August 1, 2011

You already know that last week’s debt ceiling legislation, “The Budget Control Act of 2011” (S. 365), authorized $2.4 trillion in additional government borrowing, did not raise any new revenues and provided for $2.5 trillion in spending cuts over the next ten years.

The best news for anesthesiologists is that the passage of the bill prevented the U.S. Treasury from defaulting on its debts.  Most economists agree that the consequences of a default could have been catastrophic – although it’s hard to see the consequences of the new law, a stock sell-off that as of Thursday had brought S&P 500 losses to 12 percent since the index’s high point on April 29, as much better.

Unfortunately, like all physicians, anesthesiologists have even more to worry about.  Under the legislation, Medicare payments to providers may be reduced in several scenarios.  There are three different mechanisms for achieving the Budget Control Act’s $2.5 trillion deficit reduction:

1. Caps on discretionary spending

1. Almost $1 trillion of deficit reduction will come from the establishment of ten-year caps. In the first two years, there will be separate caps for security and non-security spending. For the purpose of these caps or firewalls, security spending includes defense, state and foreign operations, homeland security, and military construction/veterans affairs.
2. Total discretionary spending in Fiscal Years 2012 and 2013 will be capped at about $7 billion and $3 billion, respectively.  The security savings represent roughly half of the two-year $10 billion in total reductions.

2. Super Committee” to develop legislation for the other $1.5 trillion

1. A joint committee made up of six Senators and six Congressmen, equally divided between Democrats and Republicans, will be appointed and charged with developing legislation to achieve at least $1.5 trillion in future deficit reduction by Thanksgiving.
2. The committee may propose cuts in entitlement programs as well as discretionary spending – and also revenue (i.e., tax) increases.
3. The proposed legislation will be guaranteed an up-or-down vote in Congress, without any amendments, by December 23.

3. Across the board cuts if the Super Committee’s legislation does not produce at least $1.2 trillion in reduced spending between 2013 and 2021

1. If the Super Committee does not come up with a proposal that achieves at least $1.2 trillion, or if Congress fails to enact recommendations that would produce that amount, automatic cuts will be triggered.
2. One half of the cuts will come from defense and one half from other mandatory and discretionary programs.  Social Security, Medicaid, veterans’ benefits, civil and military pay and other benefit programs will be exempt – but not Medicare.
3. Any cut to Medicare would be limited to no more than 2% of the program’s cost.  The savings would come from payments to providers; there would be no cuts in benefits or increases in Medicare premiums.

For physicians, all this means that:

1. The first stage, the caps on discretionary spending, will not affect the amount of funds available for Medicare – but the physician fee schedule conversion factors will drop by nearly 30% effective January 1, 2012, if Congress does not repeal the Sustainable Growth Rate (SGR) formula.
2. The Super Committee may develop legislation that would reduce spending on medical and/or hospital services, or
3. If the Super Committee is not successful and the automatic $1.2 trillion worth of cuts is triggered, there will in all likelihood be a sizable (up to $15 billion annually starting in 2013) series of decreases in Medicare payments to physicians.  Expectations for the success of the Super Committee are low, given the hyper partisanship currently infecting Congress.  According to Kaiser Health News, “Stan Collender, a partner at Qorvis Communications and former congressional budget staffer, said he gives less than a 5 percent chance the committee will come to an agreement that Congress will approve.”

Organized medicine is nevertheless going to lobby the Super Committee – whose members the Senate and House leadership must appoint by August 16th  – to recommend the “doc fix,” i.e.,  to repeal the SGR as part of a comprehensive debt package.  The sticking point will be the cost of repeal, not the principle, with which virtually all players agree.  Another one-year fix would cost $25 billion, and a two-year deferral of the impact of the SGR would run to about $50 billion.  Over the ten years of deficit reduction, repealing the SGR would cost $300 million.  It will be quite a feat to persuade the Super Committee, or Congress, to pay for the doc fix in the context of deficit reduction and a poor economic environment.  But our lobbyists must try; we cannot stay on the sidelines.

Although the picture is grim, there are some hopeful signs.  The negotiations leading to the Budget Control Act made clear that higher premiums for the well-off, means-testing and raising the age for Medicare eligibility are all on the table as ways to reduce spending on Medicare.  The Super Committee will probably consider vouchers or credits that would allow seniors to buy their own insurance in the private market, the radical Medicare reform proposed by Congressman Paul Ryan.   Other ideas that the Super Committee might entertain, noted in the August 3rd issue of American Medical News online, include:

• Restricting first-dollar coverage in Medicare supplemental insurance, or Medigap, plans.
• Extending Medicaid prescription drug rebates to patients eligible for Medicare Part D coverage.
• Reducing excess payments to hospitals for graduate medical education programs.
• Cutting Medicare payments for bad debts, such as for hospitals whose patients have unpaid deductibles and co-pays.
• Accelerating home health savings under the health system reform law.

Changes in spending for initiatives created in the Affordable Care Act may be reduced.  We doubt, though, that the Independent Payment Advisory Board – the expert panel charged with recommending ways to reduce spending if the per capita growth in Medicare expenditures exceeds defined target growth rates --will be defunded.

Then again, Congress always has the option of undoing the Budget Control Act altogether, or just partially, through supervening legislation.  Alternatively, they may continue to defer reductions in Medicare spending.  An opinion piece in the August 4 Wall Street Journal asked whether the Medicare cuts were real, and answered the question cynically:

Well, not really. ... All politicians—but these days especially Democrats—like to pretend they'll pay providers somewhat less in the future, despite knowing that is unlikely to happen in practice. Medicare's prospective payments are low enough that further reductions may jeopardize access to care and in many cases threaten the viability of hospitals and physician practices. So the main effect of these "cuts" is merely to move future spending off the federal balance sheet.

Also on the brighter side, physicians as a group will experience an income surge in 2014, when nearly everyone will have health insurance under the Affordable Care Act.   According to a study of healthcare spending by CMS economists published in Health Affairs online on July 28th, public and private spending on physician and clinical services will increase by 8.9% in 2014, compared with a growth rate of 5.6% in 2013, and a historic low of 3.9% in 2010 when so many individuals had lost their jobs and their employer-sponsored healthcare insurance.

Moreover, employers are unlikely to drop healthcare coverage in 2014 when the Affordable Care Act’s state insurance exchanges are in operation, as many had warned that they would do.  In a new survey of 894 employers by Mercer, only 2% reported that they were very likely to stop offering coverage and shift their employees to the insurance exchanges, which will presumably lower provider payments.

These developments all underline the importance of adapting to a healthcare system where providing anesthesia services is only part of what is required of anesthesiologists.  The clinical integration that fosters overall high quality patient care is increasingly important.  Indeed, on August 4th Kaiser Health News quoted from Politico Pro thus:

Republican staff on the [House] Energy and Commerce Committee are considering a proposal to address the problem of looming cuts to Medicare physician payments by implementing a pay-for-performance system, according to lobbying sources. The new system, the sources said, would cost less than a more straightforward ‘fix’ of the Sustainable Growth Rate formula, which will slash Medicare payments to doctors by nearly 30 percent at the end of the year if congress doesn't intervene.(Feder, 8/3)

We continue to believe that the anesthesia groups that can add value by taking on expanded responsibilities in perioperative care and OR management will do well in the new environment.  We will continue providing our readers with information on how anesthesiologists can be leaders in clinical and financial integration as we move forward.

Sincerely,

Tony Mira
President and CEO