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Kennedy-Kassebaum and Alternative Health Care:
Reason to Worry

by Michael Tanner

September, 1996

The recently passed health insurance reform legislation, HR 3103, more commonly known as the Kennedy-Kassebaum bill, has a number of provisions that should be of concern to alternative health care providers.

1. The Portable Insurance Provisions

The major focus of the legislation is an attempt to make health insurance more portable for people who lose their jobs. Under the bill, an individual who has had insurance coverage for the previous 12 months can move from one job to another without being subject to preexisting condition exclusions. He cannot be denied coverage or charged higher premiums than a healthy person. Individuals who lose their jobs are also guaranteed the right to convert their previous group policy to individual coverage.

The portability concept underlying Kennedy-Kassebaum is seriously flawed. The notion of removing preexisting restriction exclusions is based on the faulty premise that insurers should have to sell fire insurance on a burning house. Ending preexisting condition exclusions has a worthy intent, expanding access to insurance for those with pre-existing conditions who find it difficult or impossible to purchase insurance under the current system. However, the reforms may have unintended consequences that will increase the cost of insurance and actually leave more people without insurance.

Insurance is a business of risk allocation in which the insurer receives payment in exchange for agreeing to cover the expense of certain risks. The cost and scope of coverage are determined by morbidity-mortality statistical analysis. To the degree insurers are prevented from basing their contracts on actuarial values, other policyholders will be forced to absorb the additional costs associated with covering high-risk individuals. Indeed, studies estimate that, while employers with high-risk employees would certainly notice improved access to coverage under proposed insurance reforms, overall premiums could increase substantially. While the sponsors of Kennedy-Kassebaum suggest the premium increase will be no more than 3-5 percent, other estimates indicate that for some small groups and individual policies, the increase could be as much as 100 percent or more.

Moreover, the bill's removal of restrictions on pre-existing conditions for individual policies is particularly troubling. Our employment-linked health insurance system presents a real problem. If you lose your job, you generally lose your health insurance. If you lost your employer-provided health insurance under Kennedy-Kassebaum, you would have the right to purchase an individual policy regardless of your health. However, most people who lose their jobs are not prepared to assume the high cost of individual insurance premiums. Healthy people will be likely to gamble--to take a chance and go without insurance during the few months of unemployment. However, sick people will almost certainly choose to purchase insurance. As a result, the insurance pool will become sicker and sicker, driving prices higher in an ever- increasing spiral.

2. The Anti-Fraud Provisions

The danger to alternative providers is that the increase in premiums will accelerate the push toward managed care, resulting in additional restrictions on the type of treatment that will be reimbursable under most health plans. However, such dangers are indirect.

There are several lesser known provisions that hold more direct threats for alternative health care providers. Most significant, the legislation would strengthen and expand federal "anti-fraud" enforcement efforts. Many of the anti-fraud provisions were lifted word-for-word from the abortive Clinton health care plan and would not only increase federal programs to combat Medicare and Medicaid fraud but would also expand federal authority over private commercial health insurance.

For example, the bill calls for the Departments of Justice and Health and Human Services to develop a plan to coordinate federal, state, and local programs investigating fraud and abuse in commercial health insurance. Both the Justice Department and the Health and Human Services Inspector General would also be empowered to conduct investigations, audits, and inspections involving the "delivery of and payment for health care in the United States."

Until now HHS has been restricted to investigations of Medicare and Medicaid fraud. The Justice Department has always had authority to pursue mail and wire fraud but has rarely exercised that power in the context of private health insurance plans.

Several federal agencies would receive additional funding to expand their anti-fraud efforts. HHS would receive $820 million over the next 7 years for anti-fraud efforts, while the Justice department would receive $330 million over seven years, mostly targeted toward hiring additional prosecutors. HHS plans to use the majority of its funding to establish an anti-fraud office in all 50 states and to expand its two-year old pilot program, Operation Restore Trust, targeting fraud in home health care, nursing home services, and durable medical equipment.

In addition, the FBI would receive $548 million over seven years to hire additional investigators. The Health Care Financing Administration (HCFA) would receive approximately $500 million per year to establish a new Medical Integrity Program. Altogether, anti-fraud programs will cost more than $5 billion over the next 7 years.

Of course, no one condones health care fraud. Anyone actually guilty of fraud should be severely punished. But the federal government's definition of fraud often hinges on its interpretation of "appropriate" medical care. Given the government's long-standing bias in favor of traditional allopathic medicine, it is likely that alternative health care providers could easily become targets of federal harassment or prosecution.

Beyond the general dangers of expanding federal authority to define and prosecute health care fraud, there are several specific provisions that are cause for additional concern.

3. The Informant and Fraud Prosecution Provisions

One of the most dangerous provisions would give financial rewards for informants who provide information leading to the collection of at least $100 in penalties. The bill also provides civil immunity to informants. This is an open invitation for abuse.

The bill establishes a Health Care Fraud and Abuse Trust Fund to accept gifts, criminal fines, civil monetary penalties, and forfeited property. The more zealous the prosecutor, the more money that will be available for prosecutions. This could quickly lead to the same type of abuses seen with other types of asset forfeiture provisions. Indeed, the legislation significantly expands asset forfeiture in health care fraud cases. Under the bill, "[t]he court, in imposing sentence on a person convicted of a Federal health care offense, shall order the person to forfeit property, real or personal, that constitutes or is derived, directly or indirectly, from gross proceeds traceable to the commission of the offense."

The bill includes draconian fraud and abuse provisions that make criminal penalties for miscoding a Medicare form tougher than penalties for robbery or rape. Civil monetary penalties are also expanded, increased from $2,000 to $10,000 per item or service. In what could be a particular threat to alternative health care, new civil penalties are created for billing for "a medically unnecessary procedure."

Fortunately, in a last minute victory for health freedom, language was added to the bill requiring that "intent to defraud" be proved before penalties can be imposed. In a provision opposed by the Clinton administration, the bill now would allow prosecution for fraud only if the provider "knowingly" presents a claim that the person "knows or should know" is fraudulent. Early versions of the bill did not require any proof of an intent to defraud, but an outcry from physician groups and others forced the change.

In what seems to abrogate 4th and 5th Amendment protections, failure to provide information to a criminal investigator carries a five-year prison term. In addition, the bill says that "[i]n any investigation relating to any act or activity involving a Federal health care offense, . . . [the Attorney General] may require the production of ANY records that MAY be relevant." The person who supplies patient records in response to such a subpoena "shall not be liable in any court of any State or the United States to any consumer or other person for such production or for nondisclosure of that production to the customer."

Health information so produced could be used against the patient if "the action or investigation arises out of and is directly related to the receipt of health care or payment for health care." These provisions could severely compromise patient privacy and could empower the federal government to use medical records to prosecute almost anybody.

4. The Patient File Provisions

There are other reasons to be concerned about health privacy. The legislation could compromise patient privacy by establishing a central, government-controlled data base for medical records. The secretary of health and human services is directed to establish a system of unique health identification numbers for every health care provider, patient, and health plan. These identification numbers will make it possible to track every individual patient through every encounter with the health care system.

The National Commission on Vital and Health Statistics is supposed to advise the secretary on ways to ensure patient privacy. However the threat of abuse is enormous. Every health care provider, including alternative providers, will be required to register with the federal government to receive his or her identification number. Patients will know that every diagnosis and every treatment will be on file, accessible by insurers or government agencies.

A separate data bank is established for records of health care fraud and abuse, including mere allegations of abuse.

5. Other Provisions

The bill does contain one small bit of good news for alternative care providers. The bill would allow a pilot program experimenting with a limited number of medical savings accounts. Because money in medical savings accounts could be used for any health care expense deemed reimbursable under IRS rules, patients would be able to use these funds to pay for many alternative treatments not covered under most traditional insurance policies.

Unfortunately, the MSA experiment will be an extremely small one, limited to only 750,000 policies. In addition, only businesses with 50 or fewer employees or the self-employed will be eligible to participate.

Other provisions in the bill would increase the health insurance deduction for the self-employed from 30 percent of premiums to 80 percent by 2006; allow a tax deduction for long-term care expenses, including premiums for long-term care insurance; and allow life insurers to offer accelerated death benefits to terminally ill policyholders.

Copyright © 1996. All rights reserved. Reprint permission obtained from Emord & Associates. This report is an excerpt from Emord & Associates' FDA REGULATION.