Obama's 2010 Budget Unveiled: The Health Reform Reserve Fund

By: Chrissy Spicer, Senior Manager

Many have claimed that the economy cannot be fixed without addressing the cost and access to healthcare. At a macro level, it is clear that spending on health will continue to be a large portion and necessary component of the Gross Domestic Product (GDP); however, due to the exponential increases in health costs coming during a recessed economy, more and more families will be forced to face the ramifications of the high costs of healthcare or delay the attention of much needed healthcare. In a recent statement, President Barack Obama said “because of crushing health care costs and the fact that they drag down our economy, bankrupt our families and represent the fastest-growing part of our budget, we must make it a priority to give every single American quality, affordable health care [1]” On Thursday, Obama has exercised this commitment through the recent development and launching of his budget related to healthcare reform. The following provides a macro evaluation of the costs related to healthcare and the resulting outline of the fiscal 2010 budget related to healthcare reform.

In 2009, the National Healthcare Expenditures (NHE) in the United States is projected to increase 5.5 percent while Gross Domestic Product (GDP) is anticipated to decrease 0.2 percent [2]. According to a news release by Center for Medicare and Medicaid Services (CMS), “over the period 2008 – 2018, average annual health spending growth (6.2 percent) is anticipated to outpace average annual growth in the overall economy (4.1 percent). By 2018, national health spending is expected to reach $4.4 trillion and comprise just over one-fifth (20.3 percent) of GDP [3].” Additionally, Obama’s budget indicates “after adjusting for inflation, family health insurance premiums have risen 58 percent since the year 2000, while wages have increased only 3 percent. Nearly 46 million Americans have no health insurance [4].”

The truth behind the numbers has most in agreement that there is a desperate need for healthcare reform in America. Who pays and how the expansion for health insurance comes to fruition becomes the next series of questions that Obama has outlined in his budget. Overall, Obama’s plan includes a $634 billion payment over 10 years as a reserve fund to fuel healthcare reform that would be derived from multiple sources including: increasing taxes to the wealthy, decreasing Medicare and Medicaid Payments to insurance companies, and decrease payments to drug makers and hospitals.

According to a summary provided by Ropes & Gray LLP, the details that impact the healthcare industry the most are summarized below [5]:

Financing the Health Reform Reserve FundAbout half of the president’s $633.8 billion health care reserve fund is financed by reducing federal Medicaid and Medicare spending by $316 billion over 10 years. $19.5 billion that is directly related to an increase of Medicaid rebated from 15.1% to 22.1%. These Medicaid and Medicare savings fall into three broad categories:

1. Aligning incentives toward quality ($20.5 billion):
· Reduce Medicare payments to hospitals with high readmission rates ($8.4 billion)
· Link a portion of Medicare inpatient payments to hospital performance on quality measures (pay for performance) ($12 billion)


2. Promoting efficiency and accountability ($287 billion):
· Reduce overpayments to Medicare Advantage plans by establishing a competitive bidding system ($175 billion)
· Bundle Medicare payments for hospital inpatient services and certain post-acute services in the 30-day period after discharge ($17.8 billion)
· Increase the minimum Medicaid prescription drug rebate from 15.1 to 22.1 percent of the Average Manufacturer Price, allow states to collect rebates from Medicaid managed care plans, and apply rebates to new drug formulations ($19.5 billion)
· Establish a pathway for FDA approval of generic biologics ($9.2 billion)
· Restructure Medicare home health care payments ($37 billion)
· Use radiology benefit managers to ensure appropriate Medicare payments for imaging services
· Expand Medicaid family planning services ($190 million)
· Use the National Correct Coding Initiative edits for Medicaid payments ($620 million)
· Reallocate Medicare and Medicaid Improvement Funds that currently support Quality Improvement Organizations ($24 billion)
· Address conflicts of interest in physician-owned specialty hospitals (negligible savings)

3. Encouraging shared responsibility ($8 billion):
· Extend means testing for certain high-income Medicare beneficiaries to Part D drug coverage premiums ($8 billion)

Now more than ever, pharmaceutical manufacturers should begin to strategically evaluate their relationship with the government as a customer and gain a full understanding and planning of how the proposed changes may impact current operations.

Sources:
To view the 2010 Fiscal Year Budget: http://www.whitehouse.gov/omb/assets/fy2010_new_era/A_New_Era_of_Responsibility2.pdf
[1] http://bulletin.aarp.org/yourhealth/policy/articles/obama_s_health_reform.html
[2] February 24, 2009, CMS Medicare News
[3] February 24, 2009, CMS Medicare News
[4] http://bulletin.aarp.org/yourhealth/policy/articles/obama_s_health_reform.html
[5] http://www.ropesgray.com/frameworkforhealthreform/