Providers Awaken to Day One of Sequestration

The deadline has passed and the doomsday scenario of federal budget cuts that were designed to be too painful to contemplate are about to kick in.

The across-the-board cleaver cuts will lop $1.2 trillion off the federal budget over the next nine years, averaging more than $109 billion each year. This includes $11 billion in Medicare funding in 2013 in the form of 2% reimbursement cuts.

Reaction in the healthcare sector has been largely a resigned shrug. After witnessing gridlock and brinksmanship in Washington over the last several years, healthcare executives who spoke with HealthLeaders Media this week expressed concern about the long-term effect of the cuts, but also said they were preparing for some scenario that involved doing more with less money.

Chris Van Gorder, president/CEO of Scripps Health in San Diego, says sequestration cuts are just the latest in a series of budget challenges that healthcare executives have had to face from all levels of government.

"The federal government and federal legislators only look at [Centers for Medicare & Medicaid Services] cuts. The states only look at Medicaid cuts. The counties only look at their responsibility. Sometimes it appears to providers as if all of these agencies don't look at the combined impact of their decisions," Van Gorder said in an email exchange.

"For example, we are preparing for Medicare reimbursement and (Disproportionate Share) reductions called for in the (Affordable Care Act). In California, the governor is reducing Medi-Cal reimbursement and we know that due to trickle down impact, the county will end up looking at County Medical Services reimbursement. This is all on top of reductions we are anticipating in commercial reimbursement starting in 2014 with the insurance exchanges."

"When we add sequestration, we will see additional unexpected reductions of 2% in Medicare reimbursement. But to add to that, we will need to look at the impact of reductions in research funding and graduate medical education and others types of reimbursements or grants some organizations receive that will also trickle down due to cuts in their budgets. Remember, the providers are at the very end of the economic food chain."

Craig Samitt, president and CEO of Madison, WI-based Dean Clinic, acknowledges that the cuts will force providers to do more with less but said that "the bright side is that sequestration will further instigate organizations to transforms from volume to value."

"Dean's focus is on better care at a lower cost. That strategy has taught us that in the world of bundled payments there are an array of strategies that can be implemented to reduce cost and make up for reductions in fee-for-service reimbursements," Samitt said.

"For us, sequestration creates even greater urgency to try and transform from a sickness care company to a wellness care company."

"I am sure there are differing views that the sky is falling with sequestration," he says. "It certainly puts pressure on us to deliver care at lower costs. But it should open our eyes to an alternative care model that focuses on wellness and prevention and care coordination. It will further catalyze the importance of moving in a new direction."

Standard & Poor's analyst Martin Arrick said in a report issued Thursday that most hospitals examined by the bond rating agency weren't unprepared by sequestration. "Most of the providers we rate have already budgeted for basically flat Medicare revenue for fiscal year 2013, and providers also have robust cost-containment strategies in place to meet these challenging cuts," Arrick said.

"Nonetheless, the sequestration reductions will, in our opinion, contribute to compressed earnings and cash flow immediately, which could impact credit ratings over time.";

That sentiment was echoed by Adam Rogers, an attorney at DLA Piper's Miami Health Care Practice.

"A lot of providers, even though they are starting to get worried, they are also taking a wait-and-see approach," said Rogers. "Everyone knows that when this administration and Congress are 'working together' things tend to happen, if at all, at the last minute. No one budges until they have to."

Rogers says many providers expect that President Obama and Republicans in Congress will strike some sort of deal, even if sequestration remains in effect after April, to retroactively reimburse Medicare for the cuts imposed in the sequestration period.

"A lot of providers are used to hearing about the sky falling with the sustainable growth rate cuts and then at the last minute or retroactively it always gets patched," Rogers says. "That is probably in people's minds that 'they really aren't going to let us go out of business.' But as hard as it's been for this Congress and administration to get something done, I am not sure that when they do get something done how user friendly it will be."

Van Gorder says Scripps has been preparing for an era of flat or even reduced reimbursements, in whatever form they might take. At some point, he says, "even for Scripps and large healthcare systems like ours, we can reach a breaking point where we will have to look at programs and all aspects of care delivery."

"We are nearing that breaking point," he says. "I suspect that smaller and independent facilities have reached and are probably past the breaking point. If all of these cuts and reductions come to pass you will be seeing a significant increase in lay-offs of healthcare providers, program closures and organizations going into bankruptcy."

Van Gorder says he expects the effects of the cuts to be felt increasingly over the months and years. "We are already feeling the pressure from cuts in state and commercial reimbursement. Sequestration will hit us later this year and the planned cuts in DSH and additional Medicare in 2014," he said.

"So we are already feeling the pain and unless something changes, it will just grow over the next couple of years. But we are not standing still either. We are working every day to lower costs by reducing unnecessary variation and by building in system-wide efficiencies - while not forgetting quality along the way."