Balanced Budget Act of 1997

In 1997 the Clinton Administration signed into law the Balanced Budget Act. One of the key provisions of this act was reduction in Medicare payments to health care providers. The reductions threw a health care system that was essentially in equilibrium into turmoil.

Let me describe the BBAs phase-out methodology in this way. Imagine a grocery store buys a gallon of milk from their wholesaler for $4.00, but the law allows the purchaser to buy that same gallon of milk for $3.00. Does anyone believe the purchaser wont buy the milk for $3.00? How long would that store sell milk? If they did decide to sell milk, how long would they stay in business? (D.H. Impact of Budget)
The answers to the questions are fairly obvious, but in fact this is exactly what the Balanced Budget Act of 1997 did to hospitals across the country. By substantially lowering the payments for Medicare patients, the government forced many hospitals and out of business and managed-care companies to stop caring for Medicare patients.

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According to Medicares WebPage Medicare is a Health Insurance Program for people 65 years of age and older, some disabled people under 65 years of age, and people with End-Stage Renal Disease (permanent kidney failure treated with dialysis or a transplant). Medicare has two parts, Part A which is for basically hospital insurance. Most people do not have to pay for Part A. In addition it has a Part B, which is basically medical insurance. Most people pay a small monthly fee for Part B. Medicare first went into effect in 1966 and was originally administered by the Social Security Administration. In 1977 the control of it was switched over to the newly formed Health Care Financing Administration. Beginning in July 1973 Medicare was extended to persons under the age of 65 with certain disabling conditions. In 1988 Congress passed legislation to expand the program to cover health care costs of catastrophic illnesses.

The Balanced Budget Act of 1997 was designed to lower spending in some areas to help balance the budget. Hence the name Balanced Budget Act. The main area from which the BBA cuts back spending is Medicare.
Changes in the Medicare program were an essential part of the budget agreement that led to the Balanced Budget Act of 1997. Without the $191.5 billion in net spending reductions over the next five years, a balanced budget would not have been achieved. (M.M. www.urban.org.)
The problem with drastically lowering the amount that Medicare pays health care providers is obvious. Just like every other industry in America, the health care business needs make money to survive. You dont open up a new factory and make a new toy for $45 and then turn around and sell it to your customer for $20. You would go out of business in no time. This is essentially what Medicare is doing to the health care business. In the past four years, more than 40 hospitals have closed, and 64% are losing money, Feinstein said. Three hundred physician groups have gone bankrupt since 1996. (J.J LA Times) These statistics are from California only, but are very representative of the entire country.

As with any major legislation, the Balanced Budget Act included some policies that are flawed or have had unintended consequences that are posing immediate problems to some providers and beneficiaries, said Clinton in a letter to Sen. William V. Roth Jr., chairman of the Finance Committee. (C. B. PP A08)
It is quite obvious that even the government recognizes that there is definitely a problem with the way in which the BBA has been implemented.
We believe that congressional intent was for this policy to be implemented in a way that is budget-neutral for hospitals, the White House said in a memo yesterday, meaning the cuts should have been compensated in some other area of hospital payments. (C.B PP A08)
According to Modern Healthcares By the numbers issue, profits dropped from $21.9 billion in 1997 to $19.4 billion in 1998, a $2.5 billion dollar decrease in just one year. Thats pretty impressive considering there were more hospital admissions that year than any previous year.

Not only were hospitals hit hard by the drop in Medicare payments, the managed-care industry took severe loses as well. A special report in Modern Healthcare said that Medicare managed-care annual enrollment growth has decreased from 36.2% in 1995 to a mere 4.8% in 1999. For the year 2001, 65 managed-care providers already have notified the government that they will be dropping out of Medicare. This will require an estimated 934,000 beneficiaries to switch HMO plans. (A.P Gore Outlines) When the government does not pay the managed-care companies enough money to cover the cost of their Medicare patients, they have no choice but to stop accepting Medicare patients.

Bill Clinton and the current administration realize that the cuts they made in Medicare payments have been to deep. They are now proposing boosts in Medicare payments. President Clinton proposed a $21 billion boost in Medicare payments over five years for hospitals and other health care providers Tuesday, saying, Medicare patients are at risk because of insufficient spending. (A.P. Clinton: Medicare needs) The $21 billion dollars helps, but it is only 11% of the amount cut by the BBA. It is fairly obvious that Medicare is already being stretched to its feasible limits, but Al Gore does not think so.
Gore has proposed using a $338 billion of the projected 10-year budget surplus to add a prescription-drug benefit to Medicare that gives free complete coverage to the elderly poor and a voluntary cost-sharing benefit to others. (A.P. Gore Outlines)
Perhaps the Administration should resolve the problems caused by the BBA before they try to expand Medicare coverage.

In summary it can be said that the Balanced Budget Act of 1997 has had many negative effects on the health care industry as a whole.
By eliminating the Medicare cost-based reimbursement system and not replacing it with an alternative payment mechanism to protect the grant funds, the BBA threatens health canters fundamental ability to continue to make health care affordable and accessible to millions of low-income seniors and disabled Americans. (D.H. Impact of Budget)
In the governments favor it can also be said that the government realizes this and is trying to do their best to right some of its wrongs by reimbursing some of the payments they have cut.


Bibliography:
Hawkins, Daniel R. Jr. Impact of budget cuts on health care: Daniel R. Hawkins Jr. Congressional Testimony (07-19-2000)
Associated Press. Gore Outlines Medicare Plan Omaha World Herald (09-26-2000)
Babington, Charles. Clinton Moves to Undo Some Medicare Compensation Cuts. The Washington Post (10-20-1999) PP A08.


Johnson, John. Los Angeles Time (10-10-2000)
Associated Press. Clinton: Medicare needs billions more. USAtoday (6-20-2000)
Hallam, Kristen. A big problem for health plans. Modern Healthcare (6-5-2000) PP 48-52.


Author Unknown. By the numbers. Modern Healthcare (7-31-2000) PP 1-68.


Author Unknown. Medicare: An Overview. Online. Available: http://www.medicare.gov/basics/overview.asp. 10-11-2000.


Moon, Marilyn Gage, Barbara and Evans, Alison. An Examination of Key Medicare Provision in the Balanced Budget Act of 1997 Online. Available: http://www.urban.org/entitlements/moonfinal.htm#exec. 10-11-2000.