How the Federal Deficit Affects Health Costs (from Lockton)

Lockton Benefit Group’s Health Reform Advisory Practice issued weekly legislative updates in the months leading up to the passage of the Patient Protection and Affordable Care Act of 2010 (the “Affordable Care Act”), the federal health reform legislation signed into law in March 2010. We will continue these legislative updates on a periodic basis as Congress continues to tinker with or otherwise address the controversial new law and other healthcare legislation.

Congressional Supercommittee Fails to Agree on
How to Cut Federal Debt

On November 21, 2011, the co-chairmen of the special congressional supercommittee charged with making recommendations on how to trim $1.2 trillion from the federal budget, acknowledged the supercommittee had failed.  In a joint statement, Senator Patty Murray (D-Wash.) and Representative Jeb Hensarling (R-Tex.), stated they were “deeply disappointed that we have been unable to come to a bipartisan deficit reduction agreement.”

Senator John Kyl (R-Ariz.) blamed the committee’s failure on Democratic reluctance to cut into popular programs such as Social Security and Medicare. Senator John Kerry (D-Mass.) responded that efforts to reach agreement ultimately failed because of the Republican refusal to accept any tax increases on the wealthy in exchange for spending cuts.

Although Republicans had agreed to $300 billion in additional tax revenue over 10 years, the offer was conditioned on dropping the top tax rate on personal income to 28 percent from the current 35 percent, cutting the top corporate tax rate and continuing the Bush-era tax cuts, which are set to expire at the end of 2012. Democrats balked because they were disinclined to reduce the top marginal tax rate and because permanently extending the Bush-era tax cuts was expected to increase the deficit by about $4 trillion over the next decade.

What does the failure to reach agreement mean?

In the absence of a deficit reduction plan from the supercommittee, federal law calls for $1.2 trillion in automatic spending cuts.  Half of the cuts are to come from the Defense Department budget.  Other cuts will be made to Medicare; the law calls for an annual two percent cut in Medicare reimbursements to healthcare providers.

An additional $294 billion will come from domestic discretionary spending, resulting in such spending being a significantly lower percentage of gross domestic product, 2.6 percent, than it was during the Reagan, Clinton or Bush presidencies (4.2 percent, 3.7 percent and 3.8 percent respectively).  The Medicaid program, however, is saved from automatic cuts.

The automatic spending cuts are spread over 10 years and don’t start until 2013, giving lawmakers a full year to come up with alternatives.  However, most observers believe that a debt reduction deal is unlikely to be completed until after the November 2012 elections.

How will the failure affect healthcare spending?

Throughout the supercommittee’s discussions, it appeared that last year’s health reform law, the Patient Protection and Affordable Care Act (PPACA), would be left largely intact.  The exception was the law’s $14 billion public health and prevention fund and the law’s long-term care entitlement program (the CLASS Act), which the Obama Administration had already decided not to implement, for cost reasons.

With the failure of the supercommittee, Republican efforts to eliminate or reduce funding for healthcare reform will most likely pause until after next year’s ruling by the Supreme Court on the health reform law’s “individual mandate.”  If the Supreme Court upholds all or nearly all of the health reform law, Republicans can be expected to redouble their efforts to eliminate funding for all or substantial parts of the PPACA.

Also up could be a GOP attempt to take money budgeted for the health reform law to pay for at least part of the expensive physician payment fix – the annual search for as much as $37 billion to temporarily fix the broken formula for physician payments under Medicare.

Janae L. Schaeffer, J.D.
Compliance Services

About thebenefitblog

Eric is a Producer at Lockton Insurance Brokers, Inc., the world’s largest privately held commercial broker. Eric has over 23 years of experience in the insurance industry and has spent the last 11 years with Lockton. Eric specializes in Health & Welfare Benefits, Retirement Planning, and Executive Benefits. Eric's clients utilize his expertise in the areas of Plan Due Diligence, Transaction Structure, Fiduciary Oversight, Investment Design, Compliance and Vendor negotiation to improve the operational & financial outcome for each client. The Benefit Blog is a place to share that expertise and industry news.
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