SCHIP Crowd-Out

Background:  The State Children’s Health Insurance Program, established under the Balanced Budget Act (BBA) of 1997, is a state-federal partnership originally designed to provide low-income children with health insurance—specifically, those children under age 19 from families with incomes under 200 percent of the federal poverty level (FPL), or approximately $40,000 for a family of four.  States may implement SCHIP by expanding Medicaid and/or creating a new state SCHIP program.  SCHIP received nearly $40 billion in funding over ten years as part of BBA, and legislation recently passed by Congress in December (P.L. 110-173) extended the program through March 2009, while providing additional SCHIP funds for states.

One concern of many conservatives regarding the SCHIP program relates to crowd-out—a phenomenon whereby individuals who had previously held private health insurance drop that coverage in order to enroll in a public program.  The Congressional Budget Office (CBO) analysis of H.R. 3963, a five-year SCHIP reauthorization which the President vetoed (and the House failed to override), found that of the 5.8 million children who would obtain Medicaid or SCHIP coverage under the legislation, more than one-third, or 2 million, would do so by dropping private health insurance coverage.

Administration Guidance:  In order to prevent policies that encourage crowd-out, and ensure that SCHIP funds are more effectively allocated to the low-income beneficiaries for whom the program was created, the Centers for Medicare and Medicaid Services (CMS), on August 17, 2007, issued guidance to state health officials about the way CMS would evaluate proposals by states to expand their SCHIP programs to include families with incomes above 250% of the federal poverty level (FPL).  Specifically, CMS included several steps which states should take before contemplating expansions above 250% of FPL:

  • Cost sharing requirements for state plans similar to those for private plans;
  • A one-year period of uninsurance for beneficiaries prior to receiving SCHIP coverage, to ensure that individuals and families are not dropping private coverage in order to receive benefits on government rolls;
  • Monitoring of child beneficiaries’ eligibility for coverage provided by non-custodial parents;
  • Assurance that states have enrolled at least 95% of children in families below 200% of FPL who are eligible for coverage under SCHIP or Medicaid;
  • Data that private insurance coverage for targeted populations has not declined more than two percentage points in the past five years; and
  • Regular monthly reporting of enrollment data monitoring crowd-out in state plans.

The guidance intended to maximize the use of state and federal SCHIP funding by ensuring that scarce resources are targeted at the populations for whom the program was originally created, and that government funds for health insurance are not merely replacing private dollars.  CMS later used the policies embodied in the August letter to reject New York’s application to extend SCHIP to children in families making up to 400% FPL—or nearly $85,000 per year.  New York and other states are suing the federal government to overturn CMS’ decision and allow further expansion of government-funded health insurance.

On May 7, 2008, CMS issued another letter to state health officials providing further clarification on the August 17, 2007 guidance.  The letter indicated that CMS would work with states to evaluate whether the states have effectively enrolled 95% of eligible children below 200% FPL before expanding their programs up the income scale.  It also noted that CMS does not expect states to apply the anti-crowd-out provisions—including the one-year waiting period for SCHIP coverage and cost-sharing requirements comparable to private insurance plans—for unborn children or children with family incomes below 250% FPL—approximately $53,000 for a family of four.  Most importantly, the letter noted that changes made to state procedures need not be applied to current enrollees—meaning that no child need be dropped off the SCHIP rolls as a result of CMS’ August 17, 2007 letter.

Recent Legislative Developments:  On May 15, 2008, the House Energy and Commerce Committee held a legislative hearing on H.R. 5998, introduced by Reps. Frank Pallone (D-NJ) and Carol Shea-Porter (D-NH).  The legislation would prohibit the Administration from implementing its August 17, 2007 guidance letter to states regarding SCHIP crowd-out.  Press reports indicate that during the hearing, advocates of the legislation argued first that it would negatively impact enrollment in the SCHIP program, and second that the Government Accountability Office (GAO) and other experts have concluded that CMS violated the Congressional Review Act by promulgating its policy as a “guidance letter,” rather than issuing a formal rule using notice-and-comment procedures.  In response, Health Subcommittee Ranking Member Nathan Deal (R-GA) noted that the guidance process allowed for more flexibility in responding to any concerns raised by states than would a formal rule.

On the same day, an amendment by Sen. Frank Lautenberg (D-NJ) to nullify the August 17 letter was attached to the wartime supplemental spending bill at a Senate Appropriations Committee markup.  This SCHIP provision was added to legislative provisions overriding seven Medicaid anti-fraud regulations issued by CMS, which were also attached to the House version (H.R. 2642) of the supplemental spending bill.

Conclusion:  Most conservatives support enrollment and funding of the SCHIP program for the populations for whom the SCHIP program was created.  That is why in December the House passed, by a 411—3 vote, legislation reauthorizing and extending the SCHIP program through March 2009.  That legislation included an additional $800 million in funding for states to ensure that all currently eligible children will continue to have access to state-based SCHIP coverage.

However, many conservatives retain concerns about the significant expansions of SCHIP contemplated by House Democrats and their impact on reducing private health insurance coverage while increasing reliance on a government-funded program.  In this vein, the Administration’s guidance to states remains consistent with the goal of ensuring that SCHIP remains targeted toward the low-income populations for which it was designed.  Therefore, many conservatives will support the reasonable attempts by CMS to bolster the integrity of the SCHIP program while retaining state plans’ flexibility, and question efforts by Congressional Democrats—and states like New York—to encourage further expansion of government-funded health insurance financed by federal taxpayers.

Weekly Newsletter: April 28, 2008

  • Genetic Non-Discrimination Act Returns for House Vote

    This week, the House is expected to vote on Senate amendments made to the Genetic Information Nondiscrimination Act (H.R. 493), in order to send the bill to the President’s desk. The compromise language negotiated between Senate sponsors and Sen. Tom Coburn (R-OK) allowed the bill to pass the Senate on a 95-0 vote last Thursday.

    The compromise language corrects several issues of concern to conservatives. Insurers and employers will be prohibited from discriminating against individuals on the basis of fetal genetic information, ensuring that individuals will not feel pressured into aborting their unborn children. In addition, existing policies on insurance underwriting for diseases already manifest in individuals will be maintained, and entities subject to existing privacy regulations under the Health Insurance Portability and Accountability Act (HIPAA) will not be subject to a new regulatory regime. Lastly, the compromise language improved a conservative concern that employers will not be subject to Equal Employment Opportunity Commission (EEOC) tribunals or lawsuits for decisions they make in their capacity as an insurer for their employees.

    Full House Votes to Override Medicaid Fiscal Integrity Regulations

    This past week, the full House by a 349-62 vote approved 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. Although the bill was approved by the Energy and Commerce Committee 46-0, seven Energy and Commerce Committee Republicans opposed House passage— because of either substantive concerns about the legislation or as a protest against the expedited procedures under which the multi-billion dollar bill was considered.

    Despite the wide margin of passage, 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.

    Action now moves to the Senate, where Minority Leader Mitch McConnell (R-KY), Minority Whip Jon Kyl (R-AZ), and Finance Committee Ranking Member Chuck Grassley (R-IA) all support allowing CMS’ regulatory actions to continue without further intrusion from Congress. In addition, the American Medical Association (AMA)—which supports legislative action to block the regulations—on Friday expressed concern that HR 5613 would utilize funds from a physician quality improvement fund to help pay for the moratoria. Some conservatives may view the AMA letter as confirming the belief that, by using a physician quality fund “in a manner inconsistent with its intended purpose,” HR 5613 relies on budgetary gimmicks not consistent with the spirit of House pay-as-you-go budgetary scoring rules.

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

    Article of Note: Broken Promises Ahead

    This week, The Hill reported that Congressional Democrats do not believe the fundamental health care overhauls advanced by Sens. Hillary Clinton (D-NY) and Barack Obama (D-IL) have a realistic chance of enactment in the near future. The story quoted several Democratic leaders:

  • Democratic Senate Campaign Committee Chairman Chuck Schumer (D-NY): “I am not sure that we’re ready for a major national health care plan;”
  • Senate Finance Committee Member Jay Rockefeller (D-WV): “We all know there is not enough money to do all this stuff;”
  • House Ways and Means Committee Member Kendrick Meek (D-FL): “The money is not necessarily there right now” to enact comprehensive reform;
  • Senate Finance Committee Chairman Max Baucus (D-MT): “If they try to solve all the problems, it’s going to be difficult;”
  • Former Senator John Breaux (D-LA): “You don’t want to rush and do something and do it incorrectly.”

    Some conservatives may not be surprised by the skepticism from within the Democratic Party, particularly as Sen. Clinton has recently admitted her willingness to raise tobacco taxes to pay for her reform plan, while also garnishing individuals’ wages who do not comply with an individual mandate to purchase health insurance. Rep. Meek’s comments that “there is…a Congress here with feelings and experience on this issue…this is not a kingdom, this is a democracy” speak to the reluctance of Congressional Democrats to accept their Presidential candidates’ desire to raise taxes and grow government-run health care. Some conservatives would argue that, by reforming health care to create new markets, the sector could slow its soaring growth, obviating the need for additional taxes and spending to finance new public health care programs.

    Read the article here: “Dems Hedge on Health Care

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

[2] Office of Management and Budget, Analytical Perspectives: Budget of the United States Government, Fiscal Year 2009, available online at (accessed April 1, 2008), p. 383.

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

[4] Ibid., p. 19.

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

[6] Ibid., p. 24.

[7] See ibid., p. 30.

[8] Clifford Levy and Michael Luo, “Medicaid Fraud May Reach into Billions,” The New York Times 18 July 2005, available online at (accessed March 29, 2008).

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

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

Question and Answer: Health Savings Account Restrictions

On April 9, 2008, the House Ways and Means Committee passed legislation (H.R. 5719) with provisions placing additional restrictions on Health Savings Accounts (HSAs).  In anticipation of floor consideration of the measure, the RSC has prepared the following document providing context and background information on the proposal.

What change to Health Savings Accounts are Democrats proposing?

Section 17 of H.R. 5719 requires “substantiation” of all HSA transactions from an independent third party, to ensure that money withdrawn from an HSA pays for qualified medical expenses.  Specifically, the section would make the income tax deduction associated with HSA contributions contingent on substantiation of all withdrawals, beginning in 2011.  This oversight of every single account transaction would make HSAs similar to Flexible Spending Arrangements (FSAs), an earlier consumer-driven health care model.

How are FSAs and HSAs different?

One of the prime differences between the two account-based models lies in the control source for the funds in the account.  The Internal Revenue Code makes clear that FSA accounts are held by employers, while HSA funds remain exclusively the property of the employee.  This distinction explains why unused FSA funds in an employee’s account at the time of departure revert back to the employer, while HSA funds always remain with the employee, and remain portable from job to job and into retirement.  Some conservatives may be concerned about the potential implications of transferring a “substantiation” system designed for employer-owned FSAs to individually-owned HSAs—both in terms of the legal liabilities placed on employers and administrators to verify transactions, and the restrictions placed on individuals to control their HSA account dollars.

How are HSA and FSA withdrawals administered?

Right now, most HSA transactions take place using point-of-sale debit cards that make electronic fund transfers directly from the account.  Conversely, most FSA transactions remain paper-based, requiring out-of-pocket spending by the individual and subsequent reimbursement from the FSA after approval by an administrator.  While Treasury has released new regulations to make FSA reimbursement simpler, some conservatives may remain concerned that the Democrats’ proposed change may make the HSA model less attractive to consumers.

What penalties are currently in place to ensure HSA funds are spent on qualified medical expenses?

Under the Internal Revenue Code, non-qualified withdrawals from an HSA are subject to individual income taxes, as well as a 10% penalty.  HSA account activity is subject to audits from the Internal Revenue Service, and account holders are advised to retain their receipts documenting qualified medical expenses in the event of an audit.

What measures do HSA administrators currently have in place to ensure that withdrawals from the account are made for qualified medical expenses?

Right now, some banks that administer HSAs have electronic debit cards that can “read” the merchant code where the transaction is taking place (e.g. a doctor’s office).  If a request for transaction is occurring at a location not normally associated with qualified medical expenses, the debit card can decline the transaction.  Some administrators have developed more advanced technology to differentiate product codes within a merchant’s offerings—for instance, accepting grocery store transactions for cough syrup (a permissible over-the-counter drug) while rejecting attempts to purchase items within the same store for items without a clear medical use, such as beer or wine.  This advanced technology is in the process of being rolled out; however, many banks and account administrators have expressed their view that enactment of this legislative provision could prompt their withdrawal from the HSA marketplace.

Does the fact that some HSA withdrawals are made at places like grocery stores mean that these withdrawals are not for qualified medical expenses?

Not necessarily.  The list of qualified medical expenses is quite broad, and generally includes most items reimbursable from a Flexible Spending Arrangement or deductible on an individual tax return if total medical expenses exceed 7.5% of an individual’s adjusted gross income.  Under certain circumstances, legal expenses (to authorize mental health care), lodging and travel expenses (related to medical treatment) and even the cost of a telephone (for the hearing impaired) can be considered medical expenses.  Some conservatives may be concerned that the proposal under consideration would essentially shift the burden of proof from the government (to prove that an expenditure was improper in the context of a tax audit) to the consumer to prove compliance at the time of withdrawal, causing additional inconvenience to the HSA holder.

Are withdrawals made for causes other than qualified medical expenses unlawful?

Only if the account holder does not pay income taxes and a 10% penalty.  Under current law, it is the account holder’s obligation to declare such non-qualified withdrawals—a policy comparable to withdrawals from an Individual Retirement Account (IRA).  Account holders who do not pay appropriate taxes and penalties on withdrawals not for qualified medical expenses are subject to an Internal Revenue Service audit.

How many HSA withdrawals are unlawful?

The percentage is unclear for two reasons.  First, estimates of the amount of withdrawals made that do not involve qualified medical expenses vary.  While one HSA administrator claimed that 12% of withdrawals were made at vendors not normally associated with qualified medical expenses, HSA administrators affiliated with the American Bankers Association claim that only 2.7% of their withdrawals took place at such vendors—and, for the reasons explained above, the fact that a vendor is not a qualified health provider does not mean that a transaction itself is not a qualified medical expense.  A 2006 Government Accountability Office (GAO) study on HSA usage found that 10% of all withdrawals were made for purposes other than qualified medical expenses; however, GAO had only a single year (2004) of HSA withdrawal data available at the time it compiled its report.

What remains largely unknown is the percentage of transactions not associated with qualified medical expenses for which the account holder does not pay appropriate taxes and penalties.  At the Ways and Means markup, Treasury Department officials presented preliminary data indicating a relatively high rate of compliance with respect to self-attestation of non-qualified withdrawals, which if proven accurate would obviate the need for the legislative change.  Even as the Ways and Means Committee passed the substantiation language, both Democrats and Republicans decried the lack of available evidence to judge the need for this particular provision.

How does this provision save money for the federal government?

The Joint Committee on Taxation notes that Section 17 of H.R. 5719 would save $151 million over five years and $308 million over ten years.  However, the cause for this savings is unclear.  During the Ways and Means markup, Joint Tax staff admitted their inability to determine how much of the savings would result from newly captured penalties and taxes and how much of the savings would come from lower HSA take-up rates and/or lower contribution levels to HSAs.  Some conservatives may be concerned that it remains unclear whether this provision would achieve its stated purpose by increasing oversight of questionable HSA withdrawals—or will instead achieve budgetary savings by making HSAs less attractive to consumers.

Employers contribute money to their employees’ HSAs.  Shouldn’t they have a right to know that their contributions are being spent for medical purposes?

Unlike FSAs, which are considered as being held by the employer, an HSA is considered the employee’s property, and any cash contributions immediately accrue to the worker.  Thus an employer has no more or less right to know the employer’s contributions are spent on qualified medical expenses than a business has a right to determine that the employer’s share of 401(k) contributions is ultimately spent on retirement expenses.  In both cases, the penalties for a non-qualified distribution are the same—income taxes owed, plus a 10% penalty.

In an advisory opinion on the status of HSAs, the Department of Labor (DOL) held that an employer’s transfer of cash contributions into an employee’s HSA does not constitute group coverage under the Employee Retirement Income Security Act of 1974 (ERISA) because of the employer’s inability to control the funds in the employee’s account.  Many small businesses—who have heretofore not been able to finance health insurance coverage for their workers—have used the flexibility provided by the DOL opinion to place cash contributions into their employees’ HSAs without triggering the regulatory burdens imposed on ERISA group health insurance plans, benefiting both the business and the worker.

What may be the practical implications of this proposed change to HSAs?

In addition to increased inconvenience for end users, introducing a new step of independent “substantiation” may well increase costs for banks and account administrators, who are likely to pass these costs on to employers and/or consumers.  While Democrats have complained in recent months about the charges which banks and other commercial lending institutions pass on to their customers, this provision carries a strong likelihood of increasing those costs further.  In addition, some conservatives may also be concerned that should this proposal pass, an HSA mechanism created to reduce the growth of health care costs—and which has achieved some noteworthy successes in the time since its introduction—would lead to increased costs for businesses and individuals.

What organizations oppose this proposed change to HSAs?

Although some members of the business community support other provisions included in H.R. 5719, many organizations have expressed concern about the substantiation requirements—including the company (Evolution Benefits) that first brought the issue to the Committee’s attention.  A partial list of organizations opposing the HSA substantiation provision includes:

  • America’s Health Insurance Plans
  • Business Roundtable
  • Credit Union National Association
  • Financial Services Roundtable
  • HSA Council (part of American Bankers Association)
  • International Franchise Association
  • National Association of Health Underwriters
  • National Association of Manufacturers
  • National Federation of Independent Business
  • National Restaurant Association
  • National Retail Federation
  • National Taxpayers Union
  • U.S. Chamber of Commerce

Weekly Newsletter: April 14, 2008

Floor Vote Impending for Restrictions on Health Savings Accounts

The House Ways and Means Committee last week reported legislation that would enact new restrictions on Health Savings Accounts (HSAs) as part of tax legislation (HR 5719) anticipated on the floor this week. The legislative proposal would require all HSA account holders to independently verifiy the qualified nature of medical expenses for all withdrawals, subjecting those transactions not substantiated to income taxes. This language is a significant departure from an earlier draft proposal, which imposed an annual reporting requirement on beneficiaries to list their total substantiated and unsubstantiated HSA withdrawal amounts—but left enforcement in the hands of the Internal Revenue Service.

At the Ways and Means markup, Republicans and Democrats alike noted the scarcity of available data documenting whether and to what extent HSA holders are making non-qualified withdrawals without paying appropriate income taxes and penalties. In addition to the hurried process that saw the provision added to legislation without thorough vetting and/or committee hearings, some conservatives may be concerned by the Joint Committee on Taxation’s inability to determine what portion of the $308 million in purported “savings” from this provision stems from newly captured taxes and penalties and what portion of reduced tax expenditures comes from lower HSA take-up rates and contribution levels. In other words, it is unclear whether this provision will be effective in increasing oversight of questionable HSA expenditures—Democrats’ stated intent in passing this provision—or instead generate budgetary savings by making HSAs less attractive to consumers.

Some conservatives may be concerned that this proposal represents the first of perhaps many attempts by the Democrat majority to enact burdensome and bureaucratic regulations undermining HSAs, which in a few short years have proven successful at slowing the growth of health costs and insurance premiums for millions of individuals and small businesses. Some conservatives may also be concerned that the many banks and financial organizations who have expressed concerns about their ability to implement the substantiation requirements could end up increasing administrative costs for end users—or exiting the HSA marketplace entirely.

During floor debate, the RSC will weigh in to protect the important consumer-driven health programs which Republicans have succeeded in establishing in recent years.

An RSC Policy Brief discussing this issue is available here.

House Committee Marks Up Bill Overriding Medicaid Fiscal Integrity Regulations

On Wednesday, the House Energy and Commerce Committee held a subcommittee markup 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 was passed by voice vote, after Members adopted substitute language that would narrow the scope of the moratoria to permit CMS to continue to negotiate agreements with states on issues related to the proposed rules.

Despite the narrowing of the proposed moratoria, 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. Some conservatives also may be concerned that the moratoria on further regulatory action until April 2009 would transfer this issue to a new Administration, which could withdraw these proposed regulations to curb wasteful and abusive spending—and which will lower federal Medicaid spending by only 1% over the next five years.

Congressional Democrats have indicated their desire to include the moratoria provisions as part of the wartime supplemental appropriations measure. In addition, news reports have surfaced suggesting that a temporary increase in the federal Medicaid matching rate could be included in a second “stimulus” package, which could also be attached to the defense supplemental. Some conservatives may consider this proposed increase in federal matching funds a “bailout” to states who failed to incorporate into their long-term budgets the possibility of an economic downturn and its impact on state revenues.

Rather than attempting to enact measures that attempt to replace state funding with additional federal spending, some conservatives may believe that Congress should instead embrace the opportunity presented by this discussion to advance concepts for more comprehensive reform of Medicaid program financing, to control health care costs and set clear fiscal priorities for the use of scarce federal dollars.

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

Article of Note: “Is There a Doctor in the House?”

Last Sunday, a column in The Washington Post highlighted one of the key problems with government-funded health insurance—lack of access to care. The column cited a survey by the Medicare Payment Advisory Commission (MedPAC), noting that 29% of Medicare beneficiaries reported difficulty in searching for a new primary-care physician. Due to government-imposed price controls on physician reimbursement levels, many doctors have chosen not to accept additional Medicare-paying patients.

As Congress considers legislative actions connected with a 10.1% cut in physician reimbursements scheduled to take effect on July 1, some conservatives may believe that the access difficulties encountered by millions of American seniors—and the Medicare trustees’ recent funding warning noting that the Hospital Insurance Trust Fund will be exhausted in just over a decade—warrant a more comprehensive and lasting reform to entitlements. Converting Medicare into a system similar to the Federal Employees Health Benefit Plan (FEHBP), where beneficiaries receive a defined contribution from Medicare to purchase a health plan of their choosing, would ensure that all beneficiaries would have access to broad choices of insurance plans and physicians—rather than a government-controlled plan where rationed payments limit access to care. Just as important, by harnessing the benefits of competition, such a reform can slow the growth of health care spending, preserving Medicare for future generations.

Read the article here: “On Medicare and Scorned by the Docs” – The Washington Post

Weekly Newsletter: April 7, 2008

Democrats Plot Restrictions on Health Savings Accounts

Reports surfaced this week that the Democratic majority may be attempting to enact new restrictions on Health Savings Accounts (HSAs) as part of upcoming health legislation. The proposal being discussed would require that all HSA account holders submit information showing what portion of their HSA expenditures in a given year have been independently verified as constituting qualified medical expenses.

Available data suggest that the percentage of HSA funds being used for non-medical expenses is comparatively low—particularly upon close examination. For instance, purchases in a grocery store may at first blush appear irrelevant to HSA use—but in reality many of these transactions could involve permissible medical items (over-the-counter pharmaceuticals, prescriptions, medical supplies, etc.). And in those instances when individuals do use their HSA funds to make major non-health expenditures, the Internal Revenue Service has audit procedures in place to ensure that account-holders pay income taxes on non-qualified distributions—plus a 10% penalty to discourage such behavior.

When drafting the regulations implementing Health Savings Accounts in 2004, the Treasury Department attempted to create a framework that would ensure that HSA funds would be used for bona fide medical expenses, while avoiding burdensome regulations that would inhibit the growth of this innovative consumer-driven health product. The proposal under discussion places an additional burden on account holders to document their purchases—even the $3 bottle of cough syrup an individual might choose to buy at a grocery store like Safeway rather than at a CVS or other pharmacy—and may have a similarly chilling effect on insurance carriers and banks currently offering account-based products to individuals and employers.

Some conservatives may be concerned that this proposal represents the first of many impending attempts by the Democrat majority to enact burdensome and bureaucratic regulations undermining HSAs, which in a few short years have proven successful at slowing the growth of health costs and insurance premiums for millions of individuals and small businesses. Some conservatives may also be concerned that this particular provision, brought to the attention of the Democratic Ways and Means Committee staff by a former Republican staffer-turned-lobbyist, may constitute a legislative “earmark” drafted specifically to benefit one company (Evolution Benefits) seeking to market its substantiation technology to HSA administrators.

The attached policy brief explains the issue in further detail. The RSC will continue to monitor this or any similar attempts to enact burdensome restrictions on HSAs, and will weigh in to protect the important consumer-driven health programs which Republicans have succeeded in establishing in recent years.

House Committee Attempts to Override Medicaid Regulations Restoring Fiscal Integrity…

This past Thursday, the House Energy and Commerce Committee held a Subcommittee hearing 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 regulations come as a response 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, reducing their share of program spending through various mechanisms designed primarily to increase the amount of federal matching funds received. The Energy and Commerce Committee may mark up legislation overriding the regulations as soon as this week.

While several state officials testified about the impact that the proposed regulations would have on their Medicaid programs in the current economic downturn, many conservatives may be concerned about the ways in which various questionable financing schemes—some of which have been used by states for more than a decade—have left Medicaid paying for non-health-related activities, such as trips to grocery stores and bingo games. With the proposed regulations reducing the federal share of Medicaid spending by only 1% over the next five years, some conservatives may have concerns should Congress attempt to override CMS’ modest attempts to restore fiscal integrity to Medicaid. However, some conservatives may embrace the opportunity presented by this discussion to advance concepts for more comprehensive reform of Medicaid program financing, to control health care costs and set clear fiscal priorities for the use of scarce federal dollars.

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

…While Marking Up New Regulations on Tobacco

Thursday’s hearing in the Health Subcommittee followed Wednesday’s full Energy and Commerce Committee markup of legislation (H.R. 1108) that would impose authority on the Food and Drug Administration (FDA) to regulate tobacco. While the bill as modified in Committee altered proposed “user fee” language, some conservatives may remain concerned that the bill would impose additional free speech and marketing restrictions on tobacco companies, and could increase black market activity of tobacco products. Some conservatives may also echo the statements of FDA Commissioner Andrew von Eschenbach, who has stated that tobacco regulation is not in line with FDA’s core mission—and question why Congressional Democrats who have criticized the FDA’s handling of various matters related to food and drug safety now consider the agency competent to regulate tobacco products.

The RSC will be monitoring this legislation as it makes its way to the House floor, and will be weighing in during the process to express conservatives’ concerns.

Interview of Note: “Crisis? What Crisis?”

This past week, Chairman of the House Ways and Means Health Subcommittee Pete Stark (D-CA) appeared on C-SPAN’s Washington Journal to discuss the Medicare trustees’ report released during the congressional recess. When asked about the impact of the trustees’ projection that the Medicare Hospital Insurance Trust Fund would become insolvent in 2019—just over one decade from now—Stark answered: “I don’t think it makes any difference what they say.” This followed on the heels of his statement at Tuesday’s Health Subcommittee hearing that “Medicare is not in crisis.”

Many conservatives may be concerned by Chairman Stark’s insouciance at a time when the federal government faces spiraling costs for Medicaid, Medicare, and Social Security that both the Medicare trustees and most independent observers agree are unsustainable. Many conservatives believe that the time has long since arrived for the federal government to place its own fiscal house in order, because, as countless homeowners have observed in recent months, further delay will do nothing to prevent the problem—and will only make the ultimate solution harder on all parties.

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 (accessed March 1, 2008).

[2] Institute of Medicine, To Err Is Human: Building a Safer Health System, summary available online at (accessed March 1, 2008).

[3] Pennsylvania Health Care Cost Containment Council, Hospital Acquired Infections in Pennsylvania, available online at (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 (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 (accessed March 1, 2008).

[8] Kaiser Family Foundation, Trends and Indicators in the Health Care Marketplace, Section Five, available online at (accessed March 3, 2008) ; Whelan, “Bad Medicine.”