Breaching the Federal Debt Ceiling: Healthcare Implications

The federal statutory debt limit is currently set at $31.4 trillion. As congressional Republicans and President Joe Biden continue to haggle over a budget agreement that would include an increase in the debt ceiling, the date at which the current limit will be reached is coming closer. Treasury Secretary Janet Yellen has indicated that the limit could be breached as soon as June 1, 2023, while Moody's Analytics currently estimates that the date on which the U.S. Department of the Treasury will be unable to pay the nation's bills on time will be June 8 (they acknowledge, however, that it could occur as early as June 1 or as late as early August). Many federal officials likely presumed they had more time to negotiate an agreement, but revenues received during the Spring 2023 tax season were lower than anticipated, due in part to natural disaster-related filing extensions granted in a number of states. The current estimates of the so-called "X-Date" are falling on the short side of June 15, when a large inflow of quarterly payments from higher-income earners is expected.

How Can a Default Be Averted?

There is a number of scenarios under which a default could be averted, including 1) reaching a budget agreement, 2) a temporary debt limit extension, 3) a suspension to buy more time for negotiations and/or 4) the sale of securities held by the federal government in various trust funds in order to raise cash (which the Treasury Department is saying it will not do).

Some more unlikely options have also been proposed, including an administrative determination that the statutory debt limit is unconstitutional under Section 4 of the 14th Amendment ("[t]he validity of the public debt of the United States … shall not be questioned"), the production of a $1 trillion platinum coin by the U.S. Mint that is then accepted by the Treasury Department, or the issuance of "IOUs" by the Treasury Department – but the legality and feasibility of these ideas are highly suspect.

Healthcare Sector Repercussions

The United States has never failed to make timely payments of interest and principal on its obligations – this is not the same as the government "shutdowns" that occur from time to time when discretionary appropriations bills are not enacted prior to the beginning of the fiscal year – and most politicians are promising that it will not happen. The danger with playing "chicken," however, is that sometimes the participants do allow the worst to happen. So, recognizing that predicting the consequences of an unprecedented event involves a great deal of supposition, it is worth asking what might be the implications of the debt standoff and whether there are specific repercussions for the healthcare sector.

Even coming close to the debt ceiling triggers economic impacts, some of which we are already seeing. As in prior debt limit standoffs, the interest rate on short-term securities is spiking, and the prices of credit default swaps on Treasury Department securities (essentially an insurance policy against not being repaid) are rising. What has not occurred yet is a dramatic nosedive in the financial markets, which happened in 2011 when Speaker of the House John Boehner and President Barack Obama came dangerously close to the X-Date and the stock market plunged almost 20 percent on intraday trading.

But what would happen on X-Date plus 1? While a minority of commentators and politicians argue that breaching the debt ceiling would not be a catastrophic event, the majority view is not so sanguine. Expected immediate impacts for even a short-term breach include a rout in the equity and bond markets, a significant decline in consumer and business confidence, a recession triggered by both of the foregoing, a permanent increase in federal government borrowing costs as well as private borrowing costs, and international economic and geopolitical consequences for the United States. None of these results will be good for anyone, but the publicly traded portion of the healthcare sector would be badly impacted by lost valuations, and higher borrowing costs would impact nonprofit and for-profit healthcare providers adversely, many of which are already seeing liquidity and margins harmed by the current cycle of interest rate hikes. Moreover, given the elasticity of demand for many healthcare services, recession-driven belt tightening by consumers would certainly result in deferral of care and a loss of provider revenues similar to the impact of COVID-19 in 2020.

How the Treasury Department Could React When Cash on Hand Is No Longer Sufficient

With regard to how the Treasury Department would react when cash on hand is no longer sufficient to pay daily bills and further borrowing is not an option, there are many unanswered questions but two basic approaches have been identified. One approach would be for the federal government to begin to prioritize its obligations. Under this scenario, the Treasury Department would likely first pay interest on its debt and principal on notes as they come due (while reissuing expiring debt and paying higher interest rates). Then, difficult choices would have to be made on which payments to make and which to defer.

The federal budget is complicated, but a handful of large activities – Social Security, defense (including military pay), Medicare and Medicaid – command a significant portion of the budget and a major $100 billion transfer payment from the Treasury Department to the Centers for Medicare and Medicaid Services (CMS) and the U.S. Social Security Administration is due on June 2. As the Bipartisan Policy Center has noted, fulfilling payment for all of these large and politically popular programs could quickly become impossible.

Medicare payments to providers could end up drawing the short straw, irrespective of existing prompt pay laws (which would be violated thereby triggering future penalty payments). The government could start delaying Medicare payments to providers and perhaps Medicaid quarterly payments to states. The initial impact could be devastating to smaller healthcare organizations and costly and inconvenient to larger ones. And, as Moody Analytics has noted, there could be longer-term movement by providers away from treating Medicare patients. Medicare does not pay well, but historically it has paid reliably.

There is no express legal authority for the Treasury Department to pick and choose among the programs that it will pay for and the ones it will defer, and the political optics of choosing winners and losers would also be difficult. Additionally, while federal information technology systems to manage and pay for debt instruments are distinct from those used to pay other obligations, it is entirely unclear whether the existing systems could be quickly modified to identify payments that would be made and those that would not be made. Accordingly, some analysts believe that the Treasury Department would adopt a "pay by the day" approach. Under this scenario, the federal government would wait until it had enough revenue to pay a single day of obligations. Then it would pay the next day's obligations as soon as it had enough revenue to do so, and so forth. The Treasury Department would steadily fall further and further behind making obligated payments to everyone (including debt holders) as long as the situation continued. From a healthcare perspective, this approach would be less disruptive than prioritization, but it would obviously not be ideal.

It is, of course, to be hoped that, as in past debt limit showdowns, cooler heads will prevail. If not, it is helpful to anticipate the potential consequences, which are likely to be significant.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.