How Does the President Achieve His Health Care Savings?

Included in the President’s FY 2014 budget proposal is a $400 billion package of health care savings. As we described in our analysis of his budget, these health savings are part of the President’s deficit reduction offer that was also on the table during the fiscal cliff negotiations and offered as replacement to sequestration. Much of the savings comes from reforms that have been introduced in the President’s prior budget proposals and the bulk of them are from reductions in Medicare spending. But this year's budget includes some new additions and changes to previous policies.

• Prescription drug rebates and related reforms ($162 billion): As he did in last year's budget plan, the President proposes requiring rebates for drugs purchased for beneficiaries in the Medicare Part D Low-Income Subsidy (LIS) program. Currently, Medicaid requires drug companies to pay "rebates" equal to at least 23.1 percent of the average manufacturer price (AMP), and more for drugs with rapid cost growth. The President’s budget would make manufacturers of these drugs responsible for the same rebate for drugs provided to Part D LIS beneficiaries, saving the federal government $123.2 billion. The Administration also proposes closing the Part D coverage gap ("donut hole") through rebates for brand name drugs by 2015 instead of 2020 under current law, saving $11.2 billion. Other reforms would prohibit pay-for-delay agreements between brand name and generic pharmaceutical companies that delay entry of generic drugs and biologics into the market and facilitate faster development of generic biologics.
• Post-acute care provider reductions ($94 billion): The President’s budget includes various reforms to post-acute care provider payments. These include reducing market basket updates to Inpatient Rehabilitation Facilities (IRFs), Long Term Care Hospitals, Skilled Nursing Facilities, and home health agencies. It would also implement bundled payments for at least half of the payments to these providers beginning in 2018. To further improve efficiency and savings, the President proposes equalizing payments for certain conditions treated at IRFs and SNFs, reducing payments to SNFs with high rates of preventable readmissions, and reinstating stricter classification rules for IRFs.
• Other provider reductions ($55 billion): The President includes a handful of other reductions to provider payments such as reducing Medicare payments to cover bad debts (unpaid patient cost-sharing), reducing certain rural health provider payments, and better aligning Graduate Medical Education (GME) payments with actual costs. Many of these are based upon recommendations proposed by MedPAC. The budget also includes a few reductions to Medicaid spending, such as limiting Medicaid reimbursement of durable medical equipment based on Medicare rates. However, it does not include some of the larger cost-saving policies from the President’s FY 2013 budget which would have lowered the Medicaid provider tax threshold to reduce state gaming and applied a single blended matching rate to Medicaid and the Children's Health Insurance Program. They have backed off those changes since the Supreme Court's decision on the Affordable Care Act, which allowed states to opt out of the Medicaid expansion without any additional loss of funding.
• Income related premiums ($50 billion): Perhaps one of the most significant changes to a previously proposed policy was to the President’s proposal to increase income-related premiums for certain Medicare beneficiaries. Currently, most Medicare beneficiaries pay 25 percent of Part B (physician’s offices) premiums, while those with incomes over $85,000 ($170,000 for couples) pay between 35 to 80 percent, depending on their income. Last year, the President proposed increasing these income-related premiums by 15 percent, saving roughly $28 billion over ten years. However, this year’s proposal would add more income-related brackets and increase premiums until capping the highest tier at 90 percent for those earning over $196,000. This is slightly more regressive than last year's proposal, increasing premiums more for those between $85,000 and $107,000 than for those above $186,000 -- over a 50 percent increase compared to a 12 percent increase at the top -- but increasing savings to $50 billion as a result.

^{Source: CMS}

• Cost sharing reforms ($14 billion): We recently highlighted the potential cost sharing reforms have for bipartisan compromise. While the President’s budget does not go as far as some of the other cost sharing proposals out there, it does provide $14 billion in savings by applying a $25 increase to the Part B deductible in 2017, 2019, and 2021; introducing a $100 home health copayment for certain episodes; introducing a surcharge on Part B premiums for new beneficiaries who purchase Medigap policies with low cost-sharing requirements; and lowering copayments for generic drugs for lower-income beneficiaries.
• Other changes ($27 billion): The remaining health savings come from adjustments to Medicare Advantage payments and reforms to the Federal Employees Health Benefit Program (FEHBP). The largest of these reforms would be a gradual increase to the minimum coding intensity adjustments to Medicare Advantage plans, which reflects differences in coding practices between Medicare and Medicare advantage ($15.3 billion). A new policy that has gained some attention is a change that would allow FEHBP to offer a Self+One option to domestic partners, which OMB estimates would save over $5 billion.

All in all, the President deserves credit for making a concerted effort to reduce health spending. However, his proposal falls short of addressing one of the major long-term drivers of health care spending over the next few decades: population aging. More can be done to bend the health care cost curve with reforms that target our aging population and lower excess health care cost growth. It appears some consensus is emerging on such health care reforms. Meanwhile, the President’s proposal adds to the options on the table that should be considered in a comprehensive plan to put health spending on a more sustainable path.