Deficit And Debt Politics: A Wake-Up Call For The Health Care Industry?

The 2010 Affordable Care Act (ACA) called for significant Medicare savings.  All told, the Congressional Budget Office projected that the law would trim over $400 billion from Medicare spending during 2010-2019, reducing the program’s annual growth rate from 6.8 percent to 5.5 percent.

Those savings were enabled, at least in the case of hospitals, by the promise of expanding insurance coverage that would bring in more insured patients (and thus more revenues to help offset the Medicare cuts).  Yet some observers in the health industry no doubt assumed that the ACA’s payment reductions could be reversed over time.   After all, they had seen Congress repeatedly cancel scheduled payment cuts to Medicare physicians in the annual melodrama surrounding the Sustainable Growth Rate.

Why couldn’t the health care industry similarly expect to evade the ACA’s cost controls?  In coming years, the industry could argue that any payment cuts would jeopardize patients’ access to care.  And given that Medicare’s own actuary cast doubt on how realistic the projected savings were, the odds must have seemed good to hospitals and other providers that they could sooner or later count on SGR-like relief from Washington.  Health reform offered an appealing political and business strategy:  initially accept the projected cuts in the ACA, then gain more paying customers through the implementation of insurance expansion, and, finally, work to reverse the cuts and “unbend” the cost curve.

If there is one lesson for the health care industry from the just concluded agreement to raise the federal debt ceiling, it is that those assumptions no longer look so good.  The politics of cost control are about to get much tougher.

Implications For Medicare Provider Payments

To be sure, federal health insurance programs emerged largely unscathed from the initial round of budget cuts, which instead target discretionary spending.  But it certainly must be worrisome to the industry that if a bipartisan supercommittee cannot agree on and Congress cannot pass legislation to reduce another $1.5 trillion in spending, then the $1.2 trillion in automatic cuts that will be triggered include Medicare provider payment reductions of up to 2 percent.  Though the triggers are supposed to be sufficiently onerous to compel action, impasse is a real possibility.

The Congressional supercommittee is likely to consider changes to Medicare benefits as well, including raising the eligibility age and expanding income-related premiums—“adjustments” that President Obama apparently was willing to make in exchange for his failed grand bargain with House Speaker John Boehner.  Increasing Medicare beneficiaries’ cost-sharing obligations and limiting Medigap coverage may also be on the table.

But regardless of any benefit changes that are made—and unpopular cuts in Medicare benefits will be more difficult to secure in a prolonged negotiating process that draws public scrutiny—the rise of deficit and debt politics creates significant pressures to slow the growth rate in federal health spending.  And that means reducing growth in provider payments.  In their failed negotiations, Obama and Boehnerreportedly discussed $250 billion in Medicare and $110-$150 billion in Medicaid savings.  Any Congressional plan to extract a similar magnitude of savings will surely look to impose pain on providers and not just beneficiaries.

The past three decades of Medicare reform have shown that targeting providers is politically easier than targeting beneficiaries.  Nor will the prospect of Republicans taking control of the Senate and the White House after the 2012 election necessarily spare the health care industry from fiscal pain.  Republicans are traditionally more willing than Democrats to impose costs on Medicare beneficiaries and more friendly to providers. Paul Ryan’s Medicare voucher plan, passed by the G.O.P. majority in the House of Representatives, would have cut Medicare benefits substantially.  But tellingly, Ryan’s budget also maintained the ACA’s Medicare provider savings, the very same savings that Republicans campaigned against during the 2010 election.  It’s one thing to rail against “death panels,” but quite another to jettison already scheduled Medicare savings when you are looking to cut federal spending.

Suddenly, in a political environment where health policy is budget policy and entitlement reform means controlling medical care spending, the odds of reversing the ACA’s payment cuts don’t look so good.  Instead, the health care industry may increasingly find itself in a zero-sum (or more accurately, slower growth) environment where different segments of the industry battle to see who will take the brunt of federal budget cuts (and the SGR dilemma awaits a costly fix).

Health care’s insatiable appetite for more federal dollars could additionally collide with the efforts of other powerful  interests—namely defense—to avoid the budget axe. The health care industry’s protestations that government payment cuts are unfairly widening the gap between public and private payers, and in the process jeopardizing patient access,  thus may result not in policymakers raising Medicare rates but in growing federal interest in all-payer reform that would level the playing field, though that prospect remains unlikely for now.

Another Potential Target: The Employer Coverage Tax Exclusion

Medicare and Medicaid will not be the only targets for deficit hawks.  Pressures to curtail the deficit will likely bring renewed scrutiny to many health analysts’ least favorite policy, the tax exclusion for employer-sponsored insurance.  The political advantage is that limiting the tax exclusion has historically been the one tax increase that Republicans like—though whether such reform can pass muster these days with Grover Norquist and conservatives opposed to any revenue increases remains to be seen.  But the temptation to speed up and expand the ACA’s limit on the tax exclusion will be strong, even as such proposals encounter public resistance.

Maybe the health care industry should find a new fiscal religion and lobby for tax increases.  The more that raising revenues is off the table as an option for reducing the deficit, the more that budget cutters will look to savings from health care programs.   In Washington, the long-run deficit problem is viewed as a health care problem.  A “balanced” deficit reduction package that included significant revenue increases would be welcome news for a medical-industrial complex that will chafe under tightening budget constraints.  Perhaps the next round of hospital ads to stave off federal cuts should tell Congress to end the Bush tax cuts and “save” Medicare in the process.

The American health care industry’s capacity to expand and beat back serious efforts at cost control should never be underestimated.  Health care remains a growth industry, and as always health care spending is heading upwards.  But the rise of deficit and debt politics, along with the ACA, signals a new era of (relative) fiscal austerity that could produce stronger efforts at health care cost control and intensifying challenges to the industry’s inflationary trajectory.

Jonathan Oberlander is associate professor of Social Medicine and Health Policy & Management at the University of North Carolina-Chapel Hill and holds an adjunct appointment in the Department of Political Science. His research interests include health care politics, health care reform, Medicare, American politics, and public policy. His articles have appeared in the New England Journal of Medicine, Annals of Internal Medicine, Health Affairs, Journal of Health Politics, Policy and Law, and Law & Contemporary Problems.

This post first appeared at Health Affairs Blog on 08/04/2011. Copyright ©2010Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.