Kusserow’s Corner: Medicare Trust Fund Estimated to Survive through 2030

It is widely known that the aging of the population is creating a “time bomb” for Medicare Part A. The question for decades has been when will the bomb explode, that is, when will the Fund bankrupt and not have enough money to pay for Medicare Beneficiary services. The Trust Fund is supported by the Federal Insurance Contribution (FICA) tax of 7.65 percent that is automatically withheld from every employee’s check with another 7.65 percent being paid by the employer on behalf of the employee. This is to pay into both the Social Security and Health Insurance (HI) Trust Funds. Of the 7.65 percent FICA, exactly 1.45 percent of the salary goes into the HI trust.

The reason for the time bomb concern is that, demographically, we have long known that the ratio of working employees that contribute to the trust funds is declining against the growing number of elderly individuals who are drawing against the funds as Social Security recipients and Medicare beneficiaries. The simple reality is that Americans are living longer. There are only a few options open for staving off the explosion for the Medicare Trust Fund: raise FICA taxes, reduce the rates of escalation of health care costs, and/or cut benefits.

During my tenure as HHS Inspector General, we worked diligently to reduce the rate of health care costs due to waste, abuse, and fraud. The Office of Inspector General (OIG) continues in this effort. No matter the amount of effort, this cannot but slightly slow down the rate of the explosion. Other measures to reduce the rate of increase in health care costs relate to cutting back expenditures for health services, not an attractive alternative. The daily press speaks about changes in reimbursement initiatives by Medicare and how that invokes a great deal of outcry from the provider community. The most controversial method to staving off bankruptcy of the HI is to cut on the benefit side of the equation. So far, the only step in that direction is moving towards means-tested programs whereby those with larger incomes may receive fewer benefits.

So, the question comes down to the estimated date of the explosion or bankruptcy of HI. This year, the Office of the Actuary in CMS issued its most recent report on the state of the Medicare Trust Fund to the Trustees who are mandated to report annually to Congress on the financial operations and actuarial status of the program. There is one combined report, discussing both the HI program (Medicare Part A) and the Supplementary Medical Insurance (SMI) program (Medicare Part B and Prescription Drug Coverage). It is the second-largest social insurance program in the U.S. after Social Security, with 52.3 million beneficiaries and total expenditures of $583 billion in 2013. The Trustees Report details a substantial amount of information on the past and estimated future financial operations of the Trust Funds. The report projects that the Medicare HI Trust Fund will face depletion by 2030.

The Trustees project that total Medicare costs (including both HI and SMI expenditures) will grow from approximately 3.5 percent of GDP in 2013 to 5.3 percent of GDP by 2035, and will increase gradually thereafter to about 6.9 percent of GDP by 2088. The Trustees noted that projected long-term actuarial imbalance is smaller than that of the Social Security trust funds under the assumptions employed in this report.

It is important to note that Part B of SMI, which pays doctors’ bills and other outpatient expenses, and Part D of SMI, which provides access to prescription drug coverage, is outside the Trust Fund. Under current law, it is funded by the Treasury of the United States and is part of the federal budget. As such, the federal government automatically provides financing each year to meet the next year’s expected costs. General revenues finance roughly three-quarters of these costs, and premiums paid by beneficiaries finance almost all of the remaining quarter. SMI receives a small amount of financing from special payments by states and from fees on manufacturers and importers of brand-name prescription drugs.

However, the aging population and rising health care costs cause SMI projected costs to grow steadily from 1.9 percent of the Gross Domestic Product (GDP) in 2013 to approximately 3.3 percent of GDP in 2035, and then more slowly to 4.5 percent of GDP by 2088. What this means is that it could bankrupt the federal government. As such, we can expect that health care will remain a top policy issue for the federal government for years to come as they seek solutions to a problem that is growing daily. What providers can expect is increased scrutiny and action by enforcement agencies to find any and all waste, abuse, and fraud that is contributing to the problem.

Richard P. Kusserow served as DHHS Inspector General for 11 years. He currently is CEO of Strategic Management Services, LLC (SM), a firm that has assisted more than 3,000 organizations and entities with compliance related matters. The SM sister company, CRC, provides a wide range of compliance tools including sanction-screening.

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Copyright © 2014 Strategic Management Services, LLC. Published with permission.

Quality and Cost Reduction are Focus of New IPPS Rule

CMS has issued an advanced release of its hospital inpatient payment policy and changes for Fiscal Year (FY) 2015, which will strengthen the connection between care quality and Medicare payments received by approximately 3,400 general acute care and 435 long-term care hospitals (LTCHs). The final rule includes a payment rate update of 1.4 percent for acute care hospitals and an update of 1.1 percent for LTCHs. Despite the payment updates, CMS projects overall Medicare payments to inpatient hospitals will decrease by $756 million in FY 2015. The most significant provisions of the final rule are focused on improving the quality of care in hospitals by reducing hospital payments for readmissions and hospital acquired conditions (HACs).

Value-Based Purchasing

The Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) Value-Based Purchasing Program, adjusts hospital payments under the Inpatient Prospective Payment System (IPPS) relative to the quality of care furnished by the hospital. The amount CMS is taking back from base operating diagnosis-related group (DRG) payments, in order to disperse among participating hospitals with the highest quality is rising from 1.25 percent of DRG payments to 1.5 percent of DRG payments. The amount of quality care incentives to be dispersed among hospitals will be $1.4 billion for FY 2015.

Readmissions and Acquired Conditions

Payment reductions under the Hospital Readmissions Reduction program will increase from 2 to 3 percent to motivate increased inpatient care quality and reduce unnecessary hospital readmissions. The HAC program developed by the ACA will begin operation in FY 2015 and will reduce payments by 1 percent for hospitals with the highest number of HACs. Under the HAC program, Medicare limits reimbursement to hospitals for conditions that were reasonably preventable after the beneficiary was admitted to a hospital. The program negatively impacts hospitals that score in the lowest 25 percentile for HACs.

Wage Index

CMS is required to adjust its IPPS payments based upon geographic differences in labor costs. CMS is going to use the most recent labor market area delineations issued by The Office of Management and Budget (OMB) in its wage index for FY 2015. However, CMS is going to implement a transition into the use of the new OMB delineations by using a blend of the old and new wage index. The new wage index will take full effect in FY 2016.

Other Changes

The Final rule includes a reminder to hospitals that the ACA aimed to promote pricing transparency. CMS recommends that in order to comply with statutory requirements, hospitals make public a list of their standard charges or make such a list available upon inquiry. The Final rule also imposes changes to the Inpatient Quality Reporting (IQR) program, which previously reduced a hospital’s applicable payment percentage increase by two points if the hospital did not participate successfully in the IQR program. Under the new rule, the reduction for failure to participate successfully in the IQR program will be a reduction of one quarter of a hospital’s annual payment increase.

Can Your Doctor Ask About Guns? 11th Cir. Says No.

Finding that the law in question was a “legitimate regulation of professional conduct,” a Florida restriction on physician inquiry and record-keeping in regard to patient’s gun ownership and use was upheld by the 11th Circuit. While the case turned on the First Amendment and how it applies to physician’s speech, the practical implications it could have for health care providers could be far-reaching.

Florida’s Firearm Owners Privacy Act

The Act that was the basis of the 11th circuit ruling was the Florida’s Firearm Owners Privacy Act, which was signed into law by Governor Rick Scott in 2011. Specifically, the Act states that “health care practitioners and facilities…‘may not intentionally enter’ information concerning a patient’s ownership of firearms into the patient’s medical records that the practitioner knows is ‘not relevant to the patient’s medical care or safety, or the safety of others,” and should “refrain from inquiring as to whether a patient or his or her family owns firearms, unless the practitioner or facility believes in good faith that the ‘information is relevant to the patient’s medical care or safety, or the safety of others.”

District Court

In September of 2011, the district court in Florida preliminarily enjoined the Act and, then subsequently, in June of 2012, the court permanently enjoined the “enforcement of the inquiry, record-keeping, discrimination, and harassment provisions of the Act.” More particularly, the district court found that the law imposed a “content-based restriction on practitioners’ speech on the subject of firearms.” Further, in terms of the state’s interest in protecting individuals’ Second Amendment right to bear arms, the court determined that “such a right is ‘irrelevant’ to the Act and therefore is not ‘a legitimate or compelling interest for it.”

11th Circuit

Reversing the district court’s decision, the 11th Circuit acknowledged that the Act “recognizes that when a patient enters a physician’s examination room, the patient is in a position of relative powerlessness.” In that light, the 11th Circuit found that the Act is a “legitimate regulation of professional conduct.” Contrary to what the district court found, this court determined that any restraints on practitioners’ speech caused by the limitations adopted by the Act were incidental. The court likened the limitations in the Florida act to other restraints imposed on physician’s by state law: “It is uncontroversial that a state may police the boundaries of good medical practice by routinely subjecting physicians to malpractice liability or administrative disciple for all manner of activity that the state deems bad medicine, much of which necessarily involves physicians speaking to patients.” The court founds that the analysis regarding the physicians’ inquiry and recordkeeping regarding patients’ gun ownership should be conceptualized in the same way. “Although the Act singles out a particular subset of physician activity as a trigger for discipline, this does little to alter the analysis.”


Since the 11th Circuit’s decision was published on July 25, 2014, physician groups have spoken out in opposition to the ruling. The American Academy of Pediatrics (AAP), for example, openly condemned the ruling, labeling the decision “dangerous” and asserting that it “gives state legislatures free license to restrict physicians from asking important questions about health and safety that are vital to providing the best medical care to patients.” The AAP also noted the effects that the decision could have, outside of the notion of effective health care practice. “More than 40,000 children are killed by guns every year,” James Perrin, President of the AAP stated, “Parents who own firearms must keep them locked, with the ammunition locked away separately. In this case, a simple conversation can prevent a tragedy.”

Kusserow’s Corner: Favorable OIG Advisory Opinion to Pharmaceutical Direct-to-Patient Product Sales Program

The HHS Office of Inspector General (OIG) issued Advisory Opinion 14-05 that concluded no enforcement action would be taken against a drug manufacturer’s direct-to-patient discounted sales program that operates outside of federal health care programs. The Opinion was in response to questions involving a program under which a brand-name drug manufacturer offers to sell products directly to patients at a heavily discounted fixed cash price.

Recital of Facts

The requester explained that the patients have valid prescriptions for the product and are uninsured, have commercial prescription drug insurance, or are enrolled in Medicare Part D or another federal health care program that provides outpatient prescription drug coverage (e.g., Medicaid, TRICARE, or U.S. Department of Veteran Affairs). The proposed arrangement provides the patents with a means of obtaining the product on an outpatient basis in circumstances where it may not be readily available at retail pharmacies or covered by prescription drug plans, including Medicare Part D plans. The requestor further noted that the drug is either not included on most third party payor formularies due to the availability of generic equivalents, or, where it is covered, it is placed on non-preferred formulary tiers and subject to prior authorization, step therapy, or other coverage and reimbursement restrictions.

Under the discount program, Medicare Part D patients with a valid prescription are able to obtain the drug from an online pharmacy, which dispenses the product on behalf of the manufacturer at a fixed price established by the latter. The manufacturer supplies the product to the pharmacy, under which the manufacturer retains title to the product until the pharmacy dispenses it to patients. The manufacturer pays the pharmacy a fair market value fee for the dispensing services. Neither the pharmacy nor the patient seeks reimbursement for the product from any third party payor, government or private, nor does the manufacturer or the pharmacy discuss or otherwise market any other product or service to patients who have opted into the discount program.

OIG Analysis

In analyzing this program under the Federal Anti-Kickback Statute (AKS), the OIG recognized that the program operates entirely outside of all federal health care programs, meaning that patients obtain the product without using their Medicare Part D benefit or any other federal health care program benefit. Nevertheless, the OIG reasoned that the AKS could be implicated if (1) the discount induced patients to purchase other products marketed by the manufacturer that are reimbursed under federal programs; or (2) the discount induced patients to switch to the product and then, if the manufacturer terminated the discount arrangement, use their Part D plan or other federal program to purchase the product. OIG concluded that that the risk of the first type of inducement was minimized because the manufacturer certified that it would not use the discount as a vehicle to market other federally reimbursable products that it manufactures. With regard to the second type of inducement, if the discount program were terminated, few Part D enrollees would be able to obtain coverage of the product through their Part D plans because of the prevalent coverage exclusions and limitations applicable to the drug, whereas enrollees could easily obtain coverage of generic equivalents.

OIG Findings

  1. The operation operates entirely outside all Federal health care programs and does not involve any payments with those programs.
  1. The dispensing arrangement with the pharmacy did not constitute an unlawful swapping arrangement under the AKS—i.e., a vehicle for the manufacturer to provide fees to the pharmacy for dispensing the product to cash paying patients as an inducement for the pharmacy to recommend the manufacturer’s other drugs that are covered under federal programs.
  1. The fees paid to the pharmacy are fixed and consistent with fair market value in an arm’s-length transaction, and do not take into account the value or volume of referrals or other business generated between the parties.
  1. There is no exclusive distribution arrangement with a pharmacy for the product.
  1. The arrangement does not have the potential to influence Medicare or Medicaid beneficiaries to use the online pharmacy for federally reimbursed products, so that there is minimal risk of a violation of the civil monetary penalty prohibiting beneficiary inducements (42 USC 1320a-7a(a)(5)).

Based upon the facts provided, the OIG concluded that it would not impose administrative sanctions on the Requestor for the arrangement.

Richard P. Kusserow served as DHHS Inspector General for 11 years. He currently is CEO of Strategic Management Services, LLC (SM), a firm that has assisted more than 3,000 organizations and entities with compliance related matters. The SM sister company, CRC, provides a wide range of compliance tools including sanction-screening.

Connect with Richard Kusserow on Google+ or LinkedIn.

Subscribe to the Kusserow’s Corner Newsletter

Copyright © 2014 Strategic Management Services, LLC. Published with permission.