The Super Committee's Failure - Impacts to Health Care

November 28, 2011

The failure of the Joint Select Committee on Debt Reduction - or Super Committee for short - to agree on a spending reduction strategy was of little surprise to even casual observers of the panel's work.

Created under the Budget Control Act (BCA) of 2011, the six Republicans and six Democrats were charged with developing a strategy to reduce spending by $1.2 trillion over the next decade. But with partisan lines sharply drawn, the super committee barely got out of the starting gate. With few exceptions members met only with those of their own party, and recommendations for action seemed more for political leverage than real policy making.

The ideas that emerged mirrored the debate of the last 12 or more months. Democrats said that they were willing to cut spending for domestic programs if taxes were increased, especially on the wealthiest Americans. Republicans countered that spending on entitlement programs needed to be reined in, but stubbornly resisted increasing revenues.

With no deal struck, the "sequester" provision of the BCA kicks in, whereby Medicare reimbursements will be cut two percent from 2013 through 2021. Defense spending will see substantial reductions, with smaller cuts to other programs. Reductions in Medicaid, as well as food stamps and veterans' benefits, were specifically excluded from the sequester provision.

Health care interests were split on their desire for the committee to succeed. Physicians had hoped that the sustainable growth rate formula (SGR) by which Medicare and Tricare reimbursements are calculated would be addressed (the so-called "doc fix"), thereby avoiding a potential 27 percent cut in reimbursements come January 1.

But others were rooting against the super committee delivering a compromise - they feared that Medicaid was a prime candidate for cuts. And they were correct - substantial cuts to the program were considered by the committee. It remains to be seen if theirs was the correct call.

Differences in Philosophy

Reports emerging from the committee negotiations reveal that Democratic committee members offered large cuts in Medicare and Medicaid, on the order of $500 billion over the next decade. This was in addition to the $1.2 trillion in cuts the committee was required to identify. As a quid pro quo, the Democrats also put $500 billion in new revenues on the table, predominately by rolling back some of the Bush tax cuts.

This was not the first time that Democrats had offered up big cuts to the two programs. Vice-President Joe Biden's "secret" deficit reduction talks and President Obama's plan last summer both proposed cuts that were just as large, if not more so. The refusal of Republicans to accept cuts at that time should have been a clue that they would refuse them later.

Committee Republicans countered the Democrats, offering $760 billion in cuts to Medicare and Medicaid and $300 billion in tax increases. But unlike the Democrats' proposal, the new revenue would come mostly from elimination of tax breaks identified with the middle class such as the mortgage interest deduction. At the same time, they called for a reduction in the top personal and corporate income tax rates from the current 35 percent to between 25 and 28 percent.

With the two parties so far apart both fiscally and philosophically, the committee had little chance of success. As the deadline for action passed, there was no hesitation in casting blame for the stalemate. Republicans blamed Democrats for not being serious about cutting the deficit, while Democrats accused their counterparts of wanting to preserve the Bush tax cuts above all else.

Aftermath

With no recommendation from the committee, President Obama quickly promised to veto any legislation that sets aside the BCA and its sequester provisions. And for good reason. Before the Thanksgiving turkey was even cold there was talk that the defense cuts under sequestration were too large and may have to be scaled back, offset by larger cuts to domestic programs.

That talk will only get louder in the months ahead. Congress has just over a year to take action before the sequestration cuts take effect. And despite the president's veto threat, those wanting to cut Medicare and Medicaid will likely have some leverage. In the next month or so there will be efforts to stimulate job creation, extend jobless benefits and address the SGR and deficit hawks will want revenue-neutral cuts to domestic programs.

What does that mean for Medicare and Medicaid? Even with substantial increases in revenue, either through economic growth or higher tax rates, they will have to be cut if the deficit is to be brought under control. The only question is how large the cuts will be, and how they will be applied.

Impacts to Health Care Delivery

Providers, especially hospitals, argue that are already facing large cuts under the Affordable Care Act - $22 and $14 billion respectively to Medicare DSH and Medicaid DSH. Additional cuts would only push more of the cost onto state and local governments and providers, as well as low-income patients in the form of higher premiums and co-pays.

The first test of whether Congress can set aside partisan differences and produce a policy fix is the SGR. For years Congress has kicked the can down the road, passing temporary fixes - two so far this year. But having made at least a tacit commitment to budget discipline, it will be difficult to see how the SGR can be revised without cutting spending elsewhere. In the absence of action, potentially hundreds of thousands of Medicare beneficiaries and military dependents could lose their access to physician care.

Hospitals see potential danger in cuts to both Medicare and Medicaid. Under sequestration, a 2 percent cut added to another 1.5 percent in market basket and productivity reductions will result in a total 3.5 percent reduction in payments in 2013 - if additional cuts are not adopted in the interim. (The 2 percent cut would also affect physician payments.) Providers are already seeing reduced payments from cuts in state Medicaid programs. Reductions in federal appropriations to Medicaid would give added impetus for further cuts in state programs.

Another possibility would be to alter the sequestration provisions by reducing the cuts to Medicare and replacing them with cuts to Medicaid. Despite President Obama's veto promise, this is a very real possibility. Why? Because every candidate for office knows that a greater percentage of older Americans (Medicare) vote, and low-income Americans (Medicaid and CHIP) don't. Not to mention that the majority of Medicaid and CHIP enrollees are children and can't vote at all.

But even if the sequestration provisions survive to 2013, Medicaid programs in those states with substantial military installations or contractors - Texas, Virginia and Maryland, for example - could be impacted by reduced revenues to state coffers. Cuts in military spending would ripple through the economies of those states, reducing jobs, wages and tax revenues.

What does this mean for providers, particularly hospitals? The days of generous funding from Washington are over, at least for the next decade - or until deficit spending is brought under control. Hospitals will have to be leaner and more efficient, developing business models structured toward delivering quality care at a lower cost. Specialty hospitals or those that have focused on high-cost procedures are likely a thing of the past unless they can find ways to be cost competitive. Hospitals, if they haven't already done so, will need to morph into health systems that provide coordinated care.

Congress was given a job to do, and they punted. Hospitals don't have that option.