Highlights of Administration Budget Proposals for Fiscal Year 2007

February 6, 2006

MEDICARE

• The President’s budget proposes to reduce Medicare spending by $36 billion over five years (2007-2011) and $105 billion over 10 years (2007-2016). About half of the five-year total comes from reductions in the inpatient, inpatient rehabilitation, and outpatient hospital update factors; a change in payment for post-acute care of hip and knee replacement patients; and a phase out of bad debt payments. Other major sources of five-year savings are SNF ($5.1b) and home health ($3.5b) updates, and changes to payment for oxygen ($6.6 b). Most of the update factor recommendations for fiscal year 2007 follow MedPAC’s recommendations; a market basket minus 0.4% reduction is proposed for later years.
• Eliminating the indexing of income thresholds for the income-related Part B premium is proposed. This would increase the number of beneficiaries paying the premium and generate five-year savings of $1.9 billion, taking into account both increased premium collections and decreased Medicare Part B spending. These additional premiums would be more than offset, however, by a $3.8 billion reduction in general Part B premiums resulting from proposed Part B payment changes. The net effect of all proposals is a $1.9 billion reduction in premium collections.
• The budget also emphasizes Medicare’s long term financing problem, and proposes to build on the Medicare warning provision enacted as part of the Medicare Modernization Act (MMA) by establishing an automatic annual 0.4% payment reduction that would take effect absent other Congressional action. The MMA warning is tied to Medicare’s general revenue funding, suggesting that Part B might be the particular target of savings. The Administration does not appear to limit its automatic reduction proposal to Part B spending, however. If enacted as described, this provision would have the effect of permanently lowering the Medicare baseline, meaning a full market basket update would be considered new spending.

Other Medicare proposals of note:

• Survey and certification user fee ($170m over five years)
• Competitive bidding is proposed for clinical laboratory payments ($1.4b over five years). In addition, the budget assumes regulatory action to implement competitive bidding in July 2006 for certain physician-administered drugs and to institute competitive bidding for medical supplies and equipment ($1.8b over five years).
• Additional savings are anticipated from regulatory changes to long term care hospitals ($2.5b over five years) and inpatient rehabilitation facilities ($1.1b over five years).

Summary of Proposed Medicare Savings

*Over five years, eliminating the indexing of the income-related premium reduces federal Medicare outlays by $1.9 billion, taking into account both increased premium collections and decreased Medicare Part B spending. This total is more than offset, however, by a $3.8 billion reduction in general Part B premiums resulting from proposed Part B payment changes.

MEDICAID/SCHIP

• Proposed legislative and regulatory changes to Medicaid would result in net five-year savings of $12.3 billion, while proposals affecting the State Children’s Health Insurance Program (SCHIP) are expected to increase spending by $440 million over the 2007-2011 period.
• The Administration proposes a series of administrative changes that limit states’ ability to “recycle” provider payments, including a phase down of the allowable provider tax rate from 6% to 3%, ($2.1b over five years) and capping payments to government providers at costs ($3.8b over five years).
• Other regulatory initiatives related to rehabilitation and transportation services and pharmacy payments are expected to reduce federal Medicaid spending by $6.4 billion over five years.
• Savings would result from two proposed changes to prescription drug payments: limiting reimbursement for multiple source drugs to 150 percent of the average manufacturers’ price ($1.3b over five years), and giving states the option to use managed formularies ($177m over five years). In addition, the Administration proposes to modify the Medicaid drug rebate formula to permit private purchasers to negotiate lower drug prices (budget neutral).
• Additional savings would come from changing the treatment of TANF-related Medicaid administrative costs ($1.8b over five years), reduced matching rates for targeted case management services ($1.2b over five years), and strengthening third-party liability collections ($430m over five years)
• $100 million in annual grants for Medicaid and SCHIP outreach for children are expected to increase enrollment and spending in the two programs by $2.3 billion over five years.
• The Administration will seek legislative authority to modify targeting of SCHIP funds to states with shortfalls, generating $110 million in additional five-year spending.
• With regard to Medicaid reform, the Administration plans to develop a new waiver initiative that emphasizes “market-driven” approaches, in the model of the Florida waiver.
• Transitional Medical Assistance for former welfare recipients would be extended again through fiscal year 2007 to permit 12 months continuous coverage and reduced income reporting requirements. ($360m over five years)
• One proposal with no budget effect would provide Medicaid and SCHIP beneficiaries with HIPAA protections promoting continuity of coverage.

HEALTH SAVINGS ACCOUNTS

• The Administration proposes several changes to increase enrollment in Health Savings Accounts (HSAs), and projects that these changes will increase HSA enrollment by 50 percent by the year 2010 (from current estimate of 14 million to 21 million). According to the Treasury Department, 37 percent of current HSA enrollees were previously uninsured. The total cost of the proposed changes to increase HSA contribution limits, create a deduction for premiums, and provide a tax credit for low-income HSA participants is $59 billion over five years and $156 billion over 10 years.
• An HSA option for Medicare beneficiaries will also be developed.
• The Administration also reiterates its support for legislation creating association health plans and legislation permitting insurers to sell coverage across state lines.

PROPOSED APPROPRIATIONS FOR HEALTH PROGRAMS

The President’s fiscal year 2007 budget proposes a 0.5 percent decrease in total nondefense/homeland security discretionary spending from 2006 levels. In total, appropriations for the National Institutes of Health would be frozen, the Centers for Disease Control and Prevention would receive $179 million less, and the Health Resources and Services Administration total would decrease by $252 million. More specifically:

National Institutes of Health

• Total request for NIH is $28.6 billion which is the same amount provided for the current year. This marks the fourth year in which NIH increases have been below the rate of inflation. Across the Institutes the most significant changes are reductions of $40 million and $21 million for the National Cancer Institute and the National Heart, Lung, & Blood Institute, respectively, and an increase of $140 million for the Office of the Director. Most of the increased funds in the Director’s Office are to support the “NIH Roadmap” initiative that targets trans-Institute research opportunities and gaps.

Health Resources & Services Administration

• The only significant increase in support for HRSA programs is the request for an additional $181 million for Community Health Centers (for a total of almost $2 billion), which the Administration says would generate 300 new or expanded sites treating an additional 1.2 million people. Ryan White HIV/AIDS activities is also proposed to increase by $95 million.
• Funding for the health professions workforce programs under Title VII in the budget would go from $146 million in FY2006 to $10 million in FY2007 for scholarships for disadvantaged students.
• Nursing education programs authorized under Title VIII would be frozen at this year’s level -- $150 million.
• Funds for bioterrorism hospital preparedness would be level-funded at $474 million.
• Special graduate medical education payments for children’s hospitals would be reduced from $297 million to $99 million and funding for rural health is cut (-$133m).
• The budget proposes to terminate a number of HRSA programs, including-- Emergency Medical Services for Children (-$20m) and the Traumatic Brain Injury Program (-$9m).

Centers for Disease Control & Prevention

• Overall, the budget requests $8.2 billion for CDC activities, or about $179 million less than was appropriated for FY2006. Most of the reductions were taken from funds that would be available for buildings and facilities at CDC. Other proposed cuts are recommended for certain health promotion activities and in the Preventive Health & Health Services Block Grant to the states.

BUDGET ENFORCEMENT

• The Administration repeats two budget enforcement proposals made last year that would have a direct effect on procedures to consider legislation that would increase Medicare or Medicaid spending.
  • Mandatory spending would be subject to a pay-as-you-go requirement that spending increases be offset by spending reductions elsewhere. Unlike the expired pay-as-you-go rule, however, revenue is excluded. That is, proposed tax cuts would not be subject to the 60-vote pay-as-you-go requirement, and spending increases could only be offset by spending reductions, not revenue increases. In addition, the budget scoring baseline would be adjusted to assume extension of expiring tax cuts.
  • A "long-term unfunded obligations" provision is proposed, which would establish a point-of-order against legislation that worsens the unfunded obligation of Medicare and other major entitlement programs. In addition, the Administration would report on legislation enacted that worsens long-term entitlement obligations.
• With respect to appropriations, very tight discretionary spending caps would be imposed for the next five years. For 2006-2008, separate defense and nondefense caps would be enforced; a single cap would apply in 2009-2011. After upward adjustments to encourage program integrity funding, including health care fraud and abuse control, the nondefense cap would be set at $411 billion in 2006; $410.9 billion in 2007 and $413.3 billion in 2008. An across the board sequester of nondefense discretionary program funds would be enforced to keep within the spending limits.
• The Administration seeks a line item veto authority for the purpose of deficit reduction.

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