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Senate Finance Unveils Plan to Cut $10 Billion from Medicare, Medicaid

OCTOBER 20, 2005 -- After weeks of negotiations, Senate Finance Committee Republicans on Thursday agreed on a package of Medicare and Medicaid spending cuts that would save a net of $10 billion over five years, meeting their target under this year's budget resolution.

Chairman Charles E. Grassley, R-Iowa, scheduled a formal markup of the package for 4 p.m. on Oct. 24. The proposal would carve a net $4.26 billion from Medicaid, the joint federal–state health insurance program for the poor, and a net $5.76 billion from Medicare, the federal health program for the elderly and disabled.

As expected, the major Medicare cost savers in the bill include eliminating a fund created by the 2003 Medicare drug law (PL 108-173) to encourage preferred provider organizations to offer regional coverage to Medicare beneficiaries. Lawmakers say the fund has proved unnecessary, because plenty of plans stepped forward to offer such coverage. Scrapping that "stabilization" fund would save about $5.4 billion over five years. "The need for the stabilization fund is dubious at best," Senate Finance Health Policy Director Mark L. Hayes told reporters at a Thursday briefing.

The Grassley proposal also would save about $6.5 billion over five years by implementing language in the Bush administration's fiscal 2006 budget proposal to give higher payments to insurers that cover sicker patients and lower payments to plans that enroll healthier patients.

A Medicare "pay for performance" provision for acute-care hospitals, physicians, Medicare Advantage plans, and other Medicare providers is expected to save about $4.5 billion over five years, according to Finance documents. The bill also includes a one-year, 1 percent payment increase for physicians, averting a 4.4 percent scheduled cut. Physicians would not have to participate in the "pay for performance" program to receive the update, Hayes said.

American Medical Association President J. Edward Hill praised the increase. "We look forward to working with the House to build upon the Senate's progress on this issue of critical importance to our nation's seniors and the physicians who care for them," Hill said in a statement Thursday.

Hayes said the physician payment update would increase Medicare beneficiaries' Part B premiums by a net of 42 cents per month because other provisions of the Grassley package would lower costs for Part B, which covers physicians visits and other outpatient services.

The Finance bill also includes $1.8 billion over five years to funnel extra Medicaid money to states affected by Hurricane Katrina. That is significantly less than Grassley and ranking Democrat Max Baucus of Montana had sought, but it nonetheless would help states with some of their unexpected health costs from the hurricane.

Hayes called the measure a "placeholder," indicating Grassley may seek to pass a more sweeping version of the legislation (S 1716) he is co-sponsoring with Baucus. "We are still working on other ways to move this spending."

Grassley's draft also includes $834 million over five years to fund his legislation (S 183) to allow families at or below 300 percent of the federal poverty level to buy Medicaid coverage for their disabled children.

The Finance measure would also make a series of changes to the way Medicaid pays for drugs, including redefining the "average manufacturer price" to reflect discounts and rebates available to retail pharmacies. The package of prescription drug payment changes would save about $4.6 billion over the next five years. In addition, the measure would increase the rebates for covered outpatient drugs to 17 percent from 15.1 percent, saving about $1.1 billion over the next five years.

Grassley's bill would also overhaul current Medicaid asset transfer rules but it would not alter the current three year "look back" asset transfer period for Medicaid beneficiaries.

Other provisions in the package would:

  • Reduce Medicare's reimbursement of skilled nursing facility bad debt from unpaid beneficiaries' co-payments and deductibles from 100 percent to 70 percent of allowable costs.
  • Prohibit new physician-owned limited service hospitals from having any ownership or investment interest by physicians who refer Medicare or Medicaid patients to the hospital. The measure would also confirm that the "whole hospital" exception would not apply to any new physician-owned limited service hospital effective as of June 8, 2005.
  • Provide additional funding to states facing shortfalls in State Children's Health Insurance Program funding and expand outreach and enrollment activities to get more children covered.
  • Put in place a series of measures to encourage the purchase of long-term care insurance.
  • Freeze implementation of the so-called "75 percent rule" at 50 percent level for two years through June 30, 2007. Hospitals or units that qualify as inpatient rehabilitation facilities qualify for higher Medicare reimbursements.
  • Maintain current moratorium on therapy caps for one year.
  • Encourage states to aggressively Medicaid waste, fraud, and abuse.

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