Sequester the Sequestration Cuts, Please! Why the Health Care Industry Must Brace Itself for More Change...

by Nossaman LLP

As the federal government scrambles to cut burgeoning health care costs, yet increase health care coverage to the uninsured or underinsured, the paradox of expansion, on the one hand, yet constriction, on the other, has formed a tenuous union. This Catch-22 paradigm of expansion yet constriction is evident by the passage of the Affordable Care Act (ACA), i.e., expansion, versus the across-the-board “sequestration” cuts that became operational on March 1, 2013, i.e., constriction. 

While most industry professionals know a little (or a lot) about the ACA, fewer may understand “sequestration”, and its immediate impact on the industry. So what is sequestration and why should you care?

Sequestration Cuts
In an attempt to regain a modicum of control and raise the debt ceiling, in August 2011, Congress passed the Budget Control Act (BCA) in which it directed a bi-partisan Joint Committee on Deficit Reduction to reduce the deficit by $1.2 trillion over a ten year period. As leverage, the BCA threatened that automatic, across-the-board, “sequestration” cuts would be triggered if a savings plan was not agreed upon by the Committee and enacted by Congress.  It is perhaps not surprising that the Committee could not agree on a savings plan, and thus, the omnibus of automatic sequestration cuts – which most parties agree were never actually intended to be implemented - were triggered.  As a result, this fiscal year alone, $85 billion in across-the-board cuts to most federal agencies and programs must take place. 

So what can the beleaguered health care industry expect by way of these new cuts? 

The Impact of Sequestration
The adverse impact of sequestration is manifold.

First, the immediate impact on physicians and hospitals will most prominently be felt through automatic Medicare cuts. Specifically, sequestration slashes funding for Medicare and community health centers by 2% through a myriad of reductions to physicians, hospitals, and other health care providers, as well as insurers participating in Medicare Advantage.  Medicare payments since 2001 have only increased by four percent, while the cost of care has increased by more than 20 percent.  Thus, a 2% reimbursement cut will widen the already substantial gap between payment for services and costs of care.

Second, in typical cart-before-the-horse fashion – though the BCA mandates that $85 billion in cuts must be implemented in 2013 – it is silent as to how such automatic cuts are to be implemented, and whether the cuts must be evenly distributed!  This lack of an implementation process may present quite the conundrum because it is exceedingly unlikely that the Medicare agency will be capable of cutting every existing Medicare account by 2%.  For example, it will be virtually impossible to cut Medicare’s drug benefit until drug makers renegotiate their contracts with the program later in the year.  Thus, inevitably, some sectors will absorb a bigger hit than others (at least in the short-term), which has hospitals, who often operate under shorter Medicare contracts than other parts of the Medicare program, concerned.

Third, the sequestration cuts target nearly all health related federal agencies, such as the Food and Drug Administration (FDA), the Centers for Disease Control and Prevention (CDC), and the National Institutes for Health (NIH).  Such cuts, which will cut funding to programs aimed at disease prevention, early detection, and, in some cases, treatment, may very well increase the overall burden felt by doctors and hospitals who will have to absorb the physical consequences of the cuts.  For example, in California alone, $1.1 million in federal funding for vaccines is being cut, which will result in approximately 15,810 fewer children receiving immunizations.  Decreased immunizations could result in greater numbers of sick children, which will increase the number of children requiring treatment from doctors and hospitals.  For additional stats regarding the impact of sequestration on California, see this article.

Thankfully, not all news is bad news.  Programs unaffected by the nine years of sequester include: Medicaid and funding for its expansion, most expenses associated with the ACA, and the Children’s Health Insurance Plan.

Moving Forward
As more of the sequester’s cuts take effect, hospitals and providers must turn their attention to absorbing the cuts in ways that do not affect quality of care.  Given the ever increasing changes facing the healthcare industry, it is increasingly important for health care industry to stay “ahead of the game”, and take proactive, rather than reactive steps, to gird itself for the changes that are coming in the near future.  The landscape of healthcare law  – one that must balance the dual, often paradoxical, paradigm of expansion yet constriction – will cause the unwary hospital CEO to stumble, or at least sit down and throw up his or her hands in protest or frustration.  But now, more than ever is not the time to be caught unaware; rather, the industry must be vigilant in planning and preparing for the changes that are coming.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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