The Budget Deal

December 18, 2013

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By way of background, the Joint Select Committee on Deficit Reduction, or “Super Committee,” created by the Budget Control Act of 2011 (BCA) failed to identify $1.1 trillion dollars in federal spending reductions as was required of it by law. As a result, across-the-board spending cuts known as sequestration took effect, despite the intentionally painful nature of the cuts a characteristic meant to incent Republicans and Democrats to find common ground on difficult spending negotiations. Absent Congressional intervention, on Jan. 15, 2014, sequestration will require even deeper spending cuts from a number of programs, including defense.

However, these looming cuts, coupled with the aftermath of a politically damaging shutdown of the federal government in October 2012 and a Congress weary from repeated battles over continuing resolutions and debt ceilings, have set the stage for agreement on a broad framework for federal spending, cast between House Budget Committee Chairman Rep. Paul Ryan (R-Wis.) and Senate Budget Committee Chairwoman Sen. Patty Murray (D-Wash.). The agreement was approved by the House of Representatives on Dec. 12, followed by Senate passage on Dec. 18. What follows is a detailed analysis of this budget resolution and the related measures contained within the overall agreement.


Spending Levels: The two-year deal sets spending for the Pentagon and other federal agencies at $1.012 trillion for fiscal 2014, midway between the $1.058 trillion sought by Democrats and the $967 billion sought by Republicans. For fiscal 2015, overall spending would increase only slightly to $1.014 trillion. The deal calls for extending part of the sequester into 2022 and 2023 to get an additional $23 billion. That extension would affect Medicare providers who will have an additional two years of across-the-board cuts.

In addition to the extension of the sequester for Medicare providers, other policies are put in place to be implemented over the next decade. They include $12.6 billion in higher security fees for airline passengers, $8 billion in higher premiums for federal insurance for private pensions, $6 billion in reduced payments to student-loan debt collectors and $3 billion saved by not completely refilling the nation’s strategic petroleum reserves.

Part of the savings achieved in this agreement come from reduced contributions to federal pensions, split evenly between military retirees and new civilian workers who start after Dec 31.

For those in the military, the reduction would take the form of lower cost-of-living increases for retirees between the ages of 40 and 62. New civilian workers would be required to contribute an additional 1.3 percent to their retirements. Current federal workers are not affected. For those in the military, the reduction would take the form of lower cost-of-living increases for retirees between the ages of 40 and 62, many of whom take other jobs while collecting their military pensions.

Analysis: The deal provides some certainty that spending levels are established for two years for the government, meaning that the likelihood of a government shutdown as a tactic or a result of a failure to act by Congress would not occur in the next two years. It also lessens concerns on the part of the Defense Department that the next spending cut would be harmful to the nation’s defense. Although the sequester cuts were extended for Medicare, Medicare remains a protected program at a time when reimbursement models and delivery of care is undergoing significant change. While the package includes a number of health extenders, many of them are extended only until April 2014, which means that Congress will have to consider and package a number of health provisions early next year. This creates an opportunity for other policy changes within Medicare.

In addition, the absence of tax provisions in the deal leaves everything on the negotiating table for tax reform efforts going forward — an oft-cited priority for House Ways and Means Committee Chairman Dave Camp (R-Mich.) and Senate Finance Committee Chairman Max Baucus (D-Mont.). If the budget deal passes, proponents of tax reform may have their best chance yet to reach agreement on a tax code overhaul without the disruption of budget battles and threats of government shutdowns through fiscal 2015.

With regard to energy policy, the budget deal contains language approving of the U.S.-Mexico Transboundary Agreement. The House and Senate were in disagreement over a provision included in the House’s version of legislation approving the transboundary agreement giving companies operating under the U.S.-Mexico pact waivers from a Dodd-Frank law mandate to disclose payments from foreign governments. Once approved, Mexico and the United States will begin to operate under the framework established under the agreement, developing and sharing hydrocarbon resources, including billions of cubic feet of natural gas estimated to lie in waters beyond each country’s exclusive economic zones.

Health Care

Attached to the budget deal were “must do” health provisions and other policy changes. This included a short-term physician fee fix, a number of “health extenders” and some changes to Medicaid.

Medicaid Third Party Liability: This provision reinforces Medicaid’s standing as the payer of last resort by letting states delay paying for certain claims to ensure payment, so long as the delay does not harm beneficiaries’ access to care. It allows states to collect medical child support in cases where health insurance is available from a non-custodial parent. Medicaid can recuperate costs from beneficiary-liability settlements. This provision is estimated to save $1.4 billion.

Medicaid DSH: This provision delays the scheduled reductions in Medicaid Disproportionate Share Hospital (DSH) allotments. The Affordable Care Act (ACA) reduced Medicaid disproportionate share payments over time under the assumption that the ACA’s Medicaid expansion would reduce hospitals’ uncompensated care costs. The ACA required $18.1 billion in total reductions from fiscal 2014 through fiscal 2020. This provision delays the cuts to 2014 and makes a special provision for fiscal 2023. In 2023, the DSH allotment for a state shall be equal to the DSH allotment for the state in fiscal 2022.

Medicare Physician Payment Update: This provision averts a 24 percent reduction in Medicare payment to physicians and provides a 0.5 conversion factor but only through March 2014. Congress would have to act again to avoid an additional cut in reimbursement to physicians.

Work Geographic Adjustment : Under current law, the Medicare fee schedule is adjusted geographically for three factors to reflect differences in the cost of resources needed to produce physician services: physician work, practice expense and medical malpractice insurance. This provision extends the existing 1.0 floor on the “physician work” index to April 1, 2014.

Medicare Payment for Outpatient Therapy Services: Current law places annual per beneficiary payment limits for all outpatient therapy services provided by non-hospital providers, but includes an exceptions process for cases in which the provision of additional therapy services is determined to be medically necessary. This provision extends the exception process through Dec. 31, 2014.

Medicare Ambulance Add-On Payments: Under current law, ground ambulance transports receive an add-on to their base rate payments of 2 percent for urban providers, 3 percent for rural providers, and 22.6 percent for super-rural providers. This provision extends the add-on payment for ground transport, including in super rural areas, through April 1, 2014.

Extension of Medicare Inpatient Hospital Payment Adjustment for Low-volume Hospitals: Qualifying low-volume hospitals receive add-on payments based on the number of Medicare discharges. To qualify, the hospital must have less than 1,600 Medicare discharges and be 15 miles or greater from the nearest like hospital. This provision extends the payment adjustment until April 1, 2014.

Extension of the Medicare-Dependent Hospital (MDH) Program: The Medicare Dependent Hospital (MDH) program provides enhanced reimbursement to support rural health infrastructure and to support small rural hospitals for which Medicare patients make up a significant percentage of inpatient days or discharges. This greater dependence on Medicare may make these hospitals more financially vulnerable to prospective payment, and the MDH designation is designed to reduce this risk. This provision extends the MDH program until April 1, 2014.

Extension for Special Needs Plan: Authority for Medicare Advantage plans for special needs individuals from 2014 to 2016.

Extension of Medicare Reasonable Cost Contracts: This provision allows Medicare cost plans to continue to operate for an additional year, until Jan. 1, 2015, in areas where at least two Medicare Advantage coordinated care plans operate.

Performance Improvement: Under the Medicare Improvement for Patients and Providers Act of 2008, the U.S. Department of Health and Human Services (HHS) entered into a five-year contract with a consensus-based entity for certain activities relating to health care performance. This provision continues this funding until all funds are expended.

Extension of Funding Outreach and Assistance for Low-Income Programs: This provision extends the funding for one year for State Health Insurance Counseling Programs (SHIPs), Area Agencies on Aging (AAAs), Aging and Disability Resource Centers (ADRCs), and The National Center for Benefits Outreach and Enrollment.

Extension of the Qualifying Individual Program: The Qualifying Individual (QI) program allows Medicaid to pay the Medicare Part B premiums for low-income Medicare beneficiaries with incomes between 120 percent and 135 percent of the federal poverty level. Under current law, QI expires Dec. 31, 2012. This provision extends the QI program through March 2014.

Extension of Transitional Medical Assistance: Transitional Medical Assistance (TMA) allows low-income families to maintain their Medicaid coverage as they transition into employment and increase their earnings. This provision extends the program until March 31, 2014.

Extension of Family-to-Family Health Information Centers: This provision continues the Family-to-Family Health Information Centers (F2F HIC) to assist families of children/youth with special health care needs in making informed choices about health care in order to promote good treatment decisions, cost-effectiveness and improved health outcomes. This provision will help families navigate the health care system so that their children can get the care and benefits they need through Medicaid, the State Children’s Health Insurance Program (SCHIP), Supplemental Security Income (SSI), early intervention services, private insurance and other programs. In addition, F2F HICs provide leadership and training for health care providers and policymakers to promote a family-centered “medical home” for every child. There is one F2F HIC in every state and the District of Columbia.

Payment for Inpatient Services in Long-Term Care Hospitals (LTCHS): This provision creates new criteria for payment effective on Oct. 1, 2015. For a more detailed description of the key changes contained within the budget that significantly impact payment to, and development within, the LTACH industry, please see this summary prepared by McGuireWoods LLP.

Enforcement Delay of Medicare Two-Midnight Rule to Permit Development of a New Medicare Payment Methodology for Short Inpatient Hospital Stays: This provision directs the Secretary of Health and Human Services to not enforce the two-midnight rule for admissions before Oct. 1, 2014, and to develop a new Medicare payment methodology for short inpatient hospital stays.

Tax Issues

The budget deal includes increases to certain “user fees,” which raise revenue without making any changes to the tax code.

Paul Ryan is already battling the backlash from some Republicans who say the increases to user fees are just tax increases by another name. Ryan’s rebuttal is that the user fees, unlike a general tax, are charged only to those who choose to use the specific government service to which the fee applies.

Components of the bill likely to bring in the most revenue and create the most controversy include increased airline fees, increased rates for federal guarantees on private employers’ defined benefit plans, and increases to the amount new federal employees must contribute to their retirement.

The “fees” included in the deal:

Aviation Security (Transportation Security Administration): The so-called 9/11 fee for a one-way trip would increase from $2.50 (nonstop)/$5.00 (with connections) to a flat $5.60, regardless of whether your flight is nonstop or includes connections.

The current fee structure covers about 30 percent of the total cost of aviation security implemented after the terrorist attacks on Sept. 11, 2001. Under this agreement, the fee will cover about 43 percent of the total cost.

Guarantees of Pension Benefits: The rates that private employers pay to the federal Pension Benefit Guaranty Corporation to guarantee their employees’ defined benefit pension plans would go up to $57 for a plan year for flat-rate premiums in 2015 and $64 in 2016. Flat-rate premiums would then be indexed to the growth in wages for subsequent years.

The variable-rate premium would increase by $5 in plan year 2015 and an additional $5 in plan year 2016, with conformity to wage growth thereafter.

Increased Pension Contributions for Federal Employees: New federal employees (hired after Dec. 31, 2013) would be required to contribute 1.3 percent more toward their pensions.

Cost-of-living Adjustment for Retired Military under Age 62: The cost-of-living adjustment for working-age military retirees would equal inflation minus 1 percent, gradually phased in.

Customs User Fees: User fees collected by the Department of Homeland Security’s

Bureau of Customs and Border Protection (CBP), which include nine different conveyance and passenger user fees and a merchandise processor fee, would be extended through 2023. They are currently set to expire in 2021.

Conservation Planning: The plan would allow the Natural Resources Conservation Service to charge a fee for providing technical and financial assistance on the development of individualized, site-specific conservation plans.

Energy Issues

The budget deal includes two major oil and gas provisions. One is the phasing out/repeal of an Energy Policy Act of 2005 provision creating a research program for ultra-deep water and unconventional natural gas/petroleum resources. The provision was included in the 2005 Energy Policy Act, when the outlook for domestic production of oil and gas was slim and the United States was looking into alternative ways to inventory and access unconventional domestic sources. However, the advent of hydraulic fracking and other new drilling technologies has strengthened the domestic production to the point that programs like this can be more easily phased out in the energy expansion currently being experienced in the United States.

The second item is the approval of the U.S.-Mexico Transboundary Agreement. Both the House and Senate have considered legislation approving the agreement, but the House-passed bill gave companies operating under the U.S.-Mexico pact waivers from a Dodd-Frank law mandate to disclose payments from foreign governments. The final budget deal removed the controversial House language. Had Congress not acted on the transboundary agreement legislation before a Jan. 17 deadline, Mexico could have moved forward with leases in the region without being subject to the terms of the deal. The U.S. Department of the Interior estimates that the Western Gap contains 172 million barrels of oil and 304 billion cubic feet of natural gas.

Other energy-related provisions include:

Ultra-Deepwater and Unconventional Natural Gas and Other Petroleum Resources: This provision repeals the Ultra-Deepwater and Unconventional Natural Gas and Other Petroleum Resources Research Program — a research and development program created in 2005 — and rescinds the program’s remaining funds.

Amendment to the Mineral Leasing Act: This provision makes permanent a requirement that states receiving mineral revenue payments help defray the costs of managing the mineral leases that generate the revenue. It saves $415 million over 10 years.

Approval of Agreement with Mexico and Amendment to the Outer Continental Shelf Lands Act: This provision approves the U.S.–Mexico Transboundary Agreement, which will set up a framework to explore, develop and share revenue from hydrocarbon resources that lie in waters beyond each country’s exclusive economic zones. Another provision gives the Secretary of the Interior the authority to implement the U.S.–Mexico agreement and any future transboundary hydrocarbon reservoir agreements entered into by the president and approved by Congress.

Federal Oil and Gas Royalty Prepayment Cap: This provision limits the amount of interest payable to lessees on royalty overpayments to up to 110 percent of the amount due.

Strategic Petroleum Reserve: This provision rescinds all available funds in the “SPR Petroleum Account.” This provision permanently repeals the federal government’s authority to accept oil through the royalty-in-kind program to fill the SPR.


This deal will prevent another government shutdown, but it does not address the debt ceiling, which Congress must resolve by next spring. However, the agreement will have broad implications across all industries. We have prepared this document to help you better understand how the proposed budget deal will affect your business and what it means for key industries such as tax, health care and energy. If you have any questions, please do not hesitate to contact any of the authors listed below.

Stephanie A. Kennan

Russell W. Sullivan

Danielle R. Dellerson

Brian D. Vanderbloemen

Brian J. Looser

Founded in 1998, McGuireWoods Consulting LLC (MWC) is a full-service public affairs firm offering state and federal government relations, national/multistate strategies, infrastructure and economic development, strategic communications and grassroots issue management services. McGuireWoods Consulting is a subsidiary of the McGuireWoods LLP law firm and in 2010 was ranked in the Top 20 of The National Law Journal‘s “The Influence 50,” an annual report of the top public affairs firms in Washington, D.C.

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