As reported last week, President Obama released his $3.77 trillion budget proposal for fiscal year 2014, which includes $400 billion in spending cuts to health care and would raise taxes on higher-income individuals.  The budget would eliminate the recent cuts under sequestration, which implemented a 2 percent cut in Medicare provider payments and a 5.1 percent cut to the National Institutes of Health (NIH), and replace them with other reductions.

It is important to note that budgets are not law, and the proposals contained in the document need to be adopted by Congress prior to their implementation. The Obama budget proposal will now join competing budget outlines that have already been approved by the Republican-controlled House and the Democratic-run Senate.  Washington insiders predict that serious budget negotiations will not take place until the summer, when the government will again be confronted with the need to raise the government’s borrowing limit or face the prospect of a first-ever default on U.S. debt.

Doc Fix

The proposal includes a “doc fix” on the sustainable growth rate (SGR) formula used to set Medicare pay rates. The current formula will trigger a 25% cut in physician pay on January 1, 2014, unless Congress steps in again to delay the cuts.  The President’s budget proposal would freeze physician pay rates at their current level. The proposal would implement several years of fee-for-service “payment stability” that would give the Centers for Medicare & Medicaid Services (CMS) more time to develop various pay-for-performance models from which physicians eventually could choose. The goal of the budget plan is to “provide predictable payments that incentivize quality and efficiency in a fiscally responsible way.” The proposal establishes a baseline expense of $249 billion over 10 years, which assumes the cost of repealing the SGR and a 10-year payment freeze.


The budget proposal allocates a total of $80.1 billion for Health and Human Services (HHS), or about $4 billion more than was budgeted for the department in 2012.  This includes $1.5 billion to cover the health reform law’s insurance exchanges, which are due to start covering people in 2014.  The budget proposal also appropriates $31.3 billion for the NIH, of which 83% would go to fund outside research. NIH also hopes to spend $40 million “on research collaborations with academic institutions, the private sector, and other government agencies on the new Brain Research through Application of Innovative Neurotechnologies (BRAIN) Initiative,” as noted in the budget document.

The $400 billion in health care spending cuts would come from Medicare provider cuts, Medicare reforms, and implementation of fraud and abuse programs. Further details include the following:

Medicare Cuts to Providers

  • Cuts $11 billion over 10 years to Medicare Indirect Medical Education (IME) Payments beginning in 2014;
  • Reduces the bad debt reimbursement for eligible Medicare providers from 65% to 25% over three years starting in 2014, which would total $25.49 billion in cuts over 10 years;
  • Requires Medicare to get the same drug rebates that Medicaid receives for brand name and generic drugs provided to beneficiaries who receive the part D low-income subsidy.  Accelerates drug rebates to Medicare beneficiaries in the coverage gap. A total of $134.38 billion in cuts over 10 years;
  • Reduces payment of physician administered Part B drugs from 106 percent of average sales price to 103 percent of average sales price. Total of $4.48 billion in cuts over 10 years;
  • Increases the levy authority for payments to Medicare providers with delinquent tax debt.
  • Allows providers who meet certain accountability standards to self-refer radiation therapy, therapy services, and advanced imaging services. A total of $6.05 billion over 10 years.

Reforms to Medicare Program

  • Establishes a Part B premium surcharge for beneficiaries that purchase Medigap coverage;
  • Modifies Part B deductible for new enrollees;
  • Encourages use of generic drugs by low-income beneficiaries;
  • Strengthens the Independent Payment Advisory Board by reducing the target growth rate from GDP per capita plus 1% to plus 0.5%.

Medicare and Medicaid Fraud Proposals

  • Allows civil monetary penalties or intermediate sanctions for providers who do not update enrollment information;
  • Requires prior authorization for advanced imaging;
  • Directs states to track high prescribers and utilizers of prescription drugs in Medicaid to identify abnormal billing and prescribing patterns;
  • Expands the mandate for authorities to investigate and prosecute allegations of abuse or neglect of Medicaid beneficiaries in additional health care settings;
  • Affirms Medicaid’s position as a payer of last resort by removing exceptions to the requirement that State Medicaid agencies reject medical claims when another entity is legally liable to pay the claim;
  • Alleviates state program integrity reporting requirements by consolidating redundant error rate measurement programs to create a streamlined audit program with meaningful outcomes, while maintaining the Federal and State Government’s ability to identify and address improper Medicaid payments.