Legislative Watch

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March 2005

By George G. Olsen, JD

A more than modest proposal

President Bush’s budget includes billions for Medicare and Medicaid

President George W. Bush sent his $2.57 trillion fiscal year (FY) 2006 budget to Capitol Hill on February 7, 2005. The budget includes $840.3 billion for discretionary programs subject to annual appropriations. The budget plan represents an overall spending increase of 3.5%, but virtually all of the increase comes from spending on defense, homeland security, and entitlements. Beyond those areas, the President’s budget cuts spending by about 0.5%. It proposes to eliminate or sharply reduce 150 federal programs, saving about $20 billion; 12 federal agencies will have their overall budget authority reduced next year under the proposal. The budget proposes $137 billion in savings over 10 years from cuts to mandatory programs, including Medicaid, and fees such as increased prescription drug co-payments for veterans.

The budget forecasts that the federal deficit, originally projected at $521 billion in FY 2005, will actually be $427 billion in FY 2005 and then decline to $390 billion in FY 2006 and gradually to $207 billion in FY 2010. By FY 2009, the deficit would fall to $233 billion, meeting the President’s goal of halving the deficit within 4 years.

HHS would receive 13.8% more in total budget authority under Bush’s FY 2006 budget, mostly due to the implementation of the Medicare prescription drug benefit, which goes into full effect on January 1, 2006. The Administration estimates an outlay of $345.2 billion for Medicare in FY 2006, compared with an estimate of $290.3 billion in 2005. Overall, HHS would get $662.1 billion in new budget authority, an increase of $80.4 billion, or 13.8% over 2005. The budget request for HHS recommends a discretionary spending level of $67.2 billion, a decrease of $691 million, or 1%, over last year.

Some of the health care budget highlights follow:

$74 billion over 10 years for health insurance tax credits for low-income individuals and families that will help families purchase health insurance.
$4 billion in grants to states to establish health insurance purchasing pools, through which people who qualify for the health insurance tax credit and others can obtain coverage.
$28.5 billion over 10 years for tax deductions for premiums for high deductible insurance, intended to help Americans save for health care costs in tax-free accounts.
$19.2 billion over 10 years for tax rebates for small businesses that contribute to their employees’ health savings accounts.
$2.0 billion for Health Centers in medically underserved areas.
$1 billion in grants over 2 years for “Cover the Kids,” a new campaign to enroll millions of low-income children in Medicaid and the State Children’s Health Insurance Program (SCHIP).
$125 million for health information technology to move toward electronic health records by 2014.
$3.2 billion to expand the President’s Emergency Plan for AIDS Relief.

The President’s budget request for CMS is $545.5 billion in net outlays, a $56 billion or 11.4% increase for FY 2005. The request funds, among other things, Medicaid, Medicare, State Children’s Health Insurance Programs, and other agency activities.

MEDICAID
The Administration’s goal of decreasing health care spending is focused on slowing the growth of Medicaid by $60 billion over the next 10 years. The Bush proposal anticipates a 7.2% annual growth in Medicaid spending, down from a previous 7.8% estimate. The savings would require changes in the law that would cut what is deemed “inappropriate spending” in Medicaid, namely reducing overpayments for prescription drugs, tightening restrictions on beneficiaries who transfer assets to qualify for Medicaid, and ending “overpayments” in state reimbursements. The proposal puts about $15 billion of those savings back into Medicaid and children’s health programs. The Bush budget seeks to “assure appropriate Federal-State Partnerships,” and documents released by HHS provide some detail on payment reforms and other ways the Administration seeks to reduce costs. For example:

The Administration seeks to restrict intergovernmental transfers. Through various mechanisms, state and county government providers return federal Medicaid funds back to the states for other uses. States, in turn, may recycle these funds by using them to draw down additional funding. To curb this practice, the Administration proposes match-only funds kept by providers as payment for services. This would save $11.9 billion over 10 years.
The Administration proposes limiting cost-based reimbursement for Government providers to no more than the cost of providing services, which would save $3.3 billion over 10 years.
The Administration proposes saving $1.4 billion over 10 years by bringing managed care organizations in line with other provider classes with respect to tax requirements.
The Administration proposes to reduce the targeted case management match to 50%, which would save $4 billion over 10 years.
To save $7.7 billion over 10 years, the Bush budget proposes to explicitly clarify which services may be claimed as Medicaid targeted case management costs.

From a long-term perspective, the Bush proposal would give states more flexibility to tailor the Medicaid program, but gives few details about how that restructuring would occur. Administration officials have been stating they plan to “build on the success of SCHIP in modeling the Medicaid program.” SCHIP is funded through a per capita allotment, similar to a block grant, so states can alter coverage relatively quickly. The budget also includes $91 billion in Medicaid savings that do not require changes in the law. Instead, the savings result from altered assumptions about Medicaid spending, such as the number of people on the rolls or the estimated costs of prescription drugs.

In 2006, funding for Medicaid is projected to be $338 billion, about $193 billion of which is paid by the federal government. The White House is proposing mandatory savings of $44.6 billion over 10 years. The budget proposes giving states more power to reduce benefits to certain Medicaid recipients, particularly children and low-income parents. This would allow the states to expand coverage to more people “without additional costs for the federal government.”

CHALLENGES
Cover the Kids. Despite the availability of health care coverage through Medicaid and SCHIP, millions of children eligible for these programs have not enrolled. The 2006 budget proposes a national outreach campaign, which would provide $1 billion in grants over 2 years. This program would combine the resources of the federal government, states, schools, and community organizations to enroll as many Medicaid- and SCHIP-eligible children as possible.

Medicaid and SCHIP Modernization. The Administration proposes to modernize Medicaid to give states greater flexibility without requiring “burdensome” waiver applications. Principles that are employed in SCHIP and emphasize innovation will be expanded to Medicaid beneficiaries, while long-term care reforms will build on successful programs that use consumer direction and home- and community-based care.

Medicare Premium Assistance. The Administration proposes to continue Medicare Part B premium assistance for Medicare beneficiaries between 120% and 135% of the federal poverty level for 1 year. In 2005, these premiums will be $78.20 per month. States receive 100% federal funding for these benefits.

HIPAA. Since enacted in 1996, HIPAA has increased the continuity, portability, and accessibility of health insurance. To ensure that Medicaid and SCHIP beneficiaries receive the benefits of HIPAA coverage, the Administration proposes two legislative changes. Under this proposal, eligibility for a Medicaid/SCHIP Employer-Sponsored Insurance (ESI) Program would be a qualifying event, which would allow families to enroll in ESI immediately through special enrollment. This proposal also would require SCHIP programs to issue certificates of creditable coverage, which promote portable health coverage by verifying the period of time an individual was covered by a specific health insurance policy.

Improving Options for People with Disabilities. The budget includes several policies that promote home- and community-based care options for people with disabilities. These policies build on the New Freedom Initiative, part of a nationwide effort to integrate people with disabilities more fully into society.

Reforming Provider Taxes. Under certain conditions, states may use the proceeds of taxes collected from a certain class of health providers to help finance the state’s share of Medicaid expenses. Under current rules, the tax cannot exceed 6% of revenues and must be applied uniformly across all health care providers in the same class. The 2006 budget proposes to phase down the allowable tax rate from 6% to 3% and require that managed care organizations be treated the same as other classes of health care providers with respect to provider tax requirements. This is expected to save $6.2 billion over 10 years.

Strengthening Reimbursement Policies for Selected Medicaid Services. The 2006 budget proposes: (1) clarifying allowable services that can be claimed under targeted case management (TCM), and rehabilitation services; (2) aligning federal reimbursement for TCM services with administrative matching rate of 50%; and (3) codifying in regulation CMS reimbursement policies for services provided free of charge to the public.

MEDICARE
Medicare will serve 42 million individuals in FY 2006. The budget proposes a total of $393.8 billion in Medicare spending, $67.8 billion above the FY 2005 level, and $98.5 billion above the FY 2004 level.

Part A benefit outlays are estimated at $184.96 billion, a $3.86 billion increase from the FY 2005 level and a $19 billion increase from FY 2004.
Part B benefit outlays are estimated at $155.24 billion, a $6.09 billion increase from FY 2005 and a $21.12 billion increase from FY 2004, while Part D outlays are estimated at $58.4 billion.
$75 million from the $1.075 billion Health Care Fraud and Abuse Control Account will be invested in program integrity efforts to combat fraud and abuse in the Medicare Prescription Drug program and the Medicare Advantage programs. This figure remains the same as it was in 2004 and 2005.

The Bush proposal aims to phase in over 4 years the savings from full implementation of risk adjustment payments to account for the different health statuses of beneficiaries in Medicare Advantage plans. The phase-in will begin in 2007 and will be completed by 2010. It is projected to produce savings to the extent that Medicare Advantage plans serve healthier beneficiaries, on average, compared to fee-for-service. The budget assumes that in 2006, 16% of beneficiaries will enroll in Medicare Advantage plans, and that by 2009 this number will increase to 24%.

The budget also proposes to improve payment accuracy for patients who are transferred from inpatient hospitals to postdischarge acute settings, such as nursing facilities. The budget proposes that HHS will refine the Skilled Nursing Facility (SNF) Prospective Payment System (PPS) in 2006 to ensure appropriate payments for certain high-cost cases.

Starting in 2006, Medicare beneficiaries will be able to enroll in the voluntary prescription drug benefit. Medicare will spend $394 billion for benefits in 2006 to assist almost 43 million Americans who enroll. This will be financed through beneficiary premiums and general revenue and is projected to cost $58.9 billion in 2006.

Under the Medicare Premium Assistance, the Administration proposes to extend assistance for qualified individuals for an additional year. States will still be fully reimbursed for the cost of the program. The cost for 1 year is projected to be $230 million. The cost for 5 and 10 years is projected to be $230 million and $230 million, respectively.

George G. Olsen, JD, is an attorney with the law firm of Williams & Jensen, PC, Washington, DC.

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March 2005