By John Wasik

The dreaded sequester cuts mandated by the Budget Control Act of 2011 went into effect this month, putting into place a 2 percent cut in Medicare spending.

While Congress can still enact a “fix” that will delay or amend these cuts, that seems unlikely as of this writing. Yet how the cuts will impact Medicare and its nearly 50 million beneficiaries is a still a moving target.

In a joint study issued September 2012 by the American Hospital Association, the American Medical Association and the American Nurses Association, it was estimated that some 766,000 jobs would be lost by 2021 if the sequester cuts went into effect.

According to the study, “Researchers forecast that more than 496,000 jobs will be lost during the first year of sequestration, and these cuts will impact health-care sectors in every state. In California alone, the health sector could lose more than 78,000 jobs by 2021.”

The job loss numbers may be overstated, though, as these estimates are projected out to 2021 and assume a 27 percent reduction in physician payments due to the contentious (but nearly always patched) sustainable growth rate (SGR). Additionally, with health care demand growing with the aging of the U.S. population, this forecast may be too broad. Despite all of Washington’s foot-dragging and a financial meltdown and ensuing recession, the health care sector has remained one of the most vibrant sectors of the U.S. economy.

Even more uncertain is how sequestration will impact the provider community. It will take weeks for physicians, hospitals, clinics and other health care institutions to adjust their payment systems. According to Medscape Today, the cuts will “result in $11 billion in lost revenues to Medicare doctors, hospitals and other providers.”

And is it possible that sequestration cuts may prevent patients from obtaining necessary care? The reduced compensation, physician groups say, will curtail patients’ access to care. For example, beneficiaries with chronic conditions who cannot find a doctor may find their conditions exacerbated, ultimately making them more expensive to treat. Jeffrey Cain, M.D., told Medscape:

“Sequestration will slash thousands of dollars from family physicians’ practice revenue. Because private insurers based their payments on Medicare rates, family physicians will see a domino effect as private insurance payment reflects the cuts imposed by the sequester. As small businesses operating on a razor-thin margin, family physicians will face a stark choice between putting their practices at risk and reducing the number of elderly and disabled patients they can see. Rather than rein in costs, sequestration payment cuts to health care providers will reduce access to needed care, increase the risk that preventable health conditions will develop or will worsen, and increase the chance that patients will ultimately require more intensive and expensive care.”

The Government’s Response

To date, there’s been alarmingly little information from the Centers for Medicare & Medicaid Services (CMS) on the total impact of the sequestration. In a March 28 “CMS Medicare FFS Provider e-News” bulletin, the agency devoted only three short paragraphs to the matter, which is buried in a long list of other items.

Claims processed for the fee-for-service plan will be subject to the 2 percent cut. The cuts also apply to claims submitted by “critical access and cancer hospitals and pass-through payments to graduate medical education, organ acquisition programs and Medicare Bad Debts.”

A much more detailed picture of specific reductions is contained in an obscure 224-page report issued last year by the Office of Management and Budget (OMB), “Report Pursuant to the Sequestration Transparency Act of 2012.” Among the specific line items targeted in the CMS budget are:

• $5.6 billion from the Hospital Insurance Trust Fund;
• $4.9 billion from the Supplementary Medical Insurance Trust Fund;
• $559 million from Part D; and
• $66 million from Affordable Insurance Exchange grants.

These are preliminary estimates, but suggest that the sequester will do more than just pare provider payments; it will undermine the basic funding of the two Medicare’s trust funds (Part D is paid for out of the SMI Trust Fund), although in a relatively small way compared to the program’s half-trillion-dollar-plus annual spending.

The Political Reality

While the sequester legislation didn’t directly scale back benefits, an argument can be made that it will force providers to overhaul their business models if the cutbacks remain in place. If they can’t reduce their operating and labor costs by 2 percent, then they may refuse to take Medicare patients. Or, as many economists suggest, providers could pass costs along in other ways, such as to their private-paying patients.

How many patients will lose their physicians remains to be seen. It would largely depend on the kinds of practices involved. Are they primarily seeing Medicare patients? In certain parts of the country, such as the Sun Belt states of Florida, Arizona and Texas, that may be the case. And it won’t be easy for doctors to turn away long-time patients.

More to the point, however, is the fact that the sequester does nothing to address the question of how to make Medicare fiscally viable over the long term. With more than 70 million baby boomers flooding into the program, Washington has yet to come up with a plan that controls costs within the fee-for-service program. The White House has offered several alternative budget plans to the sequester’s blunt cuts, but they’ve been rebuffed at every turn by Republican leadership, which keeps offering a partial privatization proposal as the party’s reform plan.

In one sense, the sequestration has given politicians convenient political cover for direct provider cuts because the reductions are across-the-board. The Budget Control Act of 2011 also slashed approximately 1,200 agency budgets automatically in every U.S. government department. And both parties voted for it.

If beneficiaries start to be turned away from health care providers in large numbers, the political calculus will change. What is not clear is whether that will happen, or if Congress will derail the locomotive powered by the powerful engine of the sequester.

John Wasik is the award-winning author of 13 books and is a personal finance columnist/blogger for Reuters. This post originally appeared in The Medicare Newsgroup.