Health Care for Undocumented Immigrants

Background:  Data from this year’s Census Bureau report on the uninsured indicate that more than one-fifth—over 9.7 million—of the uninsured are foreign-born residents of the United States lacking American citizenship.  This category—which includes both legal residents not yet citizens as well as undocumented aliens—contains the highest percentage of uninsured Americans (43.8%) of any age, race, income, or other cohort included in the Census survey.[1]

While the Census Bureau reports do not contain specific data on the uninsurance rate among illegal immigrants, a 2005 study using data from the Los Angeles area provides some insight regarding this population.[2]  Extrapolating the 68% uninsured rate for aliens found in the Los Angeles study to a nationwide undocumented population of 12 million would yield approximately eight million uninsured—about one-sixth of the total number of uninsured Americans—who are illegally present.

Impact on Federal Programs:  In general, provisions in Title IV of the 1996 welfare reform law (P.L. 104-193) prohibit the provision of health care or other services to aliens illegally present in the United States.[3]  However, federal health care programs address the issue of verifying identity and nationality as a condition of providing care in various ways, while other programs attempt indirectly to offset the impact of uncompensated care for illegal aliens on health care providers.  The most important of these include:

Medicare:  Under Title XVIII of the Social Security Act, Medicare benefits are available to eligible citizens, as well as to legal aliens continually resident in the United States for at least five years prior to application for benefits.[4]  The five-year residency requirement was challenged on due process grounds, and eventually upheld by the Supreme Court in June 1976; Justice John Paul Stevens, writing for a unanimous Court, stated “it is obvious that Congress has no constitutional duty to provide all aliens with the welfare benefits provided to citizens.”[5]

The Social Security Administration (SSA) determines eligibility for Medicare benefits, including the process of verifying an applicant’s identity and citizenship (or legal resident status).  The standards used by SSA are found in federal regulations, and include evidence of age (e.g. birth certificate or hospital record), identity (e.g. driver’s license, school record, or other documents identifying an individual), and citizenship (e.g. birth certificate, passport, or certificate of naturalization).[6]

Medicaid:  Under the provisions of the welfare reform law, states may only receive federal Medicaid matching funds for legal U.S. citizens or qualified aliens (subject to a five-year waiting period in most cases.[7]  However, while the Medicaid statute has required since 1986 that applicants declare their nationality under penalty of perjury, until recently most states relied on self-attestation to verify citizenship status.[8]  A 2005 report by the Department of Health and Human Services Inspector General found that 40 states (including the District of Columbia) allowed self-declaration, with an additional seven states sometimes permitting self-declaration of citizenship status; of these 47 states, 27 did not verify the accuracy of the citizenship attestation.[9]

As a result of this report, Congress in the Deficit Reduction Act (DRA, P.L. 109-171) eliminated the ability of state Medicaid programs to rely on self-declarations by beneficiaries as the sole means of citizenship verification.  Specifically, Section 6036 of the Act requires states receiving federal Medicaid funds to verify participants’ identity and citizenship on the basis of appropriate documentation (e.g. passport, birth certificate, etc.).  The verification provisions do not apply to dual eligible (i.e. enrolled in both Medicare and Medicaid) beneficiaries, or to Medicaid beneficiaries receiving SSI benefits, as the Social Security Administration verifies the identities of these beneficiaries, as outlined above.

Shortly after the DRA provisions took effect, the Centers for Medicare and Medicaid Services (CMS) issued an interim final rule on July 12, 2006, using discretionary authority included in the DRA to expand the list of eligible documents that could be used to verify citizenship and/or identity, in order to ease the transition to the new verification regime.[10]  In addition, the Tax Relief and Health Care Act of 2006 (P.L. 109-432) exempted children in foster care from the DRA documentation provisions.  While the verification requirements were sharply criticized by some organizations at the time of their enactment, many conservatives may note the relative lack of controversy surrounding Medicaid verification two years after the provisions took effect as proof that citizenship verification can be implemented in an effective manner that ensures aliens do not have access to federal benefits while preserving existing programs for eligible individuals.

SCHIP:  Because of the hybrid nature of the State Children’s Health Insurance Program (SCHIP), only some children undergo citizenship verification as part of the application process.  The Balanced Budget Act of 1997 (P.L. 105-33), which created SCHIP, gave states the option to use SCHIP funds to expand their Medicaid programs, create a new program for SCHIP beneficiaries, or some combination of the two approaches.  The eight states (and the District of Columbia) which chose Medicaid expansion programs—as well as Medicaid participants in the 24 states with combination programs—are subject to the citizenship verification requirements enacted as part of DRA.[11]  However, the 18 states with separate SCHIP programs currently have no requirement to verify the identity and nationality of individuals before enrolling beneficiaries.

EMTALA:  Enacted in 1986 as part of the Combined Omnibus Budget Reconciliation Act (P.L. 99-272), the Emergency Medical Treatment and Active Labor Act (EMTALA) imposes requirements on hospitals accepting Medicare payments to treat patients in emergency conditions.  The Act’s requirements apply to all patients, regardless of their Medicare eligibility status, ability to pay, or immigration status.[12]  The Act also includes significant penalties: violations of EMTALA can result in fines of up to $50,000 and exclusion from the Medicare program in repeated or egregious cases, as well as lawsuits by patients adversely harmed by an EMTALA violation.

In recognition of the rising costs to providers associated with the EMTALA unfunded mandate, particularly as it relates to care for illegal aliens, Section 1011 of the Medicare Modernization Act (P.L. 108-173) provided a total of $1 billion in grants directly to providers (though on the basis of state-based formulae) for uncompensated emergency care given to illegal aliens—$250 million for each of Fiscal Years 2005 through 2008.

Community Health Centers:  Under the Public Health Service Act, the federal government provides competitive grants to federally qualified health centers, including migrant health centers.  In 2007, health centers treated 16.3 million patients, while the health centers grant program received $2.065 billion in the Fiscal Year 2008 omnibus appropriations bill (P.L. 110-161).[13]  Subsequent legislation passed in the House (H.R. 1343) and Senate (S. 901) would increase health center authorization levels to $15 billion over the FY09-FY13 period.

The statute authorizing the health centers grant program requires that care not be denied to patients based on an inability to pay for services.[14]  In addition, the Congressional Research Service reports that grant recipients are not required to verify the citizenship status of their patients.  Given that the authorizing statute is silent with respect to enforcing the prohibition against federal benefits being provided to illegal immigrants, some conservatives therefore may be concerned that federal tax dollars are being used to provide aliens with health care services.

Disproportionate Share Hospital (DSH) Payments:  While not providing care to illegal aliens, the section of the Medicaid statute related to DSH payments implicitly recognizes the impact this population can have on providers.  In particular, the statute deems hospitals with a low-income utilization rate of 25% as qualifying for DSH payments, without limiting the low-income population to citizens normally eligible for federally-funded care.[15]  As a result, states may allocate portions of their Medicaid DSH payments—estimated to total $8.8 billion in Fiscal Year 2008—to offset care provided by hospitals to illegal aliens.[16]

Legislative Proposals:  Much of the debate surrounding health care for aliens during the 110th Congress has focused on SCHIP reauthorization.  While many Democrats have attempted to use reauthorization as a vehicle to limit or repeal the Medicaid citizenship verification provisions enacted in DRA, many conservatives believe that a reauthorized SCHIP program should incorporate the Medicaid documentation requirements to improve the integrity of the program.

More specifically, H.R. 3162, passed by the House in July 2007, would make Medicaid citizenship verification a state option for children under 21, retroactive to the July 2006 effective date of the DRA provisions.  In addition, Section 112 of the bill would also establish “Express Lane” agencies to enroll beneficiaries in Medicaid and SCHIP, without including citizenship verification or documentation requirements; Section 136 would require states to conduct audits on a sample caseload to ensure that federal Medicaid and SCHIP funds “are not unlawfully spent” on illegal aliens.  Some conservatives may be concerned that the removal of the mandatory Medicaid verification language for children, along with the “Express Lane” provisions, would effectively undermine the important reforms enacted as part of DRA, and that sample audits would not be sufficient to ensure compliance with provisions of the 1996 welfare law cited above stating that no illegal alien may receive federal health or welfare benefits.

H.R. 3963, vetoed by the President in October 2007, would extend citizenship verification requirements to both the SCHIP program has a whole and the “Express Lane” mechanism outlined in H.R. 3162 above.  However, the bill would provide an alternative verification process to the DRA provisions that would instead rely upon name and Social Security number validation—a process which, according to a September 2007 letter from Social Security Administration Commissioner Michael Astrue, would not keep an applicant from fraudulently receiving coverage under Medicaid or SCHIP (if they claimed they were someone they were not).  Some conservatives may therefore be concerned that this provision—coupled with the incentive to states provided by a greatly enhanced federal match to establish this more lenient verification system—would weaken the process put in place by the Deficit Reduction Act.

Conversely, several proposed Republican SCHIP alternatives (H.R. 3176, H.R. 3888, and S. 2193) would apply the Medicaid citizenship verification requirements, as created by the DRA, to the SCHIP program, with an enhanced federal match for administrative costs.  Some conservatives would support the extension of the reasonable Medicaid DRA provisions to the SCHIP program, along with an enhanced administrative match to reimburse states for any increase in overhead costs associated with citizenship verification.

More recently, press reports indicate that the Democratic “Tri-Caucus” of Hispanic, Black, and Asian Members have written to Speaker Pelosi asking her to include provisions repealing the five-year waiting period for qualified aliens to become eligible for Medicaid or SCHIP coverage as part of any SCHIP bill considered by the House this fall.[17]  This change would alter provisions in the 1996 welfare reform law—which also prohibited illegal aliens from receiving federal benefits—that limited access to benefits for most “qualified aliens” for five years.[18]  Some conservatives may be concerned that this provision would increase costs while encouraging would-be immigrants to file claims for asylum in order to obtain federal health care coverage.

Implications for Comprehensive Health Reform:  In light of reports suggesting that illegal immigrants represent a significant—and fast-growing—component of the uninsured in America, some conservatives may focus on two elements necessary to address this issue in any comprehensive health care bill that may be considered.  First, consistent with the debate surrounding SCHIP legislation during this Congress, many conservatives may believe that any reform package must include provisions similar to those in the DRA that impose verification requirements for all applicants to preserve the integrity of federal programs and avoid providing incentives for illegal immigration.  For instance, while the Healthy Americans Act (S. 334) by Sen. Ron Wyden (D-OR) excludes access to new state-based health plans for illegal immigrants, it contains no enforcement or verification provisions to implement this restriction.

Secondly, some conservatives may be concerned about the impact which uncompensated care given to illegal immigrants may impose on providers, particularly hospitals.  The unfunded mandate created by EMTALA has a significant impact on providers treating illegal immigrants, who are less likely to have the health insurance necessary to pay catastrophic expenses.  The combination of DSH payments and the $1 billion uncompensated care fund created by MMA, scheduled to sunset at the end of the fiscal year, only partially defer the uncompensated care cost paid by providers who treat illegal aliens.

Consistent with the conservative concerns about uncompensated care is the relatively new phenomenon of lawsuits against hospitals initiated by illegal immigrants.  The New York Times recently reported on a case from Florida where a hospital, having provided $1.5 million in uncompensated care to a Guatemalan alien, asked for and obtained a court order to return the immigrant to Guatemala; no nursing home in the United States would accept an alien patient without insurance and ineligible for Medicaid, while the hospital could not release a patient with brain injuries into the general population without arranging post-discharge care.[19]  In a case with potentially far-reaching implications, relatives for the alien had the Florida court order reversed after deportation—and subsequently filed suit against the hospital for false imprisonment.

Though tragic on multiple levels, the Florida case highlights a reality a growing number of providers may face—offer virtually unlimited care to illegal aliens, even when an inability to pay is glaringly apparent, or face legal action initiated by the aliens or their caretakers.  Therefore, some conservatives may support actions designed to ensure that providers offering reasonable emergency care to illegal aliens need not be subjected to additional and costly lawsuits.

Conclusion:  The Census data breaking down the uninsured by citizenship and national origin, while not widely publicized, illustrate one reason why the concept of universal health insurance coverage may prove ineffective.  Democrat proposals for an individual mandate to purchase coverage would prove ineffective for this population, who by their very presence have already violated United States law.  Although the uninsured population is not limited to undocumented aliens, many conservatives may believe that a truly comprehensive solution to this health care issue must address the significant demands on the health care system placed by illegal immigrants in a way that preserves the fiscal integrity of existing entitlement programs while protecting providers from liability imposed upon them by aliens illegally present.

 

[1] “Income, Poverty, and Health Insurance Coverage in the United States: 2007” (Washington, Census Bureau, August 2008), available online at http://www.census.gov/prod/2008pubs/p60-235.pdf (accessed August 26, 2008), Table 6, p. 30.

[2] Dana Goldman, James Smith, and Neeraj Sood, “Legal Status and Health Insurance among Immigrants,” Health Affairs 24:6 (November/December 2005), 1640-1653.

[3] Illegal aliens are eligible for emergency care (as defined by the EMTALA statute discussed below) provided under Medicaid, and for public health assistance with respect to immunization for, and treatment of, communicable diseases.  Some groups of qualified aliens—excluding those illegally present—are eligible for other federal benefits, as discussed below.

[4] Available at 42 U.S.C. 1395o.

[5] Mathews v. Diaz, 426 U.S. 82 (1976).

[6] Some examples of documentation can be found at 20 CFR 422.107.  In addition, SSA’s Program Operations Manual System (POMS) includes guidelines for workers in SSA field offices; the section of the manual relating to citizenship, alien status, and residency can be found online at https://s044a90.ssa.gov/apps10/poms.nsf/lnx/0200303000 (accessed August 25, 2008).

[7] According to the Kaiser Family Foundation, 17 states provide benefits funded solely by state dollars to illegal aliens and/or aliens subject to the waiting period.  See “Health Insurance Coverage and Access to Care for Low-Income Non-Citizen Adults,” (Washington, Kaiser Policy Brief #7651, June 2007), available online at http://www.kff.org/uninsured/upload/7651.pdf (accessed August 26, 2008), p. 3.

[8] The requirement is in Section 1137 of the Social Security Act, available at 42 U.S.C. 1320b-7(d)(1)(A).

[9] Daniel Levinson, “Self-Declaration of U.S. Citizenship for Medicaid,” (Washington, DC, HHS Office of the Inspector General, Report OEI-02-03-00190, July 2005), available online at http://oig.hhs.gov/oei/reports/oei-02-03-00190.pdf (accessed August 20, 2008), pp. 16-18.

[10] A final rule incorporating comments to the July 12, 2006 interim final rule was published in the Federal Register on July 13, 2007 and can be found online at http://edocket.access.gpo.gov/2007/pdf/07-3291.pdf (accessed August 20, 2008).

[11] A state-by-state breakdown of SCHIP program status can be found in Congressional Research Service, The State Children’s Health Insurance Program (SCHIP): An Overview, Report RL 30473, available online at http://www.congress.gov/erp/rl/pdf/RL30473.pdf (accessed August 21, 2008), Table 1, Column 1, pp. 18-21.

[12] The full EMTALA statute can be found at 42 U.S.C. 1395dd.

[13] Fiscal Year 2009 HHS Budget in Brief, available online at http://www.hhs.gov/budget/09budget/2009BudgetInBrief.pdf (accessed August 20, 2008), pp. 21-25.

[14] The statutory language is available at 42 U.S.C. 254b(k)(3)(G)(iii)(I).

[15] The definitions of Medicaid DSH institutions can be found at 42 U.S.C. 1396r-4(b).

[16] March 2008 CBO Medicaid baseline, available online at http://www.cbo.gov/budget/factsheets/2008b/medicaidBaseline.pdf (accessed August 20, 2008).

[17] Mike Soraghan, “Minority Caucuses to Press for Two SCHIP Provisions,” The Hill August 13, 2008, available online at http://thehill.com/leading-the-news/minority-caucuses-to-press-for-two-schip-provisions-2008-08-12.html (accessed August 21, 2008).

[18] Title IV of P.L. 104-193 did contain some exceptions to the “qualified alien” waiting period—most notably for legal permanent residents with a substantial work history (i.e. 40 qualifying quarters of Social Security coverage) and for those with a military connection (i.e. veterans, active-duty servicemen, and their spouses and dependents).

[19] Deborah Sontag, “Immigrants Facing Deportation by U.S. Hospitals,” New York Times August 3, 2008, available online at http://www.nytimes.com/2008/08/03/us/03deport.html?_r=1&sq=jimenez&st=cse&adxnnl=1&oref=slogin&scp=10&adxnnlx=1219331895-evIAEOYXEq2SKfB7dLGcEg&pagewanted=print (accessed August 21, 2008).

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

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

Process for a Vetoed Bill:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Year Statutory

Annual

Update (%)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

Medicare Physician Payment Policy

History and Background:  In 1989, the Omnibus Budget Reconciliation Act (P.L. 101-239) established a new physician fee schedule for Medicare, replacing the reasonable charge payment formula that had existed since the program’s inception.  The fee schedule was designed to alleviate perceived disparities in physician reimbursement levels by more closely tying payment to the amount of resources used for a given service or procedure.  The Balanced Budget Act of 1997 (P.L 105-33) modified the fee schedule formula, creating the Sustainable Growth Rate (SGR) mechanism as a means to incorporate cumulative physician spending into reimbursement levels.  In addition to slowing the growth of Medicare spending by setting an overall target for physician expenditure levels, the SGR was also intended to eliminate the fluctuations associated with setting annual (as opposed to cumulative) spending targets.

Payment Formula:  Under current Medicare law, doctors providing health care services to Part B enrollees are compensated through a “fee-for-service” system, in which physician payments are distributed on a per-service basis, as determined by the fee schedule and an annual conversion factor (a formula dollar amount).  The fee schedule assigns “relative values” to each type of provided service, reflecting physicians’ work time and skill, average medical practice expenses, and geographical adjustments.  In order to determine the physician payment for a specific service, the conversion factor ($38.0870 through June 2008) is multiplied by the relative value for that service.  For example, if a routine office visit is assigned a relative value of 2.1, then Medicare would provide the physician with a payment of $79.98 ($38.0870 x 2.1) for that service.

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

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

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

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

Since 2003, Congress has chosen to override current law, providing doctors with increases each year, and level funding in 2006.  In 2007, Congress provided a 1.5% update bonus payment for physicians who report on quality of care measures, and legislation enacted in December 2007 (P.L. 110-173) provided a 0.5% update for January through June of 2008.  The specific data for each year are outlined in the following table.

Year Statutory

Annual

Update (%)

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

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

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

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

Because the Tax Relief and Health Care Act (P.L. 109-432), signed into law in December 2006, provided that 2007’s Congressional “fix” was to be disregarded for the purpose of calculating the SGR in 2008 and future years, the 10.1% negative annual update for 2008 will be restored once the December 2007 legislation expires on July 1, 2008, absent further Congressional action.

Participation and Assignment:  When treating Medicare beneficiaries, physicians may choose to accept assignment on a claim, agreeing to accept Medicare’s payment of 80% of the approved fee schedule amount—with the beneficiary paying the remaining 20% as coinsurance—as payment in full for the claim of service.  Physicians who agree to accept assignment on all Medicare claims in a given year are classified as participating physicians.  Physicians classified as non-participating—those who may accept assignment for some, but not all, claims in a given year—only receive 95% of the fee schedule amount for participating physicians on those claims for which they accept assignment.  The Medicare Payment Advisory Commission (MedPAC) reports that 93.3% of physicians and other providers who bill Medicare agreed to participate in Medicare during 2007, with 99.4% of allowed charges being accepted on assignment from physicians (both participating and non-participating).[1]

In cases where a physician considers the Medicare payment level under the fee schedule and SGR formula an insufficient reimbursement for the time and resources necessary to perform the relevant service, the physician’s opportunities to charge beneficiaries the full value of the service performed are extremely limited.  Non-participating physicians may “balance bill” beneficiaries for charges above the Medicare fee schedule amount on claims where the physician does not accept assignment from Medicare.  However, physicians may not bill beneficiaries in excess of 115% of the non-participating fee schedule amount—which, because Medicare fees are lower for non-participating physicians, has the effect of limiting “balance billing” to 9.25% above the fee schedule amount for participating physicians.  Moreover, providers who wish to “balance bill” their beneficiaries in some cases will therefore be classified as non-participating, resulting in a 5% reduction in fee schedule amounts for all claims—including those for which the provider is willing to accept assignment—in a given year.

Conclusion:  The Medicare funding warning issued by the plan’s trustees last year, and again this past March, provides an opportunity to re-assess the program’s structure and finance.  These two consecutive warnings—coupled with the trustees’ estimate that the Medicare trust fund will be exhausted in just over a decade’s time—should prompt Congress to consider ways to reduce the growth of overall Medicare costs, particularly those which utilize competition and consumer empowerment to create a more efficient and cost-effective Medicare program.

Viewed through this prism, the current Medicare physician reimbursement fee schedule may be perceived by some conservatives as symptomatic of the program’s larger problems.  While the SGR mechanism has provided several opportunities in recent years to review physician payment levels, the changes made by Congress as a result of such reviews have generally only made minor, temporary adjustments to the current system of government-dictated fee schedules.  These legislative vehicles have not revamped or repealed the fee schedule formula to take market forces into account, instead delving into the minutiae of provider reimbursement levels to arrive at a short-term fix that meets budgetary muster.  However, as Senate Finance Committee Chairman Baucus recently conceded at a health care summit: “How in the world am I supposed to know what the proper reimbursement should be for a particular procedure?”[2]  Therefore, even though supporting actions that yield budgetary offsets slowing the growth of Medicare spending, some conservatives may still view legislative outcomes that do not comprehensively address the lack of market forces in a government-dictated fee schedule as lacking.

Some conservatives may support legislative provisions designed to repeal prohibitions on “balance billing” by providers, either for all Medicare beneficiaries or only for those beneficiaries already subject to means-testing for their Part B premiums.  Such a measure, which has been introduced by several RSC Members in various forms in recent Congresses, would inject some free-market principles into Medicare, by allowing providers to charge reasonable levels for their services rather than adhering to government-imposed price controls.  Additionally, this policy change could have the potential to slow the growth of health costs at the margins, by providing slightly greater beneficiary exposure to the true cost of care, which in some cases may be subsidized by the monopsony power Medicare exercises over providers.

On a more fundamental level, some conservatives may also support a premium support model that would convert Medicare into a system similar to the Federal Employees Benefit Health Plan (FEHBP), in which beneficiaries would receive a defined contribution from Medicare to purchase a health plan of their choosing.  Previously incorporated into alternative RSC budget proposals, a premium support plan would provide comprehensive reform, while confining the growth of Medicare spending to the annual statutory raise in the defined contribution limit, thus ensuring long-term fiscal stability.  Just as important, by potentially shifting the focus of Medicare from a government-run program to a series of private payers, it would reduce or eliminate the need for the seemingly annual ritual of adjustments to Medicare fee schedule amounts, and may ensure that providers receive more reasonable and consistent reimbursement levels.  By confining the growth of Medicare spending and limiting the opportunities for Congress to tinker with physician and other reimbursement policies, some conservatives may view a premium support model as a return to the principle of more limited government.

 

[1] Medicare Payment Advisory Commission, “Report to the Congress: Medicare Payment Policy,” (Washington, DC, March 2008), available online at http://www.medpac.gov/documents/Mar08_EntireReport.pdf (accessed June 16, 2008), pp. 110-11.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

[4] Ibid., p. 19.

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

[6] Ibid., p. 24.

[7] See ibid., p. 30.

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

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

Medicaid and the States

Executive Summary:  The Centers for Medicare and Medicaid Services (CMS) has issued several proposed regulations concerning various issues relating to federal reimbursement of certain Medicaid services.  Although the proposed regulations address state financing arrangements that government reports have questioned for decades, the Democratic Congress passed moratoria prohibiting CMS from issuing final regulations.  Many conservatives may be wary of any further legislative efforts to override the proposed regulations—or to provide a temporary increase in the federal Medicaid match in an economic “stimulus” bill—as encouraging states to engage in questionable funding schemes and poor financial planning, resulting in significantly higher outlays for the federal government.

Background:  The Medicaid program, enacted in 1965, serves as a federal-state partnership providing entitlement health care coverage to certain low-income and disabled populations.  Federal funding for the program is provided on a matching basis, according to a Federal Medical Assistance Percentage (FMAP) formula established in statute.

Because of the nature of the federal match, states have for some time created mechanisms designed to maximize the federal share of spending on Medicaid services.  In 1991, Congress passed legislation (P.L. 102-234) designed to restrict Medicaid provider taxes, as states were collecting funds from providers, then rebating those funds back to the providers once the states had utilized the taxes collected to capture additional federal matching funds.  The 1991 provisions were designed to avoid provider-specific taxes, and included “hold harmless” mechanisms guaranteeing that providers would receive all their money back after it was used by the state to recoup additional federal funds; however, broad-based provider taxes remained permissible, and states soon developed other ways to maximize federal Medicaid spending.

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.  Specifically, the various proposed rules 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;
  • Eliminate Medicaid reimbursement for graduate medical education;
  • Restrict the scope of rehabilitation services subject to the federal Medicaid match and eliminate coverage of day habilitation services for individuals with developmental disabilities;
  • Prohibit federal Medicaid payments for administrative activities performed by schools and transportation of children to and from school;
  • Restrict the scope of Medicaid outpatient hospital services and clarify the upper payment classification for outpatient services; and
  • 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.

The proposed regulations were issued at various times between May and December 2007, and are collectively projected to result in at least $12.1 billion in savings to the federal government over the next five fiscal years.[1]  By point of comparison, these savings would constitute approximately 1% of total federal spending on Medicaid, which over the next five years is estimated to total $1.2 trillion.[2]

In addition, in February 2008, CMS issued proposed regulations altering current regulations on provider taxes; this rule, proposed as a result of legislative changes enacted in the Tax Relief and Health Care Act of 2006 (P.L. 109-432) and the Deficit Reduction Act of 2005 (P.L. 109-173), would reduce the maximum provider tax under the federal “safe harbor” from 6% to 5.5% and make other related changes, saving an estimated $400-600 million over five years.[3]

Recent Legislative Developments:  In response to several of the Medicaid payment rules proposed last year, Congress has taken action to block CMS from issuing final regulations.  Section 7002(a)(1) of the 2007 wartime supplemental appropriations bill (P.L. 110-28) prohibited promulgation of regulations related to cost limits for providers and graduate medical education (GME) for one year—until May 25, 2008.  In addition, Medicare physician payment legislation passed last December (P.L. 110-173) included prohibitions on promulgation of regulations addressing rehabilitation and school-based transportation services until June 30, 2008.

On March 13, 2008, House Energy and Commerce Committee Chairman John Dingell (D-MI) and Rep. Tim Murphy (R-PA) introduced H.R. 5613, Protecting the Medicaid Safety Net Act.  The legislation would extend until April 1, 2009, the existing moratoria on CMS’ issuance of the Medicaid regulations discussed above, and would further impose moratoria on issuance of  proposed rules addressing case management, re-defining hospital outpatient services, and allowable provider taxes.  An Energy and Commerce hearing on the legislation is scheduled for April 3, 2007, and further legislative action is possible, either as a stand-alone measure or as part of Medicare physician reimbursement legislation.

In addition, House Energy and Commerce Health Subcommittee Chairman Frank Pallone (D-NJ) has introduced H.R. 5268, which would provide a temporary increase in federal Medicaid matching funds to states under the FMAP formula for five fiscal quarters, through October 2009.  Similar proposals were circulated early this year as part of the debate surrounding the “stimulus” bill; while the National Governors Association and state Medicaid directors expressed strong support for these provisions, they were not included in the final legislation.  However, it is possible but not certain that such measures regarding FMAP could be attached to either the wartime supplemental appropriations legislation or a possible second “stimulus” package being discussed by the Democratic leadership.

GAO Analysis:  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.[4]  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.”[5]

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.[6]

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.”[7]

Many of the GAO reports over the past decade—whose titles are listed at the bottom of this brief—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.[8]  Several of CMS’ proposed regulations attempt to remedy this problem, and restore clarity and fiscal integrity to the Medicaid program.

Reports of 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.[9]

Likewise, reports from the Department of Health and Human Services’ Inspector General 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.

Conservative Concerns:  Given the many GAO reports highlighting problems with state Medicaid financing schemes, and the disturbing reports of fraud and graft within many Medicaid programs, some conservatives may be troubled by potential legislative action to override CMS’ modest attempts at limiting questionable behavior by state Medicaid agencies.  Likewise, a potential increase in the Medicaid FMAP formula might be viewed by some conservatives as a “bailout” for states which over-extended entitlement promises over the last few years—and which have failed to implement strong anti-fraud programs to ensure that Medicaid funds are spent wisely.  Some conservatives may argue that states wishing to reverse CMS’ proposed rules, or to seek an “emergency” FMAP increase from the federal government, should first ensure that their own fiscal houses are in order with respect to Medicaid waste, fraud, and abuse.

Although many state governors and Medicaid directors have pointed to the recent economic slowdown as putting a particular squeeze on their budgets, a recent study by researchers at the Urban Institute found that revenue loss generates a measurably larger impact on state budgets than enrollment increases in Medicaid and related public health programs.[10]  Because potential state deficits during economic downturns therefore stem largely from failed revenue models rather than greater public reliance on Medicaid and related programs, some conservatives may question whether the tactic of relying upon the federal government for backstop assistance will have the twin negative effects of increasing federal spending and debt while encouraging “moral hazard” among states with flawed budgetary models.

However, the discussion of Medicaid funding levels does provide conservatives with an opportunity to raise the important issue of entitlement reform.  One possible solution would see Medicaid converted into a block grant program, allowing for predictable payments to states, ending state distortionary schemes designed to win additional federal dollars, and enabling Congress to engage in a more rational attempt to control health care costs while setting clear national fiscal priorities.  At a minimum, some conservatives may support efforts to convert those portions of Medicaid not directly related to essential medical services into a discretionary spending program, which would re-focus Medicaid on its original mission of providing health care for low-income individuals, while allowing services tangential to that mission to compete with other federal programs for scarce funding dollars.

 

[1] Kaiser Commission on Medicaid and the Uninsured, “Medicaid: Overview and Impact of New Regulations,” (Washington, DC, Report 7739, January 2008), available online at http://kff.org/medicaid/upload/7739.pdf (accessed March 31, 2008), p. 2.

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

[3] Jean Hearne, “Medicaid Provider Taxes,” CRS Report RS22843, March 21, 2008, pp. 4-6.

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

[5] Ibid., p. 19.

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

[7] Ibid., p. 24.

[8] See ibid., p. 30.

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

[10] John Holahan, Stan Dorn, et al., “Medicaid, SCHIP, and Economic Downturn: Policy Challenges and Policy Responses,” (Washington, DC, Alliance for Health Reform briefing on Health Care and the Economic Slowdown, February 15, 2008), available online at http://www.allhealth.org/briefingmaterials/MedicaidSCHIPeconomicdownturn_2-14-2008-1079.ppt (accessed March 29, 2008).