On Thursday, September 9, the House Committee on Energy and Commerce (E&C) released the legislation that they intend to mark up starting on Monday, September 13th. The legislation is sweeping and touches many aspects of American life. House Speaker Nancy Pelosi is hopeful that the House can pass this legislation, along with other sweeping legislation passed by several other House committees, by the end of the month.
The audacity of this effort—an attempt to pass hundreds of big-government proposals with an extremely limited opportunity for public debate—may be unprecedented. The health care provisions would substantially increase federal government control over America’s health sector with broad new spending, tax, and regulatory programs. These proposals would create many problems, including punishing life-saving medical innovation, exacerbating Medicare’s financial problems, lavishing hundreds of billions of additional taxpayer dollars on health insurance companies, and creating a variety of slush funds for special interest groups to pillage. Below are a dozen particularly bad problems.
1) Reducing Pharmaceutical Innovation and Lowering the Quality of Americans’ Lives
The E&C proposal would require the Secretary of Health and Human Services “to determine the maximum fair price” of many pharmaceuticals. These prices would not simply apply to government programs but would also impact private coverage. Empowering the Secretary of HHS to set the prices of prescription drugs will reduce incentives for innovation and will lead to fewer lifesaving and life-enhancing medications. The Secretary of HHS does not possess the information, nor have the right incentives, to properly set pharmaceutical prices. If this becomes law, prices will be set by relative lobbying power of interest groups, and the market’s valuable, natural ability to best meet unmet needs will be thwarted.
In 2019, the White House Council of Economic Advisers estimated that providing the HHS Secretary with such sweeping authorities will reduce the number of new treatments by one-third over ten years. According to the CEA, this would lower American life expectancy by about four months and have total economic costs that dwarf any benefits from lower prices. The most negatively affected would be vulnerable populations with serious health conditions. Remarkably, the E&C proposal would punish the American innovation that produced the vaccines in record time to help rescue the world from COVID-19.
2) Artificial Limits on Price Increases Will Lead to Shortages
The E&C proposal would require drug manufacturers which increase their prices faster than inflation to pay back that excess amount to the federal government. Fundamentally, price increases can be societally beneficial if demand rises or if supply contracts. The price increases serve to get products to people who need them most and to incentivize other suppliers to bring additional product or suitable alternatives to market. Restricting price increases will impede these beneficial market responses and ultimately harm patients.
3) Drug Prices Have Actually Been Falling, Unlike the Significant Inflation Characterizing the Rest of Economy
Federal fiscal policy, with massive increases in government spending and debt, is contributing to the significant rise in inflation. The Labor Department reported that inflation was 5.4 percent from July 2020 to July 2021. While inflation is high, one significant area where prices are falling is prescription drugs. According to the Labor Department, prescription drug prices fell by 2.5 percent during that same period—which is somewhat remarkable given the general rise in prices. Declining drug prices are a trend that has persisted for several years, with significant credit due to the Trump administration’s prioritization of new generics and using competition to lower prices.
Drug price inflation versus overall inflation
Source: Bureau of Labor Statistics.
4) Expanding Medicare is Irresponsible Given the Program’s Deteriorating Finances
Last week, the Medicare trustees—all Biden administration appointees—issued the annual Medicare trustees report. The report is full of bad news, such as “Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation. Such legislation should be enacted sooner rather than later to minimize the impact on beneficiaries, providers, and taxpayers.” Among the alarming findings, the Part A trust fund that finances hospital-based care is set to be bankrupt in 2026. At that point, Medicare providers will face a nine-percent payment cut, which will hurt enrollees and their access to services.
Given Medicare’s deteriorating finances, the E&C proposal to add dental, vision, and hearing benefits to standard Medicare, which could cost $60 billion a year when phased in, is completely irresponsible. Policymakers should be shoring up Medicare to preserve the program for those who are relying upon it, rather than adding to its financial problems and threatening future enrollees’ access to services.
5) Seniors Already Have Access to Dental, Hearing, and Vision Benefit Through Medicare Advantage
In addition to the burden that expanding standard Medicare has on workers and future generations, it is also unnecessary. Seniors who value dental, vision, and hearing benefits can already purchase a Medicare Advantage plan that covers these benefits. Since Medicare Advantage is more efficient than traditional Medicare, these plans often offer these added benefits at no extra cost. In fact, 89 percent of seniors with Medicare Advantage already have preventive dental coverage.
6) Large Corporate Welfare for Health Insurers
Obamacare delivered massive subsidies to health insurance companies, both those who offered coverage in the exchanges as well as those who participated in the law’s Medicaid expansion. As a result of Obamacare, insurance company profits and stock prices soared, more than doubling the growth of the S&P 500 from 2014 through 2018.
Rather than empowering consumers to decide how to best pay for their health care needs, the E&C proposal would result in hundreds of billions of additional taxpayer subsidies directed straight to insurance company coffers. First, the proposal expands eligibility for premium subsidies to individuals with incomes below 100% of the poverty line from 2022-2024. Second, the proposal creates a new Medicaid program apparently run by insurance companies selected by the HHS Secretary in states that did not adopt Obamacare’s Medicaid expansion. Third, the proposal creates a new reinsurance program to pay insurers for the expense of people with high-cost claims. All these subsidies empower the government and insurance company bureaucracies and effectively limit consumer options to only plans approved by the government.
7) Improper Medicaid Spending Already Exceeds $100 Billion Annually
As mentioned above, the E&C proposal would create a Medicaid program in non-Medicaid expansion states. A November 2020 report by the Center for Medicare and Medicaid Services found that improper spending in the Medicaid program exceeded $86 billion annually with an improper payment rate above 21%. Had all states been fully audited, the report would have shown an improper payment rate exceeding 25%, with annual improper payments above $100 billion. Most of these improper payments are due to enrollment of people who either are ineligible for benefits or whose eligibility was not properly determined. These estimates were prepared before federal COVID-19 relief legislation prohibited states from receiving higher matching rates if they removed ineligible people from their rolls. Medicaid is already far too large for the government to properly manage, and thus already harms both taxpayers and those truly in need.
8) Medicaid Needs Reform, Not Expansion
Eight years into Obamacare’s Medicaid expansion, we know this model fails to help lower-income people access care and improve their health. During the first three years of the expansion, mortality trends worsened in states that expanded Medicaid relative to non-expansion states. Medicaid expansion also led to a surge in emergency room use, much slower ambulance response times, and an increase in opioid abuse.
A study by Harvard, MIT, and Dartmouth economists found that the actual value of the Medicaid program to recipients is only about a quarter of its cost. The big winners from Medicaid expansion are insurance companies that manage the benefit and hospitals that replace charity care with taxpayer payments. Writing recently in the New York Times
9) Requiring States to Maintain Their Medicaid Expansion Is Likely Unconstitutional
The proposed Medicaid expansion program in non-Medicaid expansion states presents expansion states with an incentive to drop their expansion. By dropping their expansion, they would save their share of the cost of the expansion population. People with income below 100% of the poverty line would qualify for the new program and people with income above that level would receive premium subsidies in the exchanges. States would not have to contribute to subsidies for either group. This might induce states that have expanded Medicaid to unwind their expansions. That would be politically problematic for the congressional majority, so they decided to impose a requirement that states maintain their expansions. This requirement is likely unconstitutional. In NFIB v. Sebelius, the U.S. Supreme Court held that the federal government could not compel states to expand Medicaid by threatening their federal Medicaid funding if they did not adopt the expansion. Therefore, states will likely be able to drop their Medicaid expansion and will not face penalty. And such action will increase the total cost of the program.
10) The Home and Community Based Service Program is Designed for Workers, not People in Need
Democratic leaders have largely framed the home and community-based service program as a jobs program. The Wall Street Journal suggested that this is a political effort to increase wages for workers who can be unionized and become an added source of campaign contributions. President Biden originally called for a $400 billion slush fund, but the E&C proposal cost is projected at about half of that, with financing through Medicaid. If the goal is to help those who are truly disadvantaged, the program should directly give them the resources and allow them to choose their care.
11) Massively Increasing Medicaid is the Worst Way to Provide States with Additional Funds
The home and community-based service program would be funded with a permanent seven percentage point increase to the percentage that Washington already reimburses state Medicaid expenditures. Under normal economic conditions, Washington finances about 60% of state Medicaid expenditures, with the federal reimbursement being larger in states with lower per capita income. This would increase the percentage that Washington finances of state Medicaid spending to about 67% on average. Such a policy change would significantly increase the already substantial improper Medicaid spending, as states would even have less incentive to ensure Medicaid spending is appropriate. It would pass more of the responsibility from states, which are currently awash in cash, to the federal government, which is running massive budget deficits. Moreover, a flat, across-the-board increase in the federal Medicaid reimbursement percentage helps richer states that have created profligate Medicaid programs at the expense of poorer states and states with more efficient Medicaid programs.
12) Creation of Giant Slush Funds
The E&C proposal contains tens of billions of dollars in slush funds for HHS to distribute, which will likely incite a lobbying bonanza. While many of these grants, programs, and funding appear to have noble purposes, Congress should take time and debate the merit of such funding and ensure a depoliticized process for the awarding any such funds.
