IT'S BYE-BYE to black ink in Washington, D.C., and hello, again, to the deficit. As with every other industry with a significant stake in federal spending, the business of home care will have to adjust to a new reality.

The bad news for providers is that the government is likely to be less generous, and the competition for available funds will be tougher. The good news — what there is of it — is that members of Congress may show their more gentle side when they're up for re-election, especially since the balance of party power in the House rests on a very thin margin.

“[Congressmen] tend to want to be helpful to their constituents in an election year,” says Tom Connaughton, president and chief executive officer of the Alexandria, Va.-based American Association for Homecare. On the other hand, he says, “Deficit time tends to be tough for everybody. We've got to make our case, and we've got to make it strong.”

I Scream, You Scream …

At center stage is the Medicare budget, which is under pressure from several directions. It is by far the most important federal program for home medical equipment providers, since it accounts for just under 30 percent of the nation's total spending on durable medical equipment, according to the Baltimore-based Centers for Medicare and Medicaid Services. But several other constituencies want a bigger share of Medicare funds just as the Bush administration is trying to slow the program's growth so that more can be spent on military and domestic security.

Also garnering significant Congressional attention are home health agencies, who, with the backing of the non-partisan advisory board on payment policy, want Congress to cancel the 15 percent reduction scheduled for the home health benefit this fall.

And, physicians are fighting to roll back a recent cut in their own Medicare fees. Senior groups such as the Washington-based American Association of Retired Persons are planning a major push for a big, new Medicare benefit — coverage for prescription drugs. And, of course, the problem of the program's long-term solvency has yet to be solved.

On top of all this, the Bush Administration's critics in Congress say the spending plan underestimates the growth in existing Medicare programs. If they're right, the cuts may have to be deeper than Bush has proposed.

Competitive Savings

As it is, Bush's Medicare budget for the 2003 fiscal year, which begins Oct. 1, is significantly tighter for HME. It proposes a cut in reimbursement through an expansion of competitive bidding for durable medical equipment and supplies, which the White House expects will trim $5.05 billion from Medicare spending over the next 10 years.

Most of the savings would come near the end of the decade, with an average annual savings of about $600 million, or about a tenth of Medicare's DME/supplies spending. But the administration wants to give competitive bidding a major push as early as next year. The bidding program currently is limited to a pair of pilot projects in Polk County, Fla., and in the San Antonio area, which together are believed to save about $3 million a year in DME costs, according to CMS. The administration wants to save $240 million, or about 4 percent, through bidding expansion in 2003 alone.

The Bush Administration says the small-scale demonstrations have produced significant savings — roughly 20 percent for the products that were put out to bid. Mark Winn, a senior analyst at CMS, says bidding has worked “extremely well” in Polk County and San Antonio, where, he says, competitive bidding is saving Medicare about 20 percent, or about $1 million per year in Polk County and $2 million in San Antonio.

Winn says it may not be possible to extend the bidding system into every U.S. metropolitan area, but he foresees it eventually working in most of them. He adds that the experience in Polk County, which has a population of about 500,000, shows that CMS can get enough suppliers and enough competition to get good results even in a relatively small market.

However, HME industry advocates such as Connaughton and AAHomecare are waving the caution flag, trying to stop the bidding bandwagon at least until Congress has had more time to examine the pilot project results — not just in cost savings but in Medicare beneficiaries' access to quality services. But, bidding opponents have at least one advantage: The Bush administration would have to get a new law passed to expand any competitive bidding beyond the pilots.

Connaughton would prefer that Congress take its time, though. He says the jury is still out on Polk County and San Antonio, and bidding may not travel well — or cheaply — to other markets. “If you're going to preserve any choice, you have to spend a lot of time seeing what providers are there, and you have to structure a system providing reasonable choice to every beneficiary, and that's expensive.”

Vying for Dollars

The HME industry also would like legislation to add a cost-of-living adjustment to oxygen payments. Connaughton and others believe that the lack of a consumer price index provision for oxygen is a technical error, since current law does adjust other HME payments for inflation. “There's a lot of recognition that that's unfair,” he says. “We are going to make a major argument on this one.”

The problem for HME providers is that they won't be the only ones making arguments this year. They'll be competing for suddenly scant resources against some well-connected lobbies, including doctors. With the politics of scarcity taking hold, it's getting much tougher to resist cuts, especially cuts such as competitive bidding, which are seen by the administration as a way to reduce administrative costs without compromising service. And it may take a lot more than simple appeals to fairness to get a cost-of-living boost for oxygen.

Within home care itself, for instance, home health agencies are pressing for more Medicare money than the administration is proposing. And HHAs seem to have more support, at least publicly, than providers on the equipment side.

Also, HHAs, with AAHomecare working on their behalf, want Congress to rescind a cut in home health base rates set to take effect in October. This “15 percent cut” — given that label from a cost reduction target set by Congress — actually would cut agencies' base rates by between 4 and 7 percent. Still, observers say this would be another sharp blow for an industry that has been through plenty of turmoil and consolidation already.

Home health agencies seem to have much of Congress on their side. Last year, the Senate voted 99-1 to set up a reserve fund to eliminate the 15 percent cut. That measure was set aside after Sept. 11, but since then the non-partisan Medicare Payment Advisory Commission has weighed in on the home health agencies' side. In January, MedPAC recommended not only that the 15 percent cut be rescinded, but also that home health payments be raised by the full “market basket” cost index, not the index minus 1.1 percent of current law.

“We have no data to suggest that payments in the [home health] sector are inappropriate now,” says MedPAC analyst Sharon Bee. “This sector has experienced a multitude of changes over the past five years. We're suggesting that stabilizing the payment in 2003 is the appropriate course.” MedPAC further recommended that Congress retain 10 percent bonus payments for agencies serving rural areas. The 10-year cost of these adjustments, none of them in the Bush budget, has been estimated at $19 billion.

And MedPAC didn't stop with home health. Responding to pleas from physicians, who were hit with a 5.4 percent, across-the-board payment cut at the beginning of the year, MedPAC recommended a more doctor-friendly payment formula that would cost an estimated $127.7 billion over 10 years. The commission also wants to see higher payments to hospitals and nursing homes, with a projected 10-year price tag of about $27 billion.

However, MedPAC's views simply are advice, which Congress and the administration are free to reject. But some provider groups, such as physicians, also have powerful friends in Congress to take up their cause. One is Rep. Nancy Johnson, R-Conn., who chairs the Ways and Means Health Subcommittee. Johnson, whose panel oversees Medicare, has identified physician-fee relief as one of her top legislative priorities.

In a Feb. 8 letter to the Bush administration, Johnson and Ways and Means Chairman Bill Thomas, R-Calif., also noted that the Bush budget leaves no room for any of the MedPAC recommendations, even though “MedPAC has identified serious problems, such as significant and successive payment cuts to physicians, which are unsustainable and require reform.”

Johnson and Thomas asked the administration which, if any, of the issues raised by MedPAC should be acted upon. The administration's response, so far, has been to leave such choices to Congress and to insist that all changes be budget-neutral. CMS administrator Thomas Scully told a Senate Energy and Commerce subcommittee on Feb. 13, for instance, that the administration would work with Congress to fix the physician-fee problem, but not by giving ground on the overall budget. “I know that will not be easy,” he said.

It also won't be easy for Congress to come up with funds to pay for a new, big-ticket program like a prescription drug benefit. Last year, Congress in its budget resolution for the current fiscal year approved $300 billion for this program; the new Bush budget earmarks less — $190 billion — for Medicare program improvements including prescription drug coverage. No one outside the administration seems to think this is enough.

Democrats, aligned with senior groups, say it's woefully inadequate. Senate Budget Committee Chairman Kent Conrad, D-N.D., told HHS Secretary Tommy Thompson at a Feb. 14 hearing that it would take $750 billion to create a drug benefit comparable to what federal retirees receive. Most Republicans say, in defense of the Bush plan, that it's better than doing nothing. As Thompson put it at the hearing, “We have to start someplace.”

At that same hearing, Conrad also charged that the administration was underestimating Medicare's future growth. The White House's Office of Management and Budget forecasts a growth rate of 3.5 percent annually in the program during the next 10 years. But Conrad pointed to a 5 percent growth estimate from the Congressional Budget Office and said private insurance spending per capita is estimated to grow 6.1 percent per year. If he's right and the administration has budgeted too little for future growth, providers can expect more cuts ahead as Congress and the White House struggle to rein in spending.

Definite Uncertainty

With so many demands converging on an ever-tightening budget, Congress either will have to make some very tough choices — and make one or more key constituencies mad — or postpone some or all of the choices. The saving grace of the budget process is that there are plenty of ways to do the latter.

The imprecision of budget numbers comes in handy, because it gives Medicare providers and others plenty of wiggle room in bargaining about payment cuts.

A lot can happen in 10 years to make today's budget forecasts totally irrelevant, of course. In fact, just one year's worth of events can radically shift the outlook. Just ask the CBO, which downsized its 10-year cumulative surplus forecast from $5.6 trillion in January 2001 to $1.6 trillion in January 2002, because of war, recession and tax cuts.

This uncertainty gives politicians and providers an excuse to delay harsh spending cuts in hopes that the forecasts will brighten in a few years and the cuts never will be needed. Doctors, for instance, might get fee relief this year by agreeing to deeper cuts around 2010. The 10-year totals can be made to look the same, but the pain will be postponed and, with luck, avoided entirely.

Something like this could happen to the 15 percent cut in home health, which already has been postponed twice in recent years and might simply be delayed again. Nationwide HME competitive bidding already seems destined for a slow start if Congress does not quickly pass a bill to expand it. And Congress doesn't have much time to work out details of new programs or start ambitious initiatives such as the drug benefit. Election years also are short legislative years, with early adjournment to allow time for campaigning.

That tight schedule, combined with the election-year desire to make constituents as happy as possible, keeps alive the hope that Congress will find ways to soften — or put off — the harsher effects of the Bush budget. As Connaughton notes, the news looks grim on deficits but more promising on the political front. “It's going to be an interesting year,” he adds.

Red Ink Rising

AFTER 28 YEARS of deficit spending, the federal government ran surpluses for four years, from fiscal 1998 through 2001 (all federal fiscal years start on Oct. 1 the preceding calendar year). Then came the economic downturn, and it was back to red ink.

The deficit for the current year, fiscal 2002, is expected to total $106 billion. The Bush administration expects a slightly lower shortfall of $80 billion in 2003 and a $14 billion deficit until the budget, it's hoped, returns to surplus in 2005.

For 2003, the White House proposes spending $2.13 trillion on revenue of $2.05 trillion. Defense spending is due to rise 10 percent, from $336 billion to $368 billion. Medicare would rise a more modest 4 percent, from $223 billion to $231 billion. The administration estimates total Medicare spending during the next 10 years, from fiscal 2003 through 2012, will be $3.14 trillion.

Source: U.S. Office of Management and Budget

Home Care Spending: The Federal Share

ACCORDING TO FEDERAL actuarial estimates for 2000, the latest year for which figures are available, Americans were spending $18.5 billion per year on durable medical equipment and $32.4 billion on home health care. The federal government, mainly through Medicare, plays a key funding role for both these industries.

More than half the DME costs, or $9.6 billion, was paid for out-of-pocket; $3.6 billion, or 19 percent, was covered by private insurance. Federal programs mostly funded the remaining $5.3 billion, or 29 percent. Medicare paid for about $4.6 billion, and about $400 million came from the Department of Veterans Affairs, with various state and federal programs making up the remainder.

In home health, less than half the funding $15.5 billion, or 48 percent, came from private sources such as insurance. The rest was from public programs, with Medicare, at $9.2 billion or 28 percent, the largest. Home health also received $6 billion, or 19 percent, from Medicaid, which is financed by state and federal governments. The federal share of Medicaid funds for home health was $3.3 billion, or just below 10 percent, of the home health total.

Most non-durable, non-drug medical products are bought directly by patients. But the federal government funds a small share of these. In 2000, total spending in this category was estimated at $31.2 billion, of which federal programs funded 4 percent, or $1.3 billion.

Source: Centers for Medicare and Medicaid Sevices, Office of the Actuary, National Health Statistics Group