Wednesday, July 15, 2009

Legislative Bulletin: Changes Made in H.R. 3200

On July 14, 2009, the Chairmen of the three House Committees with jurisdiction over health care legislation—Education and Labor Chairman George Miller (D-CA), Energy and Commerce Chairman Henry Waxman (D-CA), and Ways and Means Committee Chairman Charlie Rangel (D-NY)—introduced H.R. 3200, “America’s Affordable Health Choices Act.” The legislation is a revised version of the “discussion draft” first publicly released on June 19. The Chairmen announced their intent to commence markups in their respective Committees beginning on July 16, with an eye toward floor action before the August recess.

Executive Summary: The introduced bill sets the tone for a Washington takeover of the health care system—one defined by federal regulation, mandates, myriad new programs, and higher federal spending. The bill would ensure the heavy hand of federal bureaucrats over the United States health care system, levying costly new taxes on individuals and businesses who do not comply. Many Members may question how additional federal mandates and bureaucratic diktats raising costs appreciably for all Americans would make health care more “affordable.” Many Members may also be concerned that the bill’s provisions—only partially masked by budgetary gimmicks and “smoke-and-mirrors” accounting—cost well over $1 trillion, financed largely by significant job-killing tax increases imposed on small businesses during a recession.

Highlights of major provisions likely to cause Member concern include:

Creation of a government-run health plan that experts say would result in 114 million Americans losing their current coverage—a clear violation of any pledge to allow individuals to keep their current health plan;
More than half a trillion dollars in tax increases on certain income filers, a majority of whom are small businesses—and $820 billion in tax increases overall;
Insurance regulations that would raise costs for nearly all Americans, particularly young Americans, and confine choice of plans to those approved by a board of bureaucrats;
New price controls on health insurance companies that provide perverse incentives to keep individuals sick rather than managing chronic disease, while impeding patient access to important services just because those services do not provide a direct clinical benefit;
Additional federal mandates that would significantly erode the flexibility currently provided to employers—and could result in firms dropping coverage;
Massive expansion of Medicaid—fully paid for by the federal government—to all individuals with incomes below 133 percent of the Federal Poverty Level ($29,326 for a family of four), replacing the existing private health coverage of millions with taxpayer-funded health care;
Language opening employers operating group health plans to State law remedies and private causes of action—subjecting employers to review by 50 different State court rulings, thereby raising costs and encouraging more employers to drop their current health plans;
Establishment of bureaucrat-run health Exchange that would abolish the private health insurance market outside the Exchange—and could evolve into a single-payer approach due to the Exchange’s ability to cannibalize existing employer plans;
Creation of a new government board, the “Health Benefits Advisory Committee,” that would empower federal bureaucrats to impose new mandates—including a mandate to obtain and provide abortion coverage—on individuals and insurance carriers;
Taxation of individuals who do not purchase a level of health coverage that meets the diktats of a board of bureaucrats—including those who cannot afford the coverage options provided;
New, job-killing taxes—over $200 billion worth—on employers who cannot afford to provide their workers health insurance, which could result in up to 4.7 million employees losing their jobs;
Penalties as high as $500,000 on employers who make honest mistakes when filing paperwork with the government health board—which would likely dissuade businesses from continuing to provide coverage, increasing the amount of health care provided through the bureaucrat-run Exchange;
“Low-income” health insurance subsidies to a family of four making up to $88,200;
Arbitrary and harmful cuts to popular Medicare Advantage plans that would result in millions of seniors losing their current health coverage; and
Expanded price controls on pharmaceutical products that would discourage companies from producing life-saving breakthrough treatments.

Preliminary Scores: On July 14, the Congressional Budget Office released a preliminary score for certain provisions in the bill—with the noteworthy caveat that “those estimates are based on specifications provided by the tri-committee group rather than an analysis of the language released today.” As a result, CBO notes that “our review of that language could have a significant effect on our analysis.”

It is also unclear precisely which provisions in the bill were and were not included in the CBO score. The score generally includes the cost impact of low-income subsidies, new insurance regulations, and penalties on individuals not purchasing and employers not offering “acceptable” coverage. However, the Medicare provisions in the discussion draft received a separate preliminary score released last week—but these provisions changed significantly when compared to the discussion draft, and are not included in the score released yesterday. Moreover, while some of the Medicaid changes were included in the specifications which CBO reviewed when preparing its preliminary score, it is unclear whether the score includes all the bill’s Medicaid provisions, or only the ones highlighted in the specifications.

Cost: With the above caveats, CBO estimates that the selected provisions would result in nearly $1.28 trillion in federal spending during the 2010-2019 period—$438 billion for the Medicaid expansions, $773 billion for “low-income” subsidies, $53 billion for small business tax credits, and $15 billion in interactions relating to tax revenues (resulting from changes in employer-sponsored coverage). Offsetting payments would include $29 billion in taxes on individuals not complying with the mandate to purchase coverage, as well as a total of $208 billion in taxes and payments by businesses associated with the “pay-or-play” mandate.

Most notably, CBO Director Elmendorf—speaking at a July 15 Energy and Commerce Committee briefing on the bill as introduced—admitted to Members that the Democrat bill would essentially have no impact on the long-term growth of health care costs—the legislation’s purported goal. Many members may be concerned that spending nearly $1.3 trillion to finance a government takeover of health care would not only not help the growth in health costs, but—by creating massive and unsustainable new entitlements—would also make the federal budget situation much worse.

Tax Increases: The Joint Committee on Taxation notes that the bill provisions would increase federal revenues by $583 billion over ten years—over and above the $237 billion in tax increases related to the individual and employer mandates noted above—for a total of $820 billion in tax increases over ten years. JCT found that the “surtax” would raise nearly $544 billion, the worldwide interest implementation delay would raise $26.1 billion, the treaty withholding provisions would raise $7.5 billion, and the codification of the economic substance doctrine would raise $3.6 billion. Finally, the tax on health benefits used to finance the Comparative Effectiveness Research Trust Fund would raise $2 billion over ten years.

Out-Year Spending: The score clearly indicates that of the nearly $1.28 trillion in spending under the specifications examined by CBO, only $8 billion—or only 0.6%—of such spending would occur during the first three years following implementation. Moreover, the bill in its final year would spend a total of $254 billion to finance coverage expansions. Thus the true cost of ten years’ worth of spending once the bill is fully implemented would likely exceed $2 trillion.

Budgetary Gimmicks: As noted above, the bill includes several provisions—some of which are not reflected in the CBO score—to mask its true cost. Most egregiously, the bill includes directed scoring provisions instructing CBO not to score the nearly $100 billion in spending included in the plain text of the bill regarding the retiree reinsurance and the public health investment fund. The bill also makes changes designed to lower the bill’s apparent cost—for instance, reducing a permanent extension of the qualifying individual program to a two-year extension.

Coverage: The score also claims that the number of uninsured individuals would be reduced to 17 million by the end of the ten-year budgetary window, a reduction of 37 million in 2019 when compared to current law. Approximately 30 million individuals would purchase their health insurance from the Exchange, including more than 6 million individuals who would lose their current private health coverage purchased on the individual market and enroll in the government-run Exchange.

The CBO score asserts that employer-based coverage would increase slightly, due to the individual and employer mandates. However, CBO also notes that because the government-run plan reimburses at Medicare rates, its costs would be approximately 10 percent lower than other forms of coverage. Particularly as the Lewin Group has indicated that a government-run plan would cause up to 114 million Americans to lose their current coverage, some Members may question CBO’s apparent assumption that employers would not choose to drop their health plans to enroll their workers in a government-run plan with purportedly lower costs than existing coverage.

Undocumented Individuals: The CBO score notes that the specifications examined would extend coverage to 94 percent of the total population, and 97 percent of the population excluding unauthorized immigrants. However, the score goes on to note that of the 17 million individuals remaining uninsured, “nearly half”—or about 8 million—would be undocumented immigrants. Given that most estimates have placed the total undocumented population at approximately 12 million nationwide, some Members may question whether this statement presumes that some undocumented immigrants would obtain health insurance—including health insurance funded by federal subsidies.

Summary of Changes Made: The bill as introduced adds 156 pages of text to the 852 page discussion draft, as well as hundreds of billions of dollars of new tax increases on individuals and small businesses. However, the bill does not substantially alter the creation of a government-run health plan that would cause 114 million Americans to lose their current coverage according to non-partisan actuaries at the Lewin Group. Nor does the bill achieve its purported goal of making health care more affordable—as the legislation’s mandates, bureaucracies, and regulations are likely to increase costs, not lower them. Highlights of changes made when compared to the discussion draft include:

Coverage Provisions

Insurance Regulations

Bans the sale of individual market health plans outside the Exchange—while the prior draft stated that coverage purchased on the private market would not qualify as “acceptable” coverage for purposes of the federal mandate (effectively a de facto prohibition, as few would buy such plans), the bill as introduced says that private health coverage “may only be offered” as part of the bureaucrat-run Exchange.
Strikes language stating that the Health Benefits Advisory Committee should “ensure that essential benefits coverage does not lead to rationing of health care.” Some Members may view this change as an admission by Democrats that the bureaucrats on the Advisory Committee—and the new government-run health plan—would therefore deny access to life-saving services and treatments on cost grounds.
Requires insurers to make disclosures on plan documents in “plain language”—and requires the Commissioner “to develop and issue guidance on best practices of plain language writing.”
Requires the Commissioner to conduct audits of health benefits plans in conjunction with States—a provision which some Members may be concerned could lead to overlapping and duplicative requirements on private businesses.
Establishes whistleblower protections against employees who file complaints regarding actual or potential violations of the Act’s provisions, and permits employees to bring actions for damages under provisions in the Consumer Product Safety Act.
Includes severability language regarding constitutionality, namely, that if some provisions—such as the individual mandate—are struck down as unconstitutional, the entire bill shall not be struck down on constitutional grounds.
Imposes price controls on insurance companies effective in 2011. Specifically, the bill requires carriers who do not meet a medical loss ratio—that is, the percentage of premiums paid back in medical claims—“specified by the Secretary,” those companies will be forced to pay “rebates” back to patients. Some Members may be concerned first at the prospect of imposing price controls on private enterprises, and second by the blanket authority given to federal bureaucrats to do so.
Prohibits carriers from rescinding insurance policies effective October 1, 2010, except in cases of “clear and convincing evidence of fraud” on the part of the applicant.
Includes specifications for a reinsurance program for early retirees, including a $10 billion Retiree Reserve Trust Fund to finance reinsurance payments to employers (including multiemployer and other union plans) who offer coverage to retired workers aged 55 to 64 who are not eligible for Medicare. The Trust Fund would pay 80 percent of claim costs for all retiree claims exceeding $15,000, subject to a maximum of $90,000; payments must be used to reduce overall insurance premiums and “shall not be used for administrative costs or profit increases.” Some Members may be concerned that such reinsurance programs, by providing federal reimbursement of high-cost claims, would serve as a disincentive for employers to monitor the health status of their enrollees. Some Members may also be concerned that the bill language includes scoring provisions directing the Congressional Budget Office to consider this $10 billion new entitlement “off-budget”—a gimmick intended to hide the true cost of the bill’s provisions.

Insurance Exchange

Clarifies that new Medicaid beneficiaries may enroll in Exchange plans, but may not enroll in Medicaid while in an Exchange plan.
Inserts a prohibition on private insurance carriers from “us[ing] coercive practices to force providers not to contract with other entities” offering coverage through the Exchange. However, the bill places no such prohibitions on the government-run plan, thus permitting the Department of Health and Human Services to use its authority to set conditions of participation in a way that would undercut private insurance plans and effectively drive them out of business.
Includes language requiring participants in Exchange plans to pay premiums directly to the plans themselves, and not through the Exchange. Some Members may view this provision as being inserted because the Congressional Budget Office would score premiums to insurance carriers routed through governmental entities (i.e. Exchanges) as part of the federal budget—and therefore an attempt to mask the true nature of the government takeover of health care the legislation contemplates.
Limits the Medicaid eligibility of a newborn not covered under acceptable coverage to 60 days.

Government-Run Health Plan

Appropriates $2 billion—as well as 90 days worth of premiums as “reserves”—for the government-run health plan, with repayment—not including interest—to be made over a 10-year period.
Directs that the reimbursement rates set by the Secretary beginning in the fourth year of the government-run plan’s operation must be consistent with the bill’s language linking payment to Medicare rates and “shall not be set at levels expected to increase overall medical costs” when compared to Medicare rates.
Requires Medicare providers, including physicians, to participate in the government-run plan unless they opt-out of said participation.
Provides that all providers who accept the government-run plan’s reimbursement rates shall be considered “preferred physicians”—regardless of their quality or expertise—and creates a new category of “participating, non-preferred physicians” who agree to abide by balance billing requirements similar to those in Medicare. Other providers may participate in the government-run plan only if they agree to accept the plan’s reimbursement rates as payment in full.

Insurance Subsidies

Allows the Commissioner to delegate to other “public entit[ies]” the task of determining eligibility for “low-income” subsidies. Some Members may be concerned that this broad blanket authority could result in easier access to federally-financed benefits for non-eligible individuals.
Eliminates a provision permitting individuals with an offer of employer-sponsored coverage to decline that coverage and enroll in an Exchange plan, unless the annual cost of that plan exceeds 11 percent of family income.
Modifies the schedule for “low-income” subsidies, such that premiums and total cost-sharing shall not exceed 1.5 percent of income (up from 1 percent) for individuals with income below 133 percent of the federal poverty level ($29,327 for a family of four) and 10 percent of income for individuals below 400 percent FPL.

Individual and Employer Mandates

Requires that employers offering “acceptable” coverage for purposes of the federal mandate automatically enroll their employees in the lowest-cost plan, with employees able to opt-out of their group plan.
Benchmarks the minimum contribution required by employers for purposes of the federal mandate (72.5 percent for individual coverage, 65 percent for family coverage) to the lowest-cost plan offered by the employer.
Prohibits “any contribution on behalf of an employee for which there is a corresponding reduction in the compensation of the employee” from qualifying as an employer contribution for purposes of the individual mandate. Some Members may be concerned that this provision would prohibit firms from adjusting their compensation practices to comply with the bill’s massive unfunded mandates—and in so doing, could have the perverse effect of encouraging firms to lay off workers rather than absorb the costs associated with the mandate.
Adjusts the impact of the “pay-or-play” mandate to include a tax on non-compliant firms of 8 percent of average wages in a manner that allows for aggregation of total employee costs.
Exempts small businesses with total annual wages less than $250,000 from the mandate, and subjects small businesses with wages under $400,000 to lower tax increases in a range of 2-6 percent. Some Members may be concerned that these limits—which are not linked for inflation—would create perverse incentives at the margins for businesses not to hire workers, or increase salaries, for fear of being subjected to additional taxes.
Increases the tax for non-compliance with the individual mandate from 2 percent to 2.5 percent. Members may note that the bill does not limit this tax increase to individuals with incomes over $250,000, thus violating a central tenet of then-Senator Obama’s campaign platform.
Lowers the limit on “highly-compensated individuals” ineligible for the small business tax credit from $125,000 to $80,000. Some Members may question how an individual making $80,000 would have qualify as “highly-compensated” for purposes of the small business tax credit, but—if in a family of four—would be eligible for “low-income” subsidies available to families with incomes under $88,200 per year.

Tax Increases

Imposes a new “surtax” on individuals with incomes over $350,000, that would ultimately raise rates by 2 percent on individuals with incomes between $350,000-$500,000, 3 percent on individuals with incomes between $500,000-$1,000,000, and 5.4 percent on individuals with incomes over $1 million. The tax would apply beginning in 2011. The bill provides that the first two “surtax” levels would remain at 1 and 1.5 percent (instead of 2 and 3 percent, respectively) if the Office of Management and Budget certifies in 2012 that at least $675 billion in federal health reform savings would occur as a result of the bill’s passage. The Joint Committee on Taxation estimates that such provisions would raise taxes by $544 billion over ten years. As more than half of all high-income filers are small businesses, many Members may be concerned that this provision would cripple small businesses and destroy jobs during a deep recession. Members may also be concerned that the “federal health reform savings” would never materialize, particularly during the short time window available prior to such certification—resulting not only in higher federal spending, but additional job-crushing taxes on small businesses.
Delays for an additional ten years the application of worldwide interest allocation provisions first enacted into law (but never implemented) in 2004, which JCT estimates would raise $26.1 billion over ten years. Some Members may be concerned that, in addition to increasing taxes on businesses during a recession, further extension of these provisions would create undue uncertainty for many firms in an uncertain enough economic climate.
Limits the treaty benefits for certain deductible payments made by members of multinational entities in the U.S. that are controlled by foreign parent corporations in nations that hold tax treaties with the U.S. The bill prohibits certain previously negotiated taxes reductions on payments to foreign affiliates under current tax treaties. Some Members may be concerned that this provision would violate previously negotiated treaties and impose higher taxes on foreign companies with affiliates that create jobs in the U.S. Some Members may also be concerned this provision could harm U.S. business by spurring retaliatory acts from foreign companies. JCT scores this provision as raising $7.5 billion over ten years.
Codifies the economic substance doctrine—which is used to prohibit tax benefits on transactions that are deemed to lack “economic substance.” The bill states that a transaction has economic substance only if the transaction changes the taxpayer’s “economic position” in “a meaningful way” and the taxpayer has a “substantial purpose” for entering into the transaction. In addition, the bill would impose a 20% penalty on understatements attributable to a transaction lacking economic substance (40% in cases where certain facts are not disclosed). Some Members may be concerned that this provision would impose new burdens of proof and new liability penalties on taxpayers for making business decisions related to taxes. JCT scores this provision as raising $3.6 billion over ten years.

Medicare Provisions

Traditional Medicare

Makes adjustments to skilled nursing facility payment rates for non-therapy ancillary services, and instructs the Secretary to make adjustments to the case mix classification system.
Beginning in 2017, directs the Secretary to reduce disproportionate share hospital (DSH) payments to hospitals by up to 50 percent if there is a reduction in the number of uninsured by 8 percentage points during the 2012-14 period.
Extends reductions in productivity adjustments (resulting in a net decrease in reimbursements) to ambulance services, ambulatory surgical centers, laboratory services, and durable medical equipment not subject to competitive bidding.
Eliminates a proposed two-year extension of a payment rule for certain therapeutic radiopharmaceuticals—as the Centers for Medicare and Medicaid Services has proposed regulations addressing this issue. Some Members may view this change as a budgetary gimmick intended to shift the costs for such a proposal outside the legislative arena.
Waives a surety bond requirement for certain durable medical equipment providers, and requires oxygen suppliers to continue to provide supplies during the useful lifetime of the oxygen equipment. Exempts certain pharmacies from accreditation requirements for the sale of diabetic testing strips.
Delays by one year (from 2011 to 2012) implementation of provisions reducing payments to hospitals with high re-admission rates, and makes other changes.
Requires conversion of a post-acute care bundling demonstration program into a pilot program available to all providers, provided such a program would result in overall reductions in Medicare spending.
Requires revisions to geographic adjustment factors for Medicare payment systems in a way that would not result in an overall reduction in payment rates.

Medicare Advantage

Requires risk adjustment for purposes of determining quality bonus payments to Medicare Advantage plans, and permits the Secretary to disqualify plans as not highly ranked, irrespective of their quantitative performance, “if the Secretary has identified deficiencies in the plan’s compliance.”
Eliminates the three month open-enrollment period for Medicare Advantage plans, confining changes in enrollment to the period between November 1 and December 15.
Extends Secretarial authority to reject Part D prescription drug plans for any reason. Some Members may be concerned that this provision—like similar provisions applicable to Medicare Advantage plans included in the initial draft—would provide federal bureaucrats with the power to reject any or all private health plans for arbitrary reasons—including an ideological objective to consolidate enrollment in a single government-run plan.
Eliminates an extension of fully integrated Special Needs Plans.

Medicare Part D

Reduces the scope of the proposed extension of the Medicaid drug rebate program to dual eligible benefits only—whereas the discussion draft proposed a broader universe of all low-income subsidy individuals—and specifically directs that revenues from said rebates be deposited into a fund intended to finance the gradual elimination of the “doughnut hole.”
Requires drug manufacturers, as a condition of participation in Part D, to sign a “discount agreement” providing discounts of 50 percent to beneficiaries in the “doughnut hole” prior to its elimination. Given the ostensibly voluntary nature of the agreement with pharmaceutical manufacturers that led to this provision, some Members may question why the bill links participation in the Part D program to these “voluntary” discounts—one that amounts to a form of price control.

Other Medicare-Related Provisions

Limits a new expansion of low-income subsidies to all subsidy-eligible individuals to two years (2010 and 2011). Some Members may view this provision as a budgetary gimmick designed to mask the bill’s true cost.
Eliminates provisions providing for automatic re-enrollment in the low-income subsidy program.
Eliminates the Part B “hold harmless” provision, as well as provisions requiring guaranteed issue of certain Medigap supplemental policies.
Modifies the accountable care organization (ACO) pilot program to allow for other physician organization models, and for non-Medicare participating physicians to be included in the ACO.
Modifies primary care incentives to include nurse practitioners and physician assistants, and makes obstetricians and gynecologists similarly eligible for bonus payments.
Amends the Comparative Effectiveness Research Commission—which guides the activities of the Comparative Effectiveness Research Center established in the bill—to require that at least nine of its members be practicing physicians
Includes an additional $300 million in start-up funding for comparative effectiveness research, and makes changes to the tax on health benefits created to finance such research.
Requires hospitals and ambulatory surgical centers participating in Medicare or Medicaid to submit public reports on hospital-acquired infections to the Centers for Disease Control.
Increases anti-fraud funding by $100 million per year, beginning in 2011, and makes other changes to anti-fraud provisions.

Medicaid and SCHIP Provisions

Requires that States demonstrate the adequacy of their provider networks before requiring beneficiary enrollment in managed care organizations.
Removes asset tests from certain Medicaid eligibility categories.
Provides for total $10 billion reduction in Medicaid disproportionate share hospital (DSH) payments–$1.5 billion in Fiscal Year 2017, $2.5 billion in 2018, and $6 billion in 2019—in a manner that reflects States’ increase in insurance coverage rates.
Reduces Medicaid matching rate for preventive services from an enhanced match rate to the existing federal match, and strikes provisions eliminating cost-sharing for preventive services.
Reduces the federal match for nurse home visitation services from the enhanced federal match level to the regular Medicaid matching rate.
Strikes provision requiring States to cover Medicaid health services provided in school-based clinics.
Strikes provision providing enhanced federal match for electronic eligibility systems.
Requires stand-alone SCHIP programs to implement a 12-month continuous eligibility option for low-income children in families with incomes less than twice the federal poverty line.
Requires drug manufacturers to direct Medicaid rebates for enrollees in Medicaid managed care organizations to State Medicaid agencies rather than the managed care organizations.
Allows the Secretary to impose price controls on Medicaid managed care organizations in the form of medical loss ratios that exceed the discussion draft’s statutory minimum of 85 percent. Some Members may be concerned both at the prospect of extending price controls to private enterprise, and by the Secretary’s blanket authority to make arbitrary determinations regarding same.
Reduces the extension of the Qualifying Individual program—which was made permanent in the discussion draft—to two years. Some Members may view this provision as a budgetary gimmick designed to mask the true cost of the legislation.
Reduces size of new mandatory spending on nurse home visitation programs from $1.75 billion to $750 million during Fiscal Years 2010 through 2014.

Public Health Provisions

Increases spending on a new Public Health Investment Fund from $33.7 billion over five years to $88.7 billion over ten years—a 263 percent increase in funding from the discussion draft. Also includes provisions directing the Congressional Budget Office to consider such funding “off-budget”—which many Members may view as a gimmick designed to mask the true cost of the bill’s spending.
Increases authorization levels for community health centers from $12 billion over five years in the discussion draft to $38.8 billion over ten years.
Inserts a new grant program for training of medical residents in community-based settings.
Increases funding for the Prevention and Wellness Trust from $15.2 billion over five years to $35.3 billion over ten, and includes ten-year authorizations (through Fiscal Year 2019) for other prevention and public health programs.
Extends discounts provided in the 340B program for certain hospitals and providers to inpatient drugs. Some Members may be concerned that this provision would amount to an expansion of federal price controls within the pharmaceutical industry.
Creates new grant program to finance operation of school-based health clinics.
Establishes national medical device registry to analyze post-market safety and outcomes data.

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Legislative Bulletin: Changes Made in H.R. 3200