Weekly Newsletter: July 28, 2008

Tobacco Bill Coming Soon

This week the House could consider legislation (H.R. 1108) granting the Food and Drug Administration (FDA) the authority to regulate tobacco, possibly under suspension of the rules. The bill would establish a new center within FDA to regulate tobacco products and assess tobacco companies more than $5 billion in “user fees” over the next ten years to pay for this regulation.

Some conservatives may be concerned by the regulatory regime the bill would establish, which would require an agency charged with promoting food and drug safety to regulate a product inherently unsafe and unhealthy. Some conservatives may also object to the multiple layers of regulation the bill would create, by leaving intact the Federal Trade Commission’s ability to regulate tobacco advertising and distribution and providing only limited pre-emption against additional state-based regulations and restrictions. Some conservatives may question whether the highly prescriptive restrictions in the bill— including advertising limitations on the use of color advertising and regulation of the font size of tobacco disclaimer warnings, all of which raise significant constitutional questions about their free-speech implications—constitute good public policy, particularly as the Congressional Budget Office estimates that H.R. 1108 will reduce smoking levels by only 2% over 10 years.

Lastly, some conservatives may object to provisions in the bill that could prompt an international trade dispute. Last week, HHS Secretary Leavitt wrote to Energy and Commerce Committee Ranking Member Barton about H.R. 1108, observing that, because the bill prohibits all tobacco flavorings except menthol, foreign countries which manufacture clove or other flavored cigarettes may take action against the United States for providing unfair and disparate treatment for a particular type of manufactured cigarette. As press reports indicate that H.R. 1108 may be considered under suspension of the rules, some conservatives may be concerned by the lack of procedural opportunities available to address this disparity, such that the United States can live up to its obligations under international free-trade agreements.

A Policy Brief on H.R. 1108 (as reported by the Energy and Commerce Committee) can be found here.

Democrats Ignore Medicare Funding Warning

Last week Democrats responded to the Medicare trustees’ finding that the Medicare program faces significant future funding shortfalls—by resolving to ignore the problem. The resolution concerned a provision inserted into the Medicare Modernization Act at the behest of the RSC, which provided for the President to submit, and Congress to consider under expedited procedures, legislation to remedy Medicare’s funding problems when the program is projected to consume more than 45% of its funding from general revenues (as opposed to the Medicare payroll tax and beneficiary premiums). The Democrat majority’s action turned off this funding “trigger” for the balance of the 110th Congress, preventing those who believe in entitlement reform from taking action to force a House floor vote on Medicare reform legislation.

Many conservatives may be disappointed by the actions of Congressional Democrats, which prevented the President’s reasonable and modest proposals for Medicare reform—means testing that would make wealthier individuals like Warren Buffett and George Soros pay $2 per day more in Part D prescription drug premiums and liability reform to reduce the costs associated with defensive medicine practices— from receiving a vote in Congress. Many conservatives may believe that solving Medicare’s $86 trillion in unfunded obligations—and a Hospital Trust Fund scheduled to be exhausted in little more than a decade—will not be helped by Democrats’ apparent eagerness to ignore the problem. However, when Democrats like Florida’s Alcee Hastings note that “the perceived problem with Medicare funding has already been addressed,” many conservatives may be concerned that this lack of awareness will only hasten the day when Medicare’s funding shortfalls jeopardize the viability of the program—and wonder what policy-makers will tell their senior constituents when it does.

There are RSC Policy Briefs related to the Medicare trigger: Legislative Background; Talking Points on Trigger; Questions for House Democrats; Size of Medicare Program; White House Trigger Bill; Medicare Trustees Report

Article of Note: Fuzzy Math

Last Wednesday the New York Times reported on the many financial discrepancies surrounding the health care plan of Sen. Barack Obama (D-IL). While Sen. Obama has been consistent in saying that his health plan would save every American family $2,500 per year, many observers have come to question the factual basis for a “best guess” assertion by his advisers early last year. Independent estimates, including those by the Congressional Budget Office, have questioned whether the savings from such initiatives as health information technology and chronic care management will materialize, particularly in the four-year timeline Sen. Obama has promised—such that even a statement by Obama’s own advisers backtracked from any assertions that the purported savings would materialize by a date certain.

Many conservatives may be skeptical of Sen. Obama’s claims, particularly as the liberal Commonwealth Fund released a report in December with a menu of options for savings that would by their estimates achieve a total reduction in spending of only 6% in 10 years. Some conservatives may also be concerned that, in an attempt to reduce health care costs—whether by 8%, 6%, or some lesser amount— Sen. Obama would rely first and foremost on imposing price controls on physicians, pharmaceutical manufacturers, and insurance companies, along with rationing care through a government-controlled comparative effectiveness institute. Many conservatives may believe that such bureaucratic restrictions would in the long run prove far more effective at growing the size of government than slowing the growth of health care costs.

Read the article here: New York Times: “Health Plan from Obama Sparks Debate

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.”

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.

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.

Legislative Bulletin: S. 2499, Medicare, Medicaid, and SCHIP Extension Act

Order of Business:  The bill is scheduled to be considered under suspension of the rules on Wednesday, December 19, 2007.  The Senate introduced and passed the bill on Tuesday, December 18, by unanimous consent.

 

Summary:  S. 2499 eliminates for six months a reduction in Medicare physician payments scheduled to take effect on December 31, 2007, providing a 0.5% increase through June 30, 2008.  S. 2499 also extends the State Children’s Health Insurance Program through March 31, 2009, and provides additional funding to cover currently eligible children, without expanding or extending eligibility definitions beyond current cohorts.

Medicare:  S. 2499 contains many provisions that alter Medicare, Medicaid, and SCHIP law as follows:

Update for Medicare Physician Services.            S. 2499 would provide a 0.5% update to the conversion factor for physician reimbursements for the six months ending June 30, 2008, at a cost of $6.4 billion over ten years.  In November, the Centers for Medicare and Medicaid Services (CMS) announced that the annual update to the conversion factor for 2008 would be negative 10.1%, as spending on physicians’ services and other Part B services has been growing at a much faster rate than target spending.  Providing a 0.5% update to the conversion factor would ensure that the -10.1% update does not go into effect.  CBO estimates that this provision will cost $6 billion over ten years.  To learn more on the background of this provision and details of the conversion factor and Sustainable Growth Rate (SGR), please read the section below entitled “Additional Background.”

Bonus and Quality Reporting.  The bill extends a physician quality reporting system, as well as 5% bonus payments to physicians practicing in physician shortage areas through June 30, 2008. In recent years there has been a large government push to require pay for performance standards tied to physicians’ Medicare reimbursement payments in order to control spiraling medical costs.  This would require physicians to report on minute aspects of the doctor-patient interaction so the government could review and measure quality of care to set reimbursement levels.  This issue is controversial, as there has been no discussion on who sets the “quality standards” and who would define what quality looks like under such a system.  Opponents of quality reporting provisions would argue that quality of care can only be determined by patients and physicians.

Extension for Other Provider Payments.  In addition to the adjustment to the SGR conversion factor, S. 2499 would extend provisions related to physician pathology services (no net cost), clinical laboratory tests in rural areas (no net cost), and therapy caps (net cost of $200 million) through June 30, 2008.  The legislation also adjusts the reimbursement rate for diabetes laboratory tests approved for home use (net cost of $700 million) and brachytherapy (no net cost) services beginning April 1, 2008.

Medicare Advantage Enrollment.  The bill would extend the authority for certain existing Medicare Advantage plans to count as “special needs plans” – those plans serving institutionalized patients, or beneficiaries with severe or disabling chronic diseases – and target enrollment to specialized populations through December 31, 2009.  However, the bill would also preclude the Secretary from designating any new such plans, and would prohibit beneficiaries from enrolling in any expanded service areas by existing plans through December 2009.  CBO scores this provision as costing $1.4 billion over ten years.

Reduction in Medicare Stabilization Fund.  S. 2499 would remove the remaining $1.5 billion from the Medicare stabilization fund for regional provider organizations in 2012.  It is important to note that unlike numerous Democrat Medicare and SCHIP bills, this legislation does not cut payments to Medicare Advantage plans, which has provoked past veto threats, because doing so would discourage many private plans from participating in the program, perhaps eliminating the private Medicare option in many areas and for many individuals.

Medicare Secondary Payer.  The bill includes additional requirements on group insurance plans and liability insurers to the Secretary to determine that the beneficiary is entitled to benefits under the Medicare Secondary Payer program.  CBO scores this provision as saving $1.1 billion over ten years.

Average Sales Price Computation.  S. 2499 would establish a volume-weighted average sales price for prescription drugs based on average sales volume.  CBO scores this provision as saving $2.6 billion over ten years.

Long-Term Care Provisions.  The bill would freeze the market-basket reimbursement rate for long-term care (LTC) facilities for the last quarter of 2008, saving $1.2 billion over ten years.  Additionally, S. 2499 would establish new review requirements on long-term care facilities to ensure patients are receiving appropriate levels of care, and impose a limited moratorium on the development of additional long-term care facilities.  Some conservatives may be concerned that these provisions, by preventing the development of additional long-term care facilities, represent an unnecessary government intervention in the LTC market.

Reduction in Inpatient Rehabilitation Services.  The legislation reduces the market basket update factor for inpatient rehabilitation facilities (IRFs) at 0% from April 1, 2008 through Fiscal Year 2009, saving $4 billion over ten years.

Medicare Payment Advisory Commission.  S. 2499 would change the status of the Medicare Payment Advisory Commission (MedPAC) – an agency that submits reports and recommendations to Congress regarding payment policy, access to care, quality of care, and related issues affecting Medicare – from that of an independent agency to an agency of Congress.

Medicaid and SCHIP:

Extension of Qualifying Individual Program.  The bill would extend the qualified individual (QI) program, which provides assistance through Medicaid for low-income seniors in paying their Medicare premiums, through June 30, 2008, at a cost of $200 million over ten years.

TMA and Title V Extension.  S. 2499 would extend for six months (until June 30, 2008), both the authorization for Title V programs (abstinence education programs), and the authorization for Transitional Medical Assistance (Medicaid benefits for low-income families transitioning from welfare to work), at a cost of $400 million over ten years.  TMA has historically been extended along with the Title V Abstinence Education Program.  Regarding the Title V grant program, in order for states to receive Title V block grant funds, states must use the funds exclusively for teaching abstinence.  In addition, in order to receive federal funds, a state must match every $4 in federal funds with $3 in state funds.

SCHIP Extension and Funding.  The bill extends the State Children’s Health Insurance Program through March 31, 2009, to allow for a reauthorization process that does not become entangled in the 2008 election season.  The bill also provides supplemental funding for states that are expected to exhaust their SCHIP funding at current levels.  (See “Additional Background.”)   This provision has a net cost of $800 million, according to CBO.

Additional Background: 

Medicare.  Under current Medicare law, doctors providing health care services to Part B enrollees are compensated through a “fee-for-service” system, in which physician payments are distributed on a per-service basis, as determined by a fee schedule and an annual conversion factor (a formula dollar amount).  The fee schedule assigns “relative values” to each type of provided service.  Relative value reflects physicians’ work time and skill, average medical practice expenses, and geographical adjustments.  In order to determine the physician payment for a specific service, the conversion factor ($37.8975 in 2006) is multiplied by the relative value for that service.  For example, if a routine office visit is assigned a relative value of 2.1, then Medicare would provide the physician with a payment of $79.58 for that service.  ($37.8975 x 2.1)

Medicare law requires that the conversion factor be updated each year.  The formula used to determine the annual update takes into consideration the following factors:

  • Medicare economic index (MEI)–cost of providing medical care;
  • Sustainable Growth Rate (SGR)–target for aggregate growth in Medicare physician payments; and
  • Performance Adjustment–an adjustment ranging from -13% to +3%, to bring the MEI change in line with what is allowed under SGR, in order to restrain overall spending.

Every November, the Centers for Medicare and Medicaid Services (CMS) announces the statutory annual update to the conversion factor for the subsequent year. The new conversion factor is calculated by increasing or decreasing the previous year’s factor by the annual update.

From 2002 to 2007, the statutory formula calculation resulted in a negative update, which would have reduced physician payments, but not overall physician spending. The negative updates occurred because Medicare spending on physician payments increased the previous year beyond what is allowed by SGR.  The SGR mechanism is designed to balance the previous year’s increase in physician spending with a decrease in the next year, in order to maintain the aggregate growth targets.  Thus, in light of increased Medicare spending in recent years, the statutory formula has resulted in negative annual updates.  It is important to note that while imperfect, the SGR was designed as a cost-containment mechanism to help deal with Medicare’s exploding costs, and to some extent it has worked, forcing offsets in some years and causing physician payment levels to be scrutinized annually as if they were discretionary spending.

Since 2003, Congress has chosen to override current law, providing doctors with increases each year, and level funding in 2006.  In 2007, Congress provided a 1.5% update bonus payment for physicians who report on quality of care measures; however, Congress also provided that the 2007 “fix” would be disregarded by CMS for the purpose of calculating the SGR for 2008, resulting in a higher projected cut next year.  The specific data for each year is outlined in the following table.

Year Statutory

Annual

Update (%)

Congressional “Fix” to the Update (%)*
2002 -5.4 -5.4**
2003 -4.4 +1.6
2004 -4.5 +1.5
2005 -3.3 +1.5
2006 -4.4 0
2007 -5.0 +1.5***
2008 -10.1§ 0.5 (proposed)

* The annual update that actually went into effect for that year.

** CMS made other adjustments, as provided by law, which resulted in a net update of – 4.8%; however, Congress did not act to override the -5.4% statutory update.

*** The full 1.5% increase was provided to physicians reporting quality of care measures; physicians not reporting quality of care received no net increase.

  • The Tax Relief and Health Care Act signed last year provided that 2007’s Congressional “fix” was to be disregarded for the purpose of calculating the SGR in 2008 and future years.

SCHIP.  According to a November Congressional Research Service report, 21 states are projected to face SCHIP shortfalls in the absence of additional funding for Fiscal Year 2008.  However, at least nine of these states’ shortfalls stem in part from their decisions to cover children in families making above 200% of the federal poverty level and/or to cover adults using the enhanced SCHIP funding match.  A Heritage Foundation analysis of the CRS data notes that “these overextended [state] programs…account for the lion’s share of the [SCHIP] shortfall.”  Some conservatives may have concerns that additional funding is being provided to cover the additional expenditures of states that have chosen to exceed the originally intended parameters of the SCHIP program.

Cost to Taxpayers:  S. 2499 eliminates a scheduled 10.1% reduction in payments to physicians effective December 31, 2007, at a cost of $6.4 billion.  The bill also includes $800 million in additional SCHIP funding to eliminate shortfalls through March 31, 2009.  This new spending is offset by rescinding $1.5 billion from the Medicare stabilization fund, which finances payments to regional preferred provider organizations.  S. 2499 also reduces payments to long-term care hospitals and inpatient rehabilitation facilities in 2008, saving an additional $5.2 billion over ten years.  These and other changes make S. 2499 technically compliant with PAYGO rules.

Committee Action:  The bill has not been considered by a House Committee.

Administration Position:  The Administration has indicated no opposition to the measure.

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?: No.

Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax Benefits/Limited Tariff Benefits?:  An earmarks/revenue benefits statement required under House Rule XXI, Clause 9(a) was not available at press time.

Constitutional Authority:  A committee report citing constitutional authority is unavailable.