How the Obama Administration Hid Facts to Pass Obamacare

Over the weekend, Politico ran a report about how a “Trump policy shop filters facts to fit his message.” The article cited several unnamed sources complaining about the office of the Assistant Secretary for Planning and Evaluation (ASPE) within the Department of Health and Human Services (HHS), and its allegedly politicized role within the current administration.

One of the article’s anonymous sources called ASPE’s conduct over the past 18 months “another example of how we’re moving to a post-fact era.” Richard Frank, a former Obama appointee and one of the few sources to speak on the record, said that he found the current administration’s “attack on the integrity and the culture of the office…disturbing.”

As a congressional staffer conducting oversight of the CLASS Act in 2011-12, I reviewed thousands of pages of e-mails and documents from the months leading up to Obamacare’s passage. Those records strongly suggest that ASPE officials, including Frank, withheld material facts from Congress and the public about CLASS’s unsustainability, because full and prompt disclosure could have jeopardized Obamacare’s chances of passage.

About the CLASS Act ‘Ponzi scheme’

The Community Living Assistance Services and Supports program, or CLASS for short, intended to provide a voluntary insurance benefit for long-term care. Included as part of Obamacare, the program never got off the ground. In October 2011, HHS concluded it could not implement the program in an actuarially sound manner; Congress repealed the program entirely as part of the “fiscal cliff” deal enacted into law in the early days of 2013.

CLASS’s prime structural problem closely resembled that of the Obamacare exchanges—too many sick people, and not enough healthy ones. Disability lobbyists strongly supported the CLASS Act, hoping that it would provide financial support to individuals with disabilities. However, its voluntary nature meant that the more people already with disabilities enrolled and qualified for benefits, the higher premiums would rise, thereby discouraging healthy people from signing up.

Moreover, although actuarially questionable in the long-term, CLASS’s structure provided short-term fiscal benefits that aided Obamacare’s passage. Because CLASS required a five-year waiting period to collect benefits, the program would generate revenue early in its lifespan—and thus in the ten-year window budget analysts would use to score Obamacare—even if it could not maintain balance over a longer, 75-year timeframe.

This dynamic led the Senate Budget Committee Chairman Kent Conrad (D-ND), to dub CLASS “a Ponzi scheme of the first order, the kind of thing Bernie Madoff would have been proud of.”

Internal Concerns Minimized in Public

A report I helped draft, which several congressional offices released in September 2011—weeks before HHS concluded that program implementation would not go forward—highlighted concerns raised within the department during the debate on Obamacare about CLASS’ unsustainable nature. For instance, in September 2009, one set of talking points prepared by ASPE indicated that, even after changes made by Congress, CLASS “is still likely to create severe adverse selection problems”—i.e., too many sick people would enroll to make the program sustainable.

Frank told me that, during one public speech in October 2009, “I spent about half my time setting out the problems with CLASS that needed to be fixed.” He did indeed highlight some of the actuarial challenges the CLASS program faced. But Frank’s remarks, at a Kaiser Family Foundation event, closed thusly:

We’ve, in the department, have modeled this extensively, perhaps more extensively than anybody would want to hear about [laughter] and we’re entirely persuaded that reasonable premiums, solid participation rates, and financial solvency over the 75-year period can be maintained. So it is, on this basis, that the Administration supports it that the bill continues to sort of meet the standards of being able to stand on its own financial feet. Thanks.

Frank told me over the weekend that his comments “came at the end of my explaining that we were in the process of addressing those issues” (emphasis mine). But Frank actually said that the Obama administration was “entirely persuaded” of CLASS’ solvency, which gives the impression not that the department had begun a process of addressing those issues, but had already resolved them.

Frank’s public comments notwithstanding, ASPE had far from resolved the actuarial problems plaguing CLASS. Two days after his speech, one of Frank’s employees sent around an internal e-mail suggesting that the CLASS Act “seems like a recipe for disaster.”

But the ‘Fixes’ Fall Short

In response to these new analyses, HHS and ASPE came up with a package of technical fixes designed to make the CLASS program actuarially sound. One section of those fixes noted that “it is possible the authority in the bill to modify premiums will not be sufficient to ensure the program is sustainable.”

However, the proposed changes came too late:

  • No changes to the CLASS Act made it into the final version of Obamacare, which then-Majority Leader Harry Reid (D-NV) filed in the Senate on December 19, 2009.
  • The election of Scott Brown (R-MA) to replace the late Kennedy in January 2010 prevented Democrats from fixing the CLASS Act through a House-Senate conference committee, as Brown had pledged to be the “41st Republican” in the Senate who would prevent a conference report from receiving a final vote.
  • While the House and Senate could (and did) pass some changes to Obamacare on a party-line vote through the budget reconciliation process, the Senate’s “Byrd rule” on inclusion of incidental matters in a budget reconciliation bill prevented them from addressing CLASS.

The White House’s own health care proposal, released in February 2010, discussed “a series of changes to the Senate bill to improve the CLASS program’s financial stability and ensure its long-run solvency.” But as HHS Secretary Kathleen Sebelius later testified before the Senate Finance Committee, the “Byrd rule” procedures for budget reconciliation meant that those changes never saw the light of day—and could not make it into law.

Kinda Looks Like a Conspiracy of Silence

By the early months of 2010, officials at ASPE knew they had a program that they could not fix legislatively, and could fail as a result. Yet at no point between January 2010, when ASPE proposed its package of technical changes, through Obamacare’s enactment, did anyone within the administration admit that the program could prove impossible to implement.

Over the weekend, I asked Frank about this silence. He responded that “when the reconciliation package was shelved”—which I take to mean that the CLASS changes did not make it into the reconciliation bill, which did pass—“we began working on regulatory remedies that might address the flaws in CLASS.” However, from the outset some of Frank’s own employees believed those changes might prove insufficient to make the program actuarially sound, as it later proved.

To put it another way: In February 2011, Sebelius testified before the Senate Finance Committee that “the snapshot [of CLASS] in the bill, I would absolutely agree, is totally unsustainable.” She, Frank, and others within the administration had known this fact one year previously: They just hoped they could arrive at a package of regulatory changes that would overcome the law’s structural flaws.

But did anyone within the administration disclose that CLASS was “totally unsustainable” as written back in February 2010? No, because doing so could have jeopardized Obamacare’s chances of passage. The law passed the House on a narrow 219-212 margin.

If HHS had publicly conceded that CLASS could become a “zombie” program—one that they could not fix, but could not remove—it would have caused a political firestorm, and raised broader questions about the bill’s fiscal integrity that could have prevented its enactment.

Was Obamacare Sold on a Lie?

Conservatives have pilloried Obamacare for the many false statements used to sell the law, from the infamous “Lie of the Year” that “If you like your plan, you can keep it” to the repeated promises about premium reductions, Barack Obama’s “firm pledge” to avoid middle-class tax increases, and on and on.

But there are sins of both commission and omission, and the CLASS Act falls into the latter category. Regardless of whether one uses the loaded term “lie” to characterize the sequence of events described above, the public statements by HHS officials surrounding the program prior to Obamacare’s enactment fell short of the full and unvarnished truth, both as they knew it at the time, and as events later proved.

Politico can write all it wants about ASPE under Trump “filter[ing] facts to fit his message.” But ASPE’s prior failure to disclose the full scope of problems the CLASS Act faced represents a textbook example of a bureaucracy hiding inconvenient truths to enact its agenda. If anonymous HHS bureaucrats now wish to attack a “post-fact era” under Trump, they should start by taking a hard look in the mirror at what they did under President Obama to enact Obamacare.

This post was originally published at The Federalist.

More CBO Transparency Could Have Prevented Obamacare’s CLASS Debacle

Mere days into a Republican Congress, Democrats are making charges of ideological bias when it comes to the majority’s handling of the Congressional Budget Office. A group of leading Senate Democrats wrote a letter to House Speaker John Boehner specifically noting that “a CBO director should not be required to revise the score of the Affordable Care Act in order to please partisan interests.” It’s an ironic charge, given that it’s far from partisan to question why the CBO failed to perform analyses that could have predicted the collapse of an $86 billion Obamacare program — exactly what happened under its current director, Doug Elmendorf.

The program in question, Community Living Assistance Services and Supports, or CLASS, was designed to provide cash benefits for those needing long-term services and support. CLASS made it into Obamacare at the behest of then-Sen. Ted Kennedy, and over the objections of both Republicans and moderate Democrats, who considered it fiscally unsustainable; then-Senate Budget Committee Chairman Kent Conrad, D-N.D., famously dubbed CLASS “a Ponzi scheme of the first order, the kind of thing Bernie Madoff would have been proud of.” And so it proved — in October 2011, less than two years after the law’s passage, the Department of Health and Human Services determined CLASS could not be implemented in a fiscally solvent manner, and in January 2013, Congress repealed it entirely.

But Congress and the American people could have been spared this trouble had CBO performed a more thorough analysis of CLASS. In 2009, the budget agency assumed that CLASS’s administrative expenses would remain confined to three percent of premiums, even though HHS’ own actuary later called this requirement “unrealistic and undesirable.” The actuary hired by HHS went on to estimate total expenses at 20 percent of premiums — nearly seven times the level specified in the law.

The unrealistically low administrative expenses go to the heart of CLASS’s structural flaws. The program proved fiscally unsustainable because it faced a classic actuarial death spiral—a lack of healthy people paying into the pool to fund benefits for those needing care.

Had CBO formally analyzed CLASS’s administrative expenses, it likely would have concluded that the unrealistic assumptions written into the law meant premiums would eventually have to rise, benefits fall, or both, to meet the shortfall — making the program even more unattractive to healthy individuals, and further imperiling its solvency. The CBO does have models to estimate the cost of insurance; with Obamacare, it stated in November 2009 that insurance exchanges would reduce the administrative costs of individually-purchased coverage. But when it came to CLASS, CBO did not perform a similar analysis.

Likewise, CBO at no point attempted to quantify the potentially massive costs to states that CLASS would have imposed. The program would have required state Medicaid programs to create a benefit eligibility system similar to that used by the Social Security disability insurance program. That program costs nearly $3 billion to administer every year — meaning CLASS could easily have imposed costs to states of $20 billion-30 billion over a decade.

Within HHS, officials expressed concern that CLASS would “create significant new burdens on the states.” Coming at a time when governors of both parties were criticizing the “mother of all unfunded mandates” in the form of Obamacare’s Medicaid expansion, a CBO finding that CLASS imposed mandates on states in the billions, or tens of billions, would have prompted bipartisan outrage — and could have scuttled the program entirely. But from its introduction to its repeal, CBO at no point even acknowledged the significant cost to states associated with CLASS.

In fairness to CBO, the months leading up to Obamacare’s passage were by far the busiest in my time as a Capitol Hill staffer. Lack of enough hours and lack of sleep could, and did, cause details to slip through the cracks; to quote Nancy Pelosi, we really did have to pass the bill to find out what was in it. But that neither excuses nor explains why CBO has not publicly acknowledged the shortcomings outlined above, and what if anything it needs to change — whether in resources, oversight, or both — to improve its analysis going forward.

Judging from his silence on CLASS, Elmendorf may view protecting his office’s budget analysts as a prime objective of a CBO director. As much as I value loyalty, CBO’s prime loyalty should lay to Congress — and ultimately to the public, which funds both CBO and the programs it analyzes. While Elmendorf has taken measures to release more information publicly — developments I welcome — such steps generally fall into the realm of making CBO less opaque, rather than truly transparent.

Democrats’ political posturing aside, it’s not partisan to ask for a public explanation why an independent budget office did not produce analyses that could have revealed the instability of an $86 billion “Ponzi scheme” before Congress enacted it into law. In fact, the principles of good governance should compel the CBO in exactly this direction. Hopefully CBO’s next director, whoever he or she is, will move more rapidly down the road of this much-needed transparency.

This post was originally published at the Washington Examiner.

Obamacare Challenges: Where the Conventional Wisdom Falls Short

Since the U.S. Court of Appeals for the D.C. Circuit struck down an Internal Revenue Service regulation implementing Obamacare, some observers have predicted that the IRS rule would ultimately be upheld. The regulation extends federal subsidies to individuals purchasing insurance from federal exchanges and not just state-run exchanges, as the Affordable Care Act specifies. But when it comes to legal challenges regarding the health-care law, the conventional wisdom has sometimes been wrong.

Consider, for instance, the Supreme Court’s decision upholding Obamacare two years ago. The day that the court ruled in June 2012, President Barack Obama said: “Earlier today, the Supreme Court upheld the constitutionality of the Affordable Care Act.

Actually, the court was more nuanced. On Page 58 of the ruling in National Federation of Independent Business v. Sebelius, the justices wrote: “The Affordable Care Act is constitutional in part and unconstitutional in part.” While the court upheld the individual mandate as a permissible exercise of the taxation power, it struck down provisions of the ACA’s expansion of Medicaid as unconstitutional “economic dragooning that leaves the States with no real option but to acquiesce in the Medicaid expansion.”

Two years later, a digital campaign on the White House Web site argues for states to expand Medicaid under the ACA–and warns of dire consequences for those that do not. But the administration embarked on the campaign because the Supreme Court made Medicaid expansion optional for states.

It’s also worth noting that seven of the nine Supreme Court justices agreed that it was unconstitutional to mandate Medicaid’s expansion. Those seven justices included Stephen Breyer, previously a staffer for Sen. Edward Kennedy, and Elena Kagan, a former solicitor general in the Obama administration. So those predicting that some judges and justices would preserve the IRS rule based solely on which president appointed them to the bench may yet be disappointed.

Legal decisions don’t always break down along party lines or meet political talking points. That’s something to bear in mind as the cases wind through the courts.

This post was originally published at the Wall Street Journal Think Tank blog.

Profits Before Principles: How AARP Wins When Seniors Lose

A report originally compiled by staff for Sen. Jim DeMint.

REPORT HIGHLIGHTS

  • AARP functions as an insurance conglomerate with a liberal lobbying arm on the side.  Independent experts and former AARP executives admit that the organization’s billions of dollars raised from its business enterprises – most notably the sale of health insurance plans – have compromised the organization’s mission and independence.
  • AARP depends on profits, royalties, and commissions to make up over 50% of its annual budget.  Membership dues from seniors account for only about 20% of AARP’s revenue.
  • AARP’s $458 million in health insurance revenue in 2011 would rank it as the nation’s sixth-most profitable health insurer.
  • The health care law, which AARP lobbied heavily for, could lead to over $1 billion in new AARP health insurance profits over the next decade by forcing seniors off Medicare Advantage plans into Medigap supplemental coverage.
  • AARP earns more profit the higher premiums rise on seniors in Medigap plans, charging a “royalty fee” of 4.95% of every premium dollar paid by seniors on these plans.
  • In 2011, AARP failed to disclose to its senior membership that it lobbied Congress to oppose Medigap reform, legislation that could lower senior premiums by as much as 60%, and save seniors $415 per year on average.
  • AARP could lose as much as $1.8 billion in revenue over ten years if Medigap reforms pass and successfully lower senior premiums.
  • Documents show close coordination between Obama Administration and AARP, including efforts to deceive the public.  In November 2009, a senior AARP executive wrote to the White House saying “we will try to keep a little space between us” on health care – because AARP’s “polling shows we are more influential when we are seen as independent, so we want to reinforce that positioning….The larger issue is how best to serve the cause.”
  • AARP has benefitted by supporting the Obama Administration’s unpopular health care law.  Unlike other forms of insurance, AARP’s Medigap insurance plans were exempted from many of the health care law’s mandates, including the ban on pre-existing condition discrimination.
  • The Obama Administration has not publicly criticized AARP’s business practices, even though it has publicly attacked other insurance companies with much smaller profit margins than those generated by AARP’s Medigap insurance.
  • Democrats continue to praise AARP – HHS Secretary Sebelius called them the “gold standard” for “accurate information” – even though AARP earns more profit the higher Medigap premiums rise for seniors.

Even though President Obama has criticized Republicans for placing seniors at the mercy of insurance companies, the health care law he signed allows organizations like AARP to continue discriminating against Medigap applicants with pre-existing conditions.

 

Introduction

The AARP bills itself as the nation’s premier senior advocacy group, but has opposed important reforms to Medigap supplemental insurance that would save seniors, on average, hundreds of dollars a year.

Why? There are $1.8 billion reasons.

The reforms currently being proposed to Medigap would drastically reduce the “royalty fees” AARP generates by peddling insurance to its members by an estimated $1.8 billion over ten years. If AARP supported these reforms, which are sure to save seniors money, the lobbying group would lose billions.

This report shows how the AARP has a history of being compromised by its lucrative insurance businesses.  The pressure group’s opposition to Medigap reform is just the latest instance where its financial enterprises have trumped the well-being of its members.

AARP is mounting a “You’ve Earned a Say” campaign to solicit member viewpoints about how to reform entitlements, but our examination of the organization’s actions over the years shows AARP executives, who seek to boost their bottom lines, always have the biggest say.

The AARP Empire

Founded in 1958, AARP is now an organization with an annual budget exceeding $1 billion.  The organization spent $206 million to acquire its headquarters building in Washington, DC more than a decade ago.[1]  According to its most recently filed tax returns, AARP spent more than $246 million on postage, and over $280 million on compensation in 2010.[2]  In that same year, AARP provided compensation of over $100,000 to 543 separate employees, including one senior executive who received nearly $1.2 million in compensation.[3]

While AARP claims to be a membership-driven organization, in reality most of its revenue comes not from member dues but from “royalty fees” generated from the sale of other products, namely health insurance.  “Royalty fees” are payments AARP receives for putting its brand name on certain products and services.  So while insurance companies provide a tangible product and service in exchange for the premiums they charge, AARP receives more than half a billion dollars per year for essentially playing the middle man.

According to its 2011 financial statements, more than half of AARP’s revenue came from royalty fees – over $704 million of its $1.35 billion in total revenue last year.[4]  Revenues from health insurer United Health Group comprised nearly two-thirds of AARP’s total “royalty fee” revenue, or $457.6 million.[5]  By comparison, in 2011 AARP generated only $265.8 million from membership dues – just over half the amount received from the sale of AARP-branded insurance products.[6]

AARP’s royalty fees have risen significantly in recent years, making the organization ever more dependent on the sale of insurance policies to fund AARP’s massive payroll.  Between 2001 and 2011, AARP’s total royalty fees rose by more than 350% – from $196.7 million in 2001 to over $704 million last year.[7]  Much of this increase comes from additional health insurance-related revenue.  Over the past five years, AARP has generated over $2 billion in revenue from United Health Group alone – $284 million in 2007,[8] $414 million in 2008,[9] $427 million in 2009,[10] $441 million in 2010,[11] and $458 million in 2011.[12]

AARP’s $458 million in insurance revenue in 2011 would rank it as the nation’s sixth-most profitable insurer, based on data collected by Fortune magazine.[13]  For instance, insurer Health Net generated only $204 million in net revenue last year – on over $13.6 billion in total revenue.[14]  By contrast, AARP’s $458 million in insurance-based “royalty fees” go directly to the organization’s bottom line.

AARP’s Questionable Insurance Practices

Even as it claims to be a non-profit advocacy organization, AARP has received criticism from many quarters for its heavy reliance on revenue from insurance sales.  Marilyn Moon, a former AARP executive, said “there’s an inherent conflict of interest” because AARP is “very dependent on sources of income.”[15]

AARP’s dependence on “royalty fee” income has resulted in numerous controversies over the years.  For instance, in 2008 a congressional inquiry[16] found that AARP was using potentially misleading language in its marketing materials; seniors thought they were buying comprehensive health insurance, but in reality purchased policies covering only a limited amount of health costs.  Following a public outcry, AARP ordered an investigation,[17] and eventually stopped selling these types of limited benefit plans.[18]

More recently, the tax implications of AARP’s significant “royalty fees” have come under scrutiny.  An investigation by several members of the House Ways and Means Committee last year raised questions about whether or not AARP’s licensing revenue should be considered “royalty fees” or “commissions.”[19]  If the revenue in question should in fact be classified as “commissions,” then AARP could owe significant amounts of back taxes on billions of dollars in revenue.  The Ways and Means members referred the matter to the Internal Revenue Service, and requested an IRS investigation.[20]

The Medigap Cash Cow

The Ways and Means member investigation also made clear that one of AARP’s prime sources of revenue is the sale of Medigap-branded supplemental insurance plans.  AARP does license Medicare Advantage plans, along with a Medicare Part D prescription drug plan.  However, AARP receives a flat financial payment from United Health Group for its Medicare Advantage and Part D plans, regardless of the number of people enrolled in each plan.  Conversely, AARP receives a percentage of total Medigap premiums paid – meaning that while AARP receives no financial benefits if its Medicare Advantage or Part D plan enrollment rises, it will receive a windfall if its Medigap plan generates additional customers, or those customers pay higher premiums.

The health care law includes more than $300 billion in cuts to Medicare Advantage.[21]  As a result of these payment reductions, enrollment in Medicare Advantage plans will be cut in half, with 7.4 million fewer seniors enrolled.[22]  Many of these 7.4 million seniors will need supplemental coverage through Medigap, to fund catastrophic expenses not covered by Medicare.

Because the health care law will have the effect of migrating millions of seniors from Medicare Advantage plans – which are less lucrative financially to AARP – to more-lucrative Medigap supplemental coverage, the Ways and Means member report concluded that the organization could receive a windfall exceeding $1 billion over the next ten years thanks to the law.[23]

Medigap Reform with Bipartisan Appeal

The potential Medigap-related windfall for AARP resulting from the health care law is not the only instance in which the organization’s financial interests have coincided with its policy positions.  In recent months, a renewed focus on reforming entitlements, and making Medicare more sustainable, has prompted new attention to various proposals to reform Medigap plans.  While these plans would benefit most seniors financially, they would harm AARP’s financial interests – so perhaps not surprisingly, AARP has decided to oppose them.

Under the proposals being discussed, the traditional Medicare program would be reformed to provide catastrophic coverage, while Medigap would provide limited supplemental coverage.  For the first time in the program’s history, seniors would know their Medicare costs would not exceed a set amount.  In exchange, Medigap supplemental coverage, which covers co-payments and deductibles, would also be reformed, so that seniors would face an out-of-pocket deductible not covered by insurance.

Reform to Medigap insurance plans has generated bipartisan appeal.  Versions of this reform have been proposed by the Simpson-Bowles Commission,[24] the Rivlin-Domenici commission on debt and deficits, [25] Sens. Tom Coburn (R-OK) and Joe Lieberman (D-CT),[26] and even President Obama’s most recent budget.[27]  Policy-makers in both parties believe that, by limiting first-dollar coverage of medical expenses through Medigap, seniors would serve as smarter purchasers of health insurance, such that overall spending in Medicare might decline modestly.

Although some seniors might pay slightly more out-of-pocket under these changes, a study from the Kaiser Family Foundation said that “the savings for the average beneficiary” under Medigap reform “would be sufficient to more than offset his or her new direct outlays for Medicare cost sharing.”[28]  According to Kaiser, nearly four in five Medigap policy-holders would receive a net financial benefit from this reform – with those savings averaging $415 per senior each year – because creating a new deductible for all Medigap plans will cause premiums to fall.[29]

Under Medigap reform, seniors would spend much less money on premiums.  Just as with automobile insurance, or with Health Savings Account policies for individuals under age 65, adopting a higher deductible would yield significant premium savings for Medigap policies.  The Kaiser study found that under one proposed reform, Medigap premiums would plummet by an average of over 60%, from nearly $2,000 per year to only $731.[30]  Because less money from Medigap policy-holders would be diverted to administrative overhead, seniors would be able to keep their own money to finance their own health care.

AARP Wins When Seniors Lose

The overall premise of Medigap reform is simple: Less money going to insurance companies means greater financial savings for most seniors.

Unfortunately for AARP, things are not that simple.  As one independent financial adviser has said, AARP’s sales tactics are a “dirty little secret” that are “all about fattening the coffers of the organization.”  And the biggest “dirty little secret” of all is that AARP has a major financial incentive to keep premiums high for seniors.[31]

The House Ways and Means Committee members’ investigation last year found that AARP receives a percentage of each senior’s Medigap premium dollar.[32]  The organization’s “royalty fee” totals 4.95% of every premium dollar paid.  So, similar to a salesman pushing the most expensive product in order to receive a higher commission, regardless of the customer’s needs,  AARP has an incentive to sell more Medigap policies – and to sell the most expensive Medigap policies – even if seniors do not need the insurance.  The higher the cost of seniors’ Medigap policies, the more money AARP makes.

Based on AARP’s existing contractual arrangements and the Kaiser Family Foundation study projections, it is relatively simple to calculate the projected financial loss to AARP under Medigap reform.[33]   If premiums decline by more than $1,200 per year, as the Kaiser study predicted, AARP stands to lose an average of $62 in “royalty fees” for every senior enrolled in its Medigap insurance.  With nearly 3 million seniors enrolled in AARP’s Medigap plan, those numbers add up – over $181 million in one year, and $1.8 billion over the course of a decade.[34]  With the organization generating total revenue of $1.35 billion in 2011, Medigap reform would result in an immediate loss of over 13% of AARP’s annual revenue.[35]

AARP’s Covert Campaign to Kill Medigap Reform

Given its financial interest in keeping Medigap premiums high, it is perhaps unsurprising that AARP engaged in a covert lobbying campaign designed to kill Medigap reform, and keep its existing “royalty fee” regime in place.  Last year AARP wrote to members of the congressional “supercommittee” on deficit reduction, asking them not to include Medigap reforms – which, as noted above, would benefit four out of five Medigap policy-holders, but significantly harm AARP’s financial interests.

AARP published excerpts of their letter to the “supercommittee” on its website.[36]  But AARP has yet to put anything on its website indicating that the organization has been privately contacting Members of Congress, asking them not to reform Medigap – and preserve AARP’s lucrative Medigap commissions.

Two years ago, an AARP spokesman told CNN that the organization doesn’t lobby Congress on Medigap issues “at all.”[37]  While the organization is apparently trying to keep its actions secret, the fact remains that AARP is lobbying Congress against Medigap reform, opposing changes that will just so happen to save AARP members tens of billions, but that would also cost AARP billions.

AARP Works Against Its Members

Whereas last year AARP actively lobbied against Medigap reforms that would help its members but hurt AARP financially, three years ago the organization did NOT lobby for Medigap reforms that would help its members but could hurt AARP financially.  Specifically, even after enactment of the health care law, Medigap plans are still permitted to impose waiting periods on senior citizen applicants with pre-existing conditions.  AARP, despite its stated support for ending pre-existing condition restrictions,[38] imposes waiting periods on its own members applying for Medigap coverage[39] – and stood idly by as an attempt to end this practice within Medigap was stricken from the health care bill before it became law.

Section 1234 of House Democrats’ June 2009 health care discussion draft would have prohibited pre-existing condition discrimination for certain Medigap applicants – achieving one of AARP’s chief goals.[40]  However, last year the Washington Post claimed that the Medigap provision “was dropped from the legislation during congressional negotiations because it would have increased Medicare costs, according to a House Democratic congressional aide.”[41]

The Congressional Budget Office scored provisions eliminating pre-existing condition discrimination in Medigap as costing about $400 million per year.[42]  However, AARP had previously stated that the organization “would gladly forego every dime of revenue to fix the health care system.”[43]  As noted above, its $700 million in “royalty fees” last year far exceeds the $400 million annual cost of ending Medigap pre-existing condition discrimination.  It remains unclear why this provision was dropped from the bill, if AARP was so interested in foregoing profits in order to help its members.

In addition to allowing AARP to continue imposing waiting periods on Medigap applicants, the law enacted in March 2010 also exempted AARP’s lucrative Medigap policies from several other new insurance regulations.[44]  At a December 2009 hearing,[45] AARP’s Board Chair claimed to have no idea that legislation that she and the AARP had previously endorsed included numerous exemptions for Medigap plans, including an exemption from the ban on pre-existing condition discrimination.[46]

After the numerous Medigap-related exemptions included in the health care law were publicly exposed, AARP eventually endorsed legislative changes to end some of the exemptions.[47]  However, despite this public turn-around, AARP has yet to explain to the public why it allowed these exemptions to be enacted in the first place – if the organization is not motivated by its own financial interests, as it claims.  Moreover, the organization has not apologized to its members for failing to act and end pre-existing condition discrimination in Medigap plans two years ago, and the impact such failure has had on AARP’s own members.

Members REVOLT

Documents released by a House Energy and Commerce Committee oversight investigation reveal just how strongly AARP members opposed their organization’s behavior during the health care debate three years ago.  The files show overwhelming opposition from AARP members to the legislation, based on summaries of AARP call center activity:

July 23, 2009 – 77 members support; 1,031 oppose

July 28, 2009 – 36 members support; 4,174 oppose

July 29, 2009 – 23 members support; 2,656 oppose[48]

On a single day (July 28, 2009) during the height of the debate, 1,897 individuals cancelled their membership in AARP to protest its position on the health care bill.[49]

The documents also reveal that AARP members were well aware of the organization’s financial conflicts, and believed that these conflicts were influencing AARP policy.  One member from Oklahoma called in and complained that:

AARP has a conflict of interest between selling insurance and helping senior citizens.  Until it decides which one is more important, the $$$ or the people, it is deceiving old folks into thinking it works for their benefit.  Actually it works for the insurance companies [sic] benefit and interests, which is why it is so gung-ho on the health care reform bill….Not OK with me.[50]

Members also complained about “perceived partisanship on AARP’s part” – and the documents reveal this to be an accurate concern.  In November 2009, a senior AARP executive wrote to the White House saying “we will try to keep a little space between us” on health care – because AARP’s “polling shows we are more influential when we are seen as independent, so we want to reinforce that positioning….The larger issue is how best to serve the cause.”[51]  In other words, the organization was attempting to protect its image by publicly deceiving its members – acting detached in public, even as AARP was frantically lobbying behind the scenes to ram the legislation through for the good of the liberal cause.

AARP’s Misguided Political Focus

It is perhaps unsurprising that AARP would focus on “serv[ing] the cause” of liberalism, because many of its senior executives have strong liberal connections.  When the organization hired its current CEO, Barry Rand, one Capitol Hill publication noted that “New AARP Chief Gave Big to Obama.”[52]  Indeed, Mr. Rand has given tens of thousands of dollars in contributions to liberal Democrats over the years.[53]  Many other members of AARP’s executive team also have strong connections to liberal causes; the head of AARP’s government relations and advocacy program was a senior adviser in the Clinton Administration,[54] while other AARP key executives have worked for Sen. Ted Kennedy,[55] Rep. Geraldine Ferraro,[56] and the National Wildlife Federation, a liberal environmental group.[57]

The political philosophy of the organization’s leadership results in AARP mounting advocacy campaigns trumpeting liberal talking points that frequently have little basis in fact.  For instance, in September 2011 AARP released an advertisement with seniors claiming that “I paid into my Medicare,” and decrying any efforts to “cut our benefits.”[58]  However, the ad did not acknowledge what an Urban Institute study makes clear: Most seniors receive more in Social Security and Medicare benefits than they paid in taxes during their lifetime.[59]  An Associated Press story based on the Urban Institute study – “What You Pay for Medicare Won’t Cover Your Costs” – was initially placed on aarp.org, but was later removed from the website, perhaps because its conclusions represent inconvenient truths to AARP.[60]

Other ads run by the AARP during last year’s debt limit debate were also debunked as false and misleading.  In June 2011, the Washington Post’s “Fact Checker” column awarded an AARP ad four “Pinocchios” for “perpetuat[ing] the worse stereotypes about how easy it would be to balance the budget.  At a time when the nation’s fiscal crisis – amid the looming retirement of the baby-boom generation – demands informed and reasoned debate, the AARP misinforms its members about the choices the nation faces.”[61]

Of course, AARP has a financial interest in misinforming its members – because the organization derives much of its revenue from preserving the status quo.  In launching a “multi-million dollar” ad campaign featuring misleading claims, AARP made clear it wanted no changes to the existing Medicare benefit structure.[62]  As outlined above, changes to the Medicare benefit – such as Medigap reform – would cost AARP billions, while saving many seniors hundreds of dollars per year.  By blocking reforms that would dent its profits, AARP hurts seniors two ways – first, by preventing seniors from saving hundreds of dollars in Medigap premiums, and second, by leaving the Medicare program less solvent for future generations.

Democrats Encourage AARP’s Abuses

Even as AARP racks up billions of dollars in insurance profits by overcharging seniors for Medigap plans, Democrats encourage these abuses by giving AARP special favors, and ignoring its questionable sales tactics.  As noted above, the health care law exempted AARP’s lucrative Medigap insurance plans from the ban on pre-existing condition discrimination, thus allowing AARP to continue to impose waiting periods on individuals applying for coverage.  However, that’s not the only exemption that Medigap coverage received in the law; Medigap insurance was also exempted from:

  • The law’s $500,000 cap on executive compensation for insurance industry executives. [63]  Thanks to this exemption, AARP can continue to pay its senior executives more than $1 million in annual compensation.[64]
  • The tax on insurance companies that will total more than $14 billion per year.[65]   Medigap insurance received this exemption even though AARP generates more money from insurance industry “royalty fees” than it received from membership dues, grant revenues, and private contributions combined.[66]
  • The requirement imposed on other health insurance plans to spend at least 85 percent of their premium dollars on medical claims.[67]  Medigap policies are currently held to a far less restrictive 65 percent standard, and the difference can be used to fund higher profits to AARP paid out of the pockets of its senior citizen members.[68]

In addition to these numerous exemptions for Medigap insurance provided in law, the Administration provided a further exemption for Medigap coverage during the rulemaking process.  The Department of Health and Human Services’ rule on insurance rate review exempted Medigap plans from further scrutiny of their premium increases.[69]  In arriving at this determination, HHS concluded that insurance plans like Medigap coverage “do not appear to be a principal focus of the Affordable Care Act” – meaning that because Medigap plans were exempted from the law’s other regulatory requirements, they should be exempted from rate review as well.[70]

Obama Administration Hypocrisy

The frequent exemptions given to Medigap insurance – a product line where AARP holds the largest market share – directly contradict the claims made by Democrats about the 2,700 page health care law.  For instance, Department of Health and Human Services Secretary Kathleen Sebelius’ official biography claims that she “is implementing reforms that end many of the insurance industry’s worst abuses.”[71]  However, with respect to Medigap insurance, that claim is entirely false.  Because Medigap plans were exempted from the law’s new requirements, organizations like AARP can continue to discriminate against applicants with pre-existing conditions, and overcharge seniors in order to generate greater profits.

Even as the Obama Administration fails to acknowledge that the health care law exempts Medigap insurance from all of its new requirements, it has attacked conservatives’ Medicare reform proposals for granting too much power to insurers.  In her speech to the 2012 Democratic National Convention, Secretary Sebelius criticized Republicans for “let[ting] insurance companies continue to cherry-pick who gets coverage and who gets left out, priced out, or locked out of the market.”[72]  And in his speech to the same convention, President Obama said that “no American should have to spend their golden years at the mercy of insurance companies.”[73]  Given that the legislation President Obama signed into law exempted Medigap coverage for seniors from virtually all of its new regulatory requirements, it is more than a little hypocritical for his Administration to criticize others for leaving seniors to the mercy of insurers.

The Administration has yet to answer a basic question at the heart of the numerous exemptions granted to Medigap insurers in their 2,700 page health care law: If the law’s protections are so good, then why are seniors left out of its supposed benefits when it comes to their supplemental insurance?  Unfortunately, the answer could be that AARP has been unwilling to forfeit its profits, and so the Obama Administration has looked the other way as the organization continues to take advantage of seniors.

Kathleen Sebelius: Watchdog or Lapdog?

Even as it has been willing to politically strong-arm insurance companies with whom it disagrees, the Obama Administration’s Department of Health and Human Services has failed to confront AARP about its questionable business practices.  In March 2010, as the Administration was gearing up to ram through its health care law, Secretary Sebelius asked other insurers to “give up some short-term profits” for the nation’s good.[74]  At the time, estimates by Fortune magazine indicated that health insurer profits averaged about 2.2 percent.[75]  Yet Secretary Sebelius made no such request of AARP to give up some of its revenues – even though its Medigap profit margin was 4.95 percent, more than double that of the insurance industry as a whole.

Shortly after the health law passed, Secretary Sebelius undertook a publicity campaign to “encourage” insurance companies to ban rescissions and extend coverage to young adults under age 26 earlier than was required under the law.  While the Secretary made very public efforts to have insurance companies “abandon…efforts to rescind health insurance coverage from patients who need it most,” she made no attempt to encourage AARP and other Medigap insurers to stop discriminating against applicants with pre-existing conditions.[76]  At an implementation briefing to Congress shortly after the law passed, Senate Republican staff asked HHS officials why the Department was asking other insurers voluntarily to change their business practices, but was not asking AARP to stop discriminating against Medigap applicants.  While Jeanne Lambrew, head of the Department’s Office of Health Reform, promised to look into the matter, the Department never took action.

Rather than ask AARP to reform its business practices, Secretary Sebelius instead has blindly offered the organization praise.  In an October 2010 speech to the AARP convention, she hailed the organization as “the gold standard in cutting through spin and complexity to give people the accurate information they need to make the best choices.”[77]  Even though AARP has a strong financial conflict-of-interest in its Medigap insurance – because the organization earns more profit when seniors pay more in premiums – Secretary Sebelius still claimed that AARP constituted “the gold standard” in giving “accurate information.”

The National Association of Insurance Commissioners (NAIC) has previously expressed strong concerns about the percentage-based compensation model under which AARP receives much of its revenue.  In fact, Section 18 of NAIC’s Producer Model Licensing Act recommends that states require explicit disclosure by insurers, and clear written acknowledgement by consumers, of any percentage-based compensation arrangement, due to the potential for abuse.  As a former insurance commissioner, Secretary Sebelius should be well aware of the financial conflicts inherent when an organization like AARP receives a percentage of every Medigap dollar paid by seniors.  Yet the Secretary apparently ignored these concerns, and went on to praise AARP as a source of impartial advice, even though even former AARP executives have criticized the organization as hopelessly compromised by financial conflicts-of-interest.

In her time heading HHS, Secretary Sebelius has undertaken clearly political actions, including those that violated the law.  Just last week, the Office of the Special Counsel publicly released a report concluding that the Secretary engaged in political activity that violated the Hatch Act prohibitions on federal officials campaigning for partisan political causes.[78]  It is therefore quite reasonable to ask whether Secretary Sebelius has also engaged in a pattern of politically-motivated selective enforcement – attacking other insurers when convenient, but failing to examine AARP’s questionable business practices, because AARP supports the President’s liberal causes.

As noted above, AARP executives e-mailed the White House in November 2009 stating that “the larger issue is how best to serve the cause.”  It would thus appear that both AARP and the Administration recognize their political interests are aligned.  Certainly the Administration’s actions – exemptions for Medigap coverage included both in statute and in rulemaking; attacks on insurers with smaller profit margins than AARP; failure to criticize AARP’s percentage-based compensation model – are consistent with a governing philosophy that permits AARP to engage in questionable and abusive behavior towards seniors, so long as AARP funnels the profits from said behavior back into supporting the Administration’s liberal causes.

In April 2010, Secretary Sebelius wrote to insurers to stop rescinding insurance policies earlier than required under the law, encouraging them “not to wait until the fall to do the right thing.”[79]  America’s seniors have been waiting for years for Secretary Sebelius, and the entire Obama Administration, to do the right thing – to apply the law fairly, without regard to political persuasion.  Unfortunately, the facts suggest that the Administration has knowingly looked the other way, and failed to take on AARP over its business practices – because political advantage outweighs the need for impartial enforcement, or extending the supposed benefits of the health care law to senior citizens.

Conclusion

Though it purports to be a seniors advocacy organization, AARP functions in many respects as an insurance conglomerate with a liberal lobbying arm on the side.  Independent experts and even former AARP executives have admitted that the organization’s billions of dollars raised from its business enterprises – most notably the sale of health insurance plans – have compromised the organization’s mission and independence.  As one consultant put it: “Either you’re a voice for the elderly or you’re an insurance company – choose one.”[80]

As this report has demonstrated, AARP has acted against its members’ interest, but in its own financial interests, on several occasions during the major health care debates of the past several years.  First AARP endorsed a health care law that gave its most lucrative product offering – Medigap insurance – a major opportunity to solicit new members, exempted those Medigap plans from the law’s regulatory regime, and allowed AARP to continue imposing waiting periods on the sickest seniors looking to buy Medigap coverage.  More recently, AARP has engaged in a covert lobbying campaign designed to kill Medigap reforms that would benefit nearly four in five policy-holders and improve Medicare’s solvency – but could cost AARP billions.

This year, AARP has embarked upon a “You’ve Earned a Say” campaign, purportedly designed to solicit members’ opinions on ways to reduce the deficit.  However, the organization has yet to solicit members’ viewpoints about its own actions.  For instance:

  1. How many members know that senior AARP executives have received over $1 million in compensation from the organization – and that 543 individuals received over $100,000 in compensation last year?
  2. How many members know that AARP has generated over $2 billion in revenue from selling health insurance plans in the past five years?
  3. How many members know that AARP imposes waiting periods on Medigap applicants with pre-existing conditions – and stood idly by as provisions to eliminate Medigap pre-existing condition discrimination were stricken from the health care law?
  4. How many members know that nearly four in five Medigap plan holders would financially benefit from reforms, to the tune of several hundred dollars per year?
  5. How many members know that Medigap reforms that would help seniors could cost AARP billions of dollars in lost revenue?

At the very least, AARP should be up-front and honest with its members about the massive financial stake it has in this debate.  Better yet, the organization should start thinking less about its bottom line and more about its members, and endorse reforms that will help the vast majority of Medigap policy-holders.

 

[1]Behind the Veil: The AARP America Doesn’t Know, report by Reps. Wally Herger and Dave Reichert, March 29, 2011,  http://herger.house.gov/images/stories/pdf/20110329aarpreport.pdf, p. 6.

[2]AARP Inc., 2010 Internal Revenue Service Form 990, http://www.aarp.org/content/dam/aarp/about_aarp/annual_reports/2010_990_aarp.pdf, p. 1.

[3] Ibid., pp. 8-9.

[4] AARP Inc., 2011 Consolidated Financial Statements,  http://www.aarp.org/content/dam/aarp/about_aarp/annual_reports/2012-05/Consolidated-Financial-Statements-2011-2010-AARP.pdf, p. 3.

[5] Page 9 of the AARP 2011 financial statements notes that “the service provider United Healthcare Corporation accounted for 65% of total royalties earned in 2011 and 2010.”  65% of the total $704 million in royalties equates to $457.6 million received from United Healthcare.

[6] Ibid., p. 3.

[7] Letter from AARP Chief Operating Officer Thomas Nelson to Rep. Dave Reichert, November 2, 2009, pp. 3-4.

[8]AARP Inc., 2008 Consolidated Financial Statements,  http://assets.aarp.org/www.aarp.org_/TopicAreas/annual_reports/assets/AARPConsolidatedFinancialStatements.pdf, pp. 4-9.

[9]Ibid., pp. 3-9.

[10]AARP Inc., 2009 Consolidated Financial Statements, http://assets.aarp.org/www.aarp.org_/cs/misc/2009_aarp_consolidated_financial_statements_12_31_09.pdf, pp. 3-9.

[11] AARP Inc., 2010 Consolidated Financial Statements, http://www.aarp.org/content/dam/aarp/about_aarp/annual_reports/2010_aarp_consolidated_financial_statements_12_31_10.pdf, pp. 3-9.

[12] AARP Inc., 2011 Consolidated Financial Statements.

[13] Fortune 500, Health Care: Insurance and Managed Care, May 23, 2011, http://money.cnn.com/magazines/fortune/fortune500/2011/industries/223/index.html.

[14] Ibid.

[15] Gary Cohn and Darrell Preston, “AARP’s Stealth Fees Often Sting Seniors With Costlier Insurance,” Bloomberg December 4, 2008,  http://www.bloomberg.com/apps/news?pid=newsarchive&refer=&sid=a4OkPQIPF6Kg.

[16] Letter from Senate Finance Committee Ranking Member Chuck Grassley to AARP CEO William Novelli, November 3, 2008, http://www.grassley.senate.gov/news/upload/110320081.pdf.

[17] Robert Pear, “AARP Orders Investigation Concerning Its Marketing,” New York Times November 18, 2008,   http://www.nytimes.com/2008/11/19/us/19insure.html?_r=1.

[18] Emily Berry, “United Stops Selling AARP Limited-Benefit Insurance,” Amednews.com May 28, 2009,  http://www.ama-assn.org/amednews/2009/05/25/bisd0528.htm.

[19] Behind the Veil: The AARP America Doesn’t Know.

[20] Letter from House Ways and Means Committee Members Wally Herger, Charles Boustany, and Dave Reichert to Internal Revenue Service Commissioner Douglas Shulman, December 21, 2011,  http://waysandmeans.house.gov/uploadedfiles/letter_to_irs-shulman_12-15-11.pdf.

[21] Congressional Budget Office, score of H.R. 6079, Repeal of Obamacare Act, July 24, 2012, http://cbo.gov/sites/default/files/cbofiles/attachments/43471-hr6079.pdf.

[22] Robert Book and Michael Ramlet, What Changes will Health Care Reform Bring to Medicare Advantage Plan Benefits and Enrollment?, Medical Industry Leadership Institute- Carlson School of Management, October 2011, http://americanactionforum.org/sites/default/files/Embargoed_Book+Ramlet_MILI-Working-Paper_2011-10-13_Final.pdf.

[23] Behind the Veil: The AARP America Doesn’t Know, Table 4, p. 16.

[24] The Moment of Truth, report of the National Commission on Fiscal Responsibility and Reform, December 2010,

http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf, p. 39.

[25] Restoring America’s Future, report of the Bipartisan Policy Center’s Debt Reduction Tax Force, November 2010, http://bipartisanpolicy.org/sites/default/files/BPC%20FINAL%20REPORT%20FOR%20PRINTER%2002%2028%2011.pdf, pp. 52-53.

[26] Overview of Coburn/Lieberman Medicare reform proposal, June 2011, http://www.coburn.senate.gov/public/index.cfm?a=Files.Serve&File_id=1ea8e116-6d15-46ba-b2e0-731258583305.

[27] White House Fiscal Year 2013 budget submission to Congress, February 2012, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/budget.pdf, p. 35.

[28] Kaiser Family Foundation, “Medigap Reforms: Potential Effects of Benefit Restrictions on Medicare Spending and Beneficiary Costs,” July 2011, http://www.kff.org/medicare/upload/8208.pdf, p. 8.

[29] Ibid.

[30] Ibid., Exhibit 2, p. 6.

[31] “AARP’s Stealth Fees Often Sting Seniors With Costlier Insurance.”

[32] Behind the Veil: The AARP America Doesn’t Know.

[33] Kaiser Family Foundation, “Potential Effects of Benefit Restrictions on Medicare Spending and Beneficiary Costs,” Exhibit 2, p. 6.

[34] Behind the Veil: The AARP America Doesn’t Know, Table 2, p. 9.

[35] AARP Inc., 2011 Consolidated Financial Statements, p. 3.

[36] AARP Press Release, “AARP to Super Committee: Don’t Cut Medicare, Social Security Benefits,” October 19, 2011, http://www.aarp.org/about-aarp/press-center/info-10-2011/aarp-to-super-committee-dont-cut-medicare-social-security-benefits.html.

[37] Carol Costello, “150,000 Seniors In Revolt,” CNN American Morning January 6, 2010, http://www.cnn.com/video/?/video/politics/2010/01/06/costello.aarp.health.care.cnn.

[38] AARP Press Release, “AARP Thanks Senate for Passing Health Care Reform,” December 24, 2009,  http://www.aarp.org/about-aarp/press-center/info-03-2010/aarp_thanks_senateforpassinghealthcarereform.html.

[39] New York State Department of Financial Services, list of insurers offering Medicare supplemental coverage, http://www.dfs.ny.gov/insurance/caremain.htm#insurer.

[40] House Tri-Committee Health Reform Discussion Draft, June 19, 2009, http://democrats.energycommerce.house.gov/Press_111/20090619/healthcarereform_discussiondraft.pdf, p. 358.

[41] Susan Jaffe, “Medigap Supplemental Coverage Can Be Too Pricey for Younger Medicare Beneficiaries,” Kaiser Health News March 7, 2011,  http://www.washingtonpost.com/wp-dyn/content/article/2011/03/07/AR2011030703978.html.

[42] Congressional Budget Office, preliminary estimate of House Tri-Committee Health Reform Discussion Draft, July 7, 2009, http://democrats.energycommerce.house.gov/Press_111/20090708/cbomedicare.pdf, p. 4.

[43] Letter from AARP Chief Operating Officer Thomas Nelson to Rep. Dave Reichert, November 2, 2009, p. 4.

[44] Karl Rove, “ObamaCare Rewards Friends, Punishes Enemies,” Wall Street Journal January 6, 2011, http://online.wsj.com/article/SB10001424052748704405704576063892468779556.html.

[45] House Energy and Commerce Subcommittee on Health hearing, “Prescription Drug Price Inflation: Are Prices Rising Too Fast?” December 8, 2009, http://energycommerce.house.gov/hearings/hearingdetail.aspx?NewsID=7588.

[46] AARP Press Release, “AARP Endorses Affordable Health Care for America Act,” November 5, 2009, http://www.aarp.org/about-aarp/press-center/info-11-2009/affordable_health_care_act_endorsement.html.

[47] Letter to the Editor, Wall Street Journal, by AARP President Lee Hammond, January 11, 2011, http://www.aarp.org/about-aarp/press-center/info-01-2011/aarp_letter_to_theeditor.html.

[48] House Energy and Commerce Committee, investigation into closed-door Obamacare negotiations, supplemental materials for June 8, 2012 memorandum, http://archives.republicans.energycommerce.house.gov/Media/file/PDFs/060812relevantdocsmemoIII.pdf, pp. 63-68.

[49] Ibid., p. 73.

[50] Ibid., p. 79.

[51] Ibid., p. 88.

[52] Jeffrey Young, “New AARP Chief Gave Big to Obama,” The Hill March 12, 2009, http://thehill.com/business-a-lobbying/3963-new-aarp-chief-gave-big-to-obama.

[53] Ibid.

[54] “AARP Leadership Profile: Nancy LeaMond,” http://www.aarp.org/about-aarp/executive-team/info-2009/Nancy_Leamond.html.

[55] “AARP Leadership Profile: Debra Whitman,” http://www.aarp.org/about-aarp/executive-team/debra_whitman/.

[56] “AARP Leadership Profile: Kevin Donnellan,” http://www.aarp.org/about-aarp/executive-team/info-2009/Kevin_Donnellan.html.

[57] “AARP Leadership Profile: Cindy Lewin,” http://www.aarp.org/about-aarp/executive-team/info-2010/cindy_lewin.html.

[58] Michael Muskal, “AARP Ads: Hands Off Social Security and Medicare,” Los Angeles Times September 21, 2011, http://www.standard.net/stories/2011/09/21/aarp-ads-hands-social-security-and-medicare.

[59] Gene Steuerle and Stephanie Rennane, “Social Security and Medicare Taxes and Benefits Over a Lifetime,” Tax Policy Center, June 2011, http://www.urban.org/UploadedPDF/social-security-medicare-benefits-over-lifetime.pdf.

[60] While the Associated Press story from December 30, 2010 has been removed from the AARP website, it can still be found at http://www.cbsnews.com/2100-204_162-7197847.html.

[61] Glenn Kessler, “AARP’s Misleading Ad about Balancing the Budget,” Washington Post June 20, 2011, http://www.washingtonpost.com/blogs/fact-checker/post/aarps-misleading-ad-about-balancing-the-budget/2011/06/17/AGQKRsYH_blog.html.

[62] AARP Press Release, “AARP Launches New TV Ad Calling on Congress to Protect Medicare and Social Security from Harmful Cuts,” June 16, 2011, http://www.aarp.org/about-aarp/press-center/info-06-2011/aarp-launches-new-tv-ad-calling-on-congress-to-protect-medicare-and-social-security-from-harmful-cuts.html.

[63] Section 9014 of the Patient Protection and Affordable Care Act (PPACA) as amended, http://housedocs.house.gov/energycommerce/ppacacon.pdf, pp. 816-18.

[64] AARP Inc., 2010 Internal Revenue Service Form 990, pp. 8-9.

[65] PPACA, Section 9010(h)(3)(C) as amended, p. 815.

[66] AARP Inc., 2011 Consolidated Financial Statements,  p. 3.

[67] PPACA, Section 1001, p. 22.

[68] Section 1882(r)(1) of the Social Security Act, 42 U.S.C. 1395ss(r)(1).

[69] Department of Health and Human Services, Rate Increase Disclosure and Review, Final Rule, Federal Register May 23, 2011, http://www.gpo.gov/fdsys/pkg/FR-2011-05-23/pdf/2011-12631.pdf, pp. 29966-67, 29985.

[70] Department of Health and Human Services, Rate Increase Disclosure and Review, Proposed Rule, Federal Register 23 December 2010, http://www.gpo.gov/fdsys/pkg/FR-2010-12-23/pdf/2010-32143.pdf, pp. 81007, 81009, 81026.

[71] Official HHS Biography of Secretary Kathleen Sebelius, http://www.hhs.gov/secretary/about/biography/index.html.

[72] Remarks by HHS Secretary Kathleen Sebelius at the Democratic National Convention, September 4, 2012, http://dyn.politico.com/printstory.cfm?uuid=CB187143-9624-3760-BC9CC2DBE9C60BD7.

[73] Remarks by the President at the Democratic National Convention, September 6, 2012, http://www.whitehouse.gov/the-press-office/2012/09/07/remarks-president-democratic-national-convention.

[74] Jane Norman, “Sebelius Urges Health Care Insurers to Trim Their Profits,” CQ HealthBeat March 10, 2010, http://www.commonwealthfund.org/Newsletters/Washington-Health-Policy-in-Review/2010/Mar/March-15-2010/Sebelius-Urges-Health-Insurers-to-Trim-Their-Profits.aspx.

[75] “Top Industries: Most Profitable,” 2009 Fortune 500, http://money.cnn.com/magazines/fortune/fortune500/2009/performers/industries/profits/.

[76] HHS Press Release, “HHS Secretary Kathleen Sebelius Urges Wellpoint to Immediately Stop Dropping Coverage for Women with Breast Cancer,” April 23, 2010, http://www.hhs.gov/news/press/2010pres/04/20100423a.html.

[77] Remarks of HHS Secretary Kathleen Sebelius at AARP Orlando@50+ Conference, October 1, 2010, http://www.hhs.gov/secretary/about/speeches/sp20101001.html.

[78] Office of Special Counsel, File No. HA-12-1989 (Kathleen G. Sebelius), September 12, 2012, http://www.osc.gov/documents/hatchact/Hatch%20Act%20Report%20on%20HHS%20Secretary%20Kathleen%20Sebelius.pdf.

[79] HHS News Release, “Momentum Building on Sebelius’ Challenge to Insurers to Ban Rescission Before Law Takes Effect in September,” April 28, 2010, http://www.hhs.gov/news/press/2010pres/04/20100428a.html.

[80] Cited in Dan Eggen, “AARP: Reform Advocate and Insurance Salesman,” Washington Post October 27, 2009,  http://www.washingtonpost.com/wp-dyn/content/article/2009/10/26/AR2009102603392_pf.html.

 

The CLASS Act’s Untold Story

A PDF copy of this report is available on Sen. John Thune’s website.

Introduction

The Patient Protection and Affordable Care Act (PPACA), the Obama administration’s keystone health care legislation, established a new long-term care insurance entitlement known as the Community Living Assistance Services and Supports (CLASS) Act.1 Documents uncovered through a bicameral congressional investigation show that well before the law’s passage, warning flags were raised within the Department of Health and Human Services (HHS) about the CLASS program’s sustainability in the long-term. The documents also describe the extent to which the Administration may shift costs and administrative burdens for the program onto states and employers.

The CLASS Act created an optional, government-backed, long-term care insurance program that would pay a daily or monthly benefit to enrolled subscribers if they become unable to perform activities of daily living, such as dressing, meal preparation, and personal grooming. Because the program requires a five-year vesting period before subscribers can collect any benefits, the Congressional Budget Office (CBO) calculated that in the first 10 years of the program, the CLASS Act would account for $70 billion in deficit reduction. This calculation was based on the premise that during the initial years of the program, it will take in more revenue in premiums than it pays out in benefits, including the first five years of the program in which no benefits are paid at all.

This $70 billion in CBO-scored “savings” was crucial to garnering support for passage of the health care law. CBO did not make public any estimates on what would happen as the population of subscribers to the program age and the CLASS Act requires increasing amounts of money to be paid out in benefits.

It is now widely acknowledged that the alleged savings from the CLASS Act are illusory. The month after PPACA passed, Rick Foster, Chief Actuary of HHS’ Centers for Medicare and Medicaid Services (CMS), released a report indicating that the CLASS Act was not fiscally sound.2 The chief actuary is a non-partisan, high-ranking official in CMS whose estimates are critical in understanding current health care law and proposed changes to the law.

Senate Budget Committee Chairman Kent Conrad, a supporter of the PPACA legislation, publicly called the CLASS program “a Ponzi scheme of the first order, the kind of thing Bernie Madoff would be proud of.”3 In testimony before Congress, HHS Secretary Kathleen Sebelius conceded that the CLASS program is “totally unsustainable” in its current form.4

But these concessions came long after PPACA had been signed into law. As a result of this investigation, it is now clear that some officials inside HHS warned for months before passage that the CLASS program would be a fiscal disaster. Within HHS the program was repeatedly referred to as “a recipe for disaster” with “terminal problems.” As this report will show, the chief actuary stated on numerous occasions that the program was not fiscally sustainable and would result in what he referred to as an “insurance death spiral.”

According to emails and other documents obtained pursuant to this investigation, senior leadership of HHS and Democratic staff in the Senate and House reviewed these warnings but did not change the law and did not inform the public of the doubts about the CLASS Act. Instead, the officials continued to claim that the program would be sound, sustainable, and actually produce budget savings that could help pay for other parts of the health care law.

While there has been little public discussion of the costs PPACA imposes on employers and states, this investigation revealed for the first time the extent to which HHS both anticipated these costs and yet tried to impose even more burdens. The documents we have obtained demonstrate that officials at HHS knew that the CLASS Act would saddle employers and states with, at minimum, a heavy administrative burden. The emails also reveal discussions inside HHS about combating low participation in the program by requiring employers to participate. HHS anticipated this mandate could be imposed at some future date, and it is possible they will still attempt to impose such a mandate through regulation.

The documents that were produced as part of this investigation were reviewed and analyzed by a working group of Republicans in both houses of Congress. This report is the product of our joint investigatory research and analysis.

Internal HHS Documents Questioned Fiscal Viability of CLASS

While PPACA established the long-term care program, it left many of the important details about the CLASS Act to be decided by HHS through regulation. HHS is required to issue those regulations by October 1, 2012. Until HHS issues those regulations, the public does not know how much subscribers will have to pay in premiums to enroll in the program, what benefits they will receive if they become disabled, or what level of disability will trigger the benefits.

When balancing premiums collected against benefits paid, internal HHS documents show that regulators have long been concerned about the problem of “adverse selection.” If CLASS suffers from adverse selection (also called “anti-selection”), a high proportion of people with long-term care needs enroll in the program and initial premiums will need to be very high to cover costs. Those high premiums will encourage healthy people to drop out of the program, causing premiums to rise again for the sicker individuals who remain. This could result in what is called a premium “death spiral” and massive taxpayer losses.

Internal emails from HHS and CMS show a number of officials raised alarm about the sustainability of the CLASS Act program. Between May and September of 2009, the CMS chief actuary repeatedly stated his concerns to CMS leadership. It appears from the documents that he was later cut out of the discussions regarding the CLASS Act. CMS and Democratic staff on the Senate Committee on Health, Education, Labor and Pensions (HELP) instead turned to CBO, which produced more favorable estimates than the chief actuary. But others within HHS continued to question the viability of the CLASS Act. What follows is a timeline of how these discussions progressed.

May 2009
The Chief Actuary Predicted “Insurance Death Spiral”

The CMS chief actuary first analyzed the adverse selection problem in a May 19, 2009, email. (See Exhibit A.) Commenting on a draft legislative proposal from Senator Kennedy’s office, the chief actuary said, “let me offer a few preliminary comments:

I didn’t see any provision for a Federal subsidy of this program; in other words, the intention appears to be that it would be financed solely through participant premiums and interest earnings. Nonsubsidized, voluntary insurance programs generally involve substantial “antiselection” by those who choose to participate. As summarized below, this could be a terminal problem for this proposal.5

The program is intended to be “actuarially sound,” but at first glance this goal may be impossible. Due to the limited scope of the insurance coverage, the voluntary CLASS plan would probably not attract many participants other than individuals who already meet the criteria to qualify as beneficiaries. While the 5-year “vesting period” would allow the fund to accumulate a modest level of assets, all such assets could be used just to meet benefit payments due in the first few months of the 6th year.

The resulting substantial premium increases required to prevent fund exhaustion would likely reduce the number of participants, and a classic “assessment spiral” or “insurance death spiral” would ensue.

Alternatively, suppose that a significant number of people without any limitations in [activities of daily living] could be persuaded to participate in the program. How many people would be needed to cover the benefit costs for those qualifying as beneficiaries? For the sake of illustration, suppose 10 million people qualify for benefits of $50 per day (annual cost of $182.5 billion). About 234 million people, paying premiums of $65 per month, would be needed to cover this cost (ignoring administrative expenses). The size of the U.S. population aged 20 and over is about 225 million, and about 165 million of these are employed. This rough—but probably not unrealistic—example further calls into question the feasibility of the maximum financing versus the minimum benefits.

The problem identified by chief actuary at the earliest stages of the bill’s consideration remained in the legislation through subsequent drafts. The chief actuary’s concern was that it would not be possible to attract enough people to the program to maintain it as a self-funding program.

The chief actuary’s email does not include the text of the draft language from Senator Kennedy’s office, but it appears from the premium and benefit example used that the first draft of the statutory language may have required $50 a day in benefits and/or premiums of $65 per month. The final version of the CLASS Act gives the Secretary of HHS discretion to set the premiums and benefit levels as long as premiums allow the program to be fiscally sound over 75 years and benefits are at least $50 per day.

June – July 2009
The Administration Supported the CLASS Act Based on Budgetary Gimmicks, Not Long-Term Actuarial Analysis

In the summer of 2009, a series of email exchanges between the chief actuary and the CMS Office of Legislative Affairs show that support for the long-term care program was growing within the Obama administration and among Democrats in Congress, while the chief actuary’s concerns were becoming more emphatic. Despite these concerns,
supporters of the CLASS Act continued to rely on budgetary gimmicks and flawed modeling.

On June 29th, a staffer in the CMS Office of Legislative Affairs forwarded a news story to the chief actuary that discussed how the CLASS Act allegedly would save money. The email noted, “Bottom line, the CLASS Act was scored by CBO with a savings of $58 billion over 10 years, including a $2.5 billion savings in Medicaid.” A follow up email from CMS Legislative Affairs on July 8 said, “the Administration is now officially on record supporting the CLASS Act.” (See Exhibit B.)

The chief actuary responded with a critique of two studies that had been offered in support of the insurance program:

I’ve finished reviewing the two studies provided by Sen. Kennedy’s staff regarding the CLASS proposal. I’m sorry to report that I remain very doubtful that this proposal is sustainable at the specified premium and benefit amounts.

The actuarial study conducted for AARP assumed participation rates based on a portion (40% to 100%) of current rates for 401(k) plans. In practice, I think current experience for participation in employer based long-term care plans would be much more applicable, and such participation is far lower than for 401(k)’s (for fairly obvious reasons). The AARP study emphasized the sensitivity of premium levels to the number of healthy participants. Although the actuaries didn’t model a plan with participation in the few-percentage range, I strongly suspect that the resulting premiums would be so large as to further diminish the number of participants and to fail to achieve the critical mass of participants in average health needed to cover the selection and subsidy costs.

All the analysis in the Moran study is based on an assumption that the CLASS program would be mandatory. The results look legitimate for such a program, but they are not applicable to the voluntary plan proposed for CLASS.

I haven’t been able to talk to CBO yet regarding their participation assumptions. Unless they have a compelling reason to expect greater-than-[long-term care] levels of participation, however, I can’t see how there would be enough workers participating to cover the selection costs for those with existing [activities of daily living] limitations plus the costs for the internal subsidies for students and low-income persons. Thirty-six years of actuarial experience lead me to believe that this program would collapse in short order and require significant federal subsidies to continue. (See Exhibit B.)

The comments by the chief actuary demonstrate that any reduction in the federal budget deficit identified by CBO would be a function of budgetary time-shifting rather than true savings. While programs like Social Security are often analyzed on a 75-year basis of long-term actuarial solvency, congressional rules require CBO to analyze legislative proposals, like the CLASS Act, over a 10-year budget window.

But the CLASS program likely will not even begin collecting premiums until 2013, and five years of participation are required before subscribers are vested in CLASS, so the program is not likely to begin paying out any benefits until 2018. CLASS was therefore scored as a revenue raiser. Using this budget gimmick, the true costs of the program— the subsequent benefit payments—were essentially ignored, because only a few years of benefit payments were within the official 10-year CBO scoring window of 2010-2019.

CLASS Supporters Relied on Flawed Modeling

The internal documents show that advocates of the CLASS program relied on strikingly unrealistic participation estimates. One study noted above, commissioned by AARP and dated March 3, 2008, assumed nearly 50 million Americans would join the program, a level well above current participation in private long-term care insurance. The second, by the Moran Group, assumed participation would be mandatory for everyone.6

As the chief actuary pointed out, those are completely invalid assumptions on which to base estimates of a long-term care insurance program. CBO’s own estimate also assumed participation rates that were higher than long-term care insurance currently has, and higher than the chief actuary believed could plausibly be expected. By relying on unrealistic estimates of how many people would participate in the CLASS program, its supporters masked the program’s underlying viability problems.

Even with these unrealistic assumptions, the AARP-commissioned analysis also concluded that the program’s design flaws “will ultimately lead to … an unsustainable situation with respect to the premiums.” (See Exhibit C.) Emails between Obama administration officials and congressional staff show that AARP, which publicly supported PPACA, has refused to release the entire study. (See Exhibit D.)

To further rebut the AARP and Moran studies, the chief actuary also forwarded to CMS Legislative Affairs staff a report by the American Academy of Actuaries and the Society of Actuaries that substantiated his concerns about the long-term viability of the proposed CLASS program. (See Exhibit E.) The American Academy of Actuaries provided their report to the Senate HELP Committee on July 22, 2009. (See Exhibit E.)

August – September 2009
CMS and Senate HELP Democrats Ignored Warnings about Actuarial Soundness and Pressed Forward with CLASS as a New Entitlement

The chief actuary remained concerned about the soundness of the CLASS program throughout the summer of 2009, and he sought to ensure that his concerns were communicated to the senior people working on health care reform inside HHS as well as the chief architects of the program in Senator Kennedy’s office. On August 14, 2009, the chief actuary sent another email to the CMS Office of Legislative Affairs in which he said:

As you know, I continue to be convinced that the CLASS proposal is not ‘actuarially sound,’ despite Sen. Kennedy’s staff’s good intentions. I assume you’ve conveyed these concerns to the staff but, if not, let me know and we can express the concerns in a memo.

The Office of Legislative Affairs responded, “Yes, both Amy and the HHS Office of Health Reform have been in communication with [a senior democrat staff member] of the HELP Committee relaying your concerns about the actuarial soundness of the CLASS Act.” (See Exhibit F.)

A few weeks later, on August 24, 2009, the chief actuary again asked CMS to consider the American Academy of Actuaries report questioning the CLASS Act’s viability. (See Exhibit B.)

HHS Officials Effectively Silenced the Chief Actuary and Stopped Soliciting His Input

After receiving consistent negative information from the chief actuary about the financial viability of the program, Senator Kennedy’s staff moved to cut out the chief critic of the CLASS Act within HHS from providing any further analysis of the bill. On September 10, 2009, the Director of Policy Analysis in the Immediate Office of the Secretary of HHS emailed the Deputy Assistant Secretary for Planning and Evaluation saying, [a senior democrat staff member] “got back to me, and decided she does not think she needs additional work on the actuarial side.” (See Exhibit G.)

An email the following week, September 16, reiterated Democrats’ position: [a senior democrat staff member] “at HELP has done a lot of work changing the program and per CBO it is now actuarially sound.” (See Exhibit H.) There had been a clear shift from relying on the chief actuary’s 36 years of experience in favor of the flawed 10-year timeframe of CBO.

Despite the shift, the chief actuary continued to be involved in discussions as late as September 23, 2009, when he attended a meeting with CBO in which the structure and cost of the CLASS Act were discussed. (See Exhibit I.) After this date, there were apparently no other email communications from the chief actuary regarding the CLASS Act. There is no indication in the documents that the drafters of the legislation in Congress or HHS ever again sought the chief actuary’s opinion on the program before the law was enacted. However, his questions about the sustainability of the program continued to be raised in published actuarial reports.7

CBO Produced Long-Term Analyses of CLASS; Models Have Yet to Be Made Public

At the same time CLASS supporters began to marginalize the warnings from the chief actuary about the long-term viability of the program, Democratic staff on the Senate HELP Committee worked with CBO to come up with an alternative model to analyze CLASS. On September 9, 2009, an HHS official e-mailed that HELP staff “had CBO do lots and lots of runs out to 50 years to ascertain solvency. [The HELP staff member] is going to send to me to forward on.” (See Exhibit J.)

Congress relies on CBO to estimate the economic impact of proposed laws and in this role it is vital that CBO’s models be completely transparent. The formulas, algorithms and assumptions should be explicitly defined so that Congress and the public can fully understand the basis for their estimates. Yet two years after it was providing analyses to HELP Committee staff, CBO has declined to disclose the models it developed to analyze the CLASS program’s long-term solvency. CBO staff now say that they do not have the capacity to analyze the CLASS Act’s long-term solvency, despite apparently undertaking that analysis for congressional Democrats before the bill’s passage.

On August 15, 2011, HHS did provide an analysis by CBO that congressional staff gave to CMS in September 2009. That analysis is one page of a spreadsheet projecting net premium collections of $59 billion through 2019 – a 10-year budget estimate, not the 50-year solvency estimates referred to by Senate HELP Committee staff. The document does not disclose what participation rates it assumed or how it established the assumed $65 premium rate. (See Exhibit K.)

September – December 2009
HHS’ Office of the Assistant Secretary for Planning and Evaluation Began To Question CLASS but Also Was Ignored

Despite the chief actuary’s email silence after September, others within HHS began to raise red flags about the soundness of the CLASS program. On September 25, 2009, just two days after the CBO meeting with the chief actuary, the Office of the Assistant Secretary for Planning and Evaluation (ASPE) prepared talking points for the CLASS program, including the concern that the program “is still likely to create severe adverse selection problems.” (See Exhibit L.)

On October 22, 2009, ASPE again questioned the viability of the program. One staffer wrote in an email:

You can get a policy through the [Federal Long-Term Care Insurance Program] (albeit underwritten) with a higher benefit, better inflation protection, and lower premium [than CLASS]. I don’t see any reason why anyone would opt for CLASS if they could pass the underwriting. And if you couldn’t make it through underwriting, you could simply enroll in CLASS to cover some of your current or likely future [long-term care] costs. Seems like a recipe for disaster to me… (See Exhibit M.)

This staffer also said: “I can’t imagine that CLASS would not have high levels of adverse selection given the significantly higher premiums compared to similar policies in the private market.” (See Exhibit M.)

HHS Officials’ Public and Private Statements on CLASS Solvency Conflict

During this entire time, public statements by HHS officials gave no hint of the internal concerns voiced within the agency. On October 20, 2009, Richard Frank, Deputy Assistant Secretary for Planning and Evaluation at HHS, gave a public speech at a Kaiser Family Foundation event in which he said:

We’ve, in the department, have modeled this extensively, perhaps more extensively than anybody would want to hear about [laughter] and we’re entirely persuaded that reasonable premiums, solid participation rates, and financial solvency over the 75-year period can be maintained. So it is, on this basis, that the administration supports it that the bill continues to sort of meet the standards of being able to stand on its own financial feet.8

It was around this same time that internal email from Frank’s staff indicated the nonpublic opinion that prospects for the program’s solvency looked more like “a recipe for disaster.”

Figures from the Social Security Chief Actuary Also Lead to Questions of Anti-Selection Problems within CLASS

HHS staff acknowledged that CLASS premiums would need to be less than $100 for the program to be viable. On November 27, 2009, an ASPE staffer commented, “I suspect that these changes would decrease the premium to well under $100, which seems to be the consensus threshold needed to get decent participation and avoid catastrophic adverse selection.” (See Exhibit N.)

But on December 8, ASPE analyzed Social Security Chief Actuary Steve Goss’ actuarial report and noted that estimated monthly premiums were approximately $177 per month (if a certain reenrollment loophole were not closed) or $140 per month (if the loophole were closed). They also noted that after five years, premiums could increase to $332.53 per month. The office concluded its analysis by noting that adverse selection was a serious threat to the program’s viability. (See Exhibit O.)

HHS Officials Question CLASS, but Their Concerns are not Addressed in the Legislation

On December 1, 2009, ASPE had prepared technical comments on the CLASS Act, in which, even before its analysis of the Social Security data, the Office pointed out:

Unlike most private insurance that reimburses policy holders for long-term care expenses, the CLASS benefit is a lifetime cash payment paid daily or weekly once a person meets the eligibility criteria of the program. … The end result could be severe adverse selection that would in turn threaten the long-run solvency of the program. (See Exhibit P.)

The technical comments also included several recommendations from the American Academy of Actuaries to increase the solvency of the program. These included adding a waiting period before benefits kick in; reducing the benefit from lifetime to a fixed number of years; using an established list of activities of daily living to determine the trigger for benefits; and moving from a daily cash benefit to one that makes reimbursements based on services used.

None of those recommendations were adopted in the final language of the bill, and the concerns expressed by ASPE were not addressed or shared with the public.

January 2010
HHS Officials Privately Conceded CLASS May Be Unsustainable, but Failed to Disclose Their Concerns Publicly

In January 2010, HHS staff prepared a list of suggested technical corrections to the CLASS Act that the Department wanted included as the House and Senate reconciled their separate versions of health care reform. However, for both political and procedural reasons, the House was forced to accept the version of health reform – and the CLASS Act – adopted by the Senate on December 24, 2009, and none of the corrections were made.

Chief among the corrections the Department wanted to make was a so-called “failsafe,” which HHS staff described this way:

In the current bills, the Secretary can alter the premiums in response to threats to financial stability of the CLASS program. However, it is possible the authority in the bill to modify premiums will not be sufficient to ensure the program is sustainable. The failsafe provision gives the Secretary authority to alter earnings and vesting provisions of the CLASS Act to further decrease adverse selection and maintain long-run stability. (See Exhibit Q.)

The documents reveal HHS’ concern that the CLASS program as written in the Senate bill – and the version signed into law – would become fiscally unsustainable. Yet at no point between the date of the document – January 4, 2010 – and the day the House voted to pass the Senate health bill – March 21, 2010 – did Secretary Sebelius or any other HHS official publicly air the Department’s concerns that the CLASS program as drafted could be unsustainable.

It appears that the significant fiscal concerns surrounding CLASS may have been silenced within the Department for political reasons and the fear that publicly discussing concerns about CLASS’ sustainability could have jeopardized the bill’s passage in the House.

The technical comments on the January 2010 document raise additional contradictions between HHS’ public and private statements. Throughout 2011, Secretary Sebelius and other HHS officials have repeatedly expressed – and have testified before Congress about – their belief that the CLASS Act legislation gives them the authority they need to construct the program in a fiscally sustainable manner.9 This public assurance stands in marked contrast with the internal corrections document asserting that it is possible the Department’s authority “will not be sufficient to ensure the program is sustainable.”

CLASS May Leave Employers On the Hook for a Failed Entitlement

Even before PPACA became law, HHS and the law’s drafters began to look for ways to pass the costs on to other parties. While it was clear that some of the future projected shortfalls in the program would add to the federal budget deficit and be borne by American taxpayers, other costs would be shifted to employers and the states. The documents show a consistent effort by HHS to impose unfunded mandates on others, so that the cost of some of the questionable decisions made by the law’s drafters would not fall on the federal government.

Employer Participation Creates Compliance and Administrative Burdens

To participate in CLASS, subscribers would pay a yet-to-be-determined premium each month that would be deposited into a trust fund established by the Secretary of the Treasury for the purpose of paying cash benefits to eligible claims. Premiums would be collected either through voluntary employer payroll withholding or by a mechanism determined by the Secretary for those who are self-employed, have more than one employer, or have an employer that does not participate in the automatic enrollment process.

The critical mechanics of how an employer would withhold CLASS program premiums from employees’ paychecks and then transfer those premiums to the U.S. Treasury could place a significant compliance and administrative burden on employers. The complexity and cost of any new payroll deduction and enrollment process could be substantial, especially for small employers.

Documents show that HHS knew of the program’s administrative burden on employers and pressed forward anyway. In the HHS ASPE office’s technical comments on the draft CLASS Act legislation from December 1, 2009, the Department acknowledged:

The collection of premiums is a fiduciary responsibility that requires employers to accurately collect and transmit premiums to the government. Collecting premiums would require a nontrivial change to existing payroll systems and additional responsibilities that employers may be reluctant to take on. (See Exhibit P.)

HHS warned that employer participation in a voluntary enrollment program was likely to be low because CLASS premiums will be difficult for employers to calculate and “employee interest in CLASS may be minimal.” (See Exhibit P.)

What was more, because employers participating in the program would be taking on a fiduciary responsibility, they could be at risk of lawsuits from their workers for calculating premiums incorrectly. Because, as HHS acknowledged, calculating premiums will be “complex” and difficult to implement, such lawsuits could become commonplace. HHS appears to have understood that the prospect of litigation and significant liability might make employers less likely to want to get involved in the program.

The Forthcoming Regulations on CLASS Could Require Employers, at a Minimum, to Provide Enrollment Information

In December 2009, HHS staff discussed how to use the regulatory process to change the not-yet-passed CLASS Act in a way that would make it even more burdensome for employers. Staff were concerned that low participation by employers would lead to fewer people signing up for the program.

One email chain included a discussion about requiring employers to play a more active part in enrollment by requiring them to issue enrollment forms to employees.

A major enrollment issue that needs to be addressed is how to identify the relevant employers/employees (i.e., the self-employed, small employers, and large employers), and determine if statutory requirements are being met. The Department of Labor may be of some assistance. (See Exhibit R.)

Another email from the same month indicates that HHS tried to make last minute changes to a manager’s amendment, though the language never made it into the final version of the amendment. The Deputy Assistant Secretary for Planning and Evaluation suggested:

Employer requirements: In the current formulation of the bill, employers have complete discretion regarding whether to participate in the CLASS program and auto-enroll employees …. The provision introduced in this amendment maintains the original optional participation in autoenrollment, but adds a requirement that employers inform their employees about the CLASS program. (See Exhibit S.)

Nothing in the documents suggests that the Obama administration ever conducted an analysis to quantify how much these proposed unfunded mandates would cost employers in time and resources.

The Administration Considers New Mandates on Employers as a “Solution” to Low Participation

The concern inside HHS about potentially low participation by employers led to an even more burdensome suggestion: mandate that employers over a certain size offer enrollment to employees. As HHS explained, “One possible alternative is to move to a ‘mandated offer’ approach where employers over a certain size (e.g., 50 employees) would be required to offer enrollment.” (See Exhibit P.)

Documents show that the idea that the Administration should solve its participation problem by requiring employers to offer enrollment to employees continued to be a major theme of communications regarding implementation of the program. On December 11, 2009, a staffer in ASPE commented:

I am writing right now about whether we should integrate employers even more into the process by moving to a ‘mandated offer’ approach instead of just ‘mandated information.’ The major problem is that mandating that employers offer information about the program probably will not yield high enough participation; we need to have employers more integrated into the enrollment process and not have them drop off once they simply provide information about the program. (See Exhibit T.)

The recipient of that email responded:

I agree that there is a risk to the entire program if we don’t have a sufficiently robust outreach and educational campaign and one that is specifically targeted to employers. This employer notification mandate makes me think of Part D, whereby … insurers are required to notify their Medicare eligibles whether their prescription drug coverage is creditable. (See Exhibit T.)

In numerous other emails, HHS staff argued that employers should bear the responsibility to enroll employees. (See Exhibit R.) HHS envisioned this requirement increasing participation in the program, but the documents do not discuss the unfunded mandate that would be imposed on employers. The final version of the CLASS Act is silent on employer requirements, but it is entirely within the HHS Secretary’s discretion to impose the obligations on employers when she issues regulations for the program this fall.

Even if the Secretary does not require employer participation in the regulations to be released this fall, the email communications discussing mandatory employer participation and employer fiduciary responsibility foreshadow ways HHS could later modify the CLASS Act in a desperate attempt to make the program solvent.

CLASS Saddles States With Yet Another Mandate

In addition to the burdens placed on employers, the emails indicate that HHS believed many costs of implementation will be shouldered by the states.

HHS Knew CLASS Imposed Heavy Administrative Burdens and Unrealistic Deadlines

States will have a significant administrative role in the implementation of the CLASS program, including responsibility for establishing and helping to administer eligibility determination centers. For example, the CLASS Act requires the Secretary of HHS to establish an Eligibility Assessment System similar to the Social Security Disability Insurance (SSDI) program, to be administered by the states. That system is to be completed by January 1, 2012. The CLASS Act also requires the HHS Secretary to enter into agreements with each state’s Protection and Advocacy System, which advocate for people with disabilities, and with other groups and state agencies to provide additional counseling services.

According to several internal emails, HHS and CMS staff noted the unreasonable burdens the legislation would impose on states by requiring implementation of the Act within two years. On April 19, 2010, one email said that requiring states within two years of enactment to “designate or create entities to serve as fiscal agents for CLASS beneficiaries” would “create significant new burdens on the states.” (See Exhibit U.)

Another email from even earlier, December 18, 2009, also warned of this problem, stating that a two year deadline for states “to build the direct care workforce capacity for CLASS enrollees” is “flawed (and perhaps fatally so).” (See Exhibit V.)

HHS Underestimated Administrative Costs, Leaving States to Bear Costs of Eligibility Determinations

Even if the deadlines can be met, HHS has not released any specific estimates of how much these implementation efforts will cost or how much money the federal government will be able to offer states to help pay for the services versus how much states will have to pay on their own.

It is clear from internal HHS emails that the Department always planned to impose a number of significant administrative burdens on states. The administrative costs are expected to be significant, and HHS officials pointed out several times that cost estimates of the CLASS Act did not allocate enough money to administer the program. CLASS Act estimates only allocated three percent of premiums to run the program, while the American Academy of Actuaries recommended three percent of premiums plus five percent of benefits. (See Exhibit P and Exhibit W.)

Rather than address inadequate funding for administrative expenses, the CLASS Act imposes many administrative expenses on already-struggling states. On March 3, 2010,
when asked whether CMS analyzed implementation costs for CLASS, one CMS employee responded:

“Hate to tell you but I am almost certain that we did not do this. I really thin[k] most of the administrative costs would be in doing eligibility determinations and payments split with nursing homes and waivers, however, I think little of it is really ours versus the states.” (See Exhibit X.)

CMS Knew States Would Be Saddled With Costs But Congress Did Not Make Changes during Reconciliation

In the last few weeks before final passage of PPACA, CMS’ Office of Legislative Affairs asked staff for edits to the Senate bill that CMS deemed absolutely necessary in order to implement the Act. In a March 4, 2010, exchange, CMS specifically asked for “Not ‘nice to have’ but ‘otherwise it won’t work’” fixes. One edit provided by staff read, “require the Secretary to assume responsibility for building workforce infrastructure; otherwise, this will impose costs and burdens on states and potentially put CLASS at risk.”

CMS proposed changing the implementation date to January 2015, as “states are not uniformly equipped to perform activities related to designating existing or new entities to ensure the service infrastructure is adequate to meet the needs of beneficiaries, which will likely pose significant and potentially costly administrative challenges, particularly in light of the implementation deadline.” (See Exhibit Y.) None of these edits were included in the final version of PPACA.

Administrative Burden Likely to Get Worse Over Time

The SSDI program, on which the CLASS Act administrative structure is modeled, is experiencing significant problems in both fiscal and administrative areas. The aging of the baby boom generation has caused SSDI administrative costs to nearly double since 2000. According to a CBO report, the SSDI program will become insolvent in 2017.10 In addition, the Social Security Administration anticipates nearly 3.2 million new applicants11 for disability benefits in FY 2012. Even without those new applicants, SSDI has a huge backlog of appeals cases in which benefits have been denied. In 2007, some appeal cases had been lingering as long as 1,400 days.12

Conditions are so unstable that the Government Accountability Office (GAO) has placed federal disability programs on a High-Risk Watch List since 2003. According to GAO, “the largest disability programs – managed by the Social Security Administration, Department of Veterans Affairs, and Department of Defense – are experiencing growing workloads, creating challenges to making timely and accurate decisions.”13

As baby boomers start claiming CLASS Act benefits, program administrators can expect to see some of the problems of scale already being experienced by other federal disability programs, including rising administrative costs. However, the statute caps the program’s administrative expenses at three percent of premiums, leaving no wiggle room for states to accommodate the increased burden from an aging population. Without sufficient capital and stability from the start, it is likely the CLASS program will eventually join the other programs on GAO’s High-Risk Watch List.

The cost of administering the SSDI program state centers in 2011 was $3 billion, a cost borne exclusively by the states.14
The burdens of CLASS implementation on the states are likely to exceed that amount, because the number of CLASS beneficiaries will be significantly larger than the number of SSDI beneficiaries due to more relaxed eligibility requirements under CLASS. While HHS has not shared estimates on the costs to states to administer the CLASS Act, we feel that $3 billion per year is a conservative estimate, one that excludes additional expected start-up costs. Over the next ten years, states will be forced to bear at least $30 billion dollars for implementation of CLASS. When added on top of the mandates from the Medicaid requirements in PPACA of at least $118 billion, it is clear that states are being forced to pay the bills that Washington refuses to pay.

State Officials and Legislators Have Grave Concerns with the Solvency and Sustainability of the CLASS Act

On August 4, 2011, leaders of a key National Conference of Insurance Legislators (NCOIL) Committee expressed “grave concerns” with the CLASS Act in a letter to the HHS Secretary. The NCOIL letter asserts that the CLASS Act program “fails to apply the principles of risk management that are essential to any financially sound insurance program”. The letter went on to state, “The CLASS program risks being undercapitalized on the front end, paying more in benefits than it collects in premiums. This will drive rates up and cause adverse selection, as young and healthy consumers will not participate in the market. Also, the plan as currently configured offers little incentive for agents, brokers, and human resources professionals to encourage the enrollment needed to create a broad and stable risk pool.”15

The concerns of state legislators should be strongly heeded by HHS. Not only do states recognize that they will be on the hook for administering of the CLASS program, legislators whose policy expertise is in insurance markets recognize it is destined for failure at the expense of states, businesses, and taxpayers.

 

NOTES

1 P.L. 111-148; P.L. 111-152

2 Foster, Richard. “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act’ As Amended.” Office of the Actuary, Centers for Medicare and Medicaid Services, April 22, 2010. https://www.cms.gov/ActuarialStudies/Downloads/PPACA_2010-04-22.pdf

3 Montgomery, Lori “Proposed Long-Term Insurance Program Raises Questions.” Washington Post, October 27, 2009. http://www.washingtonpost.com/wp-dyn/content/article/2009/10/27/AR2009102701417.html

4 Roy, Avik. “Sebelius: CLASS Act is ‘Totally Unsustainable,’ Mandate Possible,” Forbes, February, 23, 2011. http://www.forbes.com/sites/aroy/2011/02/23/sebelius-class-act-is-totally-unsustainable-mandate-possible/

5 Bold/italic emphasis throughout this report not necessarily in the original.

6 The documents provided did not include the study completed by the Moran group despite it being referenced by the chief actuary and a senior democrat staff member for the Senate Health, Education, Labor, and Pensions Committee. The senior democrat staff member referenced the Moran report on October 20, 2009 at the Kaiser Family Foundation event “The Sleeper Issue: Long-term Care and the CLASS Act,” page 78. http://www.kff.org/healthreform/upload/102009_KFF_CLASS_Act_Transcript_Final.pdf

7 Foster, Richard. “Estimated Financial Effects of the ‘America’s Affordable Health Choices Act of 2009’ (H.R. 3962), as passed by the House on November 7, 2009, November 13, 2009. http://www.cms.gov/ActuarialStudies/downloads/HR3962_2009-11-13.pdf Foster, Richard. “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act’ As Amended.” Office of the Actuary, Centers for Medicare and Medicaid Services, April 22, 2010. https://www.cms.gov/ActuarialStudies/Downloads/PPACA_2010-04-22.pdf

8 Comments made on October 20, 2009 at Kaiser Family Foundation Event. “The Sleeper Issue: Long-term Care and the CLASS Act.” Page 49-50. http://www.kff.org/healthreform/upload/102009_KFF_CLASS_Act_Transcript_Final.pdf

9 Roy, Avik. “Sebelius: CLASS Act is ‘Totally Unsustainable,’ Mandate Possible,” Forbes, February, 23, 2011 http://www.forbes.com/sites/aroy/2011/02/23/sebelius-class-act-is-totally-unsustainable-mandate-possible/  House Energy & Commerce Committee. Hearing entitled, “The Implementation and Sustainability of the New, Government-Administered Community Living Assistance Services and Supports (CLASS) Program,” March 17, 2011. http://republicans.energycommerce.house.gov/hearings/hearingdetail.aspx?NewsID=8332

10 Congressional Budget Office, “CBO’s 2011 Long-Term Projections for Social Security: Additional Information,” August 2011. http://www.cbo.gov/doc.cfm?index=12375  

11 Social Security Administration. “Annual Performance Play for Fiscal Year 2012,” page 21. http://www.socialsecurity.gov/performance/2012/APP%202012%20508%20PDF.pdf

12 Astrue, Michael, Commissioner of the Social Security Administration. Statement before the House Committee on Ways and Means, Subcommittee on Social Security and the House Committee on the Judiciary, Subcommittee on the Courts, Commercial and Administrative Law. July 11, 2011. http://www.ssa.gov/legislation/testimony_071111.html

13 Government Accountability Office. Report to Congressional Committees. “High-Risk Series: An Update.” February 2011, page 147. http://www.gao.gov/new.items/d11278.pdf

14 The 2011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Table VI.C5. http://www.ssa.gov/oact/tr/2011/tr2011.pdf

15 National Conference of Insurance Legislators. Letter to the Honorable Kathleen Sebelius. August 4, 2011. http://www.ncoil.org/Docs/2007430d.pdf

Health Information Technology

Background:  Over the past several years, Congress and the Administration have focused on ways to improve the adoption of information technology as one way to foster reform within the health care system.  Advocates of health IT and electronic health records believe that their widespread adoption and use by practitioners could improve the quality of care and reduce the incidence of preventable medical errors, which kill up to 100,000 individuals annually.[1]  Some individuals also assert that health IT could generate significant savings within the health care system, though estimates vary and may be based in part on the systems changes that accompany IT adoption.

Legislative Proposals:  Although health IT legislation has been debated in previous Congresses, no proposal was enacted into law.  As a result, several pieces of legislation have been introduced or re-introduced in the 110th Congress.  In the House, the Energy and Commerce Committee approved on July 23, 2008 H.R. 6357, sponsored by Committee Chairman John Dingell (D-MI) and Ranking Member Joe Barton (R-TX).  The bill would codify the Office of the National Coordinator of Health Information Technology (ONCHIT)—previously established by Executive Order in April 2004—within the Department of Health and Human Services, set guidelines for the federal government and relevant stakeholders to develop health IT standards, and authorize grants for adoption of health technology, including electronic health records.  The bill also creates requirements for entities handling medical records to limit the circumstances under which records may be disclosed, and to notify patients in the event of an electronic data breach.

The Ways and Means Committee—which shares jurisdiction over Medicare with Energy and Commerce—is also expected to weigh in with legislative activity.  Ways and Means Health Subcommittee Ranking Member Dave Camp (R-MI) has introduced health IT legislation, H.R. 6179.  The bill would codify ONCHIT into statute, provide for a streamlined process for the promulgation of IT standards (including privacy standards), make permanent a regulatory exception promulgated by the Administration allowing hospitals to purchase IT software for physicians, and create new tax incentives for physicians to expense the cost necessary to implement a system of electronic health records.

In the Senate, the Health, Education, Labor, and Pensions Committee marked up S. 1693, sponsored by Chairman Ted Kennedy (D-MA), on June 27, 2007.  The bill is broadly similar to H.R. 6357, and includes provisions codifying ONCHIT’s role, authorizing grants for health IT promotion, and incorporating stricter privacy standards.  Press reports indicate that staff attempted to “hotline” the legislation before the August recess, but that objections from several offices precluded passage by unanimous consent.

Implications of Legislation:  While most policy-makers agree on the desirability of additional IT adoption by health practitioners, clarifying the federal role in such activity has proved more problematic.  As Congress considers potential legislative action to promote health IT, four key areas remain subject to controversy surrounding the federal government’s proper role.  These include:

Funding:  Several health IT bills—including both H.R. 6357 and S. 1693—authorize grants to promote interoperability among electronic health record systems and the adoption of health information technology.  H.R. 6357 authorizes $575 million over five years for grants to physicians, states, or local health-related entities to promote the effective use of IT, and an additional $20 million over two years for clinical education grants.   Similarly, S. 1693 authorizes $278 million over two years for grants to providers, states seeking to establish health IT loan programs, and the development of local or regional health IT plans, while including additional authorizations for clinical education grants and grants to promote telehealth services.  Some conservatives may question the need to authorize this additional new spending, and agree with the Administration’s position that market forces, not direct subsidies, are the most effective way to stimulate the growth of electronic health records and related technology.

Another approach discussed to promote the adoption of health IT focuses on adjustments to Medicare reimbursement rates—payment increases for adopters and/or payment reductions for non-adopters.  Such an approach was included in e-prescribing provisions attached to the latest Medicare physician payment legislation (P.L. 110-275).  Some conservatives may have both a specific and a general concern with this approach: first that any reimbursement adjustments be implemented in a budget-neutral manner, and second that any linkage between physician payment levels and health IT adoption could be perceived as a further attempt by the federal government to micro-manage the practice of medicine for physicians nationwide.

A third approach would utilize tax incentives—in the form of accelerated depreciation or increased deductions for the purchase of equipment related to electronic health records—as a means to spur greater health IT adoption.  While some conservatives may believe that tax expenditures constitute a more effective means of encouraging adoption of electronic health records than the direct government spending in the two examples above, others may question the necessity of federal involvement to promote health technology when other industries have adopted technological innovations much more quickly.

Some conservatives may believe that this central question—Why did it take only a few years to develop nationwide ATM networks, but decades to spur health IT adoption?—speaks to one of the fundamental drawbacks of the current health system: the distortionary effects of third-party payment.  While patients may be willing to pay for the benefits associated with an electronic health record, or the convenience of an e-mail consultation with a physician, many private insurance companies’ reimbursement and coverage decisions continue to follow the example of a Medicare program frequently slow to respond to changes in medical care.  Therefore, some conservatives may support initiatives like Health Savings Accounts as one way to minimize the effects of third-party payment and better align patient and physician incentives, improving the quality of care and thereby reducing the growth in costs.

Privacy:  Under current law, electronic health records, along with other paper-based health information, are regulated by standards promulgated pursuant to the Health Insurance Portability and Accountability Act (HIPAA, P.L. 104-191).  The law subjects “covered entities”—health plans, health clearinghouses, and providers who transmit any health information in electronic form—to a series of standards issued by the Department of Health and Human Services, commonly called the HIPAA Privacy Rule.[2]  In general, the Privacy Rule requires covered entities to obtain consent for the disclosure of protected health information—defined as health information that identifies the individual, or can reasonably be expected to identify the individual—except when related to “treatment, payment, or health care operations.”[3]  The regulations include several exceptions to the pre-disclosure consent requirement, including public health surveillance, activities related to law enforcement, scientific research, and serious threats to health and safety.[4]

In addition, current HIPAA regulations include a separate Security Rule, requiring covered entities and their business associates to safeguard protected health information held electronically.  The rule includes administrative, physical, and technical safeguards that covered entities must follow, and permits entities to contract with business associates to implement the regulatory requirements.[5]  Covered entities are not in compliance with the HIPAA Security Rule only if they become aware of “a pattern of an activity or practice” by the business associate in breach of its contract and the HIPAA security standards, yet fail to take remedial action.[6]

While supporting the desirability of personal medical information remaining private, some conservatives may also believe that privacy standards should not be implemented in a way that impedes the functioning of the health care system.  For instance, restrictions on “marketing” could be construed in such a way as to preclude pharmacists from e-mailing patient reminders to refill prescriptions, or consider cheaper generic drugs—both of which could be seen as unfortunate outcomes.  Similarly, requiring patient consent to utilize electronic health information for auditing purposes could be an invitation for patients to commit fraud, thereby encouraging criminal activity that raises costs for all individuals.

To the extent that Congress decides to incorporate a breach notification regime into health IT legislation, some conservatives may support setting clear standards for when notification is required, and safe harbor provisions for entities that act promptly to remedy any breaches that may occur.  Some conservatives may also support federal pre-emption with respect to breach notification provisions, so that covered entities will not be subjected to a patchwork of conflicting state laws.  In that same vein, some conservatives may be concerned by the implications of any attempt to introduce or expand a private right of action for individuals affected by security breaches that could serve as a breeding ground for costly litigation.

Physician Self-Referral:  One of the perceived impediments to wider health IT implementation lay in existing laws regarding physician self-referral.  In general, the so-called Stark law prohibits physicians who receive Medicare payments from referring their patients to entities with whom the physician has a financial relationship.[7]  While the statute contains a number of exceptions to the general prohibition, no portion of existing law would provide a safe harbor for a hospital or health system to donate health IT equipment to physician offices.

In response, the Centers for Medicare and Medicaid Services (CMS) in August 2006 published final regulations under which the Administration used its authority to create a “safe harbor” with respect to the Stark self-referral laws and health IT promotion; the same day, the Inspector General at the Department of Health and Human Services created a similar safe harbor with respect to the federal anti-kickback statute.[8]  Although the exception was intended to encourage the adoption of health IT by physicians and other providers without facing possible adverse legal actions, the regulations contain several potential drawbacks: the exception covers health IT software, but not hardware; requires a 15% payment by physician recipients; and, perhaps most importantly, expires in December 2013.

Some conservatives may support actions that expand the health IT exception created by the Administration to address its limitations and protect physicians from unnecessary regulations and/or legal action by CMS.  The self-referral exception created for electronic prescribing as mandated by Congress in the Medicare Modernization Act (P.L. 108-173) covered electronic hardware, providing little reason to qualify the exception with respect to electronic health records.  The required 15% payment by physician recipients appears contradictory to the exception’s purpose; a gift is either inappropriate or it isn’t—the size of any payment by a physician to the donor bears little semblance to the inherent nature of the relationship.  Finally, some conservatives may believe that eliminating the sunset date would provide important regulatory certainty for both physicians and the health IT community, rather than relying upon a future Administration and future Congresses to determine whether and how the self-referral exception should be extended.

Liability:  Unstated in most discussions about health information technology legislation is the impact which widespread health IT adoption may have on the current medical liability system.  Nevertheless, it may be reasonable to believe that the clarity afforded by electronic health records may have a measurable impact on tort claims—improved coordination of care may eliminate some medical errors before they occur, while the distinctions between frivolous and meritorious claims may become more clear.

Given this dynamic, some conservatives may support provisions in health IT legislation which create safe harbors for providers following accepted standards of care, as one potential way to minimize any increased costs associated with defensive medicine practices.  Additionally, some conservatives may view a health IT bill as a logical vehicle to attach liability reform provisions that reduce the number of frivolous lawsuits, allow for fair and reasonable compensation for individuals with legitimate claims, and encourage providers to utilize adverse events to improve the quality of future care.

Conclusion:  While health IT holds significant progress in terms of its ability to improve the quality of care and its potential to slow the growth in costs, its promise may rise or fall on the regime under which new technology is adopted.  If improperly implemented, costly new health IT mandates could spark senior physicians to take early retirement, depriving patients of well-trained and trusted providers.  Similarly, proposals that impose regulatory burdens that balkanize care in the name of privacy, while encouraging lawsuits against physicians and/or software providers, may well only inhibit the adoption of effective health IT and increase, rather than reduce, the growth of health costs.

Recognizing that the devil does indeed lie in the details, some conservatives may be cautious about assessing the implications of the final legislative product before supporting a health IT bill.  Specifically, while many conservatives may support legislation that reduces unnecessary regulations and avoids imposing new onerous burdens, bills that include significant increases in federal regulations and/or government spending may warrant stricter scrutiny.  Consistent with a belief that smaller government will allow private enterprise to thrive, conservatives may believe that a minimalist approach to health IT provides the best opportunity to allow the health system to create the innovative approaches to care that can slow the growth of costs.

 

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

[2] The definition of covered entity can be found at 42 U.S.C. 1320d-1(a); the HIPAA Privacy Rule can be found at 45 C.F.R. 160 and 164.

[3] Definitions of protected health information and individually identifiable health information can be found at 45 C.F.R. 160.103; permitted use for “treatment, payment, or health care operations” can be found at 45 C.F.R. 164.506.

[4] The full list can be found at 45 C.F.R. 164.512.

[5] The safeguards are found at 45 C.F.R. 164.308, 164.310, and 164.312, respectively.

[6] Language can be found at 45 C.F.R. 164.314(a)(1)(ii).

[7] The Stark law can be found at 42 U.S.C. 1395nn.

[8] The regulations can be found at http://www.cms.hhs.gov/PhysicianSelfReferral/Downloads/CMS-1303-F.pdf and http://oig.hhs.gov/authorities/docs/06/OIG%20E-Prescribing%20Final%20Rule%20080806.pdf, respectively (accessed August 25, 2008).

Certificate of Need Programs

History and Background:  In the 1960s, some health care policy makers began to believe that an excess supply of providers was having an inflationary impact on the price of health care.  As a result, several states, beginning with New York in 1964, enacted “certificate of need” (CON) laws giving state agencies the power to evaluate whether a new hospital or nursing home facility was needed prior to its construction.  Prompted in part by support from the American Hospital Association, 20 states enacted certificate of need laws by 1975.[1]

In January 1975, President Ford signed into law the National Health Planning and Resources Development Act (P.L. 93-641), originally sponsored by Sen. Ted Kennedy (D-MA).  The Act provided incentives for states to enact approval mechanisms prior to the construction of major facilities. As a result, by 1980 all states but Louisiana had established CON programs.[2]  However, Congress enacted legislation (P.L. 99-660) repealing the federal law in November 1986, which in time led 14 states to abolish their certificate of need programs.  Nevertheless, 36 states and the District of Columbia maintain some form of restriction on the construction of new medical facilities absent a determination of necessity.

Changes within the Hospital Industry:  In the more than four decades since the first certificate of need program was established, the hospital industry has undergone numerous changes and consolidations that may be seen as undermining the original rationale for the certificate of need mechanism.  At the time certificate of need laws were enacted, most hospitals received cost-based reimbursement for services from both the federal government and private insurers.  This payment mechanism, when coupled with a perceived lack of incentives for consumers to become cost-conscious about their health care expenditures, led policy-makers to impose external restrictions on providers’ growth (in an attempt to slow the growth of health expenditures) due to a belief that they would fail to compete on price grounds.[3]  However, the intervening decades have seen a move away from cost-based reimbursement and toward prospective payment for procedures, along with greater incentives—higher deductibles, Health Savings Accounts, co-insurance, etc.—for consumers to demonstrate price sensitivity in health care.  Thus the economic conditions which led regulators to impose certificate of need restrictions have changed appreciably for both consumers and providers, which may prompt a re-evaluation of their usefulness and efficacy.

In addition, a wave of consolidation within the hospital sector has attracted the attention of antitrust regulators, who have examined the impact of hospital mergers on health care.  As of 2001, nearly 54% of hospitals nationwide had joined a larger hospital system, with a further 12.7% working in looser affiliations.  Combined, two-thirds of hospitals nationwide (66.7%) participated in some form of network or system affiliation—more than double the 31% two decades previously, in 1979.[4]

In 2004, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) conducted a series of fact-finding hearings that culminated in a joint study analyzing the antitrust implications of health care policy, which featured several chapters specifically devoted to the changes within the hospital industry.[5]  Reports submitted to the panel cited the “extensive consolidation” within the health care industry, “at times creating virtual monopolies in geographic submarkets” that allowed hospitals to “exert greater leverage in managed care contract negotiations” while pressuring physicians to join a particular system.[6]  Other witnesses noted the way in which hospital systems attempt to include at least one “must have” hospital in each geographic market, which will allow the system to demand price increases.[7]

Both the FTC-DOJ report and other independent studies have noted the link between high levels of consolidation within the hospital industry and higher prices.  Best estimates indicate that hospital mergers tend to increase prices from 5-40%—while also resulting in decreases in quality.[8]  A National Bureau of Economic Research working paper found that, by resulting in a loss of consumer surplus of $42.2 billion over a decade (most of which went to providers), hospital mergers had the net effect of raising insurance premiums 3-5%, thus increasing the number of uninsured by almost 5.5 million life-years from 1990 through 2003.[9]

Effect of CON on Competition, Price, and Quality:  Conservatives who believe in free markets may not object to consolidation within the hospital industry, or any other industry, provided that no other external factor interferes with the operation of the economic market.  However, if the market has been distorted through public policy actions by legislators—as in the case of the 36 states and the District of Columbia with certificate of need laws—some conservatives may view such laws with caution, due to the potential negative implications which a state-granted oligopoly for existing providers may have on the ability of new entrants to improve the health care marketplace through innovative practices and techniques.

The same FTC-DOJ report that noted the correlation between hospital consolidation and rising prices also criticized the state certificate of need model as anticompetitive and not in consumers’ best interest.  Witnesses testified that the barriers to entry presented by certificate of need requirements impeded rapid implementation of new health care technologies, with significant adverse effects on overall health care spending—rising prices due to more limited access to care, and/or re-directing spending to other areas of health care (i.e. a restriction on development of new beds leading to increased investment in radiological or other equipment).[10]  The report concluded:

The Agencies believe that CON programs are generally not successful in containing health care costs and that they can pose anticompetitive risks….CON programs risk entrenching oligopolists and eroding consumer welfare.  The aim of controlling costs is laudable, but there appear to be other, more effective means of achieving this goal that do not pose anticompetitive risks.[11]

Because of the “serious competitive concerns” that outweighed the purported benefits, the agencies advised states to re-evaluate whether their certificate of need programs in fact serve the public good.

In addition to the impact of certificate of need programs on price and market penetration, the stubbornly high rates of medical errors and hospital-acquired infections may be symptomatic of quality control difficulties rooted in a lack of competition.  The 1999 Institute of Medicine study To Err Is Human estimated that between 44,000 and 98,000 Americans die annually in hospitals due to preventable medical errors, creating a total economic cost of as much as $29 billion, and a November 2006 report utilizing data from a new infection-reporting regime in Pennsylvania found 19,154 cases of hospital-acquired infections in 2005 alone, representing an infection incident rate of more than 1 in 100 hospitalizations.[12]  With consolidation having eroded the breadth of competing hospitals in some markets, and state certificate of need programs presenting a significant barrier for potential new entrants, the prime driver of quality improvement within the hospital sector may be fear of litigation—a process which some conservatives may find economically inefficient and poor public policy.

The impact of certificate of need programs on quality improvements was illustrated in data from an October 2003 Government Accountability Office (GAO) study examining physician-owned specialty hospitals.  According to GAO, 83% of all specialty hospitals—and all specialty hospitals then under development—were located in states without certificate of need requirements.[13]  The FTC-DOJ study also cited the example of a Florida law enacted in 2003, which barred single-practice specialty hospitals while simultaneously eliminating certificate of need requirements for various cardiac programs at general hospitals.[14]  Some conservatives may therefore be concerned first that the innovation and quality improvements which physician-owned specialty hospitals have introduced are being denied to residents in many states due to certificate of need restrictions, and second that this archaic and bureaucratic mechanism has become a political football that existing facilities attempt to manipulate in order to maintain existing oligopolies.[15]

Security Impact:  The September 11 attacks and subsequent concerns regarding incidents of mass terrorism, bioterrorism, or pandemic outbreaks have raised the prominence of the need for “surge capacity” in the event of a major public health disaster.  Although such surge capacity need not be located within the confines of a hospital, specialized medical centers may play a significant role in any response to a large-scale incident.

On May 5 and 7, 2008, the House Committee on Oversight and Government Reform held hearings regarding a potential lack of hospital surge capacity.[16]  Chairman Henry Waxman (D-CA) attempted to assert that the implementation of several proposed Medicaid anti-fraud regulations would compel hospitals to reduce or eliminate trauma centers whose services would be needed in the event of a major terror incident.  In response, Secretary of Health and Human Services Mike Leavitt noted that the need for proper public health capacity to respond to terrorist incidents should not impede the Administration from enacting reasonable controls to ensure that the Medicaid program meets its statutory goal of providing health care to low-income individuals, as opposed to serving as a bioterror response agency.

In addition to agreeing with the Secretary’s assertion that the distinction between public health preparedness and implementation of Medicaid anti-fraud regulations saving $42 billion over a decade is a false dichotomy, some conservatives may also believe that a better way to increase “surge capacity” in 36 states and the District of Columbia would involve a repeal of certificate of need restrictions.  Rather than maintaining bureaucratic regulations that prevent construction of health care facilities of critical importance in a mass-casualty incident—or jeopardizing existing physician-owned trauma centers by enacting new restrictions on physician ownership, as House Democrats have proposed—conservatives may believe that a better alternative would allow free markets to innovate and create new medical centers should capacity for trauma units or other segments of care be lacking in a particular market.

Conclusion:  Proposals to expand the government’s role in health care have frequently been criticized by conservatives as the first step towards rationed care.  However, some conservatives may use the certificate of need model to argue that 36 states and the District of Columbia already ration health care, by limiting the ability of new entrants to provide medical services to their citizens.  For instance, the recent decision of the Michigan Certificate of Need Commission to limit the number of new radiation facilities in the state may have an adverse impact on cancer patients seeking access to a novel form of treatment.[17]

With a McKinsey group study noting that hospitals account for 50% of the excess spending in American health care relative to other countries, some conservatives may argue that the hospital industry in particular warrants the additional innovation and reduced costs which new entrants can provide.[18]  Congress itself recognized this fact in 1980 by passing legislation (P.L. 96-499) making ambulatory surgery centers (ASCs) eligible for Medicare reimbursement, believing that new ASCs could perform certain medical procedures more cost-effectively than general hospitals.[19]  Yet the exhaustive FTC-DOJ study, as well as related literature, have documented the ways in which state-based certificate of need laws have undermined market-based efforts at cost control—by resulting in less competition, higher prices, and a diminished emphasis on quality that new market entrants can elicit.  In addition, the changed environment of a post-9/11 world raises questions as to whether states with certificate of need programs are denying to their citizens facilities that could be of critical importance in a public health crisis.  Viewed from these perspectives, the certificate of need model may look less like an effective mechanism to contain the growth of health care costs than an outdated shibboleth that ultimately harms the citizens whom it was designed to protect.

Some conservatives may believe that the nearly 100,000 deaths annually due to preventable medical errors constitute proof positive that the certificate of need model should be permanently dismantled, and that the billions of dollars in hospital expenditures made by the federal government may warrant a federal role in persuading recalcitrant states to do so.  This fiscal year alone, the federal government will spend at least $27.1 billion on payments to hospitals not directly attributable to patient care—including Medicare and Medicaid disproportionate share hospital payments, and graduate and indirect medical education costs.[20]  Some conservatives may therefore support policies intended to link some or all of these payments to states’ repeal of certificate of need laws, in the belief that the abolition of such measures will improve competition, drive down prices, and enhance the quality of health care nationwide.

 

[1] “Certificate of Need State Laws 2008,” (Washington, DC, National Council of State Legislatures, updated May 8, 2008), available online at http://www.ncsl.org/programs/health/cert-need.htm (accessed May 11, 2008).

[2] Cited in Improving Health Care: A Dose of Competition (Washington, DC, Department of Justice and Federal Trade Commission Joint Report, July 2004), available online at http://www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf (accessed May 11, 2008), p. 301.

[3] Ibid., pp. 302-303.

[4] Ibid., pp. 133-134.

[5] Background information, agendas, and transcripts for the hearings can be found online at http://www.ftc.gov/bc/healthcare/research/healthcarehearing.htm (accessed May 12, 2008).

[6] Cara Lesser and Paul Ginsburg, “Back to the Future?: New Cost and Access Challenges Emerge,” (Washington, DC, Center for Studying Health System Change Issue Brief No. 35, February 2001), available online at http://www.hschange.com/CONTENT/295/ (accessed May 11, 2008).

[7] Cited in Dose of Competition, p. 138.

[8] William Vogt and Robert Town, “How Has Hospital Consolidation Affected the Price and Quality of Hospital  Care?” (Princeton, NJ, Robert Wood Johnson Foundation Research Synthesis Project No. 9, February 2006), available online at http://www.rwjf.org/pr/synthesis/reports_and_briefs/pdf/no9_researchreport.pdf (accessed May 12, 2008), pp. 8-10.

[9] Robert Town et al., “The Welfare Consequences of Hospital Mergers,” (Cambridge, MA, National Bureau of Economic Research Working Paper 12244), available online at http://www.nber.org/papers/w12244.pdf?new_window=1 (accessed May 13, 2008), Tables 8-10, pp. 48-50.

[10] See ibid., pp. 301-306.

[11] Ibid., p. 306.

[12] Institute of Medicine, To Err Is Human: Building a Safer Health System, summary available online at http://www.iom.edu/Object.File/Master/4/117/ToErr-8pager.pdf (accessed March 1, 2008); Pennsylvania Health Care Cost Containment Council, Hospital Acquired Infections in Pennsylvania, available online at http://www.phc4.org/reports/hai/05/docs/hai2005report.pdf (accessed March 1, 2008).

[13] “Specialty Hospitals: Geographic Location, Services Provided, and Financial Performance,” (Washington, Government Accountability Office, Report GAO-04-167), available online at http://www.gao.gov/new.items/d04167.pdf (accessed May 11, 2008), pp. 20-21.

[14] Cited in Dose of Competition, p. 146, note 116.

[15] The Center for Responsive Politics notes that from 1998 through March 2008, the hospital and nursing home industry spent more than $610 million on federal lobbying alone, placing it ninth among 121 industry categories.  Data available online at http://www.opensecrets.org/lobby/top.php?indexType=i (accessed May 12, 2008).

[16] Information about the hearings can be found at http://oversight.house.gov/story.asp?ID=1929 (accessed May 10, 2008).

[17] Andrew Pollack, “States Limit Costly Sites for Cancer Radiation,” New York Times May 1, 2008, available online at http://www.nytimes.com/2008/05/01/technology/01proton.html?_r=2&adxnnl=1&8br=&oref=slogin&adxnnlx=1210543656-RJG4oNSF434Dh4b52KfeFA&pagewanted=print (accessed May 11, 2008).

[18] Cited in Regina Herzlinger, Who Killed Health Care? America’s $2 Trillion Medical Problem—and the Consumer Driven Cure (New York, McGraw-Hill, 2007), p. 62.

[19] Cited in Dose of Competition, p. 148.

[20] Congressional Budget Office March 2008 baselines for Medicare and Medicaid, available online at http://www.cbo.gov/budget/factsheets/2008b/medicare.pdf and http://www.cbo.gov/budget/factsheets/2008b/medicaidBaseline.pdf, respectively  (accessed May 12, 2008).

Legislative Bulletin: Senate Amendments to H.R. 493, Genetic Information Nondiscrimination Act

Order of Business:  The Senate amendments to the bill are reportedly scheduled to be considered on Thursday, May 1, 2008, subject to a closed rule that provides for one hour of general debate on the Senate amendments and waives all points of order against the amendments (except those arising under PAYGO).

Summary:   H.R. 493 would prohibit the use of genetic information by employers in employment decisions and by health insurers and health plans in making enrollment determinations and setting insurance premiums.  The specific provisions of the bill as amended by the Senate are summarized below.

  • Amends the Employee Retirement Income Security Act (ERISA), the Public Health Service Act, and the Internal Revenue Code to prohibit a group health plan, and a health insurance issuer offering group health insurance coverage in connection with a group health plan, from the following:
    • Adjusting premium or contribution amounts for the group covered under the plan on the basis of genetic information;
    • Requiring an individual or a family member to undergo a genetic test;
    • Requesting, requiring, or purchasing genetic information for underwriting purposes; and
    • Requesting, requiring, or purchasing genetic information with respect to any individual prior to that individual’s enrollment under the plan or coverage in connection with their enrollment.

The bill allows for certain research exceptions to the above prohibitions.

  • Defines an individual or a family member for purposes of this Act as:
    • The fetus inside of a pregnant mother; and
    • Any embryo legally held by the individual or family member (with respect to assisted reproductive technology).
  • Defines genetic test as: “an analysis of human DNA, RNA, chromosomes, proteins, or metabolites, that detects genotypes, mutations, or chromosomal changes.”  The definition does not include the following:
    • “An analysis of proteins or metabolites that does not detect genotypes, mutations, or chromosomal changes; or
    • “An analysis of proteins or metabolites that is directly related to a manifested disease, disorder, or pathological condition that could reasonably be detected by a health care professional with appropriate training and expertise in the field of medicine involved.”
  • Imposes a penalty against any plan sponsor or group health plan for failure to meet requirements with respect to genetic information in connection with their health plan.  The penalty would be $100 each day in noncompliance with respect to each participant to whom such failure relates.  Under certain circumstances, the penalty could not be less than $15,000 per participant.  In addition, the Secretary could waive the penalty under certain circumstances.
  • Prohibits a health insurance issuer in the individual market from doing the following:
    • Establishing rules for the eligibility of any individual to enroll in individual health insurance coverage based on genetic information;
    • Adjusting premium or contribution amounts for an individual on the basis of genetic information concerning the individual or a family member;
    • Imposing any preexisting condition exclusion based on the basis of genetic information, with respect to their coverage;
    • Requesting or requiring an individual or family member to undergo a genetic test;
    • Requesting, requiring or purchasing genetic information for underwriting purposes; and
    • Collecting genetic information with respect to any individual prior to the individual’s enrollment under the plan.
  • Prohibits an issuer of a Medicare supplemental policy from the following:
    • Denying or conditioning the issuance of a policy and from discriminating in the pricing of the policy of an individual on the basis of genetic information;
    • Requesting or requiring individuals to undergo genetic tests; and
    • Requesting, requiring, or purchasing genetic information during underwriting.
  • Directs the National Association of Insurance Commissioners (NAIC) to modify its NAIC model regulations to mirror the above prohibitions required by this Act.
  • Directs the Secretary of Health and Human Services to revise the Health Insurance Portability and Accountability Act (HIPAA) private regulations to be consistent with provisions in this Act, affecting the use of genetic information.
  • Prohibits employers, employment agencies, and labor organizations from the following:
    • Refusing to hire an employee or discriminating against an employee because of genetic information related to that individual;
    • Limiting, segregating or classifying employees in any way that would deprive or adversely affect the status of the employee due to their genetic information; and
    • Requiring or purchasing genetic information, except in certain circumstances.
  • Requires employers, employment agencies, and labor organizations to maintain any genetic information about employees or members as confidential, subject to certain exceptions.
  • Provides for remedies with the Equal Employment Opportunity Commission (EEOC) against employers who engage in discriminatory employment practices with respect to their employees’ genetic information.

Additional Background on Senate Amendments:  On March 4, 2008, 11 Senators, led by Sen. Tom Coburn (R-OK), sent a letter to Majority Leader Reid and Senate HELP Committee Chairman Kennedy outlining remaining conservative concerns regarding passage of the Genetic Information Non-Discrimination Act (GINA).  A summary of those concerns, along with the ways in which the compromise language addressed the issues raised in the March 4 letter, follows below.

  • Title I imposes requirements on health plans regarding insurance coverage, while Title II imposes requirements on employers regarding employment and related hiring decisions.  Earlier drafts of the bill did not include language clarifying that group health insurance plan sponsors may not be subjected to the more expansive remedies provided by Title II, which provides for rulemaking by the Equal Employment Opportunity Commission (EEOC), and remedies before the same body and, ultimately, federal courts.  This “firewall” provision was incorporated into the Senate agreement, which should ensure that the broader remedies available in Title II will be used only against employers who violate their employees’ civil rights, not for employees seeking to litigate group health plan disputes.
  • The Senate agreement maintained language in the original House-passed bill ensuring that entities covered under the Health Insurance Portability and Accountability Act (HIPAA) privacy regulations can continue to communicate medical and genetic information consistent with the HIPAA statute without facing a separate and potentially conflicting regulatory regime under GINA.
  • The Senate agreement also includes clear language excluding “manifested” diseases from GINA’s provisions.  In general, health plans can receive information about whether an individual has a manifested disease, and these facts can be used during the underwriting process for individual and small group coverage in some states.  By maintaining current law clarity, the agreement’s language would maintain long-established underwriting processes for already-occurring health conditions—while providing protections for genetic information for diseases not yet manifest in patients.
  • Lastly, as a result of efforts by the Congressional Pro-Life Caucus, the Senate agreement maintained language in the House-passed bill extending GINA protections to any fetus carried by pregnant women or any embryos held by individuals or family members.  Maintaining this language ensures that families will not have an economic incentive to abort their unborn children, fearing that they could be discriminated against due to results from prenatal testing.  Groups such as Family Research Council and the National Conference of Catholic Bishops have endorsed the compromise Senate language for this reason. 

To the extent that concerns still remain regarding the GINA language, they revolve primarily around the strength of the “firewall” language, and the lack of a general-purpose “business necessity” exemption for companies that may find a legitimate need to utilize genetic information for a reason not expressly authorized within the statute.  Some business groups also question whether and to what extent genetic non-discrimination legislation is necessary, particularly as insurers are currently prohibited from such discrimination.  Nevertheless, the significant progress made on the concerns outlined by Sen. Coburn and his colleagues outweighed any lingering concerns, leading the Senate to approve the bill by a 95-0 vote.

Legislative History:  H.R. 493 was introduced on January 16, 2007, and referred to the House Committees on Education and Labor, Energy and Commerce, and Ways and Means.  The Education and Labor Committee held a mark-up and reported the bill, as amended, by voice vote on February 14, 2007.  The Energy and Commerce Committee held a mark-up and reported the bill, as amended, on March 23, 2007.  The Ways and Means Committee held a mark-up and reported the bill, as amended, by voice vote on March 21, 2007.  The bill was passed on April 25, 2007, by a vote of 420-3.  On April 24, 2008, the Senate passed the bill with an amendment by a 95-0 vote.

Cost to Taxpayers:  According to CBO, enacting H.R. 493 “would increase the number of individuals who obtain health insurance by about 600 people per year, nearly all of whom would obtain insurance in the individual market.  The bill would affect federal revenues because the premiums paid by some of those newly insured individuals would be tax-deductible.” As such, CBO estimates that the bill would reduce revenues by less than $500,000 in each year from 2008 through 2017, by $1 million over the 2008-2012 period, and by $2 million over the 2008 through 2017 period.

In addition, CBO states that “the bill’s requirements would apply to Medicare supplemental insurance, which would affect direct spending for Medicare.”  However, CBO estimates that the bill would have no significant effect on direct spending.  Finally, CBO estimates that H.R. 493 would result in discretionary costs of less than $500,000 in FY 2008, and $2 million over the FY 2008 through FY 2017 period.

Does the Bill Expand the Size and Scope of the Federal Government?:  Yes, the bill grants authority to the Secretaries of Health and Human Services, Labor, and Treasury to promulgate regulations and engage in enforcement activities with respect to the Title I provisions relating to health insurance coverage.

Does the Bill Contain Any New State-Government, Local-Government, or Private-Sector Mandates?:   Yes.  According to CBO, the bill would “preempt some state laws that establish confidentiality standards for genetic information, and would restrict how state and local governments use such information in employment practices and in the provision of health care to employees.”  In addition, CBO explains that the bill “contains private-sector mandates on health insurers, health plans, employers, labor unions, and other organizations.”  In both cases, however, CBO does not believe that the cost of the mandates would exceed thresholds established in the Unfunded Mandates Reform Act ($66 million and $131 million in 2007, respectively, adjusted for inflation).