AY:
OUR VIEWS ON THOMAS' LETTER REGARDING MEDICARE SPENDING PRIORITIES
10:42am
EST 13-Feb-02 Salomon Smith Barney Intl
(Deborah J. Lawson
SALOMON
SMITH BARNEY Industry Note
Health Care Services
OUR
VIEWS ON THOMAS' LETTER REGARDING MEDICARE SPENDING PRIORITIES
February
13, 2002 SUMMARY
* House Ways and Means
Chair Rep. Thomas (R-CA) sent
Deborah
J. Lawson a letter
to HHS Sec'y Thompson, and OMB Director
Daniels, pursuant to Thompson's testimony before the
Committee last week. The
letter asks for a detailed
response outlining
which, if any, MedPAC
recommendations (which
call for $174 bil. over 10
yrs.) merit Congressional
action and which do not.
* Most importantly, Thomas
asks for a specific list
of Medicare savings
recommendations that should be
made to maintain budget
neutrality.
* Our conversations with
lobbyists and Capitol Hill
staff members indicate
that the two key issues likely
to receive priority are M +C reform ($4.1 billion)
and an adjustment to
the physician fee schedule
($127.7 billion).
* There do not appear
to be any significant changes
in Medicare spending pertaining to hospitals;
hospital stocks tend
to fare well in such an
environment, all else
equal. Please contact me to
receive a fax of the
letter.
OPINION
The
February 8, 2002 letter sent by House Ways and Means Chair Rep.
Bill Thomas (R-CA)
to HHS Secretary Tommy Thompson and OMB Director Mitch Daniels,
pursuant to
Thompson's testimony explicitly asks: "does the administration
believe Congress
should address any of the problems addressed by MedPAC with respect
to hospitals,
home health agencies, physicians, skilled nursing facilities and
dialysis
facilities? Please identify which provider problems you believe
merit Congressional
action and which do not. Since the budget calls for budget
neutral
payment adjustments, please provide a specific list of Medicare
savings recommendations
which can finance appropriate provider changes."
The
letter also states that even with modest savings to Medicare of
$6.5 billion
proposed in the Bush Budget, there would be $116 billion remaining
for a
prescription drug benefit for all non-low income beneficiaries
and Medicare modernization
which is insufficient, and "we assume you share our belief
that
none
of this money is intended for provider payment increases."
The
Bush Budget proposes $190 billion over 10 years for prescription
drugs (of which
$77 billion is reserved for low-income drug assistance), and Medicare
modernization,
$4.1 billion for spending increases in private plans (Medicare
+Choice),
and $6.5 billion in savings to be derived from: competitive bidding
for
durable medical equipment (DME), MediGap reform, Medicare Secondary
Payor provision,
and Graduate Medical Education reform.
We
summarize the MedPAC recommendations, and based on our "inside
the beltway" discussions,
we provide commentary below.
While Thomas' letter stated an intention
to act on Medicare legislation this spring, the various hearings
for Medicare
spending are slowly being scheduled, as other hearings that were
not planned
when the legislative calendar was set are consuming Congressional
staff time.
The
Bush budget proposes spending increases for private plans in Medicare
(e.g.Medicare
+ Choice) of $4.1 billion.
SSMB
Viewpoint: Based on our
various discussions, we believe this is likely, to
$127.7 billion range, and that this a primary issue that cannot
continue to dangle.
It is important in setting the stage for Medicare reform (from
which there
is likely to be savings to fund other proposals) and, more importantly,
a
drug
benefit.
The
collective savings proposals proposed by the Bush Budget which
should generate
$6.5 billion (competitive bidding for durable medical equipment
(DME), Medigap
reform, Medicare Secondary Payer and Graduate Medical Education
reform) are
likely to occur, in our view.
MEDPAC
Recommendations
Hospitals
--Congress
should phase in the difference in inpatient national rates between
hospitals
in MSAs >1 million and hospitals in other areas starting in
2003. In the
first year, the update for hospitals in MSAs < 1 million and
rural areas should
be increased 0.55%. Cost: $15 billion.
Rural
Hospitals
--Congress
should revise the Medicare Disproportionate Share payment formulas
so
that the payments for rural and small urban hospitals are capped
at 10% rather
than 5%. Cost: $1.8 billion
SSMB
Viewpoint: All in, there does not appear to be much activity pertaining
to hospitals,
as these were proposed in MedPAC's April 2001 meetings. Hospital stocks
tend to fare well in such
an environment, all else equal.
We were surprised
to learn that these proposals were only abandonned in early December
2001,
rather than shortly after the shifting budget priorities in response
to the
September 11th terrorist attacks.
Since this is an election year, and many constituents
are patients or hospital employees, there is a likelihood that
the rural
health provision could pass,
since it is only $1.8 billion.
SNFs
--If
the refinement of SNF payment is adopted by the Secretary as planned,
Congress
should fold-in the resource utilization group (RUG) add on payments
into
the skilled nursing rates. Cost:
$10 billion.
SSMB
Viewpoint:
While
we believe this provision could be likely, we caution investors
that the Thomas letter made no mention of renewing the rates set
to expire
in October, and many companies and investors have assumed such
a renewal.
This issue is likely to be in flux over the next several months
prior
to
resolution.
Home
health agencies:
--Congress
should update home health payments by market basket for FY 2003
(current
law stipulates market basket minus 1.1%)
Congress
should retain the 10% bonus payments for rural home health agencies.
--Congress
should eliminate the 15% adjustment to home health payments, which
otherwise
would result in a 4% to 7% reduction in payments. Cost (for both
provisions):
$17 billion.
SSMB
Viewpoint:
We
believe physicians and hospitals would be likely to take
precedence
over this provision. CMS Administrator Tom Scully stated publicly
last
week that the administration would not be supportive of the 15%
restoration,
therefore we believe it is unlikely.
Dialysis
facilities
--Congress
should update dialysis payments by 2.4% in 2003. Cost: $0.5 billion.
SSMB
Viewpoint:
Since
there is no annual update factor for dialysis, and ESRD patients
are a rapidly growing subsegment of the Medicare population, we
believe
that this could be accomplished by extending the Medicare Secondary
Payor
(MSP) provision (the time during which an ESRD patient is on private
insurance
before Medicare incurring the cost) to private insurance to 36
months up
from 30. Since MSP is identified as a Medicare savings proposal
in the President's
budget, and cited in Rep. Thomas' letter, we believe that MedPAC's
proposal
for the 2.4% increase can be achieved via implementation of the
MSP provision. We note that this is lower than the 2.6% increase
asked for in H.R. 2220
last summer, which also asked for Medicare reimbursement for a
fourth dialysis
treatment per week (up from the current level of three) for ESRD
patients
over 185 lbs., or 20% of the ESRD population.
Physicians
also (applies to non physician practitioners, e.g. Part B nursing,
occupational,
speech, physical therapist)
--Repeal
the sustainable growth rate and replace it with the Medicare Economic
Index. The Secretary should revise the physician productivity
offset from - 1.5%
to -0.5% to reflect the productivity of all costs, rather than
just labor. The
resulting update for 2003 is 2.5%. Cost: $127.7 billion.
SSMB
Viewpoint: This is a "giveback" to something that was
not a cut per se, rather,
CMS and Congress realized in November that this payment was linked
to an
overall economic indicator, and would result in 5.4% lower payments
beginning
January 1, 2002. Two bills
resulted, H.R. 3361 and S.R. 1707, each
of
which has received sponsorship of over two-thirds in the House
and Senate, respectively,
rendering them "veto proof." However,
since the bills were drafted
prior to January 1, 2002, there would have to be significant rework.
Out
of the $174 billion (over 10 years)
aggregate MedPAC dollar recommendations,
this is the largest item,
of $127.7 billion, but has overwhelming
support. We also note that
this was the only recommendation which
Thomas' letter explicitly stated when noting that "MedPAC has identified
serious
problems, such as significant and successive payment cuts to
physicians,
which are unsustainable and require reform."
We
will provide and update and further commentary when HHS Secretary
Thompson and
OMB Director Daniels respond to Rep. Thomas' letter.
Feb-13-2002 15:43 GMT
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