Sequestration and Why You Should Care
The numbers and the political divide
Our federal government is spending about $3.8 trillion per year.
No one can imagine a trillion of anything, so let’s break it down to what is spent every day, including weekends and holidays. On average, it’s $10.7 billion. A billion is still hard to conceive of, so look at it as $445.8 million dollars per hour, or about $7.4 million dollars per minute.
Now, whether spending $3.8 trillion is a problem or not depends upon how much money the government makes, primarily through taxes. That amount is about $2.6 trillion, though it will go increase some due to this year’s increase in payroll taxes and the elimination of the Bush tax cuts for higher income wage earners.
The difference between the yearly amount of spending ($3.8 trillion) and the yearly amount of income ($2.6 trillion) is the federal deficit, which is now about $1.2 trillion.
Now, whether the deficit is a problem or not depends upon whether this is a pattern or a one-time occurrence and how much debt there already is. Unfortunately, we have now had deficits of more than a trillion dollars each of the past four years, so there is a pattern of adding significantly to our debt each year.
The national debt is at $16.5 trillion, and with our country’s gross domestic product (GDP) now hovering near $15.8 trillion, most would agree that our debt is very high, and many people have come to conclude that this national spending pattern is unsustainable. After all, no one can continue to spend more than they make and borrow more than they earn for an extended period of time. Anyone remember the housing bubble?
But a crisis is often in the eye of the beholder. And whether this is a crisis or not depends upon whether you believe the country’s earning potential will increase soon or whether there are opportunities to increase revenues through increasing taxes, eliminate so-called tax loopholes, or reduce spending.
Here comes the sequester
Through the Budget Control Act of 2011, Congress and the president agreed that sequestration, an across-the-board, 2 percent cut in federal spending with some exceptions, would be triggered at the beginning of this year unless a 12-member Joint Select Committee on Deficit Reduction was successful in identifying at least a $1.2 trillion reduction in the federal deficit over 10 years that Congress would accept and implement by law.
It was meant to be painful for both sides, including military cuts that the Republicans don’t want and cuts to entitlement programs, Medicare, that Democrats don’t want.
The Joint Select Committee on Deficit Reduction was not successful. In the grand deal arrived at by Congress when confronted with the even bigger “fiscal cliff” – the simultaneous convergence of the expiration of the Bush tax cuts that would affect nearly every working American, a 2 percent payroll tax increase for nearly every working American, the imposition of a host of new taxes created under the health care reform law, and the imposition of the sequester on top of all of this – the Bush tax cuts were allowed to expire only on higher income individuals and families, the payroll tax increase was permitted to increase on most everyone, and the sequester was delayed until March 1. Tomorrow.
Congress also delayed the scheduled, nearly 30 percent cut to the Medicare physician fee schedule through the end of this year. To read more about all of this, go to http://drpate.stlukesblogs.org/2013/01/03/vertigo-the-fiscal-cliff-national-debt-and-st-lukes/.
So, here we are. I see no signs of any bipartisan agreement that will achieve the spending cuts or revenue increases, or combination thereof, to reach the targeted $1.2 trillion deficit reduction and forestall the need for the sequester, and few signs of any bipartisan agreement that will once again delay its imposition.
What’s next?
The spending cuts for this fiscal year, which would end in September, would be $85 billion. There will undoubtedly be job losses, primarily government jobs, and the local economies and businesses of communities with a large federal presence may be adversely impacted. Businesses that are dependent upon federal grants and reimbursement, such as colleges, universities, and hospitals, are also expected to be impacted and may resort to layoffs, eliminating positions, or not hiring.
The Congressional Budget Office (CBO) projects that the unemployment rate is expected to remain about 7.5 percent through 2014. If that happens, 2014 will be the sixth consecutive year that unemployment has exceeded 7.5 percent of the labor force – the longest period in the past 70 years.
The impact on our economy isn’t entirely clear, but with new and significant tax increases imposed in January, and significant spending cuts imposed by the sequester on top of an already high level of unemployment and slow economic recovery from a severe recession, there is fear that contraction of our economy could result and cause a second, double-dip, recession.
What’s next for St. Luke’s?
Through the savings we are generating through our implementation of lean principles that we apply as TEAMwork, St. Luke’s plan to weather the storm. We do not expect to lay off any of our people, and if cuts are later reversed, we plan to pass savings on to the insurers and our patients. To read more about TEAMwork, go http://drpate.stlukesblogs.org/2012/11/27/what-does-car-manufacturing-have-to-do-with-health-care/ and http://drpate.stlukesblogs.org/2012/02/07/what-does-airline-safety-have-to-do-with-us-lots/.
Is there a silver lining?
It’s actually not all bad news. The budget deficit would be predicted to decrease from $1.3 trillion to $845 billion, the lowest deficit as a percent of GDP since 2008. And if left in place, the deficits would be projected to continue to decrease, depending on what Congress decides to do with another self-imposed crisis – the debt ceiling – but that is a subject for another day.
Affordable care is what Idahoans deserve
Regardless of what happens in Washington, we of St. Luke’s must remain focused on transforming health care. We realized long ago that health care costs are unsustainable, and we have committed to fixing what is wrong with health care delivery and creating better health for the people we are privileged to serve, better care resulting in the best possible outcomes, and lowering the total costs of care.
We are in the early stages of our journey, but have already accomplished a lot, and this is a big year for us as we implement additional strategies to improve health and care, while lowering costs.
Change is very scary, and some are more afraid than others. If we change the model while others remain in the broken model that has been working for them but not for patients and patients’ employers, those others, too, will be forced to change.
Because of this, those who don’t want to change are fighting back. St. Luke’s sees the risks to changing the status quo and we are experiencing the resistance that leaders sometimes experience. But St. Luke’s, as a community resource and Idaho’s only locally owned, locally governed health system, feels a tremendous obligation to the people of Idaho and those we serve from surrounding states to be the leader in trying to make health care better and less expensive for all we are privileged to serve. Affordable, high-quality, patient-centered care is what Idahoans deserve.
Tags: Dr. David Pate, Dr. Pate, Idaho, st. luke's, St. Luke's Health System
Good review. I’m still puzzled how $85 million in cuts should impact domestic programs so much. Tomorrow, when sequestration is implemented, budgets will still be larger than last year. Obviously politics are involved. Maybe the answer is in the across-the-board cuts. Directors aren’t allowed leeway.
As you said, the crisis really is in the eye of the beholder. Nevertheless, changes are here, with more coming in our journey. I appreciate the public stance St. Luke’s has taking in leading the way toward high quality, affordable, patient-centered health care!
Hi, Dr. Erhart.
I think you have hit the nail on the head. On the one hand, some think the sequester is overblown because $85 billion is a drop in the bucket relative to the overall federal budget, or about 2.2 percent. You have to believe that in a budget that big, there is plenty that can be cut. Given the fact that the govenment has doubled in size since 2000, surely they can live on 97.8 percent of their “normal” budget.
On the other hand, different departments of the government have different levels of leanness or fat. The argument is that with across-the-board cuts instead of line item cuts, departments will be impacted inequitably. For some, these cuts may cut into bone.
And, the cuts are not 2.2 percent across all departments. The Budget Control Act excepted certain large programs from cuts, so those departments that are considered to have discretionary spending will be impacted the most. And to achieve a total 2 percent cut when the cuts are not truly across the board means that many departments will have as much as a 5 percent or more cut.
Further, the government’s fiscal year is half over today, so to get the total year’s cuts in could result in what will feel like a doubling of the impact for this fiscal year. The executive branch does have the discretion as to where specifically these cuts come from within the affected departments, and some fear that they will make the cuts in a political manner, rather than more objectively. Everyone has their favorite areas that they don’t want to see touched, even though the sequester was purposely set up so that if triggered, both parties would feel pain, Democrats through reductions in spending in Medicare and Republicans through Defense cuts.
Thanks so much for your support of our vision and strategy. The thing that I have loved about leading St. Luke’s is the commitment of our physicians and employees to fixing what is wrong with health care, even though it is hard and time-consuming, and means that we will have to make sacrifices.
It is clear that we really can’t rely on the government to protect health care or to lead its reform, so we’re taking the leadership role to transform health care and achieve the high-quality, affordable, patient-centered health care that you reference. We will continue to course correct when government throws us a curve ball, though I do have to tell you, it does make things challenging to be living in a time of so much uncertainty.
Thanks for your comment, thanks for following the blog, and thanks for all you do for our patients!
This is an interesting perspective on the sequester (the 2.2-2.4 percent reduction in the government’s spending budget) from Sen. John Cornyn:
To put this in perspective, let’s look at what a 2.4 percent cut to a family budget would look like. To reduce its spending by 2.4 percent, the family would need to:
* Run cars on 94.7 gallons of gasoline a month, instead of 97 gallons per month.
* Find $6 in savings from a $250 monthly grocery budget.
* Look for ways to conserve $4.20 from a $175 monthly utilities bill.
All working Americans had to figure out how to make ends meet with 2 percent less in their paychecks last month when the payroll tax expired. How is it that Washington can’t do the same?
Just read Dr. Pate’s sequestration article and I just wanted to say it’s a huge relief to have him at the helm. In an insecure time, it’s comforting to know that our leader cares very much about saving money everywhere with the exception of laying off staff.
And his articles are great to read. He writes well and is understandable to the lay audience. I feel like I have a much clearer understanding of what sequestration means and how it affects me personally.
Good work, Dr. Pate! I’m proud to be a St. Luke’s employee!
Thanks, Nikki!
I appreciate your kind comment! You have made my day.
I am so pleased that the blog has been so well received by our St. Luke’s family and that it has proved to be an effective communication tool.
Thanks for all you do for St. Luke’s and thanks for following the blog!
Good morning, Dr. Pate.
Thanks for the nice summary of how we got to this point.
With regard to the 2 percent to 2.5 percent figure you use in your post, unfortunately this is a bit misleading and underestimates the impact of the sequester. That is only an accurate number if you calculate the cutback using the entire federal budget as the denominator.
However, since most non-discretionary spending (Medicare, Social Security) is not included in the cutback, the true impact on the programs to be cut is closer to 6 percent to 8 percent. Applying that percentage to the analogy of a household budget that Sen. Cronyn suggests, you have a much bigger impact!
As an example near and dear to our hearts in medicine: Many science research projects currently under way to provide better, smarter treatments for our patients and funded by the federal government through NIH and NSF have barely enough money to proceed as it is. If you just bluntly take away 6 percent to 8 percent of those project budgets, many will not survive and will not be refunded. This is just one example of how the “bludgeon” method of cuts from the sequester will likely have much greater impact, and is underestimated by the 2.4 percent figure.
Hi, Dr. Dorn.
You are correct, and I tried to make the same point in my response to Dr. Erhart.
I think that your point is important. The cuts will have different impacts to different programs (some more devastating than others) when applied across the board, rather than by line item, even more so since so many of the big cost areas are exempted from the cuts and not all areas that are subject to the cuts may have the same relative amount of fat.
This is the dysfunction of our current government, and the fact that constituents and lobbying groups all have their favorite causes. It has gotten to the point that Congress is not willing to make the tough decisions and risk incurring the wrath of one or more of these groups.
On the other hand, the average American family doesn’t understand why the government can’t cut 2 percent from a budget that has doubled in the past decade. It is Congress and the President who decided to protect these large areas of spending from the cuts, so the cuts were always intended to be applied differentially, if they were triggered at all.
Great comment, and thanks for writing in to the blog!