Tag Archives: Sustainable Growth Rate

A Fiscally Irresponsible Bill

Last week the Wall Street Journal, in endorsing House Republicans’ American Health Care Act, highlighted the legislation’s “fiscal bonus.” Yes, the bill’s Medicaid reforms warrant praise as a good effort to control entitlement spending. But that meritorious effort notwithstanding, the bill contains numerous structural flaws, with potentially more on the way, that could bust budgets for decades to come.

Some of the same leaders decrying or explaining away Congressional Budget Office scores showing large coverage losses due to the bill have proved far too willing to take the bill’s supposed deficit savings at face value. But a good CBO score doesn’t necessarily mean legislation will reduce the deficit; instead, it means that lawmakers and staff have worked hard to achieve a good CBO score.

CBO scores have inherent limitations — notably, the discipline (or lack thereof) on the part of lawmakers to adhere to a bill’s parameters. Two years ago this month, the Wall Street Journal endorsed a Medicare “doc fix” bill that increased the deficit by more than $140 billion in its first decade alone. In doing so, the editorial page argued that Congress’ “cycle[s] of fiscal deception” required a return to “honest budgeting,” stopping budget games by making spending increases more transparent.

Given this history, one question naturally follows: Does the American Health Care Act engage in similar cycles of fiscal deception likely to bust future budgets? Many signs point to yes. First, the bill expands access to Obamacare’s subsidy regime for calendar years 2018 and 2019. CBO believes the bill will reduce entitlement spending only slightly in its first few fiscal years — by $29 billion next year, and $42 billion the following — as the individual mandate’s repeal will cause some to drop coverage.

But in fiscal year 2020 — when the Obamacare entitlements would end and the new tax credit would begin — the bill assumes a massive $100 billion net reduction in entitlement spending. Net entitlement spending would fall still further, to $137 billion in fiscal year 2021, which begins on October 1, 2020, mere weeks before the presidential election.

With the bill’s major “cliff” in entitlement spending coming in a year divisible by four, it’s fair for conservatives to question whether these reductions will ever go into effect, and the promised deficit reduction will ever be achieved. If the “transition” provisions end up extended in perpetuity, conservatives will end up with “Obamacare Max” — an expanded Obamacare subsidy regime available to millions more individuals.

Second, the bill does not even attempt to undo the fraudulent entitlement accounting created by Obamacare. Section 223 of the reconciliation measure passed in January 2016 transferred $379.3 billion of that bill’s deficit savings back to the Medicare trust fund. That provision represented a recognition that, as vice presidential candidate Paul Ryan said on the campaign trail back in August 2012, “President [Obama] took $716 billion from the Medicare program—he raided it—to pay for Obamacare.” Not only does Speaker Ryan’s bill not attempt to make Medicare whole from the Obamacare “raid,” the managers amendment released Monday evening consumed much of the bill’s supposed savings.

Third, while conservatives have focused on the bill’s tax credits as a new entitlement, the measure effectively creates a second new entitlement, this one for insurers. CBO’s estimate of possible premium reductions by 2026 hinged in no small part on creation of a “Patient and State Stability Fund,” and use of grants from the fund to subsidize insurers’ high-cost patients. However, the bill stops federal payments to the “Stability Fund” in 2026—and therefore the score does not take into consideration that this $10-15 billion annual bailout fund for health insurers could become permanent.

Fourth, reports suggest that House lawmakers are relying upon a bipartisan group in the Senate to repeal outright Obamacare’s “Cadillac tax” (delayed until 2026 in the most recent bill), which would worsen deficits in future decades. Leadership sources pushing this move would then argue that the bill blows a hole in the budget not because it spends more money, but because it reduces revenue.

However, the 2016 reconciliation bill repealed all of Obamacare’s tax increases and its new entitlements, while leaving the deficit virtually unchanged over the next 50 years. By contrast, if lawmakers create two entitlements — the new tax credit regime and the “Stability Fund” — while also repealing the “Cadillac tax,” they will create a fiscal hole likely to reach into the trillions. To borrow a phrase, the American Health Care Act doesn’t have a revenue problem, it has a spending problem.

Budgetary “out-years” gimmicks brought us the Medicare “doc fix” mess in the first place, which should embolden conservatives to recognize fiscal chicanery and legerdemain when they see it.

Positive Medicaid reforms notwithstanding, the structure on which the American Health Care Act is based does fiscal responsibility a disservice. A conservative-controlled Congress can and should do better.

This post was originally published at the Washington Examiner.

“Doc Fix” Bill Makes Things Worse

Proponents of the “doc fix” legislation the House passed before Congress’s Easter recess have argued that it would permanently solve the perennial issue of physician reimbursements in Medicare. But an analysis by Medicare’s nonpartisan actuary all but cautions: “Not so fast, my friends!

The estimate of the legislation’s long-term impacts by Medicare’s chief actuary is sober reading. The legislation provides for a bonus pool that physicians can qualify for over the next 10 years but applies only in 2019 to 2024. The budgetary “out-years” provide for minimal increases in reimbursement rates. Beginning in 2026, physicians would receive a 0.75 percent annual increase if they participate in some alternative payment models or a 0.25 percent annual increase if they do not. Both are significantly lower than the normal rate of inflation.

Such paltry increases could have daunting effects over time. “We anticipate that payment rates under [the House-passed bill] would be lower than scheduled under the current SGR [sustainable growth rate formula] by 2048 and would continue to worsen thereafter,” the report said. By the end of the 75-year projection, physician reimbursements under the House-passed bill would be 30% lower than under the SGR. Critics have called the current system unsustainable, but over time the House bill’s “fix” would result in something worse.

The actuary said that the inadequacies of the House-proposed payment increases “in years when levels of inflation are higher.” Under the House-passed bill, physicians would receive a 2.3% increase in reimbursements over a three-year period. According to the Bureau of Labor Statistics, the inflation rate was 11.3% in 1979, 13.5% in 1980, and 10.3% in 1981. If high inflation returned, doctors could effectively receive a paycut after inflation.

While physician groups are clamoring to avoid the 21% cut that would take effect this month if some sort of “doc fix” is not enacted, the House’s “solution” could result in larger real-term cuts in future years. Medicare’s chief actuary explains the results of these reimbursement changes over time:

“While [the House-passed bill] addresses the near-term concerns of the SGR system, the issues of inadequate physician payment rates are ultimately greater. . . . [T]here would be reason to expect that access to physicians’ services for Medicare beneficiaries would be severely compromised, particularly considering that physicians are less dependent on Medicare revenue than are other providers, such as hospitals and skilled nursing facilities.”

In sum, “we expect that access to, and quality of, physicians’ services would deteriorate over time for beneficiaries.”

The House “doc fix” legislation involved increasing the deficit by $141 billion, purportedly to solve the flaws in Medicare’s physician reimbursement system. But Medicare’s actuary thinks this legislation will make the long-term problem worse. When will Congress figure out that if you’re in a fiscal hole, it’s best to stop digging?

This post was originally published at the Wall Street Journal’s Think Tank blog.

An Unconservative Approach to Insurance Reform

The “doc fix” legislation that the House passed Thursday would add $141 billion to the deficit and make some structural changes to Medicare. Some of those changes aim to make Medicare more solvent by reducing the growth of program spending, a conservative goal, but it would achieve this by liberal means: prohibiting the sale of certain types of insurance policies.

The issue involves Medigap supplemental insurance, which pays for beneficiary cost-sharing (deductibles, co-payments, and co-insurance) not covered by the traditional Medicare program. The most popular Medigap policies cover the Medicare Part B deductible, along with other forms of cost-sharing. Studies have shown that these types of policies—which allow seniors to visit medical providers without any out-of-pocket costs—encourage beneficiaries to over-consume care, raising taxpayer spending on Medicare.

The House legislation responds to this by making some types of Medigap coverage illegal. It would prohibit the sale or issuance of any policies that insulate beneficiaries from the Medicare Part B deductible of $147. This provision would apply only to new beneficiaries and only after Jan. 1, 2020; it would not take away health insurance plans for seniors currently enrolled.

In contrast, the Obama administration’s budget plan took a more conservative approach to this problem. It proposed a “premium surcharge for new beneficiaries beginning in 2019” choosing first-dollar Medigap coverage. Under its approach, insurers could still offer, and seniors could still purchase, insulating Medigap insurance—but they would have to repay taxpayers for additional Medicare spending engendered by their generous supplemental coverage. The president’s budget did not go so far as to apply this to today’s seniors, but it would be easier to extend this premium surcharge concept to existing Medicare beneficiaries; they could keep their existing insurance and would have to make taxpayers whole.

Medigap supplemental insurance is hardly a free market. Over and above state regulation of plans, the federal government has prescribed benefit packages for many years thanks to Medigap’s interactions with Medicare. But it’s striking that policy makers in the House decided the best way to reform this insurance market was to ban certain types of insurance outright, as opposed to implementing changes to ensure that Medicare does not lose money from seniors’ overconsumption of care.

This post was originally published at the Wall Street Journal’s Think Tank blog.

At What Price Medicare “Reform?”

The Congressional Budget Office has released its score of the Medicare “doc fix” legislation scheduled for consideration Thursday in the House. Among other things, the score provides some sense of the difficulty in enacting reforms to improve Medicare’s solvency.

CBO projected that the bipartisan legislation to repair Medicare’s physician payment structure would add $141 billion to the deficit. As I wrote in an earlier post, Congress paid for temporary patches in the past in part by cutting spending and in part by planning on bigger payment reductions in future years. While the legislation’s prospective increases in payment levels would be paid for, the future payment reductions already on the books would not be covered, thus raising the deficit. That unpaid-for increase in Medicare spending would also raise the basic Medicare Part B monthly premium by $10 monthly in 2025, CBO concluded.

The bill would make two structural changes to Medicare. CBO found significant savings—more than $34 billion—from reduced subsidies for higher-income earners. But the legislation’s reforms to Medigap supplemental insurance produced comparatively paltry savings: $400 million over a decade. The smaller savings is a result of legislators delaying the Medigap changes until 2020 and watering down the proposed cost-sharing required of Medigap enrollees.

CBO analyzed the bill’s costs and fiscal impact in its second decade, but the budget scorekeepers did not say the bill would reduce the deficit in the budgetary “out-years.” Compared with current law, the bill would increase the deficit, the agency said. And when compared to “freezing Medicare’s payment rates for physicians’ services,” CBO said, “the legislation could represent net savings or net costs in the second decade after enactment, but the center of the distribution of possible outcomes is small net savings.” In other words, even if one considers the scheduled reductions in future payments budgetary gimmicks that will never happen–and thus that they should be disregarded–the bill might not reduce the deficit, and if it did the budgetary savings would be very small.

Medicare needs more than very small savings to remain viable for the long term. The program’s Part A trust fund has run deficits of more than $120 billion over the past six years. And Medicare’s problems will only increase: Urban Institute projections indicate that a married couple earning average wages that retires this year will receive more than three times as much in benefits—$427,000—over their lifetime as they have paid in Medicare taxes. If the price of reforming Medicare is raising the deficit by $141 billion, how much more “reform” can Medicare withstand?

This post was originally published at the Wall Street Journal’s Think Tank blog.

Will the “Doc Fix” Include a Compromise on Children’s Health Insurance?

Democrats on the Senate Finance Committee issued a news release Saturday expressing concern about provisions for children’s health insurance in the Medicare “doc fix” bill taking shape in the House. Media coverage of the children’s health program has largely focused on the length of the extension: Senate Democrats want a four-year extension, while a summary of the House agreement released Friday has a two-year reauthorization. But there are other, fundamental policy disagreements.

The disagreements are rooted in a letter issued by the Centers for Medicare and Medicaid Services (CMS) in August 2007. Congress was due to reauthorize the children’s health insurance program that fall, and the letter applied two principles to state programs: It targeted resources first toward families making less than 200% of the federal poverty level (now $48,500 for a family of four). If states wished to expand children’s health insurance to families with incomes greater than 250% of the federal poverty level, they had to first cover at least 95% of children in the lowest income group. The letter also instructed states to take steps to ensure that children and families were not dropping private, employer-provided coverage to enroll in taxpayer-funded programs.

Democrats reacted to the letter by refusing to vote on President George W. Bush’s nominee for CMS administrator in the Senate. The Democratic-controlled Congress passed legislation expanding children’s health insurance October 2007 and January 2008, but President Bush, viewing the bills as inconsistent with the policy goals his administration had outlined, vetoed the measures. House Republicans sustained his veto on both occasions.

Upon taking office, President Barack Obama ordered his secretary of health and human services, Kathleen Sebelius, to rescind the August 2007 memo. In February 2009 congressional Democrats enacted the children’s health insurance program expansion that had previously eluded them. Many Republicans believe the program should be targeted toward the lowest-income families, as it was initially designed. Draft reauthorization language issued by the House Energy and Commerce Committee last month would focus “funding on low-income families” to “address concerns about crowding out private coverage and subsidizing upper-middle-class families,” according to a summary.

The bipartisan deal to amend Medicare’s “doc fix” includes a two-year reauthorization of the children’s health insurance program, but policy details of that extension haven’t been released. Unless Republicans and Democrats can agree on a compromise—which eluded Congress and the Bush administration in 2007-08—one party may have to renege on policies it has adhered to for years. There are questions about the fiscal sustainability of the “doc fix,” but the philosophical questions may be no less difficult.

This post was originally published at the Wall Street Journal’s Think Tank blog.

The House “Doc Fix” and the Obama Budget

Last month, in writing about how the president’s budget would forestall changes to entitlements for several years, I said that while the budget “would include some modest changes to Medicare benefits, the overall document postpones most of the fiscal pain until after President Barack Obama leaves office.” The same might be true of bipartisan Medicare legislation that addresses physician payments.

House leaders filed “doc fix” legislation Thursday afternoon, but they have not yet released the legislative language surrounding the parts of the bill that would be paid for. A summary circulating among lobbyists in Washington suggests as one of the “pay-fors” a Medicare Advantage timing shift—a budget gimmick that would shift plan payments into a future fiscal year, masking overall Medicare spending levels.

The document also discusses more substantive changes to the Medicare program: Federal Part B and Part D subsidies would be reduced for individuals with incomes greater than $133,000. And first-dollar coverage for new beneficiaries purchasing supplemental coverage—which studies have shown encourages seniors to over-consume care–would be limited.

These changes may start to address Medicare’s structural shortfalls, but they seem relatively paltry next to some of the Obama administration’s budget proposals. The president’s plan proposed increasing the Medicare Part B deductible and introducing home health co-payments—actions that could reduce incentives for over-consumption of care and crack down on fraud, a particular problem in the home health program. But while the president’s proposed changes would not take effect until 2019, the House proposal would delay them one additional year, until 2020.

Demographics will define our fiscal future for the generation to come. The Congressional Budget Office noted this year that Social Security, health programs, and interest payments represent 84% of the increase in federal spending over the coming decade, largely because an average of 10,000 baby boomers will retire every day. Yet the House legislation could end up exempting from any structural reforms the more than 16 million individuals forecast to join Medicare by 2020.

Unsustainable trends will, at some point, give out. As I wrote last month, putting dessert before spinach by kicking tough choices to future political leaders might lead to short-term political gains but could also produce long-term fiscal and political pain. And when the fiscal reckoning occurs, voters are not likely to look kindly on those who created the problems.

This post was originally published at the Wall Street Journal’s Think Tank blog.

Paying for the Medicare “Doc Fix”

House members are working on legislation to provide a permanent repeal of provisions capping Medicare reimbursements to physicians. As past debates have shown, failure to identify spending cuts to offset the pay increase to doctors would significantly impact seniors’ Medicare premiums.

Legislative language has yet to be released, but press reports have indicated the outlines of a potential agreement between House Speaker John Boehner and Minority Leader Nancy Pelosi. The proposal is expected to permanently repeal the sustainable growth rate (SGR) mechanism established in 1997 for setting physician payments and overall physician spending within Medicare. After only a few years, spending began to exceed the SGR spending targets, prompting Congress to pass a series of bills—known as the “doc fix”–adjusting the targets upward for short periods.

In general, Congress financed these short-term doc fixes by reducing spending elsewhere in the budget. More than $165 billion worth was covered this way. But lawmakers used two statutory mechanisms to lower the cost of these short-term spending bumps and promised to recover the remaining costs in the future. Each time it has come up, Congress has kicked the proverbial can down the line.

When it comes to physician payment, the agreement being negotiated by the congressional leaders is expected to do two things: First, it would fill in the shortfall from repeated budgetary gimmicks. Maintaining flat payment rates for the future, rather than letting the SGR cuts take effect, would cost $137.4 billion, according to the Congressional Budget Office. This would not be paid for but would be absorbed into the deficit. The second part of the agreement, which provides for modest increases in physician payments in the coming years, would have a net cost of $37.1 billion, according to CBO. This increase in spending would be paid for.

One ramification of the proposed $137 billion increase in deficit spending: Seniors would fund a significant portion. As CBO noted in its 2009 score of an earlier, unsuccessful SGR repeal bill: “Beneficiaries enrolled in Part B of Medicare pay premiums that offset about 25 percent of the costs of those benefits. . . . Therefore, about one-quarter of the increase in Medicare spending would be offset by changes in those premium receipts.”

The House Republican leadership is well aware of the premium effects of an unpaid-for SGR repeal. When then-Speaker Pelosi brought an unpaid-for SGR repeal bill to the House floor in November 2009, then-Minority Leader Boehner called it an “absolute train wreck,” because it “forces seniors to pay higher premiums.” All but one House Republican voted against the legislation—largely because it did not include spending cuts to pay for the repeal.

It remains unclear how many House Republicans today might change their position from 2009, or what their public justification for doing so would be. What is clear is that any unpaid-for legislation would have a fiscal impact on America’s seniors as well as the federal budget.

This post was originally published at the Wall Street Journal’s Think Tank blog.

The VA Scandal and Medicare

The federal government adjusts its payment policies, the health-care system tailors its practices to meet those new policies, and a variety of unexpected—and perverse—consequences result.

This isn’t just one aspect of the VA scandal. It also describes the effects of physician payment policies in Medicare.

In the case of the Department of Veterans Affairs, decisions to tie performance bonuses to patient waiting times apparently resulted in attempts to manipulate the appointment system. Incidents reported in Pennsylvania, Wyoming and New Mexico illustrate how compensation and bonuses drove decisions about patient care. The New York Times reported that one Albuquerque whistleblower alleged:

“Clinic staff were instructed to enter false information into veterans’ charts because it would improve the data about clinic availability. . . . The reason anyone would care to do this is that clinic availability is a performance measure, and there are incentives for management to meet performance measures.”

In Medicare, the sustainable growth rate (SGR) mechanism established in 1997 placed an overall cap on physician spending, with an eye toward cutting payments in future years if Medicare spending exceeded the defined thresholds. But this measure, ostensibly to cut costs, only pushed the problem elsewhere. Doctors have responded to the prospect of cuts in reimbursement rates by increasing the volume of services provided. Physician spending per beneficiary increased more than 70 percent from 2000 to 2011, while reimbursement rates grew only 11 percent in the same period. Congress routinely acts to undo the projected reimbursement cuts, and the SGR has not appreciably reduced Medicare’s overall costs.

So how do these stories tie together? Clearly, health-care systems respond to incentives set by the federal government. But Washington has not proved nimble enough to avert the unintended consequences of those responses. While Gen. Eric Shinseki’s resignation as secretary of veterans affairs may stanch the political bleeding for the Obama administration, the underlying problems go far beyond one man—and even the VA. Both issues will take big-picture thinking, and actions, to repair.

This post was originally published at the Wall Street Journal’s Think Tank blog.

The Case for Medicare Reform

The panel meets in secret, is controlled by special interests, and helps determine the allocation of nearly $100 billion in federal health care spending.

Is it some clandestine panel created by Obamacare? Hardly. It’s a panel controlled by the American Medical Association (AMA)—and, as The Washington Post reported in a front-page article yesterday, it has been micro-managing the way Medicare pays physicians for nearly a quarter-century.

The panel is just one part of the complex bureaucratic machinery that sets Medicare physician payment enacted by Congress in 1989. Instead of payment set by the free market forces of supply and demand, the panel assigns “value” to different medical procedures. So, in theory, a doctor performing an hour-long surgery should be paid four times as much as a physician undertaking a 15-minute procedure.

In practice, however, the process is far from straightforward. As the Post article demonstrates, the panel operates with virtually no public transparency, little government oversight, and a structural bias toward specialty physicians over primary care procedures. Curiously, in 1989 one of the arguments advanced for this payment system is that it would rectify the bias against primary care doctors.

Worse than the inaccuracies in the current payment system is the premise underlying it: That the Medicare bureaucracy and its group of “experts” can determine the “right” price of nearly every service performed by physicians nationwide.

Later this afternoon, the House Energy and Commerce Committee will begin its markup of Medicare physician payment legislation. While the legislation would revamp the process for setting Medicare reimbursements, as a Heritage Backgrounder released last week demonstrates, it does not represent fundamental reform of the Medicare program. Instead, many of the same medical specialty societies that have abused the current rate-setting process would receive new powers to control patient care—by setting guidelines that physicians must follow and cutting doctors’ pay if they do not.

True reform of the Medicare program would use a premium support system and market forces to unleash competition that will drive down health costs. Getting the federal government out of the price-control business would allow innovative reimbursement solutions to take root.

As usual, Ronald Reagan said it best:

This is the issue:… whether we believe in our capacity for self-government or whether we abandon the American Revolution and confess that a little intellectual elite in a far-distant capital can plan our lives for us better than we can plan them ourselves.

When revamping Medicare physician payment, Congress has the opportunity to take power away from that “little intellectual elite” and should not hesitate to do so. And, rather than attempting to empower other bureaucratic entities to micromanage the health system, it should return that power back to the place where it belongs—with the people themselves.

This post was originally published at the Daily Signal.

Budget Summary — Obama’s “One Percent” Solution

According to the Congressional Budget Office’s most recent baselines, the federal government will spend a total of $6.87 trillion on Medicare and $4.36 trillion on Medicaid over the next ten years – that’s $11.2 trillion total, not even counting additional state spending on Medicaid.  Yet President Obama’s budget, released today, contains net deficit savings of only $152 billion from health care programs.  That’s a total savings of only 1.35 percent of the trillions the federal government will spend on health care in the coming decade.  Sadly, it’s another sign the President isn’t serious about real budget and deficit reform.

Overall, the budget:

  • Proposes a total of $401 billion in savings, yet calls for $249 billion in unpaid-for spending due to the Medicare physician reimbursement “doc fix” – thus resulting in only $152 billion in net deficit savings. (The $249 billion presumes a ten year freeze of Medicare physician payments; however, the budget does NOT propose ways to pay for this new spending.)
  • Proposes few structural reforms to Medicare; those that are included – weak as they are – are not scheduled to take effect until 2017, well after President Obama leaves office.  If the proposals are so sound, why the delay?
  • Requests a more than 50% increase – totaling $1.4 billion – for program management at the Centers for Medicare and Medicaid Services, of which the vast majority would be used to implement Obamacare.
  • Includes mandatory proposals in the budget that largely track last year’s budget and the President’s September 2011 deficit proposal to Congress, with a few exceptions.  The largest difference between this year’s budget and the prior submissions is a massive increase in savings from reductions to nursing and rehabilitation facilities – $79 billion, compared to a $32.5 billion estimated impact in September 2011.

A full summary follows below.  We will have further information on the budget in the coming days.

Discretionary Spending

When compared to Fiscal Year 2013 appropriated amounts, the budget calls for the following changes in discretionary spending by major HHS divisions (tabulated by budget authority):

  • $37 million (1.5%) increase for the Food and Drug Administration (not including $770 million in increased user fees);
  • $435 million (4.9%) increase for the Health Services and Resources Administration;
  • $97 million (2.2%) increase for the Indian Health Service;
  • $344 million (5.7%) increase for the Centers for Disease Control;
  • $274 million (0.9%) increase for the National Institutes of Health; and
  • $1.4 billion (52.9%) increase for the discretionary portion of the Centers for Medicare and Medicaid Services program management account.

With regard to the above numbers for CDC and HRSA, note that these are discretionary numbers only.  The Administration’s budget also would allocate an additional $1 billion mandatory spending from the Prevention and Public Health “slush fund” created in Obamacare, further increasing spending levels.  For instance, CDC spending would be increased by an additional $755 million.

Obamacare Implementation Funding and Personnel:  As previously noted, the budget includes more than $1.4 billion in discretionary spending increases for the Centers for Medicare and Medicaid Services, which the HHS Budget in Brief claims would be used to “continue implementing key provisions of [Obamacare].”  This funding would finance 712 new bureaucrats within CMS when compared to last fiscal year – a massive increase when compared to a request of 256 new FTEs in last year’s budget proposal.  Overall, the HHS budget proposes an increase of 1,311 full-time equivalent positions within the bureaucracy compared to projections for the current fiscal cycle, and an increase of 3,327 bureaucrats compared to last fiscal year.

The budget includes specific requests related to Obamacare totaling over $2 billion, including:

  • $803.5 million for “CMS activities to support [Exchanges] in FY 2014,” including funding for the federally-funded Exchange, for which the health law itself did not appropriate funding;
  • $837 million for “beneficiary education and outreach activities through the National Medicare Education program and consumer support…including $554 million for the [Exchanges];”
  • $519 million for “general IT systems and other support,” including funding for the federal Exchange;
  • $3.8 million for updates to healthcare.gov;
  • $18.4 million to oversee the medical loss ratio regulations; and
  • $24 million for administrative activities in Medicaid related to “implement[ing] new responsibilities” under Obamacare.

Exchange Funding:  The budget envisions HHS spending $1.5 billion on Exchange grants in 2013.  That’s an increase of over $300 million compared to last year’s estimate of fiscal year 2013 spending – despite the fact that most states have chosen not to create their own Exchanges.  The budget anticipates a further $2.1 billion in spending on Exchange grants in fiscal year 2014.  The health care law provides the Secretary with an unlimited amount of budget authority to fund state Exchange grants through 2015.  However, other reports have noted that the Secretary does NOT have authority to use these funds to construct a federal Exchange.

Abstinence Education Funding:  The budget proposes eliminating the abstinence education funding program, and converting those funds into a new pregnancy prevention program.

Medicare Proposals (Total savings of $359.9 Billion, including interactions)

Bad Debts:  Reduces bad debt payments to providers – for unpaid cost-sharing owed by beneficiaries – from 65 percent down to 25 percent over three years, beginning in 2014.  The Simpson-Bowles Commission made similar recommendations in its final report.  Saves $25.5 billion.

Medical Education Payments:  Reduces the Indirect Medical Education adjustment paid to teaching hospitals beginning in 2014, saving $11 billion.  Previous studies by the Medicare Payment Advisory Committee (MedPAC) have indicated that IME payments to teaching hospitals may be greater than the actual costs the hospitals incur.

Rural Payments:  Reduces critical access hospital payments from 101% of costs to 100% of costs, saving $1.4 billion, and prohibits hospitals fewer than 10 miles away from the nearest hospital from receiving a critical access hospital designation, saving $700 million.

Anti-Fraud Provisions:  Assumes $400 million in savings from various anti-fraud provisions, including limiting the discharge of debt in bankruptcy proceedings associated with fraudulent activities.

Imaging:  Reduces imaging payments by assuming a higher level of utilization for certain types of equipment, saving $400 million.  Imposes prior authorization requirements for advanced imaging; no savings are assumed, a change from the September 2011 deficit proposal, which said prior authorization would save $900 million.

Pharmaceutical Price Controls:  Expands Medicaid price controls to dual eligible and low-income subsidy beneficiaries participating in Part D, saving $123.2 billion according to OMB.  Some have expressed concerns that further expanding government-imposed price controls to prescription drugs could harm innovation and the release of new therapies that could help cure diseases.

Medicare Drug Discounts:  Proposes accelerating the “doughnut hole” drug discount plan included in PPACA, filling in the “doughnut hole” completely by 2015.  While the budget claims this proposal will save $11.2 billion over ten years, some may be concerned that – by raising drug spending, and eliminating incentives for seniors to choose generic pharmaceuticals over brand name drugs, this provision will actually INCREASE Medicare spending, consistent with prior CBO estimates at the time of PPACA’s passage.

Post-Acute Care:  Reduces various acute-care payment updates (details not specified) and equalizes payment rates between skilled nursing facilities and inpatient rehabilitation facilities, saving $79 billion – a significant increase compared to the $56.7 billion in last year’s budget and the $32.5 billion in proposed savings under the President’s September 2011 deficit proposal.  Equalizes payments between IRFs and SNFs for certain conditions, saving $2 billion.  Adjusts payments to inpatient rehabilitation facilities and skilled nursing facilities to account for unnecessary hospital readmissions and encourage appropriate care, saving a total of $4.7 billion.  Restructures post-acute care reimbursements through the use of bundled payments, saving $8.2 billion.

Physician Payment:  Includes language extending accountability standards to physicians who self-refer for radiation therapy, therapy services, and advanced imaging services, saving $6.1 billion.  Makes adjustments to clinical laboratory payments, designed to align Medicare with private payment rates, saving $9.5 billion.  Expands availability of Medicare data for performance and quality improvement; no savings assumed.

Medicare Drugs:  Reduces payment of physician administered drugs from 106 percent of average sales price to 103 percent of average sales price.  Some may note reports that similar payment reductions, implemented as part of the sequester, have caused some cancer clinics to limit their Medicare patient load.  By including a similar proposal in his budget, President Obama has effectively endorsed these policies.  Saves $4.5 billion.

Medicare Advantage:  Resurrects a prior-year proposal to increase Medicare Advantage coding intensity adjustments; this provision would have the effect of reducing MA plan payments, based on an assumption that MA enrollees are healthier on average than those in government-run Medicare.  Saves $15.3 billion over ten years.  Also proposes $4.1 billion in additional savings by aligning employer group waiver plan payments with average MA plan bids.

Additional Means Testing:  Increases means tested premiums under Parts B and D by five percentage points, beginning in 2017.  Freezes the income thresholds at which means testing applies until 25 percent of beneficiaries are subject to such premiums.  Saves $50 billion over ten years, and presumably more thereafter, as additional seniors would hit the means testing threshold, subjecting them to higher premiums.

Medicare Deductible Increase:  Increases Medicare Part B deductible by $25 in 2017, 2019, and 2021 – but for new beneficiaries only; “current beneficiaries or near retirees [not defined] would not be subject to the revised deductible.”  Saves $3.3 billion.

Home Health Co-Payment:  Beginning in 2017, introduces a home health co-payment of $100 per episode for new beneficiaries only, in cases where an episode lasts five or more visits and is NOT proceeded by a hospital stay.  MedPAC has previously recommended introducing home health co-payments as a way to ensure appropriate utilization.  Saves $730 million.

Medigap Surcharge:  Imposes a Part B premium surcharge equal to about 15 percent of the average Medigap premium – or about 30 percent of the Part B premium – for seniors with Medigap supplemental insurance that provides first dollar coverage.  Applies beginning in 2017 to new beneficiaries only.  A study commissioned by MedPAC previously concluded that first dollar Medigap coverage induces beneficiaries to consume more medical services, thus increasing costs for the Medicare program and federal taxpayers.  Saves $2.9 billion.

Generic Drug Incentives:  Proposes increasing co-payments for certain brand-name drugs for beneficiaries receiving the Part D low-income subsidy, while reducing co-payments for relevant generic drugs by 15 percent, in an attempt to increase generic usage among low-income seniors currently insulated from much of the financial impact of their purchasing decisions.  Saves $6.7 billion, according to OMB.

Lower Caps on Medicare Spending:  Section 3403 of the health care law established an Independent Payment Advisory Board tasked with limiting Medicare spending to the growth of the economy plus one percentage point (GDP+1) in 2018 and succeeding years.  The White House proposal would reduce this target to GDP+0.5 percent.  The Medicare actuary has previously written that the spending adjustments contemplated by IPAB and the health care law “are unlikely to be sustainable on a permanent annual basis” and “very challenging” – problems that would be exacerbated by utilizing a slower target rate for Medicare spending growth.  According to the budget, this proposal would save $4.1 billion, mainly in 2023.

Medicaid and Other Health Proposals (Total savings of $41.1 Billion)

Limit Durable Medical Equipment Reimbursement:  Caps Medicaid reimbursements for durable medical equipment (DME) at Medicare rates, beginning in 2014.  The health care law extended and expanded a previous Medicare competitive bidding demonstration project included in the Medicare Modernization Act, resulting in savings to the Medicare program.  This proposal, by capping Medicaid reimbursements for DME at Medicare levels, would attempt to extend those savings to the Medicaid program.  Saves $4.5 billion over ten years.

Rebase Medicaid Disproportionate Share Hospital Payments:  Proposes beginning DSH payment reductions in 2015 instead of 2014, and “to determine future state DSH allotments based on states’ actual DSH allotments as reduced” by PPACA.  Saves $3.6 billion, all in fiscal 2023.

Medicaid Anti-Fraud Savings:  Assumes $3.7 billion in savings from a variety of Medicaid anti-fraud provisions.  Included in this amount are proposals that would remove exceptions to the requirement that Medicaid must reject payments when another party is liable for a medical claim.  A separate proposal related to the tracking of pharmaceutical price controls would save $8.8 billion.

Transitional Medical Assistance/QI Program:  Provides for temporary extensions of the Transitional Medical Assistance program, which provides Medicaid benefits for low-income families transitioning from welfare to work, along with the Qualifying Individual program, which provides assistance to low-income seniors in paying Medicare premiums.  The extensions cost $1.1 billion and $590 million, respectively.

“Pay-for-Delay:”  Prohibits brand-name pharmaceutical manufacturers from entering into arrangements that would delay the availability of new generic drugs. Some Members have previously expressed concerns that these provisions would harm innovation, and actually impede the incentives to generic manufacturers to bring cost-saving generic drugs on the market.  OMB scores this proposal as saving $11 billion.

Follow-on Biologics:  Reduces to seven years the period of exclusivity for follow-on biologics.  Current law provides for a twelve-year period of exclusivity, based upon an amendment to the health care law that was adopted on a bipartisan basis in both the House and Senate (one of the few substantive bipartisan amendments adopted).  Some Members have expressed concern that reducing the period of exclusivity would harm innovation and discourage companies from developing life-saving treatments.  OMB scores this proposal as saving $3.3 billion.

State Waivers:  Accelerates from 2017 to 2014 the date under which states can submit request for waivers of SOME of the health care law’s requirements to HHS.  While supposedly designed to increase flexibility, even liberal commentators have agreed that under the law’s state waiver programcritics of Obama’s proposal have a point: It wouldn’t allow to enact the sorts of health care reforms they would prefer” and thatconservatives can’t do any better – at least not under these rules.”  No cost is assumed; however, in its re-estimate of the President’s budget last year, CBO scored this proposal as costing $4.5 billion.

Implementation “Slush Fund:”  Proposes $400 million in new spending for HHS to implement the proposals listed above.

FEHB Contracting:  Similar to last year’s budget, proposes streamlining pharmacy benefit contracting within the Federal Employee Health Benefits program, by centralizing pharmaceutical benefit contracting within the Office of Personnel Management (OPM), saving $1.6 billion.  However, this year’s budget goes further in restructuring FEHBP – OPM would also be empowered to modernize benefit designs (savings of $264 million); create a “self-plus-one” benefit option for federal employees and extend benefits to domestic partners (total savings of $5.2 billion, despite the costs inherent in the latter option); and adjust premium levels based on tobacco usage and/or participation in wellness programs (savings of $1.3 billion).  Some individuals, noting that OPM is also empowered to create “multi-state plans” as part of the health care overhaul, may be concerned that these provisions could be part of a larger plan to make OPM the head of a de facto government-run health plan.

Other Health Care Proposal of Note

Tax Credit:  The Treasury Green Book proposes expanding the small business health insurance tax credit included in the health care law.   Specifically, the budget would expand the number of employers eligible for the credit to include all employers with up to 50 full-time workers; firms with under 20 workers would be eligible for the full credit.  (Currently those levels are 25 and 10 full-time employees, respectively.)  The budget also changes the coordination of the two phase-outs based on a firm’s average wage and number of employees, with the changes designed to make more companies eligible for a larger credit.  The changes would begin in the current calendar and tax year (i.e., 2013).  According to OMB, these changes would cost $10.4 billion over ten years – down from last year’s estimate of $14 billion over ten years.  Many may view this proposal as a tacit admission that the credit included in the law was a failure, because its limited reach and complicated nature – firms must fill out seven worksheets to determine their eligibility – have deterred American job creators from receiving this subsidy.  Moreover, the reduced score in this year’s budget compared to last year’s implies that even this expansion of the credit will have a less robust impact than originally anticipated.