On May 12, 2009, Sen. Max Baucus (D-Mont.) and Ranking Member Charles Grassley (R-Iowa) held the third and final roundtable discussion on healthcare reform, previewing the multitude of policies slated for consideration when the Senate Finance Committee marks up reform legislation in June. A corresponding policy options paper (Options Paper) with proposals for financing reform was released by the Committee on May 18, 2009. Potential funding sources discussed by the Options Paper include proposals for achieving savings from the current Medicare and Medicaid payment systems, options for determining/maintaining a hospital's federal tax-exempt status, alternatives for modifying the tax treatment of certain health-related expenses, including the exclusion for employer-sponsored coverage and proposed "lifestyle" revenue raisers. The Options Paper also provides a list of the President's revenue-raising provisions that were part of the administration's FY 2010 budget proposals to Congress.

Proposals for Achieving Savings From the Current Medicare/Medicaid Payment Systems

Building on the proposals for delivery system reform addressed in the first policy options paper released on April 28, 2009, and discussed in theApril 30, 2009, issue of the Health Law Update, the third and final Options Paper enumerates proposals aimed at achieving savings within the current Medicare and Medicaid payment systems.

To that end, options under consideration for graduate medical education (GME) and disproportionate share hospital (DSH) payments include (1) adjusting current GME and DSH payment levels to "better reflect actual costs hospitals currently incur in treating the low-income and uninsured and in training medical residents," (2) reducing DSH payment levels over time concurrent with an anticipated reduction in the uninsured because of health reform, and (3) consolidating Medicare and Medicaid payments to hospitals "as a way to streamline and better account for and coordinate federal funding with the DSH and GME payment areas."

The Options Paper also follows MedPAC's recommendations in its 2009 Report to Congress to reduce indirect medical education payments for acute care hospitals, and to reduce or eliminate the market basket (i.e., inflationary) updates for skilled nursing facilities, inpatient rehabilitation facilities, home health agencies and long-term care facilities in FY 2010. Another proposal offers three options for reducing the market-basket update by an amount equal to all, one-half or one-quarter of the expected productivity gains.  

Additional proposals singled out as ripe for potential savings include:

  • Establishing an expert panel to assist the Centers for Medicare & Medicaid Services (CMS) with evaluating and adjusting payment for advanced diagnostic imaging and other "high-growth, potentially overvalued services";
  • Rebasing home health agency (HHA) payments and establishing a provider-specific annual cap on the number of allowable outlier episodes for which HHAs may be reimbursed in a year;
  • Revamping payment for "potentially overvalued" durable medical equipment (DME) items and services;
  • Reducing "inappropriate spending variations across and within geographic areas" by adjusting payments to reflect the price of inputs and health status of the local population; and
  • Increasing and expanding the brand-name and generic drug rebate amounts paid by drug manufacturers to state Medicaid programs.

Various proposals aimed at achieving savings from Medicare beneficiaries also are addressed. These include options for means-testing Part D premiums, changing out-of-pocket cost-sharing requirements under Parts A and B and imposing cost-sharing requirements for beneficiaries with Medigap coverage.

Options for Determining/Maintaining a Hospital's Federal Tax-Exempt Status

Proposals under consideration for modifying the rules pertaining to tax-exempt hospitals include an option to codify organizational and operational requirements for determining whether a hospital is a charitable organization under section 501(c)(3). Such requirements would include, among other things, that tax-exempt hospitals regularly conduct a community needs analysis, maintain a minimum annual level of charity care, "not refuse service based on a patient's inability to pay" and limit aggressive collection actions against patients. Tax-exempt hospitals failing to meet these requirements would be subject to "intermediate sanctions" or an excise tax.

Proposals for Modifying the Current Tax Treatment of Health-Related Expenses

Options under consideration for modifying the current tax treatment of health-related expenses include (1) capping the current tax exclusion for employer-sponsored coverage based on the value of the health insurance policy or the income level of the employee eligible for the exclusion, or both, or converting the employer-provided health insurance exclusion to an individual tax deduction or credit; (2) restricting contributions to Health Savings Accounts (HSAs) and increasing the penalty for withdrawing from an HSA for non-medical expenses; (3) modifying or eliminating Flexible Spending Accounts (FSAs); (4) imposing a standardized definition for "qualified medical expenses" with respect to HSAs, FSAs and itemized medical expense tax deductions; (5) eliminating the itemized deduction for medical expenses or raising the 7.5 percent floor for claiming deductions; (6) modifying the FICA tax exception for medical residents receiving stipends; and (7) extending the Medicare payroll tax to state and local government employees.

Proposed Lifestyle Revenue Raisers

Two "lifestyle" revenue raisers aimed at promoting wellness and healthy choices and curbing "activities that increase overall health care costs" are addressed as well. These include a uniform excise tax on alcoholic beverages and a new excise tax on "sugar-sweetened" beverages. For those of you who can't live without your daily Vanilla Coke, Pepsi Wild Cherry, one of the Dr. Browns or a Dr. Pepper, the Options Paper defines these beverages as ready-to-drink and fountain beverages sweetened with sugar, high-fructose corn syrup or other similar sweeteners. Beverages sweetened with non-caloric sweeteners would not be subject to the tax