Budget Gimmicks Hide the $213 Billion Cost of Medicare Doc Fix

The headline of the Congressional Budget Office’s (CBO) damning assessment of the fiscal damage done by H.R. 2 — the so-called Medicare doc fix negotiated secretly by House Speaker John Boehner and Minority Leader Nancy Pelosi — is that the deal will add $141 billion to the deficit over the next ten years.

Even this appalling outcome is sugarcoated. After unpacking the gimmicks underlying the estimate, the actual result is much worse.

First, the worst gimmick: The bill increases spending on the Children’s Health Insurance Program (CHIP) by almost $40 billion. Yet, the CBO only includes less than $6 billion in its estimate of the bill’s costs. How did over $34 billion of CHIP spending simply vanish into thin air? Easily! Much of it was already in the baseline.

Welcome to the weird world of federal budgeting, where the so-called baseline is the source of much mischief. Recall the entire reason Congress had to patch Medicare payments to doctors at least once a year for over a decade is because the budget baseline was determined by an unrealistic formula called the Sustainable Growth Rate (SGR).

Because that formula would have led to pay cuts that would have made it uneconomical for physicians to see Medicare patients, Congress had to increase physicians’ fees beyond the baseline. Most importantly, until now, those pay increases have been paid for by spending offsets.

Physicians never had their Medicare pay cut to the level dictated by the baseline. There was simply no crisis that had to be averted by last week’s budget busting Medicare doc fix.

CHIP, on the other hand, has a permanent baseline of $5.7 billion per year, even though current law only funds CHIP through 2015. How can this be? According the CBO:

  • Current law provides no new budget authority for CHIP after 2015.
  • Following the rules for developing baseline projections of programs with such expiring funding authority, CBO’s projections reflect the assumption that CHIP will continue to be funded so as to operate as it will under the law in effect immediately before the date after which no new budget authority is provided.

The baseline derives entirely from an assumption that CHIP will continue, even though there is no legal basis for that assumption. For the Medicare doc fix, on the other hand, which is continuously re-authorized, there is no such assumption.

There is no economic logic behind the different treatment of the two programs in the baseline. However, it allowed the House of Representatives to get CHIP at a fire-sale price and disguise the true cost of the Medicare doc fix.

I arrive at a net cost of $214 billion, not $141 billion, by adding the actual amount of spending described by the CBO, without the CHIP budget gimmick. That makes $248 billion. Then, I subtracted the $34 billion revenue from higher Medicare premiums charged to high-income households.

The CBO estimates costs will be further reduced by a $38 billion cut to hospitals and post-acute care facilities. I discount that figure to zero, which may be too pessimistic. Nevertheless, the one thing we know about the government-medical complex is the coalition will always come together at any opportunity to increase the amount of money it taxes people, even if it initially appears some members of the coalition will have to pay in to the pot themselves. Once the deed is done, they cry poverty and manage to claw their money back.

The fiscal horror of the Medicare doc fix passed by the House last week is one reason to reject it. A patch of no more than two years, which would mirror the CHIP extension, would be more than adequate to give Congress time to consider more fundamental Medicare reform.

Comments (6)

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  1. Al Baun says:

    Are you implying that the doc fixes have been offset by previous Congresses (Dems) and now the Repubs simply spend without offset and you want Nancy back at the helm??? Ok by me. Seriously though, the budget would have been in the very same spot after ten years of continued annual doc fixed … 10 v (10×1).

    • Not implying: Stating clearly. And there is obviously a huge difference between saying “We will spend billions of dollars on X and cut the same amount from Y” and saying “We will spend billions of dollars on X and hope that we will find the money somewhere, someday.”

  2. Jimbino says:

    It seems that there’s no use in studying STEM or economics. Better would be to school our kids in smoke and mirrors.

  3. charlie bond says:

    Hi John,
    This post illustrates the shell games played with the deficit. My good friends, Al Simpson and Erskine Bowles, are not playing John the Baptist. They are not voices in the wilderness. It is a plain and unalterable truth that our children and their children will have a lower standard of living because of the irresponsibility of the budget machinations going on in Washington.

    Health care is a large contributor to the deficit. But it is OUR health care. If it is going to be fixed, WE are going to have to fix it from the ground up, not the top down. Health care overspending and waste occurs at the time of the delivery of care. All responsible Americans should do whatever they can to bring down costs. Those who help in that effort should be rewarded–not just by lower premiums–but by the same kind of gainsharing incentives offered to providers.

    Providers should also be directly rewarded for lowering costs. Gainssharing is a direct method of incentivizing lower costs and should be the basis of restoring a sustainable economy for physicians and other providers in our country.

    In the meantime, we need to determine the real price of health care. Further squeezing of doctors is not the answer. Nor is the industrialization of health care into large institutions. It is time to challenge the sub silentio government policy that has been around since the Wilbur report in the early ’30’s which presumed that bigger is better in health care. The factory model may have been a logical extension of the concept of industrialism in the early 30’s, but it does not seem to work too well in health care. The gov’t has consistently justified its agglomeration policy by saying that it can better control prices of larger institutions. Well, we’ve seen how that works, with hospitals getting 20-30% more for the same services rendered by private physicians and patients who are being treated by hospital-employed physicians spending nearly 20% more than patients of private physicians. It seems that the government is simply ginning up a bubble-based health care sector that will be populated by health systems and health plans that are “too big to fail.”

    In fact, all health care is local. What is needed, therefore, is reform of health care delivery and pricing from the ground up, not the top down. We must engage in such reform–not for our sakes–but for the sake of our kids and their kids. And we must do it now!

    Charlie Bond

    • Thank you very much. I’ve been writing about the need to give patients the opportunity to share gains at the point of service.

      That is why this “doc fix” is so bad: All the gainsharing goes to physicians, as determined by a small elite of academic physicians. It would all but eliminate any chance at real reform.