Bookmark and Share

February 2007

Federal Update: FY 2008 Budget

Following President George W. Bush’s 2007 State of the Union address, the Administration submitted its 2008 fiscal year budget request to Congress. The request would cut $76 billion over five years from Medicare and $25 billion over five years from the Medicaid program. The proposed budget contains funding in the amount of $5 billion for the proposed reauthorization of the State Children’s Health Insurance Program (SCHIP). That allocation is approximately one third of the needed funds to support the program in its current form. In total, the administration’s 2008 fiscal year budget decreases health care entitlement programs by over $100 billion over the next five years. The cuts in this budget dwarf prior calls to control spending on the health entitlement programs. The Deficit Reduction Act (DRA), passed in February of 2006 under a Republican controlled Congress, cut a combined $10 billion from the Medicare and Medicaid programs over five years.

Medicare: The cuts proposed by the administration primarily target providers. Of the $76 billion in proposed cuts to Medicare, more than half of the cuts come from reduced payments to hospitals, skilled nursing facilities, hospice, and outpatient facilities. Beneficiaries would be responsible for increased premiums for Medicare Parts B and D and the budget devotes significant resources to combating fraud and abuse. Finally, the budget includes a provision that triggers annual 0.4 percent cuts to all providers if the Medicare general fund contribution exceeds 45 percent of the federal budget. The budget re-authorizes the Qualified Individual (QI) premium reduction program for one year. The QI Program requires state Medicaid programs to pay the Medicare Part B premium with 100 percent federal funds for individuals who are not otherwise eligible for Medicaid and who have incomes between 120 -135 percent of federal poverty levels.

Medicaid: According to the administration, its proposed cuts in the Medicaid program would save the federal government approximately $25 billion over five years. Approximately half of the cuts come from legislative changes and half from administrative changes. The proposed cuts in Medicaid continue the administration’s trend of using regulatory and administrative cuts to control the growth of Medicaid. Among others, proposed cuts and savings for the federal government include:

  • Capping the federal administrative match at 50 percent regardless of service: $5.3 billion
  • Targeted Case Management services reimbursed at 50 percent: $1.1 billion
  • Cutting the federal upper payment limit for multiple source pharmaceuticals: $1.2 billion
  • Revised standards for government providers and capping reimbursement for services “to no more than the cost of furnishing services to Medicaid beneficiaries”: $5 billion
  • Elimination of transportation and administration for school based services: $3.6 billion
  • Elimination of graduate medical education (GME): $1.7 billion
  • Cuts in Rehabilitation Services: $2.2 billion

In addition to the cuts sought by legislation, several administrative provisions will have an impact on the states. The administration is seeking to clarify Disproportionate Share Hospital (DSH) payments and provider tax provisions via regulation. These proposals build on the Deficit Reduction Act which placed limits on provider taxes and also continues the trend of the federal government discouraging state financing mechanisms designed to increase federal matching funds. The impact on states will vary depending on the extent to which the state relies upon provider taxes and DSH, but the likely overall effect will be reduced federal matching funds for states.

Congress will debate the 2008 budget resolution and begin work on annual appropriations over the next several weeks.

The 2008 budget proposal is available at