Climbing out of a fiscal hole created by expiring tax cuts, new taxes, and automatic spending cuts, members of Congress passed the American Taxpayer Relief Act on Dec. 31, 2012. The law prevented implementation of a 26.5 percent Medicare physician payment cut.
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Published 2/1/2013
Madeleine Lovette

Last-Minute Deal Averts Fiscal Cliff

Legislation delays decisions on SGR, sequestration cuts

On Jan. 2, 2013, President Obama signed the American Taxpayer Relief Act (H.R. 8) into law to avert the so-called ‘fiscal cliff’ facing the nation as a result of the expiration of the 2010 Tax Relief Act and the enactment of the 2011 Budget Control Act. The President signed the bill after Congress reached an 11th-hour deal late on New Year’s Eve and quickly passed the legislation through both chambers.

Without the legislation, $600 billion of expiring tax cuts, new taxes, and automatic spending cuts would have taken effect. Many economists had warned that failure to address the fiscal cliff could have had a significant impact on the U.S. economy and world markets.

Despite the grave nature of the legislation, it did not pass unanimously. In the Senate, five Republicans and three Democrats opposed the legislation, while 16 Democrats and 85 Republicans voted against it in the House.

Major health provisions
The American Taxpayer Relief Act includes language that prevented implementation of the 26.5 percent Medicare physician payment cuts scheduled to go into effect on Jan. 1, 2013, under the Sustainable Growth Rate (SGR) formula. Instead, the act extends current Medicare physician payment rates through December 31, 2013. It also extends the current Medicare Geographic Practice Cost Index floor, which has the effect of raising Medicare payments for physicians who practice in less populated parts of the country.

The $30 billion “doc fix” was financed through spending reductions in other areas of the healthcare sector, including the following:

  • $10.5 billion in cuts from projected Medicare hospital payments over 10 years for inpatient or overnight care through a downward adjustment in annual base payment increases
  • A reduction in Medicaid disproportionate share payments to hospitals by an additional $4.2 billion over the next decade
  • Rebased bundled payments for end stage renal disease
  • Implementation of competitive bidding for diabetes test strips purchased in retail pharmacies
  • A reduction in risk-adjusted payments to Medicare Advantage plans

Other healthcare-related fiscal offsets within the bill that could affect some orthopaedic surgeons’ practices include the following:

  • A reduction in payments for advanced imaging services based on a change in assumptions regarding the utilization of equipment
  • A change in the multiple payment procedure reduction that reduces the payment rate by 50 percent instead of 25 percent for multiple therapy services provided on the same day for the same patient
  • A cap on outpatient therapy services

The equipment utilization change will affect the practice expense relative value units for advanced diagnostic imaging services such as magnetic resonance imaging (MRI). This change only affects orthopaedic surgeons who use MRI services CPT codes.

The change in the multiple payment procedure reduction rate (from 25 percent to 50 percent) will affect total Medicare payments when a provider bills for two or more physical therapy or occupational therapy services on the same day for the same patient. This change will primarily affect orthopaedic practices that employ physical or occupational therapists.

The outpatient therapy cap provision extends the exception process for outpatient therapy caps through Dec. 31, 2013. In addition, the new law extends the application of the cap and threshold to therapy services furnished in a hospital outpatient department and counts outpatient therapy services furnished in a critical access hospital toward the cap and threshold. Per beneficiary, Medicare will cover up to $1,900 for physical therapy and up to $1,900 for occupational therapy services provided in an outpatient setting. This cap applies only to services in outpatient settings, not those provided in office settings.

Funding cuts
The legislation also cuts funding within President Obama’s major healthcare reform act, the Affordable Care Act (ACA). The remaining $1.4 billion in funding for the ACA Consumer Operated and Oriented Plan program created to provide consumers with alternative health plans in states dominated by one or a few private insurers was eliminated. In addition, the Community Living Assistance Services and Supports program for long-term care was permanently repealed.

The bill also defers the automatic spending (“sequestration”) cuts called for under the Budget Control Act 2011for two months. These include a 2 percent cut in Medicare physician payments and cuts to other health programs, including military orthopaedic programs. The American Association of Orthopaedic Surgeons is in the process of reviewing the orthopaedic impact of these changes.

Additional provisions
Although called the American Taxpayer Relief Act, the new law raises income tax rates for some families. The tax rate for individuals making more than $400,000 and couples making more than $450,000 increases from 35 percent to 39.6 percent. Additionally, rates on dividend income and capital gains increase by 5 percent for top earners.

Lower wage earners did not come out unscathed, however. The law’s failure to extend the “payroll tax holiday” means that Social Security (FICA) taxes will increase 2 percent—from 4.2 percent to 6.2 percent—resulting in an immediate reduction in take-home pay for all wage earners.

Other notable provisions in the law include the extension of unemployment benefits and a Congressional pay freeze through Sept. 30, 2013.

AAOS Response
Immediately following the enactment of the American Taxpayer Relief Act, AAOS President John R. Tongue, MD, issued a statement on the impact of the legislation. He noted that a deal was vital to averting the fiscal cliff, but that the legislation left two important issues unresolved—a permanent fix to the flawed SGR formula and the sequestration cuts.

“Short-term patches continue to breed uncertainty among patients and their physicians and hamper the medical community’s efforts to improve quality and lower healthcare cost,” he said. Dr. Tongue noted that the called-for sequestration cuts to critical healthcare programs would only exacerbate these efforts.

Dr. Tongue called on Congress to work with the physician community to find a permanent solution to the sequester and the SGR by “identifying thoughtful fiscal reforms that continue to streamline our healthcare system while maintaining funding for medical innovation and healthcare quality improvement” and “developing a sustainable payment system that rewards effective and accountable health care” for orthopaedic patients.

Listen to an analysis of the impact of the fiscal cliff legislation
by Graham Newson, director of the American Association of Orthopaedic Surgeons (AAOS) office of government relations, and Peter J. Mandell, MD, chair of the AAOS Council on Advocacy.

Madeleine Lovette is the communications specialist in the AAOS office of government relations; she can be reached at