Fiscal Year 2010 Budget in Brief

Medicare

(dollars in millions)

^/1 Represents all spending on Medicare benefits by either the Federal government or beneficiaries.
^/2 In Part D only, some beneficiary premiums are paid directly to plans and are netted out here because those payments are not paid out of the Trust Funds.
^/3 Includes related benefit payments, including refundable payments made to providers and plans, transfers to Medicaid, and additional Medicare Advantage benefits.
^/4 Includes Program Management, non-CMS administration, HCFAC, and QIOs. Of this total, $5.9 billion represents discretionary outlays for CMS and other agencies that support Medicare administration.
^/5 Includes beneficiary premiums, State contributions to Part D, and other offsets.
^/6 Preliminary estimate assumed within baseline adjustment to physician payments.

In FY 2010, gross current law spending on Medicare benefits will total $510 billion. Medicare will provide health insurance to 47 million individuals who are either 65 or older, disabled, or have end–stage renal disease (ESRD).

THE FOUR PARTS OF MEDICARE

Part A ($186 billion in 2010): Medicare Part A, or Hospital Insurance (HI), pays for inpatient hospital, skilled nursing facility, home health (related to a hospital stay), and hospice care. Part A financing comes primarily from a 2.9 percent payroll tax split between employees and employers.

Individuals with 40 quarters of Medicare-covered employment are entitled to Part A without paying a premium, but most services require a beneficiary co-payment or coinsurance. For example, in 2009, beneficiaries pay a $1,068 deductible for a hospital stay of 1-60 days, and $133.50 daily coinsurance for days 21-100 in a skilled nursing facility.

Part B ($140 billion in 2010): Medicare Part B, or Supplementary Medical Insurance (SMI), pays for physician, outpatient hospital, end-stage renal disease (ESRD), laboratory, durable medical equipment, certain home health, and other medical services. Part B coverage is voluntary, and about 94 percent of Medicare beneficiaries are enrolled in Part B.

Approximately 25 percent of Part B costs are financed by beneficiary premiums, with the remaining 75 percent covered by general revenues.

Part B premiums are based on income. Most beneficiaries pay the standard monthly premium of $96.40 in 2009, which is unchanged from 2008. Some beneficiaries pay a higher premium based on their income: those with annual incomes above $85,000 (single) or $170,000 (married couple) will pay from $134.90 to $308.30 per month.

Part C ($116 billion in 2010): Medicare Part C, the Medicare Advantage (MA) program, offers beneficiaries a variety of coverage options including health maintenance organizations, preferred provider organizations, special needs plans, and private fee for-service plans. MA enrollment totals more than 10 million of Medicare beneficiaries in 2009.

Medicare pays MA plans a capitated monthly payment to provide all Parts A and B services (and Part D if offered by the plan). Plans can also offer additional benefits or a variety of cost sharing arrangements. Beneficiaries pay monthly premiums to MA plans to cover all Medicare services plus any additional benefits. The premium varies depending on the services offered by the plan; therefore, it can be higher or lower than the regular Part B premium.

Medicare currently pays more per beneficiary on average than it pays for a beneficiary in fee-for-service MA plans. MA payment rates are 14 percent higher on average than traditional fee-for-service rates. The extent of this difference has grown over time.

Part D ($68 billion in 2010): Medicare Part D offers a standard prescription drug benefit with a 2009 deductible of $295 and an average monthly premium of $28. The standard benefit includes a coverage gap in which beneficiaries are responsible for all of their drug costs, but once out-of-pocket spending reaches $4,350, Medicare covers 95 percent or more of drug costs. For people who are low income, varying degrees of cost sharing are available with co payments ranging from $0 to $6.00 in 2009 and low or no monthly premiums.

As of 2009, about 90 percent of all Medicare beneficiaries, including over 10 million low-income beneficiaries, receive prescription drug coverage through Medicare Part D, employer-sponsored retiree health plans, or other creditable coverage. Fifty-nine percent of beneficiaries are enrolled in Part D plans; 39 percent have a prescription drug plan that offers a drug-only benefit package and 20 percent have an MA plan known as a Medicare Advantage-Prescription Drug plan that offers a combined benefit of medical services and prescription drugs.

FY 2010 LEGISLATIVE PROPOSALS

The Budget includes a comprehensive package of Medicare legislative proposals designed to strengthen the Medicare program by aligning incentives toward quality, promoting efficiency and accountability, and encouraging shared responsibility.

These Medicare legislative proposals contribute $520 million in 2010 and $287.5 billion over 10 years toward the reserve fund established by this Budget to finance fundamental reform of our health care system. Brief proposal descriptions follow.

Align Incentives Toward Quality

Hospital Quality Incentive Program: Pay hospitals an incentive payment based on the quality of care provided. The incentive payment would link a portion of base operating payments to performance on specified quality measures. The portion of payments linked to performance would be 5 percent in 2011, phasing to 15 percent by 2015.

Hospitals would earn quality incentive payments based on their performance on certain quality measures. Payments not earned back would be split equally between a pool to fund additional hospital quality incentive payments and the Medicare Trust Fund.

Reduce Hospital Readmissions: Adjust payments for targeted conditions and procedures by 30 percent for hospitals with readmission rates exceeding the 75th percentile, if the patient is readmitted within 30 days of discharge due to complication or related diagnosis, beginning in 2012. Public reporting of readmission rates would start in 2013.

Physician Bonus Eligible Organizations (BEOs): Enable physicians to form voluntary groups that coordinate care for Medicare beneficiaries. BEOs would receive incentive payments if they improve the quality of care for patients and produce savings.

Influenza Vaccination: Create incentives for primary care physicians (PCP) to vaccinate Medicare beneficiaries. Payments would be reduced by 1.5 percent for PCPs who do not meet a benchmark rate of vaccination among beneficiaries receiving their services during the preceding flu season. PCPs would not be penalized if a flu shot is contraindicated or the beneficiary refuses.

Promote Efficiency and Accountability

Competitive Bidding for Medicare Advantage Plans: Establish a competitive bidding system in which MA payments are based on the average of plan bids submitted to Medicare. MA benchmarks would be set equal to the average MA plan bid in each county. Bids would be weighted by plan enrollment in the previous year. This approach will allow the market, not Medicare, to set MA payment rates.

Bundled Medicare Payments: Promote the efficient and coordinated provision of care by bundling payments for inpatient hospital services and post-acute care within 30 days of discharge, beginning in 2013. A single payment would be made to hospitals to cover the costs of both acute and post-acute care services.

Physician-Owned Hospital Conflict of Interest: Prohibit new physician-owned hospitals from seeking reimbursement for services furnished to beneficiaries referred to the hospital by a physician with a financial interest in the hospital. Existing physician-owned hospitals would be grandfathered if they meet certain criteria, but prohibited from expanding.

Imaging Services Payments: Require prior authorization from radiology benefit managers for the use and payment of advanced imaging services to control costs and guard against potential waste and abuse.

Home Health Payment Adjustments: Modify home health payments to better reflect the average cost of providing care by advancing a planned case-mix adjustment, providing a zero percent market basket update in FY 2010, and rebasing payments in FY 2011.

Improve Medicare Payment Accuracy: Promote payment accuracy and accountability in the Medicare program which would include: 1) providing Medicare contractors with resources to update their claims processing systems to better screen for payment errors; and 2) giving CMS the authority to require providers and suppliers to re-enroll on a more frequent basis.

Generic Biologics: Establish a workable regulatory, scientific and legal pathway for accelerated FDA approval of generic biologics. A period of exclusivity would be guaranteed for the original innovator product in order to retain incentives for research and development for the innovation of breakthrough products, which is generally consistent with the principles in the Hatch-Waxman law for traditional products. In addition, brand biologic manufacturers would be prohibited from reformulating existing products into new products to restart the exclusivity process, a practice known as “ever-greening.” Expanding access to generic biologics will lead to Medicare and Medicaid savings.

Medicare and Medicaid Improvement Funds: Reallocate the Medicare and Medicaid Improvement Funds toward health care reform.

Encourage Shared Responsibility

Part D Premiums: Income-relate the Part D premium so that higher income beneficiaries will have their Part D premium increased on a sliding scale, using the same parameters in place under Part B and with income thresholds indexed annually for inflation.

FY 2010 MEDICARE ADMINISTRATIVE PROPOSALS

The Medicare budget includes administrative savings totaling $3.5 billion in FY 2010 and $27 billion over 10 years. These policies will be implemented through regulatory or subregulatory guidance:

• Medicare Advantage Coding Intensity: Adjusts MA risk score payments to bring coding intensity growth rates in line with FFS. MA risk scores have been rising faster than FFS risk scores because MA plans are more effective at coding than FFS, and this proposal adjusts for coding intensity differences. This policy was published on April 6, 2009.
• Part D Normalization: Implements a uniform, downward adjustment of Part D risk scores based on enrolled beneficiaries, as opposed to eligible beneficiaries. This approach will get the Part D program back to the original statutory intent of the government paying a 75 percent share and the beneficiary paying a 25 percent share of plan bids. This policy was published April 6, 2009.
• Skilled Nursing Facility (SNF) Case Mix Recalibration: Recalibrate case-mix indexes introduced in 2006 using actual data in the calculation rather than the projected data used initially with the introduction of nine new case-mix groups.

PHYSICIAN PAYMENTS

To promote more honest budgeting, the Budget also includes an adjustment totaling $311.1 billion over ten years to reflect the Administration’s best estimate of what the Congress has done in recent years for physician payments. However, this adjustment does not suggest it should be a future policy.

The Administration believes that the current Medicare physician payment system, while having served to limit spending to a degree, needs to be reformed to give physicians incentives to improve quality and efficiency. As part of health care reform, the Administration would support comprehensive, but fiscally responsible, reforms to this payment formula. Consistent with this goal, the Administration will explore the breadth of options available under current authority to facilitate such reforms including an assessment, both substantively and legally, of whether physician administered drugs should be covered under the payment formula.

HIGHLIGHTS FROM THE MEDICARE IMPROVEMENTS FOR PATIENTS AND PROVIDERS ACT OF 2008

Physician Quality Reporting Initiative (PQRI): The PQRI program, under which physicians and other eligible professionals receive incentive payments for reporting data on quality measures, is extended through 2010.

Electronic Prescribing: Medicare physicians will receive incentive payments for using electronic systems to order prescription drugs. Starting in CY 2011, CMS will phase-out these incentive payments and phase-in payment penalties for prescribers not using electronic systems.

ESRD Bundled Payments and Pay-for-Performance: CMS will implement a bundled payment system for ESRD services starting in 2011. In addition, CMS will develop an ESRD pay-for-performance system.

MEDICARE QUALITY IMPROVEMENT ORGANIZATIONS (QIO)

QIOs assist providers seeking to improve the quality of care delivered to Medicare beneficiaries and respond to beneficiary complaints about the quality of care received and identify inefficiencies in health care. These quality improvement efforts are essential to the Administration’s goals to modernize and strengthen the Medicare program.

9^th Statement of Work (SOW): Between 2008 and 2011, approximately $1.1 billion will be provided to QIOs under the 9th SOW. This SOW includes significant reforms to the management of the program and increases the expected performance of the QIOs. The major goals of the 9th SOW include preventing illness, increasing the safety of care provided, reducing health care disparities, and promoting the use of efficient and high quality care. The 9th SOW will measurably reduce illness, injury, and re hospitalization.

Clinical Quality Efforts: Under the 9th SOW, clinical care efforts will focus on preventing disease, improving the coordination of care to avoid unnecessary rehospitalizations, identifying and intervening in the area of health care disparities, and increasing patient safety. In addition to the clinical quality efforts, QIOs will continue to protect beneficiaries by responding to quality of care complaints and making information available to support public reporting.

New Performance Management Strategy: The 9th SOW includes several innovations in QIO contract management, including ongoing performance management reviews, mid-contract performance assessments, and financial consequences if contractors do not maintain pre-specified performance levels.

PROGRAM INTEGRITY OVERSIGHT

Health Care Fraud and Abuse Control (HCFAC): The FY 2010 Budget proposes to continue funding the HCFAC program through both mandatory and discretionary funding streams. The FY 2010 HCFAC program level is nearly $1.5 billion, $125 million more than in FY 2009. Of this total program level, approximately $1.2 billion is mandatory and $311 million is discretionary.

HCFAC Mandatory Funds: The $1.2 billion in mandatory funds are financed from the Medicare Part A Trust Fund. This funding is allocated into three major parts: 1) the Medicare Integrity Program (MIP); 2) the Federal Bureau of Investigation (FBI); and 3) the HCFAC Account, which is divided among the Department of Justice (DOJ), the HHS Office of Inspector General (OIG), and other HHS agencies annually. Activities financed by this funding are used to detect and prevent heath care fraud, waste and abuse through investigations, audits, educational activities, and data analysis.

Mandatory HCFAC funding has a proven record of returning money to the Medicare Trust Fund for each dollar spent. For MIP, the actual return on investment (ROI) is 13 to 1, and for the HCFAC Account, the ROI is 4 to 1. From 1997 to 2007, HCFAC activities (excluding MIP) have returned over $11 billion to the Trust Fund. MIP activities have yielded an average of almost $10 billion annually in recoveries, claims denials, and accounts receivable over the past decade. In FY 2007, over $425 million in Medicare recoveries was returned to the Trust Fund and approximately $266 million in Medicaid recoveries was returned to the Treasury as a result of program integrity efforts.

For 2010, the Budget proposes to streamline HCFAC administration by splitting the current funding provided jointly to HHS and DOJ into separate funding streams and changing the due date of the annual HCFAC report from January 1 to June 1.

HCFAC Discretionary Funds: As part of a government-wide proposal to fund proven program integrity activities through an adjustment to discretionary spending totals, the FY 2010 Budget requests $311 million in discretionary HCFAC funding. This total will be allocated as follows:

• Medicare ($220.32 million)
• Medicaid ($31.10 million)
• DOJ ($29.79 million)
• OIG ($29.79 million)

The 2010 HCFAC investment represents the first year of a multi-year strategy.

These funds will complement the program integrity activities funded with mandatory HCFAC dollars.

Moreover, the additional funding will better equip the Administration to minimize inappropriate payments, close loopholes, and provide greater value for program expenditures to beneficiaries and taxpayers.

Based on the proven success of the mandatory HCFAC program, it is expected that this additional discretionary investment will also aid in the reduction of improper payments and recoup many times its initial investment. It is currently estimated that for every new dollar spent by HHS to combat health care fraud, $1.55 is saved or averted. The HCFAC discretionary proposal will yield $2.7 billion in mandatory Medicare and Medicaid savings over five years.

MEDICARE PROPOSALS
(dollars in millions)

* Estimate not yet available.
^1/ The Administration continues to analyze the potential for additional Federal savings.

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