August 23, 2011
The Medicare “Perfect Storm”
Medicare is about to sail into a “perfect storm,” the result of the collision in early 2012 of three major legislative initiatives: the Balanced Budget Act of 1997; the Accountable Care Act of 2010; and The Budget Control Act of 2011. The result could create a level of political turmoil unprecedented in the program’s 46 year history, and a significant change in how much providers are paid.
Balanced Budget Act of 1997
The Balanced Budget Act of 1997 established a sustainable growth rate formula (SGR) which was intended to restrain the growth of Medicare spending on physician services to what the nation could afford. It linked the annual increase to growth in per capita GDP, after adjustment for growth in the Medicare population and increases in physician office expenses.
In practice, it requires Medicare to annually establish a global budget for spending on physician services for the following year. If that budget is exceeded by actual spending, the global payment (Medicare conversion factor) in subsequent years is to be reduced so that over time, cumulative actual spending will not exceed cumulative targeted spending, both as of April 1, 1996.
Every year since 2003 actual spending has exceeded the target. Partially as a result of effective physician lobbying, Congress has temporarily suspended application of its own SGR formula with annual legislative “doc fixes,” with most recent doc fix expiring on December 31st of this year. Because the annual fee update must be adjusted not only for the prior year’s difference between targeted and actual spending but for the cumulative difference since 1996, the update for calendar 2012 is scheduled to result in an across-the-board reduction in Medicare physician fees of 29.5%.
The cost to the federal deficit of once again kicking the can down the road with yet another one-year doc fix would be approximately $22 billion; the cost of a permanent fix by scrapping the formula altogether would be more than $300 billion. (The Congressional Budget Office always projects the 10-year impact of any legislative change or initiative).
The Accountable Care Act of 2010
The Patient Protection and Accountable Care Act of 2010 (ACA) partially paid for a projected $900 billion increase in Federal expenditures on health insurance between 2011-2019 with $575 billion in projected Medicare savings over the same period. These are over and above the cuts already called for by the SGR, and represent a hodge-podge of spending categories. Suffice to say, however, that most of the cuts fall on physicians.
Collectively, the SGR and the ACA call for almost $900 billion in cuts to Medicare provider payments over the next 10 years. These are baked into current law, and form the baseline for any future Federal expenditure reductions (an important point as will be shown below). Common sense suggests that actually implementing these reductions would have a catastrophic effect on Medicare. In fact, the Chief Actuary of CMS has projected that if implemented, Medicare reimbursement would fall below Medicaid, 20% of U.S. hospitals would become unprofitable, and most physicians would drop out of Medicare.
A rational Congress (an oxymoron?) recognizes this, and could be expected to kick the can down the road yet again with more serial doc fixes and delays in implementing the cost reductions called for in the ACA. And when the can finally reached the end of the road, Congress could be expected to haul out the road grading equipment and extend the road. But The Budget Control Act of 2012 has changed all that; it has become the catalyst for the perfect storm.
The Budget Control Act of 2012
After weeks of intense negotiations and default looming, the Budget Control Act (BCA) raised the Federal debt ceiling and put in place a process for reducing the deficit. It immediately established caps on discretionary spending that will generate 10-year savings of approximately $900 billion and increased the Federal debt limit by the same amount. It also empowered a bipartisan, bicarmel Committee on Deficit Reduction to identify up to $1.5 trillion of additional savings by Thanksgiving. If the Committee fails to report, or the Congress fails to enact, legislation that reduces the deficit by at least $1.2 trillion, automatic spending cuts (sequestrations) equal to that amount (or the difference between $1.2 trillion and a lower Committee recommendation) will be imposed automatically.
Sequestration operates as a proportional across-the board reduction in spending on non-exempt programs. Though Medicare is an exempt program, payments to doctors and other health providers are not exempt. If the Committee fails to reach agreement, Medicare will be automatically cut 2% from the current law baseline on January 1, 2013, a year after the pending 29.5% reduction in the Medicare update called for by the SGR occurs.
The problem arises from the fact that all of these BCA targeted spending reductions are calculated from current law, not current policy. In other words, a one year suspension of the SGR ($22 billion) or elimination of the formula altogether ($300 billion) or suspension of the ACA Medicare cuts ($575 billion) would all have to be added back to the Federal deficit, serving as a highly visible offset to the mandated BCA cuts.
The Perfect Storm
The perfect storm arises from the fact that those members of Congress who voted for the BCA have staked considerable political capital on achieving a minimum of $1.2 trillion in 10-year savings. To give back over 50% of it by not allowing reductions in physician payments provided for under current law to take effect is almost inconceivable. No one can predict what will happen when the necessity of maintaining Medicare reimbursement at a reasonable level collides with the political reality that maintaining it runs counter to a highly visible deficit reduction effort. One thing is certain, however: physicians are in for a very bumpy ride.
John McCracken, PhD