The Effects of President Obama’s Fiscal Year 2014 Budget on Hospitals and Health Systems

Earlier this week, President Obama released his federal fiscal year (FY) 2014 budget proposal, which sets forth a plan for spending $3.77 trillion next year. It outlines $1.8 trillion in spending cuts and raises $800 million in new revenue while eliminating the across the board cuts from sequestration in 2014.

For hospitals and health systems, the budget calls for $370 billion in Medicare savings over the next ten years by cutting payments to providers and pharmaceutical companies, while also making some seniors pay more for their coverage. It also outlines $50 billion in Medicaid savings in the next decade. Most of the Medicare savings, $267 billion, would come from hospitals and post-acute care facilities.

While this budget is being characterized as President Obama’s offer to Congress as they work toward a "grand bargain" on deficit reduction, many of the proposals will become viable "savings" as congress addresses entitlement and deficit reduction reform.

The President’s FY 2014 budget includes many proposals from his last year’s budget and draws heavily from recommendations from the Medicare Payment Advisory Commission (MedPAC) and National Commission on Fiscal Responsibility and Reform (Simpson-Bowles).

Preliminary Analysis

Following is a brief description of the hospital-related components of the President’s FY 2014 budget proposal.

The proposed budget would:

• Delay the scheduled cuts to Medicaid DSH payments and is scored as postponing cuts of $360 million dollars in 2014 until 2016 and 2017.
• Extend Medicaid DSH payment reductions to 2021.
• Reduce Medicare bad debt payments from 75% to 25%.
• Eliminate children’s hospital GME education program.
• Eliminate Rural Health Flexibility Grant.
• Reduce indirect GME payments beginning in 2014 by 10 percent.
• Reduce payments to Critical Access Hospitals from 101 percent of reasonable costs to 100 percent and eliminate the CAH designation for facilities within 10 miles of another hospital.
• Revise market basket updates for skilled nursing facilities (SNF), home health agencies, long term care hospitals and inpatient rehabilitation facilities (IRF), per MedPACs recent recommendation.
• Reduce payments to IRFs for certain conditions commonly treated in both IRFs and SNFs.
• Return to the 75% threshold for higher IRF payments.
• Reduce SNF payments by up to 3 percent beginning in 2016 for preventable hospital readmissions.
• Encourages the development of an accountable payment model for Medicare payments to physicians.

Provisions unrelated to provider payments include:

• Requiring wealthier seniors to pay a larger share of their Medicare Part B and D premiums and mandatory drug rebates for low-income seniors in Medicare Part D.
• Additional spending for new mental health services. Focused primarily on treatment for young people, the plan would distribute $25 million to states and another $50 million for training additional mental health professionals.
• Reducing the Hospital Preparedness Program and eliminate the Centers for Public Health Preparedness.

For Additional Information

Should you have any questions regarding the information contained in this memo, please contact Michael Strazzella at 202-452-7932 or Michael.Strazzella@bipc.com.