Why Medicare Will Always Need Fixing

The limits of the emerging doc fix deal.



Over the last 14 years, Medicare's Sustainable Growth Rate formula—the SGR, which was passed in 1997 as a way to keep Medicare spending growing in line with the economy—has scheduled deep cuts to physician reimbursements on 17 different occasions. On each of those occasions, Congress has avoided the cuts by passing a patch—a temporary postponement of the payment reductions called for by the SGR that is always referred to by the same name: the doc fix.

Sometimes a doc fix would last a year or so. Sometimes a doc fix would last just a few months. But no longer how long it lasted, it always ended the same way, with Congress once again staving off deep reductions to physician payments by putting together a financing package—always the biggest challenge—and, usually at the very last minute, passing another one.

The cuts called for by the SGR created an odd situation: On the one hand, it made physicians understandably anxious by scheduling major reductions to their Medicare payments (usually in the range of 25 percent) every year or so. On the other hand, the repeated patches meant that practically everyone assumed, not unreasonably, that Congress would never really let the cuts go into effect.

It was a source of tremendous uncertainty—and yet also a sure thing. And both the uncertainty and the certainty resulted in certain problems.

The uncertainty made trouble for doctors, who hated relying on a weird congressional budget ritual to keep reimbursement cuts at bay; ending the SGR has been the number one agenda item for the American Medical Association for years. At the same time, the consistent overrides also caused headaches for federal budget projections, which assumed that the SGR's Medicare payment cuts would be enacted as required by law.

Neither Republicans nor Democrats particularly liked the SGR. Yet, despite numerous hopeful discussions about how to get rid of it, they couldn't figure out how to agree on and pass a permanent fix. Instead, they opted for the annual(ish) doc fix ritual. This made for a handy illustration of congressional dysfunction, as well as a recurring reminder that Congress wouldn't necessarily follow through on spending cuts it had called for years before.

The SGR, in other words, was government in a nutshell: It didn't work, it cost more than expected, no one liked it, and no one could fix it.

Some people, however, now have hope that this might finally change. 

Since late last week, multiple reports have surfaced suggesting that Republican and Democratic leadership in the House are working on a permanent fix. The details are still being worked out, but the basic plan is to cancel the SGR in favor of some additional means testing to Medicare's physician and prescription drug components. In addition, the plan would institute more cost-sharing in Medigap, which expands coverage beyond traditional Medicare, although the savings here would be minimal; this is mostly designed to nudge seniors into Medicare Advantage plans.

There's no guarantee of passage, but even the possibility that a plan like this might have enough votes to get through the House is a serious upset to the status quo. The doc fix has been a legislative fixture for over a decade now, and most assumed that it would stay that way more or less indefinitely.

Yes, there have been multiple efforts to end the SGR, but these have always stalled, usually because Democrats and Republicans couldn't agree on how to pay for it.

The new proposal attempts to solve this problem in a somewhat novel manner by, well, not paying for it. Not fully, at least, and not immediately. 

This aspect is why the plan has already split the right.Critics complain that it won't be fully paid for in the 10-year budget window that the Congressional Budget Office (CBO) uses to score legislation. Details haven't been finalized, but news reports suggest that the plan would cost about $200 billion over the first decade, but would only offset about $70 billion.

Supporters respond that this is short-term thinking: In the longer term, the savings that would accumulate from means testing would massively swamp the cost of ending the SGR, while at the same time pushing Medicare towards what it should be: a safety net for the needy rather than a universal entitlement. And anyway, the last 14 years of doc fixes prove that the SGR cuts were illusory anyway. This is a small but meaningful structural reform to Medicare in exchange for getting rid of cuts that were never, ever going to happen.

The wrinkle here is that although the SGR cuts never happened as required by law, the doc fixes were almost always paid for with offsets—meaning that something else in the budget was cut to pay for the patch. According to the Committee for a Responsible Budget, this has resulted in a savings of about $165 billion so far, although most supporters will concede that some of these offsets were gimmicks, not real savings. Still, not all of the offsets have been budget tricks, which means that even though the SGR may not be working exactly as originally intended, it is holding down the deficit somewhat. It's not worth tossing out for a deal that isn't fully funded up front. 

So here's the dilemma, and the debate: Accept a hit to the deficit up front in exchange for a small but real long-term reform to Medicare—or reject the deal unless it can be fully paid for within the 10-year budget window? Keep a frustrating but somewhat effective tool for restraining Medicare spending—or ditch it in favor of a small but real long-term structural reform?

I think both sides make decent points; on one hand, it's probably worth holding out for a deal that is fully paid for, or at least reasonably close. On the other hand, a deal that ended the SGR charade, cleaned up the budget outlook, and put a minor-but-meaningful Medicare reform into place wouldn't be entirely awful either.

Whatever Congress does or doesn't do, however, it's worth stepping back and briefly putting all of this in historical context. The SGR has been in place for almost twenty years, and it's been recognized as a problem for more than a decade. That's how long it has taken  to even get to the point where it's remotely plausible that Congress might overhaul a policy that nearly everyone agrees is flawed.

But the history actually goes back much further than that. The SGR itself was a replacement to a previous Medicare payment growth formula—the Medicare Volume Performance Standard (MVPS), which had its own problems. The MVPS, meanwhile, was intended to work in tandem with yet another Medicare physician payment system, the resource-based relative value scale (RBRVS), which replaced Medicare's previous mechanism for paying physicians. 

It's all interlinked and connected, and whatever is done now will likely be up for revision again in another decade or two, after new glitches and frustrations emerge. As long as Medicare exists in its current form and as long as it exerts the sort of overwhelming influence on medical payment and practice that it does, these frustrations, or some as of yet unanticipated variation on them, will be with us. So while I'd like to see reform, and I'd like to see it paid for, and I'd even be pleased if that were to happen, I wouldn't be too excited about these sorts of technical system tweaks, however much they change the status quo, because those policy tweaks will just lead to more policy tweaks, and more bureaucratic responses, and then the cycle will repeat itself again. All of which is to say that even if the doc fix is fixed, it still won't really be fixed.