Big Hospitals’ Obamacare Deal Betrays Seniors and the Poor

A backroom deal made during the writing of Obamacare will harm seniors and the poor, according to The Wall Street Journal (WSJ).

During their closed-room dealings with the Obama Administration, the hospital industry’s lobbyists agreed to support Obamacare—provided that the law placed restrictions on physician-owned “specialty” hospitals, noted WSJ. These innovative specialty hospitals frequently have quality outcomes better than most traditional facilities, but no matter—the big hospital lobbyists wanted to eliminate a source of competition. So Obamacare prohibits new physician-owned hospitals from receiving Medicare payments — and prohibits most existing facilities from expanding if they wish to keep treating Medicare patients.

WSJ highlighted the actions specialty hospitals have been forced to take in response to these Obamacare restrictions:

Forest Park Medical Center in Dallas has stopped accepting Medicare patients, allowing it to escape the law’s restrictions entirely…. Rejecting Medicare ‘was a big leap, but we felt like the law gave us no choice,’ said J. Robert Wyatt, a Forest Park founder….

Other doctor-owned facilities are asking the federal government to let them duck the law’s restrictions altogether. Doctors Hospital at Renaissance near McAllen, Texas, is trying to get a waiver allowing it to expand as more than 53% of its payments come through the Medicaid federal-state insurance program for the poor.

In other words, because hospital lobbyists cut a backroom deal to support Obamacare, seniors and low-income patients have fewer health care options. Think that these examples of Americans losing access to care would prompt the hospital-industrial complex to reconsider its backroom deal? Not a chance:

Any effort to undo the expansion limits faces an uphill battle with Democrats, because the restrictions were a deal-breaker for hospitals when the White House sought their support for the law in 2009, industry lobbyists say.

Obamacare’s backroom deals (the “Louisiana Purchase,” the “Gator Aid,” and the “Cornhusker Kickback”) represented the worst in politics—well-heeled lobbyists seeking to obtain government largesse through pork-barrel spending and regulatory loopholes. The Wall Street Journal story reminds us how those backroom deals have real-world consequences when it comes to medical access—another example of how Obamacare has harmed patient care.

This post was originally published at The Daily Signal.

Weekly Newsletter: September 22, 2008

  • Specialty Hospital Ban a Special-Interest Boondoggle Reports circulated late last week that restrictions on physician-owned specialty hospitals may be included in mental health parity legislation that could come to the House floor this week. While later press reports indicated that the specialty hospital provisions would be excluded from the mental health parity bill, legislative activity cannot be ruled out.

    Advocates of a specialty hospital ban state that restricting physician ownership will slow the growth of health care costs and improve the solvency of the Medicare program. However, a look at the record of the Democrat-controlled 110th Congress shows little attempt to control the growth of health spending or solve Medicare’s long-term funding shortfalls:

  • Democrats rejected an attempt to make wealthy seniors pay $2 per day more for prescription drug coverage—which would save Medicare $12.1 billion over ten years;
  • Democrats rejected reasonable reforms to the current medical liability reform system that would eliminate the need for defensive medicine practices that raise health care costs—saving the federal government more than $6 billion over ten years;
  • Democrats could not pass structural reforms to the current system of Medicare physician payments—choosing instead to pass a budgetary gimmick that will give physicians a 21% reimbursement cut in January 2010.Given these actions—and an impending floor vote on a bill (HR 758) that will likely increase health care costs by billions of dollars—conservatives may question why Democrats have passed up attempts to save Medicare more than $12 billion by charging billionaires like Warren Buffett more for their prescription drugs and instead remain fixated on saving one-tenth that amount by eradicating a free market for physician-owned facilities.

    Part of the answer may lie in the lobbying activities of entities like the American Hospital Association— which spent nearly $20 million last year alone, and nearly $153 million over the last decade, on federal lobbying activities. Despite the fact that, by one measure, specialty hospitals represent less than 1% of total Medicare hospital spending, traditional hospitals continue their attempts to eradicate this potential source of competition—going so far as to draw a rebuke from Health and Human Services’ Inspector General for “misrepresent[ing]” the IG’s conclusions in a document sent to Congressional staff. Despite— or perhaps because of—these deceptive lobbying practices, some conservatives may support efforts to maintain free markets in health care, and oppose any further efforts by Congressional Democrats to pass a specialty hospital ban.

Medicaid Fraud Will Not Be Addressed by Bailout

Last Tuesday’s New York Times highlighted the case of Staten Island University Hospital, an institution with a history of questionable billing practices—and now one of the largest fraud settlements against a single hospital. This week the hospital agreed to return nearly $90 million to respond to claims of overbilling government programs as a result of two whistle-blower lawsuits and actions by federal prosecutors. The lawsuits and charges alleged among other things that the hospital deliberately inflated bed and patient counts in order to obtain reimbursements from Medicare and Medicaid, and come after the hospital had reached two previous settlements—one in 1999 resulting in $45 million in Medicaid repayments, and another in 2005 resulting in $76.5 returned to Medicaid—with state authorities regarding fraudulent billing activity.

Many conservatives may not be surprised by these repeated instances of fraud and graft within the program, given that a former New York state Medicaid investigator estimated that 40% of all Medicaid payments were fraudulent or questionable in nature. However, this episode may only strengthen conservative concerns that a proposed “temporary” increase in federal Medicaid matching funds (HR 5268) would do nothing to combat this fraud and abuse before spending additional federal dollars. Indeed, given that a single hospital has settled more than $200 million in fraud claims, some conservatives may wonder whether, if the Medicaid program had appropriate anti-fraud efforts in place, an additional $10-15 billion “bailout” for states would even be needed at all.

Read the article here.

Weekly Newsletter: September 15, 2008

Medicaid: More Spending Does Not Equal Reform

Today, Health and Human Services Secretary Mike Leavitt will be addressing a conference on Medicaid reform in Washington. The symposium comes at a time when some want Congress to pass legislation (H.R. 5268) providing more than $10 billion in Medicaid spending to states as a way to “fix” the program’s problems. However, many conservatives may believe that policy-makers should not use additional spending as a way to shirk from their duties to reform what is often an outmoded model of care.

In the past few years, several states have embarked upon novel and innovative reforms to improve the quality of care provided in the Medicaid program. Most recently, Rhode Island submitted a waiver application to the Centers for Medicare and Medicaid Services (CMS), asking for flexibility to revamp its program. Notable elements of this reform proposal include:

  • Incentives to promote wellness and prevention, including consumer-directed accounts and Health Savings Accounts (HSAs);
  • A shift to home and community-based care instead of a traditional nursing home setting for elderly populations;
  • Incentives to purchase long-term care insurance, so as to eliminate the need for Medicaid long-term care financing;
  • Competitive bidding for durable medical equipment; and
  • A novel financing model that ensures that total Medicaid expenses will rise by up to 5% per year.

    Many conservatives may support these and other similar reform initiatives proposed by states, as one way to slow the growth of health care costs and thereby reduce America’s unsustainable entitlement spending. Moreover, some conservatives may believe that time on the legislative calendar debating a Medicaid bailout should instead be used to discuss these types of comprehensive structural reforms to the program—so that the poorest beneficiaries are not subjected to more of the same from a government health system that does not work for many.

    The RSC has prepared a one-pager highlighting the need for comprehensive Medicaid reform based on examples from several states; the document can be found here.

    Cautionary Tales from Across the Pond

    This past week, a British think-tank published a paper that spoke the heretofore unthinkable: the policy group Reform advocated replacing the single-payer National Health Service with a voucher-based private health system. Under the proposal, individuals would receive a £2,000 voucher to purchase private insurance—injecting competition into a health system previously dominated by government, and bringing with it the potential to slow the growth of costs while achieving better value through improved care.

    The Reform proposal comes on the heels of several disturbing developments regarding the National Health Service last month. One survey found that a quarter of cancer specialists are purposely keeping their patients “in the dark” about treatment options—in order to avoid upsetting those patients when they find out the NHS will not pay for their treatments. Several weeks earlier, the National Institute of Health and Clinical Excellence (NICE)—Britain’s comparative effectiveness institute—adopted a policy of refusing to pay for four kidney cancer drugs, even though the pharmaceuticals made “significant gains” in survival times, because NICE did not believe the drugs were cost-effective.

    Conservatives may not be surprised by any of these developments—as the rationing of care frequently leads to demands to reform or abolish the governmental bureaucracies that deny life-saving treatments to patients. Some conservatives may also believe that the type of changes advocated by Reform with respect to the National Health Service, if applied to Medicare, could allow seniors a wide range of options to receive their health care, while achieving cost-savings through competition that could slow the growth of skyrocketing health and entitlement costs.

    Read the BBC News article: “Doctors ‘Keep Cancer Drugs Quiet’”

    Article of Note: The Hospital-Industrial Complex

    An article in the Wall Street Journal last month revealed the continuance of a troubling trend: hospitals using their monopoly power to raise prices for consumers—helping to contribute to the growth in health care costs. Consolidations in recent decades—coupled with state certificate-of-need laws that provide government-sanctioned exclusivity in most states—have allowed regional hospitals to tighten their grip on many markets, and the Journal article tells the tale of Carilion Health System in southwest Virginia:

  • Colonoscopy prices four to 10 times higher than a local clinic;
  • Neck CT scans more than double the price of an imaging center;
  • A significant spike in regional health insurance premiums to the highest level in the state; and
  • Over $105 million in net income achieved by a non-profit hospital over the past five years.

One local businessman called the area a “one-market town…in terms of health care,” noting that the hospital “has the leverage”—and the article demonstrates that its impact on both physician practices and the insurance premiums paid by thousands of Virginians has been significant.

The piece comes at a time when the hospital industry is attempting to eradicate one of its few remaining sources of competition, by asking Congress to place a ban on the development of physician-owned specialty hospitals. Some conservatives may oppose this measure as a high-handed approach by Washington policy-makers to interfere with free markets, further solidifying existing hospitals’ monopolies, and stifling the type of innovation in health care that new entrants like specialty hospitals can create to slow the growth of health care costs.

Additionally, conservatives may note a letter from the Department of Health and Human Services’ Inspector General from this April, which publicly rebuked several hospital trade associations for making “several statements that misrepresent our findings and draw[ing] several conclusions that we did not make” in a white paper to Congressional policy-makers on the need for a specialty hospital ban. Some conservatives may therefore be highly skeptical of claims from self-interested parties exhibiting monopolistic tendencies, who have made deceptive and misleading statements to Congress to advance their claims—and apparently lack the integrity to apologize for doing so.

Read the article here: Wall Street Journal: “Non-profit Hospitals Flex Pricing Power

Weekly Newsletter: September 8, 2008

The Outlook Ahead

Congress returns from its annual summer vacation today with several health-related issues on the agenda for the month of September. Specifically, additional Medicaid funding could be included in economic “stimulus” legislation, and a massive expansion of the State Children’s Health Insurance Program (SCHIP) could come up for another vote. Finally, an agreement-in-principle that negotiators reached on mental health parity legislation could receive a final vote if disputes surrounding the bill’s pay-fors can be resolved.

Many conservatives may be concerned about the Medicaid spending provisions (H.R. 5268), which would provide more than $10 billion in aid to states without providing any “stimulus”—as federal spending would merely supplant state outlays. At a time when the federal government’s budget deficit stands at least eight times the size of states’ combined budget deficits, conservatives may question why the federal government should be asked to bail out states facing fiscal difficulties much smaller by comparison.

Just as important, many conservatives may be concerned that this giveaway to states would not be accompanied by any substantive reforms to a Medicaid program that often fails to provide adequate care to the vulnerable patients it was designed to serve. In many cases, bureaucratic obstacles discourage providers from participating, resulting in limited access and months-long waits for beneficiaries, while fraud remains a persistent problem in several states. Some conservatives may believe that time on the legislative calendar debating a Medicaid bailout should instead be used to discuss more comprehensive structural reforms to the program—so that the poorest beneficiaries are not subjected to more of the same from a government health system that does not work for many.

On SCHIP, many conservatives may retain concerns about a significant expansion of the program— which, according to an Congressional Budget Office score, would now cost significantly more than the $35 billion expansion (H.R. 3963) vetoed by the President last fall. At a time of economic uncertainty for many Americans, conservatives may not support a substantial increase in federal tobacco taxes, which would be borne primarily by working-class families, as a way to increase the government’s role in health care. In addition, many conservatives continue to support Administration guidance designed to ensure that states enroll poor children first before expanding their SCHIP programs to wealthier families, and oppose any efforts by Congressional Democrats to repeal this important principle.

In addition to the concerns that some conservatives may have regarding the increases in insurance premiums caused by mental health parity legislation, conservatives may also be concerned about the way in which the bill’s more than $3 billion price tag will be financed. During House consideration of a mental health parity bill (H.R. 1424) in March, many conservatives objected to provisions—restrictions on physician-owned specialty hospitals, and increased drug rebates demanded from pharmaceutical companies—that undermined free markets in health care and expanded government price controls. The mental health bill is currently attached to tax extenders legislation in the Senate, which remains deadlocked over unrelated disputes; if the impasse over tax provisions continues, it remains unclear which direction or form the mental health legislation may take.

The RSC has prepared two new Policy Briefs, providing an update on SCHIP enrollment statistics and analyzing the premium support provisions within SCHIP.

Uninsured Numbers Show Need for Entitlement Reform

During the recess, the Census Bureau released its annual report on income and health insurance coverage during 2007. The report found that the number of uninsured declined by 1.3 million in 2007 when compared to the previous year, due largely to a 2.8 million increase in the number of Americans receiving coverage under various public programs, particularly Medicaid and Medicare.

Some conservatives may believe the significant growth in the number of Americans receiving government-run health insurance coverage provides another reason to re-examine entitlement spending and reform the health care system. In particular, market-based health reforms have the potential to slow the growth of health costs that threaten both America’s fiscal future and the financial well-being of many families.

The RSC has released an updated Policy Brief analyzing the new Census data, as well as a new Policy Brief highlighting the impact of illegal immigrants—who constitute as much as one-fifth of the uninsured in America—on the health care system.

Cooking the Books

During the recess, the Department of Health and Human Services’ Inspector General released a report criticizing the auditing process undertaken by the Centers for Medicare and Medicaid Services (CMS) with respect to the integrity of purchases of durable medical equipment (DME). The report stated that CMS’ guidance to the external auditors hired to examine DME claims failed to implement a rigorous level of scrutiny, and that as a result the level of questionable claims was significantly higher than CMS had first reported. Responding to the IG report, Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) said that “to look better to the public, [CMS] cook[s] the books;” he called the agency “incompetent.”

However, three weeks earlier Mr. Stark himself made dubious claims with respect to Medicare reform and President Bush’s tax relief. During debate on the resolution (H.Res. 1368) turning off the Medicare “trigger” mechanism, Mr. Stark claimed that extending the Bush tax relief would cost $100 trillion over 75 years—about three times’ Medicare’s unfunded obligations over that period—such that forgoing an extension of the tax relief provisions would somehow end Medicare’s long-term financial difficulties. However, a report by the liberal Center for Budget and Policy Priorities cites the 75-year cost of the tax relief as $13.6 trillion—less than one-seventh the number cited by Stark in debate—and explicitly states that Medicare and health costs pose a greater threat to the nation’s fiscal solvency than the President’s tax relief. Asked repeatedly to provide a source of information justifying Stark’s statement, Ways and Means Committee staff could not substantiate his comments, or provide an explanation for the $86 trillion higher figure.

Weekly Newsletter: July 14, 2008

Veto Expected on Medicare Legislation

News reports indicate that this week Congress will return to legislation addressing physician reimbursement levels under Medicare. President Bush is expected to soon veto legislation (H.R. 6331) which addressed the physician reimbursement levels, while cutting $47.5 billion from privately-run Medicare Advantage plans. Votes on an expected Presidential veto could occur later in the week.

While all parties agree on the need to address the physician reimbursement provisions, Congressional Republicans have called for passage of bipartisan legislation that would forestall the significant cuts to Medicare Advantage plans made in H.R. 6331. Some conservatives may be concerned that the bill 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 Medicare Advantage private fee-for-service plans. 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.

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

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.

Tentative Agreement on Mental Health, but Obstacles Remain

Reports over the Independence Day recess indicated that Congressional negotiators have come close to agreement on compromise mental health parity language after the passage of separate House and Senate legislation (H.R. 1424, S. 558) earlier in the Congress. Multiple sources suggest that the deal will remove two provisions considered particularly onerous by conservatives: a requirement that insurers cover all mental diseases—including many psycho-sexual disorders objectionable to many conservatives—as part of health insurance coverage, and language that would have undermined the strong federal pre-emption provided to group health insurance coverage, potentially subjecting large employers to a variety of conflicting state regulations and lawsuits.

Despite these improvements, some conservatives may still be concerned that imposing a mental health parity mandate on health insurance may raise premiums, resulting in the loss of coverage for some populations. Some conservatives may also be concerned that the bill’s nearly $4 billion cost be paid for in a responsible manner, avoiding the controversial pay-fors—restrictions on physician-owned specialty hospitals and higher mandatory rebates on Medicaid pharmaceuticals—originally included in the House bill.

Read the Legislative Bulletin on H.R. 1424 here.

Article of Note: Dead Men Prescribing

A report released by the Senate Permanent Subcommittee on Investigations last week cast new doubts on the extent of anti-fraud efforts within the Medicare program. The report found that since 2000, Medicare paid at least $92 million in claims for wheelchairs and other durable medical equipment prescribed by physicians who had been dead for at least one year. The 500,000 fraudulent claims paid— more than half of which were ascribed to physicians who had died at least five years before the date of the claim—reinforced the Government Accountability Office’s decision to place Medicare on its “high-risk” watch list because of fraud concerns within the program.

Many conservatives may be concerned by the Subcommittee’s findings, and support efforts to strengthen the monitoring of durable medical equipment suppliers as one way to combat the fraudulent claims cited. Some conservatives may also be concerned by Congress’ passage of Medicare legislation, which would delay until the next Administration the implementation of a competitive bidding program that could also reduce the incidence of fraud by ensuring that Medicare pays no more than competitive market rates when acquiring equipment and supplies for seniors’ benefit.

Read the article here: Washington Post: “Billings Used Dead Doctors’ Names

Weekly Newsletter: June 2, 2008

Health Centers Bill Would Authorize Significant Spending Increase

This week, the House is expected to take up under suspension of the rules legislation (HR 1343) reauthorizing the community health center program. The bill authorizes $14 billion in spending over the next five fiscal years, subject to annual appropriations. In addition, the bill would expand the scope of an existing government program to extend federal liability protection to volunteer medical practitioners working at community health centers.

Some conservatives may be concerned that the amount of spending contemplated by this legislation—a 40% increase in funding over a bill the House passed in 2006—may be inappropriate as a matter of fiscal policy, and further should not be considered under expedited House procedures. Some conservatives may also be concerned that the legislation’s stated goal of doubling the number of patients treated at community health centers by 2015 may be used as a justification for further spending increases in future years. Lastly, some conservatives may be concerned with a proposed expansion of a federal liability program for health center workers that has its roots in the flaws of the current medical liability system. Some conservatives may instead champion the comprehensive liability reform that all medical practitioners—private and public, volunteer and paid—need in order to restore the integrity of the doctor-patient relationship and reduce the amount of harmful litigation.

The Outlook Ahead

As Congress returns from its Memorial Day recess, several health care items remain ripe for legislative activity in the coming weeks. Democrat leaders have advised that a final version of mental health parity legislation may be voted on by both chambers, and recent reports indicate that negotiations in the Senate on health IT may yield activity prior to the August recess. In addition, legislative provisions repealing Medicaid fiscal integrity regulations, providing incentives for states to expand the State Children’s Health Insurance Program (SCHIP) to wealthier families, and imposing restrictions on physician-owned specialty hospitals remain under consideration as part of the wartime supplemental appropriations measure. The RSC has weighed in with conservative concerns on several aspects of these proposals, and will continue to do so as the process moves forward.

However, the most prominent health debate will center on the scheduled July 1 reduction in Medicare physician reimbursements under the sustainable growth rate (SGR) mechanism, and any action Congress may take to forestall such reductions. In anticipation of the debate on the Medicare legislative package, the RSC has prepared two Policy Briefs providing background on comparative effectiveness research and the Medicare Advantage program.

Articles of Note: A Tale of Two States

Last Thursday’s Wall Street Journal contained two editorials on the diverging status of health insurance markets across the 50 states. One article highlighted several key reforms enacted by Gov. Charlie Crist (R-FL) and the legislature to reform Florida’s insurance market. With the legislation’s passage, Florida became the largest of a growing number of states that are permitting carriers to offer comprehensive, lowcost insurance policies free from onerous state benefit mandates. Supporters of the concept believe that such a reform could reduce health insurance premiums by permitting carriers to create innovative insurance products and consumers to buy the plan that most suits their needs—allowing, for instance, a 20-something single male to decline maternity coverage in exchange for a lower insurance rate.

Meanwhile, a Republican Assemblyman in New Jersey introduced legislation permitting Garden State residents to purchase health insurance policies offered in other states. The initiative closely resembles federal legislation (HR 4460) offered by Congressman John Shadegg (R-AZ), and would, like the Florida legislation, attempt to reduce health insurance premiums by circumventing costly state regulations and increasing the options for consumers to find affordable coverage. Such a proposal could have significant implications in New Jersey, where guaranteed issue regulations—which encourage individuals to wait to purchase health insurance until they become sick—have raised premiums to nearly twice the national average, pricing many younger New Jerseyans out of purchasing coverage.

Many conservatives may support both these efforts, and hope that the success of Florida’s experiment provides the incentive for New Jersey and other states to follow its lead. The Journal editorial notes that the plans created by the Florida measure are “not a cure-all,” but conservatives may believe that these and similar efforts to create a more consumer-friendly health care environment could play a significant role in reducing the growth of health care costs over time.

Read the articles here: “The Florida Revelation…
…And Escape from New Jersey

Weekly Newsletter: April 21, 2008

Full House to Vote on Overriding Medicaid Fiscal Integrity Regulations

This Tuesday, the full House is scheduled to vote on legislation (H.R. 5613) that would impose moratoria on several proposed regulations issued by the Centers for Medicare and Medicaid Services (CMS) to restore fiscal integrity to the Medicaid program. The bill will be considered under suspension of the rules, which limits debate and requires a 2/3 vote for passage. Some conservatives may be concerned that a bill costing more than $1.5 billion is scheduled to be considered under such an expedited process normally reserved for naming of post offices and other smaller pieces of legislation.

In addition, some conservatives may remain concerned by congressional actions to block regulations that respond to more than a dozen Government Accountability Office (GAO) reports released since 1994 highlighting the various ways states have attempted to “game” the Medicaid program and increase the amount of federal matching funds received. The history of these abuses has prompted the Administration to threaten a veto of any measure attempting to block CMS’ attempts to restore the fiscal integrity of the Medicaid program.

Because HR 5613 only places a moratorium on further administrative action until April 2009, the stated cost of the legislation is $1.65 billion. However, some conservatives may be skeptical that Congress would ever let this moratorium be lifted, and thus may be concerned that passage of the legislation ultimately could result in the nullification of approximately $16-18 billion in proposed savings—which, though significant, will lower federal Medicaid spending by just over 1% over the next five years.

In December 2005, 212 Members of Congress—all Republicans—voted to reduce Medicaid spending by less than $4.8 billion as part of the Deficit Reduction Act. If these moratoria remain intact, some conservatives may be concerned that Congress will have more than undone the modest savings which a Republican-led Congress enacted over sharp Democrat protests.

RSC Policy Briefs on the federal-state Medicaid relationship can be found here and here.

Democrats Pass Restrictions on Health Savings Accounts

The full House last week passed legislation that would enact new restrictions on Health Savings Accounts (HSAs) as part of broader tax legislation (HR 5719). The legislation requires all HSA account holders to independently verify the qualified nature of medical expenses for all withdrawals, subjecting those transactions not substantiated to income taxes. This language prompted the White House to threaten a Presidential veto of the bill, which the Office of Management and Budget argued “would impose new administrative burdens on the trustees of HSAs…[that] could undermine efforts by employers, individuals, and insurers to reduce health care costs and improve health outcomes by empowering consumers to take greater control of health care decision-making.”

The bill passed by a 239-178 vote, but only after the Republican motion to recommit failed on a 210-210 tie. This vote on the motion to recommit was extended after the motion’s proponents had received a majority of votes cast after the allotted 15-minute vote time.

The outlook for action in the Senate is unclear, and the threat of a Presidential veto on these HSA restrictions looms as well. However, the RSC will continue to weigh in on the need to protect the important consumer-driven health programs which Republicans have succeeded in establishing in recent years.

An RSC Policy Brief discussing this issue can be found here.

Specialty Hospital Provisions Possible Farm Bill Offset

As conferees attempt to reach agreement on a farm bill reauthorization, some Democrats have introduced a potential new offset: Restrictions on physician-owned specialty hospitals. This particular offset has already been proposed twice by House Democrats to pay for expansions of the government’s role in health care—the first as part of legislation (HR 3162) placing millions of children on government-funded health insurance rolls, the second in legislation (HR 1424) that would increase health insurance premiums by forcing employers and insurance carriers to cover such mental health disorders as caffeine addiction and jet lag.

Some conservatives may be concerned that this provision—which, because it was included in neither the House nor Senate versions of farm bill legislation, is outside the scope of the conference—would undermine and stifle the innovative practices developed at physician-owned hospitals in order to pay for additional farm subsidies. Some conservatives may also be concerned that the Congressional Budget Office (CBO) scoring assumptions regarding these provisions remain in dispute, yet the Democrat majority is considering using “savings” that may or may not exist in order to finance additional government aid to the agricultural sector.

An RSC Policy Brief discussing specialty hospitals can be found here.

Article of Note: Free Health Care Isn’t Cheap

This week, Gov. Deval Patrick (D-MA) delivered the budgetary verdict on Massachusetts’ novel health reform act passed in 2006—and the statistics raised into question whether and how long the lauded Massachusetts experiment can be sustained. Only about half of the state’s estimated 600,000 uninsured have gained access to coverage since the Massachusetts law imposed an individual mandate to purchase health insurance. Moreover, many more individuals than expected claimed free or reduced-cost plans available through the state’s Commonwealth Care program, creating a $153 million budget gap for the program’s first year of operation—and aides admit that future years face similar funding difficulties.

Gov. Patrick has proposed a $1-per-pack increase in cigarette taxes in order to finance the shortfall created by rising enrollment in government-funded health insurance. This comes on the heels of reports that 748 employers have already been taxed a total of $6.6 million in “assessments” for failing to provide health insurance to their employees.

Some conservatives may not be surprised by the rising health care costs associated with Massachusetts’ plan, and may be concerned by the increasing reliance on additional taxes to finance the program. The state’s many benefit mandates and insurance regulations have consistently resulted in insurance premiums amongst the highest in the nation, and higher taxes on businesses and individuals will do nothing to control skyrocketing health care costs. Instead, many conservatives may support additional reforms to decrease costly regulations and reform the state’s health care market, reducing the growth of health care costs by empowering consumers to make wise choices about their health options.

Read the article here: “Universal Health Care to Cost Massachusetts More than Was Budgeted

Health Care Spending Growth

Background:  Last month, the Centers for Medicare and Medicaid Services (CMS) released its annual report projecting health care spending over the next decade.  The report concluded that nationwide health expenditures are expected to rise 6.7% annually in the next ten years, causing health care spending to rise to 19.5% of gross domestic product (GDP) by 2017.  These projections are consistent with a November report by the Congressional Budget Office (CBO) highlighting the long-term projections for health care spending, which estimated that health expenditures could comprise just under half (49%) of GDP within 75 years.

Ten Year Projections:  The report by the CMS actuaries, released online by the journal Health Affairs, documents the continued growth in health care spending and hints at upcoming trends associated with the retirement of the Baby Boom generation.  In 2007, health care spending is projected to have grown at a 6.7% rate, reaching $2.2 trillion, or approximately 16.3% of GDP.  The report provides a snapshot of current health expenditures, and also cites several projected spending trends over the next decade:

  • Private health insurance premiums grew at a slower rate (6.0%) than overall health care expenditures in 2007, consistent with trends evident since 2004.
  • Prescription drug spending grew by 6.7% in 2007, a measurable slowdown in spending when compared to the increases for the prior two years (12.0% in 2005 and 8.5% in 2006), due in large part to increased price competition and generic drug usage.
  • Private spending on health care is projected to grow more slowly in the latter part of the projection period (2007-2017), while public spending “is expected to accelerate…as the leading edge of the Baby Boom generation becomes eligible for Medicare.”  While the aging population will have minimal effects on overall health expenditures, its effects on public spending, particularly through Medicare, will be significant.
  • Enrollment in private Medicare Advantage plans is expected to rise to 27.5% by 2017, up from 16.4% in 2006.
  • Just over half of the growth in health care spending comes from increases in medical costs, with about one-quarter of the increase due to utilization (volume and intensity of services), and the remainder due to population growth, demographics, and related factors.

Overall, the report’s conclusions indicate that although all health spending continues to rise, the increase in public health spending has accelerated.  While the competition created by the Medicare prescription drug benefit may have contributed to the considerable slowing in pharmaceutical expenditures, an aging population moving to Medicare will only hasten the growth of public spending.

In fact, the true size of the government’s future obligations for health spending is likely underestimated by the model used in the actuaries’ report, which presumes that existing law adjustments in physician reimbursements under the sustainable growth rate mechanism (SGR) will take effect.  If the SGR’s proposed reductions are instead replaced by a 0% increase—in other words, if physician payments are held steady through 2017—Medicare spending will rise by 8.0% annually over the next decade, instead of the 7.4% projected under the trustees’ current law model.

Historical Examples and Long-Term Projections:  The report produced by the CMS actuaries follows on the heels of a study, conducted by CBO and released in November 2007, which examined both historical trends in health care spending and long-term projections for its growth over the next 75 years.  Most notably, the report documents a historical shift in health care expenditures: a significant reduction in out-of-pocket spending, which declined from 31% to 13% of all health expenditures between 1975 and 2005, and the nearly commensurate increase in third-party payment by insurance carriers, which increased from 25% to 37% of health spending nationwide.  While the growth in new technologies and services has helped drive the growth in health spending which CBO documents, the continued rise of third-party payment—which can insulate patients from the marginal costs associated with additional treatments—may well have had inflationary effects.  This shift away from out-of-pocket spending occurred despite the findings of a landmark RAND Institute study, which concluded that higher cost-sharing helped constrain health care spending at little to no adverse effect on patients’ health.

On a forward-looking basis, CBO projects that overall health care spending will more than double in the next thirty years, rising from 14.9% of GDP in 2005 (and 4.7% in 1975) to 31% in 2035, growing thereafter to nearly half the nation’s economy (49% of GDP) in 2081.  The net federal spending on Medicare and Medicaid is projected to rise at a higher rate than overall health spending, growing from 26% of total spending on health care currently to 30% within thirty years, and 38% of total spending by 2082.

These 75-year projections are materially divergent from the projections made by the Medicare trustees in their annual report.  The trustees project Medicare spending to consume nearly 11% of total GDP by the end of the projection period, while CBO estimates that Medicare will consume more than one in six dollars spent in the United States (17% of GDP).  As the Medicare trustees’ projection notes $36 trillion in unfunded liabilities for the program over the next 75 years, the significantly higher projections made by CBO in its study should provide yet another impetus to enact comprehensive entitlement reform that addresses the unchecked growth in health costs.

Excess Cost Growth:  Both the CMS actuaries’ report and the CBO study projecting long-term health expenditures highlight the issue of excess cost growth in health care.  In this context, “excess cost growth” does not imply a value judgment as to whether or not the spending is necessary or appropriate; rather, the term connotes spending that exceeds economic and productivity growth.  For instance, the CMS actuaries project that health spending will rise by 6.7% over the next ten years, while nominal (i.e. non-inflation-adjusted) GDP will rise by 4.7%, resulting in excess cost growth of 2.0% annually for the decade.

The CBO report projects that the growth of overall health care spending will exceed the rate of economic growth by more than 2% annually for at least the next decade, and will continue to exceed economic growth throughout the entire 75-year projection period.  The report also projects that excess cost growth for Medicare and Medicaid will continue at rates far exceeding cost growth within the private sector,  noting that “that aspect of the projections may appear unrealistic, but it highlights the core problem—the unsustainability of current federal law.”

Over and above the unrealistic nature of the promises made in current federal law, and the need for comprehensive entitlement reform to remedy a looming fiscal crisis for Medicare, the excess cost growth discussed in the CBO report could also have significant macroeconomic implications by displacing other spending.  While CBO projects that per capita economic consumption will increase by $15,000 (in current dollars) from 2005-2035, more than three-quarters of that higher spending will be spent on health care.  Absent external action, health care costs could grow to consume all marginal increases in economic productivity—at which point both consumption and growth of other sectors of the economy could stagnate, and standards of living apart from health care (e.g. clothing, housing, etc.) could fall over time.  Although this pessimistic scenario remains somewhat distant, it highlights the need to understand the factors behind the growth in health spending, and substantially reduce excess cost growth in the coming years.

Geographic Variations:  Another CBO report issued in February examined one source of excess cost growth in health care: geographic variations in total spending.  The report notes that state per capita health expenses in 2004 ranged from a low of about $4,000 in Utah to a high of nearly $6,700 in Massachusetts—a more than 50% disparity.  Analysis of Medicare claims data showed a similar disparity among states—ranging from a per-beneficiary expenditure of $5,600 in South Dakota to $8,700 in Louisiana—and additional variations in areas within states.

The report also notes that geographic differences in price inputs (i.e. cost of labor, etc.), health status, and demographic factors (e.g. income, race, education level) likely constitute at most half of the observed deviation in expenditures, meaning that much of the geographic variation in health spending cannot be explained by known factors.  In other words, similar patients with similar diseases, living in areas with similar prices, are likely to receive differing levels of medical treatments and services.  Of particular note is the fact that patients living in areas with higher spending yield no better results with respect to both health processes and outcomes than patients in low-spending areas—and on some measures at least may receive worse care.

While the CBO report cites studies attributing some geographic variations in health spending to areas with a high supply of health providers (particularly hospitals and specialist physicians) creating additional demand for services, competition among a greater number of providers is likely to exert downward pressure on prices, if not the number of services performed.  To the extent that geographic variation in health costs are in fact driven by excess supply, some conservatives may be wary of government efforts—such as a Certificate of Need model for approving new hospital construction, or restrictions on physician-owned specialty hospitals—that impose bureaucratic regulations to stifle the supply of health providers, as they are likely to have adverse and unintended consequences that reduce access to care.  Many conservatives might prefer a more productive solution focused on mechanisms to place reasonable restraints on demand, by reducing the historical trends that have increased reliance on third-party payment, and making price and quality measures more transparent, so that consumers can have more information about available treatment options—and make a rational choice as to whether or not the additional treatment justifies the marginal cost.

Summary and Conclusions:  The growth in health care spending projected in the coming decades, following upon years of sustained increases, is likely to place significant and exacting demands on both the private and public sectors of the American economy absent external action.  Many conservatives believe that a discussion of ways to stem the growth in health care costs should be a part of any discussion to achieve so-called universal coverage, as health insurance would become much more affordable for all Americans at the point when premium costs and related expenditures rise at a more modest (and therefore more sustainable) rate.

The geographic variations in Medicare spending, particularly those portions of which cannot be explained by regional differences in income or health status, might prompt some Democrats to call for a centralized, government-controlled mechanism to reduce spending in higher-cost areas, likely through rationed care.  One popular variation on this approach has emerged in the form of comparative effectiveness, which would attempt to conduct research on the cost-effectiveness of various treatment options with an eye towards establishing more uniform practice standards.  While such efforts by the private sector could help reduce costs, many conservatives might have strong concerns as to whether a government-run effectiveness institute—such as the center proposed by Democrats in a wide-ranging health bill last July (H.R. 3162), which would have been funded by tax increases on insurance premiums—would result in a federal bureaucracy micro-managing the doctor-patient relationship, and ultimately, rationing care to patients.

A better alternative might lie in the data showing that private health spending is not rising as dramatically as expenditures on public health programs, suggesting that competition—and placing health care dollars in control of patients—holds the true solution to containing health costs.  The significant decline in out-of-pocket spending over the past three decades, and the escalating rise in costs during that time, demonstrate the perils associated when third-party payment of health expenses, particularly incidental (i.e. non-catastrophic) expenses, insulates patients from the marginal costs of additional treatment.  Likewise, the geographic variations in Medicare spending stem from a publicly-funded system where the costs for additional treatment can be minor—especially in areas where a high percentage of seniors own Medigap policies that can insulate beneficiaries from any increase in marginal costs.

The funding warning issued by the Medicare trustees, and the subsequent action required by Congress to act on legislation addressing this “trigger,” provides an opportunity for conservatives to construct a system designed to address the geographic variations in Medicare costs—with an impact that could stretch throughout the entire health system.  An improved and enhanced Medicare system similar to the Federal Employee Health Benefits Plan (FEHBP)—where beneficiaries receive a defined contribution from Medicare to select a health plan of their choosing—would eliminate much of the geographic variations currently present within Medicare, slowing the growth of health costs and restoring the program’s long-term stability.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

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

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

Physician-Owned Hospitals

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

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

Legislative History:  Congressional action on specialty hospitals over the past several years has focused on the “whole hospital” exemption and the issue of physician self-referral.  In December 2003, Section 507 of the Medicare Modernization Act (P.L. 108-173) placed an 18-month moratorium on physician self-referrals to any new specialty hospital and ordered reports to Congress regarding the issue.  Upon expiration of the moratorium in June 2005, the Centers for Medicare and Medicaid Services (CMS) issued a further suspension in the processing of Medicare enrollment applications for specialty hospitals, pending a CMS review.

In February 2006, Section 5006 of the Deficit Reduction Act (P.L. 109-171) extended the CMS suspension of applications for new specialty hospitals until CMS submitted a report to Congress.  The report, issued in August 2006, summarized the earlier reports on specialty hospitals and outlined a strategic plan for examining the issues raised.  Although the report included no legislative recommendations, CMS did subsequently issue regulations in August 2007 requiring all hospitals, not just specialty hospitals, to notify patients of their physician ownership arrangements beginning in Fiscal Year 2008.

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

Quality of Care:  Many public and private studies that have examined the specialty hospital issue have compared the quality of care and patient outcomes for both specialty and general hospitals.  Most studies have found that specialty hospitals perform no worse than general hospitals with respect to patient outcomes, and many studies have found measurable performance improvements.  The independent quality review firm HealthGrades found that specialty hospitals constitute a disproportionate share of the highest-quality facilities among the top tier of facilities it surveyed.[1]

The focus on improved quality control comes at a time when the impact of medical errors and hospital-acquired infections has risen to greater prominence.  The landmark 1999 Institute of Medicine study To Err Is Human estimated that between 44,000 and 98,000 Americans die annually in hospitals due to preventable medical errors, creating a total economic cost of as much as $29 billion.[2]  A November 2006 report utilizing data from a new infection-reporting regime in Pennsylvania found 19,154 cases of hospital-acquired infections in 2005 alone, representing an infection incident rate of more than 1 in 100 hospitalizations, and average costs for patients who developed infections nearly six times higher than those who did not ($185,260 vs. $31,389).[3]

For this reason, many specialty hospitals include their physician-owners in all aspects of the planning, design, and implementation of the facility and its treatment delivery systems, so as to minimize the possibility of preventable errors and the spread of infection.  Additionally, regular performance of surgical procedures in specialized settings permits physicians and medical staff to develop expertise and innovative techniques that improve the quality of care delivered.  For instance, physicians in one cardiac specialty hospital developed new procedures to recognize and treat irregular heartbeats following surgery; the new protocol reduced incidence of this dangerous symptom by two-thirds.[4]

Although some critics of specialty hospitals cite concerns about “cherry-picking”—whereby physician-owned facilities attract comparatively healthy patients, leaving general hospitals to treat the sickest cases—reports such as the HealthGrades study have quantified the better care provided by many specialty hospitals on a risk-adjusted basis that controls for patients’ varied health status.  Some specialty hospitals have been found to have patients sicker than average when compared to Medicare claims data are used to compare patients in specialty hospitals and general hospitals.[5]  Moreover, to the extent that specialty hospitals may wish to pick the “easiest” cases, such changes can be resolved by reforms currently being implemented by CMS to reform Medicare’s diagnosis-related group (DRG) classification system and adjust reimbursements to more closely reflect health status upon admission.

Financial Arrangements:  Much of the criticism surrounding specialty hospitals has focused on the potential conflict-of-interest associated with physician ownership, and specifically whether an ownership stake motivates physicians to increase the number and scope of tests and procedures performed, increasing patient costs.  In scoring the additional restrictions proposed by Section 651 of the CHAMP Act, the Congressional Budget Office (CBO) asserted that Medicare spends more for outpatient services for patients treated in specialty hospitals than for treatments provided in other facilities.  Based on this assumption and related changes in reimbursements, CBO estimated that the CHAMP Act’s proposed restrictions on specialty hospitals would generate $3.5 billion in savings to the federal government over a ten-year period by diverting patient care to general and community hospitals.

However, the CBO score did not take into account any potential savings due to differential rates of medical errors and acquired infections when comparing costs in specialty and general hospitals.  One study noted that the nearly 9,000 infections acquired by Medicare and Medicaid recipients hospitals during 2004 cost taxpayers nearly $1.4 billion in added costs in Pennsylvania alone—and the study also noted that hospital-acquired infections, and thus the costs associated with them, were likely to be underreported during the report’s time frame.[6]  Given the existing studies documenting better patient outcomes and lower infection rates in physician-owned facilities, reduced costs to the federal government from an expansion of specialty hospitals could well exceed the $3.5 billion in purported savings CBO attributes to lower utilization rates by general hospitals.

In addition, some critics of the ownership arrangements of specialty hospitals have failed to acknowledge the implications of the vast growth of hospital-owned physician networks in the past two decades.  While a 2005 CMS report to Congress noted that “we did not see clear, consistent patterns of preference for referring to specialty hospitals among physician owners relative to their peers,” it also added that “physicians in general are constrained in where they refer patients by several factors.”[7]  Physicians working for networks affiliated with a particular community hospital may be contractually obligated to refer their patients to that hospital.  When viewed from this prism, the significant growth—from 24% in 1983 to 39% in 2001—of physicians directly employed by hospitals or other medical centers is likely to have had a greater impact on physician referral patterns than the growth of approximately 200 specialty hospitals when compared to 60,000 hospitals nationwide.[8]

Conclusion:  The benefits of increased specialization have been examined and analyzed by economists for more than two centuries.  In his seminal work The Wealth of Nations, Adam Smith highlighted the benefits of a division of labor to focus on discrete tasks as providing the greatest possible improvement in productivity, and thus economic growth, for all individuals.  In health care, specialization can increase productivity gains, which are the key to controlling the rise of health care costs without relying on heavy-handed rationing of care.  The growth of specialty hospitals—which focus on performing discrete groups of surgical procedures well, improving quality and thus reducing costs—is consonant with the theories which Smith and his adherents used to expound open markets and free trade worldwide.

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

 

[1] Cited in David Whelan, “Bad Medicine,” Fortune 10 March 2008, available online at http://www.forbes.com/forbes/2008/0310/086_print.html (accessed March 1, 2008).

[2] Institute of Medicine, To Err Is Human: Building a Safer Health System, summary available online at http://www.iom.edu/Object.File/Master/4/117/ToErr-8pager.pdf (accessed March 1, 2008).

[3] Pennsylvania Health Care Cost Containment Council, Hospital Acquired Infections in Pennsylvania, available online at http://www.phc4.org/reports/hai/05/docs/hai2005report.pdf (accessed March 1, 2008).

[4] Regina Herzlinger and Peter Stavros, “MedCath Corporation (A),” Harvard Business School Case No. 303-041, rev. August 2006, p. 10.

[5] Regina Herzlinger and Peter Stavros, “MedCath Corporation (C),” Harvard Business School Case No. 305-097, rev. May 2006, p. 1.

[6] Pennsylvania Health Care Cost Containment Council, Reducing Hospital-Acquired Infections: The Business Case (Issue Brief No. 8, November 2005), available online at http://www.phc4.org/reports/researchbriefs/111705/docs/researchbrief2005report_hospacqinfections_bizcase.pdf (accessed March 1, 2008).

[7] Department of Health and Human Services, “Study of Physician Owned Specialty Hospitals Required in Section 507(c)(2) of the Medicare Modernization Act of 2003,” available online at http://www.cms.hhs.gov/MLNProducts/Downloads/RTC-StudyofPhysOwnedSpecHosp.pdf (accessed March 1, 2008).

[8] Kaiser Family Foundation, Trends and Indicators in the Health Care Marketplace, Section Five, available online at http://www.kff.org/insurance/7031/print-sec5.cfm (accessed March 3, 2008) ; Whelan, “Bad Medicine.”