“There will be blood in November.”
That’s what Bob Laszewski, a widely read insurance industry consultant had to say on his Health Care Policy and Marketplace Review blog after House Republicans, Senate Democrats and President Obama reached a deal on July 31 to raise the nation’s debt ceiling by $2.8 trillion dollars. Congress passed the compromise and the President signed the legislation on Tuesday, August 2.
Device Makers’ $13.5 Billion Carnage
The health care industry didn’t have to wait until November for the bleeding to start when health care stocks took an immediate tumble as it became apparent that some of the $1.2 trillion in federal spending cuts required under the deal might well come at the expense of provider payments and therefore future company revenues.
By the time some orthopedic company stock prices bottomed out later in the week, the stock holders of the following publicly traded companies saw the per-share prices of their stockholdings fall by: Stryker – $4; Zimmer – $3; J&J – $2.75; Smith & Nephew – $5.50; and Medtronic – $2.75. The market value of those five companies combined fell by over $13.5 billion in three days.
On August 3, Bank of America analyst Bob Hopkins wrote that Medtech is out of favor after having entered the second quarter earnings season with a 15% premium to the S&P 500 index valuation. The sector exited earnings season at just a 3% premium. He said that debt ceiling driven fears, among others things, and the likely resulting cuts to Medicare pointed to potential downstream pressure on pricing and margins which, in his view, accelerated the stock price declines.
By August 4, the Dow had dropped around 750 points.
Provider Exposure
Hospitals, already on the hook for over $150 billion in Medicare and Medicaid savings over 10 years under the Accountable Care Act, warned against further cuts.
The American Hospital Association president said further funding reductions for hospital services translate into decreased access for our nation’s seniors and said the Medicare program should be exempt from automatic cuts.
The Cuts
However, it isn’t just hospitals and the health care industry that are likely to get bloodied. Physicians, who are staring at a 29.5% Medicare payment cut on January 1, 2012, are also at risk. More on that later.
The debt deal calls for overall spending cuts of $917 billion and the creation of a congressional “super-committee” to find another $1.5 trillion in savings by November 23, 2011. If the committee can’t agree on at least $1.2 trillion in savings, cuts would start automatically in 2013. The cuts are divided equally (50/50) between domestic and defense spending. Domestic spending cuts would include a 2% cut to Medicare and is required to be extracted from Medicare providers, not beneficiaries.
“There’s a lot of uncertainty about the [super-committee] and the Medicare cuts, which is why everything is cratering, ” Ipsita Smolinski, an analyst at Capitol Street in Washington, told Reuters on August 1. “People didn’t think Medicare would be included [in the cuts]. And now they’re trying to absorb that…plans and providers could get cut in the second round, ” Smolinski said.
While there were no health care cuts in the first $917 billion of spending cuts, the second $1.2 trillion tranche is where health care will make its contribution, according to Laszewski. That’s where all federal spending, including Medicare, Medicaid, the Affordable Care Act, benefits and provider payments are on the table.
“Since the budget window for the deal is ten years, it is not likely that any changes will be made to entitlement eligibility—such as delaying the Medicare eligibility age from 65 to 67. It just wouldn’t be fair to tell a 60-year-old their Medicare eligibility age is being raised. But we could see more means testing of Medicare premiums, ” said Laszewski.
Health Care’s Runaway Tab
To reach $1.2 trillion in cuts, it’s hard to see how health care spending can be ignored. Health care spending, including Medicare, Medicaid and the child health program CHIP, will expand to nearly 7% of the gross domestic product (GDP) from 5.6% today—and keep rising sharply to 9.4% of GDP by 2035, according to the Congressional Budget Office (CBO). It is the fasted growing part of the federal budget and is exceeding inflation.
Chart – Federal Spending as % of GDP
Source: Congressional Budget Office
Laszewski said it is possible that the super-committee could deal with real systemic health care reform—particularly in the way we pay providers. “But I doubt it. The committee isn’t going to have a lot of time to take up so complex a matter as systemic health care payment reform given that they will have to deal with hundreds of billions more in cuts from lots of federal programs. I don’t see the committee as having the expertise, will, or the time to tackle real health care reform.
“The real potential for cuts will be to provider reimbursement.
“So, all of those provider organizations that thought they scored big by limiting their contribution during the health care reform debate are likely be on the defensive in ways they could not have imagined 18 months ago, ” wrote Laszewski.
The Doc Fix Conundrum
Laszewski said that physicians, facing the 29.5% sustainable growth rate (SGR) fee schedule cut on January 1, 2012, need to be really worried because the SGR cut is part of the existing budget baseline from which the super-committee needs to cut hundreds of billions more. They would need to find tens of billions of dollars after the cuts to put the physician cuts off again. According to the Congressional Budget Office, the cost of a ten-year Medicare pay freeze and the cost of scrapping the sustainable growth rate formula would be more than $350 billion.
Some analysts argue that the debt reduction efforts and the need to fix the doctor reimbursement formula could collide, especially because of the cost of fixing the physician fee schedule. Pushing the issue off for another year would cost about $25 billion, although physicians have been pressing for a two-year fix at a cost of roughly $50 billion. These fixes would add to the nation’s deficit and complicate the super-committee’s work.
In the Bull’s Eye
Laszewski noted that hospitals that got off with a $150 billion contribution to the Affordable Care Act have to be in the bull’s eye this time. “Drug companies are a particularly juicy target for liberals who don’t like them and conservatives who wish the Part D program had never been passed. Medicare Advantage insurers have recently been reporting record profits—not something you want to be doing when the Congress is looking for lots of cash.”
Kaiser Health News analyst Mary Agnes Carey, addressing the “doc fix” on August 2, said that if Congress can’t find money to offset mandated payment cuts, they will be cut.
“So you’re going to have lawmakers looking for money in Medicare in a variety of areas. They’ll have the pressure of either producing this report and having it passing, or if it’s not, the across-the-board cut. And no one wants to see a Medicare physician payment cut. So you can imagine what December is going to be like on Capitol Hill.”
Laszewski notes that while there is a 2% cap on any cuts that could occur to Medicare, there are no limits to what the super-committee can cut. “As an order of magnitude, it looks to me like the cuts Medicare will have to eventually sustain from the super-committee will have to approach the cuts the program saw under the new health care law—largely because of the impact the SGR formula has on the baseline the committee will have to use.”
The debt ceiling formula is a particular problem for the physicians said Laszewski. “They are the ones who agreed to support the new health care law (the AMA anyway) without getting a fix to the SGR dilemma.”
He asks, given how reluctant Congress has been to cut the docs in past years, just how the heck are they going to accomplish net Medicare cuts and take care of the docs this time?
“[J]ust think of the impact big provider cuts could end up having on health care cost trends as providers attempt to shift the impact of these cuts to the entire health care system—just as health care cost trend has finally been slowing down, ” added Laszewski.
Winners, Losers and the Battlefield
So are there any winners in this deal?
K Street of course. Lobbyists make money on complexity, and the debt ceiling law is nothing if not complex, with multiple phases, conditional phases, nonspecific spending caps and the prospect of a tax code revamp.
There will be legislative fights involving just about every deep-pocketed interest in Washington: hospitals, doctors, military contractors, big business, small business, seniors, investors, hedge funds, etc. President Obama has vowed to find extra revenue and these groups will not only be fighting to be spared cuts, but spared higher taxes.
The required spending cuts have the potential to pit the health care provider community against their patients as seniors fight to preserve their Social Security payments and Medicare benefits. The Democrats have put providers on the chopping block while Republicans have put seniors on notice they want to change Medicare to a voucher-type system where seniors will have to pay more.
There Will Be Blood
Concluded Laszewski: “If you thought we had a tense few weeks over the debt ceiling, you had better clear your calendar for the weeks leading up to the November 23rd super-committee deadline. The debt deal was only about process, this next big fight is going to be about real and significant cuts and there will be some significant blood on the floor when it is over!”
