some beneficiaries, even though the approved waiver was supposed to give the state that flexibility.[10]

Despite the ways in which the Obama administration’s bureaucratic requirements interfered with Rhode Island’s ability to implement its global waiver fully, the state achieved measurable progress in reducing costs while improving care – providing a clear example that other states can emulate.

Indiana

The Hoosier State’s Healthy Indiana Plan (HIP), created in 2008, applied the principles of personal responsibility, consumer-driven health plans, and Health Savings Accounts in its expansion of coverage to low-income populations.  Initiated as part of a Medicaid demonstration waiver, the program requires individuals to make contributions to a Personal Wellness and Responsibility (POWER) account.  No beneficiary pays more than 5% of their income, and the state supplements individual contributions so that all participants will have $1,100 in their accounts to pay for routine expenses.

Healthy Indiana promotes personal responsibility in several ways.  First, the required beneficiary contributions to the POWER account ensure that all participants have an incentive to take greater responsibility for their own health and health spending.  Second, the program promotes preventive care by providing an additional $500 to fund important preventive screenings.  Moreover, only those beneficiaries who participate in a series of annual screenings may roll over unused POWER account funds from year to year.  Third, Healthy Indiana assesses co-payments for non-urgent visits to the emergency room, attempting to reverse a trend of high ER usage by Medicaid beneficiaries prevalent nationwide.[11]

Overall, Healthy Indiana has achieved many of its policy goals.  Despite the modest incomes of beneficiaries enrolled in the program – all of whom must have incomes below 200% of the federal poverty level, or about $31,000 for a couple in 2013 – nearly four in five contributed to their POWER account.[12]  Nine in ten participants have at least one physician visit in their first year of enrollment, demonstrating that the HIP deductible does not hinder patients from obtaining needed care.[13]  And an analysis by the consulting firm Milliman found that parents in Healthy Indiana “seek preventive care more frequently than comparable commercial populations.”[14]

Healthy Indiana has not only proved successful – it’s been popular as well.  Only about one-quarter of participants ever enrolled in the program during its first two years left the program, “a retention rate much higher than the rate for adults in Indiana’s regular Medicaid managed care program.”[15]  Approximately 70% of beneficiaries considered the required POWER account contributions just the right amount, and 94% of members report being satisfied or highly satisfied with their coverage.[16]

A 2011 policy brief by Mathematica Policy Research commented on the program’s successes:

HIP has successfully expanded coverage for the uninsured, while giving enrolled members an important financial stake in the cost of their health care and incentives for value-based decision making.  Early implementation suggests that members value HIP benefits and that at least some low-income, uninsured adults are willing and able to contribute toward the cost of their care.[17]

Just as important, the program’s increase in preventive care, and decrease in emergency room usage, have achieved measurable savings. Milliman reports that HIP exceeded its targets for budget neutrality, spending nearly $1 billion less than its original spending cap in its first five years.[18]

In the past five years, the market-based incentives of the Healthy Indiana Plan have yielded two-fold success in improving the population while containing overall spending.  It remains to be seen whether CMS will approve an extension of HIP or will instead claim that Obamacare’s bureaucratic mandates preclude the program’s continuation.  The week the law passed, then-Gov. Mitch Daniels publicly worried that Obamacare would force him to plan for HIP’s termination.[19]  State legislators seeking to avoid Obamacare’s requirements and restrictions who are looking instead to market incentives as a way to control costs would be wise to examine the Healthy Indiana Plan approach.

Florida

Earlier this year, CMS granted approval to the state of Florida’s two waivers to alter its Medicaid program.  These waivers, which follow on the heels of a five-county pilot reform program begun in 2006, will roll out over the coming 18 months; both waivers should be fully implemented by October 2014.[20]

One of the two waivers would transform the Medicaid program for low-income beneficiaries. The waiver will allow all Medicaid recipients to enroll in managed care plans; each will have at least two, and as many as 10, Medicaid plans from which to choose.[21]  The waiver allows managed care plans – which are based in one of 11 regions – to create customized benefit packages that meet the unique needs of their local populations.  In applying for its waiver, Florida rightly noted that “each plan will face the competitive pressure of offering the most innovative package,” which will allow beneficiaries “to use their premium [dollars] to select benefit plans that best meet their needs.”[22]

Other features of the waiver likewise seek to reduce costs while improving the quality of beneficiary care.  Managed care plans will be required to “establish a program to encourage and reward healthy behaviors,” similar to the Healthy Indiana Plan incentives discussed above.[23]  Florida also is seeking waiver flexibility from CMS to encourage beneficiaries to enroll in health coverage through their employer when available and require modest cost-sharing for certain populations.[24]

Coupled with another waiver for the state’s long-term care program – one which seeks to place individuals in home and community-based services instead of nursing home facilities – the two waivers collectively will transform the Medicaid program in Florida.  The waivers’ focus on participant choice, competition among plans to enroll beneficiaries, and incentives to promote wellness and preventive care all hold the potential to provide a more personalized experience for Medicaid beneficiaries – and, just as important, a more effective and efficient one as well.

Even as Florida moves ahead on implementing its waivers, state legislators are offering state-based alternatives to Obamacare’s costly Medicaid expansion.  House Speaker Will Weatherford introduced legislation – the Florida Health Choices Plus bill – with Rep. Richard Corcoran, chairman of the House Health and Human Services Committee, to provide incentives for low-income individuals to obtain health insurance.[25]  Under the proposal, individuals with incomes below the federal poverty line would receive $2,000, deposited into a CARE (Contribution Amount for Reasonable Expenses) account.[26]  Beneficiaries would be required to deposit $25 per month, or $300 per year, into the account, and employers could contribute additional amounts as well.  The money could be used to purchase affordable health coverage in the Florida Health Choices insurance clearinghouse, or used directly for health expenses.

Because more than two in three uninsured Americans lack coverage for periods of less than a year, Florida Health Choices Plus would provide bridge funding to the majority of citizens who suffer only short spells without health insurance.[27]  It does so without providing incentives for individuals to drop private health insurance and enroll in a government program – a problem that has plagued past state coverage initiatives.[28]  The proposal includes a personal responsibility component, coupled with incentives for beneficiaries to serve as wise consumers of health care.  And it accomplishes these objectives without relying on Obamacare’s massive new gusher of federal spending.

Texas

Although it has not yet come to fruition, state thought leaders have begun to consider how additional flexibility from Washington could result in better care for patients and a more predictable and stable Medicaid budget for states.  The Texas Public Policy Foundation recently released a paper outlining its vision for a Medicaid block grant, and how Texas could use the flexibility under a block grant to revamp its existing Medicaid program.[29]  The paper describes how the amount of a block grant might be set, along with the terms and conditions establishing a new compact between the federal government and states – giving states more flexibility, but also requiring accountability for outcomes in the process.

Texas envisions a block grant as providing a way to revamp its Medicaid program for both low-income and elderly beneficiaries.  For lower-income applicants, the state could choose to subsidize private health insurance, with incentives linked to Health Savings Account (HSA) plans.  Beneficiaries would fund the difference between the amount of the state-provided subsidy and the cost of the insurance plan, “provid[ing] strong incentives to the enrolled population to purchase low premium, high value plans.  Beneficiaries selecting coverage that costs less than their premium support entitlement would be allowed to deposit the difference in an HSA.”[30]

With respect to long-term care for the elderly, the Texas paper envisions a series of reforms under a Medicaid block grant.  Incremental reforms – including partial benefits for those who seek to remain in community settings, a competitive bidding process for nursing home care, and greater restrictions on asset transfers, to ensure benefits are targeted toward truly needy individuals – would eventually lead to a fundamental transformation of the long-term care benefit into a defined contribution model.  Under this reform, “the state will provide a pre-determined level of financial support directly to those eligible by establishing and funding an account on each beneficiary’s behalf” to be used for eligible care expenses – maximizing beneficiary choice and flexibility and encouraging the use of community-based service over institutional nursing homes.

Unfortunately, a block grant requires approval from Congress – and neither the Democrat Senate nor President Obama currently appear inclined to grant states the degree of flexibility the Texas paper envisions.  But Rhode Island’s Global Waiver, approved in the final days of the George W. Bush administration, shows that the administration does have the authority to grant global waivers to other states seeking the same control over their Medicaid programs.

Nevertheless, the ideas offered in the paper present a vision where both flexibility and market incentives can provide better quality coverage to residents while providing budgetary stability to federal and state governments alike.

Learning from other states

Other examples of states taking action on their Medicaid programs:

North Carolina:  States first need to be armed with solid information about how the Medicaid program is working.  They need to know who is being helped or harmed and how much is being lost to waste and inefficiency in this ossified, rule-driven program.  In North Carolina, state auditor Beth Wood recently found that the state’s Medicaid program endured $1.4 billion in cost overruns each year, including $375 million in state dollars. As a result, North Carolina has decided not to expand its Medicaid program. Before considering any action, others states should commission objective, independent audits of their Medicaid programs to understand the program and the problems that need fixing.

New York also was able to gain more control over how Medicaid subsidy money is spent in exchange for a global cap on a substantial fraction of its Medicaid expenditures.

West Virginia offers alternative benefit packages that create incentives for beneficiaries to take responsibility for their own health and health care. Kentucky and Idaho are among other states with similar programs.  Patients receive additional benefits if they select a medical home, adhere to health improvement programs, keep and arrive on time for appointments, use the hospital emergency room for emergencies only, and comply with prescribed medications.

Utah fought for and received a waiver that allowed the states to scale back Medicaid’s excessively large benefit package to stretch the money to cover more citizens.

These are a few examples of the creative programs that states could develop if they weren’t forced to jump through Washington’s Mother-May-I Medicaid hoops to get approval to make even minor changes to their Medicaid programs.  

Lessons and Themes

While each state’s Medicaid program is unique, the examples discussed above each contain common themes that should guide policy-makers seeking to transform their state health systems – and avoid the pitfalls of Obamacare’s massive, bureaucratic expansion:

  • Customized Beneficiary Services:  Providing beneficiaries with a choice of coverage options can provide plans an incentive to tailor their benefit packages to best meet individuals’ needs.  Similar incentives promoting competition in the Medicare Part D prescription drug benefit helped keep that program’s cost more than 40% below original estimates.[31]
  • Coordinated and Preventive Care:  Several of the reform programs focus on providing individualized, coordinated services to beneficiaries – an improvement to the top-down, uncoordinated care model of old.  In many cases, preventive care interventions for Medicaid recipients suffering from chronic conditions can ultimately save money.
  • Personal Responsibility:  Cost-sharing can be an appropriate incentive, to encourage beneficiaries to take ownership of their health, and discourage costly practices, such as emergency room trips for routine care.  The fact that more than two-thirds of Healthy Indiana Plan participants consider their cost-sharing levels appropriate proves that even families of modest means are both willing and able to provide some financial contribution to their cost of care.
  • Home and Community-Based Services:  Several of the reform programs attempt to continue and accelerate the trend of providing long-term care in patients’ homes, rather than in more cumbersome and costly nursing home settings.
  • No New Federal Funds:  Most importantly, each of the reform projects discussed above neither seek nor require the massive new spending levels contemplated by an Obamacare expansion.  In many cases, the programs above were implemented successfully despite Washington’s interference, not because of it.

Conclusion

Functioning in their traditional role as laboratories of democracy, states have provided better solutions for policy-makers seeking to reform their Medicaid programs.  These solutions have expanded coverage, and improved the quality of care, even while reducing costs to taxpayers.  As the Obama administration denies states true flexibility when it comes to Obamacare’s costly Medicaid expansion, states have demonstrated that they can convert a modicum of leeway from Washington into maximum improvements for their citizens – and savings for taxpayers.

The analysis above shows that Chief Justice Roberts was right: states do have a choice when it comes to their Medicaid programs.  They can – and should – choose the options that will reform and revitalize their programs, rather than the massive and costly expansion of the Medicaid monolith included in Obamacare.

States must take the lead in insisting that Washington provide more flexibility over Medicaid spending so they can expand access to care without burdening taxpayers with significant new costs or burdening their citizens with a program that can be worse than being uninsured.

States can show that Medicaid can have a more efficient and effective service delivery system that enhances quality of care and outcomes.  Expanding Medicaid without a guarantee of flexibility would be a major missed opportunity for the states. If states join together, they have more leverage to demand true flexibility than if they try to gain leverage one by one.

 

NOTES

[1] NFIB v. Sebelius, June 28, 2012, http://www.supremecourt.gov/opinions/11pdf/11-393c3a2.pdf, p. 52.

[2] Prior to the Supreme Court ruling, the Congressional Budget Office estimated that Obamacare would expand coverage to 17 million individuals through Medicaid by 2022, while the Office of the Actuary at CMS estimated the Medicaid expansion would cover 25.9 million individuals by 2020.  See CBO, “Estimates for Insurance Coverage Provisions of the Affordable Care Act Updated for the Recent Supreme Court Decision,” July 24, 2012, http://cbo.gov/sites/default/files/cbofiles/attachments/43472-07-24-2012-CoverageEstimates.pdf, Table 1, p. 19, and Office of the Actuary, Centers for Medicare and Medicaid Services, “2011 Actuarial Report on the Financial Outlook for Medicaid,” March 16, 2012, http://www.cms.gov/Research-Statistics-Data-and-Systems/Research/ActuarialStudies/Downloads/MedicaidReport2011.pdf, p. 30.

[3] Grace-Marie Turner and Avik Roy, “Twelve Reasons States Should Not Expand Medicaid,” Galen Institute, March 15, 2013, http://www.galen.org/topics/tennessee-should-block-medicaid-expansion/.

[4] Scott Gottlieb, “Medicaid Is Worse than No Coverage at All,” The Wall Street Journal March 10, 2011, http://online.wsj.com/article/SB10001424052748704758904576188280858303612.html.

[5] See, for instance, Joanna Bisgaier and Karin Rhodes, “Auditing Access to Specialty Care for Children with Public Insurance,” New England Journal of Medicine June 16, 2011, http://www.nejm.org/doi/full/10.1056/NEJMsa1013285.

[6] Chris Conover, “Will Medicaid Expansion Create Jobs?,” Forbes, February 25, 2013, http://www.forbes.com/sites/chrisconover/2013/02/25/will-medicaid-expansion-create-jobs/.

[7] CMS Bulletin, “Medicaid and the Affordable Care Act: Premium Assistance,” March 29, 2013, http://medicaid.gov/Federal-Policy-Guidance/Downloads/FAQ-03-29-13-Premium-Assistance.pdf.

[8] Lewin Group, “An Independent Evaluation of Rhode Island’s Global Waiver,” December 6, 2011, http://www.ohhs.ri.gov/documents/documents11/Lewin_report_12_6_11.pdf.

[9] Ibid., p. 40.

[10] Specifically, the report notes that the maintenance of effort requirements included in the “stimulus” (P.L. 111-5) and Obamacare (P.L. 111-148) “had a profound impact on the flexibility Rhode Island anticipated…The Special Terms and Conditions for the global waiver authorized Rhode Island to charge premiums of up to 5 percent…however, CMS prohibited Rhode Island from using this authority,” citing the maintenance of effort requirements.  Ibid., pp. 11-12.

[11] See, for instance, a 2010 Centers for Disease Control research brief finding Medicaid beneficiaries were nearly twice three times as likely as those with private insurance to visit the ER multiple times in one year.  Tamrya Caroll Garcia, Amy Bernstein, and Mary Ann Bush, “Emergency Department Visitors and Visits: Who Used the Emergency Room in 2007?” National Center for Health Statistics Data Brief No. 38, May 2010, http://www.cdc.gov/nchs/data/databriefs/db38.pdf.

[12] Timothy Lake, Vivian Byrd, and Seema Verma, “Healthy Indiana Plan: Lessons for Reform,” Mathematica Policy Research Issue Brief, January 2011, http://mathematica-mpr.com/publications/pdfs/health/healthyindianaplan_ib1.pdf.

[13] Indiana Family and Social Services Administration, Healthy Indiana Plan 1115 Waiver Extension Application, February 13, 2013, http://www.in.gov/fssa/hip/files/HIP_WaiverforPosting.pdf, p. 18.

[14] Cited in Ibid.

[15] “Healthy Indiana Plan: Lessons for Reform.”

[16] Healthy Indiana Plan 1115 Waiver Extension Application, pp. 19, 6.

[17] “Healthy Indiana Plan: Lessons for Reform.”

[18] Milliman letter to Indiana Family and Social Services Administration regarding budget neutrality of Medicaid Section 1115 waiver, January 30, 2013, http://www.in.gov/fssa/hip/files/041115_Budget_Neutrality_Waiver_Renewal.pdf.

[19] Mitch Daniels, “We Good Europeans,” The Wall Street Journal March 26, 2010, http://online.wsj.com/article/SB10001424052748704094104575144362968408640.html.

[20] Frequently Asked Questions on Statewide Medicaid Managed Care Program, Florida Agency for Health Care Administration, http://ahca.myflorida.com/medicaid/statewide_mc/pdf/FAQ_MC-SMMC_general.pdf.

[21] Ibid.

[22] Florida Agency for Health care Administration, Section 1115 waiver submission to the Centers for Medicare and Medicaid Services, http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Waivers/1115/downloads/fl/fl-medicaid-reform-pa.pdf.

[23] Ibid., p. 16.

[24] A summary of the specific federal authorities Florida seeks to waive can be found on the state Agency for Health Care Administration website, http://ahca.myflorida.com/medicaid/statewide_mc/pdf/Summary_of_Federal_Authorities_01232013.pdf.

[25] “Florida Health Choices PLUS+: Creating a Stronger Marketplace for Better Health, More Choices, and Expanded Coverage,” Floriday House Majority Office, April 2013, http://myfloridahouse.gov/Handlers/LeagisDocumentRetriever.ashx?Leaf=housecontent/HouseMajorityOffice/Lists/Other%20Items/Attachments/6/Florida_Heath_Choices_Plus.pdf&Area=House.

[26] Available online at http://myfloridahouse.gov/Sections/Documents/loaddoc.aspx?PublicationType=Committees&CommitteeId=2738&Session=2013&DocumentType=Proposed%20Committee%20Bills%20%28PCBs%29&FileName=PCB%20SPPACA%2013-03.pdf.

[27] Congressional Budget Office, “How Many People Lack Health Insurance and for How Long?” May 2003, http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/42xx/doc4210/05-12-uninsured.pdf, Table 4, p. 11.  For a further discussion of the cohorts comprising the uninsured, see Chris Jacobs, “Deconstructing the Uninsured,” Republican Study Committee Policy Brief, August 26, 2008, http://rsc.scalise.house.gov/uploadedfiles/pb_082608_uninsured%20analysis.pdf.

[28] See for instance Jonathan Gruber and Kosali Simon, “Crowd-Out Ten Years Later: Have Recent Public Insurance Expansions Crowded Out Private Insurance?” Journal of Health Economics, February 2008, http://economics.mit.edu/files/6422.  The study found that about three in five individuals enrolled in government health programs dropped their private coverage to do so.

[29] James Capretta, Michael Delly, Arlene Wohlgemuth, and John Davidson, “Save Texas Medicaid: A Proposal for Fundamental Reform,” Texas Public Policy Foundation, March 2013, http://www.texaspolicy.com/sites/default/files/documents/2013-03-RR05-MedicaidBlockGrants-Final.pdf.

[30] Ibid., p. 10.

[31] Robert Moffit, “Medicare Drugs: Why Congress Should Reject Government Price Fixing,” The Heritage Foundation Issue Brief 3880, March 18, 2013, http://www.heritage.org/research/reports/2013/03/medicare-drugs-why-congress-should-reject-government-price-fixing. ­­­

Legislative Bulletin: H.R. 6983, Paul Wellstone and Pete Domenici Mental Health and Addiction Equity Act

Order of Business:  The bill is scheduled to be considered on Tuesday, September 23, under a motion to suspend the rules and pass.

Summary:  H.R. 6983 would amend the Internal Revenue Code, the Public Health Service Act, and the Employee Retirement Income Security Act (ERISA) to require equity in the provision of mental health disorder benefits for group health insurance plans that offer both mental health benefits and medical and surgical benefits.  Previously, the Mental Health Parity Act—first enacted in 1996, and extended in subsequent legislation—required only that plans choosing to offer both mental health and medical and surgical benefits must have equal annual and lifetime limits on coverage for both types of treatments.  Specific details of the federal mandates in the bill include the following:

Treatment Limits and Beneficiary Financial Requirements:  The bill would require group health plans to offer a financial benefit structure for mental and substance abuse disorders that is no more restrictive than the predominant requirements applied to substantially all medical and surgical benefits.  The federal mandate would apply to overall coverage limits on treatment (e.g. number of days or visits) as well as deductibles, out-of-pocket limits, and similar beneficiary financial requirements.

Expansion of Definition:  The bill would expand the definition of “mental health benefits” subject to the federal mandate to include substance abuse and disorder treatments.

Medical Necessity:  The bill would permit plans to make coverage decisions for mental health and substance abuse disorders based on medical necessity criteria, but would require employers and insurers to disclose such criteria pursuant to regulations.

Out-of-Network Benefits:  The bill would mandate plans that offer out-of-network insurance coverage for medical and surgical benefits provide out-of-network coverage for mental health benefits in a manner consistent with the financial requirements listed above.

Increased Cost Exemption:  The bill would raise the level at which employers whose health insurance costs rise as a result of implementing mental health parity in benefits may claim an exemption from the federal mandate.  The bill would exempt employers whose costs due to mental health claims rise by more than 2% in the first year of implementation, and by more than 1% in subsequent years.  The more limited version of the Mental Health Parity Act first enacted in 1996 exempted employers whose claim costs rose 1%.  Employers with fewer than 50 workers would be exempt from federal mandates under the legislation, consistent with current law.

GAO Study:  The bill would require a study by the Government Accountability Office evaluating the law’s impact on the cost of health insurance coverage, access to mental health care, and related issues.

Worldwide Interest Allocation:  H.R. 6983 would delay by two years (from 2011 to 2013) the implementation of the worldwide allocation of interest, and reduces the first-year implementation of this rule.  In 2004, Congress gave taxpayers the option of using a liberalized rule for allocating interest expense between United States sources and foreign sources for the purposes of determining a taxpayer’s foreign tax credit limitation.  This is a multi-billion-dollar tax increase on Americans, taking particular aim at people who have financial dealings abroad.

Additional Background—Differences from Earlier Legislation:  On March 5, 2008, the House by a 268-148 vote passed mental health parity legislation in the form of H.R. 1424.  Subsequent negotiations with the Senate made modifications to the House-passed language that incorporated several key provisions in bipartisan Senate legislation (S. 558), and removed some provisions objectionable to conservatives.  Specifically, the compromise language in H.R. 6983:

  • Retains ERISA pre-emption for the large employers (those with more than 50 employees) subject to the law—states would not have the option of enacting more stringent and conflicting laws and regulations, as was proposed in H.R. 1424;
  • Remains silent on codifying classes of mental disorders—the compromise language removes provisions included in H.R. 1424 requiring group health plans to offer coverage for all disorders under the Diagnostic and Statistical Manual of Mental Disorders, including psycho-sexual disorders many conservatives find objectionable;
  • Does not mandate an out-of-network coverage benefit—plans must offer out-of-network coverage for mental disorders only to the extent they do so for medical and surgical benefits; and
  • Includes language stating that mental health parity provisions do not affect the “terms and conditions” of insurance contracts to the extent they do not conflict with the bill language—permitting employers and carriers to continue making medical necessity and related determinations—while requiring plans to make information on these medical management practices transparent.

While some conservatives may still have concerns with the mandates imposed by mental health parity legislation and the way in which these mandates would increase health insurance premiums, some segments of the business community have embraced the compromise as a reasonable attempt to achieve the goal of both bills without eroding ERISA pre-emption or imposing undue restrictions on benefit plan design.

Additional Background on Benefit Mandates:  Since the 1960s, state legislatures have considered—and adopted—legislation requiring health insurance products sold within the state to cover various products and services.  These benefit mandates are frequently adopted at the behest of disease groups advocating for coverage of particular treatments (e.g. mammograms) or physician groups concerned that patients have access to specialists’ services (e.g. optometrists).

A recent survey by the Council for Affordable Health Insurance found that as of 2007, states had enacted a total of 1,961 mandates for benefits and services—an increase of 60 (more than one per state) when compared to the 2006 total.[1]  The number of state mandates varies from a low of 15 in Idaho to a high of 64 in Minnesota.  However, because employer-sponsored health insurance is pre-empted from state-based laws and regulations under the Employee Retirement Income Security Act of 1974 (ERISA), benefit mandates do not apply to employers who self-fund their health insurance plans—one reason why H.R. 6983 seeks to impose those mandates on group plans (as well as state-regulated individual plans) on the federal level.

The cost and impact of benefit mandates on health insurance premiums have been the subject of several studies in recent years.  For instance, the Heritage Foundation prepared an analysis suggesting that each individual benefit mandate could raise the cost of health insurance premiums by $0.75 monthly.[2]  Although the cost of a single mandate appears small, the aggregate impact—particularly given the recent growth of benefit mandates nationwide—can be significant: For instance, Massachusetts’ 43 benefit mandates would raise the cost of health insurance by more than $30 monthly under the Heritage analysis.

Although well-intentioned, some conservatives may view the groups who advocate for benefit mandates as operating from fundamentally flawed logic: that individuals should go without health insurance entirely rather than purchase coverage lacking the “consumer protection” of dozens of mandates.  In addition, some conservatives note that the prospect of increasing the number of uninsured due to rising premium costs resulting from benefit mandates may precipitate a “crisis” surrounding the uninsured, increasing calls for a government-run health system.  In short, many conservatives may believe individuals should have the “consumer protection” to purchase the insurance plan they desire—rather than the “protection” from being a consumer by a government which seeks to define their options, and raise the cost of health insurance in the process.

Committee Action:  None; the bill was introduced on September 22, 2008.

Possible Conservative Concerns:  Several aspects of H.R. 6983 may raise concerns for conservatives, including, but not necessarily limited to, the following:

  • Process.  Multiple sources and press reports indicate that numerous stakeholders involved in negotiating the bipartisan Senate compromise have concerns with the House’s consideration of stand-alone mental health parity legislation—as opposed to its inclusion in the tax extenders package.  As recently as Monday, September 22, House Democrat leadership indicated they would not attempt to pass the mental health parity provisions separately; however, the majority later switched course.  Some conservatives may be concerned by reports indicating that this separate House vote is intended to provide “political cover” for Blue Dogs who may oppose the tax extenders bill (with mental health parity included) because it does not include enough tax increases to offset extensions of existing tax relief.
  • Tax Increase.  In order to pay for the nearly $4 billion cost of mental health parity, H.R. 6983 would delay by a further two years a provision allowing taxpayers flexibility in allocating worldwide interest for the purposes of determining a taxpayer’s foreign tax credit limitation.  Some conservatives may be concerned that this provision increases taxes on Americans in order to pay for H.R. 6983’s benefit mandates.
  • Increase Health Insurance Costs and Number of Uninsured.  As noted above, benefit mandates generally have the effect of increasing the cost of health insurance.  Moreover, some estimates suggest that every 1% increase in premium costs has a corresponding increase in the number of uninsured by approximately 200,000-300,000 individuals nationwide.[3]  Therefore, some conservatives may be concerned that H.R. 6983 will actually increase the number of uninsured Americans.
  • Private-Sector Mandates on Businesses; UMRA Violation.  As detailed above, the bill contains multiple new federal mandates on the private sector, affecting the design and structure of health insurance plans.  CBO has previously estimated that mental health parity would impose mandates on the private sector totaling $1.3 billion in 2008, rising to $3 billion in 2012, thus exceeding the annual threshold established in the Unfunded Mandates Reform Act or UMRA ($131 million in FY2007, adjusted annually for inflation).  These costs will ultimately be borne by employers offering health insurance and employees seeking to obtain coverage.

Administration Position:  Although the Statement of Administration Policy (SAP) was not available, the Administration has previously supported the goal of mental health parity—and previously opposed the worldwide interest allocation provision used to pay for H.R. 6983.

Cost to Taxpayers:  A Congressional Budget Office (CBO) score of H.R. 6983 was not available at press time.  However, CBO estimates of previously considered (H.R. 1424) mental health parity legislation noted that the bill would cost the federal government nearly $4 billion over ten years.  Direct federal outlays would increase by $820 million through increased Medicaid costs.  In addition, federal revenues would decline by more than $3.1 billion due to increases in the cost of health insurance, as employees with group coverage would exclude more of their income from payroll and income taxes.

The bill proposes to offset the costs outlined above by delaying by two years (from 2011 to 2013) the implementation of the worldwide allocation of interest, and reducing the first-year implementation of this rule. In 2004, Congress gave taxpayers, beginning in tax years after 2008, the option of using a liberalized rule for allocating interest expense between United States sources and foreign sources for the purposes of determining a taxpayer’s foreign tax credit limitation.

Does the Bill Expand the Size and Scope of the Federal Government?:  Yes, the bill would impose new federal mandates with respect to health insurance coverage requirements.

Does the Bill Contain Any New State-Government, Local-Government, or Private-Sector Mandates?:  Yes, the bill would impose significant new mandates on private insurance carriers (and large employers who self-insure their workers) with respect to the structure and design of their benefit packages.  CBO has previously estimated that the direct costs of the private-sector mandates would total $1.3 billion in 2008, rising to $3 billion in 2012, significantly in excess of the annual threshold ($131 million in 2007, adjusted for inflation) established by the Unfunded Mandates Reform Act (UMRA).

In addition, the bill would also impose an intergovernmental mandate as defined by UMRA by pre-empting some state laws in conflict with the bill, but CBO estimates that this mandate would impose no significant costs on state, local, or tribal governments.

However, costs to state, local, and tribal governments would increase under the bill, for two reasons.  First, a prior CBO cost estimate indicated that state spending for Medicaid would increase by $235 million between 2008-2012.  Second, while state, local, and tribal governments that self-insure their workers would be able to opt-out of H.R. 6983’s federal mandates, some governments that fully insure their workers (i.e. purchase coverage through an insurance carrier, as opposed to paying benefits directly) would see their costs rise under the legislation.  CBO has estimated that the bill would increase state, local, and tribal expenditures by $10 million in 2008, rising to $155 million by 2012.  However, because these increased costs result from mandate costs initially borne by the private sector and passed on to the governments while purchasing insurance, CBO did not consider them intergovernmental mandates as such.

Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax Benefits/Limited Tariff Benefits?:  A Committee report citing compliance with clause 9 of rule XXI was unavailable.

Constitutional Authority:  A Committee report citing Constitutional authority was unavailable.

 

[1] Council for Affordable Health Insurance, “Health Insurance Mandates in the States 2008” and “Health Insurance Mandates in the States 2007,” available online at http://www.cahi.org/cahi_contents/resources/pdf/HealthInsuranceMandates2008.pdf and http://www.cahi.org/cahi_contents/resources/pdf/MandatesInTheStates2007.pdf, respectively (accessed July 19, 2008).

[2] Michael New, “The Effect of State Regulations on Health Insurance Premiums: A Revised Analysis,” (Washington, Heritage Center for Data Analysis Paper CDA06-04, July 25, 2006), available online at http://www.heritage.org/Research/HealthCare/upload/CDA_06-04.pdf (accessed July 19, 2008), p. 5.

[3] See, for instance, Todd Gilmer and Richard Kronick, “It’s the Premiums, Stupid: Projections of the Uninsured through 2013,” Health Affairs Web Exclusive April 5, 2008, available online at http://content.healthaffairs.org/cgi/content/full/hlthaff.w5.143/DC1 (accessed July 19, 2008), and Government Accountability Office, Impact of Premium Increases on Number of Covered Individuals is Uncertain (Washington, Report GAO/HEHS-98-203R, June 11, 1999), available online at http://archive.gao.gov/paprpdf2/160930.pdf (accessed July 19, 2008), pp. 3-4.

Legislative Bulletin: H.R. 6331, Medicare Improvements for Patients and Providers Act

Order of Business:  The Democratic House Leadership has indicated that the House will likely vote to override the President’s veto of H.R. 6331 today, July 15, 2008.  The vote on H.R. 6331 is to either sustain or override the President’s veto.  For additional information on the process in the House regarding vetoed bills, please see the “Process for a Vetoed Bill” section below.

Process for a Vetoed Bill:

  • The House and Senate pass an identical bill.
  • The President vetoes the bill and sends a veto message to the House.
  • The Speaker “lays a veto message before the House on the day it is received…When the message is laid before the House, the question on passage is considered as pending.”
  • Consideration of a vetoed bill (a privileged matter) generally takes precedence over other floor matters (it can interrupt other floor business), except in certain specific instances: a motion to adjourn, a question of privilege under the Constitution (such as a blue-slip resolution), and unfinished business with the previous question order (such as a bill with the previous question ordered to passage on the day before, but the House adjourned before voting on passage of the bill).
  • If the House does not wish to proceed immediately to reconsider the bill, three motions are in order:

1)     motions to lay on the table (if passed, a motion to take it from the table is in order at any time);

2)     motions to postpone consideration to a day certain (it becomes unfinished business on that day); or

3)     motion to refer to committee (a motion to discharge is highly privileged and in order at any time).

  • If none of the above three motions are offered, the House proceeds to debate the override question under the hour rule and then votes on the question of overriding the veto.
  • If the veto is sustained, the bill is referred to committee. Since the bill has been rejected (when the veto was sustained), a motion to take the bill from committee is not privileged.

The Vote on H.R. 6331—Sustaining the Presidential Veto:  When a vote is requested on a vetoed bill, the question is:  “Will the House, on reconsideration, pass the bill, the objections of the President to the contrary notwithstanding.”  Thus, it is as if the bill is up for normal consideration again, only the threshold for passage is now 2/3 of those votingIf a member opposes the bill and voted NO when it was originally considered and passed, then he would vote NO again (still opposing the bill, thereby voting to sustain the President’s veto).

Summary:  H.R. 6331 eliminates for six months a reduction in Medicare physician payments scheduled to take effect on June 30, 2008, freezing payment levels for the balance of 2008 and providing a 1.1% increase in fee schedule levels for 2009.  H.R. 6331 also reduces payments to and modifies the structure of privately-run Medicare Advantage fee-for-service (FFS) plans that have shown significant growth in recent years.

Medicare:  H.R. 6331 contains many provisions that would alter Titles XVIII (Medicare) and XIX (Medicaid) of the Social Security Act as follows:

Coverage of Preventive Services.  The bill would create a process for the Secretary of Health and Human Services to extend Medicare coverage to additional preventive services under Parts A and B, and would waive the deductible with respect to the initial physical exam provided upon a beneficiary’s enrollment in the Medicare program.  CBO scores this provision as costing $5.9 billion over eleven years.

Mental Health Parity.  The bill would reduce over five years the co-payment for outpatient psychiatric services to 20%, consistent with the co-payment rate for physician visits under Medicare Part B.  CBO scores this provision as costing $3 billion over eleven years.

Marketing Restrictions on Private Plans.  The bill would impose restrictions with respect to the marketing tactics used by private Medicare Advantage and prescription drug plans.  The bill would eliminate unsolicited direct contact to beneficiaries, restrict the provision of gifts to nominal values, require annual training of agents and brokers licensed under state law, and impose related marketing restrictions.  No net cost.

Low-Income Programs.  H.R. 6331 would extend the Qualifying Individual program under Medicare and Medicaid for eighteen months, through December 2009, at a cost of $500 million.  The bill would also expand eligibility for enrollment in the low-income subsidy program by altering the asset test for the Medicare Savings Program, and engaging in further outreach to beneficiaries eligible for participation but not currently enrolled.  Other provisions in this section would codify current guidance eliminating the Part D late enrollment penalty for individuals eligible for low-income subsidies, and require the translation of the enrollment form into at least 10 languages other than English.  Total cost of these provisions is $7.7 billion over eleven years.

Hospital Provisions.  The bill includes several hospital-related provisions, including the extension of rural hospital flexibility program, new grants for the provision of mental health services to Iraq war veterans in rural areas, new grants to certain critical access hospitals, a re-adjustment of target payment amounts for sole community hospitals, a new demonstration program for integrating care in certain rural communities, and the reclassification of certain hospitals.  Total cost of these provisions according to CBO is $600 million over eleven years.

Physician Services.  The bill makes several adjustments to physician payment rates, including the following:

Conversion Factor:  The bill would extend the 0.5% update to the conversion factor for physician reimbursements, currently due to expire on June 30, 2008, through the end of calendar year 2008, effectively freezing payment levels for the balance of the year.  For 2009, the conversion factor will be 1.1%.  The bill also provides that the adjustments made for 2008 and 2009 will be disregarded for the purposes of computing the sustainable growth rate (SGR) conversion factor in 2010 and future years, which would necessitate a 21% reduction in reimbursement levels in 2010.

Quality Reporting:  H.R. 6331 would revise and extend existing quality reporting language to provide a 1.5% bonus payment in 2008, and 2.0% bonus payments in 2009 and 2010, to those physicians reporting selected quality data measurements.  Cost of both the quality reporting and conversion factor provisions is $6.4 billion over six years, and $4.5 billion over eleven.

Electronic Prescribing:  The bill provides bonus payments for physicians who participate in electronic prescribing and report relevant quality measures—2.0% in 2009 and 2010, 1.0% in 2011 and 2012, and 0.5% in 2013.  Physicians not participating in the electronic prescribing program will receive reimbursement reductions of 1% in 2012, 1.5% in 2013, and 2% in 2014 and thereafter.  Saves $1.4 billion over eleven years.

Other provisions:  With respect to physician services, the bill also revises a medical home demonstration project, extends the floor for Medicare work geographic adjustments under the physician fee schedule through December 2009, imposes accreditation requirements on the payment of diagnostic imaging services, and increases payment levels for teaching anesthesiologists.  H.R. 6331 also includes a requirement for the Secretary to report to Congress on the creation of a new system of value-based purchasing for physician services.  Total cost of $1.9 billion over eleven years.

Other Part B Adjustments.  The bill would make several other adjustments to the Part B program, among which are an extension through December 2009 of the exceptions process for Medicare therapy caps (costs $1.2 billion over eleven years), the inclusion of speech-language pathology services as a service for which providers can bill Medicare directly ($100 million cost), the establishment of cardiac and pulmonary rehabilitation programs ($500 million cost), a repeal of the transfer of ownership with respect to oxygen equipment, repeal of a competitive bidding demonstration project for clinical laboratory services coupled with other adjustments for lab services ($2 billion savings), increased payments for ambulance services ($100 million cost), payment clarification for clinical laboratory tests made at critical access hospitals ($300 million cost), and increased payment limits for federally qualified health centers treating Medicare patients ($100 million cost).

Kidney Disease and Dialysis Provisions.  H.R. 6331 makes several adjustments to the end-stage renal disease program, including new coverage for kidney disease education services, a 1% increase in dialysis reimbursement rates for 2009 and 2010, and a requirement that the Secretary develop a bundled rate payment system for renal dialysis by January 2011, to be phased in over four years, that includes payment for drugs and tests related to dialysis treatment for which Medicare currently reimburses providers separately.  Costs $1.5 billion over eleven years.

Delay of Durable Medical Equipment Competitive Bidding.  The legislation would terminate all Round 1 contracts for Medicare durable medical equipment made pursuant to the initial round of competitive bidding completed this spring, and would direct CMS to re-bid Round 1 at some point during 2009.  Future rounds of competitive bidding would also be delayed, with Round 2 taking place during 2011, and competitive bidding in rural areas and smaller metropolitan areas being delayed until 2015.  The approximately $3 billion cost of the delay would be paid for by an across-the-board reduction of 9.5% for all supplies scheduled to be subjected to competitive bidding.  In addition, the bill would require the CMS contractor to notify suppliers missing financial documentation related to their bids, extend disclosure and accreditation requirements to sub-contractors, and establish an ombudsman within CMS to respond to complaints from suppliers and individuals about the competitive bidding process.

Medicare Advantage Provisions.  H.R. 6331 would cut Medicare Advantage payments, primarily through two adjustments.  The first would phase out duplicate payments related to indirect medical education (IME) costs at teaching hospitals.  Currently, IME costs are incorporated into the benchmark which Medicare Advantage plans bid against, even though Medicare also makes IME payments to teaching hospitals in association with hospital stays for Medicare Advantage beneficiaries.  The Administration incorporated this proposal into its Fiscal Year 2009 budget submission to Congress.

The bill also would repeal “deeming” authority language for private fee-for-service plans within Medicare Advantage, which currently can reimburse providers at the traditional Medicare rate and “deem” these providers part of their network.  Instead, H.R. 6331 would require private fee-for-service plans to adopt physician networks in areas where at least two other types of coordinated care plans (e.g. Health Maintenance Organizations Preferred Provider Organizations, etc.) operate.

Preliminary data from CMS indicate that the provisions in H.R. 6331 would result in private fee-for-service plans losing their “deeming” authority in 96% of counties in which they currently operate, potentially resulting in loss of beneficiary access to a type of Medicare Advantage plan which has experienced significant growth in recent years.  The Congressional Budget Office confirms that the provision would reduce both Medicare outlays and enrollment in the Medicare Advantage program.  In a Statement of Administration Policy on the Senate bill (S. 3101) incorporating these provisions, the Office of Management and Budget opposed the changes as a “fundamental restructuring” of this segment of the Medicare Advantage program that would result in beneficiaries losing access to the enhanced benefits which Medicare Advantage plans provide.  The IME provision and the deeming language collectively cut Medicare Advantage by $12.5 billion over six years, and $47.5 billion over eleven years.

H.R. 6331 includes several other provisions relating to Medicare Advantage plans, including an extension of and revisions to plans for special needs individuals (costs $500 million over eleven years), garnishment of the remaining funds left in the Medicare Advantage stabilization fund (saves $1.8 billion over eleven years), and two studies by the Medicare Payment Advisory Commission (MedPAC) regarding Medicare Advantage quality data and payment formulae.

Pharmacy Provisions.  The bill makes changes to the Part D prescription drug program, most notably requiring “prompt payment” by drug plans to pharmacies for prescriptions within 14 days for electronic claims and 30 days for all other claims, at a cost of $700 million over eleven years.

Release of Part D Data.  The bill would permit the Secretary to utilize Part D claims data from private plans in order to improve the public health as the Secretary determines appropriate, and would further allow Congressional support agencies to obtain the data for oversight and monitoring purposes.  No net cost.

Medicare Improvement Fund.  H.R. 6331 would establish a Medicare Improvement Fund to allow the Secretary to make enhancements to Medicare Parts A and B, and appropriates funding from FY2014 through FY2017 to fund such efforts.  Costs $24.2 billion over eleven years.

Federal Payment Levy.  The bill would expand the federal payment levy—which provides for the recoupment of taxes owed the federal government by private contractors—to Medicare provider and supplier payments.  Saves $400 million over eleven years.

TMA and Title V Extension.  H.R. 6331 would extend for twelve months (until June 30, 2009), both the authorization for Title V programs (abstinence education programs), and the authorization for Transitional Medical Assistance (Medicaid benefits for low-income families transitioning from welfare to work).  TMA has historically been extended along with the Title V Abstinence Education Program.  Regarding the Title V grant program, in order for states to receive Title V block grant funds, states must use the funds exclusively for teaching abstinence.  In addition, in order to receive federal funds, a state must match every $4 in federal funds with $3 in state funds.  Costs $1 billion over eleven years.

Other Extensions.  The bill also adjusts the federal Medicaid matching rate for foster care and related services provided by the District of Columbia, and extends certain other provisions, including Medicaid Disproportionate Share Hospital (DSH) payments, TANF supplemental grants, and special diabetes grant programs.  Total cost of $1 billion over eleven years.

Additional Background on Senate Legislation:  H.R. 6331 closely resembles legislation (S. 3101) originally introduced by Senate Finance Committee Chairman Max Baucus (D-MT).  At least one circulating draft of H.R. 6331 includes “Sense of the Senate” language, despite the fact that the bill is ostensibly an original House measure.  On June 12, 2008, the Senate by a 54-39 vote failed to invoke cloture on a motion to proceed to consideration of S. 3101.

Despite sharing similar language, H.R. 6331 and S. 3101 differ in a few respects.  The House bill excludes cuts to reimbursement of oxygen supplies and power-driven wheelchairs included in the Senate version, instead incorporating the federal payment tax levy and other provisions to compensate for the lost budgetary savings.  In addition, H.R. 6331 includes legislation (H.R. 6252) introduced by Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) and Ranking Member Dave Camp (R-MI) to postpone competitive bidding of durable medical equipment.  Chairman Baucus had attempted to add these provisions to his Senate legislation, but was unable to persuade enough Senate Republicans to support cloture in order to allow him to do so, largely because Republicans objected to the Medicare Advantage cuts envisioned by his legislation.

Additional Background on Medicare Advantage:  The Medicare Modernization Act of 2003 made several changes to the bidding and payment structure for private Medicare Advantage plans to deliver health care to beneficiaries.  As currently constructed, plans receive capitated monthly payments that are subject to risk adjustment—so that plans caring for older, sicker beneficiaries receive higher payments than those with healthier populations.  In order to determine the capitated payment amount, plans submit annual bids to the Centers for Medicare and Medicaid Services (CMS).  The bids are compared against a benchmark established by a detailed formula—but the comparison against the benchmark does not directly allow plans to compete against each other, or against traditional Medicare, when CMS evaluates plan bids.

In the event a plan’s bid is below the annual benchmark, 75% of the savings is returned to the beneficiary in the form of lower cost-sharing (i.e. premiums, co-payments, etc.) or better benefits, with the remaining 25% returned to the federal government.  If a plan’s bid is above the benchmark, beneficiaries pay the full amount of any marginal costs above the benchmark threshold.

Most Medicare Advantage plans use rebates provided when bidding below the benchmark to cover additional services over and above those provided by traditional Medicare, and in so doing reduce beneficiaries’ exposure to out-of-pocket costs.  A Government Accountability Office (GAO) report released in February 2008 documented that in most cases, beneficiaries receive better benefits under Medicare Advantage than they would under traditional Medicare.  The GAO study found that beneficiary cost-sharing would be 42% of the amounts anticipated under traditional Medicare, with beneficiaries saving an average of $67 per month, or $804 annually.[1]  These savings to MA beneficiaries occurred because plans dedicated 89% of their rebates from low bids to reduced cost-sharing or lower premiums.  The remaining 11% of rebates were used to finance additional benefits, such as vision, dental, and hearing coverage, along with various health education, wellness, and preventive benefits.[2]  Due in part to the increased benefits which Medicare Advantage plans have provided, enrollment in MA plans is estimated to rise to 22.3% of all Medicare beneficiaries in 2008, up from 12.1% in 2004.[3]

Some independent studies have suggested that Medicare Advantage plans incur higher costs than the average annual cost of providing coverage through traditional Medicare, though estimates vary as to the disparity between the two forms of coverage.  However, to the extent that MA plans in fact receive payments in excess of the costs of traditional Medicare, this discrepancy remains inextricably linked to two features of the Medicare Advantage program—the increased benefits for beneficiaries, and the complexity of the MA plan bidding mechanism.  Because of the problems inherent in the statutory benchmark design, plans have little incentive to submit bids less than the cost of traditional Medicare, as plans that bid above the costs of traditional Medicare but below the benchmark receive the difference between traditional Medicare costs and the plan bid as an extra payment to the plan.[4]

Some conservatives would also argue that a discussion focused solely on Medicare Advantage “overpayments” ignores the significant benefits that MA plans provide to key underserved beneficiary populations.  Medicare Advantage plans have expanded access to coverage in rural areas.  Moreover, the disproportionate share of low-income and minority populations who have chosen the MA option suggests that the comprehensive benefits provided are well-suited to beneficiaries among vulnerable populations.  Data from the Medicare Current Beneficiary Survey demonstrate that almost half (49%) of Medicare Advantage beneficiaries have incomes less than $20,000, and that 70% of Hispanic and African-American Medicare Advantage enrollees had incomes below the $20,000 level.[5]

Additional Background on Medicare Physician Reimbursements:  Under current Medicare law, doctors providing health care services to Part B enrollees are compensated through a “fee-for-service” system, in which physician payments are distributed on a per-service basis, as determined by a fee schedule and an annual conversion factor (a formula dollar amount).  The fee schedule assigns “relative values” to each type of provided service.  Relative value reflects physicians’ work time and skill, average medical practice expenses, and geographical adjustments.  In order to determine the physician payment for a specific service, the conversion factor ($37.8975 in 2006) is multiplied by the relative value for that service.  For example, if a routine office visit is assigned a relative value of 2.1, then Medicare would provide the physician with a payment of $79.58 for that service.  ($37.8975 x 2.1)

Medicare law requires that the conversion factor be updated each year.  The formula used to determine the annual update takes into consideration the following factors:

  • Medicare economic index (MEI)–cost of providing medical care;
  • Sustainable Growth Rate (SGR)–target for aggregate growth in Medicare physician payments; and
  • Performance Adjustment–an adjustment ranging from -13% to +3%, to bring the MEI change in line with what is allowed under SGR, in order to restrain overall spending.

Every November, the Centers for Medicare and Medicaid Services (CMS) announces the statutory annual update to the conversion factor for the subsequent year. The new conversion factor is calculated by increasing or decreasing the previous year’s factor by the annual update.

From 2002 to 2007, the statutory formula calculation resulted in a negative update, which would have reduced physician payments, but not overall physician spending. The negative updates occurred because Medicare spending on physician payments increased the previous year beyond what is allowed by SGR.  The SGR mechanism is designed to balance the previous year’s increase in physician spending with a decrease in the next year, in order to maintain the aggregate growth targets.  Thus, in light of increased Medicare spending in recent years, the statutory formula has resulted in negative annual updates.  It is important to note that while imperfect, the SGR was designed as a cost-containment mechanism to help deal with Medicare’s exploding costs, and to some extent it has worked, forcing offsets in some years and causing physician payment levels to be scrutinized annually as if they were discretionary spending.

Since 2003, Congress has chosen to override current law, providing doctors with increases each year, and level funding in 2006.  In 2007, Congress provided a 1.5% update bonus payment for physicians who report on quality of care measures; however, Congress also provided that the 2007 “fix” would be disregarded by CMS for the purpose of calculating the SGR for 2008, resulting in a higher projected cut next year.  The specific data for each year is outlined in the following table.

Year Statutory

Annual

Update (%)

Congressional “Fix” to the Update (%)*
2002 -5.4 -5.4**
2003 -4.4 +1.6
2004 -4.5 +1.5
2005 -3.3 +1.5
2006 -4.4 0
2007 -5.0 +1.5***
2008 -10.1§ 0.5 (proposed)

* The annual update that actually went into effect for that year.

** CMS made other adjustments, as provided by law, which resulted in a net update of – 4.8%; however, Congress did not act to override the -5.4% statutory update.

*** The full 1.5% increase was provided to physicians reporting quality of care measures; physicians not reporting quality of care received no net increase.

  • The Tax Relief and Health Care Act signed last year provided that 2007’s Congressional “fix” was to be disregarded for the purpose of calculating the SGR in 2008 and future years.

Because the Tax Relief and Health Care Act (P.L. 109-432), signed into law in December 2006, provided that 2007’s Congressional “fix” was to be disregarded for the purpose of calculating the SGR in 2008 and future years, the 10.1% negative annual update for 2008 will be restored once the December 2007 legislation expires on July 1, 2008, absent further Congressional action.  In addition, H.R. 6331 includes a similar provision noting that the “fix” proposed would be disregarded for the purpose of calculating the SGR in 2010 and future years, resulting in a projected 21% reduction in fee schedule levels in January 2010.

Additional Background on Durable Medical Equipment:  In addition to providing coverage for outpatient physician services, Medicare Part B also helps pay for durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) needed by beneficiaries.  Currently, Medicare reimburses beneficiaries for supplies using a series of fee schedules, which are generally based on historical prices subject to annual updates or other adjustments.  Medicare finances 80% of the actual costs or the fee schedule amount, whichever less, with the beneficiary paying the difference.  The Centers for Medicare and Medicaid Services (CMS) estimates that about 10 million individuals—or about one-quarter of all beneficiaries—receive medical supplies under Part B in a given year, at a cost to Medicare of approximately $10 billion annually.[6]

In recent years, some conservatives have raised concerns that the prices on the Medicare fee schedule for DMEPOS were in excess of market prices.  In 2002, testimony by the Department of Health and Human Services Inspector General revealed that the prices paid by Medicare for 16 selected items of durable medical equipment were higher than prices paid by Medicaid, the Federal Employee Health Benefits (FEHB) plans, and consumers purchasing directly from retailers.  The Inspector General projected that using the lower prices by other payers for these 16 common items alone would have saved Medicare more than $100 million annually.[7]

In response to the above findings, Congress in the Medicare Modernization Act (MMA) of 2003 (P.L. 108-173) enacted cuts in the fee schedule levels for the 16 specific items studied by the Inspector General’s testimony, while creating a new competitive bidding process for DMEPOS suppliers in Section 302 of the law.  This nationwide program followed on the heels of three demonstration projects, authorized under the Balanced Budget Act of 1997, established during the period 1999-2002 in Florida and Texas.  The pilot programs demonstrated the ability of competitive bidding to reduce the costs of DMEPOS by an average 19.1%—saving the federal government $7.5 million, and $1.9 million in reduced beneficiary co-payments—while maintaining beneficiary access to required items.[8]

In addition to a program of competitive bidding for DMEPOS, the MMA also established a new accreditation process for suppliers designed to review suppliers’ financial records and other related documentation to establish their status as bona fide health equipment suppliers.  A November 2007 CMS estimate indicated that 10.3% of payments to medical equipment suppliers were improper—a rate of questionable payments more than double those of other Medicare providers.[9]  Coupled with the new competitive bidding program, the accreditation mechanism was intended to eliminate “fly-by-night” DMEPOS suppliers from operating within the Medicare program, and thus was included in the anti-fraud title of MMA.

In recent months, the competitive bidding program has come under criticism due both to procedural concerns as to how the bidding process was conducted—several of which CMS is working to address—and broader concerns as to whether the program will adversely affect beneficiary access to supplies and/or DMEPOS suppliers, particularly small businesses, whose bids were priced unsuccessfully.  Some conservatives may question the need to delay the competitive bidding process, particularly on the latter grounds.  CMS provided specific opportunities for small businesses to participate in the DMEPOS competitive bidding process, resulting in approximately half of firms who accepted winning bids having revenues of less than $3.5 million.  These small business opportunities occurred in the context of a market-oriented bidding mechanism that, when fully implemented, will save taxpayers approximately $1 billion annually—and will provide additional savings to Medicare beneficiaries in the form of reduced co-payments.  In addition, the accreditation mechanism established by Section 302 of MMA provides a quality check previously lacking for DMEPOS purchases and suppliers.

Cost to Taxpayers:  A Congressional Budget Office (CBO) score for H.R. 6331 was unavailable at press time.  However, a CBO estimate on a similar bill (S. 3101) introduced and considered in the Senate noted that that legislation would increase spending on physician and related services by $19.8 billion over six years and $62.8 billion over the 2008-2018 period.  These spending increases would be offset by spending cuts in other health spending, primarily Medicare Advantage plans.  Overall, S. 3101 was projected to reduce direct spending by $5 million over the six- and eleven-year budget windows.

Committee Action:  The bill was introduced on June 20, 2008, and referred to the Energy and Commerce and Ways and Means Committees, neither of which took official action on the legislation.  The House passed the bill under suspension of the rules on June 24, 2008 by a 355-59 vote, and the Senate passed the bill by voice vote after invoking cloture by a vote of 69-30 on July 9, 2008.

Possible Conservative Concerns:  Numerous aspects of H.R. 6331 may raise concerns for conservatives, including, but not necessarily limited to, the following:

  • Government Price Fixing.  By making alterations in physician and other Medicare fee schedules, H.R. 6331 would reinforce a system whereby Congress, by adjusting various reimbursement levels, permits the government, rather than the private marketplace, to set prices for medical goods and services.  Senate Finance Committee Chairman Max Baucus admitted some disquiet about this dynamic—and Congress’ lack of expertise to micro-manage the health care system—at a health care summit on June 16: “How in the world am I supposed to know what the proper reimbursement should be for a particular procedure?”[10]  Yet H.R. 6331, based on legislation Chairman Baucus himself introduced, would retain the current system of price-fixing—while repealing a competitive bidding demonstration project for clinical laboratory services and delaying a competitive bidding program designed to inject market forces into the purchase of durable medical equipment and supplies.
  • Budgetary Gimmick.  Because language in H.R. 6331 stipulates that the conversion factor adjustments in the bill shall not be considered when determining future years’ SGR rates, physician reimbursement rates will be reduced 21% in 2010—an action which, given past trends, many observers would consider highly unlikely.  Therefore, some conservatives may be concerned that this language is designed to mask the true cost of the physician reimbursement adjustments included in the bill, creating a budgetary gimmick that future Congresses will feel pressured to remedy.
  • Undermines Medicare Advantage.  H.R. 6331 includes several provisions designed to “reform” private fee-for-service plans operating within Medicare Advantage that would reduce their payments by $47.5 billion over eleven years, effectively ending their “deeming” authority, and requiring virtually all private fee-for-service plans to contract with health care providers.  Some conservatives may be concerned that these changes would undermine the effectiveness of the Medicare Advantage program, which has grown in popularity among seniors due to the benefit enhancements that private coverage can provide.
  • Creates New Medicare Fund.  The bill would establish a new Medicare Improvement Fund, which would receive $19.9 billion for the “enhancement” of traditional Medicare Parts A and B during Fiscal Years 2014-2017.  Some conservatives may consider this account a new “slush fund” that will be used to finance further expansions of government-run health programs, rather than to bolster Medicare’s precarious financial future.
  • Release of Part D Data.  H.R. 6331 would authorize the Secretary to utilize Part D claims data from private health plans for any use deemed by the Secretary as relating to the public health, and would further authorize Congressional support agencies to utilize the same data for oversight purposes.  Some conservatives may be concerned that these wide-ranging provisions could lead to the public release of private and proprietary information related to the claims and bidding practices of private health plans providing prescription drug coverage under Part D, and could be used to initiate “fishing expedition” investigations at the behest of Democrats philosophically opposed to having private entities provide coverage to Medicare beneficiaries.
  • Delays Competitive Bidding.  H.R. 6331 would delay the first round of competitive bidding for durable medical equipment, and would nullify contracts signed by CMS for the first round of bidding this spring.  Re-opening the bidding process could prejudice entities who won their bids earlier this year, while potentially reducing savings to the federal government by allowing suppliers to bid more strategically in a re-bid scenario.  Some conservatives may be concerned that the delay contemplated by H.R. 6331 would allow a new Administration to take steps undermining the competitive bidding program through the regulatory process, and/or allow a new Administration and a future Congress to make the “temporary” delay permanent and abolish competitive bidding outright.

Administration Position:  Although a formal Statement of Administration Policy (SAP) was unavailable at press time, reports indicate that the Administration opposes the legislation and will likely issue a veto threat on the bill.

Does the Bill Expand the Size and Scope of the Federal Government?:  Yes, the bill would expand eligibility for participation in the Medicare Savings Program.

Does the Bill Contain Any New State-Government, Local-Government, or Private-Sector Mandates?: No.

Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax Benefits/Limited Tariff Benefits?:  An earmarks/revenue benefits statement required under House Rule XXI, Clause 9(a) was not available at press time.

Constitutional Authority:  A committee report citing constitutional authority is unavailable.

 

[1] Government Accountability Office, “Medicare Advantage: Increased Spending Relative to Medicare Fee-for-Service May Not Always Reduce Beneficiary Out-of-Pocket Costs,” (Washington, Report GAO-08-359, February 2008), available online at http://www.gao.gov/new.items/d08359.pdf (accessed May 19, 2008), p. 23.

[2] Ibid., pp. 17-20.

[3] Department of Health and Human Services, “HHS Budget in Brief: Fiscal Year 2009,” available online at http://www.hhs.gov/budget/09budget/2009BudgetInBrief.pdf (accessed May 19, 2008), p. 58.

[4] The Medicare Payment Advisory Commission (MedPAC) has alleged that the formula-driven benchmarks themselves exceed the cost of traditional Medicare.  See Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy (Washington, DC, March 2008), available online at http://www.medpac.gov/documents/Mar08_EntireReport.pdf (accessed May 9, 2008), Table 3-3, p. 247.

[5] America’s Health Insurance Plans, “Low Income and Minority Beneficiaries in Medicare Advantage Plans,” (Washington, DC, AHIP Center for Policy and Research, February 2007), available online at http://www.ahipresearch.org/PDFs/FullReportAHIPMALowIncomeandMinorityFeb2007.pdf (accessed May 19, 2008), p. 3.

[6] Cited in Government Accountability Office, “Medicare: Competitive Bidding for Medical Equipment and Supplies Could Reduce Program Payments, but Adequate Oversight Is Critical,” (Washington, Report GAO-08-767T), available online at http://www.gao.gov/new.items/d08767t.pdf (accessed June 9, 2008), p. 3.

[7] Testimony of Janet Rehnquist, Inspector General of the Department of Health and Human Services, before Senate Appropriations Subcommittee on Labor, HHS, and Education, June 12, 2002 hearing, available online at http://www.oig.hhs.gov/testimony/docs/2002/020611fin.pdf (accessed June 16, 2008).

[8] Testimony of Thomas Hoerger, Senior Fellow, Research Triangle Institute International, before House Ways and Means Subcommittee on Health, May 6, 2008 hearing on Durable Medical Equipment Competitive Bidding, available online at http://waysandmeans.house.gov/hearings.asp?formmode=printfriendly&id=6906 (accessed June 9, 2008).

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

[10] Quoted in Anna Edney, “Bernanke: Health Care Reform Will Require Higher Spending,” CongressDailyPM June 16, 2008, available online at http://www.nationaljournal.com/congressdaily/cdp_20080616_8602.php (accessed June 16, 2008).

Legislative Bulletin: H.R. 5613, Protecting the Medicaid Safety Net Act

Order of Business:  The bill is scheduled to be considered on Tuesday, April 22nd, under a motion to suspend the rules and pass the bill.

Summary:  H.R. 5613 would extend certain existing moratoria on the Centers for Medicare and Medicaid Services (CMS), prohibiting the agency from promulgating rules related to the integrity of the Medicaid program until April 1, 2009.  In particular, the bill would extend moratoria on proposed regulations placing restrictions on intergovernmental transfers and restricting payments for graduate medical education; the prohibitions were first enacted as part of last year’s supplemental wartime appropriation (P.L. 110-28) and are scheduled to expire on May 25, 2008.  The bill would also extend prohibitions on CMS regulations relating to rehabilitation services, as well as school-based administrative and transportation services; these prohibitions were first enacted in Medicare physician payment legislation (P.L. 110-173) last December, and are scheduled to expire on June 30, 2008.

In addition, H.R. 5613 would impose additional new moratoria on CMS relating to other proposed Medicaid regulations, also until April 2009.  Specifically, the bill would prohibit the Secretary of Health and Human Services from imposing additional restrictions with respect to targeted case management payments, the definition of outpatient hospital services, and Medicaid provider taxes (with certain exceptions).

The bill also appropriates an additional $25 million per year to CMS for the purposes of anti-fraud enforcement activity within the Medicaid program.

H.R. 5613 includes two reports to Congress on the proposed regulations.  By July 1, 2008, the Department of Health and Human Services (HHS) will report on its justification and authority for proposing the regulations.  The bill also includes $5 million in appropriations for HHS to hire an independent contractor to produce a report by March 1, 2009, on the proposed regulations and their impact on states.

H.R. 5613 also extends a web-based asset verification system to all 50 states, effective by the end of fiscal year 2013.  This provision would expand the Social Security Administration’s Supplemental Security Income (SSI) pilot program, giving states a new tool for verifying the assets of Medicaid recipients.  Currently, such a system only exists as a demonstration project in three states: California, New Jersey, and New York.

Additional Background on Changes Made in Committee:  During consideration in the Energy and Commerce Committee, Chairman Dingell and Ranking Member Joe Barton (R-TX) reached agreement on several modifications to the legislation.  The revised language incorporated at Subcommittee narrowed the scope of the proposed moratoria to permit CMS to engage in outreach activities with states.  Over the past several years, CMS has used various state-level audits to reach agreements with state Medicaid agencies to curtail abusive and/or questionable financing tactics.  The revised language in H.R. 5613 would permit CMS to continue these individual consent agreements with states, while maintaining the moratoria on CMS’ ability to enact regulations prohibiting these activities permanently.

In addition, the substitute language adopted in Committee included the additional $25 million per year in anti-fraud enforcement, as well as an independent study assessing the need for the regulations and their potential impact on states.  The Committee substitute also incorporated the web-based asset verification system to pay for the moratorium; the Administration had previously suggested that this program be extended as a savings mechanism to finance portions of the farm bill.

Additional Background on Proposed Regulations:  During the past year, the Centers for Medicare and Medicaid Services (CMS) has attempted to move forward on several proposed regulations addressing specific issues and service areas within the Medicaid program.  Many of these regulations respond to Government Accountability Office (GAO) studies and reports by the HHS Inspector General highlighting areas where the fiscal integrity of the Medicaid program needed improvement.  A brief summary of each rule that would be halted by H.R. 5613 follows:

Intergovernmental Transfers:  This rule would limit reimbursement for publicly-owned health providers to costs incurred, narrow the definition of unit of government, and require providers to retain all Medicaid payments, in order to restrain intergovernmental transfers designed primarily to maximize states’ federal Medicaid payments.  A final rule was issued on May 29, 2007; the moratorium currently in place expires on May 25, 2008.  The Congressional Budget Office (CBO) scores this regulation as saving $9.0 billion in federal outlays over five years, and $22.0 billion over a decade.

Graduate Medical Education:  This rule would eliminate Medicaid reimbursement for graduate medical education, on the grounds that reimbursements for medical training are outside the statutory scope of the Medicaid program.  A Notice of Proposed Rulemaking (NPRM) was issued on May 23, 2007; the current moratorium expires May 25, 2008.  Five year estimated savings are $0.8 billion, and ten year estimated savings are $1.9 billion.

School-Based Administrative and Transportation Services:  This rule would prohibit federal Medicaid payments for administrative activities performed by schools and transportation of children to and from school.  In some instances, school districts bill Medicaid for transporting students to and from school, even though this is an educational expense, not a reimbursable medical expense.  In addition, HHS audits found that schools were claiming capital and debt service as “administrative services” subject to Medicaid reimbursement.  The proposed rule would not alter the current policy of reimbursing schools for bona fide medical expenses incurred on school property, such as speech therapy.  A final rule was issued December 28, 2007; the current moratorium expires June 30, 2008.  Five year estimated savings are $4.2 billion, and ten year savings are estimated at $10.2 billion.

Rehabilitation Services:  This rule would restrict the scope of rehabilitation services subject to the federal Medicaid match and eliminate coverage of day habilitation services for individuals with developmental disabilities.  In many instances, CMS has found that states have billed therapeutic foster care as a “bundled” payment, resulting in federal payments for activities related to foster care as opposed to direct medical expenses.  In other cases, state plans for reimbursable expenses include recreational or social activities not directly related to rehabilitative goals.  An NPRM was issued on August 13, 2007; the current moratorium expires on June 30, 2008.  CBO scores this change as saving $1.4 billion over five years, and $3.5 billion over a decade.

Outpatient Hospital Services:  This rule would restrict the scope of Medicaid outpatient hospital services and clarify the upper payment classification for outpatient services to align more closely with the Medicare definition of outpatient services.  An NPRM was issued on September 28, 2007; no moratorium is currently in place.  Five year savings are estimated at $0.3 billion, and ten year savings are estimated at $0.7 billion.

Targeted Case Management:  This rule would restrict the scope of targeted case management services, and specify that Medicaid will not reimburse states for services where another third party is liable for payment.  In many cases, HHS audits have found a lack of documentation related to targeted case management claims, or state plans for reimbursement that fall outside the scope of the Medicaid program’s focus on medical services.  A final rule was issued December 4, 2007, subject to an implementation date of March 3, 2008.  The change would save an estimated $1.5 billion over five years, and $3.3 billion over ten.

Provider Taxes:  This rule would reduce the permissible level of Medicaid provider taxes, as included in the Tax Relief and Health Care Act of 2006 (P.L. 109-432), and would also clarify the hold harmless provision for provider taxes with respect to the positive correlation between the level of provider taxes imposed by states and direct or indirect Medicaid payments from states back to providers.  A final rule was issued February 22, 2008, subject to a compliance date of October 1, 2008.  Five and ten year savings are estimated at $0.6 billion.

In total, the proposed regulations are collectively projected to result in approximately $16-18 billion in savings to the federal government over the next five fiscal years, and more than $42 billion over a decade.[1]  By point of comparison, these savings would constitute just over 1% of total federal spending on Medicaid, which over the next five years is estimated to total more than $1.2 trillion.[2]

Additional Background on GAO Reports of Medicaid Abuses:  Since 1994, the Government Accountability Office (GAO) has compiled more than a dozen reports highlighting problems with Medicaid financing, and specifically the ways in which state governments attempt to “game” Medicaid reimbursement policies in order to maximize the amount of federal revenue funding state health care programs.  The persistent shortcomings in federal oversight of these state funding schemes prompted GAO to add the Medicaid program to its list of federal entities at high risk of mismanagement, waste, and abuse in 2003.

Several of the GAO reports discuss state reimbursement efforts for several of the services CMS proposes to change in its new regulations.  For instance, testimony in June 2005 analyzed the ways in which 34 states—up from 10 in 2002—employed contingency-fee consultants to maximize federal Medicaid payments.  The report found that from 2000-2004, Georgia obtained $1.5 billion in additional reimbursements, and Massachusetts $570 million.[3]  The report concluded that the states’ claims for targeted case management “appear to be inconsistent with current CMS policy” and claims for rehabilitation services “were inconsistent with federal law.”[4]

In other areas, GAO found potentially inappropriate behavior—higher reimbursements for school-based health and administrative services that were not fully passed on to the relevant school districts, and questionable administrative costs, such as a 100% claim on a Massachusetts state official’s salary as a Medicaid administrative cost, even though the official worked on unrelated projects for other states designed to increase their own Medicaid reimbursements.[5]

The GAO reports also demonstrate states’ use of intergovernmental transfers to maximize federal Medicaid reimbursements.  In these schemes, local-government health facilities transfer funds to the state Medicaid agency.  The Medicaid agency in turn transfers funds back to the local-government facility—but not before filing a claim with CMS to obtain federal reimbursement.  Although permissible under current law in many cases, GAO found that these schemes “are inconsistent with Medicaid’s federal-state partnership and fiscal integrity.”[6]

Many of the GAO reports over the past decade—whose titles are listed at the bottom of this bulletin—have included calls for additional federal oversight around various state Medicaid reimbursement initiatives, particularly the need for clear and consistently applied guidance from CMS about the permissiveness of various financing arrangements.[7]  Several of CMS’ proposed regulations attempt to remedy this problem, and restore clarity and fiscal integrity to the Medicaid program.

Additional Background on Medicaid Waste and Fraud: Although much of the debate surrounding the proposed CMS regulations has centered on the proper scope and limits of covered services within the Medicaid program, it is also worth noting the considerable amount of waste and criminal fraud present within some state Medicaid programs.  An extensive investigation published by The New York Times in July 2005 revealed several examples of highly questionable activity within the New York Medicaid program:

  • A Brooklyn dentist who billed Medicaid for performing 991 procedures in a single day;
  • One physician who wrote 12% of all the prescriptions purchased by New York Medicaid for an AIDS-related drug to treat wasting syndrome—allegedly so the steroid could be re-sold on the black market to bodybuilders;
  • Over $300 million—far more than any other state Medicaid program—in spending on transportation services, some of which involved rides for seniors mobile enough to rely on public transportation and other services which investigators believe may not have been performed at all; and
  • A school administrator in Buffalo who in a single day recommended that 4,434 students receive speech therapy funded by Medicaid—part of $1.2 billion in improper spending by the state on speech services, according to a federal audit.

A former state investigator of Medicaid abuse estimated that fraudulent claims totaled approximately 40% of all Medicaid spending in New York—nearly $18 billion per year, which may help explain why New York’s Medicaid expenditures greatly exceed California’s, despite a smaller overall population and fewer Medicaid beneficiaries.[8]

However, other audits emphasize that in some cases, providers can be victims of state efforts to reclaim additional federal Medicaid dollars.  A 2004 report from the Department of Health and Human Services’ Inspector General found that New York state required a nursing home to return more than half of its Medicaid revenues to the state, resulting in net revenues to the nursing home that were $20 million less than its operating costs.  The report noted:

The state’s upper-payment-limit funding approach benefited the state and the county more than the nursing home.  The state received $20 million more than it expended for the nursing home’s Medicaid residents without effectively contributing any money, and the county was reimbursed 100 percent for its upper-payment-limit contribution.  We are concerned that the federal government in effect provided almost all of the nursing home’s Medicaid funding, contrary to the principle that Medicaid is a shared responsibility of the federal and state governments.

The audit went on to note that the high level of Medicaid payments the nursing home was required to return to the state—and the operating losses the nursing home incurred on its Medicaid patients as a result—led to significant levels of understaffing that may have affected the quality of care provided to patients.[9]

Other HHS audits reflect Medicaid reimbursement submissions by states that either lack appropriate documentation for the claims or represent inappropriate use of Medicaid resources.  For example, one May 2003 claim for Medicaid targeted case management reimbursement included the following notation from the case manager explaining her contact with the beneficiary:

Phone call with mother.  Discussed the outstanding warrant for [name redacted].  She does not know where he is.  She will call police when he shows up.

While it may represent good public policy for this type of contact—which attempted to locate a juvenile for whom an outstanding arrest warrant existed—some conservatives would argue that such actions lie outside the scope of the Medicaid program’s intent and represent a far-from-ideal expenditure of federal matching dollars.

Committee Action:  On March 13, 2008, the bill was introduced and referred to the Energy and Commerce Committee.  On April 16, 2008, the full Energy and Commerce Committee reported the bill to the full House by a vote of 46-0.

Possible Conservative Concerns:  Numerous aspects of this legislation may raise concerns for conservatives, including, but not necessarily limited to, the following:

  • Process.  H.R. 5613 is being brought to the House floor under suspension of the rules, a procedure generally reserved for minor authorizations and smaller pieces of legislation, such as the naming of post offices.  Some conservatives may be concerned that a bill costing over a billion dollars is being rushed through House floor consideration under expedited procedures.
  • Budgetary Gimmick.  In order to comply with PAYGO rules, H.R. 5613 would impose a moratorium on CMS action until April 2009—and the legislation contains provisions offsetting the cost to the federal government for all savings not realized through that date.  However, staff for Energy and Commerce Committee Chairman Dingell have publicly stated that H.R. 5613 is intended to delay the implementation of the Medicaid rules just long enough so that a future Administration can withdraw them.  Because withdrawing the regulations would result in approximately $16-18 billion in lost savings to the federal government over five years, and because action taken by a future Administration would not be subject to PAYGO, some conservatives may believe that H.R. 5613’s sponsors intend to violate the spirit, if not the letter, of the PAYGO requirement under House rules.
  • Undermine Previous Republican Efforts to Reform Medicaid.  In December 2005, 212 Members of Congress—all Republicans—voted for legislation (P.L. 109-171) that generated less than $4.8 billion in savings from the Medicaid program as a first attempt to restore its fiscal integrity.  However, if the moratoria remain intact, those modest reductions in Medicaid’s growth rate would be more than exceeded by the $16-18 billion in foregone savings associated with the regulations’ repeal.
  • Encourage State Efforts to “Game” the Medicaid Program.  As highlighted above, nearly three dozen states have in recent years hired contingency fee consultants designed to maximize the portion of Medicaid costs paid for by the federal government.  Blocking regulations designed to respond to funding mechanisms which states and their consultants have established—and more than a dozen GAO reports over nearly 15 years have criticized—may only further encourage states to take steps that increase federal costs and  undermine Medicaid’s fiscal integrity.
  • Harm Hospitals and Other Providers.  As explained above, HHS Inspector General reports have revealed that various funding mechanisms designed to increase federal Medicaid revenues for states have often had the ancillary effect of reducing net payments to providers.  H.R. 5613, by blocking regulations designed to ensure that payments to Medicaid providers do not become ensnared in various schemes by states to increase federal Medicaid spending, may prevent some providers from seeing their net Medicaid payments rise when the proposed regulations take effect.

Administration Position:  Although the Statement of Administration Policy (SAP) was not available at press time, Health and Human Services Secretary Leavitt has previously written to Energy and Commerce Chairman Dingell and Ranking Member Barton indicating that the Administration strongly opposes H.R. 5613 and would recommend a Presidential veto.

Cost to Taxpayers:  A final score of the bill was not available at press time.  However, a preliminary CBO estimate indicated that H.R. 5613’s moratorium through April 2009 on the issuance of seven proposed regulations would cost taxpayers $1.65 billion over five and ten years.  However, as noted above, this score presumes the full implementation of the regulations in April 2009 under a new Administration.  Outright repeal of the regulations would cost $16.5 billion over five years—ten times the cost of H.R. 5613.

Additional mandatory spending—both $25 million annually for CMS anti-fraud enforcement activity with respect to Medicaid, and $5 million for an independent study on the proposed regulations—would cost $129 million over five years, and $254 million over ten.

H.R. 5613 would pay for this spending by extending an asset verification pilot program currently operating in three states to all 50 states, saving $1.0 billion over five years and $4.5 billion over ten.  The bill would also make adjustments to the Physician Assistance and Quality Improvement (PAQI) fund to comply with five-year PAYGO scoring rules, and deposit the additional savings over and above the ten-year cost of the moratoria.  Reports indicate that the $2.6 billion in additional ten-year savings will be withdrawn from the PAQI fund later this year to help finance Medicare physician reimbursement legislation.

Does the Bill Expand the Size and Scope of the Federal Government?:  Yes, the bill would prohibit CMS from taking administrative actions (which are already built into CBO’s budgetary baseline) to prevent states from expanding the scope of the Medicaid program.

Does the Bill Contain Any New State-Government, Local-Government, or Private-Sector Mandates?:  No.

Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax Benefits/Limited Tariff Benefits?:  A Committee report citing compliance with House earmark disclosure rules was unavailable at press time.

Constitutional Authority:  A Committee report citing constitutional authority was unavailable at press time.

 

[1] Because CMS proposals with respect to rehabilitation services (estimated savings of $1.4 billion over five years), graduate medical education ($0.8 billion estimated savings), and the definition of outpatient hospital services ($0.3 billion estimated savings) are at the proposed rulemaking stage, CBO assigns a baseline weighting factor of 50% to the proposed regulations, reflecting the uncertainties of the rulemaking process.  Thus, while CBO estimates a total of $17.8 billion in savings over five years if all rules were implemented as currently issued, a permanent prohibition on these seven rules would require $16.5 billion in savings under House PAYGO rules.

[2] Office of Management and Budget, Analytical Perspectives: Budget of the United States Government, Fiscal Year 2009, available online at http://www.whitehouse.gov/omb/budget/fy2009/pdf/spec.pdf (accessed April 1, 2008), p. 383.

[3] Government Accountability Office, “Medicaid Financing: States’ Use of Contingency Fee Consultants to Maximize Federal Reimbursements Highlights Need for Increased Federal Oversight,” (Washington, Report GAO-05-748, June 2005) available online at http://www.gao.gov/new.items/d05748.pdf (accessed March 31, 2008), p. 4.

[4] Ibid., p. 19.

[5] Ibid., pp. 27-29.

[6] Ibid., p. 24.

[7] See ibid., p. 30.

[8] Clifford Levy and Michael Luo, “Medicaid Fraud May Reach into Billions,” The New York Times 18 July 2005, available online at http://www.nytimes.com/2005/07/18/nyregion/18medicaid.html?_r=1&pagewanted=print&oref=slogin (accessed March 29, 2008).

[9] “Adequacy of Medicaid Payments to Albany County Nursing Home,” (Washington, DC, Department of Health and Human Services Office of the Inspector General Report #A-02-02-01020), available online at http://oig.hhs.gov/oas/reports/region2/20201020.pdf (accessed April 20, 2008), pp. 6-7.

Legislative Bulletin: Motion to Recommit H.R. 1424, Paul Wellstone Mental Health and Addiction Equity Act

Summary of Motion:  The motion would recommit H.R. 1424, the Paul Wellstone Mental Health and Addiction Equity Act, back to the Energy and Commerce Committee with instructions that the committee report the bill back to the House floor forthwith (i.e. instantaneously) with the following amendment:

  • The amendment would replace the text of H.R. 1424 with the text of S. 558, the Mental Health Parity Act, sponsored by Sen. Pete Domenici (R-NM), which passed the Senate on September 18, 2007.  (See Additional Background below for a summary of the differences between the Senate and House legislation.)
  • The amendment would include language explicitly stating that group health plans will not be required to cover abortion services as a result of implementing mental health parity.  (See Additional Background below for concerns that mental health provisions may be used to justify further abortion-related coverage.)
  • The amended bill would be paid for by extending a web-based demonstration project requiring electronic verification of Medicaid eligibility.  This demonstration project began with respect to Supplemental Security Income (SSI) verification, and was extended to three states’ Medicaid programs by Congress in September 2007 (P.L. 110-90).  The amendment would extend the demonstration project to all 50 states, saving $4.3 billion over ten years, according to the Administration.
  • The amended bill would also be financed through a $600 million transfer from the Physician Assistance and Quality Initiative (PAQI) Fund in 2013, coupled with a $1 billion transfer to the PAQI fund in 2014.

Process:  This MTR moves to recommit the bill (with instructions) “forthwith.”  If passed, the forthwith directive would technically send the bill back to committee along with the MTR instructions, requiring the committee to immediately return the bill to the House along with the amendment.  In effect, the chairman of the committee would take the floor and immediately report the bill back to the House with the amendment instructions in the MTR.  The House would then vote on the amendment (in essence, a second vote on the MTR with instructions). If this passes, a vote on final passage – with the amendment included – would be before the House.

Additional Background on Mental Health and Abortion Coverage:  Some conservatives have raised concerns regarding the Paul Wellstone Mental Health and Addiction Equity Act (H.R. 1424).  The Supreme Court decision Doe v. Bolton lists mental health as a reason that abortion is allowed for health exceptions.  The House bill, as currently written, could be construed to mandate health care coverage for an abortion as a part of treatment for mental health issues such as depression.  As defined by the Court: “Health of the mother includes, ‘all factors—physical, emotional, psychological, familial, and the woman’s age—relevant to the wellbeing of the patient. All these factors may relate to health.’”  Furthermore, abortionist Dr. James McMahon, in testimony before the House Judiciary Committee in June 1995, cited 39 partial-birth abortions that were performed because of the mother’s “depression.”  Because this issue is unclear and H.R. 1424 lacks a conscience clause applied to this legislation, there appears to be no protection for an employer to reject healthcare coverage for such a procedure if they choose to extend mental health coverage to its employees.

Additional Background on Senate Legislation:  On September 18, 2007, the Senate passed its version of the Mental Health Parity Act.  This legislation, S. 558, sponsored by Sen. Pete Domenici (R-NM), contains significant variations when compared to H.R. 1424.  Specifically, the Senate-passed language:

  • Retains ERISA pre-emption for the large employers (those with more than 50 employees) subject to the law—states would not have the option of enacting more stringent and conflicting laws and regulations;
  • Remains silent on codifying classes of mental disorders—the language does not require group health plans to offer coverage for all disorders under DSM-IV;
  • Does not mandate an out-of-network coverage benefit—plans must offer out-of-network coverage only to the extent they do so for medical and surgical benefits, while the House bill mandates out-of-network coverage for all plans offering mental health benefits; and
  • Permits group health insurance plans to utilize medical management practices, including utilization review, authorization, medical necessity and appropriateness criteria, and use of network providers—the House bill includes no such “safe harbor” for plans.

While some conservatives may still have concerns with the mandates imposed by the Senate legislation and the way in which these mandates would increase health insurance premiums, many segments of the business community have embraced the Senate compromise as a reasonable attempt to achieve the goal of both bills without eroding ERISA pre-emption or imposing undue restrictions on benefit plan design.  Many of those same trade organizations are opposing H.R. 1424 as a legislative over-reach that will impede their ability to offer quality coverage through group health insurance plans.

Legislative Bulletin: H.R. 1424, Paul Wellstone Mental Health and Addiction Equity Act

Order of Business:  The bill is reportedly scheduled to be considered on Wednesday, March 5th, subject to a likely structured rule.

Summary:  H.R. 1424 would amend the Internal Revenue Code, the Public Health Service Act, and the Employee Retirement Income Security Act (ERISA) to require equity in the provision of mental health disorder benefits for group health insurance plans that offer both mental health benefits and medical and surgical benefits.  Previously, the Mental Health Parity Act—first enacted in 1996, and extended in subsequent legislation until it lapsed in December 2007—required only that plans choosing to offer both mental health and medical and surgical benefits must have equal annual and lifetime limits on coverage for both types of treatments.  Specific details of the federal mandates in the bill include the following:

Treatment Limits and Beneficiary Financial Requirements:  H.R. 1424 would require group health plans to offer the same financial benefit structure for both mental and physical disorders.  The federal mandate would apply to overall coverage limits on treatment as well as deductibles, out-of-pocket limits, and similar beneficiary financial requirements.

Expansion of Definition:  The bill would expand the definition of “mental health benefits” subject to the federal mandate to include substance abuse and disorder treatments. (See Additional Background section below.)

Minimum Scope of Benefits:  H.R. 1424 would require all group health insurance plans offering mental health benefits to offer coverage for any mental health and substance-related disorder included in the most recent edition of the Diagnostic and Statistical Manual of Mental Disorders.  (See Additional Background section below.)

Out-of-Network Benefits:  The bill would mandate plans that offer out-of-network insurance coverage for medical and surgical benefits to provide out-of-network coverage for mental health benefits, and at the same benefit levels.  This provision exceeds the standards required by the Office of Personnel Management for insurance carriers participating in the Federal Employee Health Benefits Program (FEHBP); plans offered through the federal program need only provide mental health parity with respect to in-network benefit packages.

Increased Cost Exemption:  H.R. 1424 would raise the level at which employers whose health insurance costs rise as a result of implementing mental health parity in benefits may claim an exemption from the federal mandate.  The bill would exempt employers whose costs due to mental health claims rise by more than 2% in the first year of implementation, and by more than 1% in subsequent years.  The more limited version of the Mental Health Parity Act first enacted in 1996 exempted employers whose claim costs rose 1%.  Employers with fewer than 50 workers would be exempt from federal mandates under the legislation.

Federal Pre-emption:  H.R. 1424 would not preclude states from imposing on employers who offer group health insurance coverage more stringent requirements with respect to “consumer protections, benefits, methods of access to benefits, rights, or remedies.”  This provision constitutes a significant variation from past federal policy with respect to employer-provided health insurance dating to ERISA’s enactment in 1974.  (See Additional Background section below.)

Random Federal Audits:  The bill would require the Department of Labor to conduct annual audits of a random sample of group health insurance plans to ensure compliance with the federal mandates included in H.R. 1424.

GAO Study:  The bill would require a study by the Government Accountability Office evaluating the law’s impact on the cost of health insurance coverage, access to mental health care, and related issues.

Medicaid Drug Rebate:  The bill would increase the rebate required of pharmaceutical companies offering single source (i.e. protected under federal patent laws) and innovator multiple source (i.e. formerly protected under federal patent law, but now subject to generic competition) pharmaceuticals in the Medicaid program from at least 15.1% of the Average Manufacturer Price (AMP) to at least 20.1% of the AMP.  The increase would apply for the years 2009 through 2015.  (See Additional Background section below.)

Specialty Hospitals:  H.R. 1424 would impose 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 at the time of the bill’s enactment, and generally prohibit facilities from expanding their total number of operating rooms or beds.  Facilities may be able to expand their number of beds by up to 50%, provided that a) the population within the area has grown at more than double the national average over a five-year period; b) the facility has an above-average rate of Medicaid admissions when compared to the statewide average; c) the facility is located in a state with average bed capacity below the national average; and d) average bed occupancy within the area is at least 80%.  The bill also imposes additional reporting and related requirements regarding the nature of physician ownership arrangements.  (See Additional Background section below.)

Additional Background on ERISA Pre-Emption:  The Employment Retirement Income Security Act (ERISA) has served as the primary federal standard for the regulation of employee benefit plans since its enactment in September 1974 as Public Law 93-406.  One of its key provisions, Section 514 (29 U.S.C. 1144), states that ERISA “shall supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan,” except in limited instances.  As Rep. John Dent (D-PA), then-Chairman of the House Labor Subcommittee and sponsor of the bill which became the ERISA statute, noted during debate on the conference report:

I wish to make note of what is to many the crowning achievement of this legislation, the reservation to federal authority the sole power to regulate the field of employee benefit plans.  With the pre-emption of the field, we round out the protection afforded participants by eliminating the threat of conflicting and inconsistent state and local regulation. [Emphasis added.]

The strong pre-emption provisions have been upheld by numerous federal courts since the enactment of ERISA more than 30 years ago.  In 2004, the Supreme Court in the case of Aetna Health Inc. v. Davila (542 U.S. 200) ruled that a Texas state law permitting lawsuits against managed care companies could not be enforced against plans provided by private employers due to ERISA’s pre-emption provisions and remedies already available under federal law.  More recently, the Fourth Circuit Court of Appeals cited ERISA pre-emption as the basis for striking down Maryland’s so-called Wal-Mart bill, which attempted to enact a “pay-or-play” mandate on large employers by requiring them to contribute a percentage of payroll expenses to their employees’ health care.

Over more than three decades, ERISA pre-emption has permitted thousands of employers to offer group health insurance coverage to millions of workers nationwide without the fear of becoming bogged down in complex and conflicting health insurance regulations in the several states.  This system currently provides more than 177 million Americans—more than half the national population—with health insurance coverage, according to Census Bureau data.  If passed, H.R. 1424 would permit states to pass laws with more stringent consumer protections, and could subject group health insurance plans to those state laws, creating the first significant erosion of ERISA pre-emption since its enactment.

Additional Background on Scope of Mental Health Benefits:  H.R. 1424 would incorporate into federal statute the Diagnostic and Statistical Manual of Mental Disorders as the basis for which group health plans offer coverage for mental health conditions.  Specifically, the bill would require plans to cover any mental disorder listed in the most recent edition of the manual, currently in its fourth edition (DSM-IV).

A 1999 executive order signed by President Clinton incorporated DSM-IV into the Federal Employee Health Benefit Program (FEHBP), beginning in January 2001.  However, the Office of Personnel Management requires FEHBP carriers to cover “all categories of…conditions” within DSM-IV, while H.R. 1424 requires overage of “any mental health condition”—a more expansive requirement for plans.  Moreover, plans offering coverage within FEHBP are permitted discretion to require an “authorized treatment plan” based on medical necessity—but are given no discretion to determine necessity under H.R. 1424.  The Office of Personnel Management has estimated that implementation of the executive order increased premium costs by 1.64% for fee-for-service plans participating in FEHBP.

The DSM-IV standards, first published in 1994 and revised slightly in 2000, include a wide variety of classifications for mental disorders, several of which are considered by some in the psychiatric community to have dubious value.  In addition, the number and breadth of declared psycho-sexual disorders included in the DSM have sparked controversy between homosexual activists and traditional values supporters.  Among the more troubling diagnoses incorporated into DSM-IV are:

  • Nightmare disorder;
  • Circadian rhythm sleep disorder (jet lag type);
  • Caffeine-induced sleep disorder;
  • Caffeine intoxication;
  • Substance-induced sexual dysfunction;
  • Gender identity disorder;
  • Transvestic fetishism; and
  • Pedophilia.

Under H.R. 1424, employers offering group coverage would be required to provide benefits related to these and similar diagnoses included in DSM-IV.

The expansive definitions of mental disorders included in DSM-IV have led to charges that psychiatric diagnoses have become politicized.  In response, the American Psychiatric Association, which publishes the DSM guidebook, included the following explanation on its website:

Q:        Aren’t some of the diagnoses included in the DSM there for political reasons?

A:        Decisions to include a diagnosis in the DSM are based on a careful consideration of the research underlying the disorder.  This is not to say that decisions are made without regard to other considerations.  Scientific data cannot be interpreted in a vacuum.  Sociological and other considerations must also be taken into account.   For example, each proposed new diagnosis carries with it the risk of making a false positive diagnosis (i.e., making a diagnosis when no disorder is present).  Since false positives can never be completely eliminated, we must consider instead how to balance the advantages of including the diagnosis in the DSM (e.g., increased detection of a treatable disorder with consequent reduction in morbidity and cost to the patient, his or her family, and to society at large) against the risks of making a false positive diagnosis (e.g., risk of stigmatization, cost and potential morbidity of unnecessary treatment, etc.).  However, the overall driving force in the decision to include or exclude a potential diagnosis from the DSM is the availability of scientific data. [Emphasis added.][1]

The American Psychiatric Association is tentatively scheduled to publish the fifth version of its Diagnostic and Statistical Manual of Mental Disorders (DSM-V) in 2011 or 2012, and any new disorders included in the revised version will be included in the federal mandate under the provisions of H.R. 1424.

Additional Background on Specialty Hospitals:  The past few years have seen the significant growth of so-called specialty hospitals.  These facilities, which generally concentrate on one medical practice area (often cardiac or orthopedic care), are often able to provide higher-quality care than general hospitals due to their focused mission.  Critics of specialty hospitals claim that, by “cherry-picking” the best—and therefore most lucrative—candidates for surgical procedures, they siphon off revenues from general and community hospitals, threatening their future viability.

The ownership arrangements of many specialty hospitals have also been questioned.  While federal law against physician self-referral prohibits doctors from holding an ownership stake in a particular department of a hospital facility, the “whole hospital” exemption permits physicians to hold an ownership stake in an entire facility.  Because many specialty hospitals are physician-owned in whole or in part, some critics believe that physicians owning a stake in a specialty hospital may be inclined to perform additional tests and procedures on patients due to a stronger profit motive.

In July 2007, Section 651 of H.R. 3162, the Children’s Health and Medicare Protection (CHAMP) Act, proposed several modifications to the “whole hospital” exemption for physician self-referral.  Most notably, the bill applied the exemption only to those facilities with Medicare provider agreements in place prior to July 2007—excluding new specialty hospitals or other facilities, including those currently under construction, from protection under the self-referral statute—and prohibited existing facilities from expanding their number of operating rooms or beds.  While the bill passed the House by a 225-204 vote, the Senate has yet to take up the measure.

Amidst spiraling costs and uneven quality, some conservatives may believe that the health sector warrants more competition, not less: new entrants to introduce innovative techniques and practices improving the quality of care; greater transparency of both price and quality information, so patients can make rational choices about the nature of their treatment options; and a funding system that reduces where possible the distortionary effects of third-party payment and empowers consumers to take control of their health.  Viewed from this perspective, opposition to undue and onerous restrictions on the specialty hospitals that have driven innovation within health care may strike many conservatives as a return to first principles.

Additional Background on Medicaid Drug Rebates:  As part of a drug payment policy designed to ensure that Medicaid paid the “best price” available, the Omnibus Budget Reconciliation Act of 1990 included provisions requiring manufacturers of pharmaceuticals desiring to offer their products to Medicaid enrollees to enter into rebate agreements with the Secretary of Health and Human Services (HHS).  As of 2003, over 550 manufacturers have entered into rebate agreements, which apply to all pharmaceuticals separately billed to Medicaid.  In 2005, states reported receiving $11.1 billion in federally required drug rebates, constituting 26% of all outpatient pharmaceutical spending.  In addition, many states have their own additional rebate policies in effect; in 2005, 22 states reported collecting an additional $1.3 billion in supplemental rebates.  However, a 2005 survey by the non-partisan Kaiser Family Foundation reported that nearly half of states surveyed (17 of 37) do not return their rebates to Medicaid, choosing instead to apply rebates to the general fund to finance other state spending.[2]

In determining rebate levels, federal law establishes two classes of pharmaceuticals.  For single source drugs (those still under federal patent protection) and “innovator” multiple source drugs (those formerly marketed under a patent, but where generic competition now exists), rebate amounts are determined by comparing the Average Manufacturer Price (AMP) to the “best price”—the lowest price offered by the manufacturer to any retailer, wholesaler, or other entity.  The basic rebate is equal to either 15.1% of the AMP or difference between the AMP and the “best price,” whichever greater.  Additional rebates for these drugs are required if their price rises faster than inflation, as measured by the consumer price index for urban areas.  For “non-innovator” multiple source (i.e. generic) drugs, rebates are equal to 11% of AMP; “best prices” are not considered, and there are no additional rebates linked to price inflation.

The Deficit Reduction Act of 2005 (DRA) made several changes related to the Medicaid rebate system, particularly with respect to reporting of prices used to compute the pharmaceutical rebates owed.  Specifically, DRA required states to report data regarding certain physician-administered outpatient pharmaceuticals, in an attempt to ensure that rebates for chemotherapy and other drugs administered in physician settings were properly paid.  In addition, the DRA required that, for manufacturers who both produce a brand-name drug and license another manufacturer to produce a generic version, that the manufacturer-reported price include the price of these “authorized generics.”  In its cost estimate for DRA, CBO scored these changes as generating $220 million in additional federal revenues over five years, and $720 million over ten years.

Additional Background on Senate Legislation:  On September 18, 2007, the Senate passed its version of the Mental Health Parity Act.  This legislation, S. 558, sponsored by Sen. Pete Domenici (R-NM), contains significant variations when compared to H.R. 1424.  Specifically, the Senate-passed language:

  • Retains ERISA pre-emption for the large employers (those with more than 50 employees) subject to the law—states would not have the option of enacting more stringent and conflicting laws and regulations;
  • Remains silent on codifying classes of mental disorders—the language does not require group health plans to offer coverage for all disorders under DSM-IV;
  • Does not mandate an out-of-network coverage benefit—plans must offer out-of-network coverage only to the extent they do so for medical and surgical benefits, while the House bill mandates out-of-network coverage for all plans offering mental health benefits; and
  • Permits group health insurance plans to utilize medical management practices, including utilization review, authorization, medical necessity and appropriateness criteria, and use of network providers—the House bill includes no such “safe harbor” for plans.

While some conservatives may still have concerns with the mandates imposed by the Senate legislation and the way in which these mandates would increase health insurance premiums, many segments of the business community have embraced the Senate compromise as a reasonable attempt to achieve the goal of both bills without eroding ERISA pre-emption or imposing undue restrictions on benefit plan design.  Many of those same trade organizations are opposing H.R. 1424, as listed below, as a legislative over-reach that will impede their ability to offer quality coverage through group health insurance plans.

Committee Action:  On March 9, 2007, the bill was introduced and referred to the Energy and Commerce Committee, the Education and Labor Committee, and the Ways and Means Committee.  On July 18, 2007, the Education and Labor Committee reported the bill to the full House by a vote of 33-9.  On September 26, 2007, the Ways and Means Committee reported the bill to the full House by a vote of 27-13.  On October 16, 2007, the Energy and Commerce Committee reported the bill to the full House by a vote of 32-13.

Possible Conservative Concerns:  Numerous aspects of this legislation may raise concerns for conservatives, including, but not necessarily limited to, the following:

  • Increase Health Insurance Costs.  As noted below, CBO estimates that H.R. 1424 would impose mandates on private insurance companies totaling $3 billion annually by 2012.  These costs will ultimately be borne by employers offering health insurance and employees seeking to obtain coverage.  Moreover, by increasing the cost of health insurance, H.R. 1424 will lead directly to an increase in the number of uninsured Americans.
  • Private-Sector Mandates on Small and Large Businesses.  As detailed below, the bill contains multiple new federal mandates on the private sector, affecting the design and structure of health insurance plans.   Among other mandates, the bill would require plan sponsors to provide out-of-network benefits for mental health services if the sponsors provide out-of-network benefits for medical and surgical services, exceeding the standard mandated of insurance carriers participating in the FEHBP.
  • Decrease in Mental Health Coverage.  While the bill imposes several new federal mandates on those employers who choose to offer mental health coverage, there is nothing in H.R. 1424 that would impose a mental health mandate on all group health plans.  Thus H.R. 1424 could have the perverse effect of actually decreasing mental health coverage, by encouraging employers frustrated with the bill’s onerous burdens to drop mental health insurance altogether.
  • Intergovernmental Mandate.  The bill would pre-empt state laws governing mental health coverage that conflict with the bill—but would not pre-empt laws providing more stringent consumer protections for employees.  Additionally, the Congressional Budget Office (CBO) notes that some state and local governments would face increased costs for health insurance provided to their employees.  However, as these higher costs would be in the form of increased insurance premiums borne by government entities, CBO does not consider these higher costs a direct intergovernmental mandate.
  • Violation of UMRA.  CBO estimates that the costs of the mandates to the private sector in the bill would be at least $1.3 billion in 2008, rising to $3 billion in 2012 and thus exceed the annual threshold established in the Unfunded Mandates Reform Act or UMRA ($131 million in FY2007, adjusted annually for inflation).
  • Codification of Treatment Mandate for Health Plans.  H.R. 1424 would incorporate into federal law the DSM-IV classification definitions as the parameter of mental health treatment for health plans.  The broad parameters included in the DSM-IV categories will obligate employers to cover “disorders” such as “jet lag” and “caffeine intoxication.”  The DSM-IV standards incorporated into federal law would also require employers to cover a broad array of sexual “disorders” that many conservatives may find objectionable, as noted above.
  • Lack of Conscience Clause.  H.R. 1424 would subject all employers with over 50 employees—including faith-based organizations—to federal mandates to cover all diagnoses under DSM-IV.  The bill does not include an exemption for faith-based groups to exclude coverage of mental disorders, particularly psycho-sexual disorders, for which they have religious or moral objections.
  • Erode Federal Pre-emption for Employers under ERISA.  While H.R. 1424 does pre-empt state laws that conflict with the bill, it also explicitly permits additional state laws that provide more stringent consumer protections.  This provision could undo a history of strict federal pre-emption dating to ERISA’s enactment in 1974, creating a patchwork of laws across all 50 states with which major employers would have to comply.  Some employers could decide to drop group health insurance coverage altogether rather than face a potentially conflicting array of state mandates and regulations to which they could be subjected under H.R. 1424.
  • Lack of Medical Management Tools.  H.R. 1424 does not include language explicitly permitting group health plans to negotiate separate reimbursement rates or provider payment rates and delivery service systems for different benefits.  These tools would empower plans to utilize medical management practices in order to reduce claim costs.

  • Decreased Access to Pharmaceuticals for Medicaid Patients.  H.R. 1424 increases from 15.1% to 20.1% the minimum rebate amount which certain pharmaceutical manufacturers must pay to offer their drugs to patients within the Medicaid program.  These tightened government price controls may cause some manufacturers to leave the program altogether, resulting in the loss of available prescription drugs for low-income beneficiaries.
  • Restrictions on Specialty Hospitals.  The bill would limit the “whole hospital” exemption under physician self-referral laws, such that any new specialty hospital—including those currently under development or construction—would not be eligible for the self-referral exemption, and any existing specialty hospital would be unable to expand its facilities, except under very limited circumstances.  Given the advances which several specialty hospitals have made in increasing quality of care and decreasing patient infection rates, these additional restrictions may impede the development of new innovations within the health care industry.
  • Budgetary Gimmick.  In order to comply with PAYGO rules, H.R. 1424 would rely upon an increase in the Medicaid rebate for pharmaceuticals lasting from 2009 through 2015.  The fact that the rebate levels are scheduled to increase and then return to current levels suggests that the legislative change proposed has as its primary motive the financing of the costs associated with an expansion of mental health parity.  Some conservatives may believe this temporary increase violates the spirit, if not the letter, of the PAYGO requirement under House rules.

Administration Position:  Although the Statement of Administration Policy (SAP) was not available at press time, reports indicate that the SAP will strongly oppose the legislation; a veto threat is possible but not certain.  In September 2007, Labor Secretary Chao and HHS Secretary Leavitt wrote to the Senate HELP Committee expressing support for the Senate mental health legislation (S. 558), and stating “concern” with the bill introduced in the House (H.R. 1424).

Cost to Taxpayers:  A final score of the substitute bill presented to the Rules Committee was not available at press time.  However, according to a Congressional Budget Office (CBO) score of the bill as marked up before the Ways and Means Committee, H.R. 1424 would cost the federal government nearly $4 billion over ten years.  Direct federal outlays would increase by $820 million through increased Medicaid costs.  In addition, federal revenues would decline by more than $3.1 billion due to increases in the cost of health insurance, as employees with group coverage would exclude more of their income from payroll and income taxes.

The bill proposes to offset the costs outlined above by increasing the rebate rate required of drug manufacturers participating in the Medicaid program with respect to certain classes of pharmaceuticals.  In addition, the bill places additional restrictions on physician-owned specialty hospitals.  In July 2007, CBO scored similar provisions included in H.R. 3162, the Children’s Health and Medicare Protection (CHAMP) Act as saving $3.5 billion over ten years by directing more patients from specialty hospitals and to general hospitals, due to CBO’s belief that such a transition would result in overall savings to Medicare based on lower utilization rates for outpatient services and related reimbursement changes.  However, as noted previously, such savings may not be realized.

Does the Bill Expand the Size and Scope of the Federal Government?:  Yes, the bill would authorize the Department of Labor to conduct random audits of plan to ensure they are in compliance with the bill’s requirements, which according to CBO would require estimated appropriations of $330 million over ten years.

Does the Bill Contain Any New State-Government, Local-Government, or Private-Sector Mandates?:  Yes, the bill would impose significant new mandates on private insurance carriers (and large employers who self-insure their workers) with respect to the structure and design of their benefit packages.  CBO estimates that the direct costs of the private-sector mandates would total $1.3 billion in 2008, rising to $3 billion in 2012, significantly in excess of the annual threshold ($131 million in 2007, adjusted for inflation) established by the Unfunded Mandates Reform Act (UMRA).

In addition, the bill would also impose an intergovernmental mandate as defined by UMRA by pre-empting some state laws in conflict with the bill, but CBO estimates that this mandate would impose no significant costs on state, local, or tribal governments.

However, costs to state, local, and tribal governments would increase under the bill, for two reasons.  First, the CBO cost estimate indicates that state spending for Medicaid would increase by $235 million between 2008-2012.  Second, while state, local, and tribal governments that self-insure their workers would be able to opt-out of H.R. 1424’s federal mandates, some governments that fully insure their workers (i.e. purchase coverage through an insurance carrier, as opposed to paying benefits directly) would see their costs rise under the legislation.  CBO estimates that the bill would increase state, local, and tribal expenditures by $10 million in 2008, rising to $155 million by 2012.  However, because these increased costs result from mandate costs initially borne by the private sector and passed on to the governments while purchasing insurance, CBO did not consider them intergovernmental mandates as such.

Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax Benefits/Limited Tariff Benefits?:  The Education and Labor Committee, in House Report 110-374, Part I, asserts that, “H.R. 1424 does not contain any congressional earmarks, limited tax benefits, or limited tariff benefits as defined in clause 9 of rule XXI.”

Constitutional Authority:  The Education and Labor Committee, in House Report 110-374, Part I, cites constitutional authority in Article I, Section 8, Clauses 1 (the congressional power to provide for the general welfare of the United States) and 3 (the congressional power to regulate interstate commerce). (emphasis added)

Outside Organizations:  The following organizations are opposing H.R. 1424:

  • Aetna;
  • American Association of Physicians and Surgeons;
  • American Benefits Council;
  • America’s Health Insurance Plans;
  • Assurant;
  • Blue Cross Blue Shield Association;
  • CIGNA;
  • Concerned Women of America (*potential key vote);
  • Family Research Council (*potential key vote);
  • National Association of Health Underwriters;
  • National Association of Manufacturers (*key vote);
  • National Association of Wholesaler-Distributors (*key vote);
  • National Business Group on Health;
  • National Restaurant Association;
  • National Retail Federation (*key vote);
  • Retail Industry Leaders Association;
  • Society for Human Resource Management;
  • U.S. Chamber of Commerce (*key vote).

 

 

[1] Available at http://www.dsmivtr.org/2-1faqs.cfm (accessed February 21, 2008).

[2] Kaiser Family Foundation, State Medicaid Outpatient Prescription Drug Policies: Findings from a National Survey, 2005 Update, available online at http://kff.org/medicaid/7381.cfm (accessed March 3, 2008).

Top Ten Conservative Concerns with H.R. 1424, Mental Health Parity Act

  1. Increases Health Insurance Costs. CBO estimates that H.R. 1424 would impose mandates on private insurance companies totaling $3 billion annually by 2012.  These costs will ultimately be borne by employers offering health insurance and employees seeking to obtain coverage.
  2. Increases Costs for Business Due to Private-Sector Mandates. The bill contains multiple new federal mandates on the private sector, affecting the design and structure of health insurance plans.   The bill also increases the threshold level at which employers suffering increased claim costs as a result of implementing the new federal mandates can claim an exemption from the provisions of H.R. 1424.
  3. Decreases Mental Health Coverage. While the bill imposes several new federal mandates on those employers who choose to offer mental health coverage, there is nothing in H.R. 1424 that would require plans to cover these conditions.  Thus H.R. 1424 could have the perverse effect of actually decreasing mental health coverage, by encouraging employers frustrated with the bill’s onerous burdens to drop mental health insurance altogether.
  4. Increases the Number of Uninsured. By increasing the cost of health insurance, H.R. 1424 will lead directly to an increase in the number of uninsured Americans.  In addition, some employers could decide to drop group health insurance coverage altogether rather than face a potentially conflicting array of state mandates and regulations to which they could be subjected under H.R. 1424.
  5. Erodes Federal Pre-emption for Employers. While H.R. 1424 does pre-empt state laws that conflict with the bill, it also explicitly permits additional state laws that provide more stringent consumer protections.  This provision could undo three decades of strict federal pre-emption for group health plans, creating a patchwork of laws across all 50 states with which large employers would have to comply.
  6. Codification of Treatment Mandate for Health Plans. H.R. 1424 would incorporate into federal law the Diagnostic and Statistical Manual of Mental Disorders (DSM-IV) classification definitions as the parameter of mental health treatment for health plans.  The broad parameters included in the DSM-IV categories will obligate employers to cover “disorders” such as “jet lag” and “caffeine intoxication.”
  7. Intergovernmental Mandate. The bill would pre-empt state laws governing mental health coverage that conflict with the bill—but would not pre-empt laws providing more stringent consumer protections for employees.  Additionally, CBO notes that some state and local governments would face increased costs for health insurance provided to their employees.
  8. Violation of UMRA. CBO estimates that the costs of the mandates to the private sector in the bill would be at least $1.3 billion in 2008, rising to $3 billion in 2012 and thus exceed the annual threshold established in the Unfunded Mandates Reform Act or UMRA ($131 million in FY2007, adjusted annually for inflation).
  9. Lack of Conscience Clause. H.R. 1424 would mandate that employers offering mental health benefits cover all diagnoses under DSM-IV.  The bill does not include an exemption for groups to exclude coverage of mental disorders, particularly psycho-sexual disorders, for which they have religious or moral objections.
  10. Lack of Medical Management Tools. H.R. 1424 does not include language permitting group health plans to negotiate separate reimbursement rates or provider payment rates and delivery service systems for different benefits.  These tools would empower plans to utilize medical management practices in order to reduce claim costs.