Healthcare and the Budget Control Act of 2011


The Budget Control Act calls for $2.1T to $2.5T in cumulative deficit reduction for the period 2013 – 2021. $917B of this is in the form of ‘up-front’ cuts in discretionary spending, and has no appreciable effect on health spending

The Act establishes a joint committee that must propose (by 11/23/11) and pass (by 12/23/11) deficit reduction legislation that lowers the deficit by at least $1.2T, under special rules that more or less guarantee a straight up-or-down vote

If the committee fails outright, or falls short of its $1.2T target, automatic spending cuts would either replace (if no legislation passes) or supplement (if legislation passes with a deficit reduction < $1.2T) the committee’s legislation and guarantee a total deficit reduction of $1.2T

The automatic cuts are divided evenly between: 1) discretionary defense spending; and 2) non-defense discretionary spending and certain entitlements. Medicare is subject to automatic cuts, Medicaid is not. Automatic cuts to Medicare are capped at 2 percent, or roughly $139B. Automatic Medicare cuts would probably take the form of across the board cuts in provider payment rates

We believe the committee has better than even odds of succeeding with legislation that produces all, or nearly all, of the $1.2T target. The politics of the committee and the parliamentary mechanics of its special rules mean the makers of products used by Medicare beneficiaries are likely to be hit with de novo rebates and/or discounts. Rebates on drugs sold under Part D are possible, despite the exclusionary clause

After rebates and discounts on inputs to care, we believe that in the following order, further means-testing of Medicare premiums and a gradual increase in the Medicare eligibility age to 67 are reasonably likely

We view major changes to Medicaid (either payment rates or eligibility) as unlikely

If the committee fails, automatic cuts to Medicare payment rates mean the entire healthcare impact of the Act falls on providers, in which case Hospitals would be the most negatively affected of healthcare’s major subsectors. If the committee succeeds – and we believe there are better than even odds that it will – Hospitals are likely to get a reprieve vs. expectations as other sub-sectors bear some of the burden; but Major Pharmaceuticals, Specialty Pharmaceuticals, Medical Devices, and Biotech are likely to fare worse than expected

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