The Conservative Argument for a Permanent Medicare Doc Fix

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Posted by Ryan Ellis on Thursday, September 11th, 2014, 12:38 PM PERMALINK

Whether it's in the lame duck after Election Day or early next year, Congress is once again going to have to address the so-called "doc fix" or "SGR" issue within Medicare.  It's going to be a top fiscal and healthcare issue, so it's worth exploring in some depth.

What is this issue?  Back in 1997, Congress adopted a Medicare cost savings formula called the "sustainable growth rate," or SGR.  The idea was for Medicare reimbursements to no longer outpace the growth of the economy.  SGR, though, was never put in place in any meaningful way.

After a one year stint living under SGR, in 2003 Congress decided to "temporarily" delay the provider cuts.  This would be the first of 17 times Congress did so, most recently in March 2014.  The total amount of "extra" Medicare spending as a result of these "patches" (popularly known as "doc fixes") is just under $170 billion.

It's pretty clear that when Congress delays something from happening 17 times that it's not going to happen.

What's the conservative argument for keeping SGR?  It comes down to a budgetary one. Every time Congress does a doc fix patch, it's scored as spending new money.  This despite the fact that all Congress did was preserve the old funding formula and stop a new (and never-used) one from coming into place.

What that means is that it appears that simply removing the never-gonna-happen SGR from the books increases government spending.  According to the latest CBO estimate, a permanent doc fix (i.e., repeal of SGR) would "cost" $131 billion over the next ten years.  Conservatives are against increasing the size of government, so opposition to SGR repeal is a natural instinct.

However, this instinct is incorrect for five key reasons:

1. The idea that repealing SGR increases government spending is derived from a faulty baseline assumption.  The Congressional Budget Office (CBO) has to assume by law that SGR will be applied in full force, permanently, going forward.  Common sense and history tells us this is a bad assumption from which to make budget policy.

Congress has delayed the onset of SGR 17 times over more than a decade.  It is blindingly obvious to everyone who pays attention to this in Washington that Congress will continue to not impose SGR cuts.  To pretend that it will, and then demand spending cuts to "pay for" repealing it, is cognitive dissonance of the highest order.  It is reminiscent of Democrat calls to "pay for" extension of the Bush tax cuts, even though all that Congress was doing was keeping tax law current.

Under a reality-based baseline, or what CBO might call an alternative fiscal scenario closer to reality, the actual score of repealing SGR should be $0.  That's because SGR has never really been put in place, Congress has delayed it consistently, and it never will be put in place again. So getting rid of it is simply not a budgetary event.  In fact, we know that roughly a decade of patches have "cost" more than simply repealing it is projected to cost now.  The question is merely whether you want to do this once a year, or do it once and for all.

Of course, if Congress wants to cut spending to feel better about an SGR repeal, that's a welcome development--spending cuts are always a good thing for conservatives.  But strictly speaking, and using a correct baseline, they are not necessary in this case.

2. Medicare's own actuaries think SGR is phony and hides the true unfunded liability of Medicare.  SGR is an assumed cut to Medicare spending which will actually never happen.  But just like CBO needs to assume it will, so did the Medicare actuaries--until this year.

For the first time ever, the Medicare actuaries admitted that SGR was a sham, and that giving credit to its phony cuts does a disservice to the public.  Including SGR cuts in long-range Medicare spending is to make long-range Medicare spending look pretty good by comparison. Here's what the actuaries had to say:

In addition, a further exception to current law is being made this year with regard to the sustainable growth rate (SGR) formula for physician fee schedule payment under Part B. Current law requires CMS to implement a reduction in Medicare payment rates for physician services of almost 21 percent in April 2015. However, it is a virtual certainty that lawmakers will override this reduction as they have every year beginning with 2003. For this reason, the income, expenditures, and assets for Part B shown throughout the report reflect a projected baseline, which includes an override of the provisions of the SGR and an assumed annual increase in the physician fee schedule equal to the average SGR override over the 10-year period ending with March 31, 2015. Since 2008, legislation overriding physician fee reductions has included provisions offsetting the 10-year cost of the overrides, but the division of those offsetsbetween Medicare savings and savings in other parts of the budget has varied. Because it is difficult to predict the extent to which policy makers will finance future overrides with other Medicare savings, the projected Medicare baseline does not include any offsets, which may result in overstating program costs.

If the top Medicare experts, whose job it is to accurately portray the health of the program, are willing to completely discount and ignore SGR, it's not worth the paper it's printed on and should be scrapped.

In addition to this, the Center for Medicare Services (CMS) has announced that it is ignoring looming SGR cuts when setting Medicare Advantage rates (the freer-market alternative to traditional Medicare).

In both these cases, the people who pay the closest attention to Medicare recognized the history of Congressional action to defer cuts, as well as the disruption it causes if one set policy based on formula, and then adjusted suddenly when Congress overrides that formula.

3. SGR smooths the path for bad policy outcomes, including and especially Obamacare.  SGR is one of many elements that conservatives can blame for saddling the country with the broken government healthcare regime we have today.

First, the existence of SGR made the solvency and sustainability of Medicare look stronger than it actually was.  That allowed for the Obama Administration and allies on Capitol Hill to justify the creation of Obamacare (paid for in large part by Medicare cuts, incidentally) because of this rosy long-term cost scenario for government in general.  The trillions of dollars in higher Medicare spending over this century than was assumed by policymakers might have given pause to a stray congressman here or senator there.

Second, SGR has historically been a magnet for other healthcare spending, known as healthcare "extenders." No one ever bothers to scrutinize these extenders, and it's likely they've cost more than the sum total of "doc fix" patches to date.  The Wall Street Journal calls one such extender "payola" included at the request of liberal Senator Chuck Schumer (D-N.Y.)

4. SGR and the resulting "doc fixes" get in the way of conservative health reforms on Capitol Hill.  It bears repeating that Congress has delayed the onset of SGR 17 times in 11 years. Every time they do so, it's a Chinese firedrill​ of the highest order.

The healthcare staff of many members and committees have to be deployed for drafting, scoring, hearings, interminable meetings and conference calls, etc.  It's a "timesuck" of epic proportions for these staffers and members.

That would be all well and good except that these are the very same conservative staffers and members who free market health reformers are counting on to do proactive improvements/repeal of Obamacare, Medicare, Medicaid, the Veterans' Administration, etc. There's only so much time on the Congressional calendar.  By necessity, Congress doesn't get to to work on these reforms because their key personnel are busy rolling the doc fix rock up the hill for the eighteenth or nineteenth time.

If you're a conservative interested in repealing Obamacare, reforming Medicare, or block granting Medicaid to the states, removing the SGR kabuki theater from the Congressional agenda is absolutely essential.  Put bluntly, we will never, ever get to do all the cool entitlement reforms we want to do if "doc fix" is on the Congressional agenda ahead of them every year.  Clear it out.

5. SGR and annual doc fixes give occasion to campaign finance shakedown operations. Another widely known fact in Washington is that Congress loves doing the annual doc fix because it gives their fundraisers an opportunity to hit up doctors and others for campaign cash.  If SGR went away as a threat, so goes the theory, the potential SGR victims might be less willing to write checks.  It doesn't take much of a Google search to see that the impeding threat of SGR is very good for fundraiser commissions.

Conservatives should be repulsed by this effect.  It's part of the corrupt, crony capitalist shell game in Washington, and it needs to stop.  Congress sets up a fake crisis which everyone knows won't happen.  

"Except, it might, Mr. Lobbyist, this year," says the senator.  "Totally different subject, Mr. Lobbyist--did you know about my cocktail reception at Johnnie's Half Shell tonight?  You'll be there?  Great, I look forward to seeing you.  Let's see what we can do about this doc fix nonsense, huh?"

On and on it goes.  A small part of draining the swamp in the Beltway is getting rid of the phony SGR threat.  Don't forget that SGR provides a vehicle for all sorts of other bad policies to become law.

There are conservatives of good will on both sides of this issue.  Some of the smartest healthcare and fiscal minds in the conservative movement think that keeping SGR, or having to cut spending dollar for dollar to repeal it, is a no-brainer.  Their arguments are serious and substantive.

But there's another side to the coin, and that's what's been presented here.  There's a good conservative case to be made that SGR needs to go, and as soon as possible.