On the evening of July 31, President Obama announced that he and congressional leaders from both parties had reached a deal on a debt reduction/debt ceiling increase package, paving the way for legislative action to be completed before the August 2 default deadline. The flurry of recent activity on Capitol Hill capped off weeks of intense negotiations on competing packages of spending cuts, as lawmakers raced to avoid the impending government default.

In addition to raising the debt ceiling, the legislative package – S. 365 – also includes corresponding deficit reduction measures spelled out in a two-step process. First, the legislation immediately caps discretionary spending over the next 10 years – a step that spares programs such as Medicare and Medicaid.

Next, S. 365 calls for the creation of a bipartisan, bicameral deficit reduction committee tasked with recommending up to $1.5 trillion in reductions that will be voted on by both chambers before the end of 2011. All deficit-reducing provisions will likely be on the table during this step, from entitlement reform (i.e., Medicare, Medicaid and Social Security) to tax reform.

If the committee cannot produce or if Congress cannot agree on a package that reduces the deficit by at least $1.2 trillion, then spending cuts with a major impact on Medicare providers will automatically be triggered. The Medicare cuts would only apply to providers – not beneficiaries – and would be capped at two percent of total program costs.

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