Federal Update: Budget Reconciliation and The State of the Union

Budget Reconciliation

On February 1, 2006, the House voted (Roll Call 4) 216-214 to pass the conference report for the budget reconciliation package (S. 1932) which was then signed into law by President Bush on February 9. The Deficit Reduction Act of 2005 is projected to save $40 billion over five years, cutting approximately $6.4 billion from the Medicare program and $4.8 billion from the Medicaid program. The long-term savings to Medicaid are projected to be $26.5 billion over 10 years.

The anticipated savings result from numerous changes to Medicaid and Medicare that will have implications on state coverage efforts. For Medicaid, the Act[1] targets the following elements for savings (all figures scored over five years):

• Cost-Sharing and Benefit Package Design: $3 billion savings

The debate over cost-sharing and benefit package cuts sparked a heated debate in Congress and continues to divide the chambers. The conference committee gave states flexibility to impose additional cost-sharing on non-preferred prescription drugs and inappropriate emergency room use. In addition, some optional populations could receive alternative benefit packages and be charged increased cost-sharing amounts or premiums. The legislation also allows, at state option, providers to precondition medical services upon payment of cost-sharing for certain populations.

• Prescription Drugs: $3.8 billion savings

The bill alters prescription drug purchasing rules by establishing a new upper payment limit for multiple source drugs, mandating that states collect rebates on physician-prescribed drugs, and requiring that authorized generic drugs are included in calculating the average manufacturer’s price.

• Asset Transfers: $2.5 billion savings

The bill reduces Medicaid spending by increasing penalties on individuals who improperly transfer assets to qualify for Medicaid long-term care. For example, it increases the look-back period, changes the countable income formula, and makes those who have more than $750,000 in housing equity ineligible for Medicaid long-term care services.

• Katrina Relief

The Secretary of Health and Human Services was provided $2 billion to subsidize the state share of Medicaid and SCHIP as well as for uncompensated care for certain uninsured individuals. The federal government will reimburse the states at a 100 percent matching rate for costs associated with caring for Katrina evacuees enrolled in Medicaid and SCHIP. Aid will end in May 2006. Finally, the states were provided $75 million for high-risk pool operations and an additional $15 million in seed grants to start high-risk pools. The authorization and appropriation for these high-risk pools is for fiscal year (FY) 2006.

• Coverage of Certain Disabled Children

The agreement allows state Medicaid programs to cover children who qualify for Supplemental Security Income (SSI) in families below 300 percent FPL starting January 1, 2007.

• State Children’s Health Insurance Program (SCHIP)

The conference agreement provided $283 million in redistributed SCHIP funds to states that overspend their allotment in FY 2006. The final conference committee will not allow the Centers for Medicare and Medicaid Services (CMS) to approve additional waivers to states to cover childless adults with unspent SCHIP funds. For all states, redistributed SCHIP funds will be limited to providing coverage to children.

• Medicaid Transformation Grants

Up to $50 million in both FY 2007 and 2008 is available for grants to states to improve effectiveness and efficiency in providing medical assistance. There is no requirement that the state provide matching funds for these grants.

State of the Union

President Bush’s vision for health care reform remains largely the same as for previous years, as evidenced by his latest State of the Union address. The President stated that a competitive America requires affordable health care and that our nation must “confront the rising cost of care.” According to the speech, the President’s goal is to make health care in the United States more affordable, portable, transparent, and efficient.[2]

To accomplish these goals, President Bush again highlighted health savings accounts (HSAs) coupled with high-deductible health plans (HDHPs). To further expand the number of people covered with these products, the President proposed additional tax incentives, including:

• Premiums for HDHPs would be deductible from federal income tax when purchased in the individual market;
• Premiums for HDHP purchases made in the individual market could be paid for on a tax-free basis out of an HSA account;
• Tax-free contributions to HSAs up to the HDHP’s out-of-pocket limits would be allowed (currently contributions are limited to the size of the deductible up to a certain amount); and
• Refundable tax credits for the purchase of HDHPs by low-income families.

In addition, the President renewed his call for Congress to pass medical malpractice reform that caps non-economic damage awards, to approve Association Health Plans, and to expand health information technology.[3] He called for legislation to allow the purchase of health insurance across state lines. His FY 2007 budget increases funding for Community Health Centers.

For states, the President proposed a new competitive grant program, totaling $500 million, to help up to 10 states design programs to improve coverage for chronically ill individuals.