BNA Pension and Benefits Blog

Denial of States

While I wasn't paying much attention, on July 19 the U.S. Supreme Court entered a short order, without opinion, denying Texas and several other would-be co-plaintiff states leave to file a complaint challenging the constitutionality of part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). Texas v. Leavitt, No. 135 Orig. (U.S.) (15 HLR 735, 6/22/06). The part of the MMA under attack is embedded in the program familiar to even the lay public, and more so to the elderly, as Part D of Medicare.

What was (and still remains) in issue is a common so-called "clawback" provision -- in Part D, one requiring the States to pay to the federal government the money that they now save under their Medicaid programs because of Medicare's funding the drug benefit costs of "dual [Medicare/Medicaid] eligibles" which would otherwise remain the States' burden.

The fiscal stakes are enormous. We are talking, of course, about a prescription drug program which, before it became law, carried a 10-year (2004-2013) estimated cost of almost $400 billion.  Afterward, in a well publicized flap, involving accusations that the then head of the CMMS had suppressed higher cost estimates of CMMS's own actuaries, Congress bitched and moaned about having been deliberately misled, and some members who had supported the bill openly declared they would have voted against it, in numbers possibly sufficient to defeat the bill, had the higher cost projection been revealed to them.

With the passage of the lead time for implementation on January 1 of this year, and considering drug price trends generally during this period, later 10-year (2006-2015) cost estimates for Part D rose in stages to a federal number of $1 trillion or more -- gross before the estimatedl hundreds of billions which the States would be billed and either pay or have offset against receivables from Washington under the clawback provisions in question.

In the context of these magnitudes up in the stratosphere, announcements of fresh estimates of other cost savings in the billions of dollars have passed for very good news. Thus, early this year, the CMS took pride in the claimed results of private-market competition in holding down drug costs, dropping previously expected spending in 2004 and 2005 and bringing the expected net cost to the federal government in 2006 to be $30.5 billion, 20% less than earlier estimated. By the new reckoning, the estimated 10-year cost -- presumably, now dealing with the less scary net numbers after clawbacks -- has been lowered from $737 billion to $678 billion, a decrease of 8%.  (In navigating through these numbers, I absolve from blame any misunderstandings on my part of the factually detailed attention Robert Pear of the New York Times has especially given to Part D program implementation and finance.  See especially Robert Pear, In Medicare Maze, Some Get Tangled in Two Drug Plans, N.Y. Times, 3/01/06.)

However, the reality is that dollar numbers that cease to evoke dread in Washington can bring on panic attacks in state capitols. In a declaration filed in the HHS Secretary's opposition brief to the States' initial motion to file in Texas v. Leavitt, a (now) CMS actuary laid out estimates making clear the size of the chunks of change subject to clawbacks against the plaintiff States.  Pursuant to the applicable law in 42 U.S.C. § 1396u-5(c), he calculated for the lead plaintiff, Texas, its 2006 liability of $261 million to send back to the federal government from the roughly $10.3 billion the State was estimated to receive this year in federal Medicaid payments -- in effect, an "adjustment" of 2.5% from gross to net.

From a federal advocate's standpoint, advising the Supreme Court that the State is complaining about having to repay HHS "only" 2.5% of the more than $10 billion of Medicaid assistance HHS sends to Austin is to make a telling point that the case merits are not substantial enough for the Court to deviate from its more routine practice of letting its non-exclusive original jurisdiction cases start out in the federal trial courts. (Beyond that, Texas is far from the threatened "irreparable injury" to the State that it pled as part of a preliminary injunction motion it filed with its proffered complaint.) From the perspective of a State governor and its chief fiscal officers, having to budget for and ask the State legislature to appropriate $261 million, or roughly a quarter-billion more than it otherwise would, to give Washington relief from perceived excesses of federally conceived and created social programs is to give offense to some attributes of state "sovereignty": the state's reserved powers under the Tenth Amendment as well as other "federalism" principles derived from it.

Go to the poorest State among Texas's co-plaintiffs, Maine, and the dollars involved invite the same gut reaction.  HHS is slated to render Maine $1.58 billion of Medicaid program aid this year, from which it is estimated it will recoup, one way or the other, via payment or offset, $39 million under the clawback rule. That is a 2.5% adjustment from gross to net, the same as in Texas.  Again, though, another $39 million to be raised from Maine taxpayers under compulsion of federal law has a  different feel to it in Augusta than in D.C.

The Supreme Court's orders of June 19 disposing of the case had an odd structure to them. First, the Court denied the plaintiff States' motion to leave to file its bill of complaint.  Second, after so declining to take jurisdiction, the Court then denied the States' motion for a preliminary injunction, as opposed to dismissing it, outright or as moot. So was the matter disposed of, seemingly with short shrift, as the Court's conference on the case (and dozens of others) was held but days earlier. Can the Court's denial of the States' motion for preliminary injunction be seen as a form of message to the lower courts that the case, if refiled, does not merit any preliminary relief to stop a program as large and meaningful as Part D of Medicare is to Medicare's 41 million enrollees and 6 million fully-covered "dual eligibles"?  Legally speaking, certainly not.

However, the plaintiff States, and their friends in other States which filed supporting amici briefs in the Supreme Court, have to date not tipped their hand on whether and when at least some of them will repair to, say, the District Court in D.C. to attack the constitutionality of the clawback provisions anew, on the same or added grounds they invoked in the High Court. As recently as yesterday (October 5), your blogger spoke with a reliable official source in Austin, who gave every indication that deliberations among certain of the States were still taking place and an upshot is not close at hand.

PPA Health Plan Relief

One of the more obscure provisions of the Pension Protection Act is Section 843, which amends IRC §419A(c) by adding new subsection (6). The new provision permits a health benefit plan sponsored by a “bona fide association” (as defined in 42 U.S.C. 300gg-91(d)(3)) to maintain a reserve of up to 35% of current operating costs. Prior to the amendment no reserve was permitted.

So, is this just another special interest goodie that slipped in under the radar? Not really. It actually provides much needed relief for many small business association health programs. Here’s the reason why. Under IRC §419A annual deductions for contributions to funded health benefit plans (other than retiree medical plans) are limited to “qualified costs,” which are defined as current claims and related administration expenses for the year, plus a reasonable cost for “run out” claims, sometimes referred to as IBNR - incurred, but not reported claims. The run out cost must either be actuarially determined or limited to a percentage of current claims, as set by statute. An exception to the annual deduction limitation is available to “10 or more employer” plans. (IRC §419A(f)(6)). However, as the statute states and the final regulations issued by the IRS and Treasury in 2003 (§1.419A(f)(6)-1) clearly explain, a plan which “experience rates” claims or costs cannot be a 10 or more employer plan. Many small business associations maintain health benefit programs for their members, some have for 50 years or more. These programs typically allow participating members to obtain health care for their employees at reduced cost through a group purchasing or funding arrangement. In order to obtain the lowest rates these programs often provide health coverage under a tiered premium arrangement, which is then made available to members from year to year according to prior usage - a clear experience rating arrangement under the final regulations.

As many who are familiar with this area know, one of the primary purposes of the (f)(6) regulations was to curb welfare plan abuses, particularly in the area of life insurance (death benefits) and severance pay plans. Unfortunately, the wide net cast by the regulations also put the association health plans in a difficult position: either they operated at break-even or at a loss each year (which created significant concerns for the plan fiduciaries under ERISA’s prudent man standard) or they had to inform their participating members that portions of their annual heath premiums paid to the group plan were non-deductible. A number of the affected associations approached their congressional representatives about the problem, and with the help of Treasury, hammered out the statutory language which is now part of the PPA. The new law will permit bona fide association health plans that experience rate their members to maintain a reserve of slightly more than 4 months’ annual premiums, enough to help these plans keep a cushion available for contingencies, while retaining competitive lower cost and fully deductible health benefits for their members. (Under the Public Health Service Act a “bona fide association” must (A) have been actively in existence for at least 5 years; (B) have been formed and maintained in good faith for purposes other than obtaining insurance; (C) not condition association membership or health insurance coverage on any health status-related factor or offer coverage to non-members; and (D) meet any additional State law requirements.

Kudos to Senators Hatch, Grassley, Baucus, Snowe and Bennett, who all worked to get Section 843 included in the PPA. Of course, Senator Snowe has long championed the right of small business associations to provide low cost health care to their member employers. Does this new provision signal possible help for her much-beleaguered proposed legislation which she touts as “giving small businesses greater access to medical care for their employees"? We will see. jeffclayton@cnmlaw.com (Submitted by my partner, W. Waldan Lloyd)