Eye on Washington

Chad Mulvany

President Obama created the bipartisan National Commission on Fiscal Responsibility and Reform by executive order last February to address the popular concern about the rapidly increasing federal deficit. Given that federal expenditures for health care are the single largest driver of future deficits, it's no surprise that many of the commission's proposals targeted Medicare, Medicaid, and other healthcare outlays.

Although the commission couldn't agree on recommendations for Congress, many of its proposals will likely surface in future budgets. As such, providers should understand the proposals' potential impact on health system bottom lines and prepare for the inevitable changes to come.

Health Provisions

The commission proposes that spending eventually be capped at 22 percent of gross domestic product (GDP) and that the federal debt be reduced to 40 percent of GDP by 2035, which the commission regards as manageable (www.fiscalcommission.gov). Reaching these goals would require substantial cuts in federal healthcare expenditures, as they account for a significant portion of the long-term structural deficit. The plan identifies $493 billion in savings by 2020 from a variety of measures designed to increase individuals' sensitivity to prices and reduce reimbursement to providers. Below is a summary of specific provisions that would affect hospitals.

Eliminate tax deductibility of employer-provided insurance. The Affordable Care Act enacts a 40 percent excise tax on plans that cost $27,500 or more for families, beginning in 2018. The commission proposes to modify this provision in 2014 by capping employer paid insurance premiums excluded from personal income at the cost of a plan in the 75th percentile and reducing the excise tax to 12 percent. The cap would be frozen in nominal terms through 2018 and slowly phased out by 2038.

The effect of this change over time would be to expose those who receive insurance through their employers to the cost of coverage. It would reduce and finally eliminate the tax benefit of employers providing a direct insurance benefit, possibly prompting employers to provide employees with an "insurance credit" in their paychecks and transitioning the employees into an insurance exchange. As a result, individuals would become more price sensitive and accepting of limited network plans that provided high-quality, low-cost care.

Provide Federal Employees Health Benefit (FEHB) premium support. Among the commission's more controversial ideas is converting the FEHB program from a defined benefit to a defined contribution plan-much as could happen in the private sector if preferential tax treatment of employer insurance contributions is eliminated. Federal employees would be offered a premium subsidy that would increase by no more than inflation plus 1 percent. It's estimated that this change would save the government $18 billion over 10 years and would give the government experience administering premium support programs similar to one contemplated for Medicare in the deficit reduction program proposed by Rep. Paul Ryan (R-Wis.), a commission member. Public-sector employees would respond similarly to those in the private sector by seeking low-cost, high-quality health insurance plans that use limited delivery networks to minimize their exposure to rising insurance premiums.

Reform Medicare cost sharing. Currently Medicare beneficiaries face a multitude of premiums, deductibles, and copayments they must pay when accessing health care. The nominal degree of cost sharing also drives overutilization of low-value services. To simplify the thicket of payments and encourage rational consumption of services, the commission proposes establishing a single annual deductible of $500 for Parts A and B. Spending above the deductible would be subject to a 20 percent coinsurance up to $5,500. Spending beyond $5,500 would be subject to a 5 percent coinsurance with cost sharing capped at $7,500. Over 10 years, this reform would save $110 billion.

This change would negatively affect providers by decreasing utilization as Medicare beneficiaries cut back on services that they-correctly or not-perceive to be of low value and by transferring responsibility to providers for collecting the increased cost sharing from Medicare beneficiaries, many of whom are of limited means.

Eliminate Medicare bad debt reimbursement. Compounding the challenge of collecting from Medicare beneficiaries, the commission proposes to eliminate Medicare bad debt reimbursement, thereby saving an estimated $23 billion over 10 years. The commission's justification for this proposal is that the practice is not mirrored in the private sector.

Reduce indirect and graduate medical education (IME and GME) payments. The commission echoes the call of the Medicare Payment Advisory Commission to reduce IME payments by $60 billion over the next 10 years by reducing the IME adjustment from the current 5.5 percent to 2.2 percent. The commission also proposes limiting direct GME payments to 120 percent of national average salary for residents and updating the amount annually based on chained consumer price index.

Fix the sustainable growth rate (SGR). In the near term, the proposal would freeze physician reimbursement at its current levels through 2013 and cut it by 1 percent in 2014. In 2015, the SGR would be reinstated, with 2014 as the "base year." Longer term, the Centers for Medicare & Medicaid Services (CMS) would develop a new reimbursement mechanism that encourages care coordination across providers and settings by paying for quality, not quantity-a goal somewhat comparable to that of an accountable care organization (ACO). This change would save an estimated $26 billion by 2020 relative to simply freezing physician payments at current levels. It also would likely accelerate the trend of physicians seeking employment as a means of income protection. Although hospitals would benefit from greater integration, they would also act as the income "backstop" for physicians who successfully lock in agreements prior to reform.

Expand successful pilots. The commission proposes expanding Affordable Care Act pilots that prove to be successful into the mainstream payment system as rapidly as possible, and strongly suggests fast-tracking state Medicaid waivers for programs that offer "demonstrable promise in improving care and achieving savings." CMS is further encouraged to introduce downside risk into existing ACO and bundled payment pilots and collaborate with the private sector on these and other payment reforms.

Eliminate state Medicaid gaming. States have long used provider taxes as a way to increase Medicaid federal matching funds. The commission recommends phasing this practice out by excluding provider taxes from the match, which would save $44 billion over 10 years. This change would reduce payments to providers that serve large numbers of lower-income patients.

Establish a long-term global healthcare budget. The commission recommends establishing a process to review total federal healthcare outlays annually. This review would include spending for Medicare, Medicaid, CHIP, FEHB, TRICARE, exchange subsidies, and the cost of the tax exclusion for health care-starting in 2020. If spending exceeds an average of GDP plus 1 percent over the prior five years, the President and Congress would be compelled to act to rein in spending.

Cost growth at a level that exceeds GDP plus 1 percent is almost certain, and the commission envisions using multiple structural reforms to rein in cost growth. Examples include moving Medicare to a defined-benefit program, allowing CMS to be a more active purchaser of healthcare services, establishing a robust public option in the healthcare exchanges, and moving toward some type of all-payer system.

Prepare, While There's Time

It's uncertain which of these proposals will be enacted into law or how a potential provision might evolve as it makes its way through Congress. However, what is certain, based on the commission's work, is that federal cost reduction strategies will center on two types of mechanisms: those that expose individuals to a greater portion of the cost of care and those that reduce reimbursement for services rendered. Fortunately for providers, preparing for this eventuality involves what could be considered "all-weather" strategies. These responses will likely be relevant regardless of the individual tactics chosen by Congress.

Given the emphasis on cost reduction and exposure of individuals to more of the cost of insurance, providers will need to significantly increase cost efficiency of the care they provide by improving the overall quality of care. To this end, providers need to think beyond traditional silos (e.g., inpatient/outpatient acute, physician's office) and find ways to collaborate with others across the care continuum to better manage population health. Demand for acute care services will decline. Yet providers that can successfully respond to the changes will likely be able to increase market share through participation in limited "high-value" delivery networks.

In response to increased point-of-service cost sharing by Medicare beneficiaries and elimination of bad debt reimbursement, providers will need to adopt a two-pronged strategy. First, they will need to improve collection efforts, particularly those executed prior to service. To this end, providers will need to become far more sophisticated in understanding the extent of each beneficiary's responsibility for payment and then provide preservice cost (or Medicare reimbursement) estimates. On the back end, providers will need to have explicitly documented charity care policies that provide sliding-scale discounts based on income and accessible assets.

Many believe the Affordable Care Act was only the first in a series of efforts to overhaul the U.S. healthcare system. The bipartisan commission's proposal provides a view of what future, more aggressive efforts to rein in cost might look like. This time of transition calls for providers to act now, deliberately and with clear vision. Those that do will be prepared to successfully meet the challenges of a dramatically transformed healthcare environment.

Chad Mulvany is a technical director in HFMA's Washington, D.C., office, and a member of HFMA's Virginia Chapter.


Strange Bedfellows-and an Unexpected Foundation for Action  

The bipartisan National Commission on Fiscal Responsibility and Reform created by President Obama in February 2010 comprised 18 members from across the political spectrum. Six were appointed by the president (four Democrats, two Republicans), and the remaining 12 were chosen evenly by the Republican and Democratic leadership of both the House and Senate. The executive order creating the commission states that its mission was to "identify policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run" (www.whitehouse.gov/the-press-office/executive-order-national-commission-fiscal-responsibility-and-reform).

To "report out" a proposal to Congress, 14 of the 18 members had to support the proposal's final version. Although Congress was under no obligation to consider the commission's proposals, most House and Senate members hold influential positions on the various budget and finance committees and would likely have included the proposals -or key components of them-in the upcoming budget.

Given the commission's seemly quixotic goal, many in Washington doubted it could produce a proposal that would attract more than six votes. It came as a surprise when the final package attracted 11 votes, three shy of the number needed for adoption. With the package receiving majority support from both ends of the political spectrum ranging from Sen. Tom Coburn (R-Okla.) to Democratic Sen. Dick Durbin (D-Ill.), it will now serve as a starting point for bipartisan deficit reduction talks (Wasson, E., "Deficit Panel's Ideas to Be Resurrected in Bipartisan Senate Bill," The Hill, Dec. 20. 2010). Sens. Saxby Chambliss (R-Ga.) and Mark Warner (D-Va.) have said recently that they plan jointly to bring a bill forward based on the commission's report.

Publication Date: Tuesday, February 01, 2011

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