Physician-Owned Hospitals

Background:  The past few years have seen the significant growth of so-called specialty hospitals.  These facilities, which generally concentrate on one medical practice area (often cardiac or orthopedic care), are often able to provide higher-quality care than general hospitals due to their focused mission.  Critics of specialty hospitals claim that, by “cherry-picking” the best—and therefore most lucrative—candidates for surgical procedures, they siphon off revenues from general and community hospitals, threatening their future viability.

The ownership arrangements of many specialty hospitals have also been questioned.  While federal law against physician self-referral prohibits doctors from holding an ownership stake in a particular department of a hospital facility, the “whole hospital” exemption permits physicians to hold an ownership stake in an entire facility.  Because many specialty hospitals are physician-owned in whole or in part, some critics believe that physicians owning a stake in a specialty hospital may be inclined to perform additional tests and procedures on patients due to a stronger profit motive.

Legislative History:  Congressional action on specialty hospitals over the past several years has focused on the “whole hospital” exemption and the issue of physician self-referral.  In December 2003, Section 507 of the Medicare Modernization Act (P.L. 108-173) placed an 18-month moratorium on physician self-referrals to any new specialty hospital and ordered reports to Congress regarding the issue.  Upon expiration of the moratorium in June 2005, the Centers for Medicare and Medicaid Services (CMS) issued a further suspension in the processing of Medicare enrollment applications for specialty hospitals, pending a CMS review.

In February 2006, Section 5006 of the Deficit Reduction Act (P.L. 109-171) extended the CMS suspension of applications for new specialty hospitals until CMS submitted a report to Congress.  The report, issued in August 2006, summarized the earlier reports on specialty hospitals and outlined a strategic plan for examining the issues raised.  Although the report included no legislative recommendations, CMS did subsequently issue regulations in August 2007 requiring all hospitals, not just specialty hospitals, to notify patients of their physician ownership arrangements beginning in Fiscal Year 2008.

In July 2007, Section 651 of H.R. 3162, the Children’s Health and Medicare Protection (CHAMP) Act, proposed several modifications to the “whole hospital” exemption for physician self-referral.  Most notably, the bill applied the exemption only to those facilities with Medicare provider agreements in place prior to July 2007—excluding new specialty hospitals or other facilities, including those currently under construction, from protection under the self-referral statute—and prohibited existing facilities from expanding their number of operating rooms or beds.  While the bill passed the House by a 225-204 vote, the Senate has yet to take up the measure.

Quality of Care:  Many public and private studies that have examined the specialty hospital issue have compared the quality of care and patient outcomes for both specialty and general hospitals.  Most studies have found that specialty hospitals perform no worse than general hospitals with respect to patient outcomes, and many studies have found measurable performance improvements.  The independent quality review firm HealthGrades found that specialty hospitals constitute a disproportionate share of the highest-quality facilities among the top tier of facilities it surveyed.[1]

The focus on improved quality control comes at a time when the impact of medical errors and hospital-acquired infections has risen to greater prominence.  The landmark 1999 Institute of Medicine study To Err Is Human estimated that between 44,000 and 98,000 Americans die annually in hospitals due to preventable medical errors, creating a total economic cost of as much as $29 billion.[2]  A November 2006 report utilizing data from a new infection-reporting regime in Pennsylvania found 19,154 cases of hospital-acquired infections in 2005 alone, representing an infection incident rate of more than 1 in 100 hospitalizations, and average costs for patients who developed infections nearly six times higher than those who did not ($185,260 vs. $31,389).[3]

For this reason, many specialty hospitals include their physician-owners in all aspects of the planning, design, and implementation of the facility and its treatment delivery systems, so as to minimize the possibility of preventable errors and the spread of infection.  Additionally, regular performance of surgical procedures in specialized settings permits physicians and medical staff to develop expertise and innovative techniques that improve the quality of care delivered.  For instance, physicians in one cardiac specialty hospital developed new procedures to recognize and treat irregular heartbeats following surgery; the new protocol reduced incidence of this dangerous symptom by two-thirds.[4]

Although some critics of specialty hospitals cite concerns about “cherry-picking”—whereby physician-owned facilities attract comparatively healthy patients, leaving general hospitals to treat the sickest cases—reports such as the HealthGrades study have quantified the better care provided by many specialty hospitals on a risk-adjusted basis that controls for patients’ varied health status.  Some specialty hospitals have been found to have patients sicker than average when compared to Medicare claims data are used to compare patients in specialty hospitals and general hospitals.[5]  Moreover, to the extent that specialty hospitals may wish to pick the “easiest” cases, such changes can be resolved by reforms currently being implemented by CMS to reform Medicare’s diagnosis-related group (DRG) classification system and adjust reimbursements to more closely reflect health status upon admission.

Financial Arrangements:  Much of the criticism surrounding specialty hospitals has focused on the potential conflict-of-interest associated with physician ownership, and specifically whether an ownership stake motivates physicians to increase the number and scope of tests and procedures performed, increasing patient costs.  In scoring the additional restrictions proposed by Section 651 of the CHAMP Act, the Congressional Budget Office (CBO) asserted that Medicare spends more for outpatient services for patients treated in specialty hospitals than for treatments provided in other facilities.  Based on this assumption and related changes in reimbursements, CBO estimated that the CHAMP Act’s proposed restrictions on specialty hospitals would generate $3.5 billion in savings to the federal government over a ten-year period by diverting patient care to general and community hospitals.

However, the CBO score did not take into account any potential savings due to differential rates of medical errors and acquired infections when comparing costs in specialty and general hospitals.  One study noted that the nearly 9,000 infections acquired by Medicare and Medicaid recipients hospitals during 2004 cost taxpayers nearly $1.4 billion in added costs in Pennsylvania alone—and the study also noted that hospital-acquired infections, and thus the costs associated with them, were likely to be underreported during the report’s time frame.[6]  Given the existing studies documenting better patient outcomes and lower infection rates in physician-owned facilities, reduced costs to the federal government from an expansion of specialty hospitals could well exceed the $3.5 billion in purported savings CBO attributes to lower utilization rates by general hospitals.

In addition, some critics of the ownership arrangements of specialty hospitals have failed to acknowledge the implications of the vast growth of hospital-owned physician networks in the past two decades.  While a 2005 CMS report to Congress noted that “we did not see clear, consistent patterns of preference for referring to specialty hospitals among physician owners relative to their peers,” it also added that “physicians in general are constrained in where they refer patients by several factors.”[7]  Physicians working for networks affiliated with a particular community hospital may be contractually obligated to refer their patients to that hospital.  When viewed from this prism, the significant growth—from 24% in 1983 to 39% in 2001—of physicians directly employed by hospitals or other medical centers is likely to have had a greater impact on physician referral patterns than the growth of approximately 200 specialty hospitals when compared to 60,000 hospitals nationwide.[8]

Conclusion:  The benefits of increased specialization have been examined and analyzed by economists for more than two centuries.  In his seminal work The Wealth of Nations, Adam Smith highlighted the benefits of a division of labor to focus on discrete tasks as providing the greatest possible improvement in productivity, and thus economic growth, for all individuals.  In health care, specialization can increase productivity gains, which are the key to controlling the rise of health care costs without relying on heavy-handed rationing of care.  The growth of specialty hospitals—which focus on performing discrete groups of surgical procedures well, improving quality and thus reducing costs—is consonant with the theories which Smith and his adherents used to expound open markets and free trade worldwide.

Amidst spiraling costs and uneven quality, the health sector warrants more competition, not less: new entrants to introduce innovative techniques and practices improving the quality of care; greater transparency of both price and quality information, so patients can make rational choices about the nature of their treatment options; and a funding system that reduces where possible the distortionary effects of third-party payment and empowers consumers to take control of their health.  Viewed from this perspective, opposition to undue and onerous restrictions on the specialty hospitals that have driven innovation within health care may strike many conservatives as a return to first principles.

 

[1] Cited in David Whelan, “Bad Medicine,” Fortune 10 March 2008, available online at http://www.forbes.com/forbes/2008/0310/086_print.html (accessed March 1, 2008).

[2] Institute of Medicine, To Err Is Human: Building a Safer Health System, summary available online at http://www.iom.edu/Object.File/Master/4/117/ToErr-8pager.pdf (accessed March 1, 2008).

[3] Pennsylvania Health Care Cost Containment Council, Hospital Acquired Infections in Pennsylvania, available online at http://www.phc4.org/reports/hai/05/docs/hai2005report.pdf (accessed March 1, 2008).

[4] Regina Herzlinger and Peter Stavros, “MedCath Corporation (A),” Harvard Business School Case No. 303-041, rev. August 2006, p. 10.

[5] Regina Herzlinger and Peter Stavros, “MedCath Corporation (C),” Harvard Business School Case No. 305-097, rev. May 2006, p. 1.

[6] Pennsylvania Health Care Cost Containment Council, Reducing Hospital-Acquired Infections: The Business Case (Issue Brief No. 8, November 2005), available online at http://www.phc4.org/reports/researchbriefs/111705/docs/researchbrief2005report_hospacqinfections_bizcase.pdf (accessed March 1, 2008).

[7] Department of Health and Human Services, “Study of Physician Owned Specialty Hospitals Required in Section 507(c)(2) of the Medicare Modernization Act of 2003,” available online at http://www.cms.hhs.gov/MLNProducts/Downloads/RTC-StudyofPhysOwnedSpecHosp.pdf (accessed March 1, 2008).

[8] Kaiser Family Foundation, Trends and Indicators in the Health Care Marketplace, Section Five, available online at http://www.kff.org/insurance/7031/print-sec5.cfm (accessed March 3, 2008) ; Whelan, “Bad Medicine.”

Top Ten Conservative Concerns with H.R. 1424, Mental Health Parity Act

  1. Increases Health Insurance Costs. CBO estimates that H.R. 1424 would impose mandates on private insurance companies totaling $3 billion annually by 2012.  These costs will ultimately be borne by employers offering health insurance and employees seeking to obtain coverage.
  2. Increases Costs for Business Due to Private-Sector Mandates. The bill contains multiple new federal mandates on the private sector, affecting the design and structure of health insurance plans.   The bill also increases the threshold level at which employers suffering increased claim costs as a result of implementing the new federal mandates can claim an exemption from the provisions of H.R. 1424.
  3. Decreases Mental Health Coverage. While the bill imposes several new federal mandates on those employers who choose to offer mental health coverage, there is nothing in H.R. 1424 that would require plans to cover these conditions.  Thus H.R. 1424 could have the perverse effect of actually decreasing mental health coverage, by encouraging employers frustrated with the bill’s onerous burdens to drop mental health insurance altogether.
  4. Increases the Number of Uninsured. By increasing the cost of health insurance, H.R. 1424 will lead directly to an increase in the number of uninsured Americans.  In addition, some employers could decide to drop group health insurance coverage altogether rather than face a potentially conflicting array of state mandates and regulations to which they could be subjected under H.R. 1424.
  5. Erodes Federal Pre-emption for Employers. While H.R. 1424 does pre-empt state laws that conflict with the bill, it also explicitly permits additional state laws that provide more stringent consumer protections.  This provision could undo three decades of strict federal pre-emption for group health plans, creating a patchwork of laws across all 50 states with which large employers would have to comply.
  6. Codification of Treatment Mandate for Health Plans. H.R. 1424 would incorporate into federal law the Diagnostic and Statistical Manual of Mental Disorders (DSM-IV) classification definitions as the parameter of mental health treatment for health plans.  The broad parameters included in the DSM-IV categories will obligate employers to cover “disorders” such as “jet lag” and “caffeine intoxication.”
  7. Intergovernmental Mandate. The bill would pre-empt state laws governing mental health coverage that conflict with the bill—but would not pre-empt laws providing more stringent consumer protections for employees.  Additionally, CBO notes that some state and local governments would face increased costs for health insurance provided to their employees.
  8. Violation of UMRA. CBO estimates that the costs of the mandates to the private sector in the bill would be at least $1.3 billion in 2008, rising to $3 billion in 2012 and thus exceed the annual threshold established in the Unfunded Mandates Reform Act or UMRA ($131 million in FY2007, adjusted annually for inflation).
  9. Lack of Conscience Clause. H.R. 1424 would mandate that employers offering mental health benefits cover all diagnoses under DSM-IV.  The bill does not include an exemption for groups to exclude coverage of mental disorders, particularly psycho-sexual disorders, for which they have religious or moral objections.
  10. Lack of Medical Management Tools. H.R. 1424 does not include language permitting group health plans to negotiate separate reimbursement rates or provider payment rates and delivery service systems for different benefits.  These tools would empower plans to utilize medical management practices in order to reduce claim costs.

Weekly Newsletter: March 3, 2008

Mental Health Parity Scheduled for Wednesday Vote

The House Democrat leadership announced last week that the House would be voting Wednesday on a mental health bill (H.R. 1424) sponsored by Rep. Patrick Kennedy (D-RI). Some conservatives may have strong concerns about both the principle behind the legislation—a costly federal mandate that will raise the health insurance premiums and increase the number of uninsured Americans—as well as the way in which the expansive House language would mandate coverage for “mental disorders” such as caffeine addiction and jet leg.

In addition, the ways in which Democrats intend to finance its $4 billion price tag may also cause conservatives concern. News reports indicate that the bill will be funded by placing further restrictions on physician-owned specialty hospitals—hindering the development of a new source of consumer choice, and medical innovation, in health care—and increasing the amount of rebates pharmaceutical manufacturers offering products to Medicaid beneficiaries must pay the federal government—which may lead some drug companies to end their participation in Medicaid altogether.

The RSC will be monitoring this legislation as it makes its way to the House floor, and will be weighing in during the process to express conservatives’ concerns.

A Top Ten list of conservative concerns about H.R. 1424 can be found here.

SCHIP Policy Brief Released

Last week the RSC released a policy brief analyzing the proposals in President Bush’s Fiscal Year 2009 budget that would effect the State Children’s Health Insurance Program (SCHIP). The brief was released prior to a House Energy and Commerce subcommittee hearing where several state Governors testified in opposition to guidance issued by the Administration that would ensure federal funds are targeted towards the low-income children for whom the SCHIP program was created.

While most conservatives support the Administration’s focus on low-income children, the significant increase in its SCHIP funding request when compared to last year—enough to fund an expansion of program participants—may give some conservatives concern.

The RSC Policy Brief can be found here.

GAO Issues Report on Medicare Advantage

Last week the Government Accountability Office released a report regarding the benefits provided by Medicare Advantage plans. The report highlighted how Medicare Advantage provides enhanced benefits and lower premiums to beneficiaries than traditional fee-for-service Medicare. Specifically, the study noted that nearly 70% of rebate payments provided to plans go directly toward reduced cost sharing for beneficiaries, with the remainder providing additional benefits and lower overall premiums.

While the GAO study generated headlines because it found that some plans in some situations may generate higher cost-sharing for beneficiaries, the true story remains the way in which private plans provide quality benefits and reduce costs for seniors, particularly low-income beneficiaries. If Congressional Democrats wish to object to so-called overpayments to Medicare Advantage plans, they should enact reforms allowing traditional Medicare to compete on a “level playing field” with private plans—which would generate downward pressure on health care costs and help Medicare remain financially viable.

Read the report here.

Article of Note: “One Cheer for the New York Times

Last week, the editorial board of the New York Times weighed in with its verdict on the President’s plan to address the funding warning issued by the Medicare trustees. The paper’s writers agree that Medicare’s funding mechanism needs reform, and think that the additional means-testing in the President’s proposal contains merit. However, the editorial also criticizes proposals for reform of medical liability laws, noting that Congress should instead “reduce the lavish and unjustified subsidies” provided to insurance plans offering Medicare Advantage coverage—or take the “sensible step” of letting the President’s tax relief expire.

While the Times’ writers at least acknowledged what some Congressional Democrats have not—namely, that Medicare needs serious reform if it is to remain financially viable—giving millions of Americans a tax increase will not resolve a problem caused by skyrocketing spending on health care. Nor will causing more than eight million Americans to lose the additional health benefits offered by Medicare Advantage plans improve the health of America’s seniors.

A better solution would transform Medicare into a health insurance system similar to that provided to Members of Congress, where beneficiaries receive a defined contribution from Medicare to select a plan of their choosing. That and other similar ideas for comprehensive reform—and not the tax increases and benefit cuts advocated by the Times—could finally begin to bring down health care costs and ensure Medicare’s long-term solvency.

Read the article here: New York Times: “Constraining the Medicare Debate

SCHIP Proposals in Fiscal Year 2009 Budget

Summary:  In submitting his Fiscal Year 2009 Budget request to Congress, President Bush proposed a number of changes to the State Children’s Health Insurance Program (SCHIP).  As part of this package, the Administration requested a $19.7 billion increase in federal funding for SCHIP over the next five years.

Background:  The State Children’s Health Insurance Program, established under the Balanced Budget Act (BBA) of 1997, is a state-federal partnership originally designed to provide low-income children with health insurance—specifically, those children under age 19 from families with incomes under 200 percent of the federal poverty level (FPL), or approximately $40,000 for a family of four.  States may implement SCHIP by expanding Medicaid and/or creating a new state SCHIP program.  SCHIP received nearly $40 billion in funding over ten years as part of BBA, and legislation recently passed by Congress in December (P.L. 110-173) extended the program through March 2009 while providing additional SCHIP funds for states.

Budget Funding Proposal:  The budget proposes an additional $2.2 billion in SCHIP spending for Fiscal Year 2009, and $19.7 billion over the five year period.  The budget includes outreach grants of $50 million in 2009, and $100 million annually for the four succeeding years, for state and local governments as well as community-based organizations to engage in activities designed to increase enrollment of eligible children.

These funding levels significantly exceed the approximately $5 billion in increased funding proposed by the President in his Fiscal Year 2008 budget last year.  The proposal also exceeds the $1.8 billion in proposed Medicaid savings in Fiscal Year 2009 and $17.4 billion over the next five years achieved by realigning and simplifying the federal matching percentage for various administrative and family planning services, among other proposed changes.

Proposed SCHIP Enrollment Levels:  The Department of Health and Human Services’ (HHS) Fiscal Year 2009 Budget in Brief document notes that CMS exceeded its 2005 goal of enrolling five million children in the SCHIP program by more than a million children.  During FY2006, 4.0 million children on average were enrolled in SCHIP during any given month, and 6.6 million children were enrolled at any time during the year.

In arriving at a top-line budget number for its SCHIP proposal, the budget document also sets assumptions for future year enrollment levels.  The proposal notes the fact that the $19 billion increase in funding proposed by the Administration would fund an average of 5.6 million children in SCHIP per month, and nearly nine million children at some point over the course of a year—both of which constitute increases of nearly a third over 2006 levels.  Much of the additional enrollment and spending would stem from the outreach efforts as a result of the $450 million in grants proposed as part of the Cover the Kids initiative.

The significant increases in enrollment proposed that would result from the Administration’s higher budget request seem to be inconsistent with another document commissioned by HHS to study the number of uninsured children.  In that report, two researchers from the Urban Institute found that in 2003-2004, only 689,000 uninsured children in families with incomes under 200% FPL were eligible for, but not enrolled in, SCHIP coverage.  During the debate over SCHIP’s reauthorization last year, Administration officials utilized these data to reject calls from Congressional Democrats for $35-50 billion in increased SCHIP funding as unnecessary to fund health insurance for all targeted populations.

Focus on Originally Targeted Populations.  The budget notes a guidance letter issued by the Centers for Medicare and Medicaid Services (CMS) on August 17, 2007 designed to prevent children from dropping private insurance coverage in order to join the government-funded SCHIP—a phenomenon commonly referred to as “crowd-out.”  The letter provided several criteria for states seeking to cover children in families with incomes above 250% FPL, including a one-year waiting period of uninsurance for individuals seeking coverage and assurance that the state has enrolled 95% of children below 200% of FPL who are eligible for coverage through Medicaid or SCHIP.  The letter, which is consistent with the Administration’s stated policy of targeting federal assistance to the low-income children for whom SCHIP was originally created, advised that CMS could pursue corrective action against states that have not worked to implement the guidance within 12 months (i.e. by August 2008).  The budget proposes legislation to extend this standard to any state wishing to expand coverage beyond 200% of FPL—the level below which states were supposed to target their SCHIP coverage, according to the original BBA provisions.

In addition, the budget would tighten SCHIP eligibility by clarifying the definition of income.  This proposal would eliminate the general “income disregard” system that has caused concern for many conservatives by enabling some states to extend government-financed SCHIP coverage to children in families making above 250-300% FPL ($50,000-$60,000 for a family of four).  However, states may still create “income disregards” around specific items (e.g. food, housing, etc.).

Coverage for Adults.  While the Administration’s budget proposes to transition adults out of SCHIP, it also proposes to transition adults into Medicaid coverage.  Although the federal matching percentage is slightly lower for Medicaid than for SCHIP, some conservatives may remain concerned that the budget’s proposed transition out of a program intended for low-income children belies the fact that these adults will remain dependent on public health insurance coverage.  Moreover, this proposal echoes language in the Senate SCHIP “compromise,” which the Administration twice vetoed (H.R. 976, H.R. 3963) last year.

Conclusion:  Most conservatives support enrollment and funding of the SCHIP program for the populations for whom the SCHIP program was created.  That is why in December the House passed, by a 411—3 vote, legislation reauthorizing and extending the SCHIP program through March 2009.  That legislation included an additional $800 million in funding for states to ensure that all currently eligible children will continue to have access to state-based SCHIP coverage.

While the Administration’s Fiscal Year 2009 budget includes several reasonable proposals to ensure that SCHIP funds are targeted toward low-income children, the significant increases in proposed funding levels may give some conservatives pause.  A study funded by the Department of Health and Human Services itself confirms the impossibility of enrolling more than 1.5 million new children to enroll in SCHIP, given current eligibility guidelines.  Therefore, it is an open question whether the nearly fourfold proposed increase in SCHIP funding—coupled with $450 million in outreach grants to states, localities, and community organizations—will only serve to encourage states to expand government-funded health insurance under the aegis of covering uninsured children.

Weekly Newsletter: February 25, 2008

Mental Health Parity Bill Headed for Floor

With the House scheduled to return from its President’s Day recess today, the period between now and the Easter recess may include action on a mental health bill (H.R. 1424) sponsored by Rep. Patrick Kennedy (D-RI). Among other provisions, the bill would impose a federal mandate that group health insurance plans offered by employers provide insurance coverage for a broad array of mental and substance abuse disorders, impose a federal scope of benefits for mental health coverage, and permit states to enact laws with more stringent consumer protections, potentially creating a patchwork of regulations to which large employers will be forced to comply.

Some conservatives may have strong concerns about both the principle behind the legislation—a costly federal mandate that will raise the health insurance premiums and increase the number of uninsured Americans—as well as the way in which the expansive House language would mandate coverage for “mental disorders” such as caffeine addiction and jet leg. The RSC will be monitoring this legislation as it makes its way to the House floor, and will be weighing in during the process to express conservatives’ concerns.

SCHIP Hearing Scheduled

Tomorrow the Health Subcommittee of the House Energy and Commerce Committee has scheduled a hearing around the State Children’s Health Insurance Program (SCHIP). This hearing will center around the guidance letter the Centers for Medicare and Medicaid Services (CMS) issued in August 2007 requiring states to take steps that ensure that SCHIP funds are targeted toward low-income children before states spend money to expand coverage to wealthier populations.

Most conservatives support enrollment and funding of the SCHIP program for the populations for whom the SCHIP program was created. That is why in December the House passed, by a 411—3 vote, legislation reauthorizing and extending the SCHIP program through March 2009. That legislation included an additional $800 million in funding for states to ensure that all currently eligible children will continue to have access to state-based SCHIP coverage. However, many conservatives also express strong reservations about further expansions of government-funded health insurance, particularly when those expansions would displace private insurance coverage held by wealthier families and children.

Interestingly enough, the Subcommittee hearing comes just over a week after full Committee Chairman John Dingell (D-MI) called the President’s Medicare trigger proposal “little more than a scare tactic.” With the size of America’s unfunded obligations rising by $2 trillion every year that Congress takes no action to reform entitlement spending, some conservatives might argue that the better way to help America’s children is to reform Medicare and Medicaid so that future generations will not be saddled with trillions of dollars of debt, not work to expand public programs for wealthier children.

Chairman Hensarling Op-Ed on Medicare Trigger Legislation

Last Friday, RSC Chairman Jeb Hensarling placed an op-ed article in The Washington Times discussing President Bush’s submissions to Congress regarding the state of Medicare—both the package of reimbursement adjustments proposed in the Fiscal Year 2009 budget, and the additional reforms proposed as part of the White House’s response to the “trigger” issued as a result of the Medicare trustees’ funding warning.

Chairman Hensarling’s article reflects the views of many conservatives that the “trigger” represents a critical opportunity to enact fundamental reform of the Medicare program that should ensure the program’s long-term sustainability and reduce its cost growth. In the coming months, RSC members will explore and advocate for market-based approaches intended to alleviate the fiscal crisis that will loom large in the absence of comprehensive entitlement reform.

Read the article here. To learn more about the Medicare trigger, read the RSC policy briefs on this issue.

Article of Note: “Lone Star Showdown”

With the Presidential primary campaign moving to the key states of Texas and Ohio, the Hudson Institute’s Betsy McCaughey examines the way in which the Democratic candidates’ proposals might affect the Lone Star State. Her op-ed piece in the Wall Street Journal posed questions to Sens. Hillary Rodham Clinton (D-NY) and Barack Obama (D-IL) that illustrated the logistical and philosophical objections many conservatives find with their health platforms:

  • Would illegal immigrants receive federal subsidies for health insurance?
  • How would a mandate for all individuals to have health insurance—or, in the case of Sen. Obama’s plan, requiring all parents to buy coverage for their children—be enforced?
  • How are guaranteed issue and community rating policies—which prohibit insurance carriers from varying premiums based on age or health status—fair to the younger workers who will pay more to subsidize older and less healthy—but presumably richer—individuals?
  • How are dozens of costly state benefit mandates consistent with “affordable” health insurance coverage?
  • Will promises that individuals will be able to keep coverage they like extend to persons with high-deductible health plans and/or Health Savings Accounts, or will they be forced to convert to more expensive coverage they may not want?
  • Is attempting to regulate the profits of insurance companies a wise role for government to be playing in health care—or in any industry, for that matter?McCaughey’s article uses examples derived from Texas, but the concerns she raises could be cited by conservatives in all states as they weigh the import of the proposals put forward by the Presidential contenders.

Read the article here: The Wall Street Journal: “Health Questions for the Candidates” (subscription required)

President’s Medicare “Trigger” Proposals

Background:  Title VIII of the Medicare Modernization Act (MMA) includes provisions requiring the President to submit legislation within 15 calendar days of his annual budget submission in the event of a funding warning being issued by the Medicare trustees.  Because the trustees last April submitted their second consecutive warning that Medicare is projected to claim a growing share of general revenues within the next seven years, the President put forward his proposals to address the pending funding shortfall.  Under provisions established in statute, the legislative proposals will be introduced by the House Majority and Minority Leaders on the President’s behalf within three legislative days.

During the conference committee’s consideration of MMA, the funding warning mechanism was included at the behest of the Republican Study Committee as one device to help alleviate conservatives’ concerns about Medicare’s long-term solvency and ensure that Medicare’s claims on general budgetary revenues would not overwhelm either other federal budgetary priorities or the national debt.  By providing “fast-track” procedures for considering bills to improve the program’s solvency, the Medicare trigger also provides conservatives with another opportunity to examine more fundamental reforms to the way seniors’ health care is financed and delivered.

Summary of Proposal:  The Administration’s legislative proposal to address the “trigger” contains two titles.  The first title puts forward suggestions to make the Medicare purchasing system more cost-effective from a budgetary standpoint.  The second incorporates liability reforms that will reduce Medicare expenditures, as well as additional means-testing proposals that will increase Medicare revenues by raising premiums on wealthy seniors.  A preliminary summary of the legislation follows:

Value-based Purchasing:  This concept, also known as “pay-for-performance,” would vastly expand the federal government’s role in health care by adjusting physician and provider reimbursement levels to reflect successful patient outcomes on a risk-adjusted basis.  The proposed legislative package would provide for greater transparency of price and quality measures, and would further authorize the Secretary to take steps to adjust reimbursement levels in order to purchase care from those providers which provide the greatest value to beneficiaries and the Medicare program.  The legislation also requires the Secretary to make high-deductible health plans available in the Medicare program, and provide a transition for individuals not yet enrolled in Medicare who own Health Savings Accounts (HSAs).

While policy-makers of all political stripes believe in providing consumers with additional price and quality transparency information, the further step of tying Medicare reimbursement levels crafted by federal bureaucrats to either process or outcome measures could prove much more problematic.  Although its advocates believe pay-for-performance can achieve significant budgetary savings, existing Congressional Budget Office (CBO) models have failed to realize any measurable impact on future Medicare expenditures.  Additionally, some conservatives may be concerned that this methodology would deepen the government’s role in health care by altering the fundamental doctor-patient relationship, leading to a more intrusive federal bureaucracy dictating the terms of patient care.

Medical Liability Reform: This proposal would help bring down health spending both within and outside Medicare by helping to eliminate frivolous lawsuits and providing reasonable levels of compensation to victims of medical malpractice.  Provisions of the bill include a three-year statute of limitations, a cap on non-economic damages of $250,000, and reasonable limits on attorney contingency fees charged to successful claimants.

In 2003, the Congressional Budget Office scored a similar liability reform bill passed by the House (H.R. 5) as lowering Medicare spending by $11.2 billion over a ten-year period.  While CBO staff have indicated that state liability reforms in the intervening time have reduced the savings level below the baseline for federal liability reform, savings from passage of the President’s proposal would likely still generate several billion dollars in savings to Medicare.

Means Testing:  The legislation proposes to establish an income-related Part D premium consistent with the Part B “means testing” included in Title VIII of the Medicare Modernization Act.  The proposal—which was included in the Fiscal Year 2009 budget—would achieve savings of $3.2 billion over five years.  The RSC has previously included similar proposals in its budget documents as one way to constrain costs and ensure consistency between a Part B benefit that is currently means-tested and a Part D benefit that is not.

Other Reform Options:  The legislative package advanced by the Administration comes on the heels of a Fiscal Year 2009 budget that proposed $178 billion in Medicare savings over the next five years, largely through adjustments to provider reimbursements.  In addition to the various proposals put forward by the Administration and described above, the opportunity afforded by the trigger could be used to advance other comprehensive proposals to reform Medicare, which could include:

Premium Support:  This model would convert Medicare into a system similar to the Federal Employees Benefit Health Plan (FEHBP), in which beneficiaries would receive a defined contribution from Medicare to purchase a health plan of their choosing.  Previously incorporated into alternative RSC budget proposals, a premium support plan would provide a level playing field between traditional Medicare and private insurance plans, providing comprehensive reform, while confining the growth of Medicare spending to the annual statutory raise in the defined contribution limit, thus ensuring long-term fiscal stability.

Restructure Cost-Sharing Requirements:  This concept would restructure the existing system of deductibles, co-payments, and shared costs, which currently can vary based on the type of service provided.  Additionally, Medicare currently lacks a catastrophic cap on beneficiary cost-sharing, leading some seniors to purchase Medigap policies that insulate beneficiaries from deductibles and co-payments and therefore provide little incentive to contain health spending.  Reforms in this area would rationalize the current system, generating budgetary savings and reducing the growth of health spending.

Increase Medicare Part B Premium:  The RSC has previously proposed increasing the Part B premium from 25% to 50% of total Medicare Part B costs, consistent with the original goal of the program.  This concept would not impact low-income seniors, as Medicaid pays Medicare premiums for individuals with incomes under 120% of the federal poverty level.

Bipartisan Commission:  This proposal would provide an expedited mechanism requiring Congress to hold an up-or-down vote on the recommendations of a bipartisan commission examining ways to reform Medicare and other federal entitlements.

Sequestration Mechanism: This proposal would cap the growth of overall Medicare spending levels, and provide adjustments in benefit structures in the event that spending exceeded statutory levels.  The budget submission to Congress did include the proposal that physician payments be reduced 0.4% for every year in which general tax revenues cover more than 45% of Medicare costs—the level at which the Medicare Modernization Act required that a funding warning be issued, and action taken by Congress.  The Administration proposal is designed to provide Congress with an impetus to embrace comprehensive entitlement reform by requiring across-the-board cuts absent pre-emptive legislative action.

Conclusion: The Medicare funding warning issued by the trustees last year provides an opportunity to re-assess the program’s structure and finance.  While competition among drug companies has ensured that expenditures for the MMA’s prescription drug benefit remain below the bill’s original estimates, introduction of pharmaceutical coverage has dramatically increased the overall growth of health care costs within the Medicare program, leading to the trustees’ funding warning.  The confluence of these two events should prompt Congress to consider the ways in which competition could be used to reduce the growth of overall Medicare costs, similar to the way in which the market for pharmaceutical coverage reduced the estimated cost of the Part D prescription drug benefit.

The Administration has put forward two separate proposals—the first in its budget submission to Congress last week, the second as part of its formal “trigger” submission this week—to address Medicare’s long-term solvency issues and begin a process of comprehensive reform.  Many conservatives are likely to view the President’s proposals as a positive first step in the discussions about ways to curb soaring entitlements, while considering additional proposals described above to advance the discussion further and to ensure Medicare’s long-term fiscal stability.

Rep. Hensarling Op-Ed: Medicare and Entitlements

It’s become an annual ritual — almost as much a herald of springtime in Washington as the cherry blossoms along the Potomac: President Bush advances a plan for entitlement reform, and Democrats in Congress proclaim it “dead on arrival.” It happened with Social Security reform three years ago, it happened with the president’s proposed savings from Medicare last year, and now it’s about to happen again with the new and enhanced Medicare proposals that the White House has delivered to Capitol Hill. But things are a bit different this time — for better and for worse.

The worsening news comes from the Medicare trustees themselves, whose latest report details the precarious financial situation of the trust funds that finance Medicare expenditures. The trustees warn that Medicare faces collective unfunded obligations of more than $74 trillion — more than six times the current size of the American economy. And those obligations are not getting smaller; they keep increasing. The Government Accountability Office estimates that for each year that Medicare and Social Security entitlements go unreformed, their projected shortfall grows by an additional $2 trillion.

The implications of these warnings from the trustees could not be more stark to the 200 million Americans under age 54 — who, according to the latest trustees’ report, will not be able to retire with full Medicare benefits. The Medicare Part A trust fund is scheduled to be “exhausted” — in plain English, flat broke — in 2019. This means that tens of millions of Baby Boomers face an uncertain retirement rife with questions about the future of health care.

If there is a silver lining to be found amid the darkening fiscal clouds, it lies in statutory provisions that ensure that proposals to curb Medicare spending will live to see the light of a fair vote in Congress. Fortunately, my Republican Study Committee colleagues and I added a little-known provision into the Medicare Modernization Act of 2003 — the overarching law that added prescription drug benefits to Medicare — that requires the independent Medicare trustees to issue a funding warning if Medicare expenditures are projected to grow to levels that will take away from other important national priorities. The president has now responded to that warning by submitting proposals that will help save the Medicare system by slowing its growth and empowering concerned Americans to demand comprehensive entitlement reform.

The president’s budget constituted a good first step toward Medicare reform, proposing to slow the growth of Medicare by nearly $178 billion over the next five years. Contrary to the mythical rhetoric of congressional Democratic leaders, the president’s budget proposal would not “cut” Medicare. Instead, his proposal allows Medicare to grow by 5 percent, instead of the 7.2 percent currently projected. Since most providers would continue to receive increased reimbursements from the federal government, the level, number and intensity of services provided would still continue to grow. And therein lies one of the keys to true Medicare reform: ensuring that budgetary savings derive from wise choices by patients and doctors about the most cost-effective treatment options.

In addition to the White House budget proposals, there are additional, more comprehensive solutions that have the potential to yield greater savings and slow the growth of the health costs that threaten to cripple our future. Solutions that would restructure Medicare cost-sharing and increase means-testing for wealthy beneficiaries would ensure the program’s sustainability by making beneficiaries more cost-conscious. Solutions like medical liability reform that would reduce providers’ costs associated with legal claims, saving money for Medicare and the general public. Solutions that would transform Medicare into a health care system similar to that which members of Congress have so that all seniors receive better care at a lower cost.

The president’s proposals have advanced the discussion of Medicare reform, and the trigger mechanism which we instituted five years ago provides Congress with a golden opportunity to conduct a thorough, stem-to-stern review of the way seniors receive health care and ensure that we can maintain our promises to baby boomers and future retirees alike.

The current race for the White House is teaching us many things about the American people. They are clamoring for change and yearn for leaders who will not only speak the truth about the problems facing our nation but work to provide solutions to them. Congress has an opportunity to do just that without waiting for a new president.

We have 2 trillion — that’s 2,000,000,000,000 — reasons to act on comprehensive entitlement reform, and to act this year. The American people expect no less.

This post was originally published in The Washington Times.

Weekly Newsletter: February 15, 2008

  • Medicare Trigger Legislation Submitted

    This week the President formally submitted to Congress legislation to reform Medicare, as required by Title VIII of the Medicare Modernization Act (MMA). The so-called trigger provisions of Title VIII—inserted into MMA five years ago at the behest of RSC members—requires the President to submit legislative remedies when the Medicare trustees certify that Medicare expenditures are consuming a growing portion of general budget revenues, and provides a mechanism for both Houses of Congress to demand an up-or-down vote on a solution to Medicare’s funding woes.

    The President’s proposal to Congress includes three planks: value-based purchasing (also known as “pay-for-performance”), medical liability reform, and a means-tested premium for Medicare Part D, similar to the means-tested Part B premium incorporated into MMA. These proposals follow on the heels of the President’s Fiscal Year 2009 budget submission to Congress, which proposed $178 billion in savings over the next five years, largely through adjustments to provider reimbursement rates (see below).

    Although some conservatives may have concerns over the significant intrusion into doctor-patient relationships that pay-for-performance could create, it is worth noting that the President has put forward two distinct proposals for Medicare reform in as many weeks. While some conservatives will look to more comprehensive measures—re-structuring of Medicare cost-sharing, and Medicare’s eventual conversion into a health care system similar to that provided to Members of Congress—many view the measures advanced by the Administration, and supported by the Republican leadership in Congress, as a positive first step in the cause of comprehensive entitlement reform.

    When it comes to entitlement reform, the cost of inaction is great: the Government Accountability Office estimates that each year Congress does not act to reform Social Security and Medicare, their unfunded liability to the federal government grows by $2 trillion. Congress needs to act—and act now—on comprehensive reforms to Medicare.

    To learn more about the trigger, read the RSC policy briefs on this issue.

    Analysis of Fiscal Year 2009 Budget Proposals

    Last week the Administration put forward its Fiscal Year 2009 budget, which contained several key health-related proposals. The President’s budget suggested generating $178 billion in savings from Medicare over the next five years, slowing its projected rate of growth from 7.2% to 5.0% and saving beneficiaries $6.2 billion in Part B premiums over five years. The budget also proposed $14 billion in savings from Medicaid, but more than offset these savings by proposing a $19 billion expansion of the State Children’s Health Insurance Program (SCHIP).

    The RSC prepared a policy brief highlighting the President’s health care proposals.

    Articles of Note

    Two articles in the past week dissected the ongoing debate between Democrat Presidential contenders over a mandate for individual coverage, while providing all the proof needed that such a mandate would likely prove ineffective. While Politico noted Sen. Hillary Clinton’s “winner-take-all” approach to universal coverage and an individual mandate, the Wall Street Journal provided insights as to why most conservatives view mandates as both unnecessary and unworkable:

    Census Department data indicate that more than one-third of the uninsured—over 17.7 million Americans—come from families with annual incomes over $50,000, raising questions as to how many of the uninsured cannot afford to buy insurance and how many do not wish to purchase insurance, because costly state regulations have inflated premiums.

  • Massachusetts has already exempted 20% of its uninsured population from its “universal” individual mandate—a number which is likely to climb in future years, as the cost of overregulated health insurance products in the state skyrockets.
  • Hawaii has incorporated a “pay-or-play” mandate—requiring most employers to subsidize their workers’ health insurance—for more than three decades, yet Hawaii still has more than 100,000 uninsured individuals—even though employers cannot easily relocate their businesses to other states in order to avoid paying the higher health costs associated with the mandate.

    As the Journal points out, enforcing a mandate will require both harsh government penalties—Sen. Clinton has suggested garnishing workers’ wages—and a new federal bureaucracy to enforce them.

    Read the articles here: Politico: “Mandate vs. Incentive

The Wall Street Journal: “The Wages of HillaryCare” (subscription required)

Legislative Bulletin: H.R. 4848, Mental Health Parity Extension

Order of Business:  The bill is scheduled to be considered on Wednesday, February 6, 2008, under a motion to suspend the rules and pass the bill.

Summary:   H.R. 4848 would extend through December 31, 2008 certain provisions relating to mental health parity coverage that previously expired on December 31, 2007.

Specifically, the bill would reinstitute federal mandates first included in the Mental Health Parity Act of 1996, and extended in subsequent legislation, requiring that annual and lifetime limits on coverage for mental health treatments equal similar limits for physical illnesses.  Group health plans failing to meet the requirements of the Mental Health Parity Act would be subject to an excise tax; however, employers with fewer than 50 employees would be exempt from the federal requirements.

H.R. 4848 would also include Medicare provider payments in the Federal Payment Levy System, which imposes a 15% levy on contractors to recover outstanding federal tax debt.  A 2004 Government Accountability Office study determined that 21,000 Medicare providers owed more than $1.3 billion in back taxes, in part because payments under Medicare Parts A and B are currently exempt from participation in the Federal Payment Levy System.  H.R. 4848 would extend the Federal Payment Levy system to Medicare Part A and B claims over a three-year period ending on September 30, 2011.

Finally, H.R. 4848 would deposit additional savings in the Physician Assistance and Quality Initiative Fund, which is used by the Centers for Medicare and Medicaid Services (CMS) to finance physician payment and quality improvement initiatives.

Possible Conservative Concerns:  Some conservatives may be concerned that the bill would raise the cost of health insurance by re-imposing a lapsed federal mandate on individual and group health plans.  Some conservatives may also be concerned that the bill could lead to further action on full mental health parity legislation (H.R. 1424; S. 558) being considered in the 110th Congress, further inflating health insurance premiums nationwide.

Committee Action:  H.R. 4848 was introduced on December 19, 2007 and was referred to the House Committee on Energy and Commerce, and in addition to the Committees on Ways and Means and Education and Labor, where no further action was taken.

Cost to Taxpayers:  However, H.R. 4848 would reduce federal revenues by $25 million over ten years by increasing the cost of health insurance, thus leading employees with group coverage to exclude more of their income from federal income and payroll taxes.  The bill would offset that foregone revenue through the extension of Part A and B Medicare payments to the Federal Payment Levy System as described above, saving a total of $374 million over ten years.  The bill diverts the additional revenue generated in excess of the foregone income and payroll taxes ($349 million over ten years) to the Physician Assistance and Quality Improvement Fund.

Does the Bill Expand the Size and Scope of the Federal Government?  No.

Does the Bill Contain Any New State-Government, Local-Government, or Private-Sector Mandates?  Yes, the bill reinstitutes federal mandates on individual and group health insurance plans regarding the design of their benefit plans.

Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax Benefits/Limited Tariff Benefits?:  A Committee report designating compliance with clause 9 of rule XXI is unavailable.

Constitutional Authority:  A Committee report citing Constitutional authority is unavailable.

Health Care Proposals in Fiscal Year 2009 Budget

Summary:  In submitting his Fiscal Year 2009 Budget request to Congress, President Bush proposed a number of health-related changes that would achieve budgetary savings to both mandatory and discretionary spending.  As part of this package, the Administration has proposed a package that would reduce the growth of Medicare spending from 7.2% to 5.0% to meet requirements under the Medicare Modernization Act.

Mandatory Spending—Medicaid/SCHIP:

The budget proposal includes $1.8 billion in Medicaid savings in Fiscal Year 2009 and $17.4 billion over the next five years.  Budgetary savings would be achieved by realigning reimbursement rates for family planning services at the statutory Federal Medical Assistance Percentage (FMAP) rate ($3.3 billion in savings over five years), and by aligning reimbursement rates for all administrative services and case management at 50% (total $6.6 billion in savings over the five-year window).  Additional savings over the next five years would be achieved through adjustments to pharmacy reimbursements ($1.1 billion), asset verification ($1.2 billion), and cost allocation ($1.77 billion).

The budget proposes an additional $2.2 billion in SCHIP spending for Fiscal Year 2009, and $19.7 billion over the five year period.  The budget includes outreach grants of $50 million in 2009, and $100 million annually in subsequent years, for state and local governments as well as community-based organizations to engage in activities designed to increase enrollment of eligible children.  Lastly, the budget proposes to simplify SCHIP eligibility by clarifying the definition of income, eliminating the “income disregard” system that has been a source of concern among many conservatives.

Mandatory Spending—Medicare:

The budget includes several proposals to reduce the overall growth in Medicare spending.  Overall, Medicare funding would fall $178 billion below the baseline over the next five years.  These proposals would not constitute overall “cuts” to the Medicare program, but would instead reduce its growth from 7.2% to 5.0%.  Highlights of the budget submission include the following:

Provider Adjustments: The Administration proposal would freeze payment rates for hospitals, skilled nursing facilities, long-term care and outpatient hospitals, ambulatory surgical centers, inpatient rehabilitation facilities, and home health providers through Fiscal Year 2011, and provide a –0.65% annual market basket update thereafter, saving $112.93 billion over five years.  The savings derived from flat-level payments would not mean that providers would not continue to receive increased reimbursements from the federal government, as the level, number, and intensity of services provided would still continue to grow.

Disproportionate Share Hospital (DSH) Payments: Medicare DSH payments, which compensate hospitals that serve large numbers of low-income individuals, would be reduced by 30% over two years, saving $20.7 billion over five years.  This modest reduction in payments to hospitals would recognize the significantly enhanced benefits provided to seniors, particularly those with low incomes, as part of the Medicare Modernization Act.

Medical Education: The budget would eliminate duplicate Indirect Medical Education (IME) payments made to hospitals on behalf of Medicare Advantage beneficiaries, and would reduce the IME add-on by 60% over the next three years, saving a total of $21.75 billion over five years.

Means Testing:  The budget proposes to end annual indexing of income-related Part B premiums and establish an income-related Part D premium consistent with the Part B “means testing” included in Title VIII of the Medicare Modernization Act.  The proposals would achieve total savings of $5.75 billion over five years.  The RSC has previously included similar proposals in its budget documents as one way to constrain costs and ensure consistency between a Part B benefit that is currently means-tested and a Part D benefit that is not.

Other Savings:  Additional savings over the five year budget window would come from a reduction in the rental period for oxygen equipment ($3 billion), extending Medicare Secondary Payor for the End-Stage Renal Disease (ESRD) program from 30 to 60 months ($1.1 billion), eliminating bad debt payments over four years ($8.5 billion), and other regulatory and administrative actions ($4.7 billion).

Medicare Funding Trigger

Concurrent with the budget submission, the Medicare Modernization Act (MMA) requires the President to submit to Congress within 15 days a proposal to remedy the Medicare “excess general revenue Medicare funding” warning announced by the Medicare trustees last spring.  In addition to the savings package described above, the opportunity afforded by the trigger could be used to advance more comprehensive proposals, which could include:

Premium Support: This model would convert Medicare into a system similar to the Federal Employees Benefit Health Plan (FEHBP), in which beneficiaries would receive a defined contribution from Medicare to purchase a health plan of their choosing.  Previously incorporated into alternative RSC budget proposals, a premium support plan would provide a level playing field between traditional Medicare and private insurance plans, providing comprehensive reform, while confining the growth of Medicare spending to the annual statutory raise in the defined contribution limit, thus ensuring long-term fiscal stability.

Restructure Cost-Sharing Requirements:  This concept would restructure the existing system of deductibles, co-payments, and shared costs, which currently can vary based on the type of service provided.  Additionally, Medicare currently lacks a catastrophic cap on beneficiary cost-sharing, leading some seniors to purchase Medigap policies that insulate beneficiaries from deductibles and co-payments and therefore provide little incentive to contain health spending.  Reforms in this area would rationalize the current system, generating budgetary savings and reducing the growth of health spending.

Increase Medicare Part B Premium:  The RSC has previously proposed increasing the Part B premium from 25% to 50% of total Medicare Part B costs, consistent with the original goal of the program.  This concept would not impact low-income seniors, as Medicaid pays Medicare premiums for individuals with incomes under 120% of the federal poverty level.

Medical Liability Reform: This proposal would help bring down health spending both within and outside Medicare by helping to eliminate frivolous lawsuits and providing reasonable levels of compensation to victims of medical malpractice.  In 2003, the Congressional Budget Office scored a liability reform bill (H.R. 5) as lowering Medicare spending by $11.2 billion over a ten-year period.

Bipartisan Commission:  This proposal would provide an expedited mechanism requiring Congress to hold an up-or-down vote on the recommendations of a bipartisan commission examining ways to reform Medicare and other federal entitlements.

Value-based Purchasing:  This concept, also known as “pay-for-performance,” would seek to adjust physician and provider reimbursement levels to reflect successful patient outcomes on a risk-adjusted basis.  While advocates believe pay-for-performance can yet achieve the significant budgetary savings not present in existing Congressional Budget Office models, some conservatives may be concerned that this methodology would deepen the government’s role in health care by altering the fundamental doctor-patient relationship.

Sequestration Mechanism: This proposal would cap the growth of overall Medicare spending levels, and provide adjustments in benefit structures in the event that spending exceeded statutory levels.  The budget submission to Congress did include the proposal that physician payments be reduced 0.4% for every year in which general tax revenues cover more than 45% of Medicare costs—the level at which the Medicare Modernization Act required that a funding warning be issued, and action taken by Congress.  The Administration proposal is designed to provide Congress with an impetus to embrace comprehensive entitlement reform by requiring across-the-board cuts absent pre-emptive legislative action.

Discretionary Proposals:  Overall, the President’s proposed discretionary budget for the Department of Health and Human Services (HHS) is $68.5 billion, $1.7 billion less than last year.  Preliminary highlights of funding levels on health programs include the following:

Centers for Disease Control (CDC): The proposal reduces overall spending by $412 million from current year levels.  Significant reductions within the CDC account include a proposed $111 million reduction for the Occupational Safety and Health Administration (OSHA), and an $83 million reduction in the World Trade Center screening and treatment program.

Earmarks: The budget proposes $451 million in savings by eliminating earmarked projects from the HHS budget.

Food and Drug Administration (FDA): The budget provides a $130 million increase for FDA over Fiscal Year 2008 levels.  More than half ($68 million) of the proposed increase comes from additional resources for drug and biologic safety programs, with an additional $33 million increase in the food safety budget.

Health Resources and Services Administration (HRSA): A total of nearly $1 billion in reductions in the HRSA account comes from several proposed sources—grants to train nurses and health professionals (reduced by $240 million); training doctors at children’s hospitals (eliminated, saving $302 million); rural health programs (reduced by $150 million); and public health buildings and projects (eliminated, saving $304 million).  Reductions in the rural health and health training accounts have previously been proposed in previous RSC budget documents.  Since that time, reconciliation legislation passed last September (P.L. 110-84) provided student loan forgiveness to public health workers, raising additional questions about the duplicative nature of the HRSA-funded grant programs.

National Institutes of Health (NIH): The National Institutes of Health would receive flat-level funding from Fiscal Year 2008, $29.5 billion in total, after years of substantial increases.  Funding for most institutes within NIH would likewise remain at constant levels for the upcoming Fiscal Year.

Conclusion: The Administration’s Fiscal Year 2009 budget includes several reasonable proposals to slow the growth of health spending and thereby help return federal entitlements to a more sustainable trajectory.  Such measures are needed urgently, as Medicare faces $34.1 trillion in unfunded liabilities over the next 75 years, according to the Government Accountability Office.  The need for immediate action is great: the first Baby Boomer becomes eligible for Medicare in 2011, and every year that Congress does not address unfunded entitlement obligations, their size grows an additional $2 trillion, according to Comptroller General David Walker.  Some conservatives may believe that these measures proposed by the Administration to constrain reimbursements to providers, while helpful, can constitute the starting point for a comprehensive discussion about entitlement reform.