The Department of the Treasury (the Treasury) has indicated that absent congressional action to suspend or raise the debt limit, the federal government will likely be unable to satisfy all of its financial obligations as early as June 1—the so-called “X Date.” As negotiations over a debt solution continue between the White House and House Speaker Kevin McCarthy (R-CA), House Republican leadership announced Thursday that members could return to their districts for the Memorial Day recess—scheduled to run until June 5, four days after the X Date—but may be called back if needed for a vote. (The Senate is currently on recess but is scheduled to reconvene on May 30.)
Implications of a Debt Limit Breach
If the debt limit is breached, there will likely be significant—but uncertain—implications for federal payments, including payments to Medicare providers and Medicare Advantage plans and Medicaid Federal Financial Participation (FFP) payments to states. Program beneficiaries would likely remain legally entitled to receive covered services in accordance with applicable program rules, even though certain federal payments may be delayed (potentially prompting a cascade of delayed payments from Medicare Advantage plans, state Medicaid programs, and/or Medicaid managed care plans). The federal government is a significant source of revenue for providers (with Medicare and Medicaid together accounting for approximately one-third of hospital revenue) and a significant source of insurance coverage for patients (nearly four out of ten people are covered by either Medicare or Medicaid), underscoring the potential impact of any disruptions in payment or access to care.
The federal government has never before failed to raise the debt limit in time to make payments when due, and there do not appear to be any laws that would guide how to proceed if the federal government loses the ability to continue financing its obligations. For guidance, many stakeholders are looking to a draft debt crisis contingency plan that was released in 2011 during that era’s debt ceiling crisis. Under that plan, the government proposed to first prioritize payments on Treasury securities as they became due in order to avoid a debt default and delay all other payments until the Treasury had sufficient funds on hand to pay a full day of obligations. Under this approach, the Administration would delay, rather than cancel, owed federal payments and would not attempt to categorize or prioritize among types of obligations other than making timely payment of debt principal and interest to avoid a default. (In fact, sources have suggested that the Treasury’s system of managing debt is too antiquated to logistically manage categorical prioritization of its debt.) A legislative solution to the debt limit would likely allow the Administration to catch up on delayed payment obligations that have already been incurred.
If the debt ceiling is reached in the coming weeks, and if the Biden Administration pursues a strategy similar to the 2011 emergency plan, the impact on health care stakeholders would depend in large part on the type of payments at issue and the timing of those payments relative to the X Date. For example:
- Medicare Advantage plans receive monthly capitation payments from the Centers for Medicare & Medicaid Services (CMS). If a debt ceiling breach and legislative fix occur within a single month, between capitation payments, Medicare Advantage plans may not experience any material impacts. However, if a monthly capitation payment comes due between a breach and a fix, that payment may be delayed until CMS has sufficient disposable funds or Congress steps in. By contrast, Medicare fee-for-service payments to providers are processed through Medicare Administrative Contractors (MACs). MACs do not receive advance payments; instead, they are authorized to withdraw funds from the Federal Reserve Bank each day through a letter of credit issued by CMS. In the event that the debt limit is reached, the letter of credit would likely become inoperative in that MACs would not be permitted to withdraw any federal funds from the Federal Reserve Bank.
- With respect to Medicaid, the impact of a delay in FFP payments to states would similarly depend on the timing of the debt ceiling breach and legislative fix relative to the FFP quarterly financing cycle, through which states receive an FFP advance ahead of each fiscal quarter based on their quarterly spending projections. With respect to the fiscal quarter that begins July 1, if CMS funds states’ FFP accounts either before a debt ceiling breach occurs or after a legislative fix is enacted, states may not experience a significant impact with respect to their FFP payments. But if CMS is forced to delay FFP payments for the next quarter for a significant period of time, states may have difficulty continuing to finance their Medicaid programs with state funds alone and in turn may seek to delay payments to providers and managed care plans.
As noted above, Medicare and Medicaid beneficiaries would likely remain entitled to receive covered services, notwithstanding any delays in federal payments, although individual providers could potentially respond to announced payment delays by temporarily declining to accept patients with certain types of insurance.