If you want to understand the fiscal cliff—and what it's likely to mean for the fedral budget going forward—it helps if you understand the doc fix.
The doc fix is just one relatively small part of the fiscal cliff. But in many ways it is the fiscal cliff in miniature. That's because the doc fix is perhaps ultimate example of a poorly conceived temporary budgeting measure that's not really temporary. And its history suggests what's in store for the federal budget—and the economy—in our post-fiscal-cliff future.
The "doc fix" is Washingtonese for a regularly updated policy patch for physician Medicare reimbursements. And by "regularly updated," what I mean is: permanently temporary.
Every year—sometimes multiple times a year—Congress overrides cuts that are scheduled to hit doctors who take Medicare patients. And just about every year there's talk of a permanent fix, one that will wipe out the need for doc fixes in the future. But every year, Congress can't get it together to pass a permanent fix. So instead Congress passes a temporary override to the scheduled cuts, sometimes coupled with an increase.
The way the doc fix developed is somewhat convoluted. In 1989, Congress set up a fee schedule governing how Medicare pays physicians. In 1997, Congress made those fees subject to something called the "sustainable growth rate" (SGR), which was a formula designed to restrain spending growth in Medicare's physician reimbursements. The formula tied total spending on physician payments to inflation, in hopes of keeping physician spending from growing faster than the economy as a whole.
No one worried much about tying doctor payments to the economy because at the time the formula was passed, the economy was humming along nicely. But when the economy entered a recession in the early 2000s, something unexpected happened: The SGR's reimbursement formula suddenly called for physicians to get less than they were expecting. So in 2002, Congress did nothing as the formula cut doctor reimbursements by 5 percent. That never happened again.
The next year, when the formula called for another reimbursement cut, Congress passed an override. And each year since, Congress has followed the same pattern. The SGR calls for a reimbursement cut. Congress either freezes payments or gives physicians a small increase for a short period of time. Sometimes the overrides last for a few months. More often they last for about a year. But a permanent fix never arrives. And each time the formula calls for a bigger cut—because with each override, Medicare's physician payment levels grow further and further from the trendline called for by the formula. If the doc fix is allowed to occur this year, physicians face a 26.5 percent cut in Medicare fees. At the same time, the long-term cost of a permanent fix grows each year. Last year's one-year fix cost $18.5 billion. This year's is expected to cost about $25 billion. Estimates put the cost between $244 and $370 billion over a decade. The ever-rising cost means that with each override the chances of a permanent fix grow even harder.
The short version, then, goes something like this: Congress passed a law intended to help restrain spending. But when it came time to actually make the cuts, Congress balked. Instead, legislators passed a temporary patch with the intention of dealing with the problem later. They never did. And over time, the problem got worse rather than better.
Now there are two big problems with the doc fix. The first is fiscal: Because budget projections are made using the current law baseline, which expects that the SGR cuts will occur (even though everyone knows they won't), the endless temporary overrides have the effect of hiding spending that everyone knows is built into the system. But no one on either side of the aisle wants to factor that spending into the actual budget projections, because it would make an already bad budget situation even worse.
The second problem is in the health care market. Doctors know that there's very little chance that the SGR cuts will ever be allowed to occur. But very little chance is not the same as no chance at all. Which makes doctors less willing to deal with Medicare beneficiaries—who could, at just about any time, suddenly bring in far less in fees. That's bad for beneficiaries, who have a harder time getting access to doctors. It's also bad for physicians, who have a harder time making business planning decisions, like whether to hire or fire support staff.
So how does this relate to the fiscal cliff?
One way is that the fiscal cliff consists in no small part of both policies designed to reduce spending that Congress would like to ignore and allegedly-temporary policies that Congress would like to be permanent, but doesn't want to include in long-term budget projections. The sequester mechanism, for example, was designed to hold down spending in defense, Medicare, and other areas. But just as with the SGR cuts, few in Congress or the White House really want to see most of those reductions enforced.
Other policies are of the permanently temporary variety: a fix to the Alternative Minimum Tax, the corporate tax extenders, and the bulk of the Bush tax cuts. No one thinks of these as policies that are likely to expire. But they are repeatedly passed on a temporary basis in order to help hide their long term cost.
The fiscal cliff exists in large part because of the confluence of a slew of these permanently temporary policies. They aren't likely to go away. Should there be a deal to avert the fiscal cliff, it's likely to simply extend many of these policies—including the doc fix itself—for another year or so.
Which means that come this time next year, we could be facing another fiscal cliff. Indeed, just as the doc fix has become a yearly congressional ritual with no end in sight, it may be that many of the temporary policies of the fiscal cliff become permanent fixtures on our policy calendar.
And if the doc fix is any guide, that will have deleterious effects on both the budget and the economy. It will provide a convenient way to hide long-term spending commitments inside repeat extensions of temporary policies. And it will result in nagging economic uncertainty as the private sector endlessly worries that this year just might be the fluke year that Congress won't act like it normally does and make a deal. At the same time, it will have the larger effect of distracting Congress from fixing the budget's real long term problems by focusing legislators' attention on an infinite loop of short-term problems. It'll be the doc fix for everything—and the fiscal cliff forever.