Medicare Sequestration Will Cost Clinicians $4.9 Billion

September 18, 2012

September 18, 2012 — What the bottom of the notorious fiscal cliff looks like became a bit clearer last week when the Obama administration revealed that Medicare would pay physicians and other clinicians $4.9 billion less next year as a result of an automatic 2% budget cut.

That reduction comes on top of a 27% Medicare pay cut scheduled for clinicians in January that is dictated by the program's sustainable growth rate (SGR) formula.

The fiscal cliff refers to a collection of budgetary crises that together could push the economy into another recession, some experts predict, unless Congress acts to avert them before year's end. One crisis is roughly $1 trillion in across-the-board budget cuts — called sequestration — through 2021 that were triggered by the failure of Congress to propose, much less enact, that level of deficit reduction last year. For Medicare providers, these automatic cuts are limited to 2%.

In addition to sending $4.9 billion in Medicare reimbursement for clinicians down the drain, the 2% cut takes away $5.6 billion from hospitals in 2013, according to a report issued September 14 by the White House Office of Management and Budget (OMB). Sequestration will continue to eat away at Medicare reimbursement through 2021.

The OMB report comes on the heels of a study released last week estimating that Medicare sequestration will eliminate 767,000 jobs, many of them in healthcare, during the next 9 years.

Other elements of the fiscal cliff include the 27% Medicare cut called for by the SGR formula and the expiration of tax cuts enacted under President George W. Bush.

Sequestration a "Blunt and Indiscriminate Instrument"

The massive budget sequestration that will kick in next year stems from the Budget Control Act (BCA) of 2011 that Congress passed to raise the federal debt ceiling and prevent the government from defaulting. The BCA called for an initial $900 billion in deficit reduction over the course of 10 years and charged a bipartisan congressional "super committee" to find $1.5 trillion more in cuts. If the committee could not forge a plan by November 23, 2011, to trim the deficit by at least $1.2 trillion, then sequestration would reduce both defense and nondefense spending by that amount, according the law. The super committee fell victim to political gridlock, releasing the sequestration beast. Most domestic programs, excluding Medicare, will take an 8.2% hit; defense programs generally will experience decreases of 9.4%.

The OMB report noted that Congress inserted the threat of sequestration in the BCA to "drive both sides to compromise" on deficit reduction. "The sequestration was never intended to be implemented," the report stated. The Obama administration, it added, considers sequestration to be "bad policy" because it is a "blunt and indiscriminate instrument."

In addition to cutting Medicare reimbursement by roughly $11 billion for both clinicians and hospitals next year, sequestration also will reduce other streams of federal healthcare spending.

Agency Sequester Amount in Fiscal 2013
National Institutes of Health $2.5 billion
Medicare Part D Prescription Drug Account $691 million
US Centers for Disease Control and Prevention (agencywide activities and program support) $464 million
US Food and Drug Administration (salaries and expenses) $318 million
Indian Health Services $320 million
Substance Abuse and Mental Health Services Administration $275 million
Aging Services Programs, Administration on Aging $122 million
Prevention and Public Health Fund $76 million
Affordable Insurance Exchange Grants (used to fund state exchanges under the Affordable Care Act) $66 million

Sequestration outside of healthcare extends to the Department of Defense and domestic programs ranging from the Federal Bureau of Investigation and the Federal Aviation Administration to the Federal Emergency Management Agency and the Environmental Protection Agency.

The OBM report said sequestration would weaken the nation's military infrastructure and, on the nondefense side, "undermine investments vital to economic growth, threaten the safety and security of the American people, and cause severe harm to programs that benefit the middle class, seniors and children." It singled out the reduction for the National Institutes for Health, saying that the agency would have to "halt or curtail scientific research, including needed research into cancer and childhood diseases."

The American College of Physicians (ACP) voiced a similar outcry in a letter to congressional leaders yesterday, urging them to halt sequestration cuts to healthcare programs.

"These cuts will have a devastating impact on public health, disease prevention, and medical research efforts, as well as essential programs to increase the number of primary-care physicians" ACP President David Bronson, MD, wrote. Dr. Bronson said sequestration is arbitrary, failing to take into account "the importance or effectiveness of any particular program."