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Sequester signals trouble ahead

Two percent cuts may not sound deep, but the sequester, scheduled to start March 1 unless Congress acts, will be painful, and has the healthcare industry worried.

The sequester cuts "will get the attention of hospitals and physicians," said Ken Perez, director of healthcare policy and senior vice president of marketing at MedeAnalytics, a California-based healthcare performance analytics company.

[See also: Medical education sequester cuts may aggravate physician shortage]

Sequestration was a provision of the Budget Control Act passed last year and delayed until March by the fiscal cliff agreement in January. Designed to be a blunt tool that would drive lawmakers to bargain over cuts, sequestration will chop off 2 percent of spending for domestic non-defense programs, and more for defense. It is targeted to save about $1.2 trillion over 10 years and $85 billion through this year.

While there is no guidance on the current impact to Medicare, by pro-rating the cuts based on figures that the Office of Management and Budget reported last September, the average hospital reduction in payments could be about $800,000 to $1.3 million, Perez said.

For physicians, the overall Medicare Part B reduction could translate into a 3 percent to 4 percent decrease, or $2 billion to $3 billion, in the physician fee schedule. "It's huge. It's a large amount of money," Perez said.
"Deficit reduction from now on is going to be a significant factor in setting reimbursement rates," Perez added. "There is no quick or snappy answer to the Medicare cuts. Finding other cuts is not likely because Medicare is such a big part of the federal budget."

Perez said that it's hard for CFOs and physician managers to keep track of all of the cuts, when they occur and how big they are. One response is to use the tried-and-true levers, like getting their cost structure and employee headcount coordinated.

[See also: Rural hospitals brace for sequestration]

However, those actions may cause issues with access to care and quality that go against some of the goals of the Affordable Care Act (ACA). Between last October and January, 60 hospitals or hospital systems laid off employees. "Over half said it was due to looming cuts coming from ACA," Perez said.

When hospitals tally their results in the next several months, they will see their margins eroding. And that's the tip of the iceberg, he said.

Hospitals and doctors are not the only entities in healthcare that will be impacted by the sequester. Healthcare entities from graduate medical education to pharmaceuticals will feel its bite one way or another.

The pharmaceutical industry, for example, is watching how the Food and Drug Administration will handle the cuts, said Andrea Bergman, senior director of legislation and health policy at McDermott, Will and Emery law firm in Washington, D.C. Drug makers must pay more user fees under the recent Prescription Drug User Fee Act (PDUFA) she said, so they won't want to have the FDA pass on the cuts to them.

Health and Human Services Secretary Kathleen Sebelius said at the recent American Medical Association National Advocacy Conference that the 2 percent reductions would also cut into new research and innovations.

The sequester is just a bump in the road – a precursor to more cuts in the immediate future, said Henry Aaron, a healthcare expert and economics studies senior fellow at the Brookings Institution, a Washington, D.C., think tank. "If that were all there was, it would be a hiccup. What healthcare administrators have to worry about is the atmosphere that healthcare spending is the kidney from which the cuts will be taken in order to achieve deficit reduction targets," he said.

Sebelius seemed cognizant of just such a possibility. At her AMA presentation, she warned the audience that the industry must be proactive about controlling spending.

"Unless we come up with an incredible plan for reducing healthcare spending across the board, we will ultimately end up in the same place, with other costs and approaches to cutting costs," she said.

"It is better to change now and take an approach where we can learn from our mistakes than to wait until later when a far blunter approach is needed," Sebelius said.

[See also: Medicare providers warn sequestration could cost 500K jobs in first year]

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