Recent/upcoming developments… In the coming days, Congress is likely to pass a “continuing resolution (CR)” that will extend unresolved FY25 government funding (annually appropriated/discretionary spending) at current levels likely through next March.  As part of that effort, Republican and Democratic leadership have traded offers and counteroffers as to which healthcare “extenders” (extension of expired programs or funding streams) and other healthcare-related proposals should be included in the CR and, if so, for how long and at what cost.

Our outlook… The fact that the two sides are actively negotiating means the probability of the CR containing at least some healthcare provisions has risen.  That said, there is not yet bipartisan agreement as to what a healthcare “package” will comprise and how it will be offset (if at all).  It is our expectation (70% probability) that lawmakers will reach a deal and enact some health care policies before year’s end, but there is a 30% probability the effort collapses, and lawmakers are forced to address these issues in ~March 2025 when the CR expires.  If this were to occur, some programs could be temporarily extended, while others would lapse and various cuts would temporarily take effect until they are addressed next March.  This latter scenario occurred last year, where a delay in Disproportionate Share Hospital (DSH) cuts, Community Health Center funding, and other issues received a temporary extension, while other areas (e.g., PFS) were subject to cuts until March.  Below is our view on the likelihood of various health care provisions being enacted in the coming days in the event a deal is reached.

Likely

Physician Fee Schedule (PFS) Relief… Lawmakers appear motivated to defray impending PFS cuts for CY25 (-2.9% relative to CY24).  However, in keeping with the past four years, we expect that any relief here will only be partial.  Reports indicate both Republicans and Democrats are eyeing a +2.5% offset ($5b) of the finalized cut for CY25, with the resulting CY25 conversion factor update being -0.4% relative to CY24.  As has previously been the case, such relief is only temporary, meaning the portion of the cut offset for CY25 would return in CY26.

Medicaid Disproportionate Share Hospital (DSH) Cut Delay… Congress has repeatedly delayed the Medicaid DSH cuts mandated by the ACA (the current delay ends this year, with cuts of $8b annually set to take effect 2025 through 2027).  Lawmakers on both sides of the aisle are motivated to further delay these cuts, though the cost associated with a multiyear delay is large.  It is unclear how long lawmakers intend to extend the delay, but it appears likely a delay will be enacted given its inclusion in both the Republican and Democratic offers.

Telehealth Flexibility Extension… Congress and CMS provided many Medicare telehealth flexibilities during the COVID-19 pandemic, most of which are set to expire at the close of this year.  There is bipartisan support for extending these flexibilities (as evidenced by strong bipartisan passage before both House W&M and E&C in recent months), though cost concerns are leading lawmakers to move toward a short-term extension.  We expect the extension will be in the two-to-three-year range (as these are the positions staked out by Democratic lawmakers and Republicans, respectively, in their current offers).  An extension is projected to cost ~$2b annually.

PBM Transparency… Both Republican and Democratic leadership have identified PBM transparency reforms as being priorities for enactment in the upcoming CR.  These are most likely to take the form of the provisions in the House-passed “Lower Costs, More Transparency Act” (H.R. 5378) which (1) mandates semiannual reporting to health plan sponsors on spending, rebates, and fees for covered drugs and (2) requires that contracts between PBMs and employer-sponsored health plans allow plan fiduciaries to audit claims and cost information without restrictions.  These reforms are projected to save the federal government ~$23m/10 years.

Medicare Pay-As-You-Go (PAYGO) Cut Delay… PAYGO requires spending cuts across the federal government if legislation enacted in a given year results in an increase in projected budget deficits.  The American Rescue Plan Act (ARPA) triggered PAYGO for FY23 and FY24, but those cuts (which, for Medicare, are capped at -4% annually) were postponed until FY25 by Congress.  Without additional Congressional action, PAYGO will be triggered in 2025, resulting in a ~$43 billion reduction in Medicare payments in 2025.  Though neither the Republican nor Democratic negotiating positions reportedly address PAYGO, we expect lawmakers to do so given the magnitude of the potential cuts.

Miscellaneous… There are dozens of other “extenders” which are likely to be included in the CR as they provide funding for niche programs which (in most cases) have existed for many years and/or have regularly been extended on a bipartisan basis (i.e., Community Health Centers, Low Volume Inpatient Hospital Add-On, Medicare Dependent Hospital Program, Special Diabetes Programs, etc.).

Possible

PBM Spread Pricing Ban & Delinking… Despite the House having passed legislation to ban Medicaid spread pricing ($1b/10 years), such a proposal is not included in the offer made by House Republicans.  However, House Republicans have proposed to include in the CR provisions which “delink” PBM compensation in Medicare Part D (~$700m in federal savings over 10 years), which is notable given that the House has only recently begun to explore this policy but has not yet received complete buy-in.  For their part, Democrats have proposed including both spread pricing and delinking in the CR.  There is a high degree of motivation to enact PBM reforms, but the divides between the House and Senate on the scope here, and the shift by House Republicans away from spread pricing suggests these PBM reforms remain in flux.

Sequester Extension… Given that PBM reforms would generate only modest federal savings in comparison to the cost of the healthcare spending likely to be included in the CR, other offsets may need to be considered.  An offset commonly used by lawmakers (i.e., eight times in the past decade) is an extension of the -2% Medicare sequester, which currently runs through FY2032.  Each additional one-year extension of the sequester would likely save the federal government ~$21b.

Medicare/Medicaid Improvement Fund Offsets… Another possible offset for new healthcare spending comes from the Medicare and Medicaid Improvement Funds, reserves established to finance improvements to the Medicare and Medicaid programs.  The funds often – but not always – have a surplus of unspent dollars and lawmakers have previously recaptured these funds to offset year-end spending.  Currently, the fund has a $0 balance, though it is possible lawmakers could shift dollars from other sources to into these funds for purpose of subsequently offsetting their year-end healthcare spending priorities (this has occurred in prior years).

Unlikely

Site Neutral Payment Reforms… Despite a moderate degree of bipartisan interest in site neutral reforms, such proposals – which would generate substantial federal savings and could serve as an offset for healthcare spending in the CR – are not included in either the Republican or Democratic offers.  Though site neutral reforms appear increasingly unlikely to be enacted this year, we expect this issue will reemerge next year when there will be a broader catalyst for it (i.e., a need for budget savings to offset healthcare policies that must be addressed, such as the expiration of expanded ACA subsidies).

Recission/Delay of Skilled Nursing Facility (SNF) Minimum Staffing… In April, CMS finalized its minimum staffing rule, which will require SNFs participating in Medicare and Medicaid to provide a minimum level of direct nursing case per day.  Estimates project a delay in the rule’s implementation would save ~$6b/five years and ~$22b/10 years if the rule is eliminated.  Republicans have proposed using repeal of the rule as an offset for healthcare spending in the CR, but Democratic lawmakers view this as a non-starter.  Regardless, this issue will remain active next year, as we expect the Trump administration will begin the process of pulling back on the rule.

ACA Enhanced Subsidy Extension… Democratic lawmakers have proposed using the CR to enact a one-year extension of the ACA enhanced subsidies.  This is unlikely to occur given (1) a lack of urgency around the subsidies (which expire 12/31/25) and (2) partisan dynamics.  This will, however, be a prominent issue next year and it is our base case that – despite Republican rhetoric to the contrary – the enhanced subsidies will be extended next year (with modifications that constrain eligibility/generosity), as moderates will likely oppose complete elimination of the enhanced subsidies and the party will be wary of the political consequences associated with letting this policy lapse.

Watch for these developments… We are watching for comments from key players in the process (i.e., House Ways & Means Chair and Ranking Member Smith (R-MO) and Neal (D-MA), House Energy & Commerce Chair and Ranking Member McMorris Rodgers (R-WA) and Pallone (D-NJ), Senate Finance Chair and Ranking Member Wyden (D-OR) and Crapo (R-ID), Senate HELP Chair and Ranking Member Sanders (I-VT) and Cassidy (R-LA)) on any of the various provisions, particularly those that are less obvious (i.e., Medicaid spread pricing and Medicare delinking) and those relating to offsets, as this will provide further clarity as to the likely composition of the year-end healthcare deal.  Separately, we are watching for indications that Republicans are insistent on offsets for new healthcare spending.  Democratic lawmakers have yet to outline any offsets of substance (i.e., sufficient to fund most incremental spending) and to the degree an impasse on this issue is reached, it would increase the probability of lawmakers enacting temporary extensions of programs/policies (i.e., DSH cuts, miscellaneous programs) and delaying other proposals (i.e., PFS relief, telehealth extension, PBMs) until the CR expires in ~March.