Federal cuts to physician reimbursement in the Medicare program would have a negative effect on U.S. nonprofit hospitals, Fitch Ratings says.

The Budget Control Act of 2011 specified that a sequestration or cutting of federal spending would start in calendar 2013 if an alternative deficit-reduction deal could not be worked out in late 2011. The Democrats and Republicans did not reach a deal and part of the sequestration would cut Medicare spending.

Unless the two parties reach a deal in December, the sequestration will cut direct Medicare payments to hospitals by 2% starting in 2013.

In September “the American Hospital Association (AHA), the American Medical Association (AMA) and the American Nurses Association (ANA) released a new report that found up to 766,000 health care and related jobs could be lost by 2021 as a result of the 2% sequester of Medicare spending mandated by the Budget Control Act of 2011.”

On Wednesday Fitch issued a statement focusing on another part of the “fiscal cliff.” The Balanced Budget Act of 1997 specified a way for the Centers for Medicare and Medicaid Services to control spending growth on physician services. The CMS was to prevent the annual increase in expense per Medicare beneficiary from exceeding the gross domestic product growth rate.

Since 2003 Congress has voted to override the CMS-mandated conversion factor, which would reduce physician payments. Congress has allowed the rates to continue to rise. At this point the difference between what CMS is recommending and what physicians would otherwise be paid next year with little or no increase is 27%, according to a Congressional Budget Office estimate.

For those physicians that are not employed by hospitals, this cut would not affect the hospitals. However, hospitals increasingly have directly employed physicians, according to Emily Wong, senior director for U.S. health care at Fitch. In particular, university hospitals usually employ all of their physicians. To the extent that hospitals employ physicians, they would be directly affected by the reimbursement cut, Wong said.

The possible cut in physician reimbursement is just another part of the fiscal cliff this year. However, the problem is magnified this year because there are so many pressures for cuts, said Christiane Mitchell, director of federal affairs at the Association of American Medical Colleges. The group represents the country’s 400 largest teaching hospitals and health systems.

Currently Congress is considering approving a one year, $7-$10 billion extension of the current physician payment rates but offsetting the expenditure by an equal cut to payments to hospitals that employ physicians, according to Mitchell. Cutting either the doctor payments or the hospital payments would be bad policy, she said.

The proposed cuts would disproportionately affect big teaching hospitals that care for Medicare and Medicaid patients, Mitchell added. Furthermore, to help offset the impact of the coverage expansion in the Affordable Care Act, hospitals agreed to $155 billion in Medicare spending cuts over 10 years.

The cuts to physicians or directly to hospitals would aggravate the impact of these reductions, Mitchell said.

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