Cloudy outlook

Now that the deficit-reduction supercommittee has failed to reach agreement, healthcare providers are dealing with the reality that things could get worse before they get worse.

A series of congressional hearings, intense lobbying efforts and countless closed-door meetings were not enough to help the 12-member Joint Select Committee on Deficit Reduction complete its task last week of delivering a proposal to Congress that identified ways to reduce the federal deficit by at least $1.2 trillion over the next 10 years. This summer's Budget Control Act required that unless Congress could identify such savings, “sequestration” would kick in starting in January 2013, when $1.2 trillion in automatic, across-the-board cuts over 10 years will be split between defense and nondefense programs. The law limits the amount of healthcare savings by capping reductions to Medicare payments at 2%.

“Despite our inability to bridge the committee's significant differences, we end this process united in our belief that the nation's fiscal crisis must be addressed and that we cannot leave it for the next generation to solve,” Rep. Jeb Hensarling (R-Texas) and Sen. Patty Murray (D-Wash.), co-chairs of the panel, said in a statement two days before the supercommittee's Nov. 23 deadline. “We remain hopeful that Congress can build on this committee's work and can find a way to tackle this issue in a way that works for the American people and our economy.”

Richard Pollack, executive vice president at the American Hospital Association, said the failure was driven by the deep divisions between the two parties about the extent and design of revenue increases, which was “sort of the gateway to discussion of entitlement programs,” he said. “Clearly unless there was some agreement on revenues, there wasn't going to be discussion on entitlement programs,” Pollack said, adding that sequestration made it easier for members to avoid reaching an agreement. “Failure meant that they would still achieve savings. They knew at the end of the day, we would still achieve savings of $1.2 trillion.”

For the healthcare community, the automatic cuts would apply to Medicare payments to Medicare Advantage plans, part D (prescription drug) plans, and providers such as hospitals and physicians. In 2013, 2% of payments to plans and providers would be about $10 billion, according to analysis from the Kaiser Family Foundation.

“Sequestration means that arbitrary reductions in resources for patient care under Medicare will now be set to take effect under the law for the remainder of the decade,” Richard Umbdenstock, president and CEO of the AHA, said in a statement last week. “This will have an impact not just on the elderly and disabled beneficiaries of the program, but on their families,” he continued. “It will also have an impact on the ability of hospitals to provide essential public services to the communities they serve given the impact that Medicare has on the entire healthcare system.”

And while the picture for 2013 looks dark, the outlook for 2012 doesn't appear any brighter for providers, given that the nation's mounting deficit problem won't go away, and lawmakers could still come up with a proposal that would result in payment cuts.

“This doesn't end with the demise of the supercommittee,” said Julie Allen, government relations director at Drinker Biddle & Reath in Washington. “Congress can still come up with and pass revenue adjustments or cuts in spending to ultimately address the sequester.”

Perhaps, but Allen, as well as Chip Kahn, president and CEO of the Federation of American Hospitals, and the AHA's Pollack all contend that doesn't seem probable in an election year. “I find it very unlikely,” Allen said. “That said, there has been a tremendous amount of focus on this now for eight to 10 months in coming up with recommendations,” she said.

Allen added that lawmakers could draw from a few previous proposals, including those from the National Commission on Fiscal Responsibility and Reform (led by former Clinton Chief of Staff Erskine Bowles and former GOP Sen. Alan Simpson of Wyoming) and the Senate's Gang of Six. “But the political will is what's not there. And when you're in an election and you're talking about significant changes to programs like Medicare, it can be challenging. Seniors won't sit by and let those go into effect.”

Healthcare is not the only area of concern, nor should it be, Allen said. On Capitol Hill last week, Sens. John McCain (R-Ariz.) and Lindsey Graham (R-S.C.) issued a joint statement that expressed their disappointment in the supercommittee's failure and said they are working on a plan to “minimize the impact of the sequester” on defense cuts. President Barack Obama, however, was unequivocal in his position that, absent another alternative, those cuts will come.

“The question right now is whether we can reduce the deficit in a way that helps the economy grow—that operates with a scalpel, not with a hatchet—and, if not, whether Congress is willing to stick to the painful deal that we made in August for the automatic cuts,” the president said, according to a transcript of his remarks Nov. 21. “Already, some in Congress are trying to undo these automatic spending cuts,” he added. “My message to them is simple: No. I will veto any effort to get rid of those automatic spending cuts to domestic and defense spending.”

So where, exactly, does that leave healthcare providers? For physician groups, they are where they have been all along: Waiting for a permanent change to the physician payment formula.

“We saw this as an excellent opportunity to address the SGR in a comprehensive manner,” said Anders Gilberg, senior vice president at the Medical Group Management Association. “The sequestration pales in comparison to the 27.4% cut that is scheduled (for physicians) for Jan. 1. “And sequestration wouldn't happen until 2013 and is only 2%.” Gilberg noted that other previous deficit-reduction proposals, including the Simpson-Bowles and Gang of Six plans, addressed the SGR fix. “They have to address it one way or another,” he said. “Of course, we wanted a more comprehensive approach.”

Rep. Allyson Schwartz (D-Pa.)—who in October sent a letter to the panel urging members to include a permanent solution to the SGR formula—chided the supercommittee for failing to achieve its goal and made it clear that lawmakers are not off the hook. “This in no way absolves Congress of our responsibility to address the imminent crisis in Medicare financing,” Schwartz said in a news release. “In fact, we must act quickly on a long-term proposal rather than simply postpone these cuts as Congress has done for far too long.”

Hospitals, meanwhile, are coming to terms with where the expected additional cuts will hit them the hardest.

Kenneth Raske, president of the Greater New York Hospital Association, said the prospect of a 2% cut in Medicare payments is particularly upsetting “on top of cuts that were already enacted in the Affordable Care Act, which was $155 billion across all sectors in Medicare and Medicaid.”

Raske added that the additional cut would mean “a significant reduction in the employment base of the healthcare system.”

The AHA's Pollack also said workforce issues will develop as a result of the cuts. “There will inevitably be job loss as a result of this,” he said. “It's impossible to avoid that when almost 60% of a hospital's budget is wages and fringe benefits.” The other two areas most affected will be access issues for patients and longer waiting times at hospitals.

“People are not going to be able to do what they have done in the past with these constraints in place over the next nine years,” Pollack said. “We will never compromise what we do on a quality perspective, but we may not do everything we do today.”