The Debt Bill’s Impact on Healthcare

Jason Lee, Director, Global Institute for Emerging Healthcare Practices, CSC

Congress and the President delivered legislation in early August that averted a potentially “catastrophic” default on U.S. debt obligations. In a deal that some news analysts have called a “Greek Tragedy,” the debt ceiling was raised in exchange for bipartisan agreement to reduce the federal budget by the same amount over the next decade.  This is certainly a case where the devil is in the details.

The first part of the Budget Control Act of 2011 establishes budget caps in federal discretionary spending over the next decade.  The second part authorizes a so-called “gang of 12” (a joint committee of a dozen Members of Congress, half from each party and half from each body) to propose at least $1.5 trillion in additional cuts over ten years.  It can recommend any kind of deficit-reducing measures, including changes to Medicare and Medicaid, the massive entitlement programs that escaped untouched in the first part of the law.

If legislation to enact at least $1.2 trillion (not a typo) in additional spending cuts does not result by mid-January 2012 from joint committee action, then automatic across-the-board spending cuts will take effect beginning January 2013, affecting defense and non-defense budgets about equally.  Cuts to the big health care programs are padded by the recently enacted debt bill, which limits Medicare cuts to no more than 2 percent each fiscal year for ten years, and exempts Medicaid and CHIP entirely.

But this is no cause for celebration.  Some Medicare providers operate on less than 2 percent positive margins serving Medicare patients.  Moreover, this potential reduction must be considered in light of two (or even three) other factors that could affect providers in the near term.  One is a significant reduction in physician fees required by sustainable growth rate (SGR) legislation absent a “doc fix” bill.  Another is the implementation of various accountable care payment modifications included in the Affordable Care Act and subsequent administrative rule making (see this new CSC white paper).  A third is the uncertainty linked to growth reduction plans to be proposed by the Medicare Independent Payment Advisory Board (IPAB), slated to go into effect in 2015.  In short, providers and many health plans (not to mention millions of beneficiaries) are concerned about the double, triple or quadruple whammy that could substantially change this highly popular federal program whose costs have run amuck.

What are the implications for healthcare?  At one extreme, providers will go bankrupt and millions of seniors will be unable to get care.  At the other, providers will buckle down and figure out how to operate more efficiently and effectively.  More likely, some providers will operate with reduced margins, others will innovate and offer value propositions, and still others will voluntarily exit the Medicare market hoping to concentrate on more lucrative sources of payment.

Another perspective is that squeezing providers by reducing government health care program spending just accelerates cost shifting to the private sector – which is reflected in high premiums, higher self-funded plan costs, and higher out of pockets costs for individuals

Future funding obligations for Medicare and Medicaid constitute about 23 percent of federal spending.  This amount is five times greater than that for Social Security.  So how can the powerful debt reduction panel—the gang of twelve—not consider mechanisms to reduce the cost of the Medicare and Medicaid programs?  They will.  We now experience a calm before the storm as politicians, powerful interest groups, vaulted thought-leaders, and perhaps the mass public (the elderly) prepare for a period of vigorous debate.

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