Vertigo: the Fiscal Cliff, National Debt, and St. Luke’s

Because it’s been a dizzying time in Washington, D.C., with consequences for us, I wanted to take the opportunity to shed some light on Congress’ legislation this week and what it means for St. Luke’s Health System.

The Fiscal Cliff Explained

The phrase “fiscal cliff” was coined to describe a set of federal tax increases (some new taxes and some expiration of prior tax cuts) and automatic spending cuts all set to take place Jan. 1.

Many predicted that if the fiscal cliff was not averted, there would be a loss of 2 million jobs amounting to an increase in the unemployment rate of about 1 percent, another downgrade of our nation’s debt, havoc in the stock markets, and a return to recession. 

These tax increases and spending cuts included:

  • Expiration of the “Bush” tax cuts from more than a decade ago, resulting in increased income taxes for nearly all employed Americans.
    • The concern here is that this would particularly hurt the middle class, causing a reduction in discretionary spending and slowing economic recovery. Just the fear of this increase in taxes may have contributed to the whisper-thin 0.7 percent increase in spending over the holidays compared with last year. This seasonal spending can make up to 20 percent of the retail industry’s annual profits.
    • An additional concern was that small businesses, including sole proprietorships, S corporations, and partnerships whose income is taxed like individuals, would be negatively impacted by these tax hikes, which would cause them to cut back on hiring, further stalling consumer spending and the recovery.
  • A 2 percent increase in payroll taxes on the first $113,700 for every working American.
    • Payroll taxes are used to fund Social Security and Medicare (these are your FICA – Federal Insurance Contributions Act – taxes). The portion for Medicare is 2.9 percent of total wages, with the employer paying half and the employee paying the other half, 1.45 percent. The portion for Social Security is 12.4 percent, but only the first $113,700 is taxed (This wage limit increases every year.), with the employer paying half and the individual paying half. Individuals pay at a rate of 6.2 percent for Social Security, but for tax years 2011 and 2012, the rate was lowered to 4.2 percent in response to the downturn in the economy, to stimulate business hiring and consumer spending.
    • There are two impacts: the return to the Social Security tax rate of 6.2 percent and a new increase to the Medicare tax provided in the health care reform law.
  • Changes to the alternative minimum tax, the AMT.
    • The AMT is the amount of income tax owed by an individual, corporation, trust, or estate. If the amount of tax calculated after deductions is less than the AMT, the taxpayer must pay the AMT amount. 
    • So what is the problem? This tax was enacted in the 1960s, but was not indexed for inflation, meaning that the exemptions did not automatically increase with inflation and therefore, more and more people owed the higher AMT rather than what their taxes would have been with standard deductions. Congress has repeatedly acted to protect the middle class from the imposition of this tax.  However, Congress has not acted this year, and the IRS estimates that this tax would negatively impact about 30 million households with incomes of $45,000 or greater and individuals with incomes of $33,750 or greater.
  • New taxes provided for in the health care reform law, including:
    • An increase of 0.9 percent in the Medicare tax for individuals earning $200,000 or more and joint filers or households earning $250,000 or more.
    • A new 3.8 percent tax on unearned income, investment income.
    • A 2.3 percent medical device tax, likely to be recovered through higher costs for these items.
    • Two changes to deductions that will impact some people:
      • The deduction for medical expenses will be limited to those expenses exceeding 10 percent of adjusted gross income. The limit previously was 7.5 percent of adjusted gross income, meaning those persons with very high medical expenses and/or lower incomes now can deduct less of the expenses from their taxes.
      • A limit has been imposed on the deduction for flexible medical spending accounts of $2,500. Previously, there was no limit, although some employers imposed limits.
  • The sequester, 2 percent across-the-board federal spending cuts with a few exceptions. It will not, for example, impact Social Security or Medicaid beneficiaries.
    • Sequestration was set to be imposed starting in 2013 through the passage of the Budget Control Act of 2011 if a 12-member Joint Select Committee on Deficit Reduction was not successful in identifying at least a $1.2 trillion reduction in the federal deficit over 10 years. The sequester implements automatic cuts that will occur over the next nine years, totaling $1.2 trillion.

What Congress Did

The U.S. Senate and U.S. House of Representatives took the following action:

  • The “Bush” tax cuts.
    • These federal income tax cuts were made permanent for single filers earning up to $400,000 and households earning up to $450,000.
    • For those over these limits, the “Bush” tax cuts expire and income taxes will increase for tax year 2013.
    • The payroll tax increases went into effect Jan. 1 for all employed Americans. Congress did not take action to stop the expiration of the payroll tax cut.
    • Congress permanently indexed the AMT for inflation and increased the exemptions for 2012 to $50,600 for individuals and $78,750 for those married filing jointly.
    • Delayed the onset of the sequester until March 1. 

A 26.5 percent reduction in the Medicare physician fee schedule, set to take place Jan. 2 in addition to the 2 percent cut resulting from sequestration, was averted for another year. The bad news is that Congress will likely look to pay for these avoided cuts through cuts to hospitals.

Debt 

The debt ceiling, the limit to how much money the U.S. can borrow without authorization by Congress, was $15.194 trillion and increased to $16.394 trillion effective one year ago. The country is expected to hit this new ceiling, and Congress will be asked to increase this limit again in about two months. 

Because the sequester was delayed until March 1, both parties have two months to work out spending cuts, which President Obama has said must be balanced, to avoid the sequester. 

The long-term debt is a real problem because:

  • There is so much of it. To put it in perspective, to pay off our country’s debt, each man, woman, and child in the country would have to pay $53,378. And that number continues to grow. That exceeds the per-capita debt of Portugal, Spain, France, Italy, and Greece, countries whose debt already has been downgraded.
  • There appears to be little willingness on the part of the government to avoid growing our debt.
  • We can expect to be downgraded again if Congress does not enact meaningful debt reduction or allow the sequester to go into effect.

The hard work is still in front of us as a country. The steps Congress took to avoid the fiscal cliff actually put us almost $4 trillion more in debt, because certain tax increases and spending cuts were avoided or delayed. While we have avoided some of the short-term adverse effects of the fiscal cliff, we have made our long-term deficit problems worse. 

What It Means for St. Luke’s

  • We must be prepared for another downturn in our national economy. How do we prepare for that? Efficiency and quality. We must continue to focus on our goal of achieving excellent outcomes through TEAMwork. 
  • We must prepare for sequestration to be implemented, meaning that our Medicare revenue will be cut by 2 percent. The work we are doing on accountable care and for the Medicare Shared Savings Program should prepare us well. We must keep focused on our good work around value-based purchasing.
  • The financial pressures on companies and individuals will continue for the forseeable future and health costs will remain a concern. Our efforts to achieve the Triple Aim – better health, better care, and lower costs – will help us keep health care as affordable as possible, with the best outcomes possible.

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24 Responses to “Vertigo: the Fiscal Cliff, National Debt, and St. Luke’s on “Vertigo: the Fiscal Cliff, National Debt, and St. Luke’s”

  • Dr. Pate,

    Thank you for breaking down this ongoing and often confusing situation and explaining it so well. I will be sharing your comments with others who have questions.

  • Thanks for taking the time to put all of this mess into a meaningful blog, one that actually amounts to “meaningful use” for the average American.

    From reading your blog I suspect that you might be familiar with Peter Schiff, who states a lot of the same issues. He is on record stating that America needs to file for bankruptcy protection before the global lenders stop lending us money, hence the ultimate limit of the “debt ceiling,” and demand to be paid.

    Here are links to several of his videos:
    * Congress Sells America Down the River to Avoid the Fiscal Cliff
    http://www.youtube.com/watch?v=5B9ycOLil7s&feature=player_detailpage&list=UUIjuLiLHdFxYtFmWlbTGQRQ
    * Debt Ceiling and the Fiscal Cliff
    http://www.youtube.com/watch?v=tj99yDMYmbg&list=UUIjuLiLHdFxYtFmWlbTGQRQ
    * Mr. Schiff Returns to Washington
    http://www.youtube.com/watch?v=UvMGHzB37lo&feature=share&list=UUIjuLiLHdFxYtFmWlbTGQRQ

    Thanks again!
    Mike

  • Thanks for taking the time to explain this. I also appreciate that you are helping our organization to prepare for the future.

  • I believe St. Luke’s will be able to strongly endure the precarious economic future because of your passion to educate and prepare us.
    Thank you, Dr. Pate, for expending your energy, time, and relevant/discerning knowledge.

    FYI: Every Thursday, I have prayed for St. Luke’s for the past 14 years and have added you also to my prayer list. Prayer: Discernment infused with wisdom and safety.

    Very respectfully,
    Anna

  • Thank you, Dr. Pate. This helps with putting things into perspective, with much more simplified explanations. I, for one, had done some reading about portions of the “fiscal cliff” outcomes, yet did not have a clear understanding.

    Thank you for taking the time to put this in terms I can clearly understand. We are committed to achieve the Triple Aim.

    Sue

  • Dr. Pate,

    With so many heath care organizations running on razor-thin margins already, how do you see the national health care landscape changing after the Medicare revenue cuts go through? Will we see health care managed by large regional entities that have the resources to survive this, or do you see a new model of health care delivery on the horizon?

  • Thank you for clearly putting our nation’s issues in a clear and concise article. I have shared it on my Facebook page for my friends and family.

    Trina

  • Thank you for the breakdown of this very difficult topic.

  • Thank you, Dr. Pate, for taking your time to share your knowledge on this confusing matter. I appreciate your help in looking out for St. Luke’s future as well as that of individual employees. And thank you for always keeping us all educated on issues such as this one.

    Thank you,
    Nicole

  • I appreciate the clarification and the time you put into explaining what we can do to prepare.

    Thank you,
    Devin

  • Hi, Lorene.

    Thanks for your kind comment. I am so pleased to learn that my explanation helped. The back and forth between the House and Senate was so confusing with all the moving parts that I had to research it a lot to be able to put it altogether for our St. Luke’s family and communities!

    Thanks for all you do for St. Luke’s and for following the blog!

  • Hi, Mike.

    Thank you for your kind comment. I am glad that I could put all this information together in a way that would be helpful to so many and make it more understandable.

    I actually am not familiar with Mr. Schiff, but I don’t think I would agree with his position on this particular issue. I think it will take a lot of hard work and compromise to get our spending under control, but we must do so for many reasons, including the rest of the world, since among other things, a downgrade of our debt would destabilize the world economy even more. I believe it can be done if Congress and the President will commit to getting it done for the sake of future generations. If we don’t, we are just digging a deeper hole for our grandchildren.

    Thanks for the info, for your comment, and for following the blog!

  • Hi, Krystal.

    You are most welcome! I appreciate your support and encouragement. I think we are preparing well for the future, but I have to admit, the uncertainty and constantly changing landscape make it challenging! We are doing our best and I think we are focused on the right things: better health, better care, and lower costs.

    Thanks for your comment and for following the blog!

  • Hi, Anna.

    Wow! You have made my day! I cannot tell you how much I appreciate your kind words. Even more, I so greatly appreciate the prayers. Some leaders believe that things are within their power and control. Not me. I know that everything I have ever accomplished has been through the grace of God and the wonderful people I have been privileged to work with. I know the power of prayer, so thank you. Please continue to pray for St. Luke’s, for God to infuse me with discernment and wisdom, and for our nation’s leaders as well.

    Thanks so much for following the blog and writing in to me!

  • Thanks, Sue!

    That is what I hoped to accomplish. I know that St. Luke’s employees are likely to be asked about these things by their friends, family, and neighbors. This way, we can make sure everyone is prepared to help others understand. And of course, employees can also refer people to the blog :) !

    Thanks for your comment and for following the blog!

  • Hi, Ron.

    Great question. I do see that these changes are going to drive more consolidation. Somewhere between a third and a half of hospitals are operating in the red. They will likely be acquired by health systems or be closed. Even hospitals that are still profitable are increasingly looking to be acquired or sold. And we are seeing health systems being acquired or merged with other health systems; you may have seen the announcement that Saint Al’s parent company, Trinity, has announced plans to merge with another large Catholic health system to become one of the largest nonprofit health care systems in the country.

    I see all these moves as defensive, rather than really trying to solve the problems of health care. As you know, I think there are solutions to what is wrong with health care and we of St. Luke’s are actively pursuing those solutions. If we are successful, we will not only secure our own future and lessen the likelihood that we would have to seek a partner, but also make health care affordable for the people we are privileged to care for.

    Thanks for your question and for following the blog!

  • Hi, Trina.

    Thanks for posting this to Facebook and helping us extend the reach of the blog!

  • Hi, Angela.

    You are most welcome. I plan to write more as Congress gets into the debt ceiling negotiations, so that we can help everyone understand those issues, as well.

    Thanks for following the blog!

  • Hi, Nicole.

    Thanks for your nice comment and thanks for all you do for St. Luke’s!

  • Hi, Devin.

    You are welcome! It does take a lot of time and effort, but it makes it all worthwhile when I see how much our employees appreciate the communication and information.

    Thanks for following the blog!

  • Thank you for this informative, yet still understandable, explanation of the fiscal cliff. It is a little less overwhelming when it is broken down, and starting to understand its implications helps it to be much less stressful. Thanks!

  • Hi, Raina.

    Thank you! Yes, I thought that if I could list each item and then break it down so that everyone could understand, especially since there are so many numbers floating around and so much jargon, that it would be much more understandable and far less confusing. Glad I was able to accomplish that for you!

    Thanks for your comment and for following the blog!

  • I am so thankful for this breakdown and explanation. I, too, will add St. Luke’s to my prayer list! Great idea, Anna!
    Thanks, Dr. Pate.

  • Hi, Julie.

    Thanks for your kind note and for adding us to your prayer list.

    Thank you for following the blog and for all you do for St. Luke’s!

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