On the first day of 2013, by a vote of 257 to 167, the House of Representatives passed the American Taxpayer Relief Act of 2012 (H.R. 8) preventing tax increases for most Americans and temporarily delaying substantial spending cuts for many federal government programs. The law represents a compromise designed to avert the so-called “fiscal cliff” that would have otherwise gone into effect January 1, 2013. President Barack Obama and House Speaker John Boehner had been unable to strike a tax deal over the two months since the general election and with the clock ticking down on 2012, Vice President Joseph Biden and Senate Minority Leader Mitch McConnell came together to broker a package able to pass both Houses of Congress. (The Senate passed the bill earlier in the day by a vote of 89 to 8.)

A number of frequently discussed Medicare policy changes were included in the legislation, though cuts to the Program did not go as deep as those advocated by many House Republicans who argued for reductions in entitlement spending to counterbalance the tax increases imposed on the wealthiest Americans.

The Details

The Act makes approximately $30 billion in Medicare and Medicaid cuts — half of which fall on the backs of hospitals — in order to pay for a one-year freeze on Medicare physician payment rates that would otherwise have been cut by 26.5 percent resulting from the sustainable growth rate (SGR) formula. The SGR one-year fix continues a decade-long Congressional trend of addressing the impact of a flawed statutory formula instead of implementing a long-term policy-driven solution which some estimate will cost more than $200 billion and require bipartisan agreement.

The American Tax Payer Relief Act includes a number of payment extensions including the Medicare work geographic adjustment, Inpatient Prospective Payment (IPPS) system adjustment for low-income hospitals, outpatient therapy caps, ambulance add-on payments for ESRD patients, the Medicare-dependent hospital program, authority for Medicare Advantage Special Needs Plans (SNPS) and Medicare reasonable cost contracts.

The largest health care offset in the fiscal cliff legislation is a $10.5 billion documentation and coding adjustment (DCA) to recoup Medicare overpayments made to hospitals in previous years triggered by detailed coding practices that do not correlate with patients’ severity of illness. Congress previously required the Centers for Medicare and Medicaid Services (CMS) to recoup earlier overpayments which resulted in $6.9 billion in cuts. Hospitals will also lose $4.2 billion in further rebasing cuts to Medicaid Disproportionate Share (DSH) payments which have been used to offset the cost of care provided to Medicaid and uninsured patients.

The legislation equalizes Medicare outpatient hospital payments for stereotactic radiosurgery (SRS) treatment delivered by a cobalt-60 energy source with that of SRS treatments delivered by linear accelerators. This provision saves $300 million and creates payment parity with similar treatment modalities.

The American Taxpayer Relief Act of 2012 changes the utilization factor used in the setting payment for advanced imaging services, an issue that has been hotly debated over the years. The policy change was proposed in the President Obama’s FY 2012 budget, discussed as part of 2011 debt ceiling talks, Super Committee negotiations and recommended by the Medicare Payment Advisory Commission (MedPAC) to control the growth in spending for advanced imaging. The utilization assumption matches payment to the number of hours/week during which equipment is used. The new law changes the equipment utilization factor from 75 percent to 90 percent to save $800 million in Medicare spending.

The legislation rebases Medicare payment for dialysis care according to recommendations contained in a recent General Accountability Office (GAO) report suggesting that the bundled Medicare payment for dialysis care has been paying dialysis facilities too much for ESRD drug costs since the bundle was expanded in 2011 to include injectable drugs, their oral equivalents and certain other items and services for which Medicare previously had paid separately. Changes in beneficiary utilization prompted the policy shift which will save $4.9 billion.

The package saves $1.8 billion by reducing payments for outpatient physical and occupational therapy and speech-language pathology for subsequent therapies when the therapies are provided the same day — an idea that was floated by MedPAC in December. The law also requires that blood glucose test strips be subject to competitive bidding. Medicare beneficiaries in nine areas of the country have received diabetes testing supplies through a mail-order Medicare Competitive Bidding Program since January 1, 2011. Expanding this requirement to all beneficiaries will save the federal government $600 million.

Currently the federal government and its Medicare Administrative Contractors (MACs) have three years from the date of reimbursement to recoup a Medicare overpayment. The fiscal cliff legislation increases the statute of limitations to five years and expects to save $500 million. Another change lowers payment rates for non emergency ambulance transports of ESRD patients to and from dialysis appointments.

Conclusions

Health care providers — especially those that treat Medicare beneficiaries — should expect additional reductions to Medicare services in the next several months as Members of Congress continue to grapple with deficit reduction as part of sequestration policies that will now go into effect in two months. There are a number of likely targets and stakeholders will be canvassing Members of Congress to protect certain programs and services for vulnerable populations and the providers that care for them. And while Medicaid is protected from statutory cuts as part of sequestration, Medicare faces a program cut of up to two percent which are expected to lead to further uncertainty in the health care sector. Federal health agencies such as the National Institutes of Health, the Food and Drug Administration, Centers for Disease Control and Health Resources and Services Administration also face substantial cuts to federal programs affecting vital research programs, inspections and approvals of drugs and medical devices, disease prevention and health centers in rural and underserved areas.

Legislators, policy makers and federal Agencies face a daunting agenda in 2013. In addition to focusing on implementing provisions of the American Taxpayer Relief Act intended to address the broader financial challenges, federal and state policymakers will continue to work to implement provisions of the Affordable Care Act, (the health care reform law), including systemic changes to Medicaid and the private insurance market in 2014 and preparing to launch state and regionally-based health insurance exchanges.