Post-Election Healthcare Forecast
The presidential election is over and Barack Obama has been re-elected. Now what?
November 14, 2012
After months of political rancor and billions of dollars in campaign spending, the election of 2012 ultimately produced an outcome of sameness: Barack Obama is still the President of the United States, the Democrats continue to hold a majority in the Senate and the Republicans maintain control of the House of Representatives. Post-election, what are the major legislative issues pertaining to healthcare, and what is most likely to transpire in Washington in the near term?
The Health Reform Law
During his campaign, Governor Mitt Romney pledged to repeal Obamacare. President Obama's election win was viewed as a victory for health reform, ensuring that the vast majority of the statute will be implemented. Tom Miller, a resident fellow at the conservative American Enterprise Institute, concluded that any repeal effort by Republicans is at least temporarily "blocked" in Congress.1 Similarly, Eric Zimmerman, a partner with McDermott Will and Emery in Washington, concluded, "Any provider standing on the sidelines? They can now take their head out of the sand. It's here to stay and it's time to get on board and take on strategies that can position hospitals for success in this brave new world."2
In general, the states constitute the remaining hurdle for the implementation of the health reform law. By Nov. 16, 2012, states must notify Washington whether they will be setting up health insurance exchanges, in which many households and small businesses will shop for private coverage. The Department of Health and Human Services will establish and operate the exchanges in states that choose to not create exchanges. States also can decide whether they will participate in the expansion of Medicaid. As of this writing, the majority of states are undecided.
The health reform law will cut Medicare reimbursement to hospitals on an across-the-board basis by $260 billion or 9% over the next decade, and it is estimated that these cuts will ramp up from $15-20 billion in 2013 to $30-35 billion in 2022.
Per the Budget Control Act of 2011, a sequestration process to cut federal spending by $1.2 trillion across the board over a 9-year period (2013-2021) will commence on Jan. 2, 2013. After deducting debt service savings of $216 billion, the net programmatic reductions total $984 billion. These will be allocated linearly across the nine years, yielding an annual spending reduction of $109.3 billion, split equally between defense and nondefense functions.3 For 2013, the cut would represent an estimated three percent of the federal budget.
The nondefense cuts will apply to Medicare, though the cut to Medicare is capped at two percent and is limited to cuts to reimbursement of healthcare providers. About 10% of Medicare spending is exempt from the cut. According to the Office of Management and Budget, the total cut to Medicare in 2013 will be $11.085 billion.4 Of that amount, an estimated $4-5 billion will come from hospitals, which translates into an average of $1.1 to $1.5 million per hospital. According to a study by Pittsburgh, Pa.,-based consulting firm Tripp Umbach, the total cut to Medicare reimbursement of providers in 2013 would directly eliminate about 212,000 jobs, of which roughly 93,000 would come from hospitals.5
During the third presidential debate on foreign policy, in response to criticism from Governor Romney that American national security would be at risk if the defense cuts take place in January, President Obama stated, "First of all, the sequester is not something I proposed, it's something that Congress proposed. It will not happen."6 Given the context, it is clear that what President Obama thought "will not happen" is the defense cut portion of the sequester, not necessarily the sequester in its entirety.
Presumably, the Obama administration would envision funding avoidance of the defense cuts by allowing the Bush tax cuts to expire or by some other tax increase. On the day after the election, House Speaker John Boehner said that he would consider higher taxes "under the right conditions" to help reduce the nation's staggering debt and put its finances in order.7 A compromise solution might feature a 1-year postponement of the defense cuts funded by some form of tax reform, perhaps including closure of certain tax loopholes, but realistically, such an approach would not coalesce until the spring of 2013. Prior to the end of December 2012, Congress and the Obama administration will most likely agree to a temporary (i.e., 2-3 month) postponement of the defense cuts.
Furthermore, given the views of President Obama and Vice President Joe Biden that doctors and hospitals are overpaid by Medicare, as expressed during the first presidential debate and the vice presidential debate, it seems likely that the Obama administration will allow the sequester's cut to Medicare and the nondefense cuts in general to take place, unless of course the Republicans agree to higher taxes to prevent the nondefense cuts.
Sustainable Growth Rate
Per the sustainable growth rate (SGR) provision, Medicare's physician fees are slated to decrease 26.5% on Jan. 1, 2013.
According to the Congressional Budget Office (CBO), a 1-year doc fix for 2013 - freezing physician fees for another year - would cost $10 billion, and a "permanent" doc fix - freezing physician fees for 10 years - would cost $245 billion for 2013-2022.8
Given the current fiscal and economic climate, it is unlikely that Washington will be able to agree upon a permanent doc fix. The most likely outcome of the lame duck session - which starts on Nov. 13 - is a 2-month doc fix, which would freeze rates at current (2012) levels for January and February 2013. A 2-month doc fix would buy time for the new Congress and the Obama administration to come up with a doc fix for the remainder of 2013 or longer.
There is legislative precedent for this, from last year. H.R. 3765, the Temporary Payroll Tax Continuation Act of 2011, included a 2-month doc fix, freezing rates at 2011 levels for January and February 2012.
However, any comfort derived from a 2-month doc fix or even a full year doc fix would be somewhat illusory and amount to kicking the can down the road. Such temporary fixes are by definition not permanent solutions, and payments under the physician fee schedule would most likely be cut by 25-30% starting on Jan. 1, 2014, to comply with the SGR.
In addition, the uncertainty regarding how a doc fix would be funded poses a significant risk to hospitals, since in the past, increased spending in one area of Medicare's budget has often been offset by decreased Medicare outlays in other areas. In the case of the SGR, one would posit that increased physician expenses could be covered by decreased reimbursements to hospitals and other providers of medical care. If covered solely by hospitals, the $10 billion needed to pay for a 1-year doc fix would translate into an average of almost $3 million in cuts per hospital.
In the wake of the election, it is clear that the majority of the health reform law will be implemented. Regarding the sequester, although White House senior adviser David Plouffe noted that "no one thinks it should happen,"9 the defense and nondefense portions of it might be treated differently, with the nondefense cuts - including over $11 billion to Medicare in 2013 - most likely to be implemented. As for the SGR, look for a short-term doc fix that buys time for Congress and the Obama administration.
As Otto von Bismarck said, "Politics is the art of the possible." Given the past few years of discord and gridlock in our nation's capital, this forecast - while obviously lacking a Hollywood ending - presents a realistic view of what could be possible. In the coming weeks, our leaders in Washington have the opportunity to take the first steps on what hopefully will be the road to constructive collaboration.
Ken Perez is senior vice president of marketing and director of healthcare policy, MedeAnalytics Inc.
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