Obama proposes $5.6B in Medicare payment cuts for FY 2014

(Story updated at 5:40 p.m. ET.)

President Barack Obama's highly anticipated fiscal 2014 budget (PDF) released Wednesday proposes $5.6 billion in Medicare payment cuts for that year and about $400 billion in total federal healthcare savings over the next decade.

In a news conference at the White House, the president called his budget—which aims to reduce the deficit by nearly $1.8 trillion over 10 years and would eliminate the sequester cuts—“a fiscally responsible blueprint for middle-class jobs and growth.” He also described the budget's Medicare cuts as ways to reduce the cost of healthcare without shifting those costs to beneficiaries. The budget would derive much of the $5.6 billion in fiscal 2014 Medicare savings from $3.1 billion it expects to save by adopting a Medicaid drug-rebate program for the dual-eligible population. The drug rebate program requires refunds from pharmaceutical manufacturers to Medicaid programs.

Following a news conference at HHS headquarters, Jonathan Blum, deputy administrator and director for the Center for Medicare at CMS said the rationale behind that decision is to ensure that the Medicare program gets the same deals as state Medicaid programs.

“I think the question really is: why should one payer get a much better rebate for the same drug, for the same population?” Blum said, adding, that Medicare Part D should benefit from the same lower prices in the Medicaid program. “Same drugs, same people, but they just happen to be eligible for Medicare, not Medicaid, and so it's a really data-driven approach to make sure that Part D is getting the best value for the program.”

Many of the healthcare savings proposed in the budget were derived through various drug cuts, including $740 million in separate drug savings in fiscal 2014 from barring pharmaceutical firm agreements to delay the availability of generic versions of brand name drugs. The drug cuts were hailed as “sensible changes to Medicare” by one advocacy group closely allied with the administration.

“It is high time that beneficiaries' costs, rather than windfall profits of the pharmaceutical industry, are protected,” Ethan Rome, executive director of Health Care for America Now, said in a written statement.

Other Medicare cuts in the budget included $780 million in graduate medical education, $830 million from post-acute care providers, $200 million less for hospital bad debt payments, $190 million in cuts to inpatient rehabilitation hospitals, and $90 million in cuts to critical-access hospitals.

The hospital cuts drew a sharp early rebuke from the industry.

“Instead of payment cuts that undermine hospitals' ability to transform healthcare, we urge the Obama administration and Congress to seek a more transformational approach to reduce costs,” Blair Childs, senior vice president of public affairs at Premier healthcare alliance, said in a news release.

However, critics dismissed the proposals because they would do little to extend the solvency of the Medicare hospital insurance trust fund, which is scheduled to be exhausted in 2024.

“Trying to reduce costs by cutting what doctors and hospitals get paid or introducing price controls for prescription drugs doesn't change the fundamental problems with Medicare and only threatens seniors' healthcare,” Sen. Orrin Hatch (R-Utah), ranking member of the Finance Committee, said in a written statement.

Savings from “Medicare structural reforms” for fiscal 2014 were made up entirely of $350 million from encouraging low-income seniors to use more generic drugs. However, additional categories of reform savings would be added in future years. Over the long term, structural reforms totaling $67.8 billion would come primarily from increasing premiums for higher-income beneficiaries.

For Medicaid, spending would jump by $428 million in fiscal 2014, as the millions of new enrollees are added in states that opt to expand eligibility as encouraged by the Patient Protection and Affordable Care Act to 138% of the federal poverty level.

Richard Umbdenstock, president and CEO of the American Hospital Association, said in a statement that the organization has “significant concerns” about certain payment policies in the budget, including the reductions for hospital bad debt payments, graduate medical education, and inpatient rehabilitation providers. But the AHA was satisfied with other areas of the budget, including a proposal to delay scheduled cuts to the Medicaid Disproportionate Share (DSH) program by one year until 2015.

“At the same time, we are pleased that the proposal backed off previous policies to cut Medicaid provider assessments and recognized the need to delay cuts to the Medicaid Disproportionate Share Hospital (DSH) program because there will be fewer insured people,” Umbdenstock said in the statement. “We also are pleased that the proposal does not include a single federal Medicaid matching rate that would have cut the program.”

The budget advocated a movement away from the Medicare's sustainable growth-rate formula, instead of its outright repeal, which the White House favored in the deficit-reduction discussions late last year. The fiscal 2014 budget proposed “a period of payment stability lasting several years” to allow development of new payment models that encourage care coordination and tying provider payments to health outcomes. Providers who adopt the new payment models would receive increased payments while those that remained in the fee-for-service system would face cuts.

Meanwhile, the budget proposes $80.1 billion in discretionary funding for HHS in fiscal 2014, which is a $3.9 billion increase from the 2012 enacted level of funding. The proposal would provide $31 billion for the National Institutes of Health, a move that the medical research community was quick to praise.

“As the centerpieces of the medical innovation ecosystem, NIH not only supports the research that leads to treatments and cures for our most devastating diseases, but drives the life sciences economic engine, annually sustaining over 400,000 jobs and nearly $60 billion in economic activity nationwide,” according to a statement from United for Medical Research, an organization that represents research institutions and advocacy groups such as the American Association for Cancer Research, the American Heart Association, Johns Hopkins University, Northwestern University and PhRMA. “The president's NIH budget proposal is an important step forward in restoring the crippling $1.6 billion cut the agency received as a result of the sequester.”

The administration also aims to bolster mental healthcare services in America by proposing a $130 million in initiative to help teachers and other adults recognize mental illness in young people. That includes $55 million for Project AWARE (Advancing Wellness and Resilience in Education) to provide mental health “first aid” training in schools and communities; $50 million to train 5,000 new mental health professionals to serve students and young adults; and $25 million for Healthy Transitions, a new competitive grant to help support transitioning young people between the ages of 16 and 25 and their families “access and navigate behavioral health treatment systems,” according to a summary of the budget for HHS.

In the HHS news conference, HHS Secretary Kathleen Sebelius detailed how much the administration has requested to implement the federally facilitated health insurance exchanges. The health insurance exchanges—both state-based and federally operated—will launch next year.

“This budget before you, the 2014 budget, asks for a total $1.5 billion in funding for the federally facilitated exchanges, both the operational side and education and outreach,” Sebelius said.