For Medicare, the focus in FY2006 will be the implementation of the Medicare Modernization Act. The law’s main features include the new prescription drug benefit (Part D) and a strengthening of the Medicare Advantage program – steps that bring Medicare’s benefits up to date – and many other provisions to make Medicare payments more accurate and efficient.
Lower Overall Medicare Spending Than Mid-Session Review Estimates
- FY 2006 net Medicare spending (benefits minus premiums) in the President’s FY 2006 budget (PB2006) is estimated to be $345.2 billion. This is the first year that Medicare’s costs include the Medicare prescription drug benefit (Part D).
- The projected FY2006 net spending is $5.4 billion or 1.6 percent lower than the most recent estimate from the FY 2005 mid-session review.
- FY 2006 Part A spending in PB2006 is estimated to be $7.6 billion (4 percent) lower than in Mid-Session Review 2005.
- FY 2006 Part B spending in PB2006 is estimated to be $1.8 billion (1.6 percent) higher than in Mid-Session Review 2005.
- FY 2006 Part D spending in PB2006 is virtually unchanged since the Mid-Session Review 2005 – up $0.4 billion or 0.7 percent, and unchanged over FY 2006-10
- Five-year spending is estimated to be $2.1 trillion, $35 billion (1.7 percent) lower than the Mid-Session Review 2005 estimate.
Contributing Factors to Lower Estimates of Medicare Net Spending
- Medicare experienced lower costs in 2004 than had been expected, leading to a lower base for the future projections of Medicare costs.
- Actual Part A costs in 2004 were lower than had been projected.
- Actual Part B costs were somewhat higher than previously projected, mainly due to relatively rapid growth in spending for physician services, outpatient hospital and ambulatory surgery centers.
- Medicare’s actuarial projections include technical refinements and updates.
- Changes in economic assumptions and technical improvements in data sources and models contributed to the changes in assumptions about overall Medicare spending growth.
- Based on input from a technical advisory panel, the Actuaries’ projections of Part D enrollment are about 10 percent lower than in previous estimates. In addition, more retirees are projected to receive coverage with assistance from employers, reducing Medicare costs, and utilization by low-income beneficiaries is expected to be somewhat higher, as was reported in Medicare’s final regulation for Title I. A number of other assumptions were also refined, based on updated data and other technical panel recommendations. Some of these other factors increased projected costs and some decreased projected costs.
- The technical advisory panel also estimates that Medicare Advantage enrollment will grow at a slower rate than previously projected. In the revised models, Medicare Advantage enrollment gradually increases to approximately one-third of all beneficiaries, the same level as in previous estimates, but growth is now projected to occur at a somewhat slower rate.
Implementation of MMA Provisions to Avoid Unnecessary Medicare Costs
The MMA contains many provisions to obtain more accurate and efficient payments in Medicare. CMS will continue to work to implement all of these provisions on schedule and with many opportunities for public input to assure effective implementation. These provisions include:
- New preventive benefits and care coordination services in Medicare. These steps will bring Medicare’s benefits up to date with modern health care’s capability to prevent chronic diseases and many complications of chronic diseases that account for most Medicare expenditures today. As a result, Medicare will have a new, more personalized orientation toward preventive care that holds the potential to avoid many errors, emergency visits, and costly complications that currently account for many billions in Medicare costs.
- Eliminating overpayments for Medicare Part B drugs using actual competitive prices (based on average sales prices) combined with appropriate payments for drug administration services, resulting in substantial savings compared to the previous “average wholesale” regulated prices in Medicare. In addition, in FY2006, Medicare will give providers the option of obtaining drug supplies through competitive bidding.
- Implementing cost-saving reforms, such as paying appropriately for ambulatory surgical center services and lab services and implementing competitive bidding for durable medical equipment, are also projected to reduce Medicare costs.
- Implementing the new systems required for the income-related premium in Medicare Part B in 2007. Under the income-related premium, all beneficiaries will continue to receive substantial subsidies for Part B services, and the cost of Part A benefits (funded by the dedicated Medicare payroll tax) will not be affected. However, high-income beneficiaries will receive smaller Part B subsidies, reducing Medicare’s dependence on general revenue financing.
- The President’s budget builds on these steps to make Medicare more efficient, and on the MMA provisions for examining Medicare’s financing as a whole, by proposing an integrated financial accounting system with a unified trust fund in Medicare.
Paying for Better Results in Medicare
The President’s FY2006 budget calls for collaborative steps with Congress and key stakeholders toward performance-based payments that do not increase total Medicare costs. In general, Medicare’s fee-for-service system pays health care providers equally for the same service, regardless of quality or impact on the bottom-line costs and outcomes for beneficiaries. This system provides only limited support and rewards for physicians and other health care professionals who can improve quality and reduce total Medicare costs by providing better care rather than simply more care for patients. FY2006 provides the best opportunities ever to implement performance-based payments:
- Medicare is working with health professionals, health care providers, consumer and purchaser groups, and other stakeholders and government agencies through organizations such as the National Quality Forum to identify valid, feasible, and effective measures of health care quality and efficiency.
- The MMA implemented a slightly higher payment for reporting an initial set of valid quality measures for hospitals, and as a result, virtually all U.S. hospitals are planning to report these measures starting in 2005.
- Medicare is implementing large-scale demonstration and pilot programs for performance-based payments for improving quality and lowering total Medicare costs for hospitals, physicians, and chronic care improvement programs. Collaborative efforts are underway for measures and payment methods for many other types of providers, including long-term care and dialysis providers.
These types of opportunities have been recognized by MedPAC, and by many other health policy experts and health care payers and purchasers throughout our health care system. CMS will work to implement performance-based payments that provide more effective financial support for Medicare providers to provide high-quality care without increasing total Medicare costs.
Savings through Medicare Contracting Reform
CMS intends to move forward rapidly on major reforms in how contractors are used to process and pay Medicare claims to get more responsive and accurate payment methods using up-to-date techniques and much greater reliance on performance-based contracting. The process for implementing these MMA-based contracting reforms is detailed in a February 7 report to Congress, “Medicare Contracting Reform: A Blueprint for a Better Medicare.”
Since Medicare’s inception nearly 40 years ago, CMS has been required to contract only with commercial insurance companies to process claims. The MMA removed this restriction, opening opportunities for a broad range of financial entities to bid for Medicare Administrative Contractor contracts, and requires that these contracts be awarded through a competitive bidding process.
CMS will replace the fiscal intermediaries and carriers that currently process claims from hospitals, physicians and suppliers of services with 15 administrative contractors responsible for processing Part A and Part B claims. There will be eight administrative contractors to process home health and durable medical equipment claims. The new administrative contractors will focus on three critical areas: customer service, operational excellence, and financial management. CMS will contract separately for specialized tasks such as program safeguard activities, coordination of benefits, and appeals.
These reforms are expected to result in savings of $900 million for Medicare over the FY06-10 period. Larger savings in administrative costs for the providers that bill Medicare are likely.
Implementation of Administrative Reforms
The President’s budget continues to assume that Medicare will implement policies in 2006 that lead to appropriate and accurate Medicare payment under current law. These policies include:
- Orderly implementation of the final rule for inpatient rehabilitation facilities; expansion of post-acute transfer policies to all DRGs to discourage double payments;
- Implementation of a refined case mix classification system for skilled nursing facilities to correctly reflect resources that beneficiaries use;
- Establishment of a consistent bad debt reimbursement policy across all eligible providers who receive payments from Medicare, based on current payment policies for hospitals;
- Phasing in the savings from full implementation of risk adjustment payments to account for the different health status of beneficiaries in Medicare Advantage plans. The four-year phase-in begins in FY 2007 and ends in 2010. It is projected to produce savings to the extent that Medicare Advantage plans serve healthier beneficiaries, on average, than Medicare fee-for-service. Recent data on Medicare Advantage enrollees indicate that differences in health status between MA plans and the fee-for-service Medicare program are more modest than had been assumed in the past.
- Refine the inpatient hospital payment system and related regulatory provisions to assure that payments are appropriate for specialty and non-specialty hospitals.
Funding for Implementation of the Medicare Modernization Act
Section 1015 of the MMA provided $1 billion in start-up funding for the administrative costs for Medicare modernization in FY04-05. Medicare’s discretionary budget proposal for FY2006 includes continued funding for critical implementation activities in FY06.
- CMS is accounting for these funds separately from other funding sources and taken steps to ensure that it is used only to implement the MMA.
- 43.5 percent of these funds are being spent on education and outreach and only 4.8 percent on payroll, with the bulk of the funds to be expended in FY2005. Additional funds are being directed toward information technology improvements and other systems activities.
- Under the statute, these amounts expire September 30, 2005. The budget includes a request for ongoing implementation funds because the availability of MMA implementation funding on October 1, 2005 is critical.
- In FY 2006, enrollment for the drug benefit begins November 15, 2005.
- Calls and requests for support through 1-800-MEDICARE, the state health insurance assistance programs, and the many other public and private organizations which work with Medicare to help beneficiaries take advantage of the new Medicare benefits are expected to increase significantly in October 2005.
- CMS must also complete the implementation of several new systems (drug benefit, employer subsidy, TrOOP or true out of pocket costs) before Jan. 1, 2006. At the same time, CMS must maintain the ongoing fee-for-service claims processing systems and be prepared to manage interactions among all of these systems.
- The budget also includes $75 million in additional funding for Medicare program integrity activities, to support implementation of protections against fraud and improper billing in the context of Medicare’s important new benefits.