Legislative and Public Policy Advisory

LEGISLATIVE AND PUBLIC POLICY ADVISORY

December 2004

ALSTON & BIRD’S EYE VIEW ON THE 2005 HEALTH POLICY AGENDA

OVERVIEW

The health policy agenda for the 109th Congress could be more sweeping than that of the 108th, which created new entitlements in federal health care programs with the pas- sage of the Medicare Modernization Act in 2003 (MMA). After a sleeper year in 2004, when Congress focused on taxes, intelligence reform and the presidential election, health policy priorities are poised to take center stage as early as March of 2005, when budget-writers consider Medicare spending in the wider context of deficit reduction.

2004 was anything but a sleeper for the Centers for Medicare and Medicaid Services (CMS), however. The agency published two major proposed rules implementing both the prescription drug benefit and the Medicare Advantage program. It also published important rules setting rates in the traditional fee-for-service program, including physician fees, updates to dialysis centers, hospital inpatient and outpatient departments, and covered prescription drugs consistent with changes in the MMA. 2005 will continue to produce more rulemakings and policy guidance as the agency girds for full implementation of the MMA in January of 2006.

The discussion below focuses on the political and policy environment in 2005 on both sides of Capitol Hill and in the Executive Branch, and focuses on the likely events and outcomes that will shape the health policy agenda for the 109th Congress. The political composition of the major policymaking bodies will not be unfamiliar; membership on key committees, with the exception of the Senate Finance Committee where three Democrats are departing, will remain stable. In the House, it is expected that Rep. Tom Reynolds (R-NY) will reclaim his seat on the Ways and Means Committee, and that incoming freshman Rep. Bobby Jindal (R-LA) will land a seat on the Energy and Com- merce Committee. The Finance Committee minority is losing three longtime members – Sens. Tom Daschle (D-SD), Bob Graham (D-FL), and John Breaux (D-LA). Sens. Chuck Schumer (D-NY) and Ron Wyden (D-OR) are slated to become the newest minority members of the Committee. The majority is losing only one seat – that of Sen. Don Nickles (R-OK) and Sen. Mike Crapo (R-ID) is likely to claim it.

These committees in particular and Congress in general are likely to confront action in three areas: (1) Medicare Payment Policy; (2) Health Care Costs and the Uninsured; and (3) Drug Regulation Issues.

www.alston.com 1 MEDICARE PAYMENT POLICY

Medicare is spending over $108 billion on hospital inpatient services annually and approximately $50 billion on physician services. Beginning in 2006, the full cost of the $400 billion outpatient prescription drug program will begin to impact the budget. (The Congressional Budget Office believes that the first year cost of the program will come to $27.5 billion; substantial increases are forecasted for the out-years.) And with little appetite for changing the bill’s basic benefits in either Congress or the Executive Branch, pressure to slow spending growth in other areas, most notably the traditional fee-for-service program, is likely to build as deficit reduction work gets underway.

The rough outlines of that battle are already taking shape. Fiscal conservatives in Congress said in November that they would push to cut payments to hospitals and other providers who serve the Medicare program. Conservative members such as the incoming Budget Committee Chairman Sen. Judd Gregg (R-NH) and Senators-elect Jim DeMint (R-SC) and Tom Coburn (R-OK) are said to be looking toward the Medicare and Medicaid program to help drive down the federal deficit. Taking a page from the famous bank robber Willie Sutton who, when asked why he robbed banks, said “because that’s where the money is,” Bill Hoagland, top budget aide to Senate Majority Leader Bill Frist told reporters in November that any serious deficit reduction package would have to look at Medicare spending, “only because you go where the money is.” The last time Congress got down to serious deficit reduction, approximately $122 billion in spending from the Medicare program was slashed in the 1997 Balanced Budget Act.

Who wins and who loses in 2005 is unknown at this time, but there are some likely candidates for cuts. Still, all providers and suppliers should be ready for changes. What is known is that any new spending proposals will need to be fully offset, and that offsets will need to be free from controversy to survive scrutiny.

Hospitals can expect, as they often do, to fight for a full market basket increase. The MMA provided a full market basket update only to facilities that submitted basic data on only a few quality indicators. Congress could conceivably up the ante this year and demand more in the way of data submission in exchange for a full update, reducing the number of providers that qualify for the full increase. Whatever the scenario, inpatient hospital services comprise the biggest “pot” among Medicare dollars. As such, they are positioned, as always, to take the biggest hit.

Physician services pose a significant problem to budget writers and authorizers. The current Sustainable Growth Rate (SGR) formula will require reductions in physician payments by about 5 percent each year from 2006 to 2012, but there is no consensus on how to avert these deep cuts. The MMA “punted” and added 1.5 percent increases in update revisions for 2004 and 2005 only – leaving the larger, more expensive policy decision making to another day. This year, one early indicator of an outcome will be the budget resolution itself and how much leeway it gives members to fix the problem. The cost of fixing the problem outright is high, ranging from $40-95 billion over 10 years, 2 depending on the option. The cheapest option would be to extend through 2006 the 1.5% update Congress gave physicians in the MMA – a policy that costs about $2 billion, but delays a long-term solution. If this scenario comes to pass, a permanent SGR fix is likely to be postponed for at least another year. And the likelihood of significant changes in 2006 – another election year – seems remote.

With respect to other facets of the program, certain fee schedules and updates frozen or reduced in the MMA may be subject to still more scrutiny as Congress looks for additional savings. Other areas that are likely to draw attention may include durable medical equipment, clinical laboratory fees, ambulatory surgery centers, home health and hospice. All of these were the subject of budget battles in the MMA. Skilled nursing facilities, largely left untouched in the MMA, may face review, as may others in the post-accute care community. Basic policy changes to Parts A and B, including the Graduate Medical Education program, the Indirect Medical Education adjustment and the Disproportionate Share Hospital program, each of which costs the Medicare program billions each year, may be closely examined as well. And once all of the regulations for MMA implementation are final, look for stakeholders – and quite possibly CMS itself -- to ask Congress for a “MMA Technicals” bill to resolve any “unintended consequences” of the statute. Conventional wisdom is that such a bill may be possible but is unlikely to receive serious consideration until late in the year, and only then when it is truly budget neutral and possible to place it into “must pass” legislation.

HEALTH CARE COSTS AND THE UNINSURED

Although it never rose to the top of campaign talking points, the rising cost of private health care coverage and the increase in the number of those living without health insurance are issues likely to surface in 2005. However, broad-based reform will probably give way to smaller, incremental system changes in the deficit reduction environment.

For the Republican majority, policies that make Health Savings Accounts (HSAs) more accessible and affordable for a broader population are likely to gain traction. The President has proposed making the cost of premiums paid on High Deductible Health Plans (HDHPs), which accompany HSAs, fully tax deductible. The President has also proposed a tax credit for low-income families and individuals to “seed” the HSA itself. In addition, the President proposed insurance market reforms that allow for the creation of Association Health Plans (AHPs) and the development of a cross-state, nationwide marketplace for insurance, allowing individuals and families to purchase the most affordable coverage they can find, even if the carrier is based in another state.

In response, Democrats are likely to seek Medicaid or S-CHIP expansions, either broadly or incrementally, that aim to reduce the ranks of the uninsured. On Medicaid issues, House Commerce Committee Chairman Joe Barton (R-TX) will wield significant influence and will likely resist any coverage expansions that do not come with offsetting cost reductions. Chairman Barton may seek further Medicaid reforms, as well. Senator 3 John Kerry (D-MA) has pledged to introduce a scaled-back version of his “Congres- sional Health Care Plan,” more targeted to covering children, at some point early in the year. Renewed talk of a federal reinsurance mechanism for employer-sponsored insurance spending over a threshold amount – proposed by Kerry in his presidential race and embraced by some moderates on the Hill and by some in the employer community – is likely to be part of the debate over cost and access, too.

Finally, Republicans are likely to advance – or simply push for votes on – medical liability reform. While medical liability reform passed relatively easily in the House, the question remains as to whether the additional handful of seats in the Senate gained by Republicans will be enough to push the bill over the top. The early guess is that without some changes in the political landscape or substantive changes in the bill, there may not be enough votes to avoid a filibuster. And while class action and asbestos litiga- tion reform are likely to precede it, votes on medical liability reform are likely to focus on the overall impact of medical malpractice on the cost of coverage.

DRUG REGULATION ISSUES

Recent months have shown increased congressional interest in Food and Drug Admin- istration (FDA) oversight that is not likely to recede in 2005. Concerns over the impact of certain antidepressants on teenagers and the alleged lack of careful scrutiny of new drug applications at FDA have been raised by members in both bodies. But by far the loudest cries are coming from Finance Committee Chairman Chuck Grassley (R-IA), who opened up the lame duck session with a full day of hearings on the recall of Vioxx and the culture of the FDA, which witnesses alleged was too quick to clear products. Chairman Grassley’s oversight and investigation is likely to continue next year. Incom- ing HELP Committee Chairman Mike Enzi (R-WY), who will maintain jurisdiction over the agency formally, is also likely to undertake his own oversight of the FDA.

Also likely to continue is congressional debate over the importation of lower-priced prescription drugs from Canada and beyond. Congress has historically shied away from taking action other than to commission studies and to charge the Department of Health and Human Services with exploring options for the safe transmission of prescription drugs from Canadian pharmacies to the United States. To date, no agency has put forth a plan for ensuring the safety of drugs re-imported from Canada. But political pressure may mount for something more this year, as more localities, despite the prohibition, take it upon themselves to purchase products from Canadian wholesalers and pharmacies. In particular, Senator Grassley is planning to introduce legislation that would allow consumers and others to import drugs from Canada and other countries – a policy he sees as a free trade issue, but concerns in the Senate leadership are likely to remain.

4 CONCLUSION

The health policy agenda for the 109th Congress is likely to begin early as budget writers get down to business in February. Both the fate of changes to Medicare payment policy and action on the uninsured will in large measure be tied to what the budget resolution ultimately includes – or doesn’t. With physicians, hospitals and nursing homes all requesting that their payments remain constant or increase, and the need to find savings for significant deficit reduction in an environment in which Social Security reform is a top agenda item, it becomes essentially a fiscal “Perfect Storm” as legisla- tors grapple with many tough issues and few easy solutions in the face of dozens of competing demands. And with concerns over drug pricing and drug safety rising to the top of Congressional attention, especially in the context of confirmation hearings for Health and Human Services nominee Mike Leavitt early in the year, action is not likely to be slow to get going.

5 This Legislative and Public Policy Advisory is published by Alston & Bird to provide a summary of significant developments to out clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. The material may also be considered advertising under the applicable court rules. If you have any questions or would like additional information, please contact your Alston & Bird attorney or any of the following who prepared this advisory:

Colin T. Roskey 202-756-3436 [email protected]

Thomas M. Boyd 202-756-3372 [email protected]

Sharon D. Brooks 202-756-3391 [email protected]

Jennifer L. Butler 202-756-3326 [email protected]

Erin L. Darling 202-756-5581 [email protected]

Bob Dole ATLANTA One Atlantic Center 202-654-4848 1201 West Peachtree Street Atlanta, GA 30309-3424 [email protected] 404-881-7000

Peter M. Kazon CHARLOTTE Bank of America Plaza 202-756-3334 101 South Tryon Street Suite 4000 [email protected] Charlotte, NC 28280-4000 704-444-1000

Marc J. Scheineson NEW YORK 202-756-3465 90 Park Avenue New York, NY 10016-1387 [email protected] 212-210-9400

RESEARCH TRIANGLE Thomas A. Scully 3201 Beechleaf Court 202-756-3459 Suite 600 Raleigh, NC 27604-1062 [email protected] 919-862-2200

WASHINGTON, D.C. If you would like to receive future Legislative and Public Policy Advisories electronically, please 601 Pennsylvania Avenue, N.W. North Building, 10th Floor forward your contact information including e-mail address to [email protected] Washington, D.C. 20004-2601 m. Be sure to put “subscribe” in the subject line. 202-756-3300