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Q:  How Would the Administration’s 2016 Budget Affect Providers?             A:  It Depends…
February 10, 2015

On February 2, the Obama Administration announced a proposed 2016 budget that  calls for savings of about $400 billion in health programs over 10 years. However, this is a net number, which obscures a much more complex story for health care providers.

For example, behind this net number the budget includes a number of specific legislative proposals that would increase health care spending, in many cases on valuable programs that would help beneficiaries, totaling nearly $100 billion (which are offset by spending reductions elsewhere).  When these increases and other interactions are taken into account, the gross savings proposed in the budget, mostly in Medicare, would be larger—on the order of $500 billion over ten years. 

At the same time, however, the budget also seeks to repeal sequestration, including the 2% Medicare sequester, at a cost of over $100 billion.  Taking sequester into account, from the perspective of health care entities, net savings are indeed closer to $400 billion. Put another way, the cost of sequester, which was broadly applied to providers and plans, would now be redistributed more selectively to providers and plans in varying amounts. And, to add a bit more complexity, the budget also includes $100 billion in costs that don’t show in the legislative proposals, which reflect the cost (discussed below) from an assumption that the SGR will be repealed and replaced with a zero percent update.

And, to broaden the picture a bit, the budget also seeks immigration reform legislation, which – if it followed the Senate proposals from last year, would increase coverage in exchanges, Medicaid and CHIP with costs on the order of $100 billion over ten years.  And though it doesn't show in the $400 billion net number for health care, the Budget seeks additional funding for the CHIP program.  Were this to be enacted, the added coverage would of course benefit providers—though some more than others.

So from a health sector perspective, were the Congress to enact all of the proposals in the budget discussed above, the effect of the budget very broadly on the health sector would look something like this:

Gross Savings                                           -$500


New proposals                                            +$100

Replace Sequester                                      +$100

SGR at 0                                                      +$100

Added coverage from

Immigration/CHIP                                        +$100

Therefore, the impact of specific legislative proposals is $400 billion, but the net impact across the health sector of all the policies discussed above would be roughly a $100 billion reduction. (Note: these numbers are rough and rounded.)

Where does the new money go?

The additional health cost items proposed includes $44 billion in additional physician incentives to enter into alternative payment arrangements, about $5 billion from lifting the cap on inpatient psychiatric days, a number of Medicaid related enhancements totaling about $22 billion, $8 billion for community health centers, and about $13 billion in a workforce initiative including extension of the Medicaid primary care bump, NHSC funding, and a “competitive value based GME program.”  

Of these proposed increases, the largest single item is the $44 billion in added physician bonuses for use of alternative payment models.  This reflects only the additional costs above that of providing a zero update to physicians over ten years.  Taken together with the $100 billion adjustment in the budget baseline, this approximates the $150 billion in costs for a proposal that roughly parallels the Congressional tri-committee SGR bill that was advanced in the last  Congress.  

The reason “only” $44 billion of the total cost is counted in getting to net savings is that, in keeping with their practice over the last several years, the Administration included the roughly $100 billion cost of providing physicians a zero update as a “baseline adjustment.” That means the budget assumes these costs as part of the underlying estimates of program spending, and doesn’t display them as a separate legislative proposal. Thus, slightly more than another $100 billion is included in the budget for physicians as well. 

Where do the savings come from?

On the budget reduction side, the specifics are very similar to last year. Post-acute care would be heavily affected, with savings of over $100 billion over ten years.  The reduction in bad debt payments would particularly affect hospitals, and a significant new addition is a proposed savings of about $30 billion over ten years from lowering payments for services provided in off-campus hospital outpatient department units to either the Medicare physician fee schedule rate or the ASC rate.  In sum, direct provider cuts in Medicare are on the order of $220 billion, but providers could also feel pressure from the $36 billion in Medicare Advantage (MA) coding adjustments reductions.  In addition, there is approximately $8 billion in Medicaid reductions DME/DSH, bringing the provider total to almost $230 billion.

Focusing just on the numbers also can obscure what could be some fairly substantial adjustments for certain providers.  For example, one proposal would make permanent the 10% increase in Medicare primary care payments in a “budget neutral manner.”  This would likely mean that non-primary care payments in the physician fee schedule would be reduced to cover the cost, but which ones and by how much remains to be seen. Likewise, the budget proposes a major expansion of “value-based payment” to additional provider types, such as home health agencies.  The budget also proposes to expand the hospital readmissions and the hospital acquired conditions programs.  Although these  proposals are similarly scored as “budget neutral,” they can obviously have significant impacts on particular providers. These “budget neutral” adjustments would likely be implemented through the annual Medicare payment rules—affecting some providers more than others again.

Most of the balance of savings in the budget comes from pharmaceuticals (on the order of $140 billion) and beneficiaries ($84 billion.)  So all told, gross reductions in the budget for health programs are closer to $500 billion over ten years, even though net savings from health programs are much smaller.  At the same time, as the gross reductions, “add-backs,” and baseline adjustments play out, the impact will vary dramatically across provider types and within sectors.


The odds that the package of changes the budget proposes would be enacted are slim at best.  But one of the functions of the President's budget is that it "legitimizes" or provides "cover" to the Congress should they decide to act in one of the areas he has proposed – it can be blamed to some degree on him.  From that perspective the most important thing in this budget is the new proposal added on "site neutral" payments, and the continued heavy emphasis on reductions in post acute care, where there is already significant interest.  The Congressional budget path and the likelihood some of these changes would become law is far from clear and will be the major focus of legislative attention over the next several months.

For additional information, please contact Keith Fontenot or Marty Corry in the firm’s Washington, D.C. office  at 202.580.7700.

For media inquiries, please contact Barrett McBride at 916.456.5855.