The payroll tax cut deal approved by the House and Senate on February 17 includes $21 billion in healthcare spending, much of which comes from blocking the physician pay rate drop of 27.4% that would have taken effect on March 1. Medicare Fee Schedule payment rates will now be frozen at their current levels through December 31. The physician payment cuts were avoided by offsetting reductions in Medicare bad debt reimbursements and other payments to hospitals, and cuts to a preventive health fund that was established under the Patient Protection and Affordable Care Act (PPACA).

Medicare Fee Schedule payments are determined by a Sustainable Growth Rate (SGR) formula that was adopted in the Balanced Budget Act of 1997, which the Centers for Medicare & Medicaid Services (CMS) is required to follow. This temporary fix is but the latest in a series of annual events. Many healthcare organizations, including the American Medical Association and the American Hospital Association, have urged Congress to find permanent solution to the problem, but a permanent fix is expected to cost the government $300 billion.

The largest offset in the current deal, expected to save the government $6.9 billion, will reduce Medicare bad debt reimbursements to hospitals from 70% to 65%. President Obama’s proposed budget had recommended cutting bad debt reimbursements to 25%. Another $4.1 billion will be saved by lowering payments to hospitals that have a disproportionate share of patients covered by Medicaid.

In a statement, the American Hospital Association said, “Today’s proposal would add an unnecessary strain to hospitals that care for vulnerable populations. It limits therapy services provided in hospitals and assistance that helps defray Medicare and Medicaid costs to low-income seniors.”

Other large offsets in the package include $5 billion from the Prevention and Public Health Trust Fund, created under PPACA to help states prevent obesity, tobacco use and the spread of HIV, and about $2.5 million through a 2% cut in Medicare payment rates to clinical laboratories.

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