Feeling pinched

The newly enacted debt-ceiling deal may have saved the nation from a financial crisis, but it also managed to paint a target on the backs of healthcare providers. And the potential size and scope of the cuts they could face has providers scrambling for a response.

The deal followed a months-long partisan fight over extending the federal government's borrowing authority beyond the $14.3 trillion limit it was set to reach Aug. 3. President Barack Obama signed a compromise into law last week that would provide $2.1 trillion in additional borrowing authority.

Critically, the deal includes two rounds of deficit cuts: more than $900 billion already-identified cuts in discretionary spending over the next 10 years; and at least $1.5 trillion in cuts or tax increases from a bipartisan congressional panel. If the 12-member panel does not produce a package with majority support that is then approved by Congress, then automatic cuts saving $1.2 trillion over 10 years would occur, beginning in 2013 (See timeline, below left).

The second phase of the deficit-reduction deal—focused around the deficit committee—is much more likely to have major financial ramifications for healthcare providers, advocates said. One reason is the fiscal reality that payments to providers through federal healthcare programs are among the largest dollar items in the federal budget. Also, providers are a politically less potent force than Medicare beneficiaries, for example, which has allowed repeated efforts to cut or limit increases in their pay.

“Provider payment cuts are pretty easy to do, relatively speaking,” Michael Regier, senior vice president of legal and corporate affairs and general counsel for the provider alliance VHA, said in an interview.

Other provider advocates noted that numerous previous attempts to cut federal costs also have targeted providers, including the sustainable growth-rate formula for physicians and the coming Independent Payment Advisory Board that can target all providers.

Once the 12 members of the Joint Select Committee on Deficit Reduction are seated by mid-August, they will have about three months to develop at least $1.5 trillion in 10-year deficit reduction that a majority supports. The committee is free to target all aspects of Medicare and Medicaid for savings, and the programs' relatively large size—they comprise one quarter of all federal spending—will make them tempting targets, according to budget experts.

For example, the Congressional Budget Office estimated that Medicare, which covers 47 million people, will spend $519 billion this year and grow to $929 billion in 2020.

“(S)ince you can't close the deficit with just spending cuts, we'll need a balanced approach where everything is on the table,” Obama said Aug. 2. “Yes, that means making some adjustments to protect healthcare programs like Medicare so they're there for future generations.”

Another reason the special panel likely will look to those programs for savings is that several similar deficit-reduction groups also have concluded that the programs cannot only afford cuts but need them in order to remain financially viable over the long term.

The Social Security and Medicare boards of trustees predicted in May that Medicare's hospital trust fund will be exhausted by 2024. Moreover, Medicare reimbursements for physicians and drugs, which are paid for by general tax revenue, are expected to nearly double as a percentage of gross domestic product over the next 25 years. “The committee could look for changes in spending among current arrangements where there has been overspending,” said Judith Feder, a fellow at the liberal Urban Institute.

Among the Medicare spending that has drawn the scorn of federal healthcare wonks and may draw the committee's attention were cuts for medical imaging, called for by the Medicare Payment Advisory Commission, because of its status as one of Medicare's fastest-growing areas. Such spending rose from $6.5 billion to $11.7 billion between 2000 and 2009, according to MedPAC.

In addition, Obama's deficit-reduction body, the National Commission on Fiscal Responsibility and Reform, is one of several that have recommended adding cost-sharing requirements for home health and hospice care, as well as accelerating cuts to home-health reimbursement included in the Patient Protection and Affordable Care Act.

Likewise, models for Medicaid spending reductions include a reported proposal by the Obama administration earlier in the deficit talks to move the program from paying varying percentages of a state's program cost to a “blended rate,” or a single national rate. The new unified rate, according to Dr. Bruce Siegel, president and CEO of the National Association of Public Hospitals and Health Systems, and other critics, would likely provide less than many states otherwise would receive and force states to hike taxes or slash other components of their Medicaid programs. A similar change could also occur in the State Children's Health Insurance Program.

“The committee has carte blanche authority over Medicaid, so we see this battle as far from over,” Siegel said.

The approach suggested by House Majority Leader Eric Cantor (R-Va.) in an interview last week with the Wall Street Journal was for the new committee to incorporate cuts proposed by the bipartisan deficit-reduction group led by Vice President Joe Biden earlier in the summer. Those included $100 billion in reduced Medicaid spending; about $50 billion in payment reductions and co-payments for skilled nursing facilities and home health; and about $14 billion in savings from changes in Medicare's rural hospital payments, according to a leaked list.

Alternately, the committee could devise its own deficit-reduction approach, but Washington policy mavens describe that as unlikely given the panel's abbreviated timeframe to produce results.

The possibility that a majority of the committee could reach an agreement on a deficit-reduction package was viewed as the preferred outcome by some provider advocates.

“Allowing the trigger to take effect is abrogating their responsibility,” Dr. Lou Goodman, CEO of the Texas Medical Association, said in an interview, referring to the automatic-cuts scenario. Still, Goodman is concerned about what the select committee will prescribe to cure the federal government's debt addiction without hearing from providers and patients about the potential impact of Medicare cuts.

Other providers expect the deficit committee will divide provider resistance by targeting the categories of providers differently.

“IPAB set the tone,” said Dr. Alex Valadka, a spokesman for the Alliance of Specialty Medicine. He noted that the provider-cutting panel targets physicians and others for reimbursement reductions in 2015, while hospitals and nursing homes are left untouched for several years. “The same mentality will hold here.”

If a majority of committee members fail to agree to a plan that cuts $1.5 trillion from the deficit over 10 years, or if the full Congress fails to pass their plan, then the Budget Control Act would require $1.2 trillion in automatic cuts beginning in 2013. The law splits those cuts between the Defense Department and, generally, Medicare providers and insurers.

Optimists hope the prospect of the automatic cuts will provide incentives for Republicans and Democrats to hammer out a deal. “If the fiscal committee took no action, the deal would automatically add nearly $500 billion in defense cuts on top of cuts already made, and, at the same time, it would cut critical programs like infrastructure or education,” a White House description said. “That outcome would be unacceptable to many Republicans and Democrats alike—creating pressure for a bipartisan agreement without requiring the threat of a default with unthinkable consequences for our economy.”

But some providers and advocates said that although the defense cuts would work to pressure Republicans to avoid the automatic trigger, the potential for provider cuts provided little incentive for Democrats to push for a committee agreement.

“Democrats aren't worried about providers because they think that hospitals and doctors are making out like bandits under these programs,” said Peter Ferrara, a senior fellow for entitlement and budget policy at the conservative Heartland Institute. “They are more likely to go to the trigger.”

The possibility that the committee will fail and automatic across-the-board cuts will occur is one of the greatest concerns for the American Hospital Association, said Richard Pollack, executive vice president for advocacy and public policy. “We want real reform, not just provider ratcheting down,” he said. “We've already had big cuts through the Affordable Care Act.”

Although providers and their representatives say it is too early to know precisely how they will describe the impact of provider cuts on access to care to the select committee members, Congress and the American public, many plan to urge alternate money-saving approaches.

For instance, some hospital advocates supported accelerating initiatives from the 2010 health reform law that aim to improve quality and lower costs.

In addition, Valadka suggested incorporating some version of the subsidized insurance plan for Medicare proposed by Rep. Paul Ryan (R-Wis.) because it would allow providers to save the system money by varying their charges based on what their patients could afford.

“That would go a long way to make Medicare solvent,” Valadka said, “at least on the provider side.”