In the Nation's Interest

The Medicare “Doc Fix:” Get It Over With

Fiscal responsibility is painful, and hard.  It is painful because it requires making choices – and for an elected policy maker with ambitious goals, choosing among alternative uses of public funds can be like choosing among your children (or among the constituents who voted for you).  It is hard because making the right choices to obtain the best outcomes requires intricate analysis and dispassionate judgment.

No surprise, therefore, that elected policymakers sometimes try to offload that hard work.  They might pass the figurative buck to an expert commission, so that if you don’t like the decision, “It’s the eggheads’ fault, not mine.”  Or they might peddle an across-the-board cut, which they will describe as equal sacrifice (which it isn’t) rather than a mindless cut of the more-important along with the less-important (which it is).

And then there is the budget-process fix: the “device,” the “deus ex machine,” the “formula,” or the “trigger.”  You write a law that tells you on the basis of some indicator how much should be cut, and where.  Then the trigger does at least some of the work for you – including taking some of the heat.

There are good triggers (a few) and then there are bad triggers (most).  And unfortunately for those elected policymakers who want to dodge the bullet of making tough decisions, the more of the hard work that the trigger does, generally speaking, the worse the trigger is.

A few examples:  In 1990 (under President George H.W. Bush, a Republican) and 1993 (under President Bill Clinton, a Democrat), Washington agreed to set caps on annual appropriations for the following five years.  Then in 2011, President Obama and the Congress signed on to a “fiscal cliff” trigger, under which either a “supercommittee” would recommend a major budget deal, or there would be substantial automatic and largely formulaic cuts in both defense and domestic spending, mostly through appropriations.  This trigger came to be known as “the sequester.”

The 1990-1993 caps and the 2011 sequester trigger fairly well demarcate the ends of the continuum between good and bad budgetary devices.  To explain why, consider an offhand remark by Jack Lew, then Director of the Office of Management and Budget under President Clinton (and now Secretary of the Treasury).  He observed that if you give the policymaking system a challenging target for spending cuts, you get hard thinking and constructive choices.  But if you instead give the system an impossible target, you get evasion, manipulation and gamesmanship.  The reasoning behind this remark is simple and unimpeachable:  Once the system feels compelled to go searching for a loophole, it might as well drive the entire truck through any one it can find.

The 1990 and 1993 spending caps were drawn up to be challenging targets.  The Congress intended to hit them, and generally did.  And by 1998, the budget was balanced.

In contrast, the “fiscal cliff” “sequester” trigger was intended to be totally unbearable and unacceptable – a nuclear weapon that would force policymakers to make policy, even though everyone knew that it could never be used.  So it was, in short, what Jack Lew said you should never do.  In the end it failed – which is to say that it did take effect.  Fortunately, it has proved to be a slow-acting nuclear weapon, and as it unfolds year by year, both sides have been trying to find a face-saving way to extricate themselves from the blast zone.

On this continuum from we-can-do-it-team to I-double-dare-you, the SGR unfortunately falls much closer to the double-dare.

The SGR was fashioned in the Balanced Budget Act of 1997.  (Spoiler alert:  The budget was already on a glide path to balance.)  It built on previous formulas to constrain the rate of growth of total Medicare costs to less than the rate of growth of the GDP.  Each year, to the extent that costs exceed the target, physician reimbursements would be reduced to recover the excess.

First, the good news:  The SGR did focus on the right target; Medicare is the source of the long-term budget problem.  And it was calibrated according to the right metric; if it hit its quantitative target, the Medicare cost problem and the overall budget problem would be solved.

But now the bad news:  The reduction in physician reimbursements is an unthinkable tool to achieve the SGR’s objective.  It was another nuclear weapon that everyone concerned recognized could never be used.  The SGR physician reimbursement cuts have been postponed 17 times over the provision’s operating history.

Some budget specialists advocate that if postponed, the SGR should be fully paid for – a “doc fix.”  In fact, that has been the pattern historically.  But as the years pass, and the triggered percentage reduction in physician reimbursements has compounded itself to over 20 percent, “paying for” the doc fix has become increasingly expensive.  And so this time around, the policymaking process has blown the whistle.  Part of the cost will be paid for, but part not; and the SGR will be turned off – permanently, and at the cost of $175 billion (before about $30 billion of net savings from associated cuts, spending and revenues) over the next 10 years.  What should we think about that?  Should the SGR postponement be paid for in full, and should the SGR be retained in future years?  Or should we just cut the least expensive deal we can – as the current legislation is alleged to be – and let it go for good?  Well, here is one person’s take:

The long-term budget problem is health care broadly, and Medicare in particular.  Medicare costs are growing exponentially, and in time and if unchecked, therefore, will crowd out everything else in the budget.

But by that very fact, “paying for” increases in Medicare costs in the rest of the budget does not solve the problem.  There simply is not enough “rest of the budget” to cut in order to pay for Medicare’s growth in the long run.

The only way truly to solve the problem is to reduce the exponential growth rate in Medicare itself.  The SGR mechanism does not do that.  If those who advocate retaining the SGR have such an idea, they should put it forward.  Now.

In the meantime, CED’s Health Care Subcommittee is hard at work on fundamental Medicare reform.  We believe that our new policy statement (to be released next week) about the private health care system contains the core of the idea that will work.  Watch this space.

There is a broader lesson here about how we should address the budget problem.  Our system does not respond well – nor should it – to the implicit threats of “triggers” that bring unbearable consequences if they are pulled.  We should not assume that budget process devices will succeed when political will is absent.  Just “doing something” is not an answer when that “something” is useless, or worse.

The time has come for our elected policymakers to do, in the immortal terminology of Governor William J. Lepetomaine in Mel Brooks’ “Blazing Saddles,” their “phony-baloney jobs.”  That does not mean setting a trap for their successors (or even themselves) in succeeding Congresses in the form of some infeasible trigger.  Rather, it means identifying the real problem and changing policy to solve it.

Joe Minarik is Senior Vice President and Director of Research at CED