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

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

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

Division A—Affordable Health Care Choices

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Division B—Medicare and Medicaid Provisions

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

Medicare Provisions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Medicaid and SCHIP Provisions

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

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

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

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

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

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

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

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

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

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

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

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

Division C—Public Health

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

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

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

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

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

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

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

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

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

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

Legislative Bulletin: HELP Committee Draft Legislation: The “Most Liberal Approach to Health Reform”

On June 9, 2009, Senate Health, Education, Labor, and Pensions (HELP) Committee Chairman Ted Kennedy (D-MA) and Sen. Chris Dodd (D-CT) introduced draft health reform legislation, the Affordable Health Choices Act.  The Senators plan a HELP Committee hearing on the legislation on June 11, followed by a markup scheduled to begin on June 16.

“The bill…is by far the most liberal approach to health-care reform being discussed in Washington and potentially is quite expensive.  It does not identify how the expansion of health coverage would be paid for…”

—Ceci Connelly, The Washington Post, June 7, 2009

Executive Summary: The 615 pages of the Affordable Health Choices Act represent a clear vision of government-run health care—one defined by federal regulation, mandates, myriad new programs, and higher federal spending.  The bill would ensure strong control by government bureaucrats over the United States health care system; Members may note that the bill omits a “Declaration of Rights” included in a widely circulated draft made available last week—perhaps because the bill’s authors understand that under the bill’s provisions federal bureaucrats, not patients and doctors, will end up controlling Americans’ personal health decisions.  Many Members may further disagree with the bill’s title, as additional federal mandates and bureaucratic diktats are unlikely to make health care more “affordable,” instead raising costs appreciably for all Americans.  Lastly, Members may note that while the bill’s provisions are rumored to cost as much as $2 trillion, the bill’s only provision to fund this federal spending is a tax on individuals who do not purchase insurance; pay-for provisions within the jurisdiction of the Finance Committee may be added at a later date.

Highlights of major provisions likely to cause Member concern include:

  • Insurance regulations that would raise costs for all Americans, particularly young Americans, and confine choice of plans to those approved by a board of bureaucrats;
  • Price controls on health insurance companies that allow bureaucrats in the Department of Health and Human Services to force carriers to provide “rebates,” and could impede patient access to important services just because those services do not provide a direct clinical benefit;
  • Mandates on insurance carriers to utilize reimbursement structures similar to Medicare—which would tie private business practices to the decisions of a bureaucracy Senate Finance Committee Chairman Baucus has termed “hidebound, not very creative, a crank-turning bunch of folks;”
  • Additional federal mandates that would significantly erode the flexibility currently provided to employers—and could result in firms dropping coverage;
  • Expansion of Medicaid—fully paid for by the federal government for the first five years—to all individuals with incomes below 150 percent of the Federal Poverty Level, many of whom have existing private health coverage;
  • Establishment of bureaucrat-run health Gateways that would likely lead to the elimination of the private health insurance market outside the Gateway—and could permit a single-payer approach that bans all private health insurance from being sold inside the Gateway;
  • Creation of a Medical Advisory Council that would empower federal bureaucrats to impose new mandates—including a mandate to obtain and provide abortion coverage—on individuals and insurance carriers;
  • Taxation of individuals who do not purchase health insurance that meets the diktats of the bureaucrats on the Medical Advisory Council—with the amount of the tax to be set by federal bureaucrats in the Treasury Department;
  • Potential new taxes on employers who cannot afford to provide their workers health insurance, which could result in as many as 1.6 million lost jobs;
  • “Low-income” health insurance subsidies to a family of four making more than $110,000;
  • Creation of a government-run health plan—the details of which remain to be released—that would “compete” with private insurance and could lead to as many as 120 million Americans losing their current coverage;
  • Establishment of a new federal entitlement to long-term care insurance—into which all working Americans would automatically be enrolled—at a time when Medicare is scheduled to be insolvent by 2017;
  • Regulation of restaurant menus and vending machines that will increase costs to business and disclose nutrition “facts” which may or may not accurately reflect restaurant meals as actually prepared for customers; and
  • Expanded price controls on pharmaceutical products that will discourage companies from producing life-saving breakthrough treatments.

Summary: The HELP Committee draft contains six titles covering matters within its jurisdiction; as noted above, additional policies—including how the as much as $2 trillion estimated cost of the bill will be paid for—are expected to be considered by the Finance Committee.

Title I—Coverage for All Americans

This title would expand existing entitlements and create new entitlements—including a government-run health plan into which physicians would be coerced into participation—in order to cover all Americans.  The title would also impose new federal restrictions on health insurance providers, creating a potentially confusing patchwork of regulations, as well as new mandates on individuals to purchase coverage approved by a board of federal bureaucrats, and on employers to finance that coverage.  Details of the title are as follows:

Insurance Regulations:  The bill would require all carriers in both the individual and group markets to accept all applicants, regardless of age or health status, though carriers may restrict such acceptance to defined “open enrollment” periods.  In addition, carriers could vary premiums solely based upon family structure, geography, benefit values, and age; insurance companies could not vary premiums by age by more than 2 to 1 (i.e., charge older individuals more than twice younger applicants).  As surveys have indicated that average premiums for individuals aged 18-24 are nearly one-quarter the average premium paid by individuals aged 60-64, some Members may be concerned that the very narrow age variations would function as a significant transfer of wealth from younger to older Americans—and by raising premiums for young and healthy individuals, may discourage their purchase of insurance.

Price Controls:  The bill requires carriers to submit annual reports to the Secretary listing the percentage of total premium revenue spent on 1) clinical services; 2) “activities that improve health care quality;” and 3) “all other non-claims costs.”  The bill requires carriers to submit premium rebates to enrollees if the carrier’s percentage of non-claims costs exceed a threshold determined by the Secretary “based on the distribution of such percentages across such carriers.”  Some Members may view this provision as a government-imposed price control, one that could be viewed as ignoring the advice of White House advisor Ezekiel Emanuel, who wrote that “some administrative [i.e. non-claims] costs are not only necessary but beneficial.”  Some Members may further be concerned that the bill would grant sole authority to the Secretary to compel carriers to deliver rebates to the federal government—and allows the Secretary to determine the appropriate level of rebates retroactively.

Benefit Mandates:  The bill requires plans to “develop and implement a reimbursement structure” that includes incentives for chronic care, patient safety, prevention of hospital readmissions, child health measures, and “cultural and linguistically appropriate care” in a manner that “substantially reflects” Medicare payment policy, and requires the Secretary to issue regulations regarding private insurance carriers’ reimbursement policy.  Particularly given Senate Finance Committee Chairman Baucus’ comments calling employees at the Centers for Medicare and Medicaid Services (CMS) “hidebound, not very creative, a crank-turning bunch of folks,” some Members may be concerned by the concept of the bureaucrats dictating business practices to private entities.

The bill requires plans to provide no more than “minimal” cost-sharing requirements for preventive care rated highly by the United States Preventive Services Task Force—a board of federal bureaucrats—as well as other screenings and immunizations.  The bill also includes a so-called “slacker mandate” requiring carriers to offer coverage to dependent children under 27 years of age, as well as a prohibition on annual or lifetime limits on coverage.  As more than half of all individuals currently enrolled in group health plans have some form of lifetime maximum on their benefits, some Members may be concerned that these additional mandates will increase costs and discourage the take-up for insurance.

Status of Current Coverage:  The bill states that the new restrictions and regulations shall not apply to coverage active on the date of the bill’s enactment.  However, some Members may be concerned that the bill would create significant dislocation for those individuals undergoing any future job changes, as these individuals would need to obtain new coverage meeting the bureaucratic standards established in the bill.

ERISA Pre-Emption and New Federal Mandates:  The bill includes a “technical amendment” applying the insurance restrictions noted above to all group health plans covered by the Employee Retirement Income Security Act of 1974 (ERISA).  Some Members may be concerned that these additional federal mandates would raise costs and so encourage employers to drop their current coverage—undermining the promise that “If you like the coverage you have, you can keep it.”

Medicaid Provisions:  While the Finance Committee retains jurisdiction over Medicaid, the HELP Committee draft contains a series of assumptions regarding a Medicaid expansion.  Specifically, the draft assumes that existing populations would remain eligible—and states would be required to cover these individuals—while Medicaid would simultaneously be expanded to include all individuals with incomes below 150 percent of the Federal Poverty Level (FPL, $33,075 for a family of four in 2009).  The expansion would be fully paid for by the federal government until 2015, at which point the federal share would phase-down until reaching the existing Federal Medical Assistance Percentage (FMAP) formula in 2020.  States that have already expanded their Medicaid programs would be eligible for an increased FMAP.

Some Members may be concerned by both the cost and scope of this unprecedented expansion of Medicaid to millions more Americans.  Some Members may believe the 100 percent federal match through 2015 would provide a strong disincentive for States to take appropriate action to control costs, as well as fraud and abuse, in their Medicaid programs.  Members may also note that a plurality of individuals (44 percent) with incomes between one and two times the poverty level have private health insurance; expanding Medicaid to 150 percent FPL would provide a strong incentive for these individuals to drop their current coverage and enroll in the government-run plan.  Moreover, given Medicaid’s history of poor beneficiary access to care, some Members may believe that Medicaid itself needs fundamental reform—and beneficiaries need the choice of access to quality private coverage rather than a government-run plan.

Health Gateways:  The bill authorizes grants to establish State health Gateways to facilitate the purchase of insurance.  Gateways would be established by one or more States, and funded by surtaxes on plans of up to 3 percent of premiums; a State may establish multiple Gateways within a State, but each must be confined to its own geographic area.  If a State does not establish its own Gateway, and bring its insurance laws into compliance with the federal statute within four years, the Secretary would be required to establish that State’s Gateway, and the insurance market changes established in the federal statute would take effect regardless.  Some Members may be concerned that this provision could be viewed as an unconstitutional breach of State sovereignty on a subject (i.e., insurance regulation) which has generally been regulated at the State level.

The bill would permit both eligible individuals—defined as those without access to employer-sponsored coverage, unless such coverage does not meet the Medical Advisory Council’s criteria for either cost or affordability—and eligible employers—defined as those with fewer than 10 employees—to purchase coverage from Gateways.  The Gateway would be required to include access to the government-run plan for all participants.  The bill would authorize grants for Gateways to contract with certain navigators (e.g., trade and industry organizations) to increase awareness about plan choices.

Gateways would establish ways, using the Internet and other methods, to make information about plan choices available to individuals—including the availability of government programs like Medicaid and the State Children’s Health Insurance Program (SCHIP).  Gateways would require carriers to consider each enrollee “to be a member of a single risk pool,” but would further facilitate risk adjustment among high-risk and low-risk plans; the Secretary would issue guidance on risk adjustment, including “criteria and methods similar to the criteria and methods utilized” for the Medicare Part D prescription drug benefit.

Gateways would be required to certify health plans as “qualified,” such that plans do not “employ marketing practices that have the effect of discouraging the enrollment in such plan by individuals with high health needs,” “ensure a wide choice of providers,” meet certain standards with respect to plan disclosure and appeals procedures, include a minimum benefit package determined by the Medical Advisory Council discussed below, and have a reimbursement structure that meets federal regulatory guidelines.  Gateways may permit plans to offer coverage that does not meet other benefit mandates, provided that the coverage meets the standards set by the Medical Advisory Council.  However, the Gateway could refuse to certify any plan meeting the other requirements, as it must also determine that “making the plan available…is in the interests of qualified individuals and qualified employers.”

Some Members may be concerned at the levels of bureaucracy established by the bill’s Gateway structure.  Bureaucrats would be required to approve plans’ reimbursement structure, benefit package, marketing plans and practices, and consumer transparency—and could still reject the plan’s inclusion if the bureaucrats running the Gateway felt it was not “in the interests of qualified individuals.”  Some Members may also note that there is no provision prohibiting Gateways from banning all private plans from participating, in order to create a single-payer system where the government-run plan is the only available option.

Medical Advisory Council:  The bill establishes a Medical Advisory Council, with members appointed by the Secretary, to make recommendations on minimum required benefit packages, as well as affordability for purposes of the individual mandate.  The Council’s recommendations would be binding unless Congress passed—and the President signed—a joint resolution disapproving its report.  The bill requires the Council to consider nine categories of “essential health care benefits”—including ambulatory and emergency services, hospitalization, maternity care, mental health care, prescription drugs, rehabilitative and laboratory services, preventive services, and pediatric services—and directs the Council to ensure that the actuarial value of the benefit package “is equal to the actuarial gross value of the benefits provided under a typical employer plan.”  The bill also requires the Council to disregard single-disease policies, as well as those with annual out-of-pocket limits exceeding those for Health Savings Accounts ($5,800 for an individual and $11,600 for a family in 2009).  The bill permits “the application of different criteria with respect to young adults.”

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

Plan Tiers; “Low-Income” Subsidies:  The bill creates three tiers of cost-sharing—the lowest tier would have an actuarial value of 76 percent and maximum annual out-of-pocket costs not to exceed those for Health Savings Account plans ($5,800 for an individual and $11,600 for a family in 2009); the middle tier would have an actuarial value of 84 percent and maximum out of pocket costs half of the low tier plan; and the highest tier would have an actuarial value of 93 percent and maximum out of pocket costs no more than 15 percent of the low tier plan. (Only Health Maintenance Organizations would likely qualify for the high tier option.)  Some Members may be concerned that these benefit tiers would raise costs by not allowing for sufficient plan variation, as seven in ten participants in Commonwealth Choice plans in Senator Kennedy’s home state of Massachusetts are enrolled in plans with actuarial values below 76 percent that would therefore not meet the coverage standards.

The bill requires the Secretary to subsidize individuals’ premiums based on income, provided said individuals enroll through the Gateway—subsidies are provided to the Gateway, which in turn subsidizes enrollees.  Individuals with incomes under 500 percent FPL ($110,250 for a family of four in 2009) would be eligible for subsidies to ensure premiums do not exceed 10 percent of income; the level of subsidies would increase down the income ladder, such that individuals with incomes under 150 percent FPL would not pay more than 1 percent of their income in premiums.  Subsidies would be capped at the weighted average annual premium of the three lowest-cost plans available.  Many Members may be concerned that the bill’s definition of “low-income”—more than twice the median household income of $50,233—would raise costs to the federal government.  Some Members may also be concerned that credits would only be provided through Gateways, and not to individuals purchasing coverage on the private market—a factor which would strongly tip the playing field in favor of the bureaucrat-regulated Gateways.

The Secretary would delegate authority for eligibility determinations to Gateways in most instances, and would require individuals to self-report a change in status to the Gateway.  Some Members may be concerned that self-reporting could result in a significant amount of fraud and abuse with respect to available subsidies.  Some Members may further be concerned that, despite the bill’s supposed prohibition on payments to individuals not lawfully present, devolution of eligibility determinations to Gateways could result in large numbers of undocumented aliens obtaining federal welfare benefits—as States would have little incentive to scrutinize eligibility for benefits being funded by the federal government.

Small Business Credits:  The bill provides a limited subsidy program for small businesses offering coverage.  The program would subsidize firms with fewer than 50 employees and an average wage of under $50,000 that pay at least 60 percent of workers’ insurance premiums.  Subsidies would total $1,000 for individuals and $2,000 for families—more if firms pay a higher share of workers’ premiums—and would be based upon firm size.  Firms could receive the credit for no more than three years.

Individual Mandate:  The bill would impose a new tax on individuals who do not obtain “qualified health coverage,” and would grant to the Treasury Secretary the authority to establish the level of taxation, provided the Secretary “shall seek to establish the minimum practicable amount that can accomplish the goal of enhancing participation.”  The bill defines “qualified health coverage” as those policies sold within the Gateway, as well as those policies that comply with the Gateway’s certification criteria, “such other requirements as an applicable Gateway may establish,” and comply with the premium taxes used to fund the Gateway.  Thus, although an individual could purchase “qualifying health insurance” outside the Gateway, it would have to meet all the bureaucratic mandates established by the Gateway itself—in which case few individuals or plans would be likely to expend the effort to purchase coverage outside the Gateway.  Some Members may view these provisions as a de facto attempt to abolish a private market for health insurance, by taxing those who dare to purchase coverage that does not meet the diktats established by the bureaucrats governing the Gateway and the Medical Advisory Council.

The mandate would not apply to certain individuals, including members of “a federally recognized Indian tribe,” those exempted under the Medical Advisory Council’s affordability guidelines, and other individuals “for whom [the tax] would otherwise represent an exceptional financial hardship, as determined by the Secretary.”  Some Members may agree with then-Senator Barack Obama, who in a February 2008 debate pointed out that in Massachusetts, the one state with an individual mandate, “there are people who are paying fines and still can’t afford [health insurance], so now they’re worse off than they were.  They don’t have health insurance and they’re paying a fine.”  Some Members may also be concerned that unlike the Massachusetts reform plan, the bill contains no religious exemption for the mandate.

Employer Mandate:  The legislative draft has under this section a comment noting “policy under discussion.”  However, press accounts had earlier reported that the HELP Committee was looking to raise as much as $300 billion in revenue by taxing employers who do not offer coverage.  Given a National Federation of Independent Business study suggesting an employer mandate could result in the loss of 1.6 million jobs, some Members may oppose any effort to impose new taxes on businesses, particularly during a recession.

Government-Run Plan:  The legislative draft has under this section a comment noting “policy under discussion.”  However, earlier press accounts reported that the Committee intended to include a “public option” that would reimburse providers at Medicare payment rates plus 10 percent, and would further require providers participating in Medicare to accept enrollees in the government-run plan.  Given estimates from the Lewin Group that as many as 120 million individuals could lose access to their current coverage under a government-run plan—and that a government-run plan reimbursing at the rates contemplated by the HELP Committee would actually result in a net decrease in provider reimbursements, even after accounting for the newly insured—many Members may oppose any effort to include a government-run plan in any health reform legislation.

Access to Services:  The bill includes several provisions related to community health centers, reauthorizing $18.2 billion in appropriations over four years—a significant increase from the $13.3 billion, five-year reauthorization that passed just last year (P.L. 110-355).  The bill would also more than triple funding for the National Health Service Corps, authorizing more than $4 billion over six years.  Some Members may be concerned by the significant increase in authorization levels given the federal government’s expected deficit of nearly $2 trillion this year.

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

New Long-Term Care Entitlement:  The bill would create a new entitlement to long-term care services, financed by a new Trust Fund generated from beneficiary premiums.  The Trust Fund would be excluded from the federal budget for purposes of both the President and Congress, and subject to a “lock-box” that would prohibit any legislation from diverting monies from the Trust Fund without the consent of 3/5 of the Senate.  Some Members may be concerned by the concept of creating a new, expansive federal entitlement program when Medicare itself is not actuarially sound and the Medicare Hospital Insurance Trust Fund is scheduled to be insolvent by 2017.

The bill would require the Secretary to develop actuarially sound plan benefit designs.  The plan could have a premium of no more than $65 per month, and could vary by age (but not among individuals of the same age).  Individuals with incomes below the poverty level and employed students under age 22 would pay a maximum premium of $5 per month, subject to a self-attestation form verifying their status.  Premiums would not increase so long as the individual remained enrolled in the program (or the program had insufficient reserves for a 20-year period of solvency).  Individuals’ eligibility for benefits would vest after five years.

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

All individuals over 18 receiving wage or self-employment income would be automatically enrolled in the program; premiums would be automatically deducted from workers’ wages, and firms would be eligible for a tax credit equal to 25 percent of the administrative cost of withholding.  Individuals “shall only be permitted to disenroll from the program during an annual disenrollment period.”  Some Members may be concerned that the opt-out provisions, coupled with the coercive nature of the disenrollment requirements, would effectively undermine a working market for long-term care insurance by diverting individuals into the government-run program.

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

Title II—Quality and Efficiency

This title includes a variety of programs, studies, and grants intended to improve the quality of U.S. health care.  While agreeing with the general goal of improving health delivery and outcomes, some Members may be concerned by the bill’s approach of relying on lists of measures, grant programs, and additional federal spending and regulatory requirements as a way to “cure” health care.  Specific programs and measures include:

National Strategy; Quality Measures:  The bill requires the Secretary to establish a national strategy to improve health delivery, taking into account factors like care of patients with chronic diseases, health disparities, gaps in quality outcomes, and the way federal payment policy can influence quality.  The bill requires an annual report on progress made in achieving the strategy, and directs the Agency for Healthcare Research and Quality (AHRQ) to award grants to develop quality measures associated with same.  Quality measures would be endorsed by multi-stakeholder groups, and publicly reported on a risk-adjusted basis.

Quality Improvement Grants:  The bill establishes a Patient Safety Research Center within AHRQ to develop and disseminate best practices and authorizes grants to provider groups and other entities to provide technical expertise.  The bill also authorizes grants to develop multidisciplinary “health teams…to support primary care practices” and improve care coordination, including chronic care management; primary care providers would “provide a care plan to the care team for each patient participant”  and work with the team “to ensure integration of care.”  The bill further authorizes grants to implement medication therapy management programs, develop innovative emergency care and trauma systems, and support trauma centers with large uncompensated care costs.

The bill requires the Secretary publicly to disclose hospitals’ rates of preventable readmissions for all entities receiving funds under the Public Health Service Act, and further requires the Secretary to work with outside entities to develop patient decision aids to educate patients about their treatment options.  The bill directs the Food and Drug Administration (FDA) to study “whether the addition of standardized, quantitative summaries of the benefits and risks of drugs” in a uniform labeling format would improve health decision making, and authorizes FDA to implement such changes if the Department determines they would be effective.  The bill establishes a Center for Health Outcomes Research and Evaluation to conduct research and provide public access to outcomes information and authorizes grants for quality improvement and patient safety training demonstration projects.  The bill creates separate Offices of Women’s Health within the Department of Health and Human Services, the Centers for Disease Control,  AHRQ, the Health Resources and Services Administration, and FDA to provide advice on issues relating to female health and wellness and authorizes grants to organizations to promote women’s health.

Administrative Simplification:  The bill requires the Secretary to adopt within two years standards “for the electronic exchange and use of health information for purposes of financial and administrative transactions,” and requires the Secretary to promulgate a final rule establishing a National Health Plan Identifier within one year of enactment.

Title III—Health and Wellness

The bill contains various provisions, grants, and programs designed to promote health and wellness.  While agreeing with the general goal of promoting wellness and prevention, many Members may disagree with the bill’s approach, which focuses heavily on creating costly new grants and programs—including a new $100 billion trust fund and a $5 billion per year federal entitlement program—as well as federal regulation of restaurant menus as part of a top-down,  government-run approach to healthy behaviors.  Specific provisions include:

Disease Prevention:  The bill would create a National Health Council to coordinate prevention and wellness activities, establish several other task forces to evaluate the effectiveness of various preventive treatments and approaches, require the development of a health prevention strategy, engage in outreach and education promoting preventive care, and create a $100 billion Prevention and Public Health Investment Fund “to provide for expanded and sustained national investment in prevention and public health programs.”

New Prevention Entitlement:  The bill creates a new state-based “Right Choices” entitlement program, administered through Medicaid or similar programs, to provide care to uninsured Americans lawfully present with incomes under 350 percent FPL ($77,175 for a family of four in 2009); individuals with incomes over 200 percent FPL ($44,100 for a family of four in 2009) would be required to contribute cost-sharing amounts on a sliding scale determined by the Secretary.  Doctors and hospitals would be paid at Medicaid reimbursement rates for providing care.  Funding would be based on a capped allotment formula similar to that used in SCHIP; federal funding could not exceed $5 billion per year.  The program would sunset when Gateways become available, “or on a date determined by the Secretary.”  At a time when Medicare is scheduled to become insolvent by 2017, some Members may be concerned by the prospect of creating yet another federal entitlement—this one to provide care to “low-income” families making more than $75,000 per year—and one that need not be ended by the Department of Health and Human Services, even once other government entitlement programs come into effect.

Other Prevention Provisions:  The bill would authorize grants for school-based health clinics and require a national public educational campaign by the Centers for Disease Control focused on oral health and prevention.  The bill would further authorize grants for research-based dental disease management and additional activities related to oral health, including “components that shall include tooth-level surveillance.”  The bill would authorize grants to promote the development of community-based preventive health activities and requires applicants to measure “decreases in weight, increases in proper nutrition, increases in physical activity,” and other metrics.  The bill requires new standards for accessibility of medical diagnostic equipment for individuals with disabilities and authorizes states to purchase vaccines using new federal grant funds to improve immunization coverage.  Finally, the bill requires funding for public health services research, collection of information regarding health disparities, and health impact assessments “as a means to assess the effect of the built environment on health outcomes.”

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

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

Title IV—Workforce Provisions

The bill contains provisions designed to increase the number of health care workers.  While supporting the goal of ensuring a vibrant health care workforce, some Members may be concerned first by the bill’s apparent approach of establishing new programs and grants to alleviate every workforce problem, and second by the higher levels of federal spending associated with these new bureaucratic programs.

New Commission and Bureaucracy:  The bill creates a national commission to evaluate “current and projected health care workforce supply and demand” and make recommendations to Congress about workforce priorities.  The Commission would make further recommendations regarding a new grant program designed to enable state planning for workforce strategies.  The bill also establishes a National Center for Health Care Workforce Analysis to evaluate the effectiveness of federal workforce strategies.

Student Loan Provisions:  The bill reduces student loan interest rates for participants in existing health care workforce loan programs, requires medical students receiving loan forgiveness to practice for a minimum of 10 years, and increases maximum loan amounts for eligible nursing students and participants in health care training for diversity programs.  The bill creates a new program of up to $35,000 in student loan forgiveness per year for individuals committing to at least two years of service in a pediatric medical or surgical specialty, establishes an additional loan forgiveness program of up to $35,000 per year—including an additional payment covering tax liabilities on said loan forgiveness—for individuals studying in public health programs who commit to practice “for the federal government” for at least three years, and expands eligibility for existing student loan forgiveness programs to allied health professionals.  The bill would also extend loan forgiveness of up to $60,000—including an additional payment covering tax liabilities on said forgiveness—for individuals who agree to serve as a full-time faculty member at a nursing school for at least four years.

Grant Programs; Authorizations:  The bill creates new grants for mid-career public health professionals, and establishes new grants for nurse-managed health clinics.  The bill increases authorizations for the National Health Service Corps to $4 billion over six years—a near-tripling of authorization levels by 2015—and eliminates an existing cap on the Public Health Service Corps, so as to establish a “Ready Reserve” to serve “in time of national emergency.”

Workforce Education:  The bill authorizes new grants to hospitals and medical schools to support primary care training and education, to institutions of higher education to provide training opportunities to direct care workers in long-term care settings, to schools of dentistry or other entities to support training in dentistry, to geriatric education centers to support career education on geriatric and chronic care management issues, to institutions of higher education to support recruitment and training of students in social work and mental and behavioral health programs, and to schools of nursing to support nurse retention programs.  The bill also establishes a primary care extension program to educate providers about preventive medicine, and authorizes grants to states for state primary care extension programs.

Title V—Fraud and Abuse

The bill contains provisions designed to reduce fraud and abuse within government health programs, establishing senior advisors on health care fraud within both HHS and the Department of Justice and creating a health care program integrity coordinating council to develop a strategic anti-fraud plan that includes fraudulent activities targeting private health insurance plans.  The bill adds new federal criminal offenses to ERISA for employers who make knowingly false statements about their plan’s financial condition or benefits.

The allows the Secretary of Labor to apply certain State anti-fraud laws to multiple employer welfare arrangements (MEWAs), notwithstanding ERISA’s general pre-emption of State laws and regulations.  The bill also grants the Department of Labor the authority to issue cease and desist and summary seizure orders against MEWAs in financially hazardous conditions and requires all MEWAs to register with the Department prior to enrolling beneficiaries in a plan.  Finally, the bill further amends ERISA by establishing evidentiary privilege and confidential communications among State and federal authorities with respect to “any investigation, audit, examination, or inquiry conducted or coordinated by any of the agencies.”  Some Members may be concerned that this overly broad communication exemption could result in activities by overzealous bureaucrats becoming obscured from all public or judicial scrutiny.

While agreeing with the general goal of fighting waste, fraud, and abuse in health care programs, many Members may be concerned with the bill’s apparent focus on fighting fraud in private health plans rather than eliminating fraud in government programs.  For instance, the bill does not increase penalties for those who commit Medicare or Medicaid fraud—the only increased penalties apply to employers.  Similarly, the bill does not require the online posting of (de-identified) claims data, to allow for better scrutiny of claims patterns and broader clinical research.  Some Members therefore may believe that this title falls far short of the measures necessary to fight the tens of billions of dollars fraudulently stolen from government health programs each year.

Title VI—Access to Medical Therapies

The bill includes a section related to the introduction of follow-on biologics; however, the text notes only that the “policy [is] under discussion.”  If language regarding FDA approval of follow-on biologics is included in the bill, some Members may support provisions providing brand-name manufacturers with a sufficient period of data exclusivity needed to generate return on their investment, in order to maintain the incentives for companies to develop the innovative treatments that have made a significant impact on the quantity and quality of Americans’ lives.

The bill expands participation in the 340B program, which reduces the price paid for outpatient pharmaceuticals purchased by certain entities.  Specifically, the bill expands the program to children’s hospitals, critical access hospitals, rural referral centers, and sole community hospitals, while also extending the price control mechanism to inpatient drugs used by such hospitals and facilities.  The bill also includes provisions for the Secretary to verify the accuracy of prices charged by manufacturers to ensure that eligible 340B entities are receiving the maximum price discount possible, including fines of up to $5,000 “for each instance of overcharging a covered entity that may have occurred.”  Some Members may be concerned that this language, by extending the scope of price controls on pharmaceutical products, represents a further intrusion of government into the marketplace—and one that could result in loss of access to potentially life-saving treatments, by reducing companies’ incentive to develop new products.

Cost: A formal CBO score is not yet available.  However, press reports indicate that the bill’s price tag could approach $2 trillion in mandatory spending—and the text of the bill itself authorizes tens of billions more in discretionary spending.  Many Members may be concerned first by the levels of spending contemplated by the bill’s provisions, and second by the fact that—other than imposing a tax on individuals who do not purchase health insurance meeting bureaucratic diktats—no provision in the bill exists that would begin to finance its costs.

Glossary of Key Health Care Terms

In anticipation of a debate on comprehensive health reform later this year, we have prepared a list of important terms surrounding the debate.

Administrative Pricing:  Reimbursement mechanisms for doctors and hospitals determined by legislative or regulatory fiat, rather than through the free market.  Critics of administrative pricing note that the “take it or leave it” philosophy imposed by Medicare and Medicaid results in numerous distortions within the health system—the price paid by the federal government has only a notional relation to the cost borne by the provider, often leading to cost shifting whereby individuals with private insurance end up offsetting the shortfalls in providers’ federal reimbursement levels.

Adverse Selection:  A phenomenon caused by a high proportion of sicker individuals enrolling in a particular insurance pool, often leading to higher premiums for all participants in the pool.  In extreme cases, a “death spiral” can result, whereby high premiums encourage healthy individuals to drop coverage—resulting in higher overall costs, yet more premium increases, and further lost coverage.  Economists have argued that guaranteed issue and community rating regulations—either without an individual mandate to purchase insurance, or with a poorly-enforced one—could result in significant adverse selection increasing the cost of coverage for healthy individuals.

Capitation:  A form of reimbursement that bases payment levels on a flat, regular (often monthly) payment, often risk-adjusted to reflect an individual’s health status.  Payments to Medicare Advantage plans are made on a capitated basis.  Supporters of capitation believe that it removes the perverse incentives present in fee-for-service reimbursement to over-bill for care, while critics voice concerns that capitation could encourage doctors and hospitals to under-provide care to save costs.

Comparative Effectiveness:  Research comparing the relative merits of two drugs or methods of treating an illness.  Of particular concern is the distinction between clinical effectiveness—which examines the merits of various treatment options without respect to their cost—and cost-effectiveness research.  Critics of government-sponsored effectiveness research have voiced concern that cost-effectiveness judgments could be used to determine reimbursement for government-funded health plans—leading to federal bureaucrats denying treatment options on cost grounds.

Cost Shift:  In health care, cost shift refers to two related phenomena—doctors and hospitals charging patients with health insurance to pay for uncompensated care provided to those without coverage, and providers charging those with private coverage more to pay for below-cost reimbursement by government programs.  With respect to the former issue, the Congressional Budget Office has testified that uncompensated care represents a minor fraction of total health spending, and its impact “appears to be limited.”  With respect to cost-shifting from public to private payers, CBO notes that reimbursement rates in Medicare and Medicaid are anywhere from 20-40% lower than rates paid by private payers.  One study estimates that, as a result of the low rates paid by government programs, families with private insurance pay approximately $1,800 per year more for their health coverage.

Crowd Out:  A phenomenon whereby individuals drop their private health insurance to enroll in government programs.  One recent example of crowd out occurred in Hawaii, where Governor Linda Lingle ended the Keiki Care program for children’s health coverage because, in the words of one official, “People who were already able to afford health care began to stop paying for it so they could get it for free.”  Due in large part to its expansion of government-run health insurance to higher-income families, the Congressional Budget Office found that the recent State Children’s Health Insurance Program legislation signed by President Obama would result in more than one-third of those children who would obtain government-run coverage—2.4 million of the 6.5 million newly enrolled—would drop private health insurance to enroll in the government program.

Delivery System Reform:  A general term for efforts to slow the growth of health costs by reforming the way health care is delivered in order to generate efficiencies.  Many of these proposals would leverage the federal government’s role in financing Medicare and Medicaid by linking hospital and physician reimbursement to certain behaviors or practices.  Critics of these proposals caution that they may not generate significant savings to the federal government, but will further entangle federal bureaucrats in the practice of medicine.

Employee Exclusion:  Dating from an Internal Revenue Service ruling during World War II, all health and related fringe benefits provided by an employer are excluded from income for purposes of both payroll and income taxes without limit. (Note however that for the employer, both wages and health benefits are tax-deductible business expenses.)  The Joint Committee on Taxation estimates that in 2007, the exclusion resulted in more than $246 billion in foregone income and payroll tax revenue to the federal government.  Many economists of varying political stripes argue that—because a marginal dollar of cash income is taxable to employees, while a marginal dollar of health insurance is completely tax-free—the exclusion encourages the purchase of overly generous insurance policies, and in turn leads to the over-consumption of health care.

ERISA:  Acronym describing the Employee Retirement Income Security Act of 1974, which enacted rules regarding employee benefit plans.  Section 514 of ERISA pre-empts “any and all State laws insofar as they…relate to any employee benefit plan,” permitting employers who self-insure their group health plans from complying with (potentially conflicting) State benefit mandates and other regulatory requirements.  Small employers who “fully insure”—that is, purchase coverage from another company without assuming insurance risk—remain subject to State regulatory requirements.

Exchange:  Also called a “Connector,” any of a variety of proposals designed to provide comparison shopping of health insurance products for individuals.  President Obama and Democrats in Congress have further proposed empowering an Exchange to serve as a “watchdog” on consumers’ behalf.  Supporters of Exchanges argue that they could enhance individuals’ plan choice as well as portability of insurance coverage from job to job.  While Exchanges can allow free markets for health insurance to flourish, they could also be used to impose price controls or other regulations, by restricting access to the Exchange for those companies who do not comply with bureaucratic mandates.

Fee-for-service:  A method of reimbursement that bases payment levels on a discrete episode of care—for instance, a single office visit or procedure performed.  Traditional Medicare and many forms of private insurance bill on a fee-for-service basis.  Critics of fee-for-service medicine argue that reimbursement policies discourage doctors to provide more efficient care—since physicians generally receive none of the savings resulting from procedures they did not perform.

Group Insurance:  Health coverage provided by employers—the largest source of coverage nationwide, with approximately 160 million individuals (more than 60% of the non-elderly population) enrolled.  Coverage is offered to all eligible employees within a given classification and can be self-insured or fully-insured by an employer—in the latter instance, the employer purchases coverage from a carrier and assumes no insurance risk.  States and the federal government also divide the group market into small and large groups, with the small groups classified as those with 2-50 employees.

Guaranteed Issue:  A requirement that insurance carriers accept all applicants, regardless of health status.  Generally coupled with community rating—a further requirement that carriers charge all individuals the same rates, with few variations.  Critics argue that the two policies, particularly when enacted in concert, encourage individuals not to purchase health insurance until they encounter significant medical expenses, and likewise—by raising premiums for all individuals—discourage young and healthy individuals from buying insurance.

High-Risk Pools:  A form of coverage for the medically uninsurable, currently offered in 34 States.  Coverage is generally extended to those rejected for coverage on the individual market.  Premiums are higher than rates for healthy individuals, but lower than the actual cost of most participants’ health care—State general fund appropriations, grants from the federal government, and/or surtaxes on insurance premiums finance the pools’ operating losses.  Supporters of these mechanisms believe that a more robust system of State-based risk pools could offer coverage to all medically uninsurable individuals, without the adverse market effects connected with a requirement that insurance companies accept all applicants (see Guaranteed Issue above).

Individual Insurance:  Health coverage purchased for an individual (or family) outside the group setting.  Individual insurance is subject to State regulation (including benefit mandates), and must generally be purchased with after-tax dollars.

Mandates, Benefit:  Laws requiring all insurance policies sold to offer coverage for a particular treatment (e.g., in vitro fertilization, hair prostheses) or access to a particular type of medical provider (e.g., dentists, massage therapists).  One survey found that as of 2008, States had enacted nearly 2,000 discrete benefit mandates.  Critics of benefit mandates argue that mandates both individually and collectively raise the cost of health insurance, making coverage less accessible to individuals.  Federal group policies regulated under ERISA are exempt from State benefit mandates.

Mandates, Employer:  Proposals requiring employers to provide health insurance benefits to their employees, and/or pay a tax to finance their workers’ health coverage.  Also commonly called “pay-or-play,” after a requirement instituted as part of the Massachusetts health reforms that employers must “play” by offering health coverage to their workers or “pay” a tax to cover the costs of their employees’ uncompensated care.  Critics cite an NFIB study that an employer mandate could result in 1.6 million jobs lost as evidence that mandates would negatively impact the American economy.

Mandates, Individual:  A requirement that all individuals have health insurance, subject to some type of enforcement by the State.  Massachusetts’ health reform law required individuals to purchase health insurance or face penalties on their tax returns.  Critics argue that mandates are not easily enforced, could result in interest groups lobbying for an overly generous definition of “insurance” for purposes of compliance with the mandate, and may penalize individuals who cannot afford health insurance by taxing them for not buying it.

Medicaid:  A State-federal partnership providing health coverage to certain vulnerable populations.  Eligibility requirements vary by State, but often include low-income women and children as well as elderly and disabled populations.  The federal government finances Medicaid through the Federal Medical Assistance Percentage (FMAP), a match rate linked to States’ relative income level that has averaged 57% of total Medicaid spending in recent years.  While low-income individuals and children constitute the majority of Medicaid beneficiaries, most Medicaid spending funds long-term and related care to elderly and disabled enrollees.

Medical Loss Ratio:  A requirement that insurance carriers dedicate a minimum percentage of premiums to paying medical claims, in an attempt to restrict “excessive” administrative costs or profits by insurance companies.  However, the Government Accountability Office has noted that “there is no definitive standard for what a medical loss ratio should be,” and White House adviser Ezekiel Emanuel has previously written that “some administrative costs are not only necessary but beneficial.”  Critics of this approach argue that imposing de facto price controls on insurance companies will only exacerbate problems in the health sector, by discouraging carriers from monitoring their patients outside a hospital or physician’s office.

Medicare:  A single-payer (i.e. government-funded) health insurance plan that offers coverage to seniors over age 65, Social Security disability recipients (after a two-year waiting period) and individuals with end-stage renal disease.  Part A (hospital services) is mandatory for all seniors, while Part B (physician and outpatient services) and Part D (prescription drug coverage) are voluntary. (Medicare Part C is Medicare Advantage, an alternative to traditional Medicare described below.)  Medicare generally pays doctors and hospitals on a fee-for-service basis, reimbursing based on a discrete office visit, procedure performed, or hospital stay.

Medicare Advantage:  Health coverage provided by private insurance companies and regulated by the federal government, in lieu of the traditional Medicare benefit.  Plans receive capitated (per-beneficiary) payments from the federal government that are adjusted according to enrollees’ risk and based on their bids against a statutorily-defined benchmark.  Plans which bid below the benchmark may use the savings to provide extra benefits—reduced cost-sharing, lower premiums, and/or vision and dental coverage—to beneficiaries.

Medigap:  Insurance products designed to supplement the traditional Medicare benefit, offered by private companies according to standardized benefit designs implemented and regulated by the federal government.  Many economic analysts—including the Congressional Budget Office—have concluded that, by insulating beneficiaries from financial exposure to deductibles and co-payments, Medigap policies encourage seniors to over-consume health care, resulting in higher costs for the Medicare program.

Pay-for-Performance:  Proposals designed to increase or decrease Medicare or Medicaid reimbursement levels to quality outcomes.  Several programs exist linking incentive payments to reporting of selected quality measures, but reimbursement has yet to be directly linked with outcomes.  Critics of this approach argue that pay-for-performance could discourage providers from accepting patients with complications that could lead to poor outcomes.

“Public Option”:  An insurance plan run and/or funded by a governmental entity.  Democrats have proposed several different ideas as to how such a plan may be structured—a Medicare-like insurance plan operated by the Department of Health and Human Services, a more independent entity where a third-party administrator makes operational decisions, or State-based governmental plans, perhaps including a buy-in to State employee health insurance offerings.  Independent actuaries at the non-partisan Lewin Group found that a government-run plan reimbursing at Medicare rates would cause about 120 million Americans to lose their current health coverage.  Regardless of the particulars of its structure, opponents may echo the concerns of CBO Director Elmendorf, who testified that it would be “extremely difficult” to have a “public plan compete on a level playing field,” such that Democrats would create inherent biases in favor of the government-run plan.  Some may also be concerned that such a plan could exercise increasing control over patients’ health decisions, leading to delays in obtaining critical treatments or outright denials of care.

Sustainable Growth Rate:  A mechanism instituted as part of the Balanced Budget Act of 1997 regarding physician reimbursements, which calls for reductions in future years’ reimbursement levels if physician spending exceeds the SGR target.  Critics note that, because the target applies to aggregate levels of spending, individual physicians have a micro-level incentive to increase the number of services they perform in order to overcome a lower per-service payment under the SGR.  On the other hand, supporters of entitlement reform argue that while imperfect, the mechanism has forced Congress to find offsets to finance increases in the SGR, resulting in a higher level of scrutiny of the Medicare program than would otherwise have been the case.

Tax Treatment of Health Insurance:  Health insurance provided through an employer is not taxable, while health insurance outside the employer group market generally must be purchased with after-tax dollars.  Three exceptions to this rule exist: 1) self-employed individuals may deduct health insurance premiums from their income (but not payroll) taxes; 2) Health Savings Account contributions may be deducted from income (but not payroll) taxes; and 3) health insurance expenses may be taken as an itemized deduction for income tax purposes, but only to the extent that total health expenses exceed 7.5% of adjusted gross income.  Critics of the current policy argue that individuals without access to employer-sponsored insurance have to pay 30-50% more for their coverage, resulting in more uninsured individuals.

Weekly Newsletter: April 27, 2009

A Victory for Patients’ Rights; How Long Will It Last?

Last week, an overwhelming majority of the Senate voted to preserve Americans’ right to keep their doctor and health plan—only for the Democrat Congressional leadership to ignore the bipartisan will of the Senate.  On Thursday, the Senate by a 79-14 vote approved a motion to instruct budget conferees intended to prevent the Senate from considering “legislation that eliminates the ability of Americans to keep their health plan and eliminates the ability of Americans to choose their doctor.”  Clear majorities in both parties supported the motion, including Budget Committee Chairman Conrad, Finance Committee Chairman Baucus, and Majority Leader Reid.

It remains unclear whether this bipartisan Senate provision will remain in the budget conference report that the House and Senate may consider later this week.  However, some Members may be concerned that the Democrat leadership will attempt to strip the provision, in order to further the creation of a government-run health plan that will cause as many as 120 million Americans to lose their current health coverage.  Some Members may also be concerned that any refusal by the Democrat majority to guarantee that patients retain the ability to keep their current doctor and health plan, coupled with Health and Human Services Secretary-designee Kathleen Sebelius’ repeated refusal to state that government cost-effectiveness research will not be used to determine reimbursement levels, may be the first steps in creating a health system where Washington bureaucrats, not doctors and patients, determine appropriate levels of care.

Survey Says…

Last week, two online surveys about health reform provided some insight as to Americans’ views on the upcoming debate.  A Kaiser Family Foundation survey conducted in March included some important revelations:

  • More than seven in ten Americans (72%) believe that scientific evidence between two treatment options “is not always clear”—suggesting that Americans would be highly skeptical of attempts by bureaucrats arbitrarily to restrict access to certain treatments or therapies.
  • Support for an outside group to evaluate treatment options plummets among Americans of all parties when the group is “appointed by the federal government”—further evidence of Americans’ opposition to a bureaucrat-run health plan.
  • More than nine in ten Americans with health coverage believe their plan is “good” (51%) or “adequate” (41%)—meaning plans to create a government-run health plan causing as many as 120 million Americans to lose their current plan may spark significant public outcry.
  • More than one-third (34%) of the uninsured would not be willing to pay $100 per month to buy health insurance, and more than two-thirds (67%) would not be willing to pay $200 monthly—suggesting a significant segment of the uninsured may be choosing not to buy health insurance, and that a mandate might not be able to persuade Americans who apparently find health coverage of little value.

On Tuesday, the online edition of the journal Health Affairs released a new analysis of data from a poll taken in February 2008.  The poll found that an individual mandate to purchase health insurance lacked support of a majority of Americans.  And while support for a brief “shared responsibility” proposal exceeded that for a stand-alone individual mandate proposal, few demographic groups offered a whole-hearted endorsement.  Support for the “shared responsibility” approach remained below 60% for most groups, including independents, even though the poll mentioned none of the potential downsides to some of the Democrat plans currently being considered—tax increases on individuals and businesses, a government-run plan leading to Americans losing their current coverage, and delays and difficulties accessing treatments as a result of interference by Washington bureaucrats Americans’ personal health decisions.

Taken together, some Members may believe the poll results offer a cautionary note to Democrats as they weigh the option of using budget reconciliation legislation to advance health reform.  At a time when most Americans with coverage value their current plan—as well as their choice of doctor—and a public consensus on health reform has yet to emerge, some Members may believe that proceeding with the creation of a government-run health plan would represent bad policy resulting in a health system many Americans may not want and some Americans would resent.

Subcommittee Hearing Exposes Democrat Disagreements

An Education and Labor Subcommittee hearing on health reform last Thursday exposed fissures in the Democrat agenda for health reform, with some Democrats arguing for a single-payer system that would abolish private insurance entirely.  Press reports indicate that Rep. John Tierney, one single-payer advocate, argued for imposing de facto price controls on insurance companies, regulating the percentage of premiums which carriers must pay out in medical benefits.

Some Members may be concerned that imposing such arbitrary price controls on health insurance companies could well discourage new entrants that would detract from market competition, while also suppressing attempts by carriers to manage disease through chronic care and other administrative initiatives that may actually reduce the total amount of medical benefits paid.  Some Members may therefore question whether imposing price controls on insurance companies would have many of the same unintended and adverse consequences that have resulted from past attempts at government price fixing, such as the stagflation associated with price controls during the 1970s.

Medical Loss Ratios

Background:  The term medical loss ratio refers to the percentage of health insurance premium costs used to pay medical claims, as opposed to overhead for various administrative expenses or surplus/profit for the insurance carrier.  For example, a medical loss ratio of 70% indicates that 70 cents of every premium dollar is spent on claims for medical services, with 30 cents dedicated towards administrative expenses, marketing costs, related overhead, and any profit for the carrier.  While the medical loss ratios of publicly-traded insurance carriers are available in filings with the Securities and Exchange Commission (SEC), privately-held and not-for-profit insurers often do not face similar public reporting and disclosure requirements.

Legislative History:  In July 2007, Section 414 of H.R. 3162, the Children’s Health and Medicare Protection (CHAMP) Act, proposed several reporting requirements and restrictions on Medicare Advantage (MA) plans with respect to their medical loss ratios.  Specifically, the bill required MA plans to submit information to the Department of Health and Human Services (HHS) regarding overall expenses on medical claims, marketing and sales, indirect and direct administration, and any medical reinsurance.  The Secretary would be required to publish this information annually.

In addition to the reporting requirements outlined above, the CHAMP Act also proposed punitive measures against MA plans which did not meet new federal requirements with respect to their medical loss ratios.  Subsection (c) of Section 414 proposed sanctions for MA plans which did not spend at least 85% of payments received (both from the federal government and beneficiary premiums) on medical services: plans below the ratio for one year would receive a decrease in their funding rate, plans below the ratio for three years would be banned from enrolling new beneficiaries, and plans below the ratio for five years would be terminated from the Medicare Advantage program.  While the bill passed the House by a 225-204 vote, the Senate has yet to take up the measure.

Presidential and State Proposals:  The actions proposed by House Democrats last year with respect to Medicare Advantage plans are consistent with the proposals advocated by the Democrat candidates for President.  During her campaign, Sen. Hillary Rodham Clinton (D-NY) proposed an unspecified minimum medical loss ratio for insurers, because “premiums collected by insurers must be dedicated to the provision of high-quality care, not excessive profits and marketing.”[1]   Similarly, the health plan of Sen. Barack Obama (D-IL) dedicates a section of his platform to explaining why insurance carriers’ “record profits” constitute “needless waste,” and pledges that “in markets where the insurance business is not competitive enough, [the Obama] plan will force insurers to pay out a reasonable share of their premiums for patient care instead of keeping exorbitant amounts for profits and administration.”[2]  However, the plan does not specify what constitutes a “competitive” state insurance market, nor the level of a “reasonable” medical loss ratio.

In recent months, several state-based efforts to reform health care have incorporated proposals to regulate medical loss ratios by insurers.  Proposals in California, Pennsylvania, New Mexico, Michigan, Illinois, and Wisconsin have all discussed setting a minimum medical loss ratio, often at 85%.  While some states currently do impose minimum medical loss ratios, these are significantly lower than the proposed new standards; in some cases, minimum ratios are designed to ensure that the policy is a bona fide insurance product, rather than attempting to influence the structure of an insurance policy or the business model of an insurance carrier.

Medicare Advantage Reports:  This week, the Government Accountability Office (GAO) released a report requested by Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) regarding profit levels by Medicare Advantage plans.  The report noted that in 2005, Medicare Advantage plans’ actual profits were higher, and their medical and administrative expenditures lower, than originally projected before the start of the contract year.  However, even the lower-than-expected percentage of revenue devoted to medical expenses—85.7%—exceeded the minimum loss ratio proposed by Congressional Democrats under the CHAMP Act.[3]  GAO also conceded that the disparity between actual and projected expenses had no impact on the total payments made to Medicare Advantage plans.[4]

In response to the GAO report, the Centers for Medicare and Medicaid Services (CMS) pointed out that contract bids for Medicare Advantage plans in 2005 were submitted under a since-replaced bidding formula, and have since been subjected to more stringent actuarial standards with respect to the accuracy of the original projections—both of which would tend to cast doubts on the relevancy of the three-year-old data on the current Medicare Advantage program.  Additionally, the fact that nearly half of the “unexpected” profits arose from a single Medicare Advantage plan raises additional questions as to whether the disparity between projected and actual medical expenditures is a system-wide problem or a relatively confined anomaly.[5]

Some conservatives may view higher-than-projected profits for Medicare Advantage plans as consistent with the free-market principles that encourage companies—in this case, private health insurers—to improve efficiencies in the hope of generating improvements for their customers and a return to their investors.  The fact that nearly half of Medicare Advantage beneficiaries were covered by plans with lower-than-expected administrative and non-medical expenses could suggest that plans took steps to reduce bureaucracies that made their delivery more efficient.[6]  Moreover, to the extent that improved care management tools implemented by insurance carriers resulted in lower-than-expected medical expenditures for plans, conservatives may argue that allowing Medicare Advantage carriers to retain these profits is not only appropriate, but desirable.

Moreover, another GAO report released in February injected a note of caution regarding attempts to use headlines about Medicare Advantage plan profits to regulate medical loss ratios, noting that “there is no definitive standard for what a medical loss ratio should be.”[7]  In the February report, officials at CMS commented that some plans may consider certain care management services an administrative expense, while other plans may classify these costs as medical treatments.  The fact that Health Maintenance Organizations (HMOs)—which are traditionally known for intensive care management techniques, and whose per-beneficiary costs are slightly lower than those for traditional fee-for-service Medicare—had the highest percentage of beneficiaries in plans under the 85% threshold ratio included in the CHAMP Act demonstrates the inherent difficulties in applying a single regulatory standard to all types of insurance.[8]

Conclusion:  The issue of regulating medical loss ratios, although not as prominent as other elements of Democrat proposals for health care reform, nevertheless deserves scrutiny.  An article in the journal Health Affairs concluded that medical loss ratios had little correlation to the quality of care provided by carriers; moreover, the article’s discussion of the loss ratio as an inherently arbitrary measure dovetails with the unintended consequences of applying a one-size-fits-all standard for health insurance.  For instance, individual insurance plans face higher administrative charges than group policies, because of the increased costs associated with selling policies on a person-to-person basis, as opposed to the hundreds or thousands of beneficiaries who obtain insurance through a single group employer.  Additionally, regulating medical loss ratios may prompt some insurance carriers to stop offering high-deductible insurance plans—which, due to their smaller premiums, may have greater difficulty meeting a federally-imposed standard—thus diminishing the impact of Health Savings Accounts (HSAs), which have over the past few years helped slow the growth of health insurance premiums.

More broadly, some conservatives may be concerned that regulating medical loss ratios represents an effort by Democrats to impose price controls on the health insurance industry.  Proposals such as those included in the CHAMP Act are unlikely to result in higher spending on medical claims, or lower profits for insurance companies; carriers could instead choose to reduce administrative costs in order to comply with a mandated medical loss ratio, resulting in additional delays for beneficiaries seeking to have their claims processed.

An alternative solution could lie in proposals for increased public transparency and disclosure of medical loss ratios.  Applied evenly to for-profit and not-for-profit insurers alike, this information would allow consumers to make an informed choice, considering the percentage of premiums devoted to medical claims payment as one element among many when selecting an insurance policy.  Although some policy-makers may find it politically expedient to criticize the profits of certain insurance carriers, many conservatives would greatly prefer the transparency of a free marketplace to heavy-handed government price controls.

 

[1] “American Health Choices Plan,” available online at http://www.hillaryclinton.com/issues/healthcare/americanhealthchoicesplan.pdf (accessed March 11, 2008), p. 7.

[2] “Barack Obama’s Plan for a Healthy America,” available online at http://www.barackobama.com/issues/pdf/HealthCareFullPlan.pdf (accessed March 11, 2008), pp 9-10.

[3] “Medicare Advantage Organizations: Actual Expenses and Profits Compared to Projections for 2005,” Letter to Hon. Pete Stark, Report GAO-08-827R, (Washington, DC, Government Accountability Office, June 2008), available online at http://www.gao.gov/new.items/d08827r.pdf (accessed June 26, 2008), p. 5.

[4] Ibid., p. 8.

[5] Ibid., pp. 11-14.

[6] Ibid., p. 6.

[7] “Medicare Advantage: Increased Spending Relative to Medicare Fee-for-Service May Not Always Reduce Beneficiary Out-of-Pocket Costs,” Report GAO-08-359 (Washington, DC, Government Accountability Office, February 2008), available online at http://www.gao.gov/new.items/d08359.pdf (accessed March 11, 2008), p. 32n.

[8] Ibid., pp. 27-28.

Weekly Newsletter: June 30, 2008

Senate Blocks Deep Cuts to Medicare Advantage…

Before recessing for the Independence Day recess, the House passed—and the Senate declined to limit debate on—legislation (H.R. 6331) addressing physician reimbursement levels under Medicare. The bill would prevent for 18 months a reduction in fee schedule levels scheduled to take effect on July 1, and would expand access to certain subsidy programs for low-income beneficiaries. These provisions would be offset largely by cuts to private Medicare Advantage plans, particularly private fee-for-service plans.

Some conservatives may be concerned that the House-passed bill’s significant cuts to Medicare Advantage would have the effect of driving beneficiaries away from a privately-run model of health insurance that has provided enhanced benefits and choice for millions of seniors, especially the 2.2 million beneficiaries in private fee-for-service plans. Some conservatives also may be concerned that the bill fails to address the long-term integrity of the Medicare program, relying on funding gimmicks and government-controlled price-fixing rather than undertaking comprehensive reform that would inject market forces into the program as a means to slow the growth of health care costs.

Following the House vote, nearly six dozen House Members—including RSC Chairman Hensarling— weighed in asking the Senate to revive bipartisan compromise legislation, crafted by Finance Committee Chairman Baucus and Ranking Member Grassley, that would address physician reimbursements without damaging beneficiary access to Medicare Advantage plans.

The Legislative Bulletin on H.R. 6331 can be found here.

…While Democrat Political Gamesmanship Prevents Physician Fix

After the Senate vote to limit debate on physician payment legislation that included significant cuts to Medicare Advantage failed on Thursday, Senate Republican Leader Mitch McConnell attempted to pass by unanimous consent a 30-day extension of current reimbursement provisions. However, Majority Leader Reid objected, and in so doing referred to several House special election results while commenting that “I don’t know how many people are up here for re-election, but I am watching a few of them pretty closely.” Because Senate Democrats objected to Republicans’ unanimous consent requests to pass a “clean” physician payment bill, physicians will take a 10% cut in their reimbursement levels beginning today unless and until Congress passes a retroactive fix. However, today’s Politico reports that the Administration is considering ways to delay the impact of the reimbursement adjustment, pending efforts by Congress after the recess to address the matter.

Some conservatives may be concerned by the Senate Majority Leader’s actions blocking a “clean” extension of current-law policies on physician reimbursement. Some conservatives may also believe that the short-term nature of current physician reimbursement extensions, coupled with their potential to become entwined in unrelated disputes and/or “held hostage” due to various political considerations, makes a powerful argument for more comprehensive reforms to Medicare, including a long-term solution to physician reimbursement policy.

While it is currently unclear whether Democrats will continue to block Republican attempts to pass noncontroversial physician payment legislation, or what precise form a more bipartisan bill designed to address the reimbursement provisions will take, the RSC will weigh in with conservative concerns and updates on H.R. 6331 and any other physician payment legislation which may be introduced or considered following the recess.

There are additional RSC Policy Briefs on issues related to the Medicare bill: Physician Payments; Medicare Advantage; Bidding for Durable Medical Equipment; and the Medicare Trustees Report.

Report Could Presage Democrat Efforts at Insurer Price Controls

In a related development, Ways and Means Health Subcommittee Chairman Pete Stark released a Government Accountability Office (GAO) study on Tuesday, which noted that in 2005 Medicare Advantage plans had lower medical costs and higher profits than first projected when submitting their bids for that contract year. Although the Centers for Medicare and Medicaid Services (CMS) noted that the profit projections were made under a now-defunct bidding process that may have explained much of the disparity, Democrats may attempt to use the GAO study to revive provisions in legislation (H.R. 3162) the House passed last year imposing a minimum “medical loss ratio” that would require Medicare Advantage plans to spend at least 85% of their total revenues on health care expenses.

To the extent that the higher-than-expected profits highlighted in the report are derived from improved care models and administrative and related efficiencies, some conservatives may view these proceeds as consistent with the free-market principles that reward companies who take measures to streamline operations while improving quality of care. Conversely, some conservatives may also believe that efforts to restrict medical loss ratios constitute de facto price controls on the insurance industry that will prove ineffective at controlling the growth of health care costs and could lead to unintended and potentially adverse consequences for enrollees.

The RSC has prepared a Policy Brief on this issue, available here.

Article of Note: Public vs. Private Debate Revolves Around Taxes

A study released last week by researchers affiliated with the liberal Center for Budget and Policy Priorities, and published online by Health Affairs, studied the relative efficiencies of private and public health insurance models. The authors conclude that public coverage through government programs like Medicaid is more efficient than private insurance, largely because public programs feature less cost-sharing than private coverage.

Given that a similar study released in 2003 found that lower reimbursement rates to providers were the primary reason that public programs had lower medical costs than private insurance, some conservatives may take issue with the study’s findings. The authors admit that providers are paid less under Medicaid than most private payers, and advocate an increase in reimbursement rates that would “improve patients’ access to and quality of care.” Yet the study methodology fails to take into account that medical spending for Medicaid patients is lower than private insurance precisely because beneficiaries in public programs have poorer access to provider care—in other words, that costs for Medicaid patients could be lower because they have coverage they cannot as readily use.

Some conservatives may believe that the authors’ admission that public programs reimburse providers at lower levels highlights the double taxation associated with expansions of Medicaid or the State Children’s Health Insurance Program (SCHIP). In addition to the amounts government spends to cover individuals in a public program, the cost-shifting that results from unrealistically low government reimbursement rates represents secondary taxes throughout the economy—on individuals with private insurance who pay more to subsidize health care costs the government will not pay; on Medicaid beneficiaries with reduced access to care; and on providers who are forced to work longer hours, or shorten the amount of time spent with each patient, in order to compensate for costs the government will not pay. For these reasons, many conservatives may believe that market-based reforms to the health care sector represent a far more preferable way to improve the quality of care while controlling the growth of health care costs.

Weekly Newsletter: March 31, 2008

Medicare Trustees’ Report Highlights Program’s Fiscal Woes…

While Congress was in recess last week, the trustees of the Medicare Trust Funds released their annual report, which quantified the size of the fiscal obstacles facing the entitlement program. According to the trustees, the Hospital Insurance Trust Fund is scheduled to be exhausted in early 2019—just over one decade from now. In addition, the trustees for the third straight year projected that Medicare is scheduled to consume a growing share of general federal revenues, “triggering” another funding warning that requires the next President to submit legislation to Congress with his (or her) budget remedying Medicare’s funding.

Of particular note in the report was the fact that while projections of future spending on hospitals (Medicare Part A) remained constant, and future estimates of physician payment levels (Medicare Part B) increased, estimated future costs for the Medicare Part D prescription drug benefit provided by private insurance companies decreased. As health costs continue to rise both inside and outside the Medicare program, some conservatives may believe that the benefits of competition and consumer empowerment seen in Part D could yield measurable savings if extended to the other parts of Medicare.

Here are RSC Policy Briefs on the Medicare trustees’ report and on health care cost growth. More information on the Medicare trigger—and the President’s proposals for reform—can be found here.

…While Democrats Minimize Need for Entitlement Reform

The trustees’ report also notes that in the past twelve months, the anticipated size of Medicare’s unfunded obligations has grown from $74 trillion to nearly $86 trillion. As Joe Antos of the American Enterprise Institute noted at an AEI briefing last week, the one-year increase in Medicare’s unfunded obligations is itself nearly ten times the size of the total losses anticipated from the losses in sub-prime lending markets.

Estimates of $1.2 trillion in worldwide losses due to the current credit crunch, less than half of which will hit American institutions, have sparked numerous “relief” proposals from the Democrat majority. Yet when it comes to the $86 trillion in losses on the horizon for Medicare, Democrats like Rep. Pete Stark (D-CA)—Chair of the House Ways and Means Health Subcommittee, with prime jurisdiction over entitlement reform—refrained from demands for swift action, calling Medicare “solvent and sustainable” and claiming that “the trigger has been pulled by Republican ideologues,” when in reality the report was written by the non-partisan actuaries at the Centers for Medicare and Medicaid Services.

By contrast, many conservatives believe that the ominous statistics in the trustees’ report provide further impetus for Congress to utilize the Medicare “trigger” to enact comprehensive entitlement reform this year. Every year that Congress does not address the unfunded obligations associated with Social Security and Medicare, their size grows by trillions of dollars. Some conservatives would argue that with the Hospital Insurance Trust Fund scheduled to be exhausted in just over a decade, Congress must act now to preserve the promise of Medicare for the neediest of American seniors.

Clinton Proposes Cap on Insurance Premiums, Additional Taxes

In an interview with the New York Times last week, Sen. Hillary Clinton offered additional details about the formulation of her health care plan. Clinton expressed a desire to cap insurance premiums for individuals at between 5-10% of individuals’ income. She also indicated her support for restrictions requiring health insurance companies to pay out a defined percentage of premium costs on health benefits (as opposed to administrative costs or profits). And she advocated an increase in the tobacco tax to finance health care reform, despite the dwindling base of smokers left to pay such taxes: “At some point, there’s going to be diminishing returns. But, sure, why not? I don’t have any objection to that.”

However, some conservatives may have objections to the Clinton approach, starting with a tobacco tax that may encourage counterfeiting and result in a long-term fiscal imbalance leading to more taxes once tobacco revenues dwindle. Both capping premiums on individuals and mandating that insurers pay a high percentage of premiums in health benefits would constitute significant government price controls on an industry that spends more than one in six dollars consumed in the United States. And some conservatives may share the concerns of MIT professor Jonathan Gruber, who generally supports Clinton’s approach but conceded that a cap on insurance premiums at 5% of income would not be “realistic” because of the heavy government subsidies necessary to finance the difference.

Instead of a heavy-handed approach that relies on additional government regulation and taxation, many conservatives support principles that rely on consumer empowerment. Unleashing the forces of competition, and providing financial incentives for individuals to curb marginal spending on health care, represents the best way to bring down costs and ensure access to care.

Article of Note: A Cry on the Left for Freedom

Just before the recess, former Senator and Presidential candidate George McGovern (D-SD) published an op-ed article in the Wall Street Journal advocating a greater role for consumers in several segments of the economy, including health care. Noting the growing array of state benefit mandates on health insurance plans while premium costs continue to rise, McGovern criticizes the “health-care paternalism” whereby “states dictate that you [have] to buy a Mercedes or no car at all.” McGovern also notes support for the idea of buying health insurance across state lines, where plan premiums may be more reasonable—a principle supported by many conservatives and introduced by RSC Member John Shadegg (R-AZ) in H.R. 4460, the Health Care Choice Act.

The fact that an icon of the Left such as Sen. McGovern can decry the growth of government regulation as a development consistent with paternalism demonstrates the incapacity of the public sector to respond to challenges such as the rapid growth in health care costs. Many conservatives believe that only through a freer market—and common-sense solutions like buying health insurance across state lines— will America finally come to take control of its skyrocketing expenditures on health care.

Read the article here: The Wall Street Journal: “Freedom Means Responsibility” (subscription required)