Providers will face pressure to deal with daunting financial restrictions
When the election is over, expect more financial stress
The new year has just started, but inside the Beltway, all eyes are on the presidential and congressional elections that will take place in November—and the renewed fiscal policy debate that awaits us once the elections are over.
Soon after the elections, barring an act of Congress, the Bush-era tax cuts will expire. Many experts believe the national debt will once again approach the congressionally established legal limit, and the sequestration spending cuts that were mandated by the Budget Control Act of 2011 will take effect.
The number imprinted on our collective conscience is $1.2 trillion—the amount that the congressional deficit-reduction supercommittee was tasked with chopping. But most economists agree the real target is about $4 trillion to $5 trillion from the federal budget deficit. (The difference is partially attributable to the cost of a permanent correction to the flawed Medicare physician payment formula, as well as any additional fiscal stimulus.) That’s substantially more than the supercommittee could begin to tackle last fall.
Most likely, deficit reduction will be achieved primarily through spending cuts. Regardless of the outcome of the November elections, any new deficit reduction proposal that is politically viable will contain a high ratio of spending cuts to tax increases. After the supercommittee admitted defeat, there were calls by some to revive the bipartisan plan released (though not endorsed) by the Simpson-bowles commission in December 2010. That plan centered on spending cuts that would exceed tax hikes by a ratio of 3 to 1. Going into 2013, the political environment could necessitate an even steeper ratio.
This points to further spending cuts, in the neighborhood of several trillion dollars, that would be divvied up among defense, discretionary spending and entitlements— three ways, but not necessarily three equal ways. In November, Defense Secretary Leon Panetta told Congress that military cuts in the sequestration would force the Pentagon to cut back ship and construction projects, furlough civilian workers, and leave the military with the smallest force since 1940. And sequestration-level cuts in domestic nondefense discretionary spending would drop this category of expenditures far lower, as a portion of gross domestic product, than it was during the Reagan, Clinton or Bush years, according to the Economic Policy Institute. As a result, entitlements—social Security, Medicare and Medicaid—are likely to bear the brunt of the cuts, and the majority of the entitlement cuts will be borne by healthcare providers.
That means providers can anticipate combined Medicare and Medicaid cuts as high as $400 billion to $600 billion, reminiscent of the deep cuts in the Balanced Budget Act of 1997. The cuts will be made using blunt instruments, such as rate cuts to Medicare and Medicaid, and value-based instruments that seek to further realign incentives to better manage care and reduce avoidable utilization, such as accountable care organizations, medical homes and bundled payments. However, these valuebased instruments are still new and largely unproven. While the jury is still out on whether these programs reduce spending overall, results from pilots and demonstrations have shown that they can improve quality and reduce acute-care utilization.
One thing is clear: Providers need to start planning for the value-based healthcare system that is evolving from the volume-based system of the past. You can start by addressing five key implications of a lower-payment, lower-volume environment:
Move from managing operating costs to redesigning your organization’s overall cost structure. Your efforts should include reexamining the services you offer, re-engineering how remaining services are delivered and reducing overall administrative costs.
Consider your market position in relation to economic and clinical integration. Horizontal integration can gain economies of scale to drive down cost and improve access to financial and human capital. Vertical integration with physicians and post-acute providers is needed to create the infrastructure for managing care across the continuum. Determining your organization’s role within your market related to integration is key.
Recognize that all providers will be held responsible for cost and quality outcomes. All providers will need to work with payers to separate risks that are within providers’ control from insurance risks, invest in clinical and financial support and create a culture that supports re-engineering of care delivery.
Prepare for a payment system that links a significant and growing portion of provider payment to quality. Despite continued challenges in defining and measuring quality— and the inevitable growing pains of quality-linked payment methodologies—the trend is unmistakable.
Be ready to provide increased transparency of both cost and quality data. Purchasers will require providers to justify their pricing based on the quality of outcomes. Also, as patients start paying a greater share of the cost of insurance premiums and healthcare services, they will use available data to act more like traditional consumers.
It will take time to achieve the gains necessary to ensure an organization’s financial sustainability. Providers would be wise to redouble their efforts given the additional payment reductions on the horizon.
Providers need to start planning
for the value-based system evolving from the volume-based
system of the past.