(By Mani) The fiscal cliff remains the biggest item on the agenda, and health care has some important issues on the line, such as the doc-fix and Medicare sequestration.
Furthermore, the debt ceiling will need to be raised yet again in early 2013, which is likely to be included in any cliff negotiations. Finally, the 27 percent Medicare doc cut is set to take effect at the beginning of next year, so this also needs to be addressed.
As would be expected, lawmakers are stubbornly digging into the trenches early in the negotiations as they try to preserve their political leverage with several weeks to go before the deadline. There are many ways that lawmakers can address the cliff, including both shorter-term and longer-term options.
"While there are many ways this could turn out, we believe lawmakers will at least come to agreement on a short-term solution that would temporarily delay some of the cuts to healthcare providers," Oppenheimer analyst Michael Wiederhorn wrote in a note to clients.
However, this would fail to remove the large political overhangs plaguing our space, and ultimately, a longer-term deal would need to be negotiated that would have to include cuts to entitlement programs such as Medicare and Medicaid.
"On a positive note, we believe some of the broader changes to entitlement programs could be pushed out for many years," Wiederhorn said.
Though the discussions are centered around taxes, unemployment benefits, military spending, and deficit reduction, it also involves health policies such as the doc-fix and 2 percent Medicare sequestration. While these important healthcare items could be dealt with through a shorter-term fix, healthcare cuts could also be used as a pay-for.
More specifically, lawmakers have discussed potentially breaking out a 1-year $25 billion doc-fix from the negotiations, which could be paid for by healthcare provisions, such as reducing hospital evaluation/management outpatient rates.
"Looking forward, it is far from a certainty that the two parties can come together on a grand bargain during 2013, given the ideological divide in Congress and the lack of compromise in their recent track records," the analyst said.
On the other hand, the Republican tax pledge remains a hurdle to any compromise. However, if a deal is negotiated, healthcare will be at the center of the discussions.
Larger scale healthcare proposals that will be considered include pushing the Medicare eligibility age to 67; Medicare means testing; limiting Medicaid provider taxes; simplifying the Medicaid Federal Medical Assistance Percentage (FMAP) payments; restricting first-dollar coverage for Medigap; raising co-pays for Medicare beneficiaries and various other provider reimbursement cuts.
"The good news is that many of the potential changes would not have a near-term impact," Wiederhorn noted.
Either way, changes to entitlement programs are ultimately going to be needed to reduce government spending, and all government-reimbursed sectors will be on the hook.
"We tend to favor the Medicaid and Medicare Advantage plans, which are a means to controlling government spending, and already operate on slim margins with little downside. Humana, Inc. (NYSE: HUM) and Centene Corp. (NYSE: CNC) are our favorite picks in the space," Wiederhorn noted.
Meanwhile, hospitals are likely to be more directly impacted by the potential pay-fors. On the bright side, some of the changes would not take effect in the near term after healthcare reform has injected new spending into the healthcare system.
"In our view, HCA Holdings, Inc. (NYSE: HCA) and Health Management Associates, Inc. (NYSE: HMA) look most attractive among the hospitals," Wiederhorn added.