Medicare pay: Budget sequester adds to annual payment rate woes

Double-digit SGR physician pay reductions plus a 2% cut under a budget reduction law could help make for an extraordinarily daunting lame-duck congressional session.

By Charles Fiegl — Posted July 30, 2012

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Much like the Medicare sustainable growth rate formula, the budget sequester that also threatens the program in 2013 is cryptically named and arbitrary in nature.

The sequester, a governmentwide spending reduction plan for the next decade, is not based on health policy, analysts say. Lower funding won’t offer health professionals incentives to improve patient care, and it won’t discourage fraud. The metaphor that critics of the plan often cite is the budgeting mechanism functioning not as a surgical scalpel, but as a meat ax or a buzz saw — eviscerating federal agency budgets over a period of nine years. Though Medicaid and Social Security are exempt from the reckoning, all other areas of the government will share in the budgetary pain.

Benefits received by enrollees in Medicare are safe, but the physicians and other health professionals who provide their health care are not. In 2013, sequestration begins to hit those contracted to provide Medicare services — including doctors, hospitals, nurses, therapists, medical suppliers and drug providers. Their payments will be reduced by 2%, so physicians and others will receive 98 cents for every dollar’s worth of medical care they provide until 2021 — to the tune of $11 billion in 2013 and $123 billion through 2021.

For physicians, the new budget cuts could lead to serious access-to-care issues for patients, said American Medical Association President Jeremy A. Lazarus, MD. He said reducing Medicare fees also could impede efforts to improve quality of care for seniors.

“This could not come at a worse time,” Dr. Lazarus said of the budget sequester. “Medicare physician payments have been nearly frozen for a decade, the cost of caring for patients has increased by more than 20%, and a cut of about 30% from the failed Medicare physician payment formula is scheduled for Jan. 1. Congress must address the difficult budget situation, but doing so through cuts to physicians is not the answer.”

To lawmakers, the across-the-board reductions were not intended to be the final answer. The Budget Control Act was signed into law in August 2011. Lawmakers had reached a compromise to raise the federal debt ceiling, which allows the government to borrow more money, after agreeing to reduce budget deficits by an equal amount. About $1 trillion was cut initially from various government programs and an additional $1.2 trillion was to be determined through another act of Congress — or, if lawmakers couldn’t come to an agreement, through the sequestration of federal funds. Talks by a bipartisan, bicameral group of negotiators known at the time as the “super committee” broke down later in the year, and the Budget Control Act now has a hold on future spending.

Virtually no one on Capitol Hill likes the sequester. In particular, most Republicans are against cuts to defense spending, and Democrats oppose cuts to key federal agencies, including those overseeing health programs. Both sides have discussed saving selected programs from the sequester, but elected leaders have yet to reach any agreement. Due to the upcoming presidential election, observers throughout the political spectrum agree that serious debate on the issue will not begin until after the beginning of November.

A steeper-than-usual fiscal cliff

Cuts scheduled under the budget sequester will be one of several heavy-duty fiscal issues for Congress to address during the lame-duck congressional session expected to be held following the elections.

The sustainable growth rate formula is scheduled to reduce Medicare physician pay rates by a double-digit amount — 27% according to the most up-to-date projection from the Centers for Medicare & Medicaid Services. Lower tax rates enacted during George W. Bush’s presidency, which were extended once by President Obama, and several other temporary tax relief measures expire on Dec. 31. U.S. Treasury officials also expect the federal government again will bump up against the $16.4 trillion debt ceiling sometime between Election Day and early 2013. The to-do list for lawmakers is massive.

“Everything is connected in my view,” said Steve Bell, senior director of economic policy at the Bipartisan Policy Center based in Washington. “But the sequester more than anything, including the Bush tax cuts, has most people deeply concerned.”

For the Defense Dept., for instance, the sequester will take a 15% chunk out of its budget, according to a June report by the center. The defense and nondefense cuts together could push the nation back into an economic recession due to the “arbitrary and abrupt nature” of the reductions, he said. Gross domestic product would be reduced by a half-percentage point, and more than 1 million jobs would be lost over the next two years, according to estimates.

“The job destruction will be the most prominent issue” when Congress comes back after the elections, Bell said.

No one knows for sure how lawmakers might address sequestration along with the other critical issues, if at all. Lawmakers have the option of nullifying the sequester’s effect in 2013 at the same time they tackle the annual SGR cut, said Paul Van de Water, PhD, a senior fellow at the Center on Budget and Policy Priorities. By freezing 2012 Medicare pay rates, for instance, Congress would put off both the SGR cuts and the sequester — at least for physicians— in 2013.

Congress also could address all of its 2013 fiscal problems in one of three ways, Bell said. Lawmakers could agree to a bill delaying all of the reductions for one year; allow all provisions to go into effect and leave it to the next elected Congress to address tax, sequester and Medicare payment provisions retroactively; or work just to minimize the size of the fiscal cliff during the lame-duck session.

“The full punt is attractive to a fair amount of people,” said Bell, a former Republican Senate staffer. “It’s least likely to damage the economy.”

The sequester is a huge part of the fiscal cliff, said Jason Peuquet, research director for the Committee for a Responsible Federal Budget. Tax provisions have a bigger overall fiscal impact, but the sequester represents roughly $1 trillion in reduced government spending that will be felt by everyone. It is designed to bring the parties together to strike a compromise that avoids harmful short-term contraction but produces gradual debt reductions over the long term.

“The sequester in many senses is equally important,” Peuquet said. “It forces lawmakers to come to the table and negotiate.”

How the Medicare squeeze would be felt

The magnitude of the sustainable growth rate formula’s impact on Medicare physician pay is much greater than the sequester. But Congress repeatedly has prevented the SGR from lowering pay dramatically, and lawmakers pledge to do so again this year.

The Congressional Budget Office states the sequester would be applied to physician payments starting on Feb. 1, 2013. Pay rates for Medicare services would be lowered by 2%, so a doctor billing an office visit that pays $100 would be paid $98.

“Despite marginal reductions, a lot of physicians would find it difficult to turn away patients, because they are giving up a revenue stream that would have an adverse effect on bottom lines,” Van de Water said.

However, updates to Medicare payment rates have not kept up with the costs of caring for patients and running a practice over the past decade, and the 2% cut would be seen by doctors as widening that gap. Sequestration in Medicare would “compromise access to care for patients and hamper physicians’ ability to improve the coordination and delivery of health care,” Dr. Lazarus said.

Reduced Medicare spending also would constrain the amount of money coming in to fund the entitlement program, said Shai Akabas, a senior policy analyst at the Bipartisan Policy Center. Because the program would cost less, patients would pay reduced premiums. As a result, the net deficit reduction promised by the sequester would be $31 billion less than the amount of the spending cuts themselves, according to the center.

If Congress decides to override the sequester before 2013, it could indicate how lawmakers would address the annual reductions to Medicare mandated by the budget mechanism, said Joseph Antos, PhD, the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute.

But not everyone might like the way lawmakers revise the sequester. Capping Medicare cuts at 2% is a relatively good outcome for physicians and hospitals when compared with possible alternatives, said Gail Wilensky, PhD, an economist and senior analyst at the international health organization Project HOPE. Wilensky was Medicare’s chief during the George H.W. Bush administration. A negotiated deficit reduction plan probably would reduce payments to Medicare health professionals with the exception of physicians, Wilensky said.

“The cuts for health care and Medicare are limited,” she said. “This probably is the best outcome health care providers can hope for.”

In May, the House debated delaying the cuts under sequestration. On a largely party-line vote, the House narrowly passed legislation protecting the Defense Dept. from massive cuts to its budget in 2013, but leaving the Medicare reduction in place. House Democrats had offered an alternative plan to spare the Medicare program, but GOP members blocked that bill.

The Senate has yet to take up any legislation addressing the sequester.

Deeper cuts for other health programs

Medicare isn’t the only program under the Dept. of Health and Human Services that would be hit by sequestration. At least in terms of percentages if not total dollars, Medicare would have an easier time.

Unlike those for Medicare, scheduled cuts to discretionary health programs are not capped at 2%. The Congressional Budget Office estimates most HHS accounts would be reduced by 7.8%.

“What is at stake is nothing less than a cure for cancer or Alzheimer’s or other diseases that will save our nation trillions in the coming decades,” Rep. Edward Markey (D, Mass.) said in a statement. “We shouldn’t mortgage our future by cutting crucial research and development programs that are creating and supporting jobs and businesses today.”

HHS officials wrote a June 29 letter to Markey detailing the sequester’s impact on health programs. About 2,300 National Institutes of Health research grants and 300 grants from the National Cancer Institute might be eliminated. Head Start and AIDS drug assistance programs would receive less financial support. The department’s program integrity efforts also could be hamstrung.

“Balanced deficit reduction, rather than sequestration, is the way to put the nation on the path to fiscal stability and protect critical national investments” within HHS, said Ellen Murray, the department’s assistant secretary for financial resources.

Regardless of the election’s outcome, President Obama will be in office when the White House Office of Management and Budget details the full impact of the discretionary cuts on Jan. 2, 2013. The budget control law defines limits on cuts to mandatory programs, but there’s nothing in the statute detailing how other reductions will be distributed. The Obama administration “might go after big institutions under the theory they can absorb more cuts,” Antos said.

However, if Republican presidential candidate Mitt Romney wins the White House, the current administration might apply the reductions more evenly and leave it to the next administration to reapportion the cuts retroactively, Antos said.

Key stakeholders will watch for how Congress addresses the cuts initially, and already massive lobbying efforts are gearing up to push for action. Given the current situation, the reductions for 2013 appear largely unavoidable, Antos said, saddling appropriators in future years with the job of tackling the automatic cuts remaining in place.

“The reason there is a fail-safe was if the super committee couldn’t come up with a recommendation,” Antos said. “The fact that there is a sequester proves that Congress can’t make hard decisions when it comes to spending.”

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A costly crisis to defuse

Enacting legislation simply to freeze 2012 Medicare rates through 2021 would be challenging for lawmakers. Preventing future sustainable growth rate cuts would cost roughly $300 billion. Congress also would need to find revenues or cuts elsewhere in the budget to replace $123 billion worth of sequestration cuts, which otherwise would lower rates by 2% for physicians, hospitals and others.

Year Sequester freeze SGR freeze
2013 $11 billion $19.1 billion
2014 $11 billion $22.9 billion
2015 $12 billion $26.1 billion
2016 $13 billion $28.8 billion
2017 $13 billion $31.3 billion
2018 $14 billion $33.9 billion
2019 $15 billion $37.4 billion
2020 $16 billion $41.1 billion
2021 $17 billion $45.1 billion

Note: Annual sequester figures are rounded.

Sources: “Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act,” Congressional Budget Office, Sept. 12, 2011; “Medicare’s Payments to Physicians: The Budgetary Impact of Alternative Policies,” CBO, June 16, 2011

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