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CBO Offers Menu of Medicare Cuts

By John Reichard, CQ HealthBeat Editor

February 26, 2007 -- With Democrats looking for big bucks to expand coverage of children in the State Children's Health Insurance Program and to prevent cuts in doctor payments, the "Budget Options" document released late last week by the Congressional Budget Office (CBO) might quickly become necessary reading for lawmakers and lobbyists.

The juiciest section for Democrats who complain that Medicare overpays managed care plans starts on page 167, estimating that $64.8 billion could be saved in 2008–2012 by equalizing payments to those plans and to fee-for-service providers.

Other options with big five-year savings include reducing Medicare payments to cover "indirect" medical education costs (IME), which saves $21.6 billion; shaving the payment increase to hospitals for inpatient care ($17.8 billion); trimming payments to home health agencies ($8.5 billion) and charging copays for those visits ($12.9 billion); and converting payments for "disproportionate share hospitals" (DSH) into a block grant program ($11.2 billion).

CBO says lawmakers can come up with some big savings by going after beneficiaries too. Increasing the share of Part B costs they must pay would save $42.2 billion, and revising other cost-sharing provisions while trimming the scope of Medigap coverage could save $27.8 billion.

Lawmakers are likely to be attracted to options that trim payments to those who provide rather than receive care. But those options carry political risks as well.

The option that would trim payments to private health plans in the Medicare Advantage part of Medicare is referred to as equalizing the "benchmark." Plans in Medicare Advantage submit bids reflecting the per capita amount of money for which they are willing to provide Medicare's covered benefits.

Medicare pays plans what they bid up to a benchmark figure; if they bid below the benchmark, they also receive 75 percent of the amount by which the benchmark exceeds their bid, but must return that 75 percent to beneficiaries either as added benefits or as premium rebates. If they top the benchmark, they pay the added amount themselves and must charge beneficiaries the full difference between the bid and the benchmark as an add-on to their premiums.

A benchmark is set for each county in the U.S. and must be at least as high as local per capita fee-for-service spending. "In many counties, the benchmark is higher than per capita fee-for-service spending, in some cases substantially" higher, CBO notes. Making the benchmark equal to local per capital fee-for-service spending in each county would save $8.1 billion in 2008 and $64.8 billion from 2008–2012, it said.

But while Democrats might like that option because of their rhetoric about greedy HMOs, the option also might slice into benefits enjoyed by populations traditionally identified as Democratic constituencies: lower-income Americans and minorities. HMOs say higher proportions of Medicare Advantage enrollees fall into those two categories. An argument against the option is that it "could lead many plans to limit the benefits they offer, raise their premiums or withdraw from the program," CBO said.

Reducing by 1 percentage point the payment increase hospitals are supposed to receive in fiscal 2008 for inpatient care would slice $17.7 billion over five years from Medicare spending, CBO said.

Freezing home health payments from 2008–2012 at 2007 levels would save $8.5 billion, while reducing payment increases for other types providers of post-acute care would raise several more billion dollars, the congressional budget analysts said.

Other options could net large savings but might be more difficult to achieve. Charging copayments for home health care has been proposed a number of times in the past, without success. Increasing the percentage of Part B costs for which beneficiaries are responsible from 25 percent to 30 percent would save $42 billion over five years, but that would mean sizeable increases in monthly premiums paid by beneficiaries.

Another option would create a combined deductible for Part A and Part B of the Medicare program, set at $500 in 2008, with beneficiaries charged a uniform coinsurance rate of 20 percent for amounts above the deductible, including inpatient care. However, a beneficiary's cost-sharing liability in 2008 would be capped at $5,000. This option would save $11.6 billion over five years. Another option would limit payouts by Medigap plans as a way of reducing utilization of services by Medicare beneficiaries. This provision would bar Medigap policies from paying any of a beneficiary's first $500 in cost-sharing in a given year, and limit Medigap coverage to half of the next $4,500 in cost-sharing. This option would save $14.4 billion. Combined, these two options modifying cost-sharing would save about $26 billion.

Other options would go after teaching hospitals and create a block grant program, both of which would be politically difficult. Reducing the "IME adjustment"—from the current 5.35 percent to 2.2 percent—that increases payments to teaching hospitals would save $21.6 billion over five years. IME payments compensate teaching hospitals for costs not attributable either to residents' compensation or the direct costs of running a teaching program. Examples include the added demands placed on staff as a result of teaching activities and the greater number of tests and procedures ordered by residents, CBO said. Converting Medicare payments to disproportionate share hospitals—those that treat a disproportionate number of low-income patients—would save $11.2 billion over five years.

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