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The President's Budget Proposes Smart Health Savings

Mar 2, 2018 | Health Care

Much of the health care discussion in President Trump's FY 2019 budget has focused on his $700 billion plan to repeal and replace the Affordable Care Act (ACA or "Obamacare"). Importantly, though, President Trump's budget also includes a number of thoughtful reforms and changes to save money in Medicare and Medicaid. Most of these proposals are new in that they were not proposed in President Trump's first budget, and many of them are similar or identical to changes proposed by President Obama.

Taken on the whole, President Trump's (non-ACA) health care proposals would reduce projected Medicare spending, lower premiums and costs for seniors, and slow overall health care cost growth. Many of these proposals work to more closely align Medicare with private insurer policies, equalize reimbursement rates regardless of site of service, and lower drug prices.

Non-ACA Health Savings in the President's FY 2019 Budget
Policy 2019-2028 Savings
Create a unified payment system for post-acute care regardless of setting $80 billion
Move payments to hospitals for uncompensated care out of Medicare and establish a new system for lower payments $70 billion
Enact medical malpractice liability reform $50 billion
Consolidate GME payments into a new grant program outside of Medicare $50 billion
Align Medicare coverage of bad debts closer with private payers $35 billion
Pay off-campus, hospital-owned providers at normal physician office rate $35 billion
Continue Medicaid Disproportionate Share Hospital (DSH) cuts $20 billion
Enact payment and delivery system reforms – expand ACOs, increase competitive bidding for durable medical equipment, and reduce payments for hospital transfers $10 billion
Increase state flexibility for Medicaid – allow states to apply asset tests to expansion population, require immigration documentation, and increase copayments $5 billion
Reform Medicare Part D benefit design $5 billion
Other savings proposals $5 billion
Extend mandatory sequester to 2028 (health portion) $25 billion
Total, Health Savings $390 billion

Sources: Office of Management and Budget and Department of Health and Human Services.
Certain other policies are not scored but would generate savings. All savings rounded to the nearest $5 billion and totals may not sum due to rounding.

Create a unified payment system for post-acute care regardless of setting ($80 billion savings). Medicare reimburses post-acute care based on many factors, including the setting in which the care is performed – usually offering higher reimbursement to hospital settings. Under this policy, starting in 2024 post-acute care payments would be prospectively set based on episodes of care rather than the setting it is performed in. This is similar to a proposal from President Obama's FY 2016 and FY 2017 budgets.

Move payments to hospitals for uncompensated care out of Medicare and establish a new system for lower payments ($70 billion savings). Under current law, Medicare pays hospitals for a portion of uncompensated care by distributing funding from a pool based on how many low-income individuals the hospital treats – which is partially disconnected from the Medicare program itself and might not belong under Medicare's purview. Under this proposal, a new process for distributing payments for uncompensated care would be established that aims to more closely align Medicare policy with that of private insurers (who don't cover uncompensated care). It would freeze payments at the FY 2018 level and grow it with CPI-U, funded out of general revenue rather than via Medicare. Payments would be distributed by evaluating each hospital's share of charity care and non-Medicare bad debt.

Enact medical malpractice liability reform ($50 billion savings). The President's budget includes an identical proposal to the FY 2018 budget to reform medical liability – also known as medical malpractice or tort reform. This includes limiting non-economic damages to $250,000 adjusted for inflation, instituting a three-year statute of limitations, and establishing "safe harbors" against claims that have clinical justification.

Consolidate Graduate Medical Education (GME) payments into a new grant program outside of Medicare ($50 billion savings). Under current law, federal health programs (including a large portion from Medicare) individually subsidize the direct costs of graduate medical training in hospitals. This proposal would consolidate all of the current programs from Medicare, Medicaid, and the Children's Hospital Insurance Program (CHIP) for GME spending into a single program for teaching hospitals. It would grow with inflation minus on percentage point annually. While this proposal is new, past Presidents' budgets have proposed various reforms to GME payments as well.

Align Medicare coverage of bad debts closer with private payers ($35 billion savings). Most private payers do not reimburse for bad debts; this policy would move Medicare toward this by lowering its coverage from 65 percent of bad debt to 25 percent over three years. Certain small hospitals and low-income clinics would be exempt from these cuts. An identical proposal appeared in President Obama's FY 2017 budget.

Pay off-campus, hospital-owned providers at normal physician office rate ($35 billion savings). Furthering the effort to reduce reimbursement variation based on site of service, this proposal would lower payments for physicians who work in hospital-owned offices that are not located in the hospital at the normal physician rate. This proposal would remove all exemptions for grandfathered facilities.

Continue Medicaid Disproportionate Share Hospital (DSH) cuts ($20 billion savings). The President's budget would continue the Medicaid DSH cuts for 2026 through 2028 at $8 billion per year. Importantly, the recently-passed Bipartisan Budget Act of 2018 prevented DSH cuts from happening in 2018 and 2019 and extended the cuts through 2025, but they have never been enacted since they were first set to go into effect in 2014.

Enact payment and delivery system reforms – expand ACOs, increase competitive bidding for durable medical equipment, and reduce payments for hospital transfers ($10 billion savings). Building on past Presidents' budgets, the FY 2019 budget proposes to increase enrollment in Accountable Care Organizations (ACOs), increase bidding for durable medical equipment, and reduce payments for hospital transfers. These delivery reforms have significant longer-term savings potential. ACOs hold potential for long-term cost control by better coordinating care and incentivizing physicians with shared savings. Changing competitive bidding for durable medical equipment would allow the administration to pay lower amounts for equipment based on geographic location. The budget would also reduce payments to hospitals when patients are quickly transferred to hospice, representing the resources required for the stay. Several other smaller delivery reform proposals, like encouraging the use of telehealth, have savings potential as well.

Increase state flexibility for Medicaid – allow states to apply asset tests to expansion population, require immigration documentation, and increase copayments ($5 billion savings). The President's budget includes several proposals to allow states more flexibility with Medicaid aside from ACA repeal and replacement. It would allow states to increase co-pays for using emergency rooms when there's no actual emergency, let states use asset tests for the Medicaid expansion population, and prohibits payments for Medicaid enrollees who haven't proved citizenship yet.

Reform Medicare Part D benefit design ($5 billion savings). Under current law, a typical Part D plan covers three-quarters of ordinary drug costs (after a deductible) and then 95 percent of "catastrophic costs" – costs above roughly $5,000 per year. The President’s budget would eliminate patient cost sharing above that threshold so that Medicare covers 100 percent of catastrophic costs. To offset this cost while providing additional cost reduction for seniors, the President’s budget would require one-third of the drug discount (“rebate”) offered to Medicare to be given directly to the consumer, and it would measure the catastrophic threshold on a post-rebate basis rather than pre-rebate costs. Finally, the increase would allow insurance companies in Part D to narrow formularies to contain as few as one (rather than two) drugs for a given medical need.

Extend the mandatory sequester to 2028 ($25 billion savings from Medicare). The President's budget proposes to extend the mandatory sequester – which mostly cuts Medicare spending -- from 2025 to 2028. The full three-year extension would result in Medicare savings of $61 billion, but the sequester was already extended to 2027 in the Bipartisan Budget Act of 2018. The resulting incremental Medicare savings for 2028 would be about $25 billion.

The President's budget has many thoughtful ideas for curbing costs in Medicare and Medicaid that lawmakers should consider adopting. However, it could have gone further by making sensible changes like limiting Medigap plans, increasing means testing for premiums, and other beneficiary changes that preserve the programs for the most vulnerable. Regardless, this is a good start for helping to further slow cost growth in the health care space.