By Julie Barnes, J.D., and Meredith Hughes, Bipartisan Policy Center

Over the summer, President Obama and Congressional leaders reached a deal to raise the United States’ $14 trillion debt ceiling, preserving our ability to borrow and carry on the day-to-day business of the government. The deal was also known as the Budget Control Act (BCA) of 2011, which effectively raised the debt ceiling by a total of $2.1 trillion. The law enacted $900 billion in cuts, and tasked a new bipartisan group—the Congressional Joint Select Committee on Deficit Reduction (the “supercommittee”)—with finding another $1.2 trillion in deficit cuts.

The supercommittee’s 12 members were evenly distributed between the House and Senate and along partisan lines. The committee was charged with creating a deficit reduction package by the end of November, to be voted on in December. But the key deadlines for the supercommittee have come and gone. On November 21, 2011, supercommittee co-chairs Representative Jeb Hensarling (R-TX) and Senator Patty Murray (D-WA) officially declared failure.

The Battle

Much of the supercommittee’s work was conducted behind closed doors, with few leaks to the press. Many insiders took this as a sign that the committee was serious about getting a deal.

By letter of the law, the goal of the supercommittee was to reduce the deficit by at least $1.5 trillion over the period of fiscal years 2012 to 2021. In practice, the goal was slightly less—the supercommittee only needed to hit the $1.2 trillion mark to avoid triggering the sequester. The “sequester” is an automatic, across-the-board cut that will hit defense, Medicare, non-defense discretionary spending, and some other mandatory spending programs.

Though it ultimately did not succeed in making a deal, the deliberations of the supercommittee came with a few surprises, such as the staunch fiscal conservative Senator Pat Toomey (R-PA) proposing a deal that featured revenue-raisers instead of just cuts. Toomey’s $1.5 trillion plan also featured $275 billion worth of cuts to Medicare and Medicaid, far more than what is possible under the sequester.^[1] The same was true of the Democrats’ proposal, which called for $350 billion in cuts to Medicare—$250 for providers and $100 billion for beneficiaries—plus over $20 billion in cuts to Medicaid.^[2] The Democrats’ proposal also featured $1 trillion in new revenues.

Late in the game, leaders tried to agree on a smaller package that would reduce the total cuts of the sequester. Democrats rejected an informal plan from Speaker of the House John Boehner (R-OH) becaue they believed it did not feature adequate tax-related changes, which were only $3 billion of a $643 billion package.^[3]

After the negotiations officially fell apart, supercommittee members and insiders on both sides of the aisle raced to Sunday talk shows to blame the other party—Republicans blamed Democrats for refusing to make structural changes to entitlement programs, while Democrats blamed Republicans for refusing to accept adequate revenue enhancers.

The Consequences

Unless Congress votes to waive it, the initial sequester will be carried out on January 2, 2013. The sequester will cut the total amount of federal spending every year over the period of 2013 to 2021. For discretionary programs, the sequester institutes a cap that will lower the total amount of funds available on a yearly basis. How that reduced funding is distributed among programs and priorities will be determined annually by federal appropriators. A true across-the-board cut to discretionary programs will not be triggered unless Congress exceeds this BCA imposed cap.^[4] Cuts to mandatory spending, such as Medicare, offer less leeway; the sequester simply eliminates the budgetary resources available.^[5]

Defense spending will face $454 billion worth of cuts under the sequester, and non-defense discretionary spending—which includes categories such as education, housing, and transportation—will see a $294 billion reduction. An additional $169 billion in projected savings comes simply from reducing the total interest payments on all our debt over the next nine years.

The other main component of the sequester is Medicare. Though Medicare represents a significant portion of mandatory federal spending, the BCA limits cuts to 2 percent. Once that limit is reached, other nondefense discretionary and mandatory programs will be cut in lieu of Medicare. ^[6] Between 2013 and 2021, the sequester will cut an estimated $123 billion from Medicare, mostly through cuts to provider reimbursement. The savings will be achieved through a 2 percent cut to payments for each individual service covered under Parts A and B and for monthly payments to Medicare Advantage plans and Part D plans (with the exception of certain Part D subsidies and the qualifying-individual program, if funded by future legislation, which are exempt). Hospital inpatient care, which constitutes the largest share of Medicare’s costs, likewise faces the largest share of these cuts (32 percent), followed by group plans, including Medicare Advantage (15 percent) and physician payments (12 percent). Other services, including hospice, ambulance, laboratory and rural health clinic services, durable medical equipment, some hospital outpatient services, Part B prescription drugs, federally qualified health centers, community mental health centers, and outpatient dialysis constitute another 14 percent of cuts. These cuts are in addition to the Medicare cuts already mandated by the Patient Protection and Affordable Care Act (PPACA), which include market basket reduction and productivity updates and reimbursement cuts for avoidable readmissions and hospital-acquired conditions.^[7]

While the premium tax credits in the PPACA are exempt from the sequester, the cost-sharing subsidies are not. The premium tax credits are available to individuals between 133 and 400 percent of the federal poverty level (FPL) on a sliding scale. The cost-sharing subsidies are available to individuals below 250 percent FPL. These subsidies will allow lower-income individuals and families to enroll in plans with higher actuarial values, thus offering access to lower deductibles and co-payments.^[8] Under this arrangement, insurers are subsidized by the government to compensate for lower patient cost sharing.^[9] Reducing the total amount of cost-sharing subsidies will save an estimated $6 billion between 2015 and 2021.^[10] The cost-sharing subsidies are estimated to cost a total of $117 billion over nine years.^[11]

Exemptions from the Sequester

Many healthcare programs that help vulnerable and low-income individuals, such as Medicaid, the Children’s Health Insurance Program (CHIP), and Part D low-income subsidies are shielded from the cuts. More broadly, other mandatory programs exempt from sequestration include Social Security, food stamps, Supplemental Security Income (SSI), refundable tax credits, veterans' benefits, and federal retirement. These exclusions apply because the Budget Control Act of 2011 references parts of the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA) and the Statutory Pay-As-You-Go Act of 2010, which exempts certain programs from cuts.^[12]

Impact on the Health Sector

Many stakeholders feared that an actual supercommittee deal would do them more harm than good. The sequester distributes the pain of cuts evenly, while a deal could target and gouge specific segments of the industry. Another important consideration, especially for providers, is that the sequester caps Medicaid reimbursement cuts at 2 percent.^[13]

Many consumer groups feared the sequester less than a deal because low-income assistance and healthcare programs, such as Medicaid and SSI, were shielded from potential cuts. ^[14] In contrast, the major deficit reduction packages in the supercommittee from both sides of the aisle featured cuts to Medicaid. Even President Obama’s proposed deficit reduction plan from September 2011 featured $72 billion in Medicaid cuts, in addition to $248 billion in Medicare cuts and over $3 billion in cuts to the PPACA’s Prevention and Public Health Fund.^[15]

Medicaid cuts would pose a huge problem for states, which are already struggling with significant budget shortfalls. In many states, Medicaid represents the largest line item in the budget. Additionally, though the enhanced federal matching funding offered by the American Recovery and Reinvestment Act of 2009 (i.e., the “economic stimulus” package) ended in June 2011, states are required to maintain their current levels of income eligibility through December 31, 2013.^[16] States who fail to meet this “maintenance of effort” requirement could lose all federal matching funding for Medicaid. Because states cannot realistically opt-out of the Medicaid program, they need to address delivery system reform and cost drivers at the local and community level. Increasing the use of community-based care options, better care management for chronically ill populations, and working to move long-term care out of an institutional setting are all options for Medicaid savings at the state level.

The exclusion of Medicaid also takes some pressure off of pharmaceutical manufacturers. Now that the supercommittee has disbanded, they cannot use, for example, an expansion of the Medicaid drug rebate to dual eligibles or an elimination of pay-to-delay agreements for generic drugs to achieve savings.

Outlook

As Congress moves into 2012, one of the most pressing problems for health spending is the sustainable growth rate (SGR) formula for Medicare physician payment. Since 2002, Congress has passed temporary stopgap measures to “patch” the SGR—a permanent fix will come at a price of $300 billion over the next decade.

After several days of fighting, the House and Senate managed to pass another temporary, two-month patch on December 23, 2011. Without a fix, physicians would have faced a 27 percent payment reduction on January 1, 2012. With only a 60-day fix, this drastic cut is still hanging over the heads of irate doctors. As this article was going to print, leadership from the House and Senate had appointed members to a bipartisan joint committee created to discuss strategies for permanently fixing the SGR.

The cost for a permanent fix to the SGR—and the nation’s budget crisis—is only growing more serious. In legislative terms, the supercommittee wielded tremendous power. The opportunity for an up-or-down vote on a broad deficit reduction proposal, with no opportunity for filibuster or amendments is unprecedented in today’s political environment. The fact that legislators could not reach a deal, even with the level of authority, does not bode well for our nation’s political future.

The Governance Institute thanks Julie Barnes, J.D., director of health policy, and Meredith Hughes, policy analyst, from the Bipartisan Policy Center for contributing this article. They can be reached at jbarnes@bipartisanpolicy.org and mhughes@bipartisanpolicy.org.

^[1] Manu Raju and Jake Sherman, “Parties brace for 'super' fallout,” Politico Pro, November 21, 2011.

^[2] 1 Trillion-1 Trillion Framework, http://big.assets.huffingtonpost.com/SuperComDems.pdf.

^[3] Meredith Shiner, “Super Committee Talks Seem to Fade Out,” Roll Call, November 19, 2011.

^[4]Loren Adler and Shai Akabas, Bipartisan Policy Center analysis, November 2011.

^[5]Ibid.

^[6]Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act, Congressional Budget Office, September 12, 2011, http://cbo.gov/ftpdocs/124xx/doc12414/09-12-BudgetControlAct.pdf.

^[7]“Health Care Reform Memo: December 12, 2011,” Deloitte Center for Health Solutions.

^[8]“Explaining Health Care Reform: Questions about Insurance Subsidies,” Kaiser Family Foundation, April 2010, www.kff.org/healthreform/upload/7962-02.pdf.

^[9]Under the sequester, it is likely insurers will still be responsible for offering these arrangements to low-income individuals, but will receive reduced compensation. C. Stephen Redhead, Budget Control Act: Potential Impact of Automatic Spending Reduction Procedures on Health Reform Spending, Congressional Research Service Report, November 2011.

^[10]Bipartisan Policy Center analysis based on Congressional Budget Office data, www.bipartisanpolicy.org/sites/default/files/Effect%20on%20the%20Deficit%20of%20the%20BCA%20Sequester.pdf.

^[11]CBO's March 2011 Baseline: Health Insurance Exchanges, www.cbo.gov/budget/factsheets/2011b/HealthInsuranceExchanges.pdf.

^[12]See sections 225 and 256 of BBEDCA, updated by the Statutory PAYGO Act of 2010; Richard Kogan, “How the Potential Across-the-Board Cuts in the Debt Limit Deal Would Occur,” Center for Budget and Policy Priorities, November 22, 2011, www.cbpp.org/cms/index.cfm?fa=view&id=3557.

^[13]Christopher C. Jennings, “Fallback Cuts or Super-Committee Concoction—Choosing Health Care's Policy Poison,” The New England Journal of Medicine, September 15, 2011.

^[14]Ibid.

^[15]Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction, Office of Management and Budget, September 2011, www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/jointcommitteereport.pdf.

^[16]Section 2001, Patient Protection and Affordable Care Act (P.L. 111–148).