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AAMS  on Washington
May 17, 2013 

Latest Debt Ceiling Extension Expires tomorrow – What’s Next?
Under “No Budget, No Pay,” the current debt ceiling suspension would expire on May 18, 2013. The next day, the debt limit would then be automatically increased by the amount of debt above the current statutory limit “necessary to fund commitment(s) incurred by the Federal government that required payment before May 19, 2013,” minus the amount of outstanding Extraordinary Measures in use on the date of enactment. The Treasury Department estimates that “extraordinary measures” can be deployed to extend the cap through the end of the summer, making what was originally expected to be a summer battle over the parameters of another increase a likely exercise for early Fall.

X Date Factors
Various projections have indicated that the next X date would fall sometime this summer, providing Congress with at least another quarter to generate deficit reduction policies that would avert default. When considering “extraordinary measures” and other factors, the X date could fall as early as August or as late as November. Other factors that could impact timing include the following:
  1. Under “No Budget, No Pay,” debt limit only increased to accommodate “required” payments from January to May 19, 2013. The definition of “required” payments could vary based on interpretation.
  2. The cumulative amount of Fannie Mae dividends to the Treasury as the result of the 2008 bailout. Depending on this number, which could be as high as $60 billion, receipts could shift the X date by another month.
  3. Overall government tax receipts and cash flows from month-to-month are variable. Experts anticipate that September 2013 receipts may not meet expenses as “extraordinary measures” are exhausted.
Based on these factors, the latest estimate would see the Federal government’s current borrowing authority expiring sometime in late-September in the immediate weeks following the six-week August recess.

House Action on Debt Prioritization
Last Thursday, the House passed H.R. 807 (by a vote of 221-207) prioritizing debt payments as necessary if Congress cannot reach a deal on the debt ceiling and seeking to provide confidence to markets in the event of another summer 2011 scenario where the country was on the precipice of default. The House bill ensures that U.S government bondholders will continue to be paid and that Social Security benefits are exempted in the event of a standoff over the debt limit. After these payments, the Obama Administration would decide which of the government’s other bills would be paid using incoming tax revenue.

The bill has virtually no chance of being considered by the Democratic-led Senate and faces a veto threat from the President if it were to be enacted. From a political standpoint, Republicans see the measure as insulating them from criticism in the event of a default, while Democrats view the legislation as favoring foreign creditors over Americans who need their government checks. 

Possible Options
Members of the House Republican conference have made it clear that they will not agree to another debt ceiling increase without equal spending cuts, which indicates Congress will need to reach agreement once again with the White House and Senate Democrats on a bill that can pass both chambers.  

The House GOP conference met for over two hours on Wednesday May 15 to begin strategizing on next steps and messaging on the next debt ceiling increase. Republicans have yet to coalesce around a legislative strategy but some of the options under consideration include:
  • Linking any debt limit increase to the passage of comprehensive tax reform legislation. One possible scenario would be to pass legislation authorizing a three-month extension to allow for the House to act on tax reform, then triggering another increase once the Senate passed tax reform, and finally a more long-term extension should the President sign comprehensive tax reform legislation into law.
  • “Kitchen sink approach.” Under this scenario, Republicans would craft a debt ceiling increase that includes the necessary “sweeteners” to get to 218 votes. Sweeteners would likely include a repeal of Obamacare (or exchange and Medicaid subsidies), approval of the Keystone XL pipeline, additional spending cuts, or components within the Ryan budget proposal. Framing as a job creation bill, the debt ceiling increase could also include a pledge to balance the budget and/or targeted entitlement reforms.
One option that is unlikely to gain traction with Republicans is the President’s request for Congress to pass a long-term and “clean” debt limit increase. Spending cuts continue to be a top priority for Republicans in the debt ceiling debate. Conversations on whether “grand bargain” talks will resume can be expected in the coming weeks, after the fog of recent scandals begins to dissipate.

Retirement Carousel in Senate Could Impact Health Policy
Since January, three senators and chairmen of key Senate health committees have announced they do not intend to seek re-election in 2014. This has prompted talk of their possible successors and whether those successors would bring a different policy focus to the committees. Each committee is outlined below.
  • Senate Finance Committee
Current Chair: Sen. Max Baucus (D-MT)
Ranking Republican: Sen. Orrin Hatch (R-UT)
Outlook: Sen. Ron Wyden (D-OR) is expected to take the helm, barring an unprecedented change of heart by Majority Leader Harry Reid (D-NV) on seniority rules to allow Sen. Chuck Schumer (D-NY) to leapfrog Wyden.
  • Senate Finance Health Subcommittee
Current Chair: Sen. Jay Rockefeller (D-WV)
Ranking Republican: Sen. Pat Roberts (R-KS)
Outlook: Most expect Sen. Debbie Stabenow (D-MI) to assume the chairmanship. 
  • Senate HELP Committee
Current Chair: Sen. Tom Harkin (D-IA)
Ranking Republican: Sen. Lamar Alexander (R-TN)
Outlook: Sen. Barbara Mikulski (D-MD) is next in line but serves as Chairman of Senate Appropriations and is unlikely to step down. Sen. Patty Murray (D-WA) is the likely successor, given HELP’s jurisdiction compared to Budget. Sen. Bernie Sanders (D-VT) is a long shot.

CMS Regulatory Releases for April/May 
In keeping with the annual regulatory calendar, CMS issued a number of major rules in April and early May that should be noted. 
  • On April 26, the FY 2014 Inpatient Hospital proposed rule was likely better than expected with a -0.1% update including ACA mandated DSH cuts. The proposed rule also includes a 1.1% update for Long-Term Care Hospitals;
  • On April 29, the FY 2014 Hospice payment proposed rule was in-line with expectations calling for a 1.1% payment increase;
  • On May 2, the FY 2014 Skilled Nursing Facility proposed rule was in-line with expectations with a 2% increase. The rule also proposed modest changes to the 60% rule. 
IPAB Trigger Not Imminent
In an April 30th letter to CMS Acting Administrator Marilyn Tavenner, Acting CMS Chief Actuary Paul Spitalnic noted that Medicare spending will not rise fast enough in 2015 to trigger cost cutting, meaning the Independent Payment Advisory Board’s recommendations would not be needed. The Affordable Care Act created IPAB to make recommendations when Medicare costs grew faster than target rates. The Board’s members - to be nominated by the President and confirmed by the Senate – are to begin making recommendations in 2014 to take effect in 2015. Hospital payments were exempted from the recommendations until 2020.  

As of May 1, no members have been nominated to the IPAB and the panel has yet to become operational. Various provider groups have urged Congress to repeal the IPAB since the passage of the ACA back in March of 2010. A recent letter to Congress, signed by more than 500 groups, expressed opposition that the IPAB would be harmful to beneficiaries and prevents their access to care. On May 9, House Speaker John Boehner (R-OH) and Senate Republican Leader Mitch McConnell (R-KY) sent a letter to the President declining to submit appointments to the IPAB on similar grounds.

CBO has said that Medicare spending targets set in ACA through 2022 are unlikely to be hit, implying IPAB will not be needed until then. CBO projects that Medicare spending per beneficiary will grow at only 3 percent over the next 10 years, a drop from the 7 percent average growth rate over the previous decade.


April 23, 2013 
Close to 100 meetings held with Congressional Leaders during the AAMS Spring Conference in Washington! 
AAMS is pleased to report the recently concluded Spring Conference in Washington a success all around! Speakers NTSB Vice Chairman, Christopher Hart; Affordable Care Act expert, Sery Kim; former Congressman James Walsh; and Communications expert, Dr. Christopher Crane were very well-received. In addition to a great series of education sessions, attendees also participated in a hugely productive Hill Day during which almost 100 meetings were conducted with Congressional leaders and key Congressional staff. AAMS thanks all of our members that made the trip to Washington this year. We hope you found your stay enjoyable and a valuable use of your time!  Also, special thanks to our conference sponsors this year...
         
             
         
                 
         


April 9, 2013
Preview: President’s FY 2014 Budget Proposal 
More Talk of Grand Bargain in Washington

Next week, Congress returns to another full plate of activity with President Obama presenting his long awaited FY2014 budget proposal coupled with ongoing concerns about the impact of the sequester on the defense, aviation and health care industries. 

Prior to the Easter recess, Congress addressed near-term budget issues by completing its work on a Continuing Resolution to fund the government for the remainder of FY 2013 to avert a government shutdown on March 27. The Senate passed H.R. 933 by a vote of 73-26 on March 20, having included full-scale appropriations measures for Agriculture, Commerce-Justice-Science and Homeland Security to the original House version of the bill (Defense, Mil-Con). On March 21, the House voted 318-109 to clear H.R. 933 to go to the President for his signature. The bill provides $1.043 trillion in non-emergency discretionary spending and retained the automatic sequester per the Budget Control Act of 2011. 

The FY 2014 budget process, which traditionally begins the first Tuesday in February with the release of the President’s budget proposal was initiated this year by Congress. In the same week period, the House Republicans and Senate Democrats also passed competing FY 2014 budget resolutions in keeping with the terms of the most recent debt ceiling suspension legislation in January. Under the “No Budget, No Pay” Act, the pay of lawmakers from either or both of the chambers was placed at risk in order to spur action on a budget resolution by April 15.

Under “No Budget, No Pay,” the current debt ceiling suspension would expire on May 18, 2013. The next day, the debt limit would then be automatically increased by the amount of debt above the current statutory limit “necessary to fund commitment(s) incurred by the Federal government that required payment before May 19, 2013,” minus the amount of outstanding Extraordinary Measures in use on the date of enactment. The Bipartisan Policy Center estimated in February that this amount would total approximately $450 billion. Based on the use of Extraordinary Measures by the Treasury Department, the BPC projects that the next X date would fall sometime in August 2013, providing Congress with roughly four months to generate the necessary deficit reduction policies in order to avert default.

Expectations for President Obama’s FY 2014 Budget Proposal

President Obama’s FY 2014 budget proposal is expected to represent a “middle ground” when compared to proposals offered by Congress earlier last month.  The proposal will revisit concessions on Medicare and Social Security, which were offered during various negotiations with Speaker John Boehner (R-OH) over the so-called “fiscal cliff,” on the condition that Republicans offer significant new revenues. Expect to see cuts to Social Security via chained CPI as well as a host of cuts to the Medicare program. 


Two things to consider in the coming days: (1) Does the “middle ground” approach hold? As in, by starting in the middle, does Obama alienate liberals when a final compromise trends toward the right instead of the left, as it has in previous negotiations? It is unlikely that Republicans will accept the President’s initial offer, so concessions will continue or talks will stall again. The President will be portrayed by the media as courageous and committed to reaching a deal, simply based on this proposal, so (2) how will Republicans respond to this proposal without giving on revenues? Last week’s Gallup poll revealed that the number one criticism of Republicans (by both Democrats and Republicans) was their “inability to compromise.” If Obama is seen as open to entitlement cuts on a large scale, will Republicans reconsider revenues outside of tax reform? The President’s “charm offensive” resumes this week with another Senate Republican dinner where members may begin to soften to compromise or risk bearing the blame for sequester’s continued impact.

Health Care Outlook for Week of April 8 
  • House Schedules Initial Hearings on Entitlements---House Ways and Means Chairman Dave Camp (R-MI) has announced a series of upcoming hearings on entitlement reforms proposed by the President and others, including but not limited to using Chained CPI, increasing the Medicare eligibility age, reducing subsidies to high-income seniors, and adjusting Medicare Part B & D premiums. Dates have not been set. The House Energy and Commerce health subcommittee will also address entitlements this month with its first hearing on April 11 on the challenges of traditional Medicare’s benefit design and ways to strengthen the program.
  • Tavenner Confirmation Hearing Set for Tuesday April 9—After serving as acting Administrator of the Centers for Medicaid and Medicare Services for almost two years, Marilyn Tavenner will receive a formal confirmation hearing by the Senate Finance Committee on Tuesday. Her nomination is widely expected to clear the committee with limited objection. 
  • FY 2014 Budget Congressional Hearings—Treasury Secretary Jack Lew testifies on Thursday April 11 in front of the House Ways & Means full committee at 10am and the Senate Finance Committee at 2:30pm.


March 19, 2013
Senate committee schedules hearing: 'Aviation Safety: FAA's Progress on Key Safety Initiatives'
The Senate Commerce, Transportation, and Science Committee has scheduled a congressional hearing for this Wednesday, March 20, at 2:30 p.m. ET, on "Aviation Safety: FAA's Progress on Key Safety Initiatives." According to the committee, the hearing will examine the effect of sequestration on the FAA's efforts to implement safety provisions in recent FAA reauthorizations, and other current aviation safety issues. 

Witnesses will include FAA Administrator Michael Huerta, NTSB Chairman Debbie Hersman, Dr. Gerald Dillingham, Director of Civil Aviation Issues for the Government Accountability Office (GAO), and Jeff Guzzetti, Assistant Inspector General at the Department of Transportation. 

The hearing will be webcast live from the Committee's website.

Congressional Outreach Continues
The last two election cycles have brought an unusually large number of new faces to Capitol Hill. AAMS Government Relations is constantly looking to build new and maintain existing relationships on Capitol Hill in order to best represent the interests of our members. In the past week, AAMS Government Relations Manager Greg Lynskey took the opportunity to attend small meet-and-greet gatherings for freshman Congressmen Trey Radel, Fla.-14 and Andy Barr, Ky.-6, as well as third-term Congressman Erik Paulsen, Minn.-3. Each event granted the opportunity to provide the Congressmen and their staffs with a familiarity with AAMS, AAMS' member programs in their respective districts, and the top issues facing the air medical community today. AAMS will continue to build upon these and other relationships to further the policy needs of our members. 


March 14, 2013
Part II: Budget Week on Capitol Hill – Examining the CR and FY 2014 Proposals

With the two-week recess begins on March 25, Congress is fast-tracking a number of budget issues for the remainder of FY 2013 as well as initiating the FY 2014 budget process between now and then. 

The House moved quickly following the President’s Day recess on its new hybrid Continuing Resolution, which would replace the CR that runs out on March 27. The bill H.R. 933 passed the House on March 6 by a vote of 267-151. The Senate is under heavy pressure this week to approve the House-passed measure to fund the government for the remaining six months of fiscal year 2013. House Speaker John Boehner (R-OH) indicated that he would abandon H.R. 933 and move to pass a “clean” CR should the Senate attempt to use the bill “as a vehicle to advance their agendas.” 

Meanwhile, Senate Appropriations Committee Chair Barbara Mikulski (D-MD) has developed a substitute that could create some hurdles for Republicans in avoiding the “clean” CR scenario. Mikulski has received support from her Republican colleagues (including Ranking Member Richard Shelby (R-AL)), but there is uncertainty leading into floor debate as to how other Republican members will react to her plan to attach three more FY 2013 Appropriations bills (Agriculture, Commerce, and Homeland Security). 

Combined with the two bills that the House inserted (Defense, Mil-Con/VA), the Senate add-ons would bring the total number of 2013 appropriations bills to five as part of the CR. Although appropriators’ initial efforts to roll all 12 unfinished appropriations bills into an omnibus failed, it appears that almost half of them are slated to be enacted as part of a CR. Both parties have also sought to give more spending flexibility to these select agencies in light of the $85 billion automatic sequester currently in effect.

Regarding the FY 2014 budget process, both the House and the Senate appear on track to pass budget resolutions – the first time the Senate has done so since April 2009. Under the terms of the most recent debt ceiling increase, the pay of lawmakers from either or both of the chambers that cannot pass such a resolution by April 15 would be delayed. We note that “No Budget, No Pay” Act did not include a requirement that budget resolutions be reconciled into a single joint budget resolution, so Congressional pay is likely to remain intact for 2013. 

Continuing Resolution – Funding the Remainder of FY 2013 

The new continuing resolution would extend funding for operations for all federal agencies, programs and services until the end of FY 2013. To avert a government shutdown, Congress must complete action on a new CR by March 27. Here is a quick overview of the legislation currently being considered by both houses.
 
House CR Summary
House Republicans passed a continuing resolution (H.R. 933) last Wednesday that would prevent a government shutdown and continue government operations until the end of the fiscal year on September 30, 2013. The legislation included a full year Defense Appropriations bill, as well as a full-year Military Construction/Veterans Affairs Appropriations bill. Though the bill would provide $1.043 trillion in funding, the amount lawmakers had previously agreed to, the top-line overall rate of spending in the CR is reduced down to approximately $982 billion due to the impact of sequestration. 

Health Care Provisions of Note
  • Increases funding for military health programs (including medical research)
  • Authorizes FDA to access user fees collected in 2013, which were set at 2012 levels per the last 2012 CR
  • Denies OMB request to Congress for an additional $949 million for health insurance exchange implementation and $567 million for programs such as HCFAC
Senate CR Summary
Senate Democrats have prepared a substitute amendment under the Appropriations Committee that would maintain current funding levels for the federal government through the end of FY 2013 but also provide full-year appropriations for three additional departments -- Agriculture, Homeland Security and Commerce.  The Senate substitute amendment provides $1.043 trillion in budget authority, consistent with the Budget Control Act of 2011.

Health Care Provisions of Note
  • Strips $200 million from Community Care Transitions Program (out of $500 million total)
  • Rescinds $10 million from Independent Payment Advisory Board (IPAB)
  • Requires HHS to obligate all funds appropriated in FY 2013 for Community Health Centers by September 30
Sticking Points

Republicans Put Up Roadblock: Appropriations Committee Chair Barbara Mikulski (D-MD) told reporters Tuesday afternoon that two Republicans are objecting to the motion to proceed to the legislation. Leader Reid indicated that one of the holds was placed by Sen. Tom Coburn (R-OK). 

Transportation Funding Amounts: The House-passed CR reduced funding for highway programs by $555 million and transit program funding was decreased by about $117 million when compared to the 2012 transportation law. In their substitute to H.R. 933, Senate Democrats are seeking to increase funding for transportation despite Republican opposition.

House Conservatives Pushing Back: Rep. Matt Salmon (R-AZ) unveiled a 'modest proposal' on Monday to vet legislation that could complicate the job of House leaders trying to whip votes. Salmon indicated that he would oppose the rule for bills that increase spending without offsetting spending cuts and also those bills that do not receive the support of the majority of the GOP conference. Salmon would only need 15 other Republicans to commit to his pledge in order to deny leadership a majority on bringing key legislation to the House floor.

FY 2014 Budget Proposals 

Tomorrow’s markups in the House and Senate Budget Committees will illustrate two parties’ unique and often conflicting approaches to the role of government and its spending priorities. House Budget Chairman Paul Ryan (R-WI) and Senate Budget Chairwoman Patty Murray (D-WA) have proposed budget resolutions that set the tax and spending targets for the Federal government for fiscal year 2014 beginning October 1.

Both chambers are expected to take up their respective budget resolutions the week of March 18.

Ultimately without a budget resolution conference agreement between the two houses (note: highly unlikely), these budget proposals hold little weight other than to set markers for ongoing deficit reduction conversations leading into the next debt ceiling expiration sometime this summer.




Ryan Budget Basics
Spending Reductions: Curbs future spending by $5 trillion over next 10 years; slows growth in annual spending to 3.4% from 4.9%

Notable Policy Proposals:
  • Repeals Obamacare ($1.2 trillion)
  • Block grant Medicaid ($770 billion) 
  • Medicare premium support in 2024 ($129 billion)
  • Increase defense spending by $500 billion, canceling the sequester
Taxes: Establishes two tax brackets for individuals — 10 percent and 25 percent. 

Deficit Impact: Balances the budget in ten years

Murray Budget Basics
Spending Reductions: Cuts federal spending by roughly $975 billion 

Notable Policy Proposals:
  • Reduce projected interest payments on the debt by $240 billion
  • Provides for $100 billion in economic-stimulus package (infrastructure development and job training programs
  • Replace sequester with mix of mix of different spending cuts and tax increases
  • Reduce health care spending by $275 billion, defense by $240 billion
Taxes: Roughly $975 billion in revenue via Tax Code overhaul that includes eliminating certain tax deductions/loopholes (effectively tax increases on top earners and corporations)

Deficit Impact: Reduces projected deficits by $1.85 trillion 

Note: President Obama’s FY 2014 budget proposal has been postponed and is not expected until on or around April 8.


March 12, 2013
BCA Sequester Implementation Takes Shape (Part I) 
With sequestration now in effect, we are learning more specifics as to how these automatic cuts will affect the air medical community:

Medicare
Under sequestration, Medicare providers will be subject to a 2 percent payment reduction for services provided on or after April 1, 2013. The payment adjustment will be figured after determining coinsurance, any applicable deductible, or any Medicare secondary payer adjustments. 

FAA Furloughs
FAA employees have received advanced notice of furloughs that will begin on April 7.  FAA employees, including everyone in the Rotorcraft Directorate and Flight Standards Division will be furloughed for one day during every pay period (two weeks).  The agency is still considering how best to implement these furloughs.  Options include rolling furloughs in which divisions would effectively remain open full-time on a diminished capacity, or designating a specific day every two weeks for the division to be closed entirely, but allowing them to maintain full staffing on all other days.
 
ATC Tower Closures
FAA Administrator Michael Huerta has indicated that if the sequestration cuts continue for any length of time, that it may be necessary to close a number of air traffic control towers in order to manage the required furloughs, while maintaining the staffing necessary for safe operations in the busiest air traffic areas.  The FAA has released an advanced list of those air traffic control towers that may be subject to closure.  While it may not be necessary to close all the towers on the list, programs operating in these areas should be prepared for the potential loss of air traffic control services.
  
Continuing Resolution
Last week, the House of Representatives passed a continuing resolution that would continue funding the federal government through the remainder of the 2013 fiscal year. The current continuing resolution expires on March 27.  The House-passed resolution would provide continued funding at current appropriated levels, minus the automatic cuts called for under sequestration.  However, the resolution does give the Department of Defense increased flexibility to shift funds among accounts to help manage the effects of the sequestration cuts.  The Senate is expected to develop its own continuing resolution to provide a basis for negotiating with the House.  Failure to agree on a continuing resolution by March 27th would result in a full government shutdown, however, both sides have committed to avoiding that result.

House Budget Proposal
On Tuesday this week, Rep. Paul Ryan (R-WI), Chairman of the House Budget Committee, will release the details of the House Republican’s budget proposal for fiscal year 2014.  According to Rep. Ryan, the budget proposal will slow the rate of federal spending from 4.9 percent to 3.4 percent and balance the budget in 10 years.  However, the proposal also assumes savings from the repeal of Affordable Care Act and shifting Medicare and Medicaid to a premium support system over the long run, which is unlikely to occur.  Senate Democrats have indicated they will be offering their own budget proposal in the near future.  If they do, this will be the first time in four years they have done so.

For those of you who want a deeper look into sequestration and its effect on the healthcare community, please continue on to the following in-depth report... 

Background

Section 302 of the Budget Control Act of 2011 (Public Law 112-25) specified procedures that, if triggered, would result in automatic cuts in mandatory and discretionary spending beginning in 2013. The automatic sequester would only be triggered in the event that the Joint Select Committee was unable to reach an agreement on specific spending cuts. The sequestration would be divided equally among the fiscal years 2013 through 2021, and half of the sequestered spending each year would be drawn from defense functions, with the other half drawn from non-defense functions. In 2014 and thereafter, the discretionary savings would be achieved through reductions in the caps on discretionary spending. The sequester was scheduled to take effect on January 2, but the “fiscal cliff” budget deal H.R. 8 “The American Taxpayer Relief Act of 2012,” postponed these cuts until March 1. The deal also sliced the scheduled 2013 sequestration by $24 billion, from $109.3 billion to $85.3 billion.  

OMB calculates that the Joint Committee sequestration requires a 7.8 percent reduction in non-exempt defense discretionary funding and a 5.0 percent reduction in non-exempt non-defense discretionary funding. The sequestration also imposes reductions of 2.0 percent to Medicare, 5.1 percent to other non-exempt non-defense mandatory programs, and 7.9 percent to non-exempt defense mandatory programs.

Status

Congressional leaders and President Obama both loathe the across-the-board nature of the sequester, yet were unable to come to agreement on an satisfactory alternative that could pass both chambers. Most Republicans want to keep the entire sequestered amount in place, simply providing federal departments with greater flexibility in how to apply spending reductions. Meanwhile, President Obama and most Democrats have encouraged a replacement proposal that would impose a combination of alternative spending cuts and tax increases. 

As required by law, President Obama issued a sequestration order on March 1, 2013. 

The sequester could still be modified by Congressional action, but it is unlikely that the $85 billion in net spending cuts would be minimized. At any time over the next nine years, Congress can elect to pass legislation to turn off the $1.2 trillion in sequestration cuts. Budget experts forecast that some government agencies will delay or modify contract awards and furlough select employees. But only time will tell whether the impact on Federal employees and programs is significant enough to prompt a legislative remedy in 2013 or beyond. 

Impact on Medicare Providers

The policy would have a direct impact on HHS spending and Medicare payments for providers under Parts A, B, and D. These providers would see a 2 percent reduction in aggregate claims over the next ten years. Under the H.R. 8 delay, the amount of savings from Medicare ($11.1 billion) did not change, however, because Medicare cuts were and are still capped at 2 percent, and the across-the-board cut that applies to other non-defense programs remains larger than 2 percent. Medicare now represents about 26 percent of the total non-defense cut as opposed to 20 percent under the original caps.

While many other sequester cuts took effect on March 1, the Medicare reductions do not apply until one month later on April 1, 2013 and will spill over into fiscal year 2014. A Bloomberg Government analysis (February 28, 2013) indicated that Part A spending would be reduced by $5.6 billion, Part B by $4.9 billion, and $560 million for Part D. (BGOV analyzed historical monthly Treasury Department outlays (FY 2007-12) for Parts A, B and D to generate patterns of spending to distribute OMB sequestration amounts. 

Projected monthly sequestration amount, total Medicare (dollars in billions)



Source: Bloomberg Government
Graphic: Paige K. Connor

Specifically, Medicare sequestration would apply to individual provider payments under Medicare Parts A and B, along with monthly payments under Part C (Medicare Advantage) and Part D prescription drug plan contracts. Payment reductions will be made at a uniform rate across all programs and activities subject to a sequestration order. Sequestration reductions would be disregarded for purposes of computing any adjustments to Medicare payment rates, including the Part C growth percentage, the Part D annual growth rate, and application of risk corridors to Part D payment rates. 

On Friday, CMS issued advance notice to claims administration contractors in order to provide sufficient time to adjust payment systems by April 1. For Medicare Parts A and B, claims with dates-of-service or dates-of-discharge on or after April 1, 2013 will incur a 2 percent reduction in payment. For DMEPOS, including claims under the competitive bidding program, the 2 percent reduction will be applied based on whether date-of-service, or the start date for rental equipment or multi-day supplies, is on or after April 1, 2013. With respect to Part C and D plans, CMS is calculating a sequester-adjusted monthly payment for April, and will announce adjustment amounts to plans on March 22.

Centers for Medicare and Medicaid Services (CMS) Sequestration Breakdown

Affordable Insurance Exchange Grants………$44 million
State Grants and Demonstrations…………....$27 million

**Both programs are experiencing at 5.1 percent cut at a critical time in the implementation of the health insurance exchanges. The President’s FY 2014 is expected to be more prescriptive in how these funds are allocated. OMB has indicated that the widespread use of grants, loans will be impacted by sequestration, which could mean delays in awards or renegotiating the current scope of Federal assistance.

Program Management……………………….$40 million

** Former CMS administrators recently raised concerns that PPACA initiatives within the Innovations Center to implement delivery system reforms could be at risk if operational funding needs to be cut under the sequester.

CO-OP Contingency Fund…………………..$13 million

** In addition to unexpected fiscal cliff cuts, CO-Ops are now facing cuts to the contingency fund that supports their efforts with plans. Advocates have suggested that continued cuts could compromise the plans’ ability to effectively provide options with lower premiums. 

HCFAC Account……………………………$57 million

** The Health Care Fraud and Abuse Control Account faces cuts under the sequester that could have a negative impact on trajectory of anti-fraud efforts. Anti-fraud programs had a $7.90 return on investment in FY 2012, so potential savings from ongoing initiatives could be minimized. 

Additional HHS Agency Impacts

Health Resources and Service Administration (HRSA) - $365 million
  • Includes funding reductions for community health centers, newborn genetic screening, child immunizations for uninsured/underinsured, tobacco cessation programs for pregnant women
Substance Abuse and Mental Health Services Administration (SAMHSA) - $168 million
  • Includes funding reductions for Mental Health Block Grants
Centers for Disease Control and Prevention (CDC) - $303 million
  • Includes funding reductions for state public health budgets, subsidized by CDC
Food and Drug Administration (FDA) - $209 million

National Institutes of Health (NIH) – $1.55 billion
 
    
February 26, 2013
Addressing the Sequester: An Overview and Outlook

Background

Section 302 of the Budget Control Act of 2011 (Public Law 112-25) specified procedures that, if triggered, would result in automatic cuts in mandatory and discretionary spending beginning in 2013. The automatic sequester would only be triggered in the event that the Joint Select Committee was unable to reach an agreement on specific spending cuts. The sequestration would be divided equally amongst the fiscal years 2013 through 2021, and half of the sequestered spending each year would be drawn from defense functions, with the other half drawn from non-defense functions, including Medicare, farm price supports, vocational rehabilitation basic state grants, and the Social Services block grant. In 2014 and thereafter, the discretionary savings would be achieved through reductions in the caps on discretionary spending. 

The widespread assumption was that the threat of large-scale defense cuts (most Republicans oppose) and large-scale domestic spending cuts (most Democrats oppose) would compel the Joint Select Committee to identify specific cuts and reforms to avoid sequestration. Despite their best efforts to reach an agreement in the summer of 2011, the sequester was triggered and the Office of Management and Budget (OMB) assumed responsibility for calculating the $1.2 trillion in sequestered amounts for FY2013 to FY2021.

The sequester was scheduled to take effect on January 2, but the “fiscal cliff” budget deal H.R. 8 “The American Taxpayer Relief Act of 2012,” postponed these cuts until March 1, just weeks prior to the expiration of the current Continuing Resolution on March 27. The deal also sliced the scheduled 2013 sequestration by $24 billion, from $109.3 billion to $85.3 billion.  About $43 billion in those reductions would come in Pentagon spending, and $43 billion would come from non-defense discretionary programs.


This reduces the percentage cuts in full-year funding for most eligible programs (those that the law does not exempt from the automatic cuts). This $24 billion reduction effectively paid off two months of the 9 months of the sequester after January 2 by lowering spending caps in 2013 and 2014 and imposing rule changes for IRAs.

Under the Sequestration Transparency Act of 2012 (STA) the President was required to submit to Congress a report on the sequestration for FY 2013.  Absent appropriations for FY 2013, the STA estimates are based on the level of sequestrable budgetary resources assuming discretionary appropriations are funded at the annualized level provided by a CR for FY 2012 plus any funding enacted as advance appropriations for FT 2013.

Health Care Impact

The policy would have a direct impact on HHS spending and Medicare payments for providers under Parts A, B, and D. These providers would see a 2 percent reduction in aggregate claims over the next ten years. Under the H.R. 8 delay, the amount of savings from Medicare ($11.1 billion) did not change, however, because Medicare cuts were and are still capped at 2 percent, and the across-the-board cut that applies to other non-defense programs remains larger than 2 percent. Medicare now represents about 26 percent of the total non-defense cut as opposed to 20 percent under the original caps.

The total reductions in Medicare spending providers would face over the next decade are considerably smaller, relative to the size of the program, than the ones they faced a little more than a decade ago in the Balanced Budget Act of 1997 (Congress ultimately restored a portion of those cuts). Specifically, Medicare sequestration would apply to individual provider payments under Medicare Parts A and B, along with monthly payments under Part C (Medicare Advantage) and Part D prescription drug plan contracts. Payment reductions must be made at a uniform rate across all programs and activities subject to a sequestration order. Sequestration reductions would be disregarded for purposes of computing any adjustments to Medicare payment rates, including the Part C growth percentage, the Part D annual growth rate, and application of risk corridors to Part D payment rates. 

The sequestration would not affect: 
•  Premiums under Parts B and D 
•  Cost-sharing for Medicare-covered services 
•  Qualifying individual program, if funded by future legislation 
•  Medicare premium and cost-sharing subsidies under Part D; and 
•  Revenues to the Medicare Part A trust fund. 

Other Impacts

Defense: Defense programs now face a 7.3 percent, or $42.7 billion, cut during the last seven months of FY 2013. The defense sequestration will be imposed as across-the-board proportional reductions in funding provided in the appropriations bills including funding for war costs, and unobligated balances carried over from prior years. The department may also face an additional $12 billion reduction at end of March because the six-month CR funding level is higher than the new defense cap. 

Aviation: The Federal Aviation Administration faces more than $1 billion in automatic cuts, bearing the largest portion of cuts to the discretionary accounts under the Department of Transportation. The STA report from OMB stated that the three FAA primary budget accounts – operations, facilities and research would face cuts under sequestration. NextGen and contractors focused on ATC systems and technologies will likely see greatest impact due to the roughly $229 million reduction in the facilities and equipment account.

Sandy Aid: The STA report projected that non-defense discretionary spending authority—of which the Sandy aid would be considered a part—would have to be cut by 8.2 percent across the board to meet the sequester spending targets. The impact on Sandy aid could be relatively small though because the tens of billions will be disbursed over the course of several years, rather than a single budget year. 

Replacement Proposals

Between now and March 1, Congress could seek to replace the sequester with more specific cuts to mandatory spending totaling as much as $1.2 trillion. Both President Obama and some Members of Congress have offered proposals for repealing or modifying the automatic spending reductions since 2011. Here are those of note:
  • President’s FY 2013 Budget Proposal: The President’s FY2013 Budget Proposal would have eliminated the automatic spending reductions for all nine years and replaced them with alternative measures to reduce the deficit. President Obama proposed replacing the BCA automatic cuts with prescribed spending cuts and tax increases. The largest of these proposals include allowing the 2001/2003/2010 tax cuts for single filers making over $200,000 and married joint filers making over $250,000 to expire; savings generated from changes to Medicare, Medicaid, agriculture, and other mandatory programs; and placing caps on spending for Overseas Contingency Operations (OCO). Together, the proposal $2,221 billion more in deficit reduction than what would be achieved by the BCA’s automatic spending reduction process between FY 2012 and FY 2022.
  • H.R. 6684 The Spending Reduction Act of 2012: A follow-on to May’s Sequester Replacement Reconciliation Act of 2012 (H.R. 5652), House Republicans passed legislation in late-December to replace only the defense sequester in an effort to win conservative votes on a “fiscal cliff” solution. The legislation sought to cancel the sequester of approximately $98 billion in discretionary defense, discretionary non-defense, and mandatory defense FY2013 funding; lower the current FY2013 cap on discretionary budget authority set by the BCA of $1,047 billion to $1,028 billion; and cut other mandatory non-defense programs. (The sequestration of FY 2013 non-defense mandatory funding would remain in place.)
  • Van Hollen Plan: Maryland Congressman Chris Van Hollen (D-MD-8) proposed to delay the sequester for one-year, citing the lack of time between now and March 1 to come up with a 10-year replacement plan. “I would hope that we could come up with something that might cover the remainder of this fiscal year and one more year,” he said. Van Hollen proposes to pay for the $85 billion through a mix of different spending cuts and taxes, such as eliminating a farm-subsidy program that offers direct payments to farmers, raising premiums on the National Flood Insurance Program, implementing a minimum tax for income over $1 million, and eliminating various tax deductions that benefit oil and gas companies.
Outlook

On Feb. 5, President Obama announced in a press conference that he still favors a broad deal that includes both spending cuts and revenue (e.g. closing tax loopholes) to replace the sequester prior to the March 1 effective date. The President did not outline a specific proposal, leaving the details up to the Congress to generate the $85 billion in deficit reduction to hold off the sequester until the end of the fiscal year. 

Senate Democrat leaders including Budget Committee Chair Patty Murray (D-WA) and Majority Leader Harry Reid (D-NV) are reportedly considering a variety of options to address the sequester. The likely preference appears to be to delay the sequester for another three months, a move that would bring the timing for addressing the debt ceiling and the sequester into alignment. The cost of a 3-month delay would be roughly $36 billion, with the preferred funding divided between spending cuts (defense and non-defense) and revenue.

There are a few key concerns with this strategy for House Republicans who in large part would prefer for the spending cuts to take effect, despite their considerable impact on military and national security spending. First and foremost, House Republicans have indicated that tax increases are a non-starter in this environment, seeking instead to identify specific cuts and reforms that would balance the budget within 10 years. Secondly, Speaker John Boehner (R-OH-8) expressed frustration indicating House Republicans are not keen on another short-term patch. "At some point, Washington has to deal with its spending problem," Boehner told reporters. "I've watched them kick this can down the road for 22 years that I've been here. I've had enough of it. It's time to act."

The battle lines between President Obama (Team Revenue) and House Republicans (Team Spending Cuts) have been set in stone. Although some defense hawks have emerged in recent days saying they may support tax increases over defense cuts, by and large the Republican Conference seems to be aligned with the Speaker in their commitment to securing spending cuts at all costs. Republicans will continue to seek as many chances as possible to take a bite at the deficit reduction apple, even if the fallback is another short-term delay of the sequester. With President Obama insisting that he will oppose any effort to replace the sequester that does not involve further tax increases, it appears that once again, one side will be forced to concede – otherwise, sequestration is more likely than not to take effect on March 1.