Health Care

CRFB's Plan to Offset Upcoming Policies

Congress and the President need to prep for some important upcoming fiscal moments, and CRFB has a plan to help them do just that. The Paying for Reform and Extension Policies Plan, or the PREP Plan shows a path to restoring the expired tax extenders and avoiding the Medicare Sustainable Growth Rate cuts without adding $1 trillion to the deficit.

The PREP Plan assumes (but does not endorse) the passage of the Tricommittee SGR reform bill and a two-year tax extenders package. The plan includes over $250 billion of offsets, roughly two thirds from reforming incentives to slow health care cost growth and one third from improving tax compliance, along with a fast-track process for tax reform.

You can read the full plan here and view some of the details in the table below.


`Due to interactions, policies can't be scored on an individual basis
*Savings are less than $500 million

In addition to putting forward a plan, CRFB released a number of principles that should apply to any effort to continue extenders or reform the SGR.

New CBO Estimates Set the Stage for "Doc Fix" Discussions

Following a final rule issued by the Centers for Medicare and Medicaid Services (CMS), CBO has updated its estimate of various "doc fix" policies to replace the Sustainable Growth Rate (SGR) formula. The new estimates show mixed news for policymakers depending on the type of approach they wish to take.

CMS determined that the SGR would cut Medicare physician payments by 21.2 percent in April when the current doc fix expires. Simply freezing physician payments at today's levels would cost $119 billion over ten years, somewhat less than the $131 billion CBO estimated in its August baseline. Providing 0.5 percent annual payment increases, as Congress did for 2014, would cost $140 billion.

Importantly, CBO re-estimated the bipartisan agreement on a permanent SGR replacement at $144 billion, $6 billion more than projected in February – and that estimate included $16 billion of new spending that was passed in the doc fix this past spring, although some of the savings within the SGR replacement bill were used to help offset the temporary fix. 

Another Way to Look at the Medicare Slowdown

A recent Health Affairs piece from CRFB's Loren Adler and Adam Rosenberg showed that the prescription drug benefit, Part D, has been responsible for a majority of the Congressional Budget Office's downward revisions to actual and projected Medicare spending since 2011 (although Part A, the hospital insurance component, also played a significant role).

But judging the slowdown by how much CBO projections have changed is only one way to look at the issue. Another way would be to compare the actual slowdown in annual growth rates of each Part of Medicare over the past few years. Not surprisingly, a similar story arises from this approach -- the slowdown has been most prominent in Part D, followed closely by Part A. 

From 2010-2014, Medicare per beneficiary spending actually shrank at an average annual rate of 0.3 percent (although total spending still increased as more and more baby boomers reached retirement). As illustrated below, both Parts A and D experienced negative per beneficiary growth over this window, while Part B grew only slightly slower than GDP per capita.

CBO Report Parses the Reasons for Part D's Slow Growth

The last few months have seen a number of new ideas to save money in Part D of Medicare by encouraging more efficient use of drugs by prescription drug plans and beneficiaries. But Part D has also grown significantly slower than expected since its inception.

On this blog and in Health Affairs, we've highlighted the disproportionate role that Part D has played in the federal health care spending slowdown. One quarter of the $900 billion downward revision in the Congressional Budget Office's (CBO's) health care spending projections through 2021 came from Part D. And Part D's downward revision was by far the largest as a percent of program spending (nearly one quarter) among the major health care programs. Looking back further, actual 2013 Part D spending ended up almost 50 percent lower than CBO's original projection when the law passed ($50 billion vs. $99 billion), and total spending over the 2004-2013 period ended up being 36 percent lower ($353 billion vs. $550 billion).

In their Health Affairs post analyzing the Medicare slowdown, CRFB analysts Loren Adler and Adam Rosenberg cited a CBO report breaking down the sources of the slowdown in Part D. In this post, we examine more closely that report, which not only goes into the reason for slower growth in Part D but also how Part D's design compares to Medicaid in controlling costs.

In analyzing the source of the slowdown, CBO's conclusion is clear:

Taken together, the faster-than-expected slowdown in national drug spending per person and the smaller-than-expected enrollment in Part D account for nearly all of the difference between CBO’s initial projection and actual Part D spending. CBO’s original projection reflected the agency’s judgment that elements of the program’s design that were intended to foster price competition between private plans would help to limit the costs of Part D, yielding lower costs per enrollee than would be expected for a similar population under a typical employment-based drug plan offered at that time.

Medicare's Slowdown: A Story About Part D

In a Health Affairs blog post, CRFB's Loren Adler and Adam Rosenberg find that most of the recent slowdown in Medicare's costs is attributable to the prescription drug benefit, Part D, and cautions that this might not bode well for the slowdown's permanence.

In looking at changes in CBO's Medicare projections since March 2011, and building on work we did previously, they note that 60 percent of the slowdown in Medicare benefits (excluding sequestration) has taken place in Part D. More specifically, Part D spending was revised down by $225 billion over ten years, while Parts A and B are $145 billion lower. The sequester accounts for another $75 billion, and increased recoveries of improper payments are another $85 billion.

Adler Figure 1

How CBO Accounts for Anti-Fraud Efforts

Fraud -- along with the closely related waste and abuse -- is too often cited as a big factor affecting our high deficits, even though  this is not the case. Nonetheless, rooting it out can be a non-controversial path to marginally reduce spending and to help assure Americans that their taxes are not being wasted. A new CBO report discusses anti-fraud efforts in federal health care programs and how they are accounted for in the agency's scoring of costs and savings in legislation.

There are a number of agencies and mechanisms tasked with reducing fraud in health care programs. The Center for Medicare and Medicaid Services (CMS), of course, is the main one. But there is also the Health and Human Services Inspector General, the Department of Justice, and the Health Care Fraud and Abuse Control (HCFAC) program, a dedicated fund for pursuing fraud that has both a mandatory and a discretionary appropriation.

Despite this anti-fraud efforts, significant improper payments (a broader category than fraud) of $65 billion in health care still exist, at least some of which is fraud. CBO discusses a number of different strategies to reduce it, including increasing anti-fraud funding, allowing new authority for agencies to pursue fraud, shifting funds to activities expected to provide higher returns, and increasing penalties.

In terms of the first strategy, based on previous efforts, CBO assumes that an additional dollar of HCFAC spending yields $1.50 of savings (see the table below for an example). The Budget Control Act allowed for adjustments to the discretionary spending caps for HCFAC totaling $3 billion in additional funding, providing estimated savings of $3.7 billion. (The ratio is less than 1.5 to 1 in this case since it takes time for the savings to materialize). Notably, however, these net savings cannot be used for budget enforcement like pay-as-you-go rules because of their uncertain nature.

Could Arbitration Help Control Medicare Part D Costs?

Medicare Part D costs have leveled off in recent years as pharmaceutical innovation has slowed and a number of blockbuster drugs lost patent protection, but a new wave of expensive specialty drugs threatens to revitalize cost growth. To help control the high prices of unique drugs paid for by Part D, Richard Frank and Joseph Newhouse recommend an innovative approach to apply binding arbitration as a fallback to price-setting negotiations.

The authors argue that policymakers overestimated the negotiating power that prescription drug plans (PDPs) would hold in setting prices when they created Part D through the Medicare Modernization Act (MMA) of 2003. Price negotiation in Part D proves most difficult for unique drugs, or those without any direct substitute. Setting prices too low for important, clinically unique drugs could harm future research and development as pharmaceutical companies could lose vital capital to continue incentivizing such research and development.

Frank and Newhouse offer a solution that incorporates binding arbitration into price setting for unique drugs. In their proposal, binding arbitration would take effect only after the government and manufacturer cannot come to an agreement, thereby encouraging the two parties to reach a negotiated settlement.

Is the 340B Program Living Up to Expectations?

The 340B Drug Pricing Program, enacted in 1992, gives hospitals and other providers serving disproportionately low-income populations the ability to buy outpatient prescription drugs at large discounts. It has come under increased scrutiny lately, though, as more and more people have questioned whether the program is actually fulfilling its purpose.

Criticism of the program has ramped up recently with charges that some hospitals are raking in large profits by taking the discounts from manufacturers and instead selling the drugs through hospital-affiliated clinics to higher-income/insured patients at the price the insurer pays. With eligibility for the 340B program determined based on a hospital's inpatient population, critics charge that this creates an incentive to serve more people in off-site outpatient settings located in wealthier areas. Hospitals deny this claim, saying that the program has served its intended purpose -- either the drugs are provided to vulnerable patients or the money is spent on expanding low-income access to care.

A new study published in Health Affairs by Rena Conti and Peter Bach examined characteristics of hospitals that participate in 340B and sided with the critics. They looked at those hospitals that also received Disproportionate Share Hospital (DSH) payments and saw how their communities changed over time. The number of 340B DSH hospitals has increased steadily since 340B's inception; however, the authors note a sizeable uptick in the growth rate of not only those hospitals but also of hospital-affiliated clinics starting in 2003. The number of clinics increased even more dramatically after 2010 when the Affordable Care Act expanded the types of providers that could qualify for 340B.

How Medicare Part D's Low-Income Subsidy Could Work Better

During the recent slowdown in Medicare spending, the prescription drug portion of the program, Part D, has been the lead actor in the story. The unexpectedly slow growth of prescription drug costs has made Part D cost much less than anticipated. But a new CBO working paper by Andrew Stocking, James Baumgardner, Melinda Buntin, and Anna Cook shows how Part D costs could be further controlled by improving the design of Medicare Part D's Low-Income Subsidy (LIS).

For background, the LIS helps people below 150 percent of the federal poverty line (FPL) afford the costs associated with Part D prescription drug plans. For those with income below 135 percent of the FPL, the LIS covers all premiums as long as the beneficiary chooses a plan that costs below the region's benchmark (ranging between about $20 and $40 per month in 2014), pays the entire deductible, and leaves minimal co-pays for drugs (for those between 135 and 150 percent of the FPL, the LIS covers a portion of each of these items). If LIS beneficiaries choose a plan with a premium above the benchmark, they pay the difference. If a plan that costs below the benchmark in one year moves above the benchmark in the next, Medicare automatically re-assigns beneficiaries to a plan below the benchmark unless they actively choose to stay with the plan or had proactively chosen their Part D plan originally.

The working paper looks at the difference in responses to competitive pressures from LIS and non-LIS beneficiaries and plans. Not surprisingly, LIS beneficiaries tend to be in less expensive plans because of the automatic assignment to plans at or below the benchmark; 87 percent of LIS beneficiaries are in a plan that is within 50 percent of the least expensive plan in the region, compared to two-thirds of non-LIS beneficiaries. But the authors note that plans catering to LIS beneficiaries tend to increase their premiums in the next year if they fall below the benchmark, since they have little incentive to have lower premiums once they are below; plans are estimated to raise monthly premiums by between $6.90 and $9.70 if they fell $10 below the benchmark in the previous year. Furthermore, the addition of a new plan sponsor into a region is estimated to lower plan bids by 0.5-0.8% for non-LIS plans, but only 0-0.2% for LIS plans.

Medicare Registers Fourth-Lowest Growth Rate in Program History in 2014

With today's release of the Congressional Budget Office's (CBO) final Monthly Budget Review for Fiscal Year (FY) 2014, many will be focused on the final 2014 deficit, but it also shows that Medicare clocked its fourth-lowest annual growth rate in history, at just 2.7 percent.

We have been closely following the unusually slow growth of Medicare throughout this year, and also documenting the program's "underlying" growth rate, or what growth would be with temporary or phased-in legislative cuts removed from the calculation*. Dechipering this underlying growth rate should provide a truer picture of the magnitude of Medicare's cost slowdown.

Interestingly (though not surprisingly), the three years with slower growth than this year -- 1998, 1999, and 2013 -- coincided with similar temporary or phased-in cuts.

For 2014, Medicare's underlying growth rate ended up at 4.9 percent, roughly one percentage point faster than both economic and beneficiary growth. Therefore, even removing these temporary effects, Medicare still grew slower than general inflation on a per beneficiary basis.

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