The debt ceiling debate currently consuming the halls of Congress has wide-ranging implications for the economy generally, employers large and small, and a number of specific industries, including health care. Congressional leadership and the Obama Administration are in closed-door negotiations, considering how to raise the debt limit, and determining what spending cuts and tax adjustments are needed upfront in order to reach agreement between the two parties and gain the votes needed to pass comprehensive legislation. The Congressional committees largely responsible for determining policies in relation to health care, tax and finance, and other programs, are not putting recommendations and proposals together. Rather, the process is being driven by the numbers – meaning, the effort is to come up with an achievable level of savings and/or revenue growth that can garner support for raising the debt ceiling. This is problematic in many ways, as the officials making decisions do not necessarily understand the impact their decisions on program cuts, such as Medicare cuts, will have on health care organizations and providers. Several sectors of health care have had to accept significant cuts as a result of the health care reform law, and at a time when those cuts and changes are only just beginning, it’s difficult for the industry to accept that they may face additional significant cuts through a debt negotiation deal.

The debt limit is $14.294 trillion and the United States $14.343 trillion in debt — $48.9 billion over the debt limit. The debt ceiling is often confused with a cap on the amount of money that Congress can spend, which is not the case. The money has already been spent. The debt ceiling is a self-imposed limit on the amount the U.S. government can pay on its debts. This is not a new issue for Congress. The debt ceiling has been raised several times in the last 10 years. The issue has loomed larger this year because of significant increases in government spending over the past decade.

By way of background, the United States government spends more money every year than it is able to raise through revenue. To fund many programs, the government borrows money by issuing treasuries. It is estimated that in a given year, almost half of U.S. expenditures are made with borrowed money. Historically, Congress has limited spending through a national debt ceiling. On May 16, 2011, Treasury Secretary Timothy Geithner announced that the federal debt had reached its statutory limit and declared a debt issuance suspension period, extending the Treasury’s borrowing capacity until Aug. 2, 2011. In an announcement on July 1, 2011, the administration confirmed that Aug. 2 date would be the day the U.S. Treasury would exhaust its borrowing authority.

Attention to resolving the issue has now turned to two plans. One plan is being shepherded by a bipartisan group of senators known as the “Gang of Six.” The plan, as currently outlined, would lead to a $4 trillion deficit reduction over the next decade, through a combination of deep spending cuts, both discretionary and mandatory programs, and new revenues raised through reform of the tax code. The second plan, developed by Senate Minority Leader Mitch McConnell (R-Ky.), with the cooperation of Senate Majority Leader Harry Reid (D-Nev.), would empower the President to raise the debt ceiling directly with a corresponding cut in spending to follow afterwards. It is possible that these two plans will be merged and the debt ceiling will be raised by the deadline with the promise of cuts comprised of many of the provisions included in the “Gang of Six” proposal.

“Gang of Six” Plan

The so-called “Gang of Six” plan, at this stage, involves a possible two-step process. First, an initial bill would be passed to make immediate cuts. This would be followed by a second bill to enact tax reforms and reforms to defense and mandatory health programs, including Medicare and Medicaid. Among the highlights of the plan:

  • Cut nonsecurity and security discretionary spending over 10 years.
  • Fully pay for repeal of Sustainable Growth Rate (the way physicians and other health professionals are currently paid in federal health programs) over 10 years.
  • Review total federal health care spending starting in 2020, with a target of holding growth to GDP plus 1 percent per beneficiary and require action by Congress and the President if exceeded.
  • Repeal the CLASS Act, which establishes a voluntary long-term disability insurance program that would pay disabled enrollees a cash benefit for assistance with basic daily living activities such as dressing and bathing.
  • Require committees to report legislation within six months that would deliver real deficit savings in entitlement programs over 10 years (the Senate Finance Committee would permanently reform or replace the Medicare Sustainable Growth Rate formula, currently utilized to set physician payment rates within Medicare ($298 billion) and find an additional $202 billion/$85 billion in health savings). Such additional savings plans being considered include:
    • reduction or elimination of hospital and long term care bad debt programs;
    • implementing uniform coinsurance across Medicare services;
    • reducing payments for home health services;
    • reducing reimbursement for diagnostic imaging services; and
    • revising coverage allowance under Medigap policies.
    • Ensure 75-year solvency of Social Security and provide for a decennial review of the program to ensure it remains solvent.
    • Achieve program integrity savings of $26 billion in entitlement programs to curb fraud, abuse and other wasteful spending government-wide.
    • Reduce marginal income tax rates and abolish the $1.7 trillion Alternative Minimum Tax.
    • Simplify the tax code by reducing the number of tax expenditures and reducing individual tax rates, by establishing three tax brackets with rates of 8–12 percent, 14–22 percent and 23–29 percent.
    • Establish a single corporate tax rate between 23 percent and 29 percent, raise at least as much revenue as the current corporate tax system and move to a competitive territorial tax system.
    • Retain the Earned Income Tax Credit and the Child Tax Credit, or provide at least the same level of support for qualified beneficiaries.
    • Shift to the chained-Consumer Price Index, intended as a more accurate measure of inflation, government-wide for updates to payment schedules starting in 2012, along with the following specifications for Social Security: (1) exempt SSI from the shift for five years, and then phase in the shift over the next five years; and (2) provide a minimum benefit equal to 125 percent of the poverty line for five years.

McConnell-Reid Plan

The McConnell-Reid plan provides a broad framework to deal with raising the debt ceiling and provides both short- and long-term options for doing so. At the moment, the plan includes the following principles:

  • Grant the President authority to raise the debt limit through 2012 in three installments – $2.5 trillion total.
  • Each time the debt ceiling is increased, the President would be required to propose an equivalent amount of deficit reduction offsetting the increase.
  • Congress could block the President’s proposal with a two-thirds super majority of both chambers of Congress.
  • An agreement by both parties would have to be reached for $1.5 trillion in spending cuts.
  • A spending freeze would be implemented over the next two years – $20 billion below levels for Fiscal Year 2011.

Conclusion

As negotiators continue to try to work toward reaching an agreement, the details of spending cuts and tax measures are expected to shift. However, the cuts and changes discussed above will likely continue to be on the table and removing any piece of the puzzle could shift discussions drastically as negotiators seek to reach a deal that addresses a specific level of spending cuts and revenue increases. The Government and Regulatory Affairs group at Drinker Biddle & Reath is following this very closely, with experts in many areas, including the health, employer and tax-related provisions, paying close attention to the specific details.