FY 2010 Budget Includes $634 Billion in Health Care Reform Initiatives

02 March 2009 Publication
Authors: Denise R. Rodriguez J. Mark Waxman

Legal News Alert: Health Care

On February 26, 2009, President Barack H. Obama released an outline of a $3.6 trillion fiscal year 2010 budget proposal that includes a $634 billion “reserve fund” over 10 years to cover health care reform. The proposal does not outline specific plans for expanding health care coverage and other aspects of reform, but does include general guidelines. The proposal also includes $316 billion in savings from cuts to Medicare and Medicaid programs such as reducing Medicare overpayments, prescription drug prices, and hospital readmissions. To raise the remaining $318 billion, the plan would increase taxes on upper-income earners by capping the tax rate for itemized deductions at 28 percent. The proposal is available online at http://www.whitehouse.gov/omb/budget/. A complete budget with line-item details will be released in April 2009.

Changes to Medicare Advantage, Part D
The plan would eliminate $177 billion over 10 years in subsidies paid to health insurers that operate Medicare Advantage plans. A competitive bidding process would be implemented for these plans, in which plan payments would be based on an average of plans’ bids submitted to Medicare. Managed care plans have been expecting that their Medicare payments would be reduced, but they are likely to fight to keep managed care payments higher in rural and low-payment areas.

In addition, Medicare prescription drug coverage monthly premiums would increase for higher-income beneficiaries, a step already in place in the Medicare Part B program. The administration expects this measure to save Medicare $8 billion over 10 years.

Hospital Readmission and Pay-for-Performance
In an effort to reduce hospital readmission rates, Medicare would pay hospitals bundled payments to cover the first hospitalization and 30 days of follow-up care from certain post-acute providers, instead of reimbursing for follow-up care on a fee-for-service basis. Hospitals with high rates of readmission will be paid less under this plan if patients are readmitted to the hospital within the same 30-day period. According to the budget outline, this will lead to fewer readmissions, saving roughly $26 billion over 10 years. The plan is similar to one laid out by Senate Finance Committee Chairman Max Baucus (D-Mont.) in his November 2008 “white paper” on health care reform. Hospital groups contend that readmission rates are often beyond a hospital’s control.

The budget outline also proposes linking a portion of Medicare payments for acute inpatient hospital services to the hospitals’ performance on specific quality measures, which would save $12 billion over 10 years, though the budget outline does not offer details on what the program would look like. The Centers for Medicare & Medicaid Services has previously addressed this issue in a number of rules and initiatives.

The proposal also allots $350 million for physician and nurse training, on top of the $500 million already set aside for this purpose in the economic stimulus package passed by the U.S. Congress earlier in February 2009.

Permanent Physician Payment System Fix Sought; Specialty Hospital Loophole Noted
The Obama budget outline also contains nearly $330 billion over 10 years in its budget baseline for Congress to craft and pass a permanent legislative fix for Medicare's physician payment system, which has been a long-time problem for doctors and has required Congress to pass temporary fixes annually. The White House said it would support “comprehensive, but fiscally responsible reforms to the payment formula. The Administration believes Medicare and the country need to move toward a system in which doctors face better incentives for high-quality care rather than simply more care.” The proposal received the support of the American Medical Association, which stated “President Obama's budget proposal takes a huge step forward to ensure that physicians can care for seniors by rejecting planned Medicare physician payment cuts of 40 percent over the next decade.”

The issue of physician-owned specialty hospitals was mentioned in the budget outline with a line item noting it would address “financial conflicts of interest in physician specialty hospitals,” although no savings figure was listed, according to news reports. This controversial issue has bedeviled Congress for several years as critics in Congress have sought to pass legislation to close what they have called a loophole in the Stark physician self-referral law.

Generic Biologics Approval Path and Drug Reimportation Policy
In addition to cost reduction, the budget outline also includes policy changes designed to improve the quality and efficiency of health care such as facilitating market entry of generic biotechnology medications. The president's budget outline also calls on Congress to keep rewards for brand biologic drug makers much lower than what the innovator pharmaceutical companies have demanded. This approach would save $9.2 billion over 10 years in reduced Medicare spending, according to the White House. The budget plan also would increase the discount that drug manufacturers are required to afford Medicaid from 15.1 percent to 22.1 percent, which would result in $19.6 billion in savings over 10 years. The budget outline also would allow the reimportation of prescription drugs from foreign countries, a practice that has been banned by the Bush administration over concerns about drug and device safety. Criticism over safety has been anticipated, as the budget plan for the U.S. Department of Health and Human Services (HHS) includes a note that the president also would provide a “substantial increase” in his budget for the U.S. Food and Drug Administration (FDA) to strengthen its drug and food safety programs. A number of high-profile failures in recent years over contaminated drugs and food products have re-ignited debate over the FDA’s capabilities to ensure safety.

Outlook for 2009
Congressional reaction to the FY 2010 budget outline fell along party lines. Democrats praised the administration for demonstrating a serious intention to reform the health care system this year, while Republicans criticized the tax increases included in the budget, and some compared the priorities to those of socialist governments in Europe. Mr. Baucus stated that the budget indicates “a clear commitment to action this year with an important and historic down payment on reform. We can and must achieve comprehensive health care reform this year, and this budget gives us a launching pad to move forward.” Speaker of the House Nancy Pelosi (D-Calif.) stated, “At long last we have a budget that is a statement of our national values, as a budget should be.” House Minority Leader John Boehner (R-Ohio) stated that “Republicans and Democrats need to work together to expand access to quality, affordable health care for all Americans, but increasing taxes during an economic recession, especially on small businesses, is not a responsible way to accomplish this goal.” In a separate statement to a conservative political action group, Mr. Boehner said, “the stimulus, the omnibus, the budget, it’s all one big down payment on a socialist experiment.”

Prospects for completing a health care overhaul brightened following the release of the budget proposal. Mr. Obama will host a White House summit in early March 2009 that will focus on health care reform. White House aides have said that this is the first step toward health care reform, with the goal of universal coverage. Senate Majority Leader Harry Reid (D-Nev.) said on February 25, 2009, that the Senate will address health care reform legislation by the end of the year, and would like to get started before the August recess. Mr. Baucus, who has positioned himself over U.S. Senate Committee on Health, Education, Labor and Pensions Chairman Edward Kennedy (D-Mass.) to take the lead on health reform in the Senate, has said that the Senate may even pass health care reform legislation before the August recess. House Majority Leader Steny Hoyer (D-Md.) has indicated that the House will not address the issue any earlier than May 2009, but he would like the chamber to take up health care reform before the August 2009 recess. This will require a conference committee between the House and Senate to resolve outstanding issues prior to any final vote.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our health care clients and colleagues. If you have any questions about this alert or would like to discuss this topic further, please contact your Foley attorney or any of the following individuals:

Robert C. Geist, Jr.
Washington, D.C.

Philip G. Kiko
Washington, D.C.

Michelle A. Leeds
Washington, D.C.

Denise Rios Rodriguez
Los Angeles, California

Michael Scarano
San Diego/Del Mar, California

J. Mark Waxman
Boston, Massachusetts

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