Public Policy and Law Alert
January 2009
Author:
www.klgates.com
The First Six Months in Health Care
Stephen Cooper
stephen.cooper@klgates.com
1.202.661.3882
The Environment
1) THERE WILL BE NO MONEY. A “macro” health care reform package costs a
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great deal of money. Although both Congress and the Administration (current and new) seem
willing to spend money on economic stimulus without regard to the growing federal deficit, it
is not clear that health care reform will fall into the category of economic stimulus. However,
it is worth noting that in the past, the inability of the federal government to finance a new
benefit program has often meant the enactment of “creative” legislation to shift the cost onto
the private sector. While President-elect Obama has already promised aid to public sector
initiatives through an increase to federal Medicaid payments to states (FMAP), investments in
health information technology, and a likely extension of the State Children’s Health Insurance
Program (SCHIP), the incoming Administration is also considering lending its support for
inclusion of additional provisions in an economic stimulus package that could affect the private
health sector and labor markets. Talks are under way about adding money to retrain medical
workers, and expanding COBRA, the law that allows unemployed people to purchase health
insurance through a previous employer’s plan.
2) THERE WILL BE AN UNHAPPY MIDDLE CLASS. An unhappy middle
class is often the precursor to significant political change, and the majority party that
does not heed the middle class will soon be a minority party (e.g., 1994 and 2006). As
the unemployment rate—and middle class unemployment in particular—continues to
increase, the new Administration and Congress will begin searching for ways to cover
this uninsured population. This may include allowing unemployed workers 55 to 65 to
“buyin” to Medicare. In addition, Congress will address individual insurance market
reform. Congress may also consider shifting some of the cost of continuing health care
benefits for “laid-off” employees onto employers.
3) T HERE IS THE NIGHTMARE OF CLINTON HEALTH CARE
REFORM. President-elect Obama is very cognizant of the failure of the Clinton
health care reform plan and is committed to not repeating the same mistakes. The
new Administration will move into the health care reform debate very cautiously and
incrementally. In all likelihood, the new Administration will let Congress take the lead
on health care reform – permitting the new President to take credit for success and
blame failure on Congress.
4) T
HERE WILL BE OPEN ATTACKS ON THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT (ERISA) PREEMPTION.
Under current federal law, states are generally preempted from regulating self-funded
benefit plans. ERISA does not preempt the ability of states or localities to regulate the
business of insurance and benefit plans offered through insurance. Many states have
argued that this schism has limited their ability to enact health care coverage or system
reform. Over the last 15 years, the federal courts have narrowed the scope of the ERISA
preemption, but eliminating or limiting the preemption will require federal legislation.
If fiscal realities or political divisions in the majority party hinder Congress’ ability to
enact health care reform, it is very likely Congress will, in frustration, enact legislation
Public Policy and Law Alert
weakening the ERISA preemption – allowing
the states to develop their own health reform
programs.
5) THERE WILL BE NOISE. During the first six
months of the new Congress, every committee with
some, albeit remote, jurisdiction will hold hearings
on health care reform. The key committees (i.e.,
the Senate Finance and Senate Health Education
Labor and Pensions (HELP) Committees, and the
House Ways and Means and Energy and Commerce
Committees) are already scheduling hearings early
next year. Secondary committees (Small Business,
Science, Judiciary, Agriculture, Aging, Education,
etc.) will schedule hearings by spring. The special
caucuses (e.g., Congressional Black Caucus, the
Farm Caucus, the Tobacco Caucus, the Cancer
Caucus, the Addiction, Treatment and Recovery
Caucus) will convene informational and strategy
sessions. If history offers any lesson, there will be
at least 50 major health reform bills introduced
within the first six months of the new Congress.
6) T HERE WILL BE TAXES. Current tax
laws allow employees to exclude the employer’s
contribution for the cost of health care benefits from
income. Many health policy analysts argue that this
exclusion benefits higher income employees more
than it does other employees. When an employer
offers several health plan choices ranging from
minimal benefit plans to very rich plans, higherincome employees have a “tax” incentive to choose
a very rich health benefit plan. It is very possible
that over the next year, Congress will enact
changes to the tax code requiring higher-income
employees to include the cost of health benefits as
income (or limit the exclusion for the cost of health
benefits). The “trigger” for this change could be
any combination of income level (e.g., those with
incomes over $250,000) or the choice of plan (e.g.,
plans offering more benefits than the average plan
offered to employees or compared to some external
actuarial standard).
7) THERE WILL BE A NEW ACCOUNTING.
Over the next several months, Congress will turn
a blind eye to the growing federal deficit or pay
as you go. However, the sheer size of the federal
deficit will force Congress to return to a pay
as you go budgeting approach. In the past, the
Congressional Budget Office has been reluctant
to assign savings as a result of systemic changes,
such as preventive health. It is very possible that
the need to demonstrate savings in a pay as you go
environment will force Congress to allow what is
commonly called “dynamic scoring.”
8) THERE IS A BIG RISK. If the economic
downturn accelerates or lingers, and unemployment
rises to 10 percent or more, there will be a public
outcry for more dramatic action and the enactment
of more radical legislation, such as a national health
program and an unraveling of employment-based
health care benefits.
Public Programs
Before Congress turns its attention to employer-based
coverage, it will address public health care benefit
programs, such as Medicare and Medicaid. Congress
will quickly enact an expansion of SCHIP, and
increase the federal matching share (FMAP) of state
Medicaid programs. There is some reason to believe
that Congress and the new Administration will increase
FMAP for the states in return for an agreement from
the states to limit or cap annual increases in Medicaid
expenditures.
In addition, Congress will probably cut payments
to Medicare Advantage (MA) plans as part of the
early steps towards freeing federal funds for health
care reform. By some estimates, it costs the federal
government substantially more to allow a Medicare
beneficiary to enroll in a private health plan (MA)
compared to beneficiaries remaining in the publicly
run traditional “fee for service” program. Some
studies suggest that on average, allowing Medicare
beneficiaries to enroll in private health plans costs
the federal government 5 to 20 percent more. In all
likelihood, Congress will begin to reduce payments
to these private plans over a several year period.
Given the current economic downturn, Congress will
probably not make substantial cuts in payments to
most “brick and mortar” health care providers. Home
care providers, medical device suppliers and other
suppliers may see a reduction in payments. Congress
and the new Administration will also attempt to enact
a new method for reimbursing physicians for treating
the elderly.
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Public Policy and Law Alert
Opportunities for Business
1) T
HE NEED TO REMAIN COMPETITIVE
IN THE GLOBAL ECONOMY. Many
businesses have noted that in many countries, health
care benefit costs are not a direct cost to business
(health care benefit costs are a secondary cost as
part of a more generalized tax structure). In these
other countries, health care benefit costs are often
spread over a broader economic base. This has
made U.S. products and services more expensive
and less competitive in the global marketplace.
As the federal government struggles to reverse
the economic downturn, many businesses may
seek assistance in covering the cost of employee
health benefits.
2) THE NEED FOR COST CONTAINMENT.
For a number of reasons, the cost of health care
services continues to increase faster than the
general rate of inflation – or other business input
prices. The cost of health care services in this
country far exceeds the cost in other “developed”
countries, without any measurable difference
in medical outcomes, life expectancy or infant
mortality rates. Many health care economists point
to the very high profit margin of some health care
companies (often exceeding 30%) as one of the
causes of growing health care inflation. The current
economic downturn, coupled with the upcoming
health care reform debate, provides the business
community an opportunity to move policy makers
to address rising health care costs.
3) T
HE NEED TO ELIMINATE THE
UNINSURED TAX. The cost of providing
health care to the uninsured and underinsured is,
in many ways, a hidden tax on businesses in this
country. Oftentimes, these patients seek routine
care in expensive hospital emergency rooms.
Similarly, patients unable to access care for
relatively treatable minor problems end up needing
emergency care and hospitalization for avoidable
complications. Hospitals and other health care
providers shift the cost of treating these patients
onto the bills of patients covered by employmentbased health benefits. This problem will only
worsen as the number of newly unemployed and
newly uninsured increases over the next year.
4)T HE NEED TO CREATE A NEW
“PREVENTION” PARADIGM . Many
businesses view the cost of health care benefits as
simply another production cost or as an investment
to increase efficiency and productivity. Some
companies with large “legacy” health care benefit
costs view the current economic downturn and
sense of crisis as an opportunity to shed these
costs. However, many other companies view the
current economic downturn as an opportunity to
improve the health delivery system and to move
away from the current paradigm that provides
benefits to treat illness (“sickness”) rather than
wellness or prevention.
5) NEW TECHNOLOGIES. A number of studies
have suggested that the widespread adoption
of new diagnostic and treatment technologies
and drugs has substantially increased the cost
of health care services in this country. In most
instances, there is little or no effort to study the
cost or “health outcome” benefit of these new
products compared to existing products. The
economic slowdown, coupled with the upcoming
health care reform debate, gives “stakeholders” an
opportunity to require cost and medical outcome
benefit analysis.
6) H E A L T H
I N F O R M AT I O N
TECHNOLOGIES. The U.S. has been on
the verge of creating a uniform and secure health
information platform for the last eight years.
Our health care community has not yet crossed
the threshold because regulators, businesses
and providers have not been able to resolve
differences. Over the next six months, the new
Congress and Administration will move toward
explicitly requiring the implementation of new
health information technologies and systems. The
business community has an opportunity over the
next six month to influence and shape the nature
and scope of these new information technologies
and requirements.
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Public Policy and Law Alert
7) PERFORMANCE BASED MEASURES.
Many health policy analysts note that, although
the U.S. spends more on health care per patient,
medical outcomes in this country are no better than
outcomes in other “developed” countries. Over the
last several years, there has been a move toward
“pay for performance” or “value based” payments.
With the development of better health information
technologies, businesses will have an opportunity
to relate payments to outcomes and quality.
Timeline
Businesses need to become part of this debate as soon
as possible. While “macro” healthcare reforms may
take several years to enact, much of the legislation
Congress enacts over the next several months will have
far-reaching effects and will influence the shape of a
larger health care reform plan.
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