By Spencer Perlman
WSC President

Summary & Overview

With the government shutdown now in its 11th day and an unprecedented government default less than one week away, WSC wanted to provide an update on recent activities in Washington and its potential impact on the economy and health care providers. There is significant activity on Capitol Hill today as House Republicans appear prepared to acquiesce to the President’s demands that the government must be funded and the debt limit must be raised unconditionally, though it still remains unclear whether House Republican leadership can secure the support of their Tea Party members. If negotiations proceed as planned, it seems to be setting the stage for broader substantive negotiations in November and December over the tax code, entitlements (including Medicare), and overall government operations and spending.

From the perspective of health providers, there is much at stake. Clearly, a government default would be extremely damaging since Medicare claims likely would not be paid in full and/or on time. Hopefully, this will not come to pass. Assuming that a deal is struck to forestall such a situation, it is prudent for providers to closely watch any “grand bargain” negotiations that arise from the deal since one of the government functions that is in the Republican’s cross-hairs is Medicare. Some options that might be on the table for Medicare changes would include means testing of beneficiaries so as to require wealthy beneficiaries to pay more in cost sharing, and SGR reform. The latter could be problematic for hospitals and other providers since it is likely they would be the “pay-for”. More details are likely to emerge in the coming days and weeks.

Detailed Analysis

Republican’s Facing Pressure to Surrender
Congressional Republican leaders face increasing external and internal pressure to relent and allow the government to reopen and the debt ceiling to be raised. Mainstream Republican constituencies such as the conservative intelligentsia, Wall Street, the business community, and the non-Tea Party rank-and-file are strongly urging Speaker of the House John Boehner (R-OH) and his leadership team to find a compromise solution that will both rescue Republicans from the political prison of their own making and allow the country to take a step back from the brink of default and potential economic disaster.

The Tea Party wing of the Republican Party and its supporters in the conservative grassroots who pushed the Speaker into this gambit show no signs of a willingness to back down or compromise, but they are slowly being isolated and marginalized. It is illustrative that the two most vocal elected officials in favor of the shutdown strategy, Sen. Ted Cruz (R-TX) and Sen. Mike Lee (R-UT), both Tea Party heroes, have grown increasingly quiet over the past week while mainstream conservative heavyweights like Senate Minority Leader Mitch McConnell (R-KY) and Rep. Paul Ryan (R-WI), the Republican’s 2012 candidate for Vice President, have emerged to help direct the Republican exit strategy.

Sen. McConnell is polling his conference to ascertain their support for agreeing to a short-term continuing resolution (CR) to fund the government and a short-term increase in the debt limit in return for reversing an unpopular medical device tax and permitting federal agencies greater discretion in managing the sequester. Meanwhile, Mr. Ryan published an op-ed this week in the Wall Street Journal laying out the framework of a potential bipartisan summit to address the country’s long-term fiscal challenges, including tax reform and entitlement reform.

Indeed, what began as a highly charged litmus test of conservative purity and a demonstration of Republicans’ unrelenting detestation of the Affordable Care Act has now morphed into a somewhat panicked desire to extract any sort of concession from the White House in return for reopening the government and raising the debt limit. For their part, the President and Senate Majority Leader Harry Reid (D-NV), who have been quarterbacking the Democrats’ strategy, continue to insist that the government should be reopened and the debt limit should be raised unconditionally.

Recent Events
There are many moving pieces on the multi-dimensional political chessboard as House Republicans, Senate Democrats, Senate Republicans, and the White House maneuver, but the most recent updates as of 10:00 a.m. are as follows:

House Republicans met with President Obama at the White House yesterday afternoon and brought a proposal to suspend the debt limit for six-weeks (through November 22) unconditionally, but to leave the government shutdown in place until negotiations can begin on addressing long-term fiscal issues such as tax reform and entitlement reform. Once negotiations began in earnest next week, the government would be reopened. The Affordable Care Act, which supposedly was the House Republicans raison d’etre for the shutdown, was not mentioned in the White House meeting. The President welcomed the offer but was noncommittal; he insisted that the government must be reopened before negotiations could begin. House Leadership huddled with the rank-and-file early this morning to determine its next steps and agreed to open the government through December 15. The formal proposal was sent to the White House this morning.

Senate Democrats are filing cloture on a bill that would suspend the debt limit through December 31, 2014. If six Senate Republicans join the Democratic Caucus in support of the cloture motion, the legislation could pass the Senate over the weekend, or sooner. It is highly unlikely that the House would take up the bill, though, even if the support is there in the Senate. At this point, it is unclear if Sen. Reid could secure the support of six Republicans, but it may be possible since many Senate Republicans have expressed growing dismay at the current situation, the House Republicans, and Senators Cruz and Lee.

Senate Republicans are putting the final touches on a proposal that would raise the debt limit for two months, fund the government for six months, permit federal agencies special authority for two years to utilize greater discretion in addressing sequestration, repeal a 2.3 percent medical device tax put into place by the ACA, pay for the repeal with changes to federal pension law that would allow private businesses to lower their pension contributions in the near-term in exchange for higher premium payments in out-years, and require income verification for persons receiving government support for paying premiums for health insurance purchased through the exchanges established by the ACA. The legislation, which is being authored by Sen. Susan Collins (R-ME), a leading moderate voice in the party, is supported by Sen. McConnell, Senate Republican Whip John Cornyn (R-TX), and leading voices like Sen. John McCain (R-AZ). The bill’s outlook is unclear, though, until or unless Sen. Reid expresses support since he controls the Senate floor.

Impact of the Shutdown
Meanwhile, the government shutdown is having a profound effect on government operations and the nation’s economy. Large swaths of the government workforce remains furloughed. Earlier in the week, the Justice Department warned that the federal court system only has enough cash to continue operations through next Thursday at the latest. It came to light that the Defense Department had to suspend payment of death benefits to soldiers killed overseas because the resources do not exist to make such payments; the Obama Administration arranged for a private foundation (The Fisher House Foundation) to make death benefit payments in the interim. The District of Columbia, which is unable to expend its own resources under the federal shutdown, has nearly exhausted its reserve funds and may have to suspend trash pickup unless the situation is resolved.

House Republicans have passed a handful of bills to permit certain agencies and activities to operate under the shutdown (including the National Institutes of Health, the District of Columbia, and the death benefits for soldiers killed in action), but the Senate Democrats have refused to take up the bills, arguing that the entire government should be reopened at one time. Tensions are rising throughout the government.

Debt Limit Chaos
From the perspective of the financial markets and the international community, while the shutdown evokes comments of bemusement and confusion, the failure to raise the debt limit is looked upon with great concern and fear. The U.S. dollar is the world’s currency in many respects and government bonds are a primary source of investment for many countries throughout the world, including the second and third largest economies, China and Japan. A failure to raise the debt limit could create an international economic catastrophe.

Treasury Secretary Jack Lew has said that the government’s financial obligations will exceed its cash on hand beginning on October 17th unless the debt limit is raised so that the Treasury Department can issue new debt to pay for government operations and obligations. The political situation has become so dire that serious discussions are underway on what would occur if the debt limit were not raised by the 17th.

Impact of a Default on Entities Receiving Government Payments
A “default” would be different than a shutdown. Under a government shutdown, the legal authority does not exist for the government to expend resources and operate normally, so the government must shut down, except for “essential” activities. Under a default, though, the government can continue to operate (its authority to expend resources and operate is not impacted), the problem, rather, is cash flow; that is, the government does not have the cash on hand to meets its obligations on any given day.

Beginning on October 17th, Treasury would need to figure out how to pay its obligations without the resources to meet each demand. There are three options:

(1)Prioritization: Treasury could prioritize which obligations to pay that day. Presumably, it would attempt to service the debt, pay Social Security benefits, and address national security concerns, but this is unchartered territory, so it is unclear what would or could be prioritized. The problem with this approach is that Treasury’s lawyers have said that the Department has no legal authority to prioritize payments in this manner. In addition, Treasury’s computer systems are not designed to make payments in this manner, so it’s probably an unworkable solution.

(2)First-Come-First-Served: Under this approach, Treasury would pay the obligations in the order in which they are received. Once the available money is expended for the day, all the unpaid obligations would be pushed until the next business day when more cash would come in. Each subsequent day, Treasury would pay what it could and defer its other obligations. Over time, though, the obligations would pile up and it would become an unsustainable approach.

(3)Apportionment: Treasury could determine how much cash it has each day and pay a percentage of each obligation apportioned accordingly. So, if Treasury has $60B in cash and $100B in obligations on the 17th, it would pay 60% of each bill / payment. Presumably, the unpaid balances would be deferred or written off. It must be noted that it is not entire clear that the legal authority exists to apportion payments in this manner.

Regardless of the approach taken by Treasury, it is clear that the government could not pay all of its obligations in full and on time. Consequently, bond holders, Social Security recipients, health providers with Medicare claims, organizations receiving grant funds, persons receiving federal loans, and others would face the prospects of delayed, diminished, or cancelled payments, which would trickle down throughout the economy and cause financial mayhem.

Looking Ahead
Based upon the most recent developments, there is some hope that cooler heads are prevailing and the debt limit will be raised. The question of where policymakers go from here, though, is unanswerable. Clearly, the country cannot continue to hurtle from crisis to crisis without paying a price in diminished economic output and international standing. It is incumbent upon the leaders in Washington to find some way of getting the government to function at a basic level. The actions taken over the weekend will be watched closely by the world.