Automatic Spending Cuts will Reduce Provider Payments by $11 Billion

Last Friday, the Obama Administration released a long anticipated report that detailed specifics of the across-the-board spending cuts, known as sequestration, which could go into effect on January 2^nd.

The sequestration measures were passed as part of the Budget Control Act of 2011. At that time, the national debt was climbing and the federal government (and investors) was worried about defaulting on loans if Congress did not increase the debt ceiling. In a compromise between Democrats and Republicans in Congress, the Act agreed to raise the debt ceiling in return for the establishment of a bi-partisan debt reduction committee (known as the Super-Committee), and automatic budget cuts beginning in 2013 if no debt reduction legislation was passed. For more on the legislation, view the L.A. Times article here.

The Super-Committee met, worked, and disbanded, without an agreed-upon action plan endorsed by both parties, and last week, the Obama Administration released a report on what the automatic cuts would look like. While the cuts would affect the majority of federal agencies, certain programs like Medicare would be spared from massive funding cuts in favor of moderate and targeted cuts.

Medicare would not remain completely unaffected, however. The cuts to the program would be 2% overall, or about $11 billion, mostly to providers.  Kaiser Health News reports that hospitals would bear the largest share of the cuts. The Federal Hospital Insurance Trust Fund would be reduced by about $5.8 billion, while the National Institutes of Health would see a $2.5 billion reduction. The Centers for Disease Control and Prevention would face cuts of $490 million, and the Food and Drug administration would see reductions of about $318 million.

Funding for the new health law’s insurance exchange grants would also decrease by $66 million, while funding for the new health law’s prevention fund would drop by $76 million, according to a report funded by doctors, hospitals and nurses groups. In addition, the National Institutes of Health “would have to halt or curtail scientific research, including needed research into cancer and childhood diseases,” the report states.

Congress can still avoid sequestration measures by passing a debt reduction plan before the end of the year, but that will likely not happen until after the November elections. The can also avoid it by passing a bill that nullifies the measures.

The Senate is currently considering a Continuing Resolution (CR) that will fund the government from the beginning of the fiscal year on October 1^st, until the end of March. That CR, however, is separate from any sequestering. Come January 3^rd, sequestration measures go into effect, unless one of the actions above is taken. In a sense, the Budget Control Act ‘trumps’ any document that does not satisfy the debt reduction requirements. Normally sequestering would slash the funding levels put forth in the budget, but since the CR would be acting as the funding document, sequestration measures slash the funding amounts that are put forth in the CR.

You can see the Administration’s full (400 page) report here. You can also find Kaiser’s article here.