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

By Dr. David C. Pate, News and Community
January 3, 2013

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.


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.

About The Author

David C. Pate, M.D., J.D., is president and CEO of St. Luke's Health System, based in Boise, Idaho. Dr. Pate joined the System in 2009. He received his medical degree from Baylor College of Medicine in Houston and his law degree from the University of Houston Law Center.