President Obama lays out aspects of his 2010 health care law, the Affordable Care Act (ACA), and his plan for Medicare reform in his fiscal year 2014 budget proposal. The proposal mostly maintains Medicare in its current form while implementing structural payment reforms to encourage the use of high-value rather than high-cost services. Thus, Obama focuses his Medicare reform proposal on two main areas: altering the current payment system, and reducing fraud and waste in the system.
Obama’s 2014 budget proposal reduces Medicare spending by $364 billion over the next decade, according to the Congressional Budget Office. The provisions in the ACA would help push back the date of exhaustion of the Hospital Insurance (HI) Trust Fund from 2016 to 2024, according to the Medicare Trustees 2012 report.
Obama opposes any plan to turn Medicare into a voucher system, or “premium support” system, and leading up to the 2012 presidential election, he campaigned against it. During the first presidential debate against GOP candidate Mitt Romney, Obama discredited his opponent’s plan to transition Medicare to a such a system, saying that it would cause Traditional Medicare to decay or die because insurers would cherry-pick the healthiest beneficiaries, leaving the poorest and sickest in the current form of the program.
Medicare Payment Reform
Obama’s proposal for Medicare reform seeks to maintain the financial stability of Medicare by initiating both general and specific payment reforms that would improve its sustainability. The point of these reforms is to encourage the appropriate use of health care services by making new beneficiaries responsible for payment of certain services.
Obama’s FY 2014 budget proposal includes general payment reforms that would extend the solvency of the Hospital Insurance (HI) Trust Fund by approximately four years, including:
- Encouraging the adoption of new physician payment models: Obama supports permanently changing Medicare’s physician payment system. Currently, physician payments are determined under a formula referred to as the sustainable growth rate (SGR). Since 2002, this formula has called for reductions in physician payment rates, which Congress has had to override in order to prevent dramatic reductions to physician reimbursements. The administration aims to work with Congress to fix the SGR and to create a Medicare physician payment system that is more predictable and permanent, because the failure to do so only prolongs long-run structural budget issues.
- Reducing Medicare coverage of bad debts: The budget calls for a gradual reduction of bad debt payments, from 65 percent to 25 percent for all providers over three years, beginning in 2014. This would more closely align Medicare policy with private sector standards and reduce spending by about $25 billion over 10 years.
- Better align Graduate Medical Education (GME) payments with patient care costs: MedPAC has found that Medicare payments for the indirect costs created by residents at teaching hospitals are significantly greater than the actual additional patient care costs at these facilities. In line with these findings, Obama’s budget proposes lowering these payments, resulting in an estimated $11 billion in savings for the program over 10 years.
- Better align rural provider payments with actual cost of care: In some instances, the amount Medicare pays rural providers exceeds the amount necessary to actually ensure patients in these areas have access to care, according to the budget proposal. Obama’s plan eliminates excessively high reimbursements, improves the consistency of payments across rural hospital types and encourages efficient care delivery. This would save the program an estimated $2 billion over 10 years.
- Encourage more efficient postacute care: Obama’s budget also targets Medicare spending on postacute care, which has increased significantly. The proposal suggests adjusting payment updates for certain postacute care providers and equalizing payments for certain conditions that commonly require skilled nursing facility (SNF) or inpatient rehabilitation facility (IRF) care, which could save approximately $81 billion over 10 years. The budget additionally suggests appropriate use of IRFs and adjustments in SNF payments to reduce hospital readmissions, which could produce another $5 billion over 10 years. It also recommends implementing a bundled payment approach for postacute care services, saving an estimated $8 billion over the same period of time.
- Adjust Medicare Advantage payments: The budget proposes increasing the minimum statutory payment adjustments Medicare Advantage plans receive beginning in 2015 to account for differences in medical coding between Part C and fee-for-service providers. The Government Accountability Office has found the current payment adjustment isn’t enough to account for overpayments to Part C plans. This will save an estimated $15 billion over 10 years. Additionally, the budget aligns employer group waiver plan payments with the average individual Medicare Advantage plan bid in each geographic payment area starting in 2015, reducing spending by $4 billion.
- Align Medicare drug payment policies for low-income beneficiaries with Medicaid policies: The budget would allow, beginning in 2014, Medicare to receive the same rebates Medicaid receives for prescription drugs provided to beneficiaries who receive the Part D Low-Income Subsidy, resulting in savings of about $123 billion over 10 years.
- Encourage low-income beneficiaries to use generic drugs: Obama’s proposal increases copayments for brand-name drugs in most instances in order to motivate low-income beneficiaries to use generic drugs. Simultaneously, the budget suggests lower specified copayments for generic drugs by more than 15 percent. This would save an estimated $7 billion over 10 years.
- Increase manufacturer discounts on brand-name drugs for beneficiaries in the coverage gap: Obama suggests increasing brand-name drug discounts for Medicare beneficiaries in the prescription drug coverage gap, or “donut hole,” from 50 to 75 percent in 2015, closing the coverage gap for brand-name drugs five years sooner than under current law. This would reduce spending by about $11 billion over 10 years.
Beneficiary Cost-Sharing Changes
Obama’s 2104 budget would also increase costs for certain beneficiaries.
- Expand means-testing for Medicare Parts B and D: The president’s proposal includes restructuring income-related premiums under Parts B and D beginning in 2017. The lowest income-related premium would go up five percentage points, to 40 percent, and other income brackets would also increase until the highest tier was capped at 90 percent. The budget proposal maintains the income thresholds for income-related premiums until 25 percent of beneficiaries under Parts B and D are subject to those premiums. These changes would reduce Medicare spending by about $50 billion over 10 years.
- Cost-sharing increases for new beneficiaries: Obama’s budget would also increase the Part B deductible by $25 in 2017, 2019 and 2021 in order to encourage patients to seek high-value health services. The budget would additionally implement a Part B premium surcharge equal to about 15 percent of the average Medicare premium for beneficiaries who purchase Medigap policies with low cost-sharing. The proposal also creates a $100 home health copayment per home health episode for new beneficiaries. (There is currently no home health service copayment.)
Fraud, Waste and Abuse Prevention
Obama’s 2014 budget puts forth new initiatives to reduce improper Medicare payments and to require prior authorization for advanced imaging. Along with policy changes to fight fraud in Medicaid and the Children’s Health Insurance Program, these reforms would save nearly $4.1 billion over the next 10 years, according to the budget.
Medicare Beneficiary Age
Obama’s 2014 budget proposal contains no mention of altering the age at which American citizens begin to receive Medicare benefits, which is currently set at 65.
The Affordable Care Act includes up to $716 billion in Medicare spending cuts from 2013 to 2022.
Of that $716 billion, 34.8 percent comes from reductions in hospital reimbursement rates. Decreased Medicare Advantage plan reimbursements account for 30.2 percent, and the remaining 35 percent comprises various small cuts, such as 5 percent in savings from Medicare Disproportionate Share Payment reductions and an 8.8 percent decrease in reimbursements to home health providers.
The Medicare provisions in the ACA designed to preserve the program's solvency also include fighting Medicare fraud and waste in the program and creating a cost-cutting Independent Payment Advisory Board (IPAB) to recommend changes in reimbursement rates. Obama’s 2014 budget proposal seeks to strengthen the authority of the IPAB to reduce long-term drivers of Medicare cost growth.
In addition, the ACA generates revenue by imposing an annual fee on brand-name prescription pharmaceutical manufacturers and importers ($27 billion in revenue through 2019), and by eliminating the tax deduction for employers who receive Medicare Prescription Drug Plans (Part D) retiree drug subsidy payments, beginning in 2013 (this will save approximately $5 billion in revenue through 2019).
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