March 1, 2010

President Obama took over the lead on health care reform (HCR) legislation last week, on Monday releasing a set of changes to the bills adopted by the Senate and the House of Representatives in 2009 and on Thursday February 25th holding an unprecedented seven-hour televised “Bipartisan Health Care Reform Summit” meeting with Congressional leaders. No new compromise agreement emerged and the pundits do not see many prospects for bipartisan legislation.

Yesterday, the White House called for a “simple up-or-down vote,” signaling its intention to push for the House of Representatives to adopt the bill passed by the Senate in December (H.R. 3590, the “Patient Protection and Affordable Care Act”). The Senate would then use the “reconciliation” process to make some changes demanded by House Democrats. Reconciliation would prevent any Republican filibuster and would allow the final package to become law with fewer than 60 votes. In this Alert we will summarize the President’s proposals of particular interest, since they are likely to be part of the legislative package on which Congress is about to start work.

The HCR summit had four themes: cost control, deficit reduction, insurance reform and expanding coverage. The Republicans insisted throughout that the entire Senate package should be set aside and the process of shaping HCR start over on a blank page, this time in incremental fashion. The Democrats seemed just as orchestrated in repeating often that the two sides were not that far apart, although at the end the President said, “I don't know, frankly, whether we can close that gap.” The two sides did agree on the following:

• Unless costs are contained, Medicare will be bankrupted and employers will stop offering coverage.
• Larger insurance risk pools are a good way to lower premium costs.
• The amount spent on malpractice litigation must be driven down.
• The amount of waste and fraud in health care should be reduced.
• Health plans should be able to sell insurance across state lines.
• Health plans should be prevented from dropping policyholders who become sick (rescission).
• There should not be annual and lifetime monetary limits on health insurance benefits.
• Young adults should be permitted to stay on their parents' health until they are 25 or 26 years old.

There is of course a large divide regarding the best ways to accomplish the above goals.

Cost Control. The Republicans in Congress would control costs by simply not spending the funds necessary to cover the vast majority of the 31 million people who currently have no insurance. The President would spend those funds and find savings elsewhere. The President’s proposal claims that it will reduce the deficit “by $100 billion over the next ten years – and about $1 trillion over the second decade – by cutting government overspending and reining in waste, fraud and abuse.”

The major source of savings would be Medicare itself and in particular the Medicare Advantage plans that now cover 20% of beneficiaries. Since the Medicare Advantage program was created, health insurers have received about 115% of regular Medicare fee-for-service program rates. The 15% premium, which was originally intended as an incentive to private insurers to create Medicare Advantage plans, now costs about $18 billion per year, according to the White House. The President’s proposal, the Senate and the House bills would all bring Medicare Advantage more in line with average Medicare fee-for-service costs. The calculation of savings is open to question- (as are so many of the dollar projections made by both sides of the debate).

While the President stated a number of times that the only cuts in the Medicare program would be to Medicare Advantage plans, the Republicans continued to denounce “Medicare cuts” in general terms. Some of the Republican lawmakers at the summit pointed out that both the Senate and the House bills would hold down annual updates for hospitals, nursing homes, home health and other providers and would make adjustments for expected productivity gains, for a savings of $186-$228 billion.

Excluding any SGR correction from the HCR legislation, of course, makes it appear that there will be savings instead of greater spending on physicians’ services to Medicare patients. Future Medicare spending would also be constrained by the Independent Payment Advisory Board (IPAB) defined in the Senate bill, one of the most potentially powerful cost control mechanisms in any of the HCR packages. The IPAB has attracted a lot of opposition from provider organizations, including the American Society of Anesthesiologists, because it would remove Congress from the loop when Medicare payment changes are being designed and implemented – read “reduce our ability to lobby.” The IPAB would be required to make recommendations for reducing Medicare spending if Medicare per capita growth rates exceed targets, beginning in January 2014. The recommendations would be implemented automatically unless Congress enacts alternative proposals that achieve same level of savings. Does this remind any readers of the SGR and previous formulaic mechanisms to restrain physician payment growth beyond a certain target?

In the private sector, the President’s proposal envisions a Health Insurance Rate Authority to oversee “rate review,” meaning that health insurers would submit their proposed premium increases to the state authority or to the Secretary of Health and Human Services (HHS). The Authority would be able to dictate lower premiums or rebates if increases were unreasonable. This concept has undoubtedly gained ground because of the double-digit increases in insurance premiums recently announced in a number of states, notably California with a 39% increase in the individual insurance market.

Tort reform is frequently mentioned by Congressional Republicans as a means to contain health care costs. Caps on noneconomic damages such as those in effect in California and Texas are the model. At the summit meeting, President Obama voiced support for the idea of reducing malpractice litigation and defensive medicine. He noted that last year he had instructed HHS Secretary Kathleen Sebelius to begin sponsoring a series of demonstration projects around the country to test the effect of courtroom alternatives such as the “sorry works” program in place at the University of Michigan Health System and no-fault programs similar to workers’ compensation. He rejected House Minority Leader John Boehner’s statement that malpractice was the greatest driver of health care costs, however, citing the Congressional Budget Office’s findings that the Republican plan for tort reform would save $5.4 billion per year- real money, but not in comparison to the $2.5 trillion annual cost of health care.

Reducing waste, fraud and abuse has the potential to yield considerably greater savings. Thomson-Reuters has published estimates that if waste and fraud, broadly defined, were eliminated, the annual cost savings would be $625-$850 billion (almost as much as the 10-year cost of the President’s HCR plan, approximately $950 billion). Senator Tom Coburn, who formerly practiced obstetrics in Oklahoma, claimed at the summit meeting that we could save 15% of the health care dollar by reducing fraud and defensive medicine.

The HCR packages adopted in both chambers of Congress in 2009 contain aggressive mechanisms for reducing fraud and abuse in Medicare and Medicaid. The President’s proposal makes a strong pitch for bipartisan support by adopting, in addition, a number of methods of fighting fraud and abuse from Republican HCR bills and the President’s FY 2011 Budget, including:

1. Removing certain statutory limitations on the ability of Medicare Administrative Contractors (MACs) to conduct random “medical review” (auditing claims for medical necessity) as well as prepayment reviews. This would repeal protections that organized medicine obtained in the Medicare Modernization Act of 2003. Anesthesiologists should realize that their MACs will have easier access to their records if this proposal becomes law.
2. Establishing a comprehensive Medicare and Medicaid database allowing law enforcement access to information relating to past sanctions on health care providers.
3. Expanding access to the Healthcare Integrity and Protection Data Bank to quality control or peer review entities as well as private plans that are involved in furnishing items or services reimbursed by Medicare or Medicaid.
4. Authorizing a CMS-IRS data match to allow CMS to determine which providers have a seriously delinquent tax debt to help identify potentially fraudulent providers earlier. This would make contractors liable for claims submitted by providers who have been excluded from the Medicare program.
5. Registration and background checks of individual and corporate billing agents.
6. Preventing providers determined to have committed fraud from discharging their liability for refunding overpayments in bankruptcy.

During the summit, Senator Coburn advanced the idea of using “undercover patients” to help root out fraud. The President expressed some interest in pursuing that concept.

Deficit Reduction. Cost control is one major aspect of deficit reduction. Raising revenue to help pay for covering 30 million people who do not have insurance is another. The President’s proposal contains a revised mix of taxes.

The President’s plan increases the assessment on the pharmaceutical industry by $10 billion, to $33 billion over 10 years, but it delays implementation by one year, to 2011. It retains a $67 million assessment on health insurers but sets the start date back to 2014; there will be a similar one-year delay, to 2013, in implementing the $20 billion tax on medical device manufacturers.

The proposal adopts the Senate’s excise tax on “Cadillac” (high-cost) insurance plans but would increase the threshold amount from $23,000 for a family plan to $27,500 and from $8,500 for single individuals to $10,200. The effective date of the new policy would be pushed back five years, from 2013 to 2018.

The House bill had provided for a 5.4% surcharge on high-income taxpayers. The Senate bill increased the Medicare Hospital Insurance tax by 0.9% on earnings income over $250,000 for couples and $200,000 for single taxpayers. In order to offset the increased spending attributable to raising the thresholds and delaying the implementation of the Cadillac tax, the President’s proposal would levy a Medicare tax of 2.9% on unearned income above the $250,000/$200,000 thresholds.

Insurance Reforms. The President’s plan adopts the Senate’s state-administered insurance exchanges in which small businesses and persons without employer coverage could buy insurance that meets new federal standards. The proposal does not include any public option. The Republicans consider the future insurance exchanges, which will begin operations in 2014, a “government takeover” of health care and object to the idea that the HHS Secretary will determine the coverage standards for all 50 exchanges.

As noted above, the two sides agree on some governmental restrictions on the more abusive private insurance practices such as rescission. Health plans should be required to extend coverage to the insured’s adult children up to the age of 26, and lifetime and annual limits should be banned.

Views on how other insurance market reforms should be implemented differ. For example,

• The parties concur that consumers should be allowed to buy insurance across state lines, although Democrats want to set minimum standards that policies in all states would have to meet. President Obama would have the Secretary establish a baseline so that the interstate insurance market would not turn into a race to the bottom. He cited the example of credit card companies that all registered in the state with the fewest consumer protections.
• The Republicans have not called for a general ban on pre-existing conditions, but pre-existing conditions would be prohibited for all insurers participating in the exchanges.

Expanding Coverage.

1. The President’s plan would expand Medicaid to cover persons earning less than 133% if the federal poverty level ($29,327 for a family of four). It would also increase federal support for all states to cover newly eligible individuals, starting at the 100% level in 2014 and phasing down to 90% after 2020.
2. The special arrangement secured by Senator Ben Nelson for his state of Nebraska would be jettisoned.
3. The plan would close the Medicare prescription drug “doughnut hole.”
4. The President’s proposal includes an individual mandate, another form of federal control that is contrary to Republican principles. The flat-rate penalty for failure to obtain insurance is lower than in the Senate bill, but the alternative percentage amount would be higher: the penalty would be the greater of $695 or 2.5% of income by 2016. The proposal increases tax credits for health insurance premiums for family with incomes below $88,000 to offset the costs associated with premiums and cost sharing requirements.
5. Although there would be no employer mandate, the President’s plan would create new fees charged to businesses with 50 or more employees that do not offer insurance and in which one or more employees obtains a subsidy (tax credit) to help pay for insurance. The fees are $2000 per full time employee with an exemption for the first 30 employees

The President’s proposal, if enacted into law, would accomplish the major objective of reducing the number of people lacking health insurance. According to an analysis by RAND COMPARE, “the President’s Plan will reduce the number of uninsured by 30 million relative to the status quo, which is roughly similar to the numbers provided by White House analysts. The President’s Plan would result in about 1 million more people obtaining insurance through the nongroup or Exchange market than the Senate bill.” (http://www.randcompare.org/publications/summaries/analysis-of-president-obamas-health-reform-proposal).

Congressional Republicans continue to reject a government-based solution on principle; the White House and the majority leaders will not accept either an incremental or a predominantly market-based approach. Expect to see a revised proposal from President Obama later this week. Its fate in the anticipated reconciliation process is far from clear.

With best wishes,

Tony Mira
President and CEO

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