Temporary Funding Forever?

What happens when the federal government finally shuts short-term money down?

In Washington, temporary funding is rarely temporary, and planned spending cuts, especially to health care, frequently fail to materialize. That means that on the rare occasions in which federal funding actually runs out—or looks ready to run out—calamity is sure to ensue. The 2009 stimulus package, for example, included an additional $87 billion for Medicaid, intended to fund the short-term expansion of the program above and beyond its usual enrollment. The funding was set to run out at the end of 2010. But along the way, states got used to the boost. By May of this year, the National Conference of State Legislatures was pleading with the federal government not to shut off the funding faucet.

And for a while, it looked as if the drip-drip-drip of federal stimulus would not end as originally called for. Congress took up an extenders bill that included an additional $24 billion in Medicaid funding—enough to keep states going until at least June of 2011. In Massachusetts, the bill's passage was assumed: Governor Deval Patrick's told fellow legislators that the funding was a "near certainty," according to the Boston Globe. And he seemed to believe it, too; he built a budget that presumed $608 million in additional Medicaid funding for his state.

But much as Patrick might wish otherwise, nearly-certain funds don't plug budget holes. As it turns out, in this case, they helped create them. What Patrick and other state governors clamoring for additional funding hadn't counted on was that deficit spending would become politically toxic in Washington right as their Medicaid money came up for a vote.

The extended funding was housed in an emergency spending bill, the "emergency" designation being the gimmick that federal legislators typically use to avoid making tough cuts in order to pay for their initiatives. But as of now, it looks very much like that gimmick has backfired. Because the bill would have contributed to the federal deficit, Senate legislators increasingly antsy about the effect of the swelling deficit on the nation's fiscal future have so far refused to give the extenders bill a pass. A handful of Democratic governors flew into Washington late Tuesday night to press for the funding, but most indications are that it's dead.

Now even those states that drafted spending plans accounting for the cutoff are facing serious budget crunches. Massachusetts will have to cut $608 million from its spending plans, while California is expected to come up nearly $2 billion short. Scott Pattison, executive director of National Association of State Budget Officers, declared that, because of the cutbacks, states face "fiscal peril."

No doubt the lack of funding puts states in a tough fiscal position. But relying on perpetual extensions of temporary funding has its dangers too.

Consider what's happened with the so-called "doc fix." In 1997, the Balanced Budget Act implemented what's known as the "sustainable growth rate" (SGR) formula to determine Medicare reimbursement rates for doctors and other health care providers. The formula, which was designed to keep per-beneficiary costs from rising faster than GDP, was installed in hopes of constraining the program's runaway growth.

For a few years, payments to providers rose. As long as that was happening, the system worked mostly as planned. But in 2002, the formula called for a 5 percent reimbursement cut. Congress allowed the cut to take effect, but the grumbling was loud enough that when the formula called for another cut in 2003, Congress overrode it and voted to institute a small reimbursement hike. Since then, that pattern has held: Each year, the SGR has called for a reimbursement cut, and each year Congress has instead voted to delay the cut and fund a hike.

As the overrides mounted over the years, so have the cuts called for by the formula. The gap between what Medicare providers are supposed to be paid and what they are paid is enormous. By the formula's reckoning, doctors face a 21 percent cut now, and depending on how long Congress continues to delay the cuts, an even steeper reduction in the future—an estimated 40 percent if the charade continues until 2014.

Doctors had hoped a permanent pay fix would be included in the new health care law. But after an initial draft proved too expensive, the provision was sent to the chopping block. Reports indicated that the AMA's support of the health care overhaul was predicated on the promise that a doc fix, with an estimated price tag of at least $276 billion, was on the way. But Congress has no clear way to fund the payments except for more deficit spending. As a result, it has struggled in recent months to pass even a temporary fix. For a few days following Memorial Day, the SGR cuts actually took effect, and by the end of June, a plan to delay cuts for a further three years was scrapped in favor of a six-month, $6.5 billion extension.

Doctors may or may not get a fix of some sort eventually. But at this point, both they and their congressional counterparts are desperate enough for a long-term solution that it's likely to be less than providers hoped for. Yet doctors have become so used to federal favors that they don't know how to operate with less; many are turning away new Medicare patients because of low payment rates.

But they'll have to. As both states and doctors are learning, relying on the federal government for an endless stream of deficit-funded handouts is unsustainable. Budgetary restraint is difficult, whether you're in the statehouse or the emergency room. But it's crucial to restoring fiscal sanity to our nation's aching economy. In the end, learning to work comfortably with less is always preferable to counting on nearly certain funding that someday will inevitably fail to arrive.

Peter Suderman is an associate editor at Reason magazine.