December 1999

The Balanced Budget Refinement Act of 1999

by Carol Barish, Consultant for Health Policy

In August of 1997, President Clinton signed the Balanced Budget Act of 1997 (BBA) into law in an attempt to reduce deficit spending and balance the federal budget. The ensuing reductions included cuts to Medicare and Medicaid. The Congressional Budget Office (CBO) initially estimated that the BBA reduction in federal spending for Medicare and Medicaid for the 1998–2002 period would amount to $102 billion less funding than prior law provided for. Today, however, the official estimates predict reductions in federal spending likely will be greater—$115 billion and $13 billion for Medicare and Medicaid, respectively, over the five-year period. Moreover, the CBO reports that Medicare spending for 1998 alone was fully $6 billion less than prior projections calculated it would be under the BBA.

The Effect on Health Care

In the beginning, no one was sure what the effects of the BBA cuts would be on health care. Today, however, many hospitals, health systems, and other health facilities are cutting back or shutting down services just to survive, and providers protest that the BBA cuts to hospitals’ services, skilled nursing facilities, and home health care are too severe.

Some federal agencies see it differently. Reports from the General Accounting Office, the Department of Health and Human Services Office of the Inspector General, and the Medicare Payment Advisory Commission indicate that there is not enough evidence as yet to blame providers’ financial problems on the BBA. In fact, nonprofit organizations such as the AARP report they see no evidence that the BBA has caused problems with access to care for beneficiaries. According to Stuart Guterman, principal research associate at the Urban Institute, "This was a political bill in response to a political situation, but whether it’s necessary, that’s hard to say" (Bureau of National Affairs Special Report, Dec. 13, 1999).

The Relief Package

In spite of these reports, Congress moved forward to reinstate some of the funding the BBA had cut. On November 29, 1999, President Clinton signed into law the Medicare, Medicaid, SCHIP Balanced Budget Refinement Act of 1999. This corrective legislation provides financial relief to Medicare and Medicaid providers and State Children’s Health Insurance Programs (SCHIPs). Overall, the act restores $27 billion over ten years and $17 billion over five years to various providers. The biggest winners are Medicare managed care organizations, with reinstatements of more than $5 billion from 2000–2005. In addition, over the same five years hospitals will receive about $8.85 billion, skilled nursing facilities will receive $2.1 billion, and home health agencies will receive $1.3 billion.

The BBA relief package will assist hospitals and health systems through provisions—such as the following—which will provide considerable savings over the five-year period:

• Canceling a proposed 5.7 percent across-the-board reduction to the outpatient prospective payment system (PPS), restoring $3.9 billion to hospitals
• Giving rural hospitals the choice of moving to the outpatient PPS or remaining under the current cost-based reimbursement structure, which will restore $800 million to such hospitals
• (1) Directing the HCFA to pay rehabilitation services based on a per-case basis rather than a per-diem basis; and (2) providing enhanced payments for all PPS-exempt hospitals. These actions will restore $300 million to hospitals
• Protecting gains and losses for the first three years during the implementation of outpatient PPSs, which should restore $1.4 billion to hospitals
• Allowing teaching hospitals to receive an increase of 6.5 percent in 2000 and 6.25 percent in 2001 for indirect medical education payments, which will restore $600 million to such hospitals

Other relief provisions offer one-time or shorter-term benefits, for example,

• allowing home health care a one-year delay in the scheduled 15 percent reduction in home health payments, which will restore $450 million to hospitals with home health agencies; and
• increasing payments to disproportionate share hospitals (DSH) by eliminating the planned 1 percent reduction in fiscal years 2001 and 2002, which will restore $100 million to DSH hospitals.

  SOURCE: Summary of the Balanced Budget Act Relief Package, American Hospital Association, 1999.

The Reaction in Michigan

In Michigan, reaction to the relief package has been mixed. Recently, a group of mid-Michigan health care executives met with U.S. Sen. Carl Levin to discuss the impact the refinement act will have on health providers in the state. Hospital administrators protested that the relief package does not go far enough; many felt that it would not make much difference. "It’s the difference between drowning in twelve feet of water or ten," said Stephen C. Lada, president of Central Michigan Healthcare System in Mt. Pleasant.

Bob Baker, president of Gratiot Community Hospital in Alma, agreed, saying, "The refinement act returns nothing, absolutely nothing, to us. That’s not uncommon to rural hospitals." Baker further explained, "The BBA of 1997 reduced Medicare payments to Gratiot Health System by $2.4 million dollars in the year ending on June 30, 1999 as compared to the year ending June 30, 1998. That $2.4 million represents 4.4 percent of Gratiot’s total net revenue of $55 million. In order to stay afloat financially, we were forced to reduce our full-time equivalent employees by 7 percent, or 48 full-time equivalent employees."

Alternatively, David Jahn, CEO of Schoolcraft Memorial Hospital—another rural hospital—said the BBA relief act has actually helped his organization by allowing it to be designated as a "critical access facility." Otherwise, his organization would be eliminating services that are now on sound financial ground. However, Jahn agreed that overall, the BBA relief act does not go far enough.

In a Detroit Free Press special report entitled "Hospitals in Crisis," Spencer Johnson, president of the Michigan Health & Hospital Association, warns, "The level of health care people have become used to won’t be there. There are going to be service reductions and layoffs. Hospitals will have to retreat to core inpatient services. What will suffer will be community outreach and outpatient care."

Home health care made significant gains under the relief act, according to Ann Marie Wagner, executive director of the Michigan Home Health Association. According to an internal memo written by Wagner, "The final package includes a delay in the 15 percent cut that had been scheduled for October 1, 2000; provides a modest bump in per-beneficiary limits for agencies below the national median; addresses concerns regarding surety bond requirements; and takes other actions to address home care providers’ concerns." Overall, she is pleased with the results, although she acknowledges that the relief act does not address all the problems.

Conclusion

The BBA of 1997 did manage to curb the record-high profit margins hospitals earned from Medicare business: Eleven months into the BBA, historically low growth in Medicare spending was recorded. This rapid turnaround may indicate that cuts were made too fast. In other words, this may be just the beginning of the battle over Medicare payments; ultimately, Congress and health care providers will have to work together to find an appropriate level of funding for the country’s health care system.