Government

Obama budget sets stage for reform of health care system, Medicare pay

The president requests a $634 billion fund to pay for some big changes.

By Doug Trapp — Posted March 9, 2009

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President Obama on Feb. 26 offered a $3.56 trillion fiscal 2010 budget outline calling for sweeping changes to health spending and tax policy, including a recognition that Medicare's physician pay cuts mandated by law are not practical.

The budget proposal, if adopted by Congress, also would set aside a $634 billion reserve fund over a decade to start paying for expanded access to health care. Obama would pay for the fund in part by fulfilling campaign pledges of increasing taxes on higher-income earners and requiring competitive bidding among private Medicare plans. While past presidents generally offered five-year spending proposals, Obama's looks ahead for a decade, through 2019.

Physician organizations, including the American Medical Association, cheered the change in tactics from President Bush's budget proposals, which did not include the cost of preventing annual Medicare physician pay cuts. Obama's budget is a "huge step forward," said AMA President Nancy H. Nielsen, MD, PhD.

Congress has halted Medicare cuts in recent years by implementing pay patches without resetting the payment formula baseline. This has steadily increased the size of the cuts required by law. The next one, in 2010, is projected to be 21%.

Obama estimated that repealing the sustainable growth rate formula instead of patching it would cost $330 billion over the next decade. The budget does not include the pay fix as a new spending proposal, but rather it adjusts the base of spending assumed under current law to account for possible action on the issue. Congress would need to repeal or reform the SGR through new legislation.

Peter Orszag, PhD, director of the White House Office of Management and Budget, said Feb. 26 that enacting health reform this year -- including physician payment reform -- is the single-most important part of the federal government's effort to manage entitlement spending better. But ending the cuts wouldn't mean that all physicians would receive the same pay increases -- or that Medicare would even maintain its fee-for-service structure, Orszag said.

"We want to work with the Congress to get a better system of providing incentives for doctors to provide high-quality care rather than just more care," he said. Orszag, former director of the Congressional Budget Office, estimated that up to $700 billion of the nation's $2.3 trillion in annual health spending does not improve outcomes. He suggested that better rewarding primary care doctors and more closely examining specialist spending could be in order.

Sen. Max Baucus (D, Mont.), chair of the Senate Finance Committee, said adopting comprehensive health reform this year is his top priority and includes revising Medicare's physician pay formula. Baucus wants to offer a bipartisan bill before Congress' August recess.

But Baucus balked at Obama's estimate that preventing the Medicare pay cuts would cost $330 billion. Baucus is working with the White House and other lawmakers on payment reforms that could help reduce that cost.

GOP objections

Republican leaders criticized Obama for proposing tax and spending increases while allowing the budget deficit to grow over time. But Senate Minority Leader Mitch McConnell (R, Ky.) agreed with the president that the federal government must reduce wasteful spending. "Unfortunately, at this juncture, while the American people are tightening their belts, Washington seems to be taking its belt off," McConnell said.

A variety of health care cuts and savings -- mostly in Medicare and Medicaid -- would pay for a little less than half of the $634 billion health care reserve fund.

The Obama proposal to require Medicare Advantage plan bidding would produce the largest savings. Plans would be paid the average of all bids, reducing federal spending by nearly $180 billion over the next decade, according to the budget outline. The plans will be paid an average of 114% of traditional Medicare rates in 2009, according to the Medicare Payment Advisory Commission. The AMA and other physician groups support equalizing private Medicare plan pay with fee-for-service pay.

Sen. Mike Enzi (R, Wyo.), the highest-ranking Republican on the Senate Health, Education, Labor and Pensions Committee, opposes the bidding proposal because it could reduce access to health coverage. "The president said repeatedly during his campaign that Americans who like the health insurance they have would keep their existing plans in his administration. His budget proposal undercuts that promise."

The budget also targets physician-owned hospitals by including a one-line proposal to "address conflicts of interest" in these facilities. The budget outline does not provide more details or projected savings, but a senior OMB official -- who asked not to be identified in order to speak freely -- said the item was included because the Obama administration thinks it's a good idea. Orszag said the president plans to offer a more detailed budget proposal in April.

Obama would pay for the other half of the health care reserve fund by limiting itemized tax deductions for people earning at least $200,000 and families earning at least $250,000 a year. Existing law allows people at these income levels to claim 35 cents on the dollar in deductions -- for items such as charitable contributions -- but Obama would cap that rate at 28 cents per dollar starting in 2011.

Although Baucus called the tax proposal "very interesting," he said he wasn't sure how palatable it would be to his fellow senators.

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ADDITIONAL INFORMATION

Saving for reform

President Obama's preliminary budget proposal includes a request for $634 billion worth of health system reforms, and it recommends a number of cuts and savings to help offset the cost. They include:

Proposal2010-2019 savings
Use competitive bidding for private Medicare plans$176.6 billion
Obtain new and increased Medicaid drug rebates$19.6 billion
Link hospital Medicare pay to quality measures$12.1 billion
Set approval pathway for generic biopharmaceuticals$9.2 billion
Reduce Medicare readmissions through pay bundling$8.4 billion
Increase Part D premiums for higher-income seniors$8.1 billion
Reduce inappropriate Medicare payments$2 billion
Use radiology benefit managers$260 million

Source: White House Office of Management and Budget (link)

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