The Congressional "Super Committee" - tasked with finding a politically acceptable way to reduce the federal deficit - threw in the towel on Monday, November 21st. Their failure to develop a compromise package of spending cuts and revenue increases that significantly reduces the deficit means an additional $1.2T in spending reductions will occur over the next 10 years as a result of "sequestration."

The sequestration rules include significant Medicare cuts. Given the reductions in Medicare payments as a result of ACA and now the sequester, providers are rightly asking "are we there yet?" Unfortunately, given the country's fiscal situation and the composition of its projected long-term deficits, the answer is no. It's only a matter of time before Congress is forced to revisit the issue and this time around federally funded healthcare programs are likely to be featured far more prominently. If there's a silver lining in this for providers, it's that they have more time to prepare for cuts by dramatically reducing their cost structures.

The Sequester

The Budget Control Act, which was passed in July and created the "Super Committee" process, reduces the deficit overall by $2.1T. It includes $900B in initial discretionary spending cuts and mandated a minimum of an additional $1.2T in deficit reduction as a result of either the "Super Committee" or sequestration process. The sequester is an automatic, across the board cut to most federal programs. Roughly half the savings will come from the Department of Defense with the remaining coming from all other areas of government. Medicaid, Social Security, and ACA "insurance affordability credits" are exempted and Medicare cuts are capped at two percent in any given year. Exhibit I (click to enlarge) below provides an estimate of how these cuts will impact physicians and hospitals. 

Exhibit I:


Within its legal authority, CMS could soften the blow to certain providers by tinkering with market basket updates, "coding creep" and other technical adjustments. Under this scenario, hospitals and other providers with narrow margins would enjoy some reprieve from the cuts. This would come at the expense of post-acute care providers, who in CMS's estimation have healthier margins.

Additionally, providers with a large Medicare Advantage population will also likely feel "pass-though" cuts from MA plans as they minimize their margin impact by increasing beneficiary cost sharing and putting pressure on provider rates.

Are We There Yet?

Including sequestered amount with the ACA cuts, hospitals are facing approximately $200B payment reductions over the next 10 years. However, given that projected long-term deficits are driven largely by Medicare and Medicaid expenditures (Exhibit II), it's likely we're only half way there.

Exhibit II - CBO Projection of Federal Deficit Under Current Law


On November 16th, the U.S. deficit surpassed $15 trillion. Most economists believe the U.S will require four to five trillion dollars in total deficit reduction to achieve a sustainable debt to GDP ratio. Achieving this overall level of deficit reduction will require at least an additional $2.3 to $3.7 trillion in savings over 10 years (Exhibit III).

Exhibit III: Estimated Additional Deficit Reduction Required to Achieve a Sustainable Debt to GDP Ratio

Committee Exhibit 3

Given the already significant cuts to defense and discretionary spending it will be hard find significant additional savings in these programs.

Using the various proposals submitted during the "Super Committee" process it's likely that a plan that achieves the required level of deficit reduction could entail an additional $400 to $600 billion in Medicare and Medicaid reductions over 10 years. Below (Exhibit IV) is a menu of items that would impact hospitals and have received significant attention in the various deficit reduction proposals.

Exhibit IV: Potential Sources of Additional Hospital Medicare and Medicaid Reimbursement Reductions   

Committee Exhibit 4

In addition to cuts that directly impact hospitals there are a number of proposals that target beneficiaries (i.e. increased cost sharing - $33 to 100B, Medigap reforms - $2 to $40B) that place additional margin pressure on providers.


While there is much discussion, especially amongst supporters of defense spending, of either softening the sequester cuts or passing a deficit reduction package prior to federal fiscal year 2013, it's not likely. The stumbling blocks encountered by the "Super Committee" remain firmly in place.

Most significant is the looming 2012 elections. Both sides would like to use the issues of deficits, taxes and entitlement spending as campaign cudgels which greatly diminishes the likelihood of significant compromise.

Second, in Washington compromise only occurs when there's no other option. According to projections the U.S. will not reach its debt ceiling limit until early 2013, removing any real sense of urgency. This should allow Congress and the President to "kick the can" down the road until after the 2012 elections. However, if the U.S. experiences a significant double-dip recession - which Moody's forecasts a 40% chance of in the next six to 12 months - we could reach the debt ceiling during late 2012.

Use Time Wisely

Current and anticipated reductions in payments, not just from the public sector, will squeeze already narrow margins. Providers need to move from managing operating costs to redesigning the organization's overall cost structure. These efforts should include re-examining the services offered by the organization, re-engineering how remaining services are delivered, and reducing overall administrative costs.

Service Evaluation: Non-core service lines and activities will need to be eliminated as organizations can no longer afford to be "everything to everyone." Services identified as providing low value to the organization with little chance for improvement should be eliminated. And non-strategic assets should be monetized.

Re-engineering Care Delivery: Organizations need to focus on making sure the care they deliver is cost-efficient for the organization and cost-effective for purchasers. Not only will care teams need to re-engineer internal processes to minimize waste and patient hazards, but the organization will need to collaborate with providers across the care continuum to ensure that avoidable admissions and readmissions are minimized, and duplicative testing and unnecessary procedures are eliminated. Achieving this outcome will require a cadre of engaged physician leaders at all levels of the organization to orchestrate process re-engineering. At the same time, providers will also need to work with payers to ensure that they capture some of the value created through more efficient care delivery. HFMA's Value Reports and related tools (/valueproject/) offer providers resources to help them undertake care process redesign.

Reducing Administrative Costs: Administrative services that do not add value to the organization should be pooled and outsourced where opportunities to reduce cost exist. Organizations also should explore population-health-management pilots with their own heavy users of health care to gain experience with the strategy and better manage benefit costs.

These efforts will take time to achieve the gains necessary to ensure an organization's financial sustainability. Providers would be wise to re-double their efforts given the additional reimbursement reductions on the horizon. 

Publication Date: Monday, November 28, 2011