On September 14, 2012, the Office of Management and Budget (OMB) issued its preliminary report detailing the estimated percentage cuts for more than 1,200 federal budget line items impacted by sequester. The report estimates overall respective cuts incurred by nonexempt, nondefense mandatory and discretionary programs at 7.6 percent and 8.2 percent in the first year with reductions to nonexempt, defense mandatory and discretionary programs occurring at the 10 percent and 9.4 percent levels, respectively. Although the OMB report fails to identify the specific "program, project and activity level" affected, it offers a sobering view of the toll sequester could take on the healthcare industry.

The Budget Control Act of 2011 (BCA) imposed caps on discretionary federal appropriations through 2021 as a result of negotiations between Congress and the Obama administration in response to the federal government having nearly exhausted its borrowing capacity. Estimated to reduce overall federal spending by $917 billion, the BCA created a bipartisan Congressional Joint Select Committee on Deficit Reduction, popularly known as the "Supercommittee," last year charged with reducing federal spending by an additional $1.2 trillion over ten years. The BCA requires an automatic across-the-board cut in budget authority (sequestration) on January 2, 2013, if Congress fails to enact the $1.2 trillion in savings. This draconian plan was included as a tactic to incentivize agreement between party leaders. Social Security, Medicaid and CHIP are exempt from sequester and the BCA caps Medicare provider and health plan payment rates at 2 percent.

As reported last year, the Supercommittee announced on November 21, 2011, that it was unable to agree on a deficit reduction plan, raising the prospects for sequestration. In response, Congress enacted the Sequestration Transparency Act (STA) on August 7, 2012, that requires the President, through the OMB, to report on the potential impact of sequestration under the BCA. Specifically, the STA requires OMB to report to Congress within 30 days on the percentage cuts generated by sequestration including "the resulting reductions at the program, project, and activity level," which the report did not identify.

A recent analysis funded by the American Hospital Association, which measured the economic impact of sequester on healthcare employment, including jobs supported by the healthcare industry, estimates that 766,000 jobs would be eliminated by 2021 starting with a loss of nearly 500,000 jobs in FY 2013. According to the analysis, California, Florida and Texas would sustain the highest job losses with hospitals (144,006), nursing facilities (63,946), doctors and other offices (61,809) and labs (56,537) topping the list of the most affected sectors through 2021.

While estimates place the squeeze on the Hospital Insurance Trust Fund at $5.8 billion, hospitals receiving graduate medical education (GME) dollars have added worry over the cap's potential to limit spending for new physician training. Similarly, an 8.2 percent decline in GME funding for children's hospitals could reduce the number of training slots available for pediatricians and pediatric subspecialists. Expressing concern over a 28 percent cut to the Medicare Sustainable Growth Rate, which also looms in January 2013, physician associations and medical societies have cautioned Congress that "The BCA's Medicare cuts could not occur at a worse time."

Across-the-board budget cuts are expected to produce significant declines in public funding for medical research including a $2.5 billion reduction to the National Institutes of Health (NIH). According to HHS, this could result in a 25 percent reduction in NIH research grants made to universities and institutes in 2013. Also impacted are the National Science Foundation ($421 million), which estimates a loss of some 2600 research and education grants and the National Cancer Institute (NCI), which anticipates a 40 percent reduction in new NCI grants.

Key agency budgets affected by sequester include HRSA, or the Health Resources and Services Administration ($605 million), the Centers for Disease Control ($464 million) and the Food and Drug Administration ($319 million). Enforcement dollars are estimated to decline with respect to the healthcare fraud and abuse control account fund ($78 million) and for the HHS Office of Inspector General ($5 million). Overall budget reductions for CMS would include cuts to program management funds ($63 million) in 2013.

Meanwhile, according to an October 1, 2012, report released by the Congressional Research Service, "a FY 2013 sequestration would significantly impact [PPACA] discretionary spending." To that end, estimates show a decline in funding for public health and preventive healthcare programs ($76 million), grants to states for establishing exchanges ($66 million) and demonstration project grants under the Medicare and Medicaid programs ($40 million). PPACA dollars for education, training, loans and grants, impacting some 30,000 health professionals and those in training, also would be scaled back.

Noting that "no amount of planning can mitigate the significant impact of the sequestration," the OMB report calls on Congress to "enact a balanced plan that achieves at least the level of deficit reduction agreed to in the BCA, and cancels the sequestration." While both parties await the outcome of the November elections, whether Congress will vote to avert sequester (possibly within a framework for future action on deficit reduction) before the January 2, 2013, deadline remains an uncertainty.