Medicare providers are facing $11.085 billion in automatic, across-the-board cuts for fiscal year (FY) 2013 under the terms of last year’s political compromise regarding the debt ceiling. Pursuant to this legislation, known as the Budget Control Act (BCA), the Office of Management and Budget (OMB) issued a report on September 14, 2012 detailing the spending cuts, known as sequestration, that will be triggered under the BCA. The cuts will go into effect on January 2, 2013 unless Congress and the Administration reach agreement on an alternative budget deal that supersedes the BCA – action that is unlikely to be considered until after the November elections and possibly not until 2013.

By way of background, the BCA set a January 2012 deadline for a bipartisan Joint Select Committee on Deficit Reduction to propose and Congress to enact a plan to reduce the deficit by $1.2 trillion in FYs 2013 through 2021. Because the Joint Select Committee failed to produce such a plan, automatic cuts to achieve this level of savings will be imposed on January 2, 2013. The cuts must be apportioned equally among FYs 2013 through 2021, and divided evenly between defense functions and non-defense functions (including Medicare provider payments subject to a cap). Mandatory programs exempt from sequestration, include, among others, Social Security, Medicaid, the Children’s Health Insurance Program (CHIP), and veterans’ benefits.

The Budget Control Act imposes a number of special rules regarding the application of sequestration to the Medicare program. Most notably, Medicare cuts are limited to provider payments, and reductions are capped at 2% percent of individual provider payments under Medicare Parts A and B, and monthly payments under Part C (Medicare Advantage) and Part D prescription drug plan contracts. Medicare payment reductions must be made at a uniform rate across all programs and activities subject to sequestration. Sequestration reductions will be disregarded for purposes of computing adjustments to Medicare payment rates, including the Part C growth percentage, the Part D annual growth rate, and application of risk corridors to Part D payment rates. Also specifically exempt from sequestration are Part D low-income subsidies, Part D catastrophic subsidies, and payments to states for Qualified Individual premiums.

The new OMB report, which was mandated by the Sequestration Transparency Act of 2012, estimates the level of BCA sequestration cuts that will be applied January 2, 2013 for the remainder of FY 2013. With regard to Medicare, the report includes a discussion of mandatory provider spending subject to the 2% cap and other discretionary spending subject to sequestration (bringing the total Medicare cuts to more than $11.085 billion). The cuts are broken down as follows: Part A/Federal Hospital Insurance (HI) Trust Fund: Mandatory and discretionary spending cuts will total approximately $5.8 billion; Part B/Federal Supplementary Medical Insurance (SMI) Trust Fund cuts will total about $5.2 billion; and Part D prescription drug plan payments will be reduced by about $591 billion (note that Part C/Medicare Advantage, funding is included in the HI and SMI trust fund reductions).

In addition to the Medicare provider cuts, OMB projects that for FY 2013, the BCA will impose cuts in other nondefense spending ranging from 7.6% to 8.2%, along with 9.4% to 10.0% cuts in defense programs (depending on whether the programs are classified as discretionary or mandatory). The nondefense cuts apply to a number of health care programs, including: a $2.5 billion cut in National Institutes of Health funding; a $605 million reduction in funding for the Health Resources and Services Administration; a $319 million cut in the Food and Drug Administration budget; a $66 million cut in Affordable Care Act (ACA) Affordable Insurance Exchange Grants; and a $78 million reduction in Health Care Fraud and Abuse Control Account funding.

It is uncertain at this time whether the sequestration cuts actually will be imposed, or if an alternative budget scheme – with potentially more dramatic Medicare and Medicaid impact – ultimately will be enacted. We will continue to post updates on budget activities impacting the Medicare program on our blog, where you also can find our previous reports on this topic.