Last year, President Barack Obama signed the Budget Control Act, which imposed more than $900 billion in discretionary spending caps over 10 years to help reduce the nation's deficit. The law also established a Joint Select Committee on Deficit Reduction to identify another $1.2 trillion in cuts. If the committee failed to do this, the law set up a sequestration procedure that would trigger automatic spending cuts split evenly between defense and non-defense programs—including the maximum 2% annual cut to Medicare—from 2013 to 2021.
The supercommittee failed to find the savings before its November deadline, which means those cuts are scheduled to take effect in a little more than three months, unless lawmakers agree on an alternative plan.
On Sept. 14, the White House provided detailed estimates on the sources for those reductions. The sequestration must reduce nondefense spending by $54.6 billion each year, of which about $11.1 billion would come next year from the portion of Medicare that is subject to the 2% limit. From that amount, about $5.8 billion would come from the Medicare Federal Hospital Insurance Trust Fund.
In a conference call with reporters, senior Obama administration officials said the administration does not “support the indiscriminate cuts in this report,” and added that the cuts should never be implemented. They were also quick to criticize congressional Republicans for failing to take a balanced approach to deficit reduction—one that would include spending cuts and tax increases—that would avoid sequestration altogether.
“It's the American people who will pay the price for Republican intransigence,” Rep. Chris Van Hollen (D-Md.), ranking member on the House Budget Committee, said in a statement.
“The report makes clear that sequestration would cause great disruptions across many vital services, from cancer research at NIH, to food-safety efforts at the Department of Agriculture and public safety at the FBI, to lowered military readiness. It's time to stop the political games and start working together to prevent the sequester, protect the economic recovery, and get our fiscal house in order,” he said. Van Hollen introduced an alternative proposal last week that calls for spending cuts and additional revenues, but the legislation did not make it to the House floor for a vote.
If implemented, the sequester also would make several reductions to other healthcare programs. For instance, the National Institutes of Health would see payment cuts totaling $2.5 billion in fiscal 2013. “The National Institutes of Health would have to halt or curtail scientific research, including needed research into cancer and childhood diseases,” according to the report. Meanwhile, about $464 million would be cut from the Centers for Disease Control and Prevention, $66 million from grants set aside for the health insurance exchanges, and about $27 million from community health centers.
Other healthcare programs would be exempt from the sequester, such as the Pre-Existing Condition Insurance Plan and Consumer Oriented and Operated Plan in the healthcare reform law, as well as Medicare health information technology incentive grants in the American Recovery and Reinvestment Act, grants to states for Medicaid, quality improvement organizations and the Children's Health Insurance Fund.
“As Congress looks for ways to cut the deficit, we must not lose sight of the economic contributions of the healthcare sector, including hospitals,” Richard Umbdenstock, president and CEO of the American Hospital Association, said last week at a news conference in Washington. “Hospitals are the largest component of the healthcare sector and employ 5 million people. In fact, hospitals rank second only to restaurants as the top source of private-sector jobs across the U.S.”
The brief report from Tripp Umbach tallies job losses projected in healthcare, as well as jobs that would be lost in industries that sell goods and services to healthcare organizations and still more that would be lost because those laid-off workers spend less money. In 2021, the report estimates 330,127 fewer direct-effect jobs in healthcare from the reductions.
Mike Harrington, chief accounting officer and controller at the Cleveland Clinic, said the report “paints an extreme picture” and placed the 2% Medicare cut in perspective for the system.
“Our organization is a $6 billion company. The sequestration impact on us is about $22 million,” Harrington said in an interview. “It's not like 10%. It's a couple tenths of a percent of our revenue stream,” he said. “When you look at our overall cash flow, it's a little bigger piece, but still less than 5% of our overall cash flow.”
Several other financial pressures are cause for concern, Harrington said, such as private insurance companies shifting more costs to patients through higher deductibles, coinsurance or copayments, meaning lower revenue for the system as patients often find it difficult to pay and providers end up writing off the amounts as bad debt.
In face of the mandatory cuts, the Cleveland Clinic will continue to do what it has done to streamline operations. For instance, the system made significant changes to its supply-chain procedures that saved about $100 million in expenses in the past 2½ years.
“That is from surgical procedure to laundry to environmental—everything nonpersonnel related,” Harrington said. “We had a variety of food-service vendors, and we've now consolidated that to one vendor and saved millions of dollars on that one transaction.”
In Michigan, the Henry Ford Health System has also focused on ways to keep costs in line with net revenue in a tight reimbursement environment, said Jim Connelly, the system's executive vice president and chief financial officer. Connelly said the 2% cut will lead to about $18 million in reduced Medicare payments for the Detroit-based system. He described those reductions as “very, very material,” especially as hospitals are already feeling the sting from Medicare cuts included in the Patient Protection and Affordable Care Act.
Connelly called job cuts “one way to look at” the consequences, but said hospitals would react in a variety of ways. At Henry Ford—a safety net provider that had more than $211 million in uncompensated care costs last year—one component is a systemwide review of administrative costs and a redesign of job functions and processes that Connelly expects would reduce the system's costs by about $25 million in 2013. “I cannot tell you that people will not be affected, but that's not where we'll start.”
Smaller hospitals may have a tougher time managing the cuts and view the jobs numbers in the report as realistic.
Rich Morrison, vice president of government affairs at Adventist Health System, Altamonte Springs, Fla., said the Medicare cut will lead to payment reductions that amount to less than a percentage point for the system. While he acknowledged that does not sound like a lot to absorb, he said it becomes harder if the cuts continue—as they are expected to—over a period of years.