Characterizing healthcare reform as key to the nation’s fiscal recovery, President Obama outlined his FY 2010 budget request to Congress in broad strokes last week. Noting that the United States spends over $2.2 trillion on healthcare each year—or approximately 16 percent of the total economy—the President’s budget establishes a non-binding reserve fund of more than $630 billion as an initial down payment on healthcare reform.

Reconfiguring Medicare

The reserve fund would be financed in part from new revenue generated by certain changes in federal taxes and from savings proposals designed "to promote efficiency and accountability" over ten years that include the following changes to the Medicare program:

  • Replacing the current payment mechanism for MedicareAdvantage plans with a competitive bidding system (savings = $176 B).
  • Bundling Medicare payments to hospitals for hospitalization and care in a post-acute setting (savings = $18 B).
  • Improving Medicare home health payments "to align with costs" (savings = $37 B).
  • Linking a portion of Medicare payment for inpatient services to a hospital’s performance on specific quality measures (savings = $12 B).
  • Reducing Medicare payments to hospitals with high readmission rates (savings = $8 B).
  • Requiring higher-income beneficiaries enrolled in Medicare Part D to pay higher premiums as is currently required for physician and outpatient services (savings = $8 B).
  • Using "private sector enhancements" to improve Medicare payment integrity (savings = $2 B).
  • Ensuring that Medicare makes appropriate payments for imaging services through the use of radiology benefit managers (savings = $260 M).

The budget document reflects a $330 billion "best estimate" baseline for "comprehensive, but fiscally responsible" physician payment reform. Recall that physician payments will undergo a 20 percent reduction in 2010 unless Congress intercedes. Changes for which no specific details or cost savings are attributed include user fees for surveys and certification by CMS and "addressing financial conflicts of interest in physician-owned specialty hospitals"—possibly indicating that the administration has not settled on a complete prohibition of physician-owned hospitals.

Other Budget Priorities and Initiatives

With respect to drug pricing, the budget establishes a regulatory pathway for generic versions of biologic drugs and increases the Medicaid drug rebate for brand name drugs. It also provides $340 million for expanding loan-repayment programs for doctors, nurses and dentists who agree to practice in medically underserved areas. Additionally, $73 million is allocated toward shoring up and modernizing the healthcare infrastructure in rural areas. As part of the administration’s multi-year plan to double cancer research funding, the budget includes $6 billion within the National Institutes of Health to support cancer research.

With respect to the Food and Drug Administration (FDA), the budget allocates $1 billion for food and safety oversight and a "substantial increase" for FDA oversight of medical products.

So What Shape Reform?

The budget document say  that the President will adhere to a set of eight principles for "transforming and modernizing" America’s healthcare system: (1) protect families’ financial health; (2) make health coverage affordable; (3) aim for universality; (4) provide portability of coverage; (5) guarantee choice; (6) invest in prevention and wellness; (7) improve patient safety and quality care; and (8) maintain long-term fiscal sustainability. With the newly nominated leadership team of Kansas Gov. Kathleen Sebelius for Secretary of HHS and former CMS Administrator Nancy-Ann DeParle as head of the White House Office for Health Reform, greater detail should become available when a line item budget is released in early April. Also, because Congress has yet to rule out using the budget reconciliation process for effecting reform, close and continuing attention to federal budget matters will be absolutely critical.