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Medicare, Medicaid and SCHIP Budgets Directly and Indirectly Impact Teaching Hospitals and Physicians

February 8, 2002 - For the second year in a row, President Bush's budget request rejects new major Medicare cuts. However, several Medicare and Medicaid cuts to providers that exist under current law are assumed in the budget's baseline.

The budget rejects new provider cuts to Medicare and does not extend expiring provisions related to the Balanced Budget Act of 1997 (BBA) that have reduced Medicare capital payments, PPS-exempt capital payments, and inpatient and outpatient hospital payments. However, the budget does assume several Medicare and Medicaid cuts to providers that exist in statute. They include:

• 13 percent reduction to Medicare Indirect Medical Education (IME) payments, scheduled to occur in FY 2003. The IME is scheduled to be reduced from 6.5 to 5.5 for every 10 percent increase in a hospital's resident to bed ratio;
• a 13 percent Medicaid Disproportionate Share Hospitals (DSH) reduction in allotments to states. The budget assumes that in FY 2003 Medicaid DSH allotments will revert back to the levels established in the BBA. Medicare refinement legislation in 2000 postponed the BBA Medicaid DSH cuts scheduled for FYs 2001 and 2002, effectively freezing allotments at FY 2000 levels for two years. However, the freeze ends in FY 2003.
• reductions to Medicaid payments as a result of recent regulations that eliminate the 150 percent Upper Payment Limit (UPL) for non-state government owned hospitals, an estimated savings of $11 billion over five years;
• "continu[ing] steps already underway to address variations in graduate medical education" by extending the cap on Medicare Direct Graduate Medical Education (DGME) Payments for those hospitals with per resident limits above 140 percent of the national average. Under current law, in FYs 2003-2005, those hospitals with per resident amounts above 140 percent of the national average would see their payments increased by market basket minus 2 percent. The proposal is estimated to save Medicare $60 million over 5 years and $570 million over 10 years.

In addition, the budget assumes potential FY 2003 reductions to Medicare physician payments as a result of the sustainable growth rate methodology that updates physician payments. While the Administration acknowledged the problematic methodology, it did not include solutions. The budget states the Administration's "willingness" to work with Congress to reform Medicare provider payment policies so that they "function smoothly and equitably over time." Interestingly, the document clearly states that any changes in policy (both short- and long-term) will be budget neutral across all providers.

The centerpiece of President Bush's Medicare budget dedicates "$190 billion over 10 years for targeted improvement and comprehensive Medicare modernization, including a subsidized prescription drug benefit, better insurance protection, and better private options for all beneficiaries." To improve Medicare beneficiary access to drug coverage, the budget proposes to phase in a comprehensive drug coverage program for lower income beneficiaries up to 150 percent of poverty; allow states to expand drug coverage to Medicare beneficiaries up to 100 percent of poverty; create incentives for states to expand coverage to Medicare beneficiaries up to 150 percent of poverty; and develop model drug waivers to allow states to both reduce expenditures and expand drug-only coverage.

The Medicare budget also includes increased payments to Medicare Plus Choice plans ($4.1 billion over 10 years) to stabilize the program and prevent more managed care plans from exiting the program; adding two Medigap plans to the existing ten to offer prescription drug and catastrophic coverage and lower cost sharing; and "new comprehensive measure of solvency accounting" for both the Medicare Hospital Insurance and Supplemental Medical Insurance trust funds.

The overall goal of the President's Medicaid budget seeks to "increase coverage and efficiency in the Medicaid and State Children's Health Insurance Program (SCHIP) by giving states more flexibility to meet health care coverage goals." For both Medicaid and SCHIP, the Administration hopes to build on an August 2001 "Health Insurance Flexibility and Accountability" demonstration initiative to give states the "statutory authority to provider broader coverage to low-income uninsured Americans" and "the flexibility to design innovative programs without seeking waivers."

Under SCHIP, the Administration also proposes to extend the availability of unspent FY 1998, FY 1999, and FY 2000 funds through FY 2006. Current law allows states to either retain or receive a redistributed portion of unused FY 1998 and FY 1999 SCHIP allotments through FY 2002 and unused FY 2002 SCHIP allotments through FY 2003. The retained/redistributed funds are available to match expenditures under approved state child health plans. Any remaining unspent dollars must be returned to the Treasury. Without the extension, the budget estimates that about $3.2 billion in SCHIP funds will return to the Treasury at the end of FYs 2002 and 2003.

Other budget proposals of interest to teaching hospital and physicians include:

• 200 million in graduate medical education funding to children's hospitals, a reduction of $85 million (29.8 percent) from FY 2002;
• elimination of funding for the Community Access Program (CAP), a grant program to communities to strengthen the effectiveness, efficiency and coordination of services for the uninsured and underinsured. Supported by the AAMC, the program was funded at $105 million in FY 2002;
• refundable tax credits initiative that would help the uninsured purchase their own health insurance coverage [see Washington Highlights, Feb. 2];
• new financial penalties on Medicare providers who submit paper, duplicate, or unprocessable claims ($1.50/claim); and
• $64.1 million to CMS for HIPAA implementation programs, including $10 million to conduct testing with Medicare providers to ensure they submit HIPAA complaint claims, and $10 million to conduct outreach and education efforts with providers and others.

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