The Doc Fix Dilemma

I already linked to the op-ed by Holtz-Eakin, Capretta, and Antos explaining why the new health care law won't reduce the deficit. But the authors actually left out one of the largest reasons why you shouldn't buy the deficit-reduction argument:  the so-called "doc fix"—an update to Medicare's physician reimbursements that could cost as much as $276 billion.

Here's the problem: In 1997, Congress decided it was high time to get Medicare spending under control. Their solution was to tie physician reimbursement rates to an inflation-based formula called the sustainable growth rate. The formula worked fine as long as it called for increased payments. But that didn't last long. In 2002, the formula, Congress allowed payments to drop 5 percent. The reaction from physicians was strong enough that they didn't let it happen again. Since 2003, Congress has voted repeatedly to temporarily extend or increase existing reimbursement rates through deficit spending. The temporary patches have substituted for permanent fixes because no one knows how to pay for a long-term fix. But by relying on a series of temporary patches, Congress has made it even more expensive to enact a long-term fix.

The result, as last summer's Health Affairs briefing on the issue dryly notes, was that "the expectation that this payment system would control spending was not realized." Given Medicare's history, that's not surprising.

Since then, the formula has called for greater and greater rate reductions. Congress keeps ignoring them. At this point, doctors are looking at a roughly 25 percent reimbursement cut. Members of both parties are keen to avoid that cut. But with the price of a permanent "fix" coming in at an estimated $276 billion (more if Congress waits a few years), no one wants to pay for it either.

Last year's Patient Protection and Affordable Care Act expanded Medicaid enrollment by a projected 16 million individuals. It provided relatively hefty health insurance subsidies to another 16 million or so. It called for the creation of an Independent Payment Advisory Board to hold keep Medicare costs in check. But in the end, the law—and the budgetary scoring for it—ignored the looming cost of the doc fix.

Democrats defend this by saying that the doc fix and ObamaCare are distinct and shouldn't be scored together.

One way to frame the issue goes like this: If you're living in a house with a leaky roof, and you decide to build a new house, should you include the cost of fixing the old roof in the new house?

The analogy is flawed. The PPACA didn't build an entirely new, separate system. It built out and expanded on the old one—a mix of employer-sponsored coverage, Medicaid, and Medicare. A better way to frame the issue would be to ask whether you would include the cost of fixing your leaky roof if you wanted to build a new floor on top of it. Most people, I think, would answer yes.

But even if you buy the old-house/new-house analogy, the answer is still yes, potentially—especially if the cost of the new house will make it even more difficult to fix an old problem. And as James Capretta explains nicely, the "offsets" that might have gone to paying for the doc fix instead got used up funding the PPACA's coverage expansion:

When President Obama assumed office, he wanted his health bill and a permanent "doc fix" too, but he didn't have enough flimsy offsets to grease the way for them both. So he came up with a new "solution": use the offsets to pave the way for Obamacare's spending, and exempt the "doc fix" from the need for offsets at all. This would create the perception of "deficit reduction" from Obamacare even as an unfinanced "doc fix" ran up the deficit by an even larger amount.

The link is now even more explicit: At the end of last year, after struggling to find funding for yet another one-year extension of doctors' payment rates, Congress eventually decided to pull money out of the PPACA's insurance subsidies.

Democrats didn't always think the doc fix was unrelated to the law either: An early draft of the legislation included the expensive patch, but it was taken out to bring down the price tag after early scores came in well over a trillion dollars. Pass it later, separately, and it's not part of the scoring math—despite the fact that Democrats initially intended it to be part of the reform package. You can also make the case that, well, it has to be done so that doctors won't turn away Medicare patients because reimbursement rates are too low. 

Even after the doc fix was taken out the legislation, it didn't stop Harry Reid from using it as a bargaining chip to ensure that doctors—in the form of the American Medical Association—would support Democrats and their health care overhaul.

Perhaps it's beside the point. Regardless of whether you factor in the SGR fix, the PPACA isn't likely to reduce the deficit under any realistic set of assumptions. But it's all part of the same problem: We can't afford the health system we have. And last year's health care overhaul almost certainly made the problem worse.