On February 4, 2008, the Bush Administration released its proposed federal budget for fiscal year (FY) 2009, which begins October 1, 2008. The President is calling for $178 billion in Medicare savings over 5 years (growing to $556 billion in 10 years and $10 trillion over 75 years) and $18 billion in Medicaid savings over 5 years. The following are highlights from the sweeping proposal impacting Department of Health and Human Services (HHS) programs.


  • Provider Rate Freezes/Reduced Updates. The budget would freeze rates from 2009 through 2011 for inpatient hospitals, long-term care hospitals, skilled nursing facilities (SNFs), hospices, outpatient hospitals, and ambulance services, followed by a full update less 0.65% annually thereafter. Rates for inpatient rehabilitation facilities (IRFs) and ambulatory surgical centers would be frozen in 2010 and 2011, followed by a full inflation update less 0.65% annually thereafter. Home health agency rates would be frozen in 2009 through 2013, followed by a full market basket update less 0.65% annually thereafter.
  • Across-the Board Payment Cuts. The budget would apply a “sequester” of -0.4% to all Medicare provider payments when general fund contributions exceed 45% of program spending. The sequester order would increase each year by -0.4% until general revenue funding is brought back to 45%.
  • Other Hospital Payments. The budget would: eliminate duplicate indirect medical education (IME) payments to hospitals for Medicare Advantage beneficiaries and adjust the IME add-on payment from 5.5% to 2.2% over three years starting in FY 2009; reduce hospital capital payments by 5% in FY 2009; phase-in a 30% reduction in hospital disproportionate share payments over two years starting in FY 2009; apply the geographic reclassification budget neutrality requirement at the state level; establish value-based purchasing incentives; and prohibit Medicare payment for “never” events and link payment updates to never event reporting.
  • Durable Medical Equipment (DME). The budget calls for a 13-month rental period for power wheelchairs and a reduction in the rental period for most oxygen equipment from 36 to 13 months.
  • End-Stage Renal Disease (ESRD) Payment.  The Administration proposes aligning the payment rates for certain dialysis services in hospital-based and freestanding facilities starting in 2009; bundling payments for dialysis services, and rebasing the first year of the new payment system starting 2011.
  • Administrative Proposals. The Budget assumes net Medicare administrative savings of $4.7 billion over five years from proposals to: withhold Medicare payment for certain conditions if they were not present at the time of hospital admission; increase the inpatient length of stay threshold that triggers transfer payment adjustments; correct for case mix distribution in the SNF payment system; phase-out the hospice-specific wage index adjustment over three years; and strengthen program integrity in Medicare payment systems. The budget also would permanently base Part D risk scores on eligible enrollees, at a cost of $3.2 billion over five years.
  • Other Medicare Provisions. Among many other things, the budget would expand clinical laboratory competitive bidding; eliminate bad debt reimbursements for unpaid beneficiary cost-sharing over four years for all providers; extend funding for survey and certification revisit user fees; boost Medicare Advantage and Part D fraud control spending; and move toward site-neutral post-hospital payments to limit inappropriate incentives for five conditions commonly treated in both SNFs and IRFs.


  • Medicaid Drugs. The budget would replace the “best price” component of the Medicaid drug rebate formula with a budget neutral flat rebate and reduce the federal upper limit reimbursement for multiple source drugs to 150%.
  • Long-Term Care. The proposal would maintain the substantial home equity amount at $500,000 (subject to inflation adjustment) and expand state flexibility to design benefits for optional long-term care groups.
  • Managed Care. States would have greater flexibility in enrolling special populations in managed care programs, and the renewal period for 1915(b) “freedom of choice” waivers would be extended from two to three years. The budget also proposes regulations defining which services are allowable for managed care savings under section 1915(b)(3) of the Social Security Act.
  • Other Medicaid Proposals. The proposed budget includes many other Medicaid reforms, including a limit on the federal Medicaid matching rate for all administrative activities in Medicaid at 50%; codification of the Medicaid “free care” policy barring providers from billing Medicaid for services furnished to the public and other payors at no cost; and a requirement that Medicaid programs adopt the National Correct Coding Initiative.

Food & Drug Administration (FDA)

The budget would provide $2.4 billion for the FDA in FY 2009, a net increase of $130 million over FY 2008. Among other things, the proposal includes increased drug safety and generic drug review funding, food safety initiatives, and medical device review improvements. In addition, proposed new authority for a regulatory pathway for approval of follow-on biologicals, a much anticipated and long debated issue that would, if implemented, permit FDA to approve the “generic” version of brand-name biological products.

Other Provisions

The budget addresses many other HHS programs, including: $268 million for Agency for Healthcare Research and Quality (AHRQ) cost effectiveness and quality initiatives; a $19.7 billion increase the State Children’s Health Insurance Program (SCHIP) over 5 years; expanded funding for health information technology efforts; and increased funding for the Health Care Fraud and Abuse Control program.

Budget documents are available here. Note that key provisions of the budget proposal would require Congressional action, and Democratic leaders have already signaled that they oppose cuts of the magnitude proposed by the President. Nevertheless, Congress is widely expected to consider reductions in Medicare and Medicaid spending later this year as lawmakers seek to avert a 10.1% cut in Medicare physician fee schedule payments that go into effect July 1, 2008.