6 Key Observations on Sequestration and Hospitals

Without legislation to replace Friday's sequester that would cut $1.2 trillion from the federal budget by 2021, $85 billion in automatic spending cuts will take effect for 2013. Defense would take the biggest hit, while social benefit programs such as Social Security and Medicaid are exempt. Medicare, however, would see a 2 percent budget cut.

Experts from Huron Consulting Group's healthcare division give their perspectives on how sequestration would hit hospitals.

1. Sequestration serves as a reminder that the healthcare industry needs to reduce its cost structures between 20 and 40 percent, whether the cuts take effect or not, said Huron Healthcare Executive Vice President Gordon Mountford. "Providers still have an urgent need to develop multi-pronged, strategic approaches to reducing costs and improving revenue across their entire enterprise," he said.

2. Cost reduction through better operational and clinical positioning for value-based purchasing becomes more important, said Huron Healthcare Managing Director Curt Whelan, adding that more providers have shown movement on this strategy over the past six to 12 months.

3. Hospitals and health systems should be aware that healthcare spending cuts are in the government's budget crosshairs. "Whether through sequestration alone, or sequestration plus additional cuts down the road, there is no doubt that the government is targeting significant reductions in healthcare spending," said Huron Healthcare Managing Director Jeff Jones.

4. Most Medicare reimbursement falls below hospitals' costs, leading providers to set goals to make margins on Medicare treatments. If those reimbursements are reduced further through sequestration, that would make providers' goal even more difficult to attain. "Most providers are not breaking even on Medicare — and that's a significant goal, and a stretch for most organizations," Mr. Whelan said.

5. Sequestration contributes to the "burning platform" in healthcare, comprised of many urgent factors such as unsustainable spending that require the industry to rapidly become more cost-efficient for the long term.

6. Having acclimated to their financial climate, hospitals and academic medical centers have made significant progress to function more efficiently with reduced reimbursements from all payors, including commercial ones.

More Articles on Healthcare Spending:

Report: Coordinated Care, Global Budgets Could Save California $110B
Feds Support States' Right to Cut Medicaid Payments
Delaying PPACA Could Save U.S. From Sequester, Gov. Jindal Says

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