Medicare Targeted for Cuts Under HHS Budget

The 2013 budget proposed by the Department of Health and Human Services reflects familiar ideas presented by President Obama to the debt reduction committee: fully fund the Affordable Care Act, reduce Medicare and Medicaid costs, and cut provider reimbursements.

Overall HHS spending is proposed to increase by about 8% from $871.9 billion to $940.9 billion. Only 8% of the HHS budget represents discretionary spending that can be shifted around, increased or eliminated. The 122-page HHS budget proposes increasing that spending by $0.3 billion to $76.4 billion.

The big winner in the HHS budget sweepstakes is the Centers for Medicare & Medicaid Services, which could see a $1 billion increase in funding to $4.8 billion for 2013. According to CMS officials about $860 million of those increased dollars are already earmarked for development of federal health insurance exchanges. The remainder will be applied to other ACA programs.

The bigger losers are Medicare providers, who would see their reimbursements slashed by $297 million over 10 years. The Obama administration projects that cuts to providers and other "improvements," will produce $366 billion in budget savings over 10 years.

The size of the reductions caught some industry observers off guard. "Cuts in Medicare and Medicaid are heavier than the industry was expecting," says Paul Keckley, executive director of the Deloitte Center for Health Solutions.

In an e-mail, Keckley noted that the cuts aren't "the only pressures docs and hospitals will feel. Remember, the sequester cuts from Medicare are 2% per year for 2013 through 2022. And, the physician pay formula (SGR) is likely to get only a temporary patch. So, the FY13 budget is one of several dark clouds hanging over hospitals."

He said this state of affairs helps explain why "Moody's downgraded the acute sector and why the majority of doctors are now transitioning from private practice to more security from jobs with health plans or hospitals."

The Medicare proposals are bad news for drug companies, rural providers, teaching hospitals and nursing homes, according to John Cousins, senior vice president of healthcare intelligence for CIT Healthcare. Here's why:

• The budget calls for Medicare payment policies for pharmacy companies to align with the rebates Medicaid receives for brand name and generic drugs provided to beneficiaries who receive the Medicare low-income subsidy. That option is expected to slash payments to drug companies by $156 billion over 10 years.
• Aligning Medicare's bad debt policy more closely with private sector policies will reduce bad debt payments to hospital and nursing homes from 70% to 25% of eligible charges. That will reduce payments by $35.9 billion over 10 years.
• Reducing the indirect medical education adjustment by 10% beginning in fiscal year 2014 will post $9.7 billion in savings over 10 years. That's dollars teaching hospitals won't have to cover the cost of increased medical tests and other expenses associated with training physicians.
• Aligning payments to rural providers with the cost of care will reduce critical access hospital (CAH) payments by $2 billion over 10 years. CAH payments are proposed to be reduced from 101% of reasonable costs to 100%.

While the bulk of savings proposals come from the healthcare industry, there are also proposals that would affect beneficiaries, says Dan Mendelson, CEO of Avalere Health. In an e-mail statement Mendelson points to the Part B premium surcharge on Medigap policies that offer first dollar coverage and copayments for home health services for new Medicare beneficiaries. Those changes are projected to save $2.5 billion and $350 million, respectively, over 10 years.

The common assessment is that "this budget is really about cuing up election year positioning, as well as a 2013 deficit reduction package," explains Mendelson.

One noteworthy omission in this year's proposed budget, says Cousins, is a fix for the sustainable growth rate. Last year the president proposed a two-year SGR fix; this year's budget is silent on the topic beyond presenting updated numbers that Congress can use as it debates the topic.

He notes that the budget is only a proposal until Congress acts. If early reactions are indications of future actions then the budget faces an uphill battle among Republicans in Congress. Republican reaction to President Obama's $3.8 trillion budget plan was swift with some suggesting that the U.S. could face a debt crisis similar to the one plaguing Greece. Others suggested that the budget is all smoke and mirrors, with many of the deficit reduction methods actually being used to disguise spending increases.