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