As any parent knows, children often don’t want to take their medicine, especially if it tastes bad. For the federal government, the Budget Control Act of 2011 (BCA) was the medicine—with certain bad-tasting elements—concocted to get the nation through the debt crisis of the summer of 2011.


The intent of the BCA was to rein in long-term federal spending and raise the debt ceiling. To those ends, it enacted $917 billion in cuts to discretionary spending (excluding Medicare) over 10 years and raised the debt ceiling by $900 billion. In addition, the BCA created a 12-member joint committee of Congress (also known as the “Super Committee”) to produce proposed legislation that would reduce the deficit by at least $1.5 trillion over 10 years.

The act mandated a sequestration process (or sequester) that would be triggered if the joint committee was unable to agree on a proposal for at least $1.2 trillion in spending cuts. To no one’s great surprise, the joint committee failed to reach an agreement, and the sequestration process was triggered. Under the provisions of the sequester, the president can request a debt limit increase of up to $1.2 trillion, and across-the-board cuts equal to the debt limit increase would apply to both mandatory and discretionary programs, with total reductions split equally between defense and nondefense functions. The cuts would be carried out from FY13 through FY21, a period of nine years. Medicare cuts would be capped at 2 percent and limited to cuts to provider payments.

Exempt from the cuts were Medicaid, welfare programs such as food stamps, and other low-income subsidies, as well as Social Security, veterans’ benefits, civilian and military retirement, and net interest payments.

As shown in the exhibit below, splitting the annual reduction of the sequester evenly between defense and nondefense functions would result in a $54.7 billion reduction for each function. 

Exhibit 1

Healthcare Reform_Exhibit 1

The Impact of the Original Sequester on Medicare 

According to a September 2012 report from the Office of Management and Budget (OMB), the sequester would pare Medicare by $11.8 billion in FY13, with the cuts distributed among Part A ($5.8 billion), Part B ($5.2 billion), and Part D ($0.6 billion). Other cuts of $0.2 billion would affect affordable insurance exchange grants, program management, state grants and demonstrations, and fraud and abuse control, among other programs. 

In early January, Congress averted the so-called fiscal cliff by passing the American Taxpayer Relief Act of 2012 (Public Law 112-240), which postponed the implementation of the sequester until March 1, 2013, reducing the total cut for FY13 by $24 billion, or 22 percent, to $85.3 billion.  

The Revised Sequester: Impact on Health Care 

President Obama and congressional leaders were unable to reach an agreement to avert the automatic spending cuts of the revised sequester, which took effect on March 1. 

According to the Congressional Budget Office (CBO), the total cut of $85.3 billion for FY13 includes $42.7 billion in cuts to defense, $9.9 billion in cuts to Medicare, and $32.8 billion in cuts to other nondefense programs, as shown in the exhibit above (CBO, “The Budget and Economic Outlook: Fiscal Years 2013 to 2023,” February 2013, p. 14). Medicare accounts for 12 percent of the total cut and 23 percent of the nondefense portion. 

Exhibit 2

Healthcare Reform_Exhibit 2

How might the $9.9 billion in cuts to Medicare be allocated? In the absence of further guidance from the OMB, a reasonable approach would be to apply the same proportions as did the OMB in its September 2012 report. This step would yield the allocation reflected in the chart at the left below, with Medicare Parts A and B sustaining the lion’s share of the cuts. 

Medicare Part A could be cut by $4.9 billion, which could include an estimated $3.1 billion cut to hospital inpatient payments. That would translate into an estimated $0.9 million reduction in Medicare payment for the average hospital, which could in turn lead to layoffs of approximately 20 employees per hospital, in the absence of other cost-saving measures and based on the general relationship between hospital revenue reduction and direct employment cuts established by Pittsburgh-based consulting firm Tripp Umbach in a report published in September 2012. 

Exhibit 3

Healthcare Reform_Exhibit3

Medicare Part B could be cut by $4.4 billion, which could include an estimated $1.7 billion cut to physician payments and a $0.7 billion cut to hospital outpatient payments.

According to the rule for sequestration, reductions in Medicare will begin in April, the month after the sequestration order is issued, thereby delaying some of the effect on outlays until the ensuing fiscal year. Thus, for the federal government’s FY13, which ends Sept. 30, the actual cuts could be $1.55 billion to hospital inpatient payments, $0.85 billion to physician payments, and $0.35 billion to hospital outpatient payments.

Long-Term Implications for Hospitals 

Unless it is repealed by Congress, the BCA—with its annual $109.3 billion sequester cuts—will require the federal government to take some rather bad-tasting medicine for each of the next eight years. For healthcare providers, there will be the specter of 2 percent funding reductions each year, as reimbursement rates are held captive to the broader philosophical and fiscal debate between the two political parties on the best way to reduce the deficit and spur economic growth. 

Ken Perez is senior vice president and director of healthcare policy, MedeAnalytics, Inc., Emeryville, Calif., and a member of HFMA’s Northern California Chapter (


Publication Date: Monday, April 01, 2013

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