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Avalere Analysis: Hospitals, Group Plans Would Be Hardest Hit Under Medicare Sequestration

By Nellie Bristol, CQ HealthBeat Associate Editor

November 23, 2011 -- Of the $123 billion in Medicare cuts from 2013 to 2021 that the deficit reduction sequestration provisions call for, the majority would come from provider payments, with a 32 percent share coming from hospital inpatient reimbursements, health consultant Avalere Health says in a new analysis.

The debt reduction law (PL 112-25) limits cuts to Medicare to no more than 2 percent a year. Other hard-hit Medicare payments would include those to group insurance plans, 15 percent of total cuts, and 12 percent of the physician payments. Hospital outpatient payments would make up an 8 percent share of the decrease and skilled nursing facilities would make up 7 percent. The figures are based on a 2 percent reduction of each service's projected payments through fiscal year 2021.

Absent a deficit reduction plan by Jan. 15, Congress must impose across-the-board cuts in federal spending in a process known as sequestration. Total federal budget reductions of $1.2 trillion would be required starting January, 2013. Medicaid, the Children's Health Insurance Program, Medicare Part D low-income subsidies and catastrophic care subsidies would be exempt. Also spared is the Qualified Individual Program, which funds Part B premiums for low-income Medicare beneficiaries, and health overhaul exchange premium subsidies. However, exchange cost-sharing subsidies would be cut.

While providers would take a hit under the scenario, unlike some other budget reduction plans, there would be no reduction in Medicare benefits.

Dan Mendelson, CEO of Avalere Health and a former Clinton administration official, said the sequestration scenario probably would be altered by Congress. "It's unlikely that this limited construct will ultimately be allowed to stand," he said in statement. "Real deficit reduction," he added would involve payment reductions, revenue growth and benefit reductions and continued delivery system reforms.

"Given the magnitude of these issues, Congress will need to use all of the tools at its disposal, but this type of courage doesn't usually materialize in an election year," Mendelson said.

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