In the wake of the so-called “fiscal cliff deal” that averted the effects of federal budget sequestration for two months, when it was passed by Congress on Jan. 1 and signed by President Obama on Jan. 2, Blair Childs, senior vice president for public affairs at the Charlotte-based Premier health alliance, spoke with HCI Editor-in-Chief Mark Hagland about the current policy and political situation on Capitol Hill. As the Washington, D.C.-based Childs noted, the fiscal cliff agreement will have a significant impact on healthcare providers.

Among other elements in H.R. 8, the American Tax Payer Relief Act of 2012, are these: the legislation has averted for one year the scheduled 26.5-percent Medicare physician reimbursement cut (this is the one-year “doc fix” that has been reported on), but in recompense, the bill included a $10.5 billion reduction to hospital inpatient payments, by phasing in the recoupment of what the Centers for Medicare & Medicaid Services (CMS) claims are overpayments stemming from the transition to the new MS-DRG documentation system, and a $4.2 billion cut, by extending for an additional year the provision of the Affordable Care Act (ACA) that lowers Medicaid disproportionate share (DSH) payments. There are a number of minor provisions that will impact provider payments under Medicare as well.

What’s more, Childs expects this entire calendar year to be one in which hospitals, physicians, and other healthcare providers will be vulnerable to the vagaries of federal politics in an environment of budget crisis and fiscal challenges. Below are excerpts from the interview.

Back in December, you had predicted that the fiscal cliff negotiations would be resolved through negotiation. You were correct, though as we all know, we technically “went over the cliff” for a day before the House of Representatives passed the Senate bill that had been crafted on deadline by Vice President Joe Biden and Senate Minority Leader Mitch McConnell. What’s your reaction to what happened, and how it happened?

What I had thought would happen pretty much happened. I knew it would go over and then it would be fixed; I really thought the House might have made it a little bit more difficult; but they decided just to move onto the debt ceiling fight. That was the calculation that the Republicans made. The thing is, I think hospitals have clearly taken a hit in this round, and I’m not sure that has yet been fully appreciated.

Blair Childs

The 2-percent Medicare cuts that were part of budget sequestration have only been postponed for two months, correct?

That’s correct. And they’ve also got a behavioral offset clause—a documentation and coding adjustment for MS DRGs. CMS, as you know when we shifted from the traditional DRG system to the DS DRG system in 2006, we went from 250 DRGs to about 580 DRGs, and when we made that transition, there was an assertion made by CMS that has been disputed by hospital organizations, including Premier. They had made reductions year after year based on the claim that CMS has asserted about documentation and coding. Now, they’ve said they’re going to take additional money from that, $10.5 billion over the next decade. The way it works is that they have a whole system of annual updates based on a variety of factors, including the costs of labor, technologies, and so on. We don’t know what each update will be, but it will now be discounted by 2 percent. So if the update goes up 2 percent, it will be a net zero. And this will take effect in 2014. So, if they postpone the 2-percent across-the-board Medicare cuts from the budget sequestration, or eliminate them, hospitals will already have effectively taken that sequestration cut  because of this legislative change. This is what is paying for the physician pay fix.

And on top of that, there could still be additional 2-percent across-the-board Medicare cuts, as they try to resolve the sequestration issue, right? Those cuts have only been postponed for two months now.

Yes, that’s right. I’ve always said that budget sequestration will not be done for future years; but I do think we still are vulnerable in this year. So even though we got a two-month reprieve here, I don’t think we’re out of the woods.

Would you be able to put a percentage on the chances of further, significant cuts in the coming months?

No, I wouldn’t…This year is going to involve this whole focus on reducing healthcare spending. And the issue is, you can reduce healthcare costs, or you can reduce healthcare spending. And the way you reduce healthcare spending is through cuts. So the question is whether they’re going to do things that will actually allow the system to correct itself, or whether you’ll just go for straight cuts. That will be the issue this year. And whether it’s through sequestration, which is sort of the meat cleaver approach, or whether it’s through things like cutting graduate medical education or making changes to the evaluation and management payments for hospitals or something more nuanced or policy-focused as opposed to across-the-board cuts, that is ‘TBD.’

You sound pessimistic.

I think it’s going to be a really tough year. And I think the question is, how will this year play out? It clearly looks like it’s going to be a sort of 2011/2012 redux. It’s going to be the same thing, where we’re going to be sort of lurching from one deadline to the next. We’re lurching now from the fiscal cliff situation to the debt ceiling. And that’s because, while there was an agreement this week on the taxes, the deficit is going to increase over the next decade by nearly $4 trillion. So how are we going to manage this? We didn’t solve the problem.

It really was just a patch over a crisis.

Yes, and in this case, the crisis was about disagreements over tax increases. The longer-term issue is how to balance the federal budget. And unfortunately, hospitals have already gotten a reduction. The optimist in me says that this is an opportunity to push for more reforms that will actually help bend the cost curve. The pessimist in me says that the short-term, expedient thing is to make across-the-board cuts in some form or fashion, rather than having more nuanced types of discussions that could end up in solutions that could bend the cost curve.

It just seems to me that this is an environment more conducive to "meat cleaver" cuts rather than to those more nuanced types of discussions.

I think you are probably right about that. And while some people are saying dire things about dysfunction in Washington, the reality is that this is how things work in Washington, and have worked for a long time.