The President’s Fiscal Year (FY) 2012 Budget request was released on February 14, 2011, and includes health care budget proposals. The following advisory summarizes key provisions of the Centers for Medicare & Medicaid (CMS) budget proposals within the FY 2012 Department of Health and Human Services (HHS) Budget in Brief.1

Physician Payment Relief: In December 2010, a decrease in physician payments due to the Medicare Sustainable Growth Rate (SGR) formula was averted with the enactment of legislation providing for a zero update for the Medicare Physician Fee Schedule through the end of calendar year 2011. The President’s Budget proposes to continue the zero percent update for an additional two years (through 2013).This proposal would increase the deficit by $54.4 billion over five and 10 years. Beyond the next two years, the administration intends to work with Congress to put in place a long-term plan to reform physician payment rates, which they estimate to increase the deficit by around $90 billion and $315.5 billion over five and 10 years, respectively.

The proposal to provide SGR relief through 2013 would be offset by proposals outlined below that produce savings:

I. Medicare FY 2012 Budget Proposals

  • Redirection of Electronic Health Records Penalties: The American Recovery and Reinvestment Act of 2009 established financial penalties for certain Medicare providers if they fail to adopt electronic health records. This proposal would dedicate these penalties to improving Medicare program financing. The proposal would be effective CY 2020. No costs or savings are projected over five years; reduces the deficit by $3.23 billion over 10 years.
  • QIO Larger Geographic Scope: The proposal would require the Secretary to determine the geographic scope of Quality Improvement Organization (QIO) contracts to maximize efficiency. It would expand the scope of QIO state contracts to include national entities and multiple QIOs in a geographic area. The intent of the proposal is to increase competition and contract efficiencies. The proposal would be effective upon enactment. Decreases the deficit by $600 million over five years, and $2.22 billion over 10 years.
  • Eliminate the Conflict of Interest Between Beneficiary Protection and Quality Improvement Activities for QIOs: The proposal would give the Secretary the discretion to contract with other types of quality organizations to perform QIO functions. The intent of the proposal is to allow the Secretary to assign work to a QIO or quality organization based on performance, expertise and cost-effectiveness. The proposal would be effective upon enactment. Decreases the deficit by $200 million over five years, and $710 million over 10 years.
  • Expand Pool of Contractors Eligible for QIO Work: The proposal would allow the Secretary to award QIOs and other quality organizations contracts within a state or region to different contractors for administrative case review and quality improvement functions. The intent of the proposal is to address conflict of interest concerns in which the contractor is responsible for both building provider relationships to improve quality and holding providers accountable for failures in the delivery of care. The proposal would be effective upon enactment. Decreases the deficit by $50 million over five years, and $170 million over 10 years.
  •  Extend the QIO Contract Length From Three Years to Up to Five Years: The proposal would extend the QIO contract length from three to up to five years. The intent of the proposal is to allow for more evaluation, enhance the scope of contract services rendered and reduce the heavy start-up burden for QIOs. The proposal would be effective upon enactment. Decreases the deficit by $30 million over five years, and $160 million over 10 years.
  • Align QIO contract terminations with Federal Acquisition Regulations (FAR): The proposal would align QIO contracting with the FAR. The intent is to enhance the Secretary’s ability to terminate underperforming QIOs and end the lengthy panel review process that can delay contract changes that promote program effectiveness and efficiency. The proposal would be effective upon enactment. No costs or savings are projected.
  •  Modify Length of Exclusivity to Facilitate Faster Development of Generic Biologics: The Affordable Care Act (ACA) pathway for FDA approval of generic biologics provides a 12-year exclusivity period. This Budget proposal would shorten the exclusivity period from 12 to seven years. It would also prohibit manufacturers who revise their product from extending their exclusivity period, a process known as “evergreening.” The proposal would be effective in FY 2012. Decreases deficit by $300 million for Medicare and $30 million for Medicaid over five years, and $2.18 billion for Medicare and $160 million for Medicaid over 10 years.
  • Prohibit Drug Companies from Delaying Availability of New Generic Drugs: The proposal would give the Federal Trade Commission authority to prohibit “pay-for-delay” agreements between brand and generic pharmaceutical companies that delay entry of generic drugs into the market. The Budget indicates that “anticompetitive agreements” between brand and generic manufacturers lead to increased costs for insurers and consumers. The proposal would be effective in FY 2012. Decreases deficit by $2.57 billion for Medicare and $850 million for Medicaid over five years, and $6.46 billion for Medicare and $2.33 billion for Medicaid over 10 years.
  • Achieve Administrative Savings Through Gaining Efficiencies: The Budget includes an allowance for unspecified administrative savings of $10 billion over 10 years.

 II. Program Integrity FY 2012 Budget Proposals

The Budget proposal includes 19 new legislative proposals to strengthen program integrity for Medicare, Medicaid and CHIP, saving $32.3 billion over 10 years.

(a) Medicare

  • Recover Erroneous Payments from Insurers Participating in MA: The proposal would require the extrapolation of the error rate found in the risk adjustment data validation (RADV) audit samples to the entire MA contract payment when recouping overpayments. The proposal would be effective upon enactment. Decreases the deficit by $2.95 billion over five years, and $6.16 billion over 10 years.
  •  Reporting of “Sweep Accounts”: The proposal would require providers to report the use of “sweep accounts” that immediately transfer funds from a financial account to an investment account, often in another jurisdiction, for receipt of Medicare payment, and permit enhanced review of reporting providers. The proposal would be effective FY 2012. No costs or savings are projected.
  •  Penalties for Outdated Enrollment Records: The proposal would authorize civil monetary penalties or other intermediate sanctions for providers who do not update enrollment records. Updated enrollment records provide important information to CMS on the providers in Medicare, such as adverse legal actions. This proposal gives providers and suppliers additional incentive to ensure their enrollment information is up to date, which reduces program vulnerability to fraud. The proposal would be effective FY 2012. Decreases the deficit by $30 million over five years, and $80 million over 10 years.
  •  Universal Product Numbers (UPNs) on Claim Forms: The proposal would study the use of UPNs on claims forms for Medicare reimbursement to facilitate appropriate payment and detection of fraud. The proposal would be effective in FY 2012. No costs or savings are projected.
  • Medicare Claims Ordering System: The proposal would create a Medicare claims ordering system and require electronic submission of orders for certain high risk services, such as DME and home health, prior to payment of a claim in order to validate that a physician or other eligible professional ordered the service. The proposal would be effective CY 2014. Decreases the deficit by $330 million over 5 years, and $1.76 billion over 10 years.
  • Review of Power Wheelchair Claims: The proposal would require prepayment or earlier review for all power wheelchair claims. Allowing CMS to conduct prepayment or earlier review on power wheelchair claims to ensure they meet the existing criteria for coverage will reduce improper payments and prevent fraud. The proposal would be effective FY 2012. Decreases the deficit by $90 million over five years, and $240 million over 10 years.

 (b) Medicaid

  • Use of Provider Taxes to Pay State Share of Medicaid: The proposal would limit states’ ability to use provider taxes to pay the state share of Medicaid by phasing down the Medicaid provider tax threshold from the current law level of six percent in FY 2014, to 4.5 percent in FY 2015, four percent in FY 2016 and 3.5 percent in FY 2017 and beyond. Restricting the use of provider taxes was recommended by the National Commission on Fiscal Responsibility and Reform. The proposal would be effective FY 2015. Decreases the deficit by $3.51 billion over five years, and $18.37 billion over 10 years.
  •  Strengthen Third-Party Liability: The proposal would strengthen third-party liability under Medicaid to improve states’ and providers’ abilities to receive third-party payments for beneficiary services, as appropriate. This proposal allows states to avoid costs for prenatal and preventive pediatric claims when third parties are responsible, and allows providers to collect medical child support where health insurance is derived from a non-custodial parent, and to recover Medicaid expenditures from beneficiary liability settlements. The proposal would be effective FY 2012. Decreases the deficit by $650 million over five years, and $1.62 billion over 10 years.
  • Track High Prescribers and Utilizers of Prescription Drugs in Medicaid: The proposal would require states to monitor high-risk billing activity to identify and remediate prescribing and utilization patterns that may indicate abuse or excessive utilization of certain prescription drugs in the Medicaid program. Under the proposal, states could choose one or more drug classes and would be required to develop or review and update their care plan to reduce utilization and remediate any preventable episodes to improve Medicaid integrity and beneficiary quality of care. The proposal would be effective in FY 2012. Decreases the deficit by $1.27 billion over five years, and $3.45 billion over 10 years.
  • Repayment of Rebates for Improper Reporting: The proposal would require drug manufacturers to repay states for improperly reported items for Medicaid-covered prescription drug coverage. This proposal requires full restitution to states for any covered drug improperly reported by the manufacturer on the Medicaid drug coverage list. The proposal would be effective in FY 2012. Decreases the deficit by $50 million over five years, and $125 million over 10 years.
  • Manufacturer Compliance with Drug Rebate Requirements: The proposal would require regular audits of drug manufacturer compliance with requirements of Medicaid drug rebate agreements, to the extent they are cost effective. The proposal would be effective in FY 2012. No costs or savings are projected.
  • Penalties for Fraudulent Noncompliance on Rebate Agreements: The proposal would increase penalties collected from drug manufacturers for fraudulent noncompliance with Medicaid prescription drug rebate agreements. The proposal would be effective in FY 2012. No costs or savings are projected.
  • Proper Listing of Drugs with FDA: The proposal would require drugs to be properly listed with the FDA in order to receive Medicaid coverage. This proposal aligns Medicaid coverage requirements with Medicare requirements. The proposal would be effective in FY 2012. No costs or savings are projected.
  • Prevent Use of Federal Funds to Pay State Medicaid or CHIP Share: The proposal would prevent states from using federal funds to pay the state share of Medicaid or CHIP, unless authorized under law to specifically match Medicaid or CHIP funds. The proposal would be effective FY 2012. No costs or savings are projected.

(c) Medicare and Medicaid

  •  Participation Exclusion for Affiliation with Sanctioned Entity: The proposal would give the Secretary additional permissive authority to exclude providers from participation in federal health care programs if they are affiliated with an entity that has been sanctioned. The proposal would be effective FY 2012. No impact on the deficit over five years; reduces the deficit by $50 million over 10 years.
  • Retain a Percentage of Recovery Audit Contractor (RAC) Recoveries: The proposal would allow CMS to use a portion of RAC recovery funds for corrective actions, such as new processing edits and provider education and training to prevent future improper payments. The proposal would be effective FY 2012. Decreases the deficit by $50 million over five years, and $230 million over 10 years.
  • Provide Flexibility in Implementing Predictive Analytics: Current law requires the Secretary to broadly implement predictive analytics technologies, even when more cost-effective tools may be available. The proposal would allow the Secretary to have increased flexibility to target this technology toward areas with the greatest return on investment. The proposal would be effective FY 2012. Decreases the deficit by $90 million over five years, and $100 million over 10 years.
  • Fraud Debt in Bankruptcy Proceedings: The proposal would limit the discharge of health care fraud debts in bankruptcy proceedings. The proposal would be effective FY 2012. Decreases the deficit by $40 million over five years, and $150 million over 10 years.
  • Penalties for Illegal Distribution of Beneficiary Identification Numbers: The proposal would strengthen penalties for the knowing distribution of Medicare, Medicaid or CHIP beneficiary identification numbers. The proposal would be effective FY 2012. No costs or savings are projected.

III. Medicaid FY 2012 Budget Proposals

  • Extend the Qualified Individuals (QI) Program: The proposal would extend authorization and funding of the QI program through September 30, 2012. The QI program pays the Medicare Part B premiums of low-income Medicare beneficiaries with incomes between 120 and 135 percent of the FPL. Current law extends this program through December 31, 2011, and this proposal would allow states to receive 100 percent federal funding through the end of FY 2012. Increases the deficit by $495 million over five and 10 years.
  • Extend Transitional Medical Assistance (TMA): The proposal would extend authorization and funding of the TMA program through September 30, 2012. The TMA program extends Medicaid coverage for at least six months, and up to 12 months, for low income families who lose cash assistance due to an increase in earned income or hours of employment. Current law extends this program through December 31, 2011. Increases the deficit by $665 million over five and 10 years.
  •  Establish Hold-Harmless for Federal Poverty Guidelines: The proposal would establish a permanent hold harmless provision to adjust the poverty guidelines only when there is an increase in the Consumer Price Index for All Urban Consumers (CPI-U). This proposal would treat the CPI-U adjustment for the poverty guidelines similarly to the treatment of the annual cost-of-living adjustments for Social Security Benefits. No costs or savings projected.
  • Rebase Medicaid Disproportionate Share Hospital (DSH) Allotments in FY 2021: As the number of uninsured individuals decreases as a result of the coverage expansions in the Affordable Care Act, uncompensated care costs for hospitals will also decrease, reducing the level of DSH funding needed. The ACA includes annual aggregate DSH reductions for FY 2014 through FY 2020, but allotments revert to levels prior to the ACA in FY 2021. This proposal would rebase the FY 2021 allotments to maintain the FY 2020 level of reductions in the ACA, and determine future allotments from the rebased level using current law methodology. No costs or savings are projected over five years; reduces the deficit by $4.17 billion over 10 years.
  • Limit Medicaid Reimbursement of Durable Medical Equipment Based on Medicare Rates: The Medicare program is in the process of implementing innovative ways to increase efficiency for payment of DME through the DME Competitive Bidding Program, which is expected to save more than $17 billion in Medicare expenditures over 10 years. This proposal extends some of these efficiencies to Medicaid, by limiting federal reimbursement for a state’s aggregate Medicaid spending on certain DME services to what Medicare would have paid in the same state for the same services. Decreases the deficit by $2.35 billion over five years, and $6.4 billion over 10 years.