Implications of the debt-ceiling deal for our industry

Chas Roades, Chief Research Officer

When President Obama signed the Budget Control Act of 2011 (BCA) into law on Tuesday he made one thing clear: the federal government is not done putting the health care industry on a budget.

While it is too early to quantify the debt deal’s direct impact on provider payments, as well as future Medicare and Medicaid program structures, the likelihood of additional cuts above and beyond those negotiated as part of the Affordable Care Act increases the urgency for providers to restructure costs and operations to thrive in an environment of lower average price per case.

A modest compromise…with deeper cuts in the crosshairs

The ultimate framework for this round of federal belt tightening presents a mixed bag for health care providers. The BCA ties an increase in the federal debt ceiling to a two stage deficit reduction process. Stage one, which is effective immediately, establishes 10-year discretionary spending limits for both security and non-security programs; these caps are projected to yield $917 billion in deficit reduction, with both entitlement program funds and provider reimbursements held harmless.

In the second stage Congress must appoint a bipartisan “super-committee” of 12 members to identify another $1.5 trillion in cuts by the end of 2011. If the Joint Select Committee on Deficit Reduction cannot come to agreement or Congress fails to approve its recommendations, an automatic “trigger” is deliver $1.2 trillion in across-the-board spending cuts, distributed evenly between security and non-security programs. And while the Medicaid program and Medicare beneficiaries are protected from these automatic cuts, Medicare providers and contractors—physicians, acute care hospitals, outpatient providers, skilled nursing facilities and Medicare Advantage plans—will share the burden of cuts totaling up to 2% of the program’s total cost.

Let the jockeying resume

With appropriators and the Joint Committee still firmly in control of how cuts will be spread across the federal budget, the next three months will see furious jockeying on Capitol Hill among industry stakeholders intent on protecting their interests. This in and of itself is a positive outcome—providers must take advantage of this short window to educate legislators on the deep impact specific cuts could portend for patients and communities.

As the Joint Committee debates the path to $1.5 trillion, what sorts of near-term health spending cuts should we as providers weigh in on? Given the relatively short amount of time for the panel to consider recommendations policy makers are likely to choose from a menu of options already placed on the table by previous deficit reduction panels (Bowles-Simpson commission, the Rivlin-Domenici task force, and the “Gang of Six,” among others):

  • Increase IPAB’s authority. Common to several committees’ recommendations, this proposal would enable the Independent Payment Advisory Board to make recommendations for all providers (no exceptions) and give those recommendations force of law, barring congressional action.
  • Reform physician payment SGR. A permanent fix to the sustainable growth rate would likely entail either freezes in payment updates, or spending increases tied to health savings elsewhere.
  • Manage costs of dual eligibles. Several savings proposals recommend placing dual-eligible beneficiaries in Medicaid managed care, with funding potentially provided with block grants to states.
  • Increase Medicare cost sharing. Such proposals increase deductibles, coinsurance, and out-of-pocket maximums, placing a greater onus on providers to increase patient collections.

Other proposals, including items such as increases in the Medicare eligibility age, whose effect would not yield savings in the 10-year budget window are less likely to draw votes in this stage of negotiations.

Given the difficulty Congress faced in passing this modest deal, providers should prepare themselves for the automatic cuts that materialize if the commission fails to offer recommendations that Congress will authorize. While it’s unclear how Medicare cuts would be distributed, it’s likely that hospitals and health systems will bear the lion’s share of the burden. And in every scenario, providers can expect reimbursement growth to slow down over the near term.

Restructuring to prosper on lower pricing

The bipartisan debt deal only accelerates what member executives have come to expect: a “slow burn” toward deteriorating operating margins as more and more patients shifted to the Medicare and Medicaid rolls. This legislation exacerbates one of the four major forces impacting hospital and health system margins over the next decade: (1) decelerating price growth, (2) continuing cost pressure, (3) shifting payer mix, and (4) deteriorating case mix.

Across the summer, the Health Care Advisory Board has been presenting our early guidance on how providers will need to restructure costs and operations to not only survive these forces but thrive in a tighter operating environment.

Our research focuses on provider action across four fronts:

  • Maximizing revenue capture. Capturing full reimbursement by demonstrating clinical excellence and improving clinical documentation will help providers capture full payment on contingent contracts and help minimize revenue leakage from denied claims.
  • Containing input cost creep. Rationalizing labor spending with flexible staffing policies and benefit redesign, coupled with development of standardized clinical protocols that reduce supply costs, minimize care variation, and improve quality outcomes constitute the most sustainable means of controlling cost growth.
  • Boosting effective capacity to manage coming volume surge. Elevating patient throughput and an expansion of outpatient capacity are the most viable strategies for capturing surging demand from an aging population with greater utilization rates.
  • Building an effective medical perimeter to manage case mix. To improve case mix, hospitals will need to “gatekeep” against avoidable medical admissions. Investing in a medical perimeter–an effective ambulatory care-management network for chronically ill patients—will help ensure more medical patients are treated in outpatient settings, enabling providers to clear room for profitable procedural volumes essential to funding inpatient facilities.

To learn more about the impact of these forces—and how much margin improvement providers can expect by delivering best-in-class performance on all of these front, I invite you to attend our upcoming Health Care Advisory Board National Meeting series. To review the agenda or register, Health Care Advisory Board members can click here. Daily Briefing readers with questions about the Health Care Advisory Board should email

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