October 20, 2020

Volume X, Number 294

October 19, 2020

Subscribe to Latest Legal News and Analysis

Analyzing the President’s FY 2021 Budget: Key HHS Proposals

On February 10, 2020, the White House released its $4.8 trillion FY 2021 budget proposal. The budget outlines the Administration’s priorities for the upcoming fiscal year. In the area of healthcare, the president requested $94.5 billion in discretionary budget authority for the US Department of Health and Human Services (HHS), which represents a 10% decrease from the 2020 enacted level. The budget also proposes targeted savings of $1.6 trillion in Centers for Medicare and Medicaid Services (CMS) mandatory programs, such as Medicare and Medicaid, over the next decade.

The Administration’s annual budget should be viewed primarily as a messaging tool, because most of its legislative policies are unlikely to be enacted. With a Democrat-controlled US House of Representatives, controversial legislative proposals almost certainly will not become law. An exception to that general rule may occur where there are proposals categorized in the budget as legislative but where the Administration has some existing statutory authority to move forward with regulatory action on the topic. Proposals categorized as regulatory should be monitored closely, however, as the Administration is more likely to have authority to advance changes through regulation, and is more likely to try to do so.

HHS Secretary Alex Azar will defend the HHS budget before Congress this week. On February 13, 2020, Secretary Azar will testify before the Senate Committee on Finance regarding the budget.

Read on for a summary of key proposals in the HHS budget. The CMS budget justification is not currently available. As additional information becomes available, we will update this document.

Prescription Drugs

In May 2018, the Administration published the American Patients First Blueprint, which established four focus areas for addressing the rising cost of prescription drugs: increased competition, better negotiation, incentives for lower list prices, and lower out-of-pocket costs. Unlike the Blueprint, the budget includes no specific regulatory proposals on prescription drug pricing. Instead, it allows for savings of $135 billion over 10 years from bipartisan drug pricing legislative proposals. The budget broadly mentions support for legislative efforts to improve the Medicare Part D benefit by establishing an out-of-pocket maximum, improving incentives to contain costs, and reducing out-of-pocket expenses for seniors. The budget also includes support for legislation that addresses policies stunting generic drug development, promotes competition, and increases patient access to more affordable medications.

The legislation referenced in the budget might be the Prescription Drug Pricing Reduction Act of 2019, a bipartisan proposal from US Senate Committee on Finance Chairman Chuck Grassley (R-IA) and Ranking Committee Democrat Ron Wyden (D-OR). This bill includes several policies that that align with proposals in the President’s budget.

By not including specific regulatory reforms relating to prescription drug costs in its budget, the Administration is signaling a preference that Congress reconcile differences between the Grassley/Wyden proposal and House Speaker Nancy Pelosi’s (D-CA) bill, the Elijah E. Cummings Lower Drug Costs Now Act (H.R. 3). H.R. 3 is the prescription drug pricing reform package developed and supported by House Democrats. It includes many policy changes found in the Grassley-Wyden bill, but also includes provisions relating to Medicare price negotiation. A comparison of H.R. 3, the Grassley/Wyden proposal and the Administration’s previous regulatory actions on prescription drug pricing can be found here.

The budget also includes proposals to revise the 340B program. One such proposal is to allow the Health Resources and Services Administration (HRSA) to collect a user fee of 0.1% for total 340B drug purchases from participating covered entities, which is estimated to save $24 million over 10 years. The budget also requests explicit general regulatory authority over the 340B program, which would allow HRSA to require covered entities to report their savings and how those savings are used.


The budget includes legislative and regulatory proposals related to Medicare that are estimated to yield gross savings of $756 billion over 10 years. The estimated net impact of the Medicare-specific proposals is $450 billion over 10 years. The budget mostly focuses on legislative proposals, which are less likely to be enacted. Noteworthy legislative proposals include the following:

  • Lowering the Medicare payment update for skilled nursing facilities, home health agencies, inpatient rehabilitation facilities and long-term care hospitals from FY 2021 through FY 2025. Beginning in FY 2026, CMS would establish a unified post-acute care payment system that would span skilled nursing facilities, home health agencies, inpatient rehabilitation facilities and long-term care hospitals, with payments based on episodes of care and patient characteristics rather than the site of service. Payment rates would be budget neutral in FY 2026, risk adjusted, and set prospectively on an annual basis, with episode grouping and pricing based on the average cost for providing post-acute care services for a diagnosis, similar to the Diagnosis-Related Group methodology under the Inpatient Prospective Payment System. This proposal is estimated to save Medicare $101.5 billion over 10 years.

  • Making site-neutral payments between on-campus hospital outpatient departments and physician offices for certain services, including imaging tests, clinic visits and drug administration. If implemented, this proposal would represent a substantial expansion of site-neutral policies recently advanced by Congress and the Administration. The budget proposes to exempt rural hospitals, which would be a bigger carve-out than the Administration has previously been willing to support. This proposal was included in last year’s budget proposal and is expected to save Medicare $117.2 billion over 10 years.

  • Requiring all off-campus hospital outpatient departments to be paid under the Physician Fee Schedule, effective CY 2021. Site-neutral payments would apply to emergency departments, cancer hospitals and off-campus hospital outpatient departments that were granted protections from adjusted payments under the Bipartisan Budget Act of 2015. This proposal was included in last year’s budget proposal.

  • Reforming uncompensated care payments by creating a payment funding pool, equal to FY 2019 funding levels and grown annually by the Urban Consumer Price Index. Uncompensated care payments would be paid out of the US Department of the Treasury, rather than the Medicare Trust Fund, and would be distributed according to a hospital’s share of charity care and non-Medicare bad debt. This proposal would be effective in FY 2022 and would generate net savings of $87.9 billion over 10 years.

  • Reducing Medicare reimbursement of bad debt payment. The Major Savings and Reforms document notes that the budget reduces bad debt payment from 65 percent to 25 percent of bad debt—copayments or deductibles that beneficiaries fail to pay—over three years. This proposal is estimated to save $33.6 billion over 10 years and was also included in last year’s budget request (and previous budget proposals).

  • Reforming Graduate Medical Education (GME) funding. This legislative proposal would consolidate federal GME spending from Medicare, Medicaid and the Children’s Hospital GME Program into a single grant program for teaching hospitals. This proposal was included in last year’s budget and is projected to save $52.2 billion over 10 years.

  • Extending the criterion to qualify for a higher long-term care hospital reimbursement rate. Medicare pays a higher prospective payment rate to long-term care hospitals when an admission follows an acute care hospital stay with three or more days in an intensive care unit, or the hospital provides at least 96 hours of mechanical ventilation services. Absent one of these circumstances, the hospital receives a lower Medicare payment rate, comparable to acute care hospitals under the Inpatient Prospective Payment System. Effective FY 2021, this proposal would increase this threshold to a minimum eight-day stay in an intensive care unit. This proposal is estimated to save $9.4 billion over 10 years.

  • Expanding the basis for beneficiary assignment to an Accountable Care Organization to include a broader set of primary care providers, including nurse practitioners, physician assistants and clinical nurse specialists.

  • Removing the Medicare Advantage benchmark caps and the double bonus payments initiated by the Affordable Care Act (ACA). The ACA changed the methodology for calculating the Medicare Advantage benchmark and capped it at the pre-ACA benchmark. The budget would eliminate the benchmark cap and remove the quality double-bonus for plans in eligible counties. This proposal is estimated to save $1.2 billion over 10 years.

The budget outlines only four regulatory proposals related to Medicare. Of these, the most noteworthy is implementation of a Medicare Advantage risk adjustment model. The budget proposes to accelerate the phase-in of a new risk adjustment model that is expected to save $40.6 billion over 10 years.


The president’s budget includes Medicaid-related legislative proposals that would result in approximately $920 billion in reductions to the program over 10 years. It is unlikely that these proposals will move forward with a Democrat-controlled House, however.

The budget includes a legislative proposal entitled “President’s Health Reform Vision Allowance.” Information on the specifics of this proposal are limited. The budget indicates that the proposal would build on the Executive Order Improving Price and Quality Transparency in American Healthcare to Put Patients First, and states that “Medicaid reform will restore balance, flexibility, integrity, and accountability to the state-federal partnership. Medicaid spending will grow at a more sustainable rate by ending the financial bias that currently favors able bodied working-age adults over the truly vulnerable.” This proposal is estimated to reduce $744 billion in Medicaid funding over 10 years.

Another Medicaid-related proposal would require “able-bodied, working-age individuals” to find employment, train for work, or volunteer in order to receive Medicaid benefits. The Trump Administration and some states have already tried to implement work requirements by applying for Section 1115 waivers, but legal challenges have stopped many of these policies. The budget proposal is projected to reduce Medicaid funding by $152.4 billion over 10 years.

The budget proposes to allow states to apply asset tests to Modified Adjusted Gross Income (MAGI) Medicaid populations. Currently, MAGI Medicaid groups, including children and low-income adults, do not have to undergo an asset test for Medicaid eligibility purposes. Only those in the aged, blind and disabled Medicaid group have asset tests. If this change were to be implemented, the new adult group and other MAGI Medicaid groups could be required to undergo an asset test. This proposal is estimated to reduce Medicaid funding by $2.2 billion over 10 years and was also included in last year’s budget.

The budget calls for a number of other Medicaid legislative changes, including removing states’ authority to increase allowable home equity levels for Medicaid eligibility. The budget also includes continued Medicaid Disproportionate Share Hospital (DSH) allotment reductions through FY 2030. The DSH allotment reductions were also included in last year’s budget. The budget also calls for modifying the Medicaid Institution for Mental Disease (IMD) exclusion to provide states flexibility in offering inpatient mental health services to Medicaid beneficiaries with serious mental illness. Of note, the Trump Administration released a State Medicaid Director letter in 2018 outlining opportunities for states to submit Section 1115 waivers to waive the Medicaid IMD exclusion for individuals with serious mental illness and serious emotional disturbances.

The budget outlines legislative changes related to Medicaid coverage for inmates. It proposes to prohibit states from terminating CHIP coverage for inmates and from terminating Medicaid coverage for the first six months that the inmate is in custody. Both proposals are new and have not been included in previous budget requests.

The budget also includes a few regulatory proposals related to Medicaid, which have a higher likelihood of being implemented because they do not require congressional action. For example, the budget proposes to give states the option of conducting more frequent Medicaid eligibility redeterminations, and notes that CMS will soon release a proposed rule on this issue entitled “Strengthening the Program Integrity of the Medicaid Eligibility Determination Process.”

The budget also refers to increased provider-level data on supplemental payments. CMS recently published the Proposed Rule Medicaid Fiscal Accountability Regulation (MFAR), which would increase provider-level reporting and make structural changes to Medicaid supplemental payments. This suggests that the Administration is still very interested in finalizing the MFAR.

Finally, the budget proposes to change the Non-Emergency Medical Transportation (NEMT) benefit from mandatory to optional. A proposal to make NEMT coverage optional was included in last year’s budget. However, the regulation providing states greater flexibility in covering the NEMT benefit is no longer included on CMS’s unified agenda.


The budget does not propose any substantive changes to the Exchange Marketplace. It allocates $1.5 billion for Marketplace-related program management (down approximately $226 million from 2020), to be funded primarily though user fees collected from insurers operating on the federal exchange and state-based exchanges on the federal platform. The budget extends the use of these user fees to cover almost all federal administrative costs associated with operating the Marketplace ($25 million would come from the Healthcare Fraud and Abuse Control Program appropriation). CMS reduced user fees to 3% of premiums on the federal exchange and 2.5% of premiums on state-based exchanges on the federal platform as part of the Notice of Benefit and Payment Parameters Rule (payment notice) for plan year 2020, and proposed maintaining that level in the payment notice for 2021. However, the proposed 2021 payment notice also included a request for comments on an alternative proposal to further reduce the user fee rates.

Program Integrity

The budget would introduce program integrity measures to ensure that the Medicare and Medicaid programs are “paying the right amount to the right entity for the right beneficiary.” The Healthcare Fraud and Abuse Control Program and the Medicaid Integrity Program constitute the largest federal investments in healthcare program integrity. The budget provides $2.3 billion in mandatory and discretionary spending for program integrity investments.

The Administration’s goal for these proposals is to prevent inappropriate payments, reduce spending, protect beneficiaries, and reduce time wasted on fraud and abuse investigations. The budget includes numerous legislative and administrative proposals estimated to save $31 billion and $220 million, respectively, over the next 10 years.

Legislative proposals include the following:

  • Expanding prior authorization in Medicare fee-for-service. CMS will explore options within its current authority through the Center for Medicare and Medicaid Innovation to test whether applying prior authorization on low-value services can reduce Medicare costs by reducing unnecessary utilization. The Trump Administration has previously used prior authorization as a tool to reduce payments for services. In the CY 2020 Hospital Outpatient Prospective Payment System Final Rule (CMS-1717-FC), CMS established a nationwide process for prior authorization for certain hospital outpatient department services that will begin July 1, 2020. As in the budget proposal, the relevant services are those that CMS identified as being at high risk for fraud and abuse.

  • Increasing provider reporting requirements. The Administration proposes the annual re-verification of national provider identifiers, the expansion of open payment reporting, and penalties for provider failure to meet reporting requirements.

  • Improving payment accuracy within MA. The budget proposal would require MA plans to submit medical records for review in CY 2022 to confirm diagnoses for risk-adjusted payments.

Rural Health

  • Inpatient Hospital Wage Index. This proposal would create a statutory demonstration to test comprehensive wage index reform. The demonstration would redefine the labor market area to commuting data by zip code, identify an alternative source for wage data, repeal the rural floor and other reclassifications and special payment adjustment (g., out-migration adjustment), and provide civil monetary penalty authority to penalize hospitals that submit inaccurate or incomplete data. The demonstration would aim to improve hospital wage index accuracy, reduce sharp differences in the wage index and Medicare payments between nearby hospitals, address the divergence between low-wage and high-wage hospitals, and protect access to healthcare in rural areas.

  • Rural Emergency Hospitals. This proposal would allow critical access hospitals to voluntarily convert to an emergency hospital that does not maintain inpatient beds. This new facility type would receive the same Medicare payment rates as other emergency departments paid under the outpatient prospective payment system, plus an additional payment to assist with capital costs. The capital cost adjustment equals 10% of the five‐year average of the facility’s payment.

  • Update Medicare Telehealth Benefit Through Value-Based Payment Models. This proposal would expand Medicare fee-for-service’s telehealth benefit by removing existing barriers to telehealth services for providers participating in Medicare fee-for-service advanced Alternative Payment Models, which require more than nominal financial risk.

  • Update Payment for Rural Health Clinics. This proposal would establish a new Medicare prospective payment system for rural health clinics with annual updates based on a market basket derived from cost report data and rebased periodically, similar to the recently implemented payment system for federally qualified health centers. This new payment system would address concerns that current payment to rural health clinics is inadequate because of caps based on the Medicare Price Index. The payment system is estimated to save $1.8 billion over 10 years.

  • Increase Medicare Telehealth Services for Federally Qualified Health Centers and Rural Health Clinics. This proposal would allow rural health clinics and federally qualified health centers to be distant site providers for Medicare telehealth, and would reimburse these services at a composite rate similar to payment for comparable telehealth services under the Medicare Physician Fee Schedule.

These policy changes were not included in last year’s budget proposal. While this reflects the Administration’s continued interest in supporting policies to address access to care in rural communities, these proposed reforms are legislative rather than regulatory, and thus likely would require congressional action to implement.

Co-Authored by Jamie Neikrie

© 2020 McDermott Will & EmeryNational Law Review, Volume X, Number 43


About this Author

Katie Waldo Healthcare Attorney

Katie is an experienced government relations strategist who helps clients navigate the complex issues surrounding Medicare, Medicaid and the healthcare marketplace.

Katie works with clients to represent their needs before the US Congress and the US Department of Health and Human Services (HHS) and its agencies by relying on extensive experience as a policy advisor on the Medicaid and Medicare programs, as well as the 340B program and other aspects of the Public Health Service Act. She anticipates the effects of state and federal policymaking on issues impacting their businesses and...

212 547 5433
Rachel Stauffer, McDermott Law Firm, Washington DC, Health Policy Consultant

Rachel is a highly experienced government relations and legislative affairs strategist and advocate who is informed by a solid foundation of health policy knowledge.

Prior to joining McDermottPlus, Rachel served as the director of policy and government relations for a health IT contractor, where she developed the company’s first strategic plan for government relations. She grew the company’s profile on Capitol Hill by establishing new relationships with key leaders in the federal, state and military health program space. As a result, the company became an authoritative source on a variety of legislative approaches, especially related to veterans’ health.

Prior to that role, Rachel was lead legislative liaison at the US Department of Health and Human Services’ Office of the National Coordinator for Health IT (ONC) where she was instrumental in providing research, analysis and feedback to Members of Congress and staff on the 21st Century Cures legislation, among other relevant policies. Rachel also created short- and long-term strategic outreach plans that increased ONC’s visibility and profile.

Government Relations Professional and Registered Lobbyist

Emma is a government relations professional and registered lobbyist who supports clients on a range of health policy issues.

As a policy consultant, Emma lobbies and consults with legislators and congressional staff on issues relating to Medicare, Medicaid payment and regulation, and the 340B Drug Pricing Program. She provides analysis of the federal political and regulatory environment, and routinely monitors pertinent Hill activities including congressional hearings, bill markups and think tank events.

Emma graduated...

Kelsey Haag McDermott Policy Analyst
Policy Analyst

Kelsey is a health policy analyst specializing in Medicare payment and regulatory issues.

As a policy consultant, Kelsey works with clients on issues relating to Medicare physician payment, coding and quality issues.  She assists clients through the CPT® Editorial Panel and RVS Update Committee (RUC) processes. She analyzes quantitative data to assess the impact of Medicare reimbursement policies on client priorities  and routinely monitors pertinent Agency activities  related to the Medicare Quality Payment Program, CMS Innovation Center, and other quality/innovation...