The US House of Representatives passed a debt ceiling package (Budget Control Act, House Rules Committee Amendment to S. 365) by a vote of 269 to 161 to lift the debt ceiling and avoid default. The US Senate voted 74 to 26 in favor of the package today and President Obama quickly signed it into law.

The debt ceiling plan immediately allows the federal government to borrow $400 billion to avoid default, and permits President Obama to raise the debt ceiling again this fall by $500 billion unless Congress passes legislation preventing it. This $900 billion in additional borrowing will allow the Treasury to pay its debts through early next year. In exchange, the deal cuts approximately $917 billion from federal spending over 10 years, beginning in Fiscal Year 2012.

The compromise package failed to include large-scale programmatic cuts required to reduce the deficit. Rather, the legislation establishes a Joint Select Committee on Deficit Reduction charged with putting together a package to identify between $1.2 and 1.5 trillion in spending cuts between 2012 and 2021 and requires Congress to revisit deficit reduction legislation and spending cuts just before the end of the year.

Within the next two weeks, twelve Members of Congress (six Democrats and six Republicans) will be appointed by the Majority and Minority Leaders of the Senate and the Speaker and Minority Leader of the House to recommend federal spending cuts and other savings for congressional approval. Although members of the Joint Committee may advocate for tax increases, the inclusion of any in a final deal is unlikely. The Joint Committee will have until November 23 to report out recommended savings.

If the congressional “super committee” reaches consensus, House and Senate committees will be required to approve the legislation without amendment no later than December 9 and present it to the full House and Senate for a final vote by December 23. If the Joint Committee is unable to approve at least $1.2 trillion in deficit reduction, a sequestration process is invoked – triggering across the board cuts in federal spending beginning in January 2013. Both parties are likely to find this option highly undesirable as legislation requires that half the cuts come from defense spending and half from non-defense sectors. Medicare provider rates would be subject to reductions but Social Security and the Medicaid program would be exempt from cuts.

It is expected that the Joint Committee will look to health care spending for a large proportion of federal savings. Late last year, the National Commission on Fiscal Responsibility and Reform chaired by former Senator Alan Simpson, R-Wyo., and Erskine Bowles who served as Chief of Staff to President Clinton, recommended more than $400 billion in health care spending cuts over a nine-year period (FYs 2012-2020). Though the Commission’s final report was largely ignored by President Obama and Congress, it is expected to figure prominently into discussions by the Joint Committee. The health care savings identified by the Simpson–Bowles commission is already creating a lobbying frenzy among governors, health care providers, manufacturers, and beneficiary groups who have so much at stake and hope to protect and have a voice in reshaping vital heath care programs.

Some of the Simpson–Bowles’ recommendations include:

  • Reforming the Medicare Sustainable Growth Rate (SGR) for physician payment and requiring the fix to be offset, which would save $26 billion relative to a freeze. Congress has been unable to tackle this problem over the years, and the accumulated shortfall of deferring physician payment reductions is expected to reduce physician payments by 23 percent in 2012. It is unclear whether a 12-member committee will have the ability to craft a technical change of this magnitude in the time frame it has but each year Congress fails to act the shortfall only compounds the problem.
  • Reforming or repealing the Community Living Assistance Services and Supports (CLASS) Act would save $76 billion through 2020. The CLASS Act, enacted as part of the Affordable Care Act, established a voluntary long-term care insurance program to address the need for non-institutional long-term care. Beneficiaries who sign up would pay modest premiums for only a few years and receive benefits many times larger calling into question whether the program could be sustained over time.
  • Restricting first-dollar coverage in Medicare supplemental insurance would save $38 billion by prohibiting Medigap plans from covering the first $500 of an enrollee’s cost-sharing liabilities and limiting coverage to 50 percent of the next $5,000 in Medicare cost-sharing. The policy could also be applied to the TRICARE for Life, the supplemental insurance for military retirees.
  • Extending the Medicaid drug rebate to dual eligibles would save $49 billion. This proposal provides rebates to individuals eligible for both Medicare and Medicaid benefits who currently receive prescription drug benefits through the Medicare Part D program.
  • Reducing Medicare payments to hospitals for graduate medical education (GME) would save $60 billion by limiting hospitals’ direct GME payments to 120 percent of the national average salary paid to residents in 2010 and updated annually thereafter by chained Consumer Price Index (CPI) and by reducing the IME adjustment 3 percent.
  • Cutting Medicare payments for bad debt would save $23 billion if the Medicare program were to discontinue reimbursing hospitals and other providers for unpaid deductibles and copays owed by beneficiaries.
  • Accelerating home health savings in the Affordable Care Act would save $9 billion. Accelerating a productivity adjustment beginning in 2013 and rebasing the home health prospective payment system by 2015 instead of 2017 would speed up intended savings.
  • Eliminating state Medicaid provider taxes would save $44 billion and prohibiting states from financing portions of their Medicaid programs by imposing taxes on health care providers – removing a stable source of funding for state Medicaid programs.
  • Placing dual eligibles in Medicaid managed care plans to save $12 billion.
  • Reducing funding for Medicaid administrative costs would save $2 billion by shifting more of the responsibility for Medicaid’s administrative costs to states and eliminating duplicative payments.
  • Enacting comprehensive medical malpractice reforms would save $17 billion if the Joint Committee is able to modify the “collateral source” rule to allow outside sources of income collected as a result of an injury to be considered in deciding awards; impose a statute of limitations on medical malpractice lawsuits; replace joint-and-several liability with a fair-share rule; create specialized “health courts” for medical malpractice lawsuits; and allow “safe haven” rules for providers who follow best practices of care, all of which could be challenging in the context of the Joint Committee’s short-term mission.
  • Instituting a premium support program in the Federal Employees Health Benefits (FEHB) Program would save $18 billion by transforming the FEHB program into a defined contribution premium support plan offering federal employees a fixed subsidy each year. Federal retirees could use this subsidy to pay a portion of the Medicare premium.

In July, House Majority Leader Eric Cantor, R-Va., released his own list of health care spending cuts totaling approximately $350 billion in federal savings over 10 years. Rep. Cantor has provided limited details about his proposals, but the broad concepts include:

  • Increasing penalties for health care providers failing to adopt electronic health records under Medicare “meaningful use” requirements would save $1 billion.
  • Validating physician orders for high-cost and potentially fraudulent services under Medicare would save $1.8 billion.
  • Requiring prior authorization for high-cost diagnostic imaging services under Medicare would save $1.1 billion and increasing the amount of time a physician practice would be expected to utilize advanced imaging equipment, which would save an additional $.8 billion.
  • Reducing Medicare payments for bad debt would save between $14 to $26 billion if the Medicare program were to discontinue reimbursing health care providers for unpaid deductibles and copayments owed by beneficiaries – which mirrors the Simpson–Bowles proposal.
  • Increasing cost-sharing for beneficiaries who use nursing home and home health services would save $50 billion. ■Obligating beneficiaries to pay a portion of their laboratory fees for services ordered by their physician. New co-payments would save between $8.5 and $16 billion.
  • Reforming Medicare payments to rural hospital programs would save $14 billion.
  • Repealing Frontier State adjustments included in the Affordable Care Act (for North Dakota, South Dakota, Nebraska, Kansas, Oklahoma, and Texas) would save $2 billion.
  • Lowering payments for Medicare Part B drugs through adjustments to the Average Sales Price (ASP) formula would save $3 billion.
  • Decreasing the Federal Matching Assistance Percentage (FMAP) would save $100 billion and would decrease the federal contribution to state Medicaid programs at a time when they are unlikely to be able to make up the difference.
  • Reducing payments for Durable Medical Equipment (DME) under Medicare would save $5 billion.
  • Reforming Direct and Indirect Medical Education (DME and IME) payments would save $14 billion though it is unclear what approach this could take.
  • Freezing Medicare income-related premium brackets after 2019 and increasing current cost-sharing by 10 percent would save $38 billion.
  • Reducing funding for the Prevention and Public Health Fund would save $8 billion. The fund was created by the Affordable Care Act to assist state and community efforts to prevent illness and promote health and was provided $15 billion over 10 years.
  • Strengthening Third-Party Liability efforts under Medicaid would save $1.4 billion.
  • Rebasing Medicaid Disproportionate Share Hospital (DSH) payments in 2021 for uncompensated care provided in hospitals would save $4 billion.

Savings derived from Medicare, Medicaid, and other health care programs will be high on the agenda of the Joint Committee as it looks for ways to reduce the deficit. It should be noted that the Gang of Six – comprised of Senators Kent Conrad (D-ND), Dick Durbin (D-IL), Mark Warner (D-VA), Saxby Chambliss (R-GA), Tom Coburn (R-OK) and Mike Crapo (R-ID) – suggested $117 billion in health care savings – much of it targeted at Medicare, including discussions to implement greater cost-sharing requirements for upper income Medicare beneficiaries.