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Let’s Get Real About the Reality of the Ongoing Federal Squeeze on Provider Payments

October 27, 2015
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Healthcare provider leaders need to face the reality that budget sequestration, with its attendant actual and effective pay cuts, will almost certainly become the new normal

It can be challenging to comment on a situation that is in such flux as the budget process currently taking place in the U.S. Congress. After all, it was just late last night (Monday night) that Republican and Democratic leaders in the U.S. House of Representatives, in concert with senior officials from the Obama administration, hammered out a deal to craft a budget that would end an impasse that had threatened to lead to a federal government shutdown within days. Indeed, the deal that was created Monday night could still fall apart, the potential victim of the current toxic political atmosphere on Capitol Hill.

Now, it’s absolutely understandable that the mainstream media reporting on the federal budget process has been almost entirely focused on the partisan bickering and jockeying for power, particularly as the House of Representatives is about to see a transition in terms of who is and will be Speaker of the House, within weeks, if not possibly days. But the reality is that one element of what has been reported by The Washington Post and other reputable media sources—that the proposed budget will include 2-percent across-the-board hospital and physician Medicare reimbursement cuts, because of a continuation in federal budget sequestration—is a fact that should be pondered for its significance, completely apart from the political squabbling and posturing currently going on, on Capitol Hill.

As we all know, the Medicare program’s actuaries released projections in late July 2014 about U.S. healthcare spending that were eye-popping. The Medicare actuaries announced that, as of last fall, the overall annual U.S. healthcare expenditures had reached $3.1 trillion in 2014, itself a staggering sum; but that within 10 years, by 2024, our nation will be spending $5.4 trillion a year on healthcare. We will also have gone from spending 17.4 percent of our nation’s gross domestic product on healthcare in 2013, to 19.6 percent in 2024. And that is with an inflation rate of 5.8 percent during the 2014-2024 period—a rate that is higher than the inflation rate of other goods and services, but still is not outrageous by any means, considering the existence of such factors as the rapid aging of the U.S. population, and an exponential growth in the presence of chronic illness in this country.

Still, as I’ve said numerous times in recent public appearances, anyone who isn’t shocked by those statistics should be. Because really, we’re going over a cost cliff in U.S. healthcare, and even with the beginnings of a genuine and sustainable shift towards value-based purchasing, and a focus on population health management and accountable care, cost increases are still accelerating at an alarming rate in the overall context of our country’s spending. The long and short of it: we really are headed towards cost unsustainability in the U.S. healthcare system.

Thus, the reality, recognized by members of Congress from both houses and both political parties, is that some form of budget sequestration or equivalent, is likely going to become a semi-permanent fixture of federal budgeting, and with it will come annual Medicare reimbursement changes that are either actual or de facto payment cuts to providers.

Along with that reality comes a longer-term reality around federal policymakers’ push towards value-based care delivery and payment in the U.S., as embodied in the announcement on the part of Sylvia Mathews Burwell, Secretary of Health and Human Services, in January, that the Department of Health and Human Services was looking for 30 percent of traditional Medicare fee-for-service payments to tied to a quality-driven, alternative payment model, such as an Accountable Care Organization (ACOs), by the end of 2016. Further, HHS had set a goal of 50 percent of traditional fee-for-service Medicare payments to be tied to quality-driven, value-based reimbursement models by 2016, and a further goal of 85 percent of all traditional Medicare payments being tied to quality or value by 2016 and 90 percent by 2018; and none of that should not really have come as a surprise, either, in the larger scheme of things.


But along with those goals coming out of the executive branch of the U.S. government, the granite-hard reality for the U.S. Congress is that Medicare reimbursement to providers is going to be squeezed as never before. And here’s the really hard part: the leaders of patient care organizations across the U.S. should plan for this 2-percent across-the-board Medicare pay cut to hospitals and physicians to become a regular element of federal budgets. Indeed, that number could even increase. Because when it comes down to it, the Medicare program is inevitably going to be a major budgetary target for Congress, since it is one of the largest programs sponsored by the federal government. Thus, what has been called the “sequester,” now that it has already been operative (you can read about the recent history of sequestration here), simply cannot be expected to fade away like the memory of a bad horror movie.

In fact, out of necessity, budget-cutting that hits healthcare is going to become increasingly bipartisan, whatever the mainstream media headlines say. And providers are simply going to have to get used to doing more with (relatively speaking) less.