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Debt Ceiling Law Postpones Significant Cuts to Major Health Entitlements

Minutes before the August 2nd deadline for increasing the federal debt ceiling, President Obama signed into law S. 365, the Budget Control Act of 2011 (P.L. 112-25),  (BCA) which increases the debt ceiling, subject to congressional disapproval, by $400 billion immediately, by another $500 billion this fall and by between $1.2-1.5 trillion next year at the President’s request (the larger figure being operative if Congress sends a balanced budget constitutional amendment to the states; the law mandates a vote in each house of Congress).  The House passed the bill on a vote of 269-161 and the Senate followed suit on a vote of 74-26.  Passage helped avoid an immediate debt ceiling crisis, but the law provides for spending cuts of only about $2.4 trillion in total over 10 years, less than the $4 trillion in cuts demanded by S&P to curtail the rating agency’s downgrade of US debt from AAA to AA+.

Leaving Medicare and Medicaid untouched, the law establishes 10-year discretionary spending caps for FY 2012-2021 that would reduce the deficit by $917 billion with a sequestration process serving as an enforcement mechanism which (see Appendix for a section-by-section explanation of the new law).  The law also sets up a 12-member congressional panel to develop, by November 23rd, another deficit-reduction package with $1.5 trillion in cuts which Congress would have to approve by December 23rd or a “trigger” would enforce $1.2 trillion in cuts evenly distributed between defense and non-defense accounts (with a cap on Medicare cuts for providers limited to 2% and no cuts to Medicaid, Social Security and low-income programs).  Of note, the committee recommendations would be exempt from the so-called “Byrd Rule” in the Senate which prohibits “extraneous” matters.  Due by August 16th are the three equal appointments to the joint committee by House Speaker John Boehner, Minority Leader Nancy Pelosi, Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell.  House and Senate committees of jurisdiction must develop any of their recommendations to the joint committee by October 14th.  It is possible that the joint committee could attempt to resurrect the 10-year $4 trillion “big deal” originally discussed by Speaker Boehner and President Obama which would likely target Medicare and Medicaid, as well as Social Security.  Such a long-term proposal could include increasing Medicare beneficiary cost sharing or the Medicare eligibility age and lifting the Medicaid maintenance-of-effort requirements.  With the current Medicare physician reimbursement formulation set to expire at the end of the year, it is a possibility that the joint committee could address the sustainable growth rate (SGR) problem in order to avoid the scheduled 29.5% cut in physician pay in January.  While the law does not provide for an increase in revenues the committee recommendations are likely to do so, particularly if they include an overhaul of the federal tax structure.

The Joint Committee may recommend more targeted reductions in federal spending and, as part of that process, changes to entitlement programs, such as Medicare and Medicaid.  These targeted cuts would be in lieu of the across the board cuts.

Like the recent discussions over the debt ceiling, politics will play an important role in the deliberations of the Joint Committee.  Given the upcoming presidential and congressional elections, it is very unlikely that the Joint Committee will recommend any changes to Medicare beneficiary benefits or eligibility (such as raising the age of eligibility for Medicare to 67 or increasing the Part B premium).  Most, if not all, of the cuts will come from providers, suppliers and plans.

The Joint Committee recommendations for Medicare may include:

  • Consolidating  payments direct and indirect medical education cost and reducing federal payments for graduate medical education (GME),
  • Reducing or eliminating Medicare “disproportionate share” adjustments,
  • “Rebasing” and “merging” the Medicare hospital wage index with the wage indices applicable to various providers,
  • Imposing cost sharing for the first 20 days of a stay in a Skilled Nursing Facility (SNF),
  • Reducing or eliminating payment incentives to providers adopting new health information technologies,
  • Requiring a larger co-payment for home health episodes covered by Medicare,
  • Reforming cost-sharing structures for Medicare and Medigap insurance,
  • Reducing Medicare’s payment rates across the board in high-cost areas,
  • Eliminating the Medicare Critical Access Hospital, Medicare-Dependent Hospital, and Sole Community Hospital programs,
  • Requiring manufacturers to pay a minimum rebate on drugs covered under Medicare Part D for low-income beneficiaries,
  • Eliminating “quality” bonus for Medicare Advantage plans,
  • Developing a new payment system (such as bundling payments) for medical devices and supplies,
  • Reducing payments and or benefits for dialysis service, and
  • Reducing or eliminating Medicare payments for drugs outside of Part D

It is important to note that in order to meet their target of $1.2 trillion in budget savings, the Joint Select Committee on Deficit Reduction may not need to propose more than $175 billion in cuts to Medicare over the ten year period - or $12 to $15 billion during the first year.  (This represents slightly more than 2 percent of program expenditures during the first year).  It is also very possible that in order to avoid a protracted and heated debate over cuts to Medicare (e.g., hospitals versus Medicare Advantage plans), the Joint Committee may propose a simple 2 percent across the board reduction.

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