On February 14, 2011, President Obama released his proposed fiscal year (FY) 2012 budget. The President proposes a variety of changes in Medicare and Medicaid policy and other Department of Health and Human Services (HHS) programs, including the following highlights:

• The budget includes 19 new legislative proposals designed to strengthen program integrity for Medicare, Medicaid, and CHIP, saving $32.3 billion over ten years. The proposals include, among others: recovering “erroneous” payments from insurers participating in Medicare Advantage (MA); new sanctions for providers who do not update enrollment records; prepayment validation of physician orders for certain high risk services (such as durable medical equipment (DME) and home health) and prepayment review for all power wheelchair claims; identifying excessive utilization of certain prescription drugs under Medicaid; requiring drug manufacturers to repay states for improperly reported Medicaid-covered prescription drugs; regularly auditing drug manufacturer compliance with Medicaid drug rebate requirements and increasing penalties for noncompliance with rebate agreements; and providing the HHS Secretary with additional permissive authority to exclude providers from participation in federal health care programs if they are affiliated with a sanctioned entity. The President also includes as a “program integrity” provision a limit on states’ ability to use provider taxes to pay the state share of Medicaid by phasing down the Medicaid provider tax threshold from the current 6% to 3.5% by FY 2017.
• The President proposes Medicare physician fee schedule Sustainable Growth Rate (SGR) relief through 2013 by extending the 0% update to the Medicare physician fee schedule for two additional years, and offsetting the cost with specific savings (e.g., Medicaid provider taxes and savings from the pharmaceutical industry) while the Administration works with Congress to achieve permanent reform.
• With regard to prescription drug/biologics policy, the budget would reduce the length of the exclusivity period for generic biologics from 12 to 7 years; prohibit manufacturers who revise their product from extending their exclusivity period (“evergreening”); and provide the Federal Trade Commission (FTC) with authority to prohibit “pay-for-delay” agreements between brand and generic pharmaceutical companies that delay entry of generic drugs into the market.
• The budget would cap federal reimbursement for a state’s aggregate Medicaid spending on certain DME services to what Medicare would have paid in the same state for the same services based in the Medicare DMEPOS competitive bidding program (savings $2.3 billion over 5 years).
• In other areas, the budget proposes $2.7 billion in budget authority and $4.4 billion in total program resources for the Food and Drug Administration (FDA) and affirms the FDA’s commitment to advancing efforts to implement the Affordable Care Act’s (ACA) provisions to establish a pathway to approve biosimilar products; calls for $32 billion for basic and applied biomedical research supported by the National Institutes of Health, and would consolidate and eliminate certain public health programs (such as elimination of a children’s hospital graduate medical education program).

Note that many provisions of the proposed budget would require Congressional approval to implement. Numerous lawmakers have faulted the plan for not addressing entitlement reform, including changes to shore up the long-term financing of the Medicare program. House Republican leaders have committed to enacting a budget with “real entitlement reform,” although specifics have not yet been released. In the meantime, the House is debating a continuing resolution (H.R. 1) to fund the federal government for the last seven months of FY 2011 that would reduce federal discretionary spending by more than $100 billion compared to the President’s FY 2011 request, including reductions in a variety of HHS-administered programs such as community health centers and the National Health Service Corps. It is too early to know the specifics of how the short- and long-term budget debate will be resolved. Nevertheless, it appears that health care programs will be examined as part of any health care spending package. Moreover, there is growing resolve in Congress to tackle the fundamental fiscal condition of the Medicare program, which could have profound ramifications for the health care industry.