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Newsletter Article


Budget Plan Hits Health Sector in the Market Basket

By John Reichard, CQ HealthBeat Editor

February 5, 2007 -- The fiscal 2008 budget proposal released by the White House Monday would reduce yearly Medicare payment updates across the health sector to grab the lion's share of the $76 billion the administration proposes to cut from the program over the next five years. The plan also would shave $26 billion from federal Medicaid spending over that period, for a total of $102 billion in cuts over both programs over five years.

The update reductions are in the "market baskets" used by the Centers for Medicare and Medicaid Services to track yearly changes in the added cost of delivering a particular type of care. Hospitals would take the biggest hit under the market basket changes proposed by the administration, seeing a reduction of 0.65 percentage points off the market basket increase for inpatient care in each of the five years and losing $13.8 billion in total as a result. The administration said the change is a "productivity" adjustment that reflects efficiency gains in delivering care.

Hospitals would see the same reduction in the market basket increase in Medicare payments for outpatient care. That change would save $3.4 billion.

Home health agencies would see the next largest reduction, with their payment rates frozen for the next five years, saving $9.7 billion. Skilled nursing facilities would have their rates frozen in 2008 and in 2009–2012 would see a 0.65 percentage point reduction each year in their market basket increases. That change would save $9.2 billion.

Inpatient rehabilitation facilities also would see a freeze in fiscal 2008 and market basket updates nicked by 0.65 percentage points in each of the following four years, costing them $1.9 billion in Medicare reimbursement over that period.

Medicare hospice payments also would see a 0.65 percentage point drop in their market basket increases in each of the five years, saving Medicare $1.14 billion. Both the updates for the Medicare ambulance fee schedule and ambulatory surgery centers would be set at the change in the consider price index minus 0.65 percentage points, with the starting year for that change fiscal year 2008 in the case of ambulances and fiscal year 2010 in the case of the surgery centers. The savings to Medicare would be $360 million and $90 million, respectively. Medicare also would save $2.4 billion by introducing competitive bidding for clinical lab services. Thus, update changes would account for about $39.5 billion of the Medicare cuts.

The proposal also calls for Medicare savings of $11.5 billion by steps to "rationalize Medicare payments and subsidies." These changes include eliminating duplicate payments for certain medical education expenses in the case of Medicare Advantage payment rates. Medicare Advantage is the private health plan component of the Medicare program. That change would save $4.4 billion. Reducing payment rates for certain conditions treated in skilled nursing facilities and inpatient rehabilitation facilities would save $2.9 billion. Establishing a 13-month rental period for power wheelchairs would save $530 million. And reducing the rental period for oxygen equipment to 13 months would save $2.4 billion. Medicare also would save about $7 billion by phasing out payments for bad debt incurred by providers.

Other legislative changes would automatically reduce Medicare payments to all providers by 0.4 percent when general revenues account for more than 45 percent of all Medicare spending. "The sequester order would increase each year by 0.4 percent until general revenue funding is brought back to 45 percent," the Department of Health and Human Services said in a summary of its budget proposal.

Higher-income Medicare beneficiaries also would pay more for Medicare benefits in Part B of the program, which covers many health care expenses outside of the hospital, and Part D, the prescription drug benefit part of Medicare.

Higher-income beneficiaries would begin paying higher monthly premiums for the prescription drug benefit. And more Medicare beneficiaries would have to pay higher premiums for Part B because the income thresholds for paying those higher charges would no longer be subject to annual indexing. The Part D change would save $3.2 billion and the Part B change would save $7.1 billion.

Altogether, these various legislative changes would save $65.6 billion, with another $10.2 billion in savings coming from administrative changes in the Medicare program to improve "efficiency, productivity and program integrity," HHS said. The legislative and administrative changes combined would slow the yearly spending growth rate over the five years from 6.5 percent to 5.6 percent, the department said.

HHS would save $13 billion from legislative revisions and $12.7 billion from administrative changes in Medicaid. Legislative changes include reducing payments for administrative costs, reducing pharmacy reimbursement, and making it hard for owners of more valuable homes to qualify for Medicaid.

Administrative changes would include savings of $5 billion by revising payments for government providers, $3.6 billion from eliminating certain payments for school-based services, $2.2 billion in changes for rehabilitation services, and $1.8 billion by eliminating Medicaid payments for graduate medical education.

At an afternoon press briefing, HHS Secretary Michael O. Leavitt said the administration would target State Children's Health Insurance Program (SCHIP) payments to families with incomes below 200 percent of the federal poverty line, a step that would mean a gradual end to coverage of adults under the program and lower payments to states for children in families above 200 percent of the federal poverty line. Those payments would be made at the lower Medicaid federal matching payment rates instead of at enhanced SCHIP federal matching payment rates. An HHS official said the lower rates would not mean children would lose coverage.

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