The Obama Administration formally released the President's line-item budget request to Congress on May 7, 2009. Building upon the budget blueprint released by the White House earlier this year [see the March 5, 2009, issue of the Health Law Update ], the line-item budget provides greater detail and insight into the President's goals and initiatives for healthcare in FY 2010 and beyond.

The Obama budget calls for the establishment of a Health Reform Reserve Fund of approximately $600 billion over ten years. Financing healthcare reform under the President's budget would be through a combination of new revenue generated from changes in federal taxes and savings derived principally from the Medicare program as described in greater detail below.

Similar approaches for reforming the Medicare payment system were discussed in the first of three "policy options papers" released by the Senate Finance Committee on April 28, 2009 [see the April 30, 2009, issue of the Health Law Update ], indicating a like-mindedness between Congress and the administration with respect to a number of proposed payment changes. When viewed in conjunction with the President's budget request, these proposals offer a preview of where the Medicare program may be heading, and by implication, how it might be used by the administration and Congress to leverage greater healthcare reform. Adding to this mix is a newly released report from the Medicare Trustees projecting complete insolvency of the Hospital Insurance (HI) Trust Fund by 2017.

The following highlights some of the details from the President's line-item budget request with respect to proposed payment changes for Medicare providers, physicians and insurance plans:

Hospital Quality Incentive Program -- Linking a portion of Medicare payment for inpatient services to a hospital's performance on specific quality measures. The portion of payments linked to performance would be 5 percent in 2011, phasing to 15 percent in 2015. Payments not earned back would be split equally between a pool to fund additional quality incentives and the Medicare HI Trust Fund.

Hospital Readmissions -- Beginning in FY 2012, decreasing 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. Public reporting of readmission rates would begin in FY 2013.

Bundled Payments -- Beginning in FY 2013, bundling Medicare payments for inpatient hospital services and post-acute care within 30 days of discharge. A single payment would be made to hospitals to cover the costs of both the acute and post-acute care services.

Physician-Owned Specialty Hospitals -- Prohibiting new physician-owned hospitals from seeking reimbursement for services furnished 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 would be prohibited from expanding.

Physician Payment -- Allocating $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." While stating that this estimate "does not suggest it should be a future policy" and that the administration would "support comprehensive, but fiscally responsible reform" to the physician payment formula, the ten-year budget estimate appears to be an intended effort by the administration to buy sufficient time to "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."

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

Imaging Services Payments -- Requiring prior authorization from radiology benefit managers for use and payment of advanced imaging services.

Home Health Adjustments and Payments -- Establishing a planned case-mix adjustment; providing a zero percent market basket update beginning in FY 2010; rebasing payments in FY 2011.

Competitive Bidding for MA Plans -- Establishing a competitive bidding system in which MedicareAdvantage (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 weighed by plan enrollment in the previous year.

Other Budget Priorities and Initiatives

Drug Pricing -- Establishing a regulatory pathway for generic versions of biologic drugs with a period of exclusivity guaranteed for the original innovator product consistent with Hatch-Waxman law. Brand biologic manufacturers would be prohibited from reformulating existing products into new products ("ever-greening") to restart the exclusivity process.

Facility Survey and Certification -- Providing an 18 percent increase over FY 2009 for health facility surveys and certification. Survey frequencies will double for accredited hospitals and increase to no less than once every three years for ESRD facilities in FY 2010. Long-term care hospitals and home health agencies will continue to be surveyed under their statutorily mandated frequencies. Hospice, rural health clinics and ambulatory surgical centers will be surveyed at least once every six years.

Two user fees will be established to finance the increase in survey and certification activity. A "revisit user fee" would be charged to facilities cited for deficiencies during initial certification, recertification or substandard complaint surveys. A "recertification user fee" would be charged to all participating healthcare facilities at the time of their periodic recertification surveys. Recertification user fees would be phased in over a three-year period to a level equal to 33 percent of costs, on average.

Fraud and Abuse -- Allocating a net increase of $6 million over FY 2009 to the Office of Medicare Hearings and Appeals which projects a 36 percent increase in claims in FY 2010 resulting from the permanent expansion of the Recovery Audit Contractor (RAC) program and a $1.7 billion increase over five years to the Health Care Fraud and Abuse Program for regulatory and enforcement activity.

The President's line-item budget request follows on the heels of a recent congressional budget agreement that provides reserve funds for reform and includes reconciliation instructions on the Senate side to limit debate and enable reform to pass with a simple majority should legislative efforts stall by October 15, 2009. This congressional budget agreement also overrides a scheduled 21 percent reduction in Medicare fees for physicians in FY 2010 by extending the physician payment "fix" for two years.