Monthly Archives: July 2008

Legislative Bulletin — H.R. 1108, Family Smoking Prevention and Tobacco Control Act

Order of Business:  The bill is scheduled to be considered under suspension of the rules on Wednesday, July 30, 2008.

Summary of Changes Made:  The latest draft text would make several substantive changes to the bill.  First, the revised text would require the Secretary of Health and Human Services to contract with states to enforce the FDA-promulgated regulations with respect to tobacco products.  However, the bill would also prohibit the Secretary from contracting with states to enforce the tobacco regulations on Indian tribal lands—or directly engage in enforcement activity on tribal lands—without the express written consent of the tribe involved.  This last change was made to resolve a jurisdictional issue raised by the Natural Resources Committee, which has jurisdiction over Indian tribal matters.

Some conservatives may note that the language discussed above creates a significant loophole in the enforcement mechanism for tobacco products—namely, that Indian tribal areas could represent a “no-man’s land” with respect to tobacco enforcement.  Some conservatives may question whether this loophole could allow unregulated products to be bought and sold on tribal lands, effectively undermining the entire regulatory regime for tobacco products which H.R. 1108 is intended to establish.

The bill includes two new offsets to pay for federal tax revenue lost as a result of the projected 2% reduction in tobacco use, which the Congressional Budget Office (CBO) estimates would cost $114 million over five years, and $446 over ten.  To offset this foregone revenue, the bill would incorporate the text of a measure (H.R. 6500) making changes to the Thrift Savings Plan (TSP) for federal workers.  That bill would require auto-enrollment of workers in the TSP, costing $225 million over five years, and $736 million over ten, due to revenue loss associated with additional employees making pre-tax TSP contributions.  However, H.R. 6500 (as incorporated into H.R. 1108) would result in a net revenue gain, due to an additional provision establishing an after-tax savings component (similar to the Roth IRA or Roth 401(k) options) in the TSP, which CBO estimates would generate $382 million in revenue over five years, and $2.0 billion over ten, resulting from employees substituting pre-tax TSP contributions with after-tax ones.

The second offset for the lost tobacco tax revenue would come from the elimination of unused sick leave in the calculation of survivors’ annuity benefits for participants in the Federal Employees Retirement System (FERS).

Press reports indicate that further language may be added to the bill requiring a study of the so-called “menthol loophole;” however, such language was not available at press time.

Summary:  H.R. 1108 would amend the Federal Food, Drug, and Cosmetic Act to grant new authority to the Food and Drug Administration (FDA) to regulate tobacco products and advertising, and amend the Federal Cigarette Labeling and Advertising Act to impose new restrictions on tobacco product labels and disclosure.  Specific bill provisions include the following:

Findings and Purpose.  The bill contains 13 pages of findings purporting the need to regulate tobacco products to protect the public health, and language designed to ensure that the bill does not affect the authorities of the Secretaries of Agriculture or Treasury.  The bill also includes severability language providing that judicial invalidation of one or more sections of the legislation will not result in the nullification of the entire regulatory regime proposed by the bill.

Regulatory Authority.  H.R. 1108 gives FDA the authority to regulate tobacco products, which are defined as “any product made or derived from tobacco that is intended for human consumption, including any component, part, or accessory of a tobacco product” and establishes a new Center for Tobacco Products within the FDA to exercise regulatory authority.  The bill states that tobacco does not qualify as a drug or medical device for purposes of FDA regulation, and limits the FDA’s regulatory authority to tobacco leaf in the possession of tobacco manufacturers (thus excluding tobacco growers).

Adulterated and Misbranded Products.  The bill defines adulterated and misbranded tobacco products, defining the former to include products that “consists in whole or in part of any filthy, putrid, or decomposed substance,” and defining misbranded products to include those that are “false or misleading,” as well as those which do not adhere to the registration, labeling, and other regulatory regimes established under the bill.  The bill grants the FDA, through the Secretary of Health and Human Services, the right to pre-approve statements made on tobacco product labels.

Information Disclosure.  The bill requires all tobacco manufacturers to disclose to the Secretary the names and descriptions of all ingredients, components, and compounds in tobacco products, including the nicotine content of same.  The bill grants authority to the Secretary to obtain information from tobacco companies on the health effects of smoking and requires the Secretary to publish “a list of harmful and potentially harmful constituents” in tobacco products by brand.

Registration and Inspection.  H.R. 1108 requires all tobacco manufacturers to register their names and places of business with the Secretary and requires the Secretary to make such information public.  The bill also requires inspection of every domestic tobacco manufacturing establishment at least once every two years, and a requirement that overseas tobacco manufacturing establishments have “adequate and effective means” for the Secretary to ensure that tobacco products manufactured overseas should be refused entry into the United States.

General Authority.  The bill would permit the Secretary to restrict by regulation the sale, distribution, and advertising of tobacco products “if the secretary determines that such regulation would be appropriate for the protection of the public health.”  In exercising this authority, the Secretary may not 1) “prohibit the sale of any tobacco product in face-to-face transactions by a specific category of retail outlets;” 2) set an age limit on the sale of tobacco products higher than 18 years of age; or 3) require use of a physician’s prescription in order to obtain tobacco products.  However, the bill does require the Secretary to promulgate regulations addressing the sale, distribution, and marketing of tobacco products remotely so as to discourage the purchase of tobacco products by underage individuals.

Product Standards.  H.R. 1108 would ban all “artificial or natural flavors” except for menthol, and requires all tobacco products to meet domestic standards with respect to pesticide use.  The bill permits the Secretary to impose further restrictions should the regulations be in the interest of the public health.  However, “because of the importance of a decision of the Secretary to issue a regulation” banning all cigarettes or reducing the level of nicotine permitted in tobacco products to zero, the bill explicitly prohibits the Secretary from taking either action.

Notification and Recalls.  The bill grants the Secretary the authority to order notification to the public, through public service announcements or other means, of tobacco products that “present an unreasonable risk of substantial harm to the public health…and no more practicable means is available…to eliminate such risk.”  The bill also authorizes the Secretary to order recalls in the event that “there is a reasonable probability that a tobacco product contains a manufacturing or other defect not ordinarily contained in other tobacco products on the market that would cause serious, adverse health consequences or death.”

Record-Keeping.  H.R. 1108 requires tobacco companies to create and preserve records, as established by regulation, designed to determine that tobacco products are not adulterated or misbranded and to protect the public health, and to provide reports of any corrective action taken by tobacco manufacturers to remove products from the market for health reasons.  The bill language states that identities of any patients discussed in applicable records should remain confidential, unless disclosure is necessary “to determine risks to public health of a tobacco product.”

Review of New Tobacco Products.  The bill requires pre-market review for all new tobacco products introduced after February 15, 2007, unless the product is “substantially equivalent” to existing products.  The application for pre-market review requires full disclosure of the products’ components, and research of the health effects of same.  The bill would require the Secretary to reject such new tobacco products if “there is a lack of a showing that permitting such tobacco products to be marketed would be appropriate for the protection of the public health,” among other conditions necessary for approval.  The bill also permits the Secretary to withdraw pre-market approval, due to a company’s non-compliance with regulations or new information on the public health effects of a product, effectively removing the product from the marketplace.

Modified Risk Tobacco Products.  H.R. 1108 places restrictions on the introduction or marketing of modified risk tobacco products.  Specifically, the bill requires that any product marketed as modified risk must “significantly reduce harm and the risk of tobacco-related disease to individual tobacco users” and “benefit the health of the population as a whole,” including both tobacco users and non-users.  In the event that the Secretary cannot make such a determination without long-term epidemiological data that is not available, the Secretary may issue a temporary approval of not more than five years for the marketing of modified risk products, provided that “the reasonably likely overall impact of use of the product remains a substantial and measurable reduction in overall morbidity and mortality among individual tobacco users,” and the product is subject to annual post-market surveillance review.  The bill also places additional restrictions on the marketing, advertising, and comparative claims presented by modified risk tobacco products.

Judicial Review.  The bill provides a process for individuals adversely affected by regulations issued pursuant to the bill, or whose application for pre-market approval was denied, to seek judicial review with the U.S. Court of Appeals for the circuit in which the party resides or has a principal place of business, subject to review by the Supreme Court.

Regulatory Requirements.  H.R. 1108 requires the Secretary to issue regulations within three years of enactment regarding tobacco product testing and disclosure of product constituents, and permits the Secretary to require label or advertising disclosure of tobacco product constituents.  The bill provides for delays of regulatory and testing requirements for “small tobacco product manufacturers,” defined as those employing fewer than 350 individuals.  The bill also clarifies that none of its provisions prohibit the Federal Trade Commission (FTC) from regulating tobacco advertising or sales.

Limited Pre-Emption.  H.R. 1108 pre-empts state laws relating to tobacco product standards, mis-labeling, adulteration, labeling, and related product standards; according to the Congressional Budget Office (CBO), this pre-emption language constitutes an intergovernmental mandate as defined in the Unfunded Mandates Reform Act.  However, the bill retains states’ ability to enact more stringent standards with respect to tobacco advertising and promotion.

Scientific Advisory Committee.  The bill establishes the Tobacco Products Scientific Advisory Committee to provide technical expertise and recommendations to the Secretary regarding the regulation of tobacco products.

Smoking Cessation.  The bill requires the Secretary to consider approving the extended use of nicotine replacement products “for the treatment of tobacco dependence.”

User Fee.  The bill assesses user fees on tobacco companies and funds FDA regulation of tobacco activities in the amount of $85 million in Fiscal Year 2008, increasing each year until reaching $712 million in Fiscal Year 2018 and each subsequent year.  The bill assesses user fees by class of tobacco products (e.g. cigarettes, cigars, etc.), and allocates them to companies within a class of tobacco products, based on the percentages outlined in tobacco buyout legislation (P.L. 108-357) passed in October 2004.

Restores 1996 Rule on Tobacco Advertising.  The bill requires the Secretary to publish within 180 days of the bill’s enactment a final rule on regulation of tobacco identical to regulations published on October 28, 1996, with an effective date of one year following the bill’s enactment.  The original regulations would restrict tobacco advertising by, among other things, prohibiting billboards within 1,000 feet of schools and permitting only black-and-white advertising.  The bill would modify the original regulation to permit the free distribution of smokeless tobacco only, and only in quantities of fewer than 15 grams (0.53 ounces) in certain “qualified adult-only facilities.”  The bill exempts the final rule, as modified, from review under the Congressional Review Act.

Nullifies Earlier Documents.  H.R. 1108 would nullify the precedent of certain documents issued by FDA during 1995-96 as they relate to a prior attempt to classify nicotine in tobacco products as a drug for purposes of FDA regulation. (H.R. 1108 would make tobacco subject to FDA regulation, but as a “tobacco product,” not a drug or medical device.)

New Penalties.  The bill would add failure to comply with the bill’s requirements as grounds for imposition of fines and/or criminal penalties, along with other offenses relating to counterfeiting tobacco products or “the charitable distribution of tobacco products.”  The bill also gives the Secretary the authority to impose a “no-tobacco sale order” against retail outlets and establishes a new system of federal fines against retail establishments selling tobacco products improperly, authorizing fines of up to $10,000 for establishments with six or more violations within a four-year period.

Studies.  The bill would require the Government Accountability Office to submit studies regarding youth smoking as well as cross-border trade and counterfeiting in tobacco products, and requires a specific study by HHS on raising the minimum age to purchase tobacco products, as well as an FTC report on concentration within the tobacco industry.

Labeling Requirements.  The bill requires all cigarettes and smokeless tobacco sold in the United States to bear clear warnings about the risks associated with tobacco use and prescribes the wording, typeface, and font size associated with such warnings. (Tobacco products manufactured domestically for international use are exempt from this requirement.)  H.R. 1108 further requires that all advertising, including matchbooks, contain language from the warning labels, and prescribes the proportions by which such labeling warning must relate to the overall size of the advertisement.  The bill gives the Secretary of HHS the authority to alter or increase the size of the labeling requirements, permits states to further regulate the type and manner, but not the content, of cigarette advertising, and extends a prohibition on television and radio advertising to smokeless tobacco products subject to the jurisdiction of the Federal Communications Commission.

Tar and Nicotine Disclosure.  The bill gives the Secretary the authority to conduct a rulemaking process to determine whether to require the disclosure of tar, nicotine, and other constituent levels in tobacco advertising, subject to a memorandum of understanding with the Federal Trade Commission.

Shipping Requirements.  H.R. 1108 requires that all packaging and shipping containers shall bear statements stating “sale only allowed in the United States” and requires the Secretary to issue regulations regarding the maintenance of records by entities manufacturing, transporting, or distributing tobacco products.  The bill also requires tobacco manufacturers and distributors to notify the Attorney General and the Secretary of the Treasury upon obtaining information “which reasonably supports the conclusion” that tobacco products formerly held by the entity have circumvented payment of applicable taxes or “diverted for possible illicit marketing.”

Cost to Taxpayers:  According to the Congressional Budget Office (CBO), H.R. 1108 would result in $2.1 billion in mandatory spending over five years, and $5.3 billion over ten, related to the Food and Drug Administration’s regulation of tobacco.  The bill would offset these costs by imposing a “fee” on tobacco companies to finance the FDA regulation.

CBO also estimates a decline in revenues of $114 million over five years, and $446 million over ten, related to a 2% reduction in overall smoking levels due to tobacco regulation, and loss of commensurate tobacco tax revenue.  In order to pay for this reduced revenue, H.R. 1108 incorporates provisions relating to the federal Thrift Savings Plan (TSP).  The bill would establish a system of auto-enrollment in TSP for all federal employees, causing a minor revenue loss, but would on balance generate additional tax revenue by establishing a new plan to permit after-tax TSP contributions, similar to a Roth IRA or the recently-established Roth 401(k) option.

Finally, CBO estimates a five-year increase in spending subject to appropriation of $3 million as a result of H.R. 1108’s enactment.

Committee Action:  The bill was introduced on February 15, 2007, and referred to the Energy and Commerce, which held a hearing and, on April 2, 2008, reported the bill as amended by a 38-12 vote.

Possible Conservative Concerns:  Numerous aspects of H.R. 1108 may raise concerns for conservatives, including, but not necessarily limited to, the following:

  • Process.  Some conservatives may be concerned that a 190-page bill seeking to establish new federal authority to regulate a multi-billion dollar industry is being considered under expedited procedures on the suspension calendar.
  • User Fee as Tax Increase.  The bill includes more than $5 billion in assessments on tobacco companies, ostensibly termed “user fees,” to finance the FDA’s work regulating tobacco products.
  • Restricts Free Speech Rights.  In addition to codifying federal restrictions, which tobacco companies agreed to in their 1998 settlement with state Attorneys General, H.R. 1108 places additional federal restrictions on tobacco advertising.  Some of the federal restrictions on advertising content in H.R. 1108 include the following specifications for the size of warning labels on tobacco products:

The text of such label statements shall be in a typeface pro rata to the following requirements: 45-point type for a whole-page broadsheet newspaper advertisement; 39-point type for a half-page broadsheet newspaper advertisement; 39-point type for a whole-page tabloid newspaper advertisement; 27-point type for a half-page tabloid newspaper advertisement; 31.5-point type for a double page spread magazine or whole-page magazine advertisement; 22.5-point type for a 28 centimeter by 3 column advertisement; and 15-point type for a 20 centimeter by 2 column advertisement.

Some conservatives may be concerned that the highly prescriptive restrictions described above, and elsewhere in H.R. 1108, constitute an undue intrusion on companies’ constitutional free speech rights to advertise a product that most Americans already know is unhealthy.

  • Hinders Introduction of Reduced Risk Tobacco Products.  H.R. 1108 places stringent restrictions on the introduction and marketing of new products that would reduce or modify the inherent risks associated with the consumption of tobacco.  The bill states that a reduced risk product may be marketed only if the product will “significantly reduce harm and the risk of tobacco-related disease to individual tobacco users” and also will “benefit the population as a whole,” including persons who do not consume tobacco products.  Some conservatives may be concerned that such onerous restrictions on the introduction of reduced risk tobacco products could have the effect of inhibiting the use of products that could reduce the risks associated with tobacco consumption while potentially serving as a barrier to entry for new market competitors.
  • FDA Improper Agency to Regulate Tobacco.  As FDA Commissioner Andrew von Eschenbach testified before the House Energy and Commerce Committee in October 2007, the FDA has heretofore been structured as an agency to promote and protect the public health.  In the Commissioner’s opinion, requiring FDA to “approve” tobacco products as a result of H.R. 1108 would dramatically change the agency’s focus: “Associating any agency whose mission is to promote public health with the approval of inherently dangerous products would undermine its mission and likely have perverse incentive effects.”
  • Other Important Priorities for FDA.  Energy and Commerce Oversight Subcommittee Chairman Bart Stupak (D-MI), in holding a hearing on FDA’s decision to approve an antibiotic despite receiving false clinical trial data, called the incident “a microcosm of the failure by all FDA stakeholders—FDA, pharmaceutical sponsors, and third-party monitors—to ensure the integrity of clinical trials used to support the safety and approval of new drug applications.”  On top of questions which Democrats themselves have raised regarding FDA’s competence, some conservatives may question whether the food safety concerns that have arisen in recent months make now an appropriate time significantly to expand the agency’s regulatory remit and mission.
  • Multiple Layers of Regulation.  While establishing FDA authority to regulate tobacco products, H.R. 1108 would also retain the FTC’s authority to regulate tobacco advertising and distribution on the federal level, and would provide only limited pre-emption of state laws, allowing more stringent state restrictions on tobacco advertising and promotion.  Some conservatives may be concerned that these multiple layers of regulation will impose undue bureaucratic and logistical difficulties on tobacco manufacturers—even though H.R. 1108 would explicitly retain tobacco as a lawful product.
  • Little Impact on Tobacco Use.  The CBO estimate of H.R. 1108 notes that under its budgetary model, smoking by adults would decline by only 2% after 10 years.  Some conservatives may question whether this marginal reduction in smoking levels warrants the significant intrusion on free speech rights and government-run regulatory bureaucracy that would be created under the legislation.
  • Billions in Unfunded Mandates; UMRA Point of Order.  The Congressional Budget Office, in its score of H.R. 1108, calculates that the fee imposed in the bill would constitute an unfunded mandate on tobacco companies of $249.1 million in Fiscal Year 2009, and more than $2.3 billion over five years, greatly exceeding the threshold established in the Unfunded Mandates Reform Act ($136 million in 2008, adjusted annually for inflation).   CBO also notes that the bill includes several unfunded mandates that would both pre-empt existing state tobacco regulations and require tribal governments manufacturing or distributing tobacco products to comply with the new federal regulatory regime.
  • Violates Trade Agreements.  HHS Secretary Leavitt, writing to Energy and Commerce Committee Ranking Member Barton on H.R. 1108, noted that the legislation could be viewed by foreign governments as a hostile trade action.  Because the bill bans clove and other flavored cigarettes—many of which are manufactured in foreign countries—while expressly permitting production of menthol cigarettes, Indonesia or other foreign governments could file complaints at the World Trade Organization claiming discrimination against their products.  Some conservatives may be concerned that passage of H.R. 1108 could ultimately result in retaliatory measures being taken against American-made products—and could lead to trade disputes with a negative effect on economic growth.
  • Menthol Loophole.  As noted above, H.R. 1108 would prohibit the use of all “artificial or natural” cigarette flavorings—with the exception of menthol, which is permitted under the bill.  Because data from the Centers for Disease Control indicate that 75% of African-American smokers consume menthol cigarettes, seven former Secretaries of Health and Human Services, representing both political parties, wrote to Congress to criticize a menthol “loophole” that “caves to the financial interests of tobacco companies” by “send[ing] a message that African-American youngsters are valued less than white youngsters.”

Because the bill is being considered under suspension of the rules, no amendments addressing the menthol issue can be considered.  Some conservatives may note that the House Democrat leadership would apparently rather retain the support of the major tobacco company (Philip Morris) supporting the legislation than permit a vote on amendments that seven former HHS Secretaries believe are in the best interests of African-Americans.

Administration Position:  Although a formal Statement of Administration Policy (SAP) was unavailable at press time, a letter from Health and Human Services Secretary Leavitt to Energy and Commerce Ranking Member Barton indicated that the Administration “strongly opposes” H.R. 1108.

Does the Bill Expand the Size and Scope of the Federal Government?:  Yes, the bill would grant new authority to the Food and Drug Administration to regulate tobacco products.

Does the Bill Contain Any New State-Government, Local-Government, or Private-Sector Mandates?:  Yes, the bill imposes new fees on tobacco companies, which CBO estimates would total $235 million in Fiscal Year 2009, $2.1 billion over five years, and nearly $5.4 billion over ten years, all greatly exceeding the thresholds established in the Unfunded Mandates Reform Act ($136 million in 2008, adjusted annually for inflation).

Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax Benefits/Limited Tariff Benefits?:  The Committee on Energy and Commerce, in House Report 110-762, reports that “H.R. 1108 does not contain any congressional earmarks, limited tax benefits, or limited tariff benefits as defined in clause 9(d), 9(e) or 9(f) of rule XXI.”

Constitutional Authority:  The Committee on Energy and Commerce, in House Report 110-762, cites constitutional authority under Article I, Section 8, Clause 3 (relating to the regulation of interstate commerce) and Article I, Section 8, Clause 1 (relating to legislation promoting the general welfare of the United States).

Weekly Newsletter — July 28, 2008

Tobacco Bill Coming Soon

This week the House could consider legislation (H.R. 1108) granting the Food and Drug Administration (FDA) the authority to regulate tobacco, possibly under suspension of the rules.  The bill would establish a new center within FDA to regulate tobacco products and assess tobacco companies more than $5 billion in “user fees” over the next ten years to pay for this regulation.

Some conservatives may be concerned by the regulatory regime the bill would establish, which would require an agency charged with promoting food and drug safety to regulate a product inherently unsafe and unhealthy.  Some conservatives may also object to the multiple layers of regulation the bill would create, by leaving intact the Federal Trade Commission’s ability to regulate tobacco advertising and distribution and providing only limited pre-emption against additional state-based regulations and restrictions.  Some conservatives may question whether the highly prescriptive restrictions in the bill—including advertising limitations on the use of color advertising and regulation of the font size of tobacco disclaimer warnings, all of which raise significant constitutional questions about their free-speech implications—constitute good public policy, particularly as the Congressional Budget Office estimates that H.R. 1108 will reduce smoking levels by only 2% over 10 years.

Lastly, some conservatives may object to provisions in the bill that could prompt an international trade dispute.  Last week, HHS Secretary Leavitt wrote to Energy and Commerce Committee Ranking Member Barton about H.R. 1108, observing that, because the bill prohibits all tobacco flavorings except menthol, foreign countries which manufacture clove or other flavored cigarettes may take action against the United States for providing unfair and disparate treatment for a particular type of manufactured cigarette.  As press reports indicate that H.R. 1108 may be considered under suspension of the rules, some conservatives may be concerned by the lack of procedural opportunities available to address this disparity, such that the United States can live up to its obligations under international free-trade agreements.

A Policy Brief on H.R. 1108 (as reported by the Energy and Commerce Committee) can be found here.

Democrats Ignore Medicare Funding Warning

Last week Democrats responded to the Medicare trustees’ finding that the Medicare program faces significant future funding shortfalls—by resolving to ignore the problem.  The resolution concerned a provision inserted into the Medicare Modernization Act at the behest of the RSC, which provided for the President to submit, and Congress to consider under expedited procedures, legislation to remedy Medicare’s funding problems when the program is projected to consume more than 45% of its funding from general revenues (as opposed to the Medicare payroll tax and beneficiary premiums).  The Democrat majority’s action turned off this funding “trigger” for the balance of the 110th Congress, preventing those who believe in entitlement reform from taking action to force a House floor vote on Medicare reform legislation.

Many conservatives may be disappointed by the actions of Congressional Democrats, which prevented the President’s reasonable and modest proposals for Medicare reform—means testing that would make wealthier individuals like Warren Buffett and George Soros pay $2 per day more in Part D prescription drug premiums and liability reform to reduce the costs associated with defensive medicine practices—from receiving a vote in Conrgess.  Many conservatives may believe that solving Medicare’s $86 trillion in unfunded obligations—and a Hospital Trust Fund scheduled to be exhausted in little more than a decade—will not be helped by Democrats’ apparent eagerness to ignore the problem.  However, when Democrats like Florida’s Alcee Hastings note that “the perceived problem with Medicare funding has already been addressed,” many conservatives may be concerned that this lack of awareness will only hasten the day when Medicare’s funding shortfalls jeopardize the viability of the program—and wonder what policy-makers will tell their senior constituents when it does.

More information on the Medicare trigger can be found here, here, here, and here.

Article of Note: Fuzzy Math

Last Wednesday the New York Times reported on the many financial discrepancies surrounding the health care plan of Sen. Barack Obama (D-IL).  While Sen. Obama has been consistent in saying that his health plan would save every American family $2,500 per year, many observers have come to question the factual basis for a “best guess” assertion by his advisers early last year.  Independent estimates, including those by the Congressional Budget Office, have questioned whether the savings from such initiatives as health information technology and chronic care management will materialize, particularly in the four-year timeline Sen. Obama has promised—such that even a statement by Obama’s own advisers backtracked from any assertions that the purported savings would materialize by a date certain.

Many conservatives may be skeptical of Sen. Obama’s claims, particularly as the liberal Commonwealth Fund released a report in December with a menu of options for savings that would by their estimates achieve a total reduction in spending of only 6% in 10 years.  Some conservatives may also be concerned that, in an attempt to reduce health care costs—whether by 8%, 6%, or some lesser amount—Sen. Obama would rely first and foremost on imposing price controls on physicians, pharmaceutical manufacturers, and insurance companies, along with rationing care through a government-controlled comparative effectiveness institute.  Many conservatives may believe that such bureaucratic restrictions would in the long run prove far more effective at growing the size of government than slowing the growth of health care costs.

Read the article here:

The New York Times: “Health Plan from Obama Sparks Debate”

http://www.nytimes.com/2008/07/23/us/23health.html?_r=1&sq=furman&st=cse&oref=slogin&scp=2&pagewanted=print

Policy Brief: Tobacco Bill Q&A

The House may soon be faced with a vote on a measure (H.R. 1108) to include tobacco products under the regulatory authority of the Food and Drug Administration (FDA).  The RSC has prepared the following analysis providing background information on the legislation, as passed by the House Energy and Commerce Committee on April 2, 2008.

What is the purpose of the provisions of H.R. 1108 regulating tobacco products? 

Both the stated purpose and expansive scope of the proposed FDA regulation of tobacco under H.R. 1108 can be observed in Title I of the bill: “The Secretary [of Health and Human Services] may by regulation require restrictions on the sale and distribution of a tobacco product, including restrictions on the access to, and the advertising and promotion of, the tobacco product, if the Secretary determines that such regulation would be appropriate for the protection of the public health.”  Under the bill, the definition of the public health is extended to both users and non-users of tobacco products.

Some conservatives may note that this language is a significant modification from the original justification for tobacco regulation—namely, the need to protect children from gaining access to tobacco products.  In fact, while children are mentioned several times in the findings section of H.R. 1108, the word “children” appears only four times in the remaining 176 pages of the bill.  Some conservatives may be concerned that this new focus on a more expansive goal of protecting the public health may divert energy away from efforts to combat underage consumption of tobacco products.

Does H.R. 1108 contain a tax increase?

Many conservatives may be concerned that it does.  The bill includes assessments on tobacco companies, ostensibly termed “user fees,” to finance the FDA’s work regulating tobacco products.  However, the Congressional Budget Office estimates that tobacco regulation will reduce the number of smokers—thus decreasing the amount of revenue derived to the federal government from tobacco taxes.

While the version of H.R. 1108 reported from full Committee attempted to address this matter by including a finding that the bill’s scope was not intended to intrude upon any authority under the Internal Revenue Code, the House Ways and Means Committee has requested a referral on the grounds that the fee ultimately constitutes a tax.  As Ways and Means Chairman Rangel wrote to Speaker Pelosi on April 3, 2008:

The amount of money raised by the assessment of the user fee is more than the amount of money being made available to the Secretary of Health and Human Services (HHS) for the regulation of tobacco….Since the bill forbids the funds from being spent on anything other than tobacco regulation, [the funds] would in fact revert back to the general fund of the U.S. Treasury.  The Committee on Energy and Commerce would then be financing the costs of government generally, which is clearly the jurisdiction of the Committee on Ways and Means.

Therefore, many conservatives may be concerned that, following Chairman Rangel’s own logic, the “user fee” in H.R. 1108 in fact constitutes a tax increase on tobacco companies.

Under what standard would tobacco be regulated under H.R. 1108?

The bill would re-institute standards first proposed in 1996 to regulate tobacco as a medical device.  However, it remains unclear how these standards can be reconciled with the inherent nature of tobacco products.  For instance, Title I of H.R. 1108 deems a tobacco product as “adulterated” if “it consists in whole or in part of any filthy, putrid, or decomposed substance, or is otherwise contaminated by any added poisonous or added deleterious substance that may render the product injurious to health.”  Based on this description, it is unclear how any tobacco product would fail to qualify as “adulterated,” raising questions as to how the standards can be appropriately applied.

Will H.R. 1108 impede the introduction of reduced-risk tobacco products?

H.R. 1108 places stringent restrictions on the introduction and marketing of new products that would reduce or modify the inherent risks associated with the consumption of tobacco.  The bill states that a reduced risk product may be marketed only if the product will “significantly reduce harm and the risk of tobacco-related disease to individual tobacco users” and also will “benefit the population as a whole,” including persons who do not consume tobacco products.  Other reduced risk products may be approved for distribution, but will be subjected to further marketing restrictions, post-market surveillance, and potential revocation of the distribution license after a five-year period.  Some conservatives may be concerned that such onerous restrictions on the introduction of new reduced risk tobacco products could have the effect of inhibiting the introduction of products that could reduce the risks associated with tobacco consumption while potentially serving as a barrier to entry for new market competitors.

How would tobacco advertising be regulated under H.R. 1108?

In addition to codifying federal restrictions, which tobacco companies agreed to in their 1998 settlement with state Attorneys General, H.R. 1108 places additional federal restrictions on tobacco advertising, while simultaneously eliminating federal pre-emption by allowing states to enact legislation “imposing specific bans or restrictions on the time, place, and manner, but not content, of the advertising or promotion” of tobacco products.  Some of the federal restrictions on advertising content in H.R. 1108 include the following specifications for the size of warning labels on tobacco products:

The text of such label statements shall be in a typeface pro rata to the following requirements: 45-point type for a whole-page broadsheet newspaper advertisement; 39-point type for a half-page broadsheet newspaper advertisement; 39-point type for a whole-page tabloid newspaper advertisement; 27-point type for a half-page tabloid newspaper advertisement; 31.5-point type for a double page spread magazine or whole-page magazine advertisement; 22.5-point type for a 28 centimeter by 3 column advertisement; and 15-point type for a 20 centimeter by 2 column advertisement.

Some conservatives may be concerned that the highly prescriptive restrictions described above, and elsewhere in H.R. 1108, constitute an undue intrusion on companies’ constitutional free speech rights to advertise a product that most Americans already know is unhealthy.

What implications might consumers draw from FDA’s proposed role in regulating tobacco?

As FDA Commissioner Andrew von Eschenbach testified before the House Energy and Commerce Committee in October 2007, the FDA has heretofore been structured as an agency to promote and protect the public health.  In the Commissioner’s opinion, requiring FDA to “approve” tobacco products as a result of H.R. 1108 would dramatically change the agency’s focus: “Associating any agency whose mission is to promote public health with the approval of inherently dangerous products would undermine its mission and likely have perverse incentive effects.”

Is FDA competent to regulate tobacco products?

The statements of several Congressional Democrats—who have criticized the agency’s handling of food and drug safety, particularly with regard to imported products—raise questions as to why they would support granting new and broad authority to FDA with regard to tobacco regulation.  For instance, Energy and Commerce Oversight Subcommittee Chairman Bart Stupak (D-MI), in holding a hearing on FDA’s decision to approve an antibiotic despite receiving false clinical trial data, called the incident “a microcosm of the failure by all FDA stakeholders—FDA, pharmaceutical sponsors, and third-party monitors—to ensure the integrity of clinical trials used to support the safety and approval of new drug applications.”  On top of questions which Democrats themselves have raised regarding FDA’s competence, some conservatives may question whether the food safety concerns that have arisen in recent months make now an appropriate time significantly to expand the agency’s regulatory remit and mission.

Weekly Newsletter — July 21, 2008

Resolution Would Block SCHIP Funds from Being Targeted to Poor Children

Last week, a group of Senators introduced a Resolution of Disapproval (S. J. Res. 44) designed to nullify guidance put forward by the Administration regarding state efforts to expand government-funded health insurance coverage to higher-income children.  The guidance, issued last August and revised this May, provides a list of steps states must take in order to expand coverage to children in families making over 250% of the federal poverty level (approximately $50,000 for a family of four), and to ensure that states do not encourage families to drop private insurance coverage in order to obtain coverage through a government program.

Many conservatives may be surprised and disappointed by this resolution, which if successful would effectively give states a disincentive to reach out and enroll poorer-income children if children from wealthier families can be more easily found and enrolled in government-funded coverage.  Particularly as the Administration has issued clarifying guidance noting that no child need be dropped off the SCHIP rolls while states implement this new policy, some conservatives may question why Democrats would prefer to extend government-funded health insurance to families making $80,000 or more, while neglecting to ensure that poorer children receive first preference for SCHIP enrollment.

A Policy Brief on the Administration’s SCHIP Guidance can be found here.

Medicaid Bailout for States Receives Committee Hearing

This week the House Energy and Commerce Committee will hold a Subcommittee hearing on legislation (H.R. 5268) designed to provide a temporary increase in the Medicaid matching rate provided to states.  News reports suggest that the Democrat leadership may attempt to attach similar provisions to a second “stimulus” package being considered by the Congressional majority.

Some conservatives may be concerned that this legislation—which was proposed, and rejected, during negotiations over the first “stimulus” bill passed in January—would not provide any “stimulus” at all, instead substituting federal Medicaid spending for state dollars, at a significant cost to the federal budget deficit.  Given an Urban Institute study suggesting that lost revenue—and not increases in Medicaid enrollment—generates a measurably larger impact on state budgets during economic downturns, some conservatives may view H.R. 5268 as providing a bailout to states, which did not engage in proper budgetary planning, that will only encourage “moral hazard” among states with flawed revenue projection models.

The legislation being considered also includes provisions designed to disregard “extraordinary pension contributions” for purposes of calculating each state’s Medicaid match rate.  Because the Centers for Medicare and Medicaid Services has noted that Michigan—home to full Committee Chairman John Dingell—is the only state that would benefit from such a change, some conservatives may consider this provision an authorizing earmark and object to its inclusion.

A Policy Brief on Medicaid matching formulae can be found here.

Documents of Note: Democrats Defend Entitlement Spending on the Wealthy

Last Wednesday, RSC Chairman Hensarling submitted an op-ed to the Washington Times discussing Medicare legislation recently enacted over the President’s veto.  The article noted that the Democrat-constructed bill pits groups of low-income seniors against each other—by adding subsidies for some, while taking away access to Medicare Advantage for millions—all the while doing nothing to make billionaires like Warren Buffett and George Soros pay $2 per day more for prescription drug coverage.  Read the op-ed here.

And as Congress once again may consider SCHIP-related legislation, some conservatives may find the colloquy between Rep. Mike Burgess (R-TX) and House Energy and Commerce Chairman Dingell from last October enlightening.  In it, Chairman Dingell admitted that states can choose to disregard tens of thousands of dollars of income from families applying for SCHIP—thus making families with six-figure incomes potentially subject to government-funded health insurance for “poor” children.

Policy Brief: Tax Treatment of Health Insurance

History:  The origins of the current income tax exclusion for employer-provided health insurance date back to World War II, when large employers successfully pressed the Internal Revenue Service (IRS) to exempt group health insurance from income and payroll taxes, thus allowing firms to offer health benefit policies as a means to circumvent wartime wage and price controls.  The IRS ruling was codified as part of the re-write of the Internal Revenue Code that took place in 1954 (P.L. 83-591), and remains part of the Code at 26 U.S.C. 106(a).  Largely as a result of this policy, employer-provided health insurance grew significantly during the postwar period, and in 2006 provided coverage to 177.1 million individuals, according to the U.S. Census Bureau.[1]

Budgetary Costs:  The growth in the number of individuals enrolled in group health insurance over the past six decades led to a commensurate rise in the tax expenditures associated with the employee exclusion.  The Office of Management and Budget estimates that, in Fiscal Year 2009, the federal government will forego more than $168 billion in income tax revenue due to the employee exclusion; tax expenditures over the next five years will total more than $1.05 trillion.[2]  The Joint Committee on Taxation (JCT) estimates a lower income tax impact for the employee exclusion, at $126 billion per year in FY09, largely because JCT assumes that individuals with high health costs will itemize their health costs over 7.5% of adjusted gross income (AGI).[3]

Employer-sponsored health insurance is also exempt from payroll taxes; however, the budgetary impact of this policy has been less accurately quantified.[4]  A Health Affairs article published in 2006 estimated that in that year, the exclusion resulted in $73.3 billion in foregone payroll tax revenue, along with an additional $23.4 billion in state income tax revenues.[5]  However, because a change in policy subjecting group health insurance coverage to payroll taxes would increase the Social Security wage base for many individuals—leading to a direct increase in promised benefits—the net impact on the federal government is likely significantly less than the estimates cited.

Economic Impact:  Many conservative and liberal economists agree that the employee exclusion, while increasing access to insurance coverage for some populations, has had several adverse and unintended consequences.  Because a marginal dollar of health insurance benefits is untaxed, whereas a marginal dollar of salary can be subject to total tax rates (income, payroll, and state/local taxes) in excess of 40%, additional health benefits are actually more lucrative to workers than an additional dollar’s wages.  Thus the employee exclusion, which is not capped, may encourage workers to consume all the health care they want, rather than the health care they need.

The disparity created by the employee exclusion may explain why the average premium for employer-sponsored insurance is $4,479 for an individual—roughly three times the average $1,500 paid for insurance coverage outside the group market, where premiums paid are generally subject to income and payroll taxes.[6]  It also may help to explain the 157.6% rise in total tax subsidies for health insurance (adjusted for inflation) between 1987 and 2006—while total employment rose somewhat during the period, most of the increase can be attributed to rising premium costs, which an uncapped federal tax subsidy can exacerbate.[7]

The growth in group health insurance coverage, sparked in part by federal tax policy that encouraged employers to offer health benefits, has increased the amount of overall health expenditures made by third-party insurers.  A report released by the Congressional Budget Office in November 2007, which examined both historical trends in health care spending and long-term projections for its growth over the next 75 years, documented a significant shift in health care expenditures: out-of-pocket spending declined from 31% to 13% of all health expenditures (both private and public) between 1975 and 2005, while third-party payment by private insurance carriers increased from 25% to 37% of health spending nationwide.[8]  Although new technologies and services have also helped drive the growth in health spending, the continued rise of third-party payment—which can insulate patients from the marginal costs associated with additional treatments—may well have had inflationary effects.  This shift away from out-of-pocket spending occurred despite the findings of a landmark RAND Institute study, which concluded that higher cost-sharing helped constrain health care spending at little to no adverse effect on patients’ health.

Additionally, the fact that tax policy generally favors employer-provided insurance when compared to health insurance purchased on the individual market tends to have distortionary effects on labor markets.  Although policy-makers have established some other tax benefits for health insurance, these generally have more limitations than the expansive employee exclusion: the self-employed may deduct health insurance premiums from income tax, but are not exempt from 15.3% payroll tax on the cost of policies purchased; Health Savings Accounts (HSAs) allow for pre-tax savings for health expenses, but cannot be used for the purchase of health insurance, except in limited instances; and deductions for medical expenses in excess of 7.5% of AGI only apply to individuals who do not itemize.

The sum total of the effects of the employee exclusion is therefore material from both a fiscal and an economic perspective.  Employees’ inbuilt incentive to over-consume health care encourages rich insurance benefits that insulate consumers from the true costs of care—raising health care costs over time—while depressing cash wages paid.  Moreover, the disparity in the tax treatment of insurance tends to perpetuate “job lock,” whereby individuals gravitate towards positions and industries that offer health coverage to the detriment of those that do not—providing a disincentive for individuals to establish their own businesses and take the entrepreneurial risks that lead to robust economic growth.

Policy Solutions:  In general, some conservatives may support reforms to the current tax treatment of health insurance that accomplish the twin goals of eliminating the disparity between health insurance offered by an employer and non-group coverage and imposing some threshold on the level of tax subsidies provided for health benefits in an attempt to slow the growth of health care costs.  Proposals in this line have varied widely; in his first term, President Bush proposed a tax credit for low-income individuals and families without access to employer-sponsored insurance, as a means to incentivize these populations to purchase health coverage.  Last year, the President proposed a new standard deduction for health insurance, similar to that first proposed by the Tax Reform Panel in 2005, that would provide tax subsidies for coverage purchased up to a set level premium ($7,500 in the case of the budget proposal submitted to Congress).[9]

Other proposals have looked to replace the current exclusion for health insurance with a tax credit available to all individuals, paid for by capping or repealing entirely the current tax subsidy for group health insurance.  Policies in this vein include provisions in the first title of comprehensive health and entitlement reform legislation (H.R. 6110) introduced by Budget Committee Ranking Member Paul Ryan (R-WI), along with the health reform plan promoted by Sen. John McCain (R-AZ).  In most cases, the credits would be refundable (i.e. paid to individuals with tax liability less than the amount of the credit) and advanceable (i.e. paid out on the same monthly basis as health insurance premiums, rather than in conjunction with the filing of an annual return).

Conclusion:  Despite—or perhaps because of—the multitude of proposals designed to reform the current tax treatment of health insurance, most conservatives share the over-arching goal of improving an arguably archaic system of tax subsidies, rooted in a wartime bureaucratic decision, that has distorted America’s more than $2 trillion health sector while inhibiting economic growth.  Although the health plan released by Sen. Barack Obama omits any discussion of the damaging and perverse effects of current tax policies on both the health sector and the broader economy, some conservatives may believe that revisiting current tax policy should be at the top of any health reform agenda.

For further information on this issue see:



[1] U.S. Census Bureau , “Income, Poverty, and Health Insurance Coverage in the United States: 2006,” (Washington, DC, Report P60-233, August 2007), available online at http://www.census.gov/prod/2007pubs/p60-233.pdf  (accessed July 2, 2008), Table C-1, p. 66.

[2] Table 19-1, Estimates of Total Income Tax Expenditures, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2009, available online at http://www.whitehouse.gov/omb/budget/fy2009/pdf/spec.pdf (accessed July 1, 2008), p. 302.

[3] Joint Committee on Taxation, “Estimates of Federal Tax Expenditures for Fiscal Years 2007-2011,” (Washington, DC, Committee Print JCS-3-07, September 2007), available online at http://www.jct.gov/s-3-07.pdf (accessed July 2, 2008), Table 1, p. 36.  For comparison with Treasury estimations, see narrative section at pp. 24-25.

[4] The payroll tax exclusion can be found at 26 U.S.C. 3121(a)(2).

[5] Thomas Selden and Bradley Gray, “Tax Subsidies for Employment-Related Health Insurance: Estimates for 2006,” Health Affairs 25(6), November/December 2006, pp. 1570-71.

[6] Kaiser Family Foundation, “Employer Health Benefits: 2007 Annual Survey,” available online at http://kff.org/insurance/7672/upload/76723.pdf (accessed July 2, 2008), p. 2; eHealthInsurance, “The Cost and Benefits of Individual Health Insurance Plans: 2007,” available online at http://www.ehealthinsurance.com/content/expertcenterNew/CostBenefitsReportSeptember2007.pdf (accessed July 2, 2008), p. 23.  It should also be noted that in recent years, the average premium in the eHealthInsurance survey has remained nearly constant, while the average deductible has risen slightly; this would lend further confirmation to the concept that individuals purchasing health care on their own, particularly on an after-tax basis, make rational choices between potential out-of-pocket costs and overall premium levels when shopping for policies.

[7] Selden and Grey, p. 1577.

[8] Congressional Budget Office, “The Long-Term Outlook for Health Care Spending,” (Washington, DC, Publication #3085, November 2007), available online at http://www.cbo.gov/ftpdocs/87xx/doc8758/11-13-LT-Health.pdf (accessed July 2, 2008), pp. 12-13.

[9] Information on the Standard Deduction for Health Insurance proposed as part of the Fiscal Year 2009 budget can be found in the Treasury Blue Book at http://www.ustreas.gov/offices/tax-policy/library/bluebk08.pdf (accessed July 2, 2008), pp. 22-25.  Details on the Tax Reform Panel proposal can be found at http://www.taxreformpanel.gov/final-report/TaxReform_Ch5.pdf (accessed July 2, 2008), pp. 20-24.

Policy Brief: Health Insurance Connectors and Exchanges

History and Background:  The 2006 Massachusetts health reform act signed into law by Republican Gov. Mitt Romney contained several concepts designed to expand insurance coverage and access.  These ideas included a health insurance “Connector,” which would allow employees at businesses not offering coverage to their workers to purchase insurance on the same tax-free basis as those covered under a group insurance plan.[1]  Because the Connector’s structure ensures that participants would be eligible for the federal tax subsidies provided to employer-sponsored coverage through the use of cafeteria plans (also named Section 125 plans after their location in the Internal Revenue Code), the state-based program provides a “back door” way to equalize the tax treatment of health insurance in the absence of federal legislation to do so.

Public vs. Private:  Although one of the more innovative concepts behind the Massachusetts plan, some conservatives may view the Connector as one of the least necessary.  While the head of a leading organization supporting the Massachusetts plan called the Connector concept “fairly unprecedented in US insurance history” for its ability to allow individuals to comparison shop between and among plans online, the private marketplace has provided that service to consumers for over a decade.[2]  Companies like eHealthInsurance, created in 1998, and Revolution Health have served for years as online insurance clearing-houses, enabling and empowering consumers to compare the features of plans offered in their area and select a plan best meeting their needs.

Given the private marketplace’s willingness to offer services comparable to the Massachusetts Connector, some conservatives may therefore view its creation as a symptom of two larger problems: the inequitable tax treatment of health insurance by the federal government and costly regulations imposed by state governments.  In an attempt to encourage younger individuals to take the step of buying insurance coverage, the Connector does sell streamlined benefit packages to 19-26 year-olds at lower costs—but some conservatives may believe that these individuals, and all Massachusetts residents, would be better served by more comprehensive insurance reform that repeals costly benefit mandates entirely, rather than loosening them only for certain populations under certain conditions.

Likewise, while the Connector concept provides an innovative way to extend current-law tax incentives for the purchase of health insurance to all individuals, some conservatives may be concerned that, should such an idea extend to other states, such a development would have the effect of perpetuating a system that depresses cash wages, encourages over-consumption of care, and results in hundreds of billions of dollars of tax subsidies annually—more than $168 billion in FY09, and more than $1.05 trillion over the next five years.[3]  Were the tax subsidies reformed, and the state benefit mandates streamlined, pre-empted, or eliminated, some conservatives may believe that the need for a government-run bureaucratic entity such as the Connector to administer health insurance plans would be minimized.

Legal Issues:  Although the Connector received significant attention from both the press and policy-makers at the time the Massachusetts plan was unveiled, some within the insurance community have raised potential concerns about the implications of super-imposing the Connector purchasing model on the existing legal framework for health insurance.  The National Association of Health Underwriters has released a paper raising several questions about the ramifications of Connector-based coverage, including whether Connector-purchased policies meets the current definition of group health insurance under applicable federal laws.

It is also possible that state-based health insurance Connectors, whether in Massachusetts or other states, could have provisions interfering with language in the Employee Retirement Income Security Act of 1974 (ERISA) pre-empting “any and all state laws insofar as they may now or hereafter relate to any employee health benefit plan.”[4]  Given the potential legal scrutiny, as well as the implications for individuals who may need to transfer their Connector-based coverage to another state or employer, some conservatives may urge caution with any state efforts to enact other versions of Massachusetts’ creation.

Connector vs. Regulator:  The relative novelty of the Connector concept has resulted in several attempts in the two years since the Massachusetts plan was first adopted to capitalize upon its perceived success by creating similar sounding models in other states and venues.  However, these models often vary widely in their structure and approach, with the major differences lying in the extent to which the Connector or Exchange represents an attempt by a bureaucratic entity to use its collective purchasing power to regulate or otherwise influence private insurance markets.

Sen. Barack Obama’s health care plan would establish a National Health Insurance Exchange, to allow individuals who do not wish to purchase coverage through his proposed new public health insurance program a choice of privately-run plans from which to buy a policy.  However, the language of his proposal makes clear that the Exchange would perform a highly active role as both a facilitator of coverage and a regulator of those plans participating in it:

The Exchange will act as a watchdog and help reform the private insurance market by creating rules and standards for participating insurance plans to ensure fairness and to make individual coverage more affordable and accessible….Insurers would have to issue every applicant a policy, and charge fair and stable premiums that will not depend upon health status.  The Exchange will require that all the plans offered are at least as generous as the new public plan and meet the same standards for quality and efficiency.  Insurers would be required to justify an above-average premium increase to the Exchange.  The Exchange would evaluate plans and make the differences among the plans, including the cost of services, transparent.[5]

The clear language of the Obama plan may give some conservatives pause that a purported health insurance “Exchange” will in fact serve more as a regulator than a mere facilitator for the purchase of insurance policies, imposing additional mandates and controls on carriers that will stifle the innovation of new insurance products and raise the cost of coverage.  Some conservatives may also be concerned that the Obama plan could in time turn into a government-run monopsony, where the Exchange as the largest and/or sole purchaser of health insurance would use its power to dominate the insurance marketplace, imposing arbitrary and damaging price controls on plans as a precondition to their participation in a venue where many Americans would seek to purchase coverage.

By contrast, several Republican Senators produced legislation (S. 1886) last year with language ensuring that state-based Connectors serve only as a purchasing tool and not as a blunt instrument to allow the federal government to intervene in health insurance markets.  The legislation provides that the health insurance tax credits created under the bill would be refundable (i.e. extended to those individuals with tax liability less than or equal to the amount of the credit) only in the case of policies purchased through a state-based Exchange.  Title II of the legislation establishes strict parameters on the actions that an Exchange may take with respect to insurance policies offered through it, prohibiting the Exchange from setting prices, imposing additional benefit mandates or guidelines, or restricting participation for any state-licensed plan.  The legislation also provides the opportunity for health insurance plans or other third parties to contract with states to organize the exchange, rather than forcing states to spend additional taxpayer resources to create something readily available in the private marketplace, as occurred in Massachusetts.

Conclusion:  Although a significant element of the Massachusetts reform law, some conservatives may believe that the Connector’s creation achieved little in practice that the private marketplace was not already working to develop—namely, an easy method for individuals to find, compare, and purchase health insurance plans.  While the tax advantages of purchases made through the Connector (as opposed to on the individual market) cannot be denied, the advisability of using the Connector as anything more than a stopgap solution until Congress debates and passes fundamental tax reform—including reform of the inequities of the tax treatment of health insurance—may be questioned.  Moreover, Internal Revenue Service guidance released last August found that individual health insurance policies purchased through tax-free Section 125 cafeteria plans established by employers need not be acquired solely by means of a Connector mechanism to receive favorable tax treatment, raising additional questions as to whether an additional state-based bureaucracy for the purchase of health insurance is necessary or desirable.[6]

To the extent that Connector-like mechanisms provide additional information and transparency to potential purchasers of health insurance, some conservatives may support these efforts as one way to replicate the information and advice which individuals may previously have received solely from employers.  However, to the extent state or federal lawmakers seek to utilize the Connector concept in an attempt for government to dominate the private insurance marketplace, many conservatives may oppose these efforts as antithetical to the principles of freedom and likely unworkable in practice.

 


[1] While the Massachusetts Connector also offers access to state-subsidized Commonwealth Care plans for low-income individuals, references to “Connectors” in this paper speak solely to mechanisms that facilitate the purchase of unsubsidized insurance from the private marketplace.

[2] Statement of John McDonough, Executive Director, Health Care for All, Alliance for Health Reform briefing on “Massachusetts Health Reform: Bragging Rights and Growing Pains,” (Washington, DC, May 19, 2008), available online at http://www.allhealth.org/briefingmaterials/Transcript-1219.pdf (accessed July 1, 2008), p. 9.

[3] Table 19-1, Estimates of Total Income Tax Expenditures, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2009, available online at http://www.whitehouse.gov/omb/budget/fy2009/pdf/spec.pdf (accessed July 1, 2008), p. 302.

[4] 29 U.S.C. §1144a.

[5] “Barack Obama’s Plan for a Healthy America,” available online at http://www.barackobama.com/issues/pdf/HealthCareFullPlan.pdf (accessed July 1, 2008), p. 4.

[6] Internal Revenue Service Notice of Proposed Rulemaking issued August 6, 2007 and available online at http://edocket.access.gpo.gov/2007/pdf/E7-14827.pdf (accessed July 1, 2008).  Language relating to reimbursement of individual health insurance premiums is in proposed 26 CFR §1.125-7(m) at pp. 43952-53.

Rep. Jeb Hensarling Op-Ed: The Medicare Veto: Shortchanging Minorities

Originally published in Washington Times, July 16, 2008

Over the last several weeks, I have heard from physicians rightly concerned that lawmakers had yet to pass legislation repealing a scheduled 10.6 percent reduction in their Medicare reimbursement rates. No doubt Congress should and will act soon, to preserve seniors’ access to physician care. This is critical for doctors, specifically primary care physicians, whom already face tremendously difficult challenges. But behind the scenes of the physician reimbursement debate lies an interesting paradox in the way Congressional Democrats protect wealthy seniors, while exposing large numbers of low-income beneficiaries whom the legislation purports to protect.

Nestled into the sprawling 278-page bill the House passed with limited debate are provisions that would expand eligibility for subsidy programs that aid low-income beneficiaries with Part B premium payments, deductibles, and co-insurance. Coupled with several proposals designed to increase outreach to low-income populations, the changes would cost hardworking Americans $7 billion over the next ten years.

Of course, budgetary rules require Congressional Democrats to pay for this expansion of the Medicare benefit. By listening to Senator Obama, you might assume that the likeliest culprit would be yet another tax on the wealthy. But that is far from it. The expanded subsidies for low-income individuals – as well as the physician reimbursement provisions and other related Medicare provisions – are paid for by cuts to Medicare Advantage plans that provide coverage to millions of seniors.

The paradox arrives in the discovery that Medicare Advantage plans disproportionately serve low-income and minority populations. Nearly half of all Medicare Advantage beneficiaries had incomes under $20,000; for Hispanic and African-American populations, that number rises to 70 percent. While policy-makers argue about “overpayments” to Medicare Advantage plans, many low-income seniors have come to appreciate – and rely on – the lower costs and increased benefits that these plans have provided. But as a result of the House-passed legislation, over 2 million seniors, including 1.8 million in private fee-for-service plans popular in rural areas with limited physician access, will lose their Medicare Advantage coverage.

To sum up: Congressional Democrats are cutting benefits for some low-income seniors – in order to extend benefits to other low-income seniors. All the while, proposals to increase Part D premiums for the wealthiest Medicare beneficiaries -think George Soros and Warren Buffett – languish in legislative purgatory.

There is a Machiavellian logic to Democrats’ apparent lack of appetite for Medicare means-testing. If wealthier individuals become less dependent on the welfare state for their health benefits in retirement, political support for the popular program may wane. But when President Bush proposed to extend current means-testing of Part B premiums to the prescription drug plan as one way to alleviate Medicare’s funding woes, The New York Times considered this element of the President’s plan a “reasonable” proposal. If President Bush and the editorial board of The New York Times can both see the merits of this concept, there is little reason why Congress, in its infinite wisdom, should not see fit to include it in the Medicare bill.

Instead, the legislative product being considered constitutes, at best, an attempt at behavioral modification – forcing low-income beneficiaries away from plans run by “greedy” insurance companies – and at worst a perverse experiment in social Darwinism, pitting one group of vulnerable seniors against another in a competition for Medicare dollars. All this so Warren Buffett can avoid having his estimated $60 billion fortune decimated by paying an extra $2 per day for prescription drug coverage.

In March, the Medicare trustees issued their annual report, which noted that Medicare faces $86 trillion – yes, trillion – in unfunded obligations. The two best ways to stem this looming tide of debt are increased competition among private Medicare Advantage plans and proposals utilizing means-testing to dedicate scarce health care resources to the seniors who need them most. Yet the House bill undermines the former, while ignoring the latter.

While introducing Medicare legislation very similar to the bill the House passed, Senate Finance Committee Chairman Max Baucus decried efforts to “protect private insurance plans” that would “leave low-income beneficiaries behind,” arguing that his “balanced legislation” will prevent the latter while discouraging the former. I agree with Senator Baucus that his legislation is indeed balanced – it would ensure that a senior with $20,000 in income will continue to pay as much for prescription drugs as Ross Perot (or Senator Baucus himself). But in their ideological quest to undermine private insurance plans, Congressional Democrats are indeed leaving millions of beneficiaries on Medicare Advantage plans, many of them low-income, behind. Speaker Nancy Pelosi and House Democrats – Cutting coverage for beneficiaries while protecting billionaires.

Rep. Jeb Hensarling is chairman of the Republican Study Committee.

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

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

Process for a Vetoed Bill:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Year

Statutory

Annual

Update (%)

Congressional “Fix” to the Update (%)*

2002 -5.4 -5.4**
2003 -4.4 +1.6
2004 -4.5 +1.5
2005 -3.3 +1.5
2006 -4.4 0
2007 -5.0 +1.5***
2008 -10.1§ 0.5 (proposed)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

Weekly Newsletter — July 14, 2008

Veto Expected on Medicare Legislation

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

While all parties agree on the need to address the physician reimbursement provisions, Congressional Republicans have called for passage of bipartisan legislation that would forestall the significant cuts to Medicare Advantage plans made in H.R. 6331.  Some conservatives may be concerned that the bill would have the effect of driving beneficiaries away from a privately-run model of health insurance that has provided enhanced benefits and choice for millions of seniors, especially the 2.2 million beneficiaries in Medicare Advantage private fee-for-service plans.  Some conservatives may also believe that the short-term nature of current physician reimbursement extensions, coupled with their potential to become entwined in unrelated disputes and/or “held hostage” due to various political considerations, makes a powerful argument for more comprehensive reforms to Medicare, including a long-term solution to physician reimbursement policy.

The Legislative Bulletin on H.R. 6331 can be found here.  Policy Briefs on issues related to the Medicare bill can be found here, here, here, and here.

 

Tentative Agreement on Mental Health, but Obstacles Remain

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

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

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

Article of Note: Dead Men Prescribing

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

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

Read the article here:

The Washington Post: “Billings Used Dead Doctors’ Names”

http://www.washingtonpost.com/wp-dyn/content/article/2008/07/08/AR2008070802340_pf.html

Read the report here:

http://hsgac.senate.gov/public/_files/PSIReport070908.pdf

Weekly Newsletter — July 7, 2008

Medicare Votes Likely This Week

After returning from its Independence Day recess, Congress will once again return to debate legislation addressing physician reimbursement levels under Medicare.  Because Senate Democrats objected to Republicans’ unanimous consent requests to pass a “clean” physician payment bill before the recess, physicians will take a 10% cut in their reimbursement levels unless and until Congress passes a retroactive fix.  Additional Senate votes are likely later in the week on this issue.

While all parties agree on the need to address the physician reimbursement provisions, Senate Republicans have called for passage of bipartisan legislation that would forestall the significant cuts to Medicare Advantage plans made in House-passed legislation (H.R. 6331).  Some conservatives may be concerned that the House-passed bill’s significant cuts to Medicare Advantage would have the effect of driving beneficiaries away from a privately-run model of health insurance that has provided enhanced benefits and choice for millions of seniors, especially the 2.2 million beneficiaries in private fee-for-service plans.  Some conservatives may also believe that the short-term nature of current physician reimbursement extensions, coupled with their potential to become entwined in unrelated disputes and/or “held hostage” due to various political considerations, makes a powerful argument for more comprehensive reforms to Medicare, including a long-term solution to physician reimbursement policy.

The Legislative Bulletin on H.R. 6331 can be found here.  Policy Briefs on issues related to the Medicare bill can be found here, here, here, and here.

Article of Note: Report Finds Comparative Effectiveness Rationing Not So NICE

A report released in Great Britain last week on the occasion of the National Health Service’s (NHS’) 60th anniversary noted the need for reforms in the way the NHS administers care based on comparative effectiveness research.  Health Minister Lord Darzi’s study admitted problems with the existing National Institute for Health and Clinical Excellence (NICE), established in 1999 to review the effectiveness of drugs and other therapies.  Specifically, the report conceded that “it has sometimes taken too long for NICE appraisal guidance to be made available on newly licensed drugs” and that “there remains unexplained variation in the way local decisions are made on the funding of new drugs before the appraisal takes place.”

With the Congressional Budget Office (CBO) holding up the British establishment of NICE as one model way to achieve comparative effectiveness research in the United States, some conservatives may be concerned by the implications such an institute would present.  At a time when the British government has admitted that NICE’s introduction has led to years-long delays in drug approval times and inherently arbitrary rationing of access to drugs from location to location, some conservatives may believe that such a heavy-handed—to say nothing of bureaucratically ineffective—role for government to play in American health care would be both counter-productive and inappropriate.

Read a summary of the clinical effectiveness provisions from BBC News here:

http://news.bbc.co.uk/1/hi/health/7478173.stm

A Policy Brief on comparative effectiveness research can be found here.