provider payments face short-term local cuts, long-term federal cuts

In the near term, gridlock in Washington will delay significant additional cuts to federal healthcare programs, but pressure will continue from local payers.

Because of the electoral calendar, gridlock, and shrinking near-term deficits, Congress is unlikely through 2016 to approve significant additional cuts to provider payments. However, increasing deficits projected over the long term likely will spur action on federal programs. In the interim, most of the new pressure on payments will come from state Medicaid programs and local employers, given that purchasers' healthcare costs apparently are growing faster now than at any time during the past five years.

Providers should use this brief window of relative stability to focus on reducing their cost structures to sustainable long-term levels.

In the Near Term

In a departure from what we have seen over the past few years, the federal government isn't facing an annual budgetary or funding crisis. Neither political party wants to risk a repeat of last fall, when gridlock over the federal budget resulted in a government shutdown, before the upcoming midterm elections. As a result, it appears that both the House and Senate will abide by the budgetary cap enacted into law at the end of 20t3 for the appropriations process for FY15, which likely eliminates the risk of another shutdown.

Further, a deal earlier this year suspended the debt ceiling through March 15, 2or5. This pact removed the already limited risk of a "grand bargain" with significant Medicare or federal Medicaid cuts, at least through 2or4.

With only special elections to Congress taking place in 2015, the odds of significant federal cuts to provider payments likely will increase. However, absent a significant economic shock, those odds remain relatively small through the 2016 elections. One reason is that Congressional Budget Office (CBO) projections released in February and updated in April show decreasing deficits through 2015, reducing pressure on Congress to act. These lower deficit projections are driven in part by Medicare spending growth that remains historically low and by constraints on payment rates that are built into current law (e.g., cuts mandated by the Affordable Care Act, and the Medicare Sustainable Growth Rate [SGR]).

Another reason for the reduced likelihood of payment cuts at the federal level is that the parties seemingly have reached an ideological stalemate as to how to tame deficits that are likely to persist at least through 2016. The menu of options to reduce the deficit has been well-established through previous fiscal crises and budget negotiations. However, neither side has shown an inclination to make the compromises needed to reach a sweeping deal, limiting the possibilities for a grand bargain that includes significant changes to entitlement spending when the debt ceiling needs to be raised next spring.

What Providers Can Expect

In the near term, providers are likely to feel more pressure from employers and state Medicaid programs than from additional Medicare cuts. In the face of the Cadillac tax and what appears to be a reversion to cost growth that is more in line with historical levels, employers will continue to shift costs to employees and expand their use of value-based strategies to reduce their exposure to healthcare cost growth.3 Offering employees a lump sum to purchase insurance in a private exchange is another strategy that many employers may look to pursue.b

Historically, Medicaid's efforts to control healthcare expenditures have been limited to paying providers well below the cost to provide care. However, many states are now experimenting with value-based payment models. The National Academy for State Health Policy has identified 18 states that are moving toward an accountable care model that would hold providers responsible for both costs and outcomes.' That list is expected to grow given that Medicaid-even with federal funds-has become the largest budget item in many states, consuming an estimated 23 percent of state budgets in 20 n.'1 Given Medicaid's already-low payment rates and the political difficulty of drastically reducing eligibility, significant additional savings probably are achievable only by better coordinating care to reduce unnecessary utilization.

From Congress, providers can expect to see additional payment cuts related to the 2 percent Medicare sequester and offsets related to the SGR. Although both parties have advocated relaxing the sequester for discretionary and defense spending, they have embraced a continuation of the Medicare cut as a means to pay for other legislative priorities. Earlier this year, for example, the reduction to Medicare payments was extended by a yearthrough 2024-to offset the cost of reversing a reduction in pension benefits for veterans younger than 62. At this point, due to the ro-year CBO scoring window, Congress can use the sequester only once a year to achieve additional savings (unless it increases the percentage reduction for the years currently under sequester) and therefore will have to wait until 2015 to use it as an offset again.

An SGR fix-either shortor long-termlikely will require an offset to other provider payments. Republicans and Democrats in both chambers of Congress agreed on a framework for replacing the SGR with a payment system that is more aligned with the provision of high-value care. Despite this consensus on a long-term framework, physicians ended up with another short-term patch when Congress couldn't find approximately $150 billion to $180 billion in offsets for a long-term package. Although momentum exists for a long-term fix, it's unclear (short of an additional reduction in the price tag) what will make a compromise on offsets for a long-term patch more appealing this December than it was in February.

Federal Cuts Seem Inevitable

In the longer term, significant reductions to Medicare and other federal healthcare programs likely will occur after the 2016 elections. Although a new administration and Congress could improve the odds of brokering an agreement, the main catalyst will be increasing deficits (both in real dollars and-more importantrelative to the size of the economy).

The CBO outlines the challenges in its February report:

"[FJuture spending projections are boosted by an aging population, the expansion of federal subsidies for health insurance, rising healthcare costs per beneficiary, and mounting interest costs on federal debt. By contrast, all federal spending apart from outlays for Social Security, major healthcare programs, and net interest payments [e.g., defense, education, transportation, etc.] is projected to drop to its lowest percentage of GDP since 1940."

Put plainly, at some point in the near future. Congress will be forced to act. Federal entitlement programs-particularly those related to health care-not only will be the main cost driver of deficits, but also likely will be heavily affected by any attempt to get the federal debt under control.

Implications for Providers

In conversations with HFMA. many health system leaders have expressed concerns that, between the anticipated compression of commercial plan rates and the changes to public healthcare programs (both rate cuts and a shift to value-based payment), they will need to reduce their cost structures between 20 and 3o percent. These leaders believe their organizations can achieve between a third and one half of the necessary margin improvement from traditional measures: more accurate documentation and coding, increased revenue cycle efficiencies, improvements in the supply chain and purchased services, and better labor management. They think these steps will give them at most three years of breathing room.

After that, the opportunities for margin improvement lie in eliminating unnecessary variations in clinical care delivery. Organizations should use these next two years wisely to develop strength in clinical and financial leadership while simultaneously building the business intelligence and process improvement capabilities that will allow them to identify and eliminate unnecessary variation. These changes will improve patient outcomes and the cost-efficiency of care delivery, providing the margin improvement necessary to be sustainable. *

a. Mulvany, C., "Driving Cost Control," hfm, October 2013; and "February Health Spending Growth Reaches 7-Year High," Altarum Institute Spending Brief #14-04, April 8,2014.

b. Miller, S., "Large Employers Weigh Future Use ol Private Health Exchanges," Society for Human Resource Management, March 16,2012.

c. "State 'Accountable Care' Activity Map," National Academy for State Health Policy, 2013, nashp.org/state-accountablecare-activity-map.

d. Miller, D., 'Medicaid Spending,' The Council of State Governments Knowledge Center, Jan. 18,2012.

Chad Mulvany is director ot healthcare finance policy strategy and development in HFMA's Washington, D.C., office and a member of HFMA's Virginia-Washington, D.C., Chapter (cmulvaney@hfma.org).