Cliff Deal Delays 26.5% Medicare Cut, Saves Medicaid Raise

January 02, 2013

The fiscal cliff deal that a contentious Congress passed yesterday postpones a 26.5% Medicare pay cut for physicians for 1 year and preserves a hefty Medicaid raise for those in primary care.

The massive Medicare cut, triggered by the program's sustainable growth rate formula and set for January 1, was a minor component of the fiscal cliff. What made the precipice so dangerous was the combination of Bush-era tax cuts set to expire this month and $109 billion worth of automatic, across-the-board cuts — called sequestration — in domestic and military spending that also were to take effect this year. Some economists said this one-two punch could have knocked the nation into another recession.

The fiscal cliff bill, called the American Taxpayer Relief Act (ATRA) of 2012, preserves the tax cuts for individuals earning no more than $400,000 and couples earning no more than $450,000. Americans earning above these thresholds will see their tax rate rise from the current top rate of 35% to 39.6%. ATRA delays sequestration until March 1, giving lawmakers 2 months to replace it with a more discriminating deficit reduction plan. The measure also extends unemployment insurance benefits and numerous tax credits and reduces tax breaks for high-income households.

When President Barack Obama signs the bill, which has his support, it will be an anticlimax to a torturous, sleep-deprived episode of New Year's Day legislating. The Democrat-controlled Senate approved ATRA at roughly 2 am January 1, with the House following suit late last night. Many Congressional Republicans fumed that the deal lacked major spending cuts, but in the end, bipartisanship prevailed. The measure easily passed 89-8 in the Senate and 257-167 in the House, where 85 Republicans, including House Speaker John Boehner (R-OH), said aye.

However, Congressional head-butting is sure to quickly resume as lawmakers grapple with how to reduce the federal deficit to defuse sequestration, which was triggered by Congress' failure to reach a deficit reduction deal in 2011. Republicans seek deep budget cuts, but Democrats want them balanced with revenue hikes.

At stake for physicians in this debate is a 2% cut in Medicare reimbursement written into sequestration. ATRA puts this off until March 1.

The New Year's Day bill freezes Medicare rates for 1 year, which is not exactly good news for physicians whose practice expenses continue to climb. On a more positive note, ATRA does not offset the $25 billion cost of this "doc fix" by cancelling a Medicaid pay hike for primary care physicians authorized by the Affordable Care Act. The act raises Medicaid rates to Medicare levels for evaluation and management services and vaccine administration. Family physicians, general internists, pediatricians, and subspecialists related to these fields (eg, pediatric cardiologists) are eligible for the increase. At one time, some House Republicans favored eliminating the Medicaid raise to fund a 1-year doc fix, an idea that provoked strong opposition from organized medicine.

Instead, ATRA pays for the doc fix largely by reducing Medicare outlays to hospitals. The American Hospital Association and other hospital umbrella groups denounce this approach as harmful to their institutions and the patients they serve.