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Commentary By Donald B. Marron

Congress Should Pay for the Medicare Doctor Fix

Economics, Economics Tax & Budget, Healthcare

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After months of struggling to put together a major health bill, Senate leaders opted for a new strategy last week. Now their goal is to pass two major health bills: one to expand health insurance coverage and the other to avoid cuts in the payments doctors receive from Medicare.

That second item is arcane, but important. Under current law, the rates that Medicare pays physicians are scheduled to decline by more than 20% at the end of the year. That cut had its origin back in 1997, when Congress decided to limit the amount spent on physician services in Medicare using something called the sustainable growth rate mechanism (SGR). The original idea was simple: if spending on physician services ever rose about the target level, it would be brought back down by lowering physician payment rates in the future.

Not surprisingly, spending did eventually rise above targeted levels and the SGR has been ready to cut payment rates in response. But Congress has repeatedly flinched. Rather than allowing the payment cuts, Congress has given doctors moderate payment increases and, in a triumph of hope over experience, has often promised to pay for them by cutting payment rates even more in the future. That’s why there’s an accumulated “debt” under the SGR that would require a 20+% cut in payment rates today.

No one, least of all the doctors, wants this to happen. So Congress has been looking for a way to fix the problem. Until last week, the Medicare doctor fix had been included in the larger health bills winding their way through Congress. The House bill had a permanent fix, at a cost of $245 billion over ten years, for example, while the Baucus bill had a one-year fix, at a cost of $11 billion.

So why has the Senate suddenly adopted a two-bill strategy? Budget politics.

Both the President and Congressional leaders have repeatedly pledged that any new spending on health insurance would be paid for by reduced spending or higher taxes elsewhere in the budget. In short, any health reform would be budget-neutral or better.

Finding enough offsets has been difficult, however, which is why Chairman Baucus decided to include only a one-year fix in his bill. He was able to find enough budget reductions to more than cover the $11 billion cost, but had nowhere near enough to cover the $245 billion cost of a permanent fix.

Doctors, of course, would prefer a permanent boost to their payment rates. And pressure is building for more spending on insurance subsidies than was included in the Baucus bill. So Senate leaders are trying a new strategy in which the main health insurance bill would still be budget neutral, while the doctor fix would get passed separately.

Thus, even as Congress struggles to enact one roughly $900 billion health bill, it also wants to hustle through a second $245 billion one. Moreover, Congressional leaders want to pass the permanent doctor fix without paying for it. All $245 billion would thus flow straight into our deficits.

For a nation running trillion-dollar deficits, such profligacy should no longer be acceptable.

In defense, proponents offer two justifications for this legislative strategy. First, they argue that it is essential to fix physician payments once and for all. Second, they point out that Congress has enacted doctor fixes repeatedly in recent years and argue that doing so today would be no different.

Neither of these arguments is correct.

The scheduled cuts in physician payment rates have certainly created a political and policy nuisance. But the only imminent problem is the reduction in payment rates at the end of the year. To avoid those cuts, Congress needs to enact only a one-year fix to payment rates, not a permanent fix. A permanent solution might well be good policy, if it’s suitably paid for, but it is not something that must be done this year.

As evidence, we need look no further than last year, when Congress enacted its most recent doctor fix. Payment rates had been scheduled to fall by 10.6% starting in July 2008. Congress stepped in, however, and enacted the Medicare Improvements for Patients and Providers Act (MIPPA), which cancelled the scheduled cut and gave doctors a 1.1% raise for 2009. That action cost $9.4 billion and, to its credit, Congress found a way to pay for it; with all its various pieces, MIPPA was exactly budget-neutral.

Congress should follow the same path today and find a way to pay for the doctor fix. There are two responsible ways to do so:

  • If Congress believes this issue is so important that it needs to be fixed once and for all, then it should do so and pay for it. Finding the political will may be difficult, but finding the money isn’t: the Senate Finance Committee has already identified more than $435 billion in Medicare spending over the next ten years that it deems unnecessary. Congress could use a portion of that money for the Medicare doctor fix, and would still have almost $200 billion left over to help pay for other priorities, such as an expansion in health insurance.
  • If Congress isn’t willing to pay for a permanent fix, then it should enact a one-year fix, and pay for it. That’s the approach taken in recent years and in the Baucus health bill. This approach is not perfect, but it would allow the merits of a long-run doctor fix to be addressed next year when our leaders will reportedly be more concerned about our harrowing fiscal situation.

If Congress passes a doctor fix without paying for it, however, that would raise serious doubts about its willingness to pay for other new spending programs. Consider, for example, the Baucus health bill, which would expand Medicaid, introduce new subsidies and tax incentives for health insurance, and make various expansions to other federal health programs. The total cost (excluding the one-year doctor fix) is just short of $900 billion over the next ten years. The bill proposes to pay for that spending through a combination of future spending reductions (e.g., reduced payment rates for hospitals in Medicare) and tax increases (e.g., a new tax on expensive health insurance plans).

On paper, the offsets in the bill appear to be larger than the new spending and, as a result, the bill scores as reducing the deficit over the next ten years. But that assumes that the offsets will really happen. Which leaves us with the trillion-dollar question: If Congress enacts a $245 billion doctor fix without paying for it, why should anyone believe it would ultimately allow the payment cuts and tax increases included in the health bills?

Donald B. Marron is a visiting professor at the Georgetown Public Policy Institute and writes about economics and finance at He previously served as a member of the Council of Economic Advisers and as acting director of the Congressional Budget Office.