Making Sense of the Federal Budget Process for Managed Care
Funding season in Washington, DC means a lot of confusing terms get thrown around, like “continuing resolution,” “omnibus” or “minibus,” and “budget reconciliation.” Despite the dry language, budget packages can result in landmark legislation. The Inflation Reduction Act (IRA) of 2022, for example, was passed as a reconciliation bill. This year, we may have two or more overlapping budget bills. They’re likely to contain some of the most significant legislation of 2025. But how are they different, and what does it mean for health care, and specifically for managed care?
New Year’s Continuing Resolutions
The federal government’s fiscal year runs from October 1 to September 30 of the following year. In theory, this means that Congress needs to pass all its various funding bills before the end of September. In practice, this has only happened four times since the system was adopted in 1977, the most recent of which was the famous Balanced Budget Act of 1997.
The Balanced Budget Act was what’s referred to by politicos as an “omnibus,” combining all 12 regular appropriations bills into one. A package that includes fewer than the full 12 is often called a “minibus.” In formal legislative jargon, both are referred to as a “consolidated appropriations act.” Notably, the Balanced Budget Act was also a reconciliation bill. More on that later.
The federal government is currently funded under a “continuing resolution” (CR) until March 14, 2025. Last month, House Republicans introduced a “budget resolution,” a roadmap instructing committees on how to craft their 2025 and 2026 budget bills, calling for $2 trillion in budget cuts. A budget resolution does not authorize any funding on its own. Republicans, who have the majority in both chambers of Congress, are now at work crafting their appropriations bills. Whether they pass final 2025 funding before the expiration of the latest CR or pursue another extender remains to be seen.
Irreconcilable Differences
You’re probably hearing a lot about budget reconciliation these days. Quick primer: Reconciliation is a specific type of funding bill that does not raise the federal deficit—at least as estimated by the Congressional Budget Office (CBO). Under current Senate rules, up to 3 reconciliation bills can be passed in a year. Reconciliation bills are subject to the “Byrd rule,” which imposes strict parliamentary limits on what can be included. The Byrd rule, named after former Senator Robert Byrd, dictates that provisions must be related to federal revenues and expenditures, cannot include “merely incidental” budgetary changes, and cannot modify the Social Security program, for example. Any senator may object to any provision, triggering a review by the Senate parliamentarian (the cutesy Beltway name for this review is a “Byrd bath”). This happened during IRA negotiations, with inflationary penalties against drugmakers specific to drug prices in the commercial market ultimately removed from the bill by the parliamentarian for being unrelated to government funding.
Why would lawmakers want to use reconciliation if it’s so restrictive? It is still probably easier than breaking the Senate filibuster. In the House, all debate is subject to time limits, followed by a vote on passage. In the Senate, however, most—but not all—debate runs indefinitely until cloture is invoked, meaning that at least 60 Senators must agree to end the debate and vote on a bill. When that threshold has not been met, a bill is filibustered. Reconciliation bills are exempt from typical cloture rules. Debate is limited to 50 hours, divided evenly between the parties. Afterwards, a simple majority is all that is needed to pass a bill.
In the current era of high partisanship and narrow majorities, major legislative packages are often passed on a party line vote, a significant obstacle if the majority party doesn’t have 60 seats in the Senate.
Down to Brass Taxing and Spending
This produces a couple of questions. First, how many budget bills can we expect in 2025? And second, what do they mean for health policy?
There may be up to 2 reconciliation bills passed this year. Senate Republicans have advanced an approach that would see 2 separate bills passed under reconciliation, while President Donald Trump and House Republicans have promoted a single bill. Vice President JD Vance and other administration officials have endorsed the 2-pronged strategy.
We could also see a third, non-reconciliation funding bill in the coming weeks, but that will likely require bipartisan compromise. This scenario isn’t out of the question but is more likely to be another CR to avoid a government shutdown, rather than a full omnibus, especially if it looks like reconciliation talks will stretch past March 14.
Toward the end of 2024, lawmakers were building bipartisan support for a package of health care provisions that might be attached to a spending bill. Notable provisions included pharmacy benefit manager (PBM) reform, drug patent litigation reform, and adjustments to physician fee schedule payment levels. Some of those provisions could be considered, but sentiment on Capitol Hill doubts all those provisions can advance on a CR and may be saved for a year-end package.
PBM Reform Pending?
Whether large or small, any CR with health policy add-ons could have serious implications for managed care. PBM reform was in the December package, and Representative Brett Guthrie, now the chair of the powerful Energy & Commerce (E&C) committee, said that he was interested in pursuing PBM reform in 2025. The new chair of the E&C Health subcommittee, Representative Buddy Carter, is a pharmacist and pharmacy-owner who has long championed PBM reform. Reform efforts could ultimately fizzle, either by political advocacy from managed care and employer groups or by simple legislative inertia. But a push to pass it seems likely, and supporters of reform are well-positioned to make it happen.
Here are a couple of PBM reform bills to watch. The Safe Step Act, first introduced in 2019, would place limitations on payers’ ability to implement step therapy protocols. The House passed the Lower Costs, More Transparency Act in 2023, which may prove a useful blueprint.
In addition to utilization management restrictions, lawmakers could also: prohibit spread pricing arrangements between plans and PBMs; mandate 100% pass throughs of rebates received by PBMs; “delinking” transaction fees paid to PBMs from the price of the drug (ie, all transactions are paid at the same, flat service fee); and, enhance reporting and transparency requirements for PBMs. Crucially, CBO only estimates savings associated with the transparency requirements. That may influence what reforms make it into a deficit-neutral reconciliation bill.
There’s also some partisan disagreement about applying these provisions to the commercial market, although it’s far from a bright line issue. Democrats are broadly supportive, but Republicans are more split. Some GOP members would prefer to limit these reforms to government programs—such as Medicare, Medicaid, and Veterans’ Affairs—while letting the private sector duke it out via contract negotiation. It also seems unlikely that private sector reforms would survive a Byrd bath during a reconciliation process since they are unrelated to government taxing and spending powers. Remember the commercial inflationary rebates that were struck from the IRA? If Congress wants to expand reforms beyond public programs, they’ll probably have to craft a bipartisan package, which is certainly possible.
Higher Prices for Patients?
The passage of most of these provisions probably leads to higher premiums for most patients, although costs for more expensive prescriptions may drop. In addition to promoting safety, utilization management helps direct patients to lower cost treatments, often with generics. Spread pricing is popular among small and medium-sized group plans because it gives plan sponsors more financial predictability, and up to 63% of drugs are subject to negative spread, meaning the PBM takes a loss on reimbursement. Delinking would cause a significant shift in how the entire pharmaceutical supply chain operates, possibly resulting in smaller rebates.
On the other hand, thoughtful transparency reforms could help control costs for patients, but questions remain. There’s uncertainty concerning to whom PBMs are supposed to be transparent. Is it to plans? To patients? To employers? Or maybe to the government or the public? Ultimately, if something passes, it’s likely to include at least a couple of those entities. Enhanced transparency could easily result in lower costs by allowing health care purchasers to make more informed choices. However, it’s not hard to imagine PBMs losing negotiating leverage with drugmakers if their agreements become public knowledge, resulting in higher prices for patients, employers, and payers.
Beyond PBM reform, there are other policies that could pass in 2025, although most are probably not likely to be included in a budget package. Drug patent litigation reform passed the Senate last year but didn’t advance in the House, so I wouldn’t be surprised to see that revisited at some point. Changes to the 340B program have been debated vigorously in the last couple of years but show little sign of immediate movement. One proposal we may see included in a reconciliation package is site-neutral payment in Medicare (also part of the Lower Costs, More Transparency Act). Currently, hospitals and hospital outpatient departments receive higher reimbursement rates for services provided to Medicare beneficiaries than physicians’ offices. Site-neutral payments would standardize the rates across settings, mainly by reducing the amounts paid to hospitals. That fits squarely within Byrd rule requirements and could be very tempting to Congressional leaders looking to find off-sets to fund tax cuts or other spending priorities.
The Bottom Line Item
It’s clear Congress views health care reform as a source of savings for 1, maybe 2 reconciliation packages. But process can dictate policy. How big might Congress try to go, knowing that some of it could be removed by a ruling from the Senate parliamentarian? PBM reform has bipartisan support, so the smarter move may be to use it as an offset in another spending bill going through regular order where there are fewer procedural obstacles to commercial reform. That carries risks of its own, with an historically small House majority that may not pass much legislation. It’s a whirlwind right now in DC. We may not know what changes are coming until after the dust settles.
