Lawmakers cleared their second Fiscal Speed Bump of the year - the expiration of the one-year "doc fix" - earlier this month, scuttling the Medicare Sustainable Growth Rate (SGR) formula for good by adding $141 billion to deficits through 2025 ($175 billion with interest). As a result, CBO's last baseline in March is now slightly out of date, and the agency usually doesn't release new ten-year numbers until August, so here's our estimate of what the baseline looks like in the post-SGR world.
The new law increases debt by about one percentage point of Gross Domestic Product (GDP) by 2025, from 77 percent to 78 percent. It also increases ten-year deficits and health care spending by about one-tenth of a percent of GDP while slightly increasing interest spending from 2.9 to 3 percent of GDP in 2025. Not surprisingly, the law slightly increases the share of spending going to health care and interest.
|The New Ten-Year Budget Outlook (Percent of GDP)|
Source: CRFB calculations based on CBO data
*Includes net Medicare, Medicaid/CHIP, and health insurance exchange subsidies
This morning, Governor Chris Christie (R-NJ) delivered an important speech in New Hampshire on the need for entitlement reform. The speech not only focused on the need to address the rapid growth of Social Security, Medicare, and Medicaid but actually put forward a plan to begin addressing these issues. By our rough estimate -- and depending on many of the details -- this plan would save over $1 trillion in the next decade alone while significantly improving the solvency of Social Security and Medicare.
Below is a short summary of Governor Christie's plan.
Social Security Reform
In his speech, Governor Christie called for Social Security reform, explaining that the program "is slowly working its way to insolvency – which the actuaries say will come in the early 2030s, less than 20 years from now... as the number of workers relative to the number of beneficiaries continues to shrink."
To address Social Security's looming insolvency, Christie proposes a number of changes. The most significant policy, in terms of savings, would be to raise the normal retirement age by two months per year from age 67 in 2022 (as under current law) to age 69, and then index it for life expectancy. At the same time, his plan would raise the earliest eligibility age from 62 to 64.
In addition, Christie proposes to calculate COLAs based on the more accurate chained CPI (with a benefit bump-up for 85 year olds), to phase out Social Security benefits for the highest earning seniors (phased out between $80,000 and $200,000 of non-Social Security income), and to eliminate the payroll tax for senior workers.
There's a simple way to make the $141 billion House-passed Medicare Sustainable Growth Rate (SGR) bill more fiscally responsible: don't exempt it from PAYGO.
As currently written, not only would the SGR legislation add $500 billion to the debt by 2035, but it includes a provision (in Section 525 of the bill for those reading along at home) exempting it from the pay-as-you-go law specifically designed to prevent Congress from adding to the debt over the course of a year.
This PAYGO loophole not only codifies the debt increases within the bill, but it also makes it more difficult for the Congress to follow through on achieving the Medicare savings in the House and Senate Budgets.
Luckily, there is an easy solution. By simply striking Section 525 and removing the PAYGO loophole, the Senate would effectively require Congress to identify $141 billion or more of deficit reduction by the end of the year.
This wouldn't require savings to take place immediately and wouldn't hold up passage of the SGR bill, but it would allow Congress the time it needs to identify savings and reforms to ensure they don't add to the nation's credit card over the long-run. And if Congress fails to find those savings, an automatic mandatory cut would reduce the cost of Medicare and (to a much lesser extent) several other smaller mandatory programs by about $15 billion per year until savings are identified.
Notably, striking the PAYGO Loophole would not impact any of the spending or savings currently in the bill.
Lawmakers often lament the difficulty of reforming Medicare and other health care programs, but the difficulty is not a lack of viable options. One particularly lush source of ideas to examine is the President’s budget.
His budget offers $435 billion in health care savings, which would pay for reforming the Sustainable Growth Rate (SGR), new health initiatives (some of which are in the SGR bill), and repealing the Medicare sequester while leaving an additional $100 billion for deficit reduction. On top of many reforms found in previous budgets, it also includes efforts to improve the delivery system and enact payment reforms – as well as new spending – not seen in previous budgets.
Here are a few highlights of the proposed savings:
- Allow the Health and Human Services (HHS) Secretary to negotiate certain drug prices: Although this item is budget-neutral, it would let the Department negotiate with pharmaceutical manufacturers to lower the price of high-cost prescription drugs and biologics for Medicare Part D. This policy is in addition to other proposed drug payment reforms in the budget that save $165 billion.
- Equalize payments for similar care performed in different sites of service: A trend in Medicare is the shift of ambulatory care from doctors' offices to hospital outpatient facilities, the latter of which receives a higher reimbursement from the government. The budget proposes to equalize payments for services that can be well provided in physician offices, regardless of whether that care is provided in a hospital outpatient department, physician's office, or an Ambulatory Surgery Center. CBO estimates that this would save $13 billion over the next decade.
The Sustainable Growth Rate (SGR) formula returned yesterday with 21 percent cuts to Medicare physician payments, although the actual effect won't be felt for a few weeks because of Medicare's ability to withhold payments for a period of time. Lawmakers have come up with a solution that is expected to be voted on when the Senate returns from recess, but it would add about $500 billion to debt by 2035.
The legislation replaces the large and blunt SGR-prescribed cuts with 0.5 percent payment increases for five years before freezing payment growth through 2024 alongside a new, consolidated quality incentive program for Medicare physicians, called the Merit-Based Incentive Payment System (MIPS). In a budget-neutral manner, the MIPS program would reward or penalized physicians based on quality, resource use, meaningful use of electronic health records, and clinical practice improvement activities. Simultaneously, the bill would also provide payment incentives for physicians to utilize alternative payment models (APMs), such as Accountable Care Organizations (ACOs), that reward quality of care over quantity of care delivered. From 2019-2024, physicians earning a significant share of their revenue from models that involve risk of financial losses and have quality measurement would get a 5 percent bonus payment each year. Over the long run, physicians in APMs would also receive annual updates of 0.75 percent while non-APM professionals receive 0.25 percent updates.
This new system is estimated to cost $175 billion through 2025 by the Congressional Budget Office, but lawmakers are choosing only to offset the $35 billion amount by which this policy exceeds the cost of a permanent payment freeze. There is at least some hope, though, that the reformed physician payment system can begin to slow costs and improve quality of care in Medicare.
In addition, the bill extends several "health extenders" that are often included with doc fixes. Most of the extensions run through 2017, but two policies -- the Qualified Individual (QI) program, which provides Medicare premium assistance for certain low-income beneficiaries, and Transitional Medical Assistance (TMA), which allows low-income workers whose income rises to temporarily keep Medicaid eligibility -- get permanent extensions. These extenders cost $19 billion through 2025 and are fully offset.
We have spent much space on this blog highlighting the fact that temporary delays of the cuts dictated by Medicare's Sustainable Growth Rate (SGR) formula have almost always been offset (98% of the time since 2004), producing $165 billion in deficit reduction all told, almost entirely from health care programs.
And despite assertions to the contrary, these health savings shouldn’t be dismissed lightly. There have been numerous recommendations put forward by the Medicare Payment Advisory Commission (MedPAC), Health and Human Services' Office of the Inspector General (OIG), the Government Accountability Office (GAO), and others that likely would have been ignored but for the need to replace savings from the SGR.
MedPAC, for instance, has warned for years that Long-Term Care Hospitals (LTCHs) and Inpatient Rehabilitation Facilities (IRFs) are paid more than is necessary for many of the cases they handle. To offset the 10% cut dictated by the SGR in 2008, Congress adopted MedPAC recommendations to reduce payment updates for both IRFs and LTCHs, and also modified the prospective payment system for LTCHs. Then again in the 2013 “doc fix” bill, in line with recommendations under discussion by MedPAC at the time, Congress applied site-neutral payments for certain conditions treated in LTCHs.
The latest “doc fix” exemplifies this trend. The largest savings in the bill, from allowing the Department of Health and Human Services (HHS) to collect and use data on values of physician services to more accurately set Medicare payments, is a variant of a direct recommendation from MedPAC the last two years.
Despite official estimates tabbing the Medicare Sustainable Growth Rate (SGR) formula replacement bill at a cost of $141 billion this decade and implying it would add upwards of $500 billion to the debt over 20 years, lawmakers have taken to fuzzy math – or simply ignoring math altogether – in order to pretend that the bill is fiscally responsible.
Earlier today, the Congressional Budget Office (CBO) released its score of the Medicare Sustaintable Growth Rate (SGR) reform bill under consideration in the House. According to CBO, the legislation would increase federal deficits by $141 billion through 2025 and much further in the second decade. By our rough calculations, including interest, that means the SGR reform bill would add over $500 billion to the debt by 2035.
More specifically, CBO estimates the spending increases in the legislation will total $210 billion over the next decade. Only about one-third ($70 billion) of this spending would be offset, with a combination of provider reductions, increased means-testing of Medicare premiums, and other minor reforms. (Details are available in the table at the bottom of this blog.)
As we had predicted, savings would then grow in the second decade but not by enough to pay for costs. In fact, according to CBO it would most likely barely be enough offset the additional costs beyond a payment freeze.
Now that we have shown that the "doc fix" proposal in the House will likely add to the debt in the longer term – refuting a key argument for not fully offsetting the ten-year cost of the bill – supporters of the legislation have come up with a cynical new argument.
Note: The analysis below is based on an earlier version of the SGR plan, which has since been adjusted to include modestly larger offsets and – more significantly – slower growth in physician payments beyond 2025. Our latest analysis shows that debt would increase by $500 billion by 2035.
Proponents of the SGR reform plan currently under discussion have suggested that lawmakers ignore its $140 billion ten-year cost and focus instead on the legislation’s long-term effects. Over time, they argue, spending reductions in the legislation will grow and thus reduce long-term debt levels. Unfortunately, this claim appears to be false – the legislation would add to the debt both this decade and next. Even accepting optimistic savings estimates, we estimate that debt would increase $400 billion by 2035 (including the cost of interest) as a result of this deal.
According to recent reports, the SGR reform bill currently under consideration would cost about $210 billion through 2025, while offsetting $65 billion – leading to about $140 billion of net costs. Some have argued that the savings will grow over time and thus the legislation will be fiscally responsible over the long-run. Yet while it is true that the savings will be greater in the second decade, costs will grow as well – and under the current framework, costs will most likely remain higher than savings in the second decade as well as the first.
In other words, proponents of the “second-decade theory” appear to be looking only at one side of the ledger. They are counting the long-term savings while ignoring the long-term costs.
To the plan's credit, Medicare savings from the offsets in the reform package will grow over time. Although some of the savings are temporary, some of the changes are not only permanent but will likely save much more in the second decade than the first, including changes to post-acute care payments, Medicare means-testing, and Medigap reform. (Importantly, much of the reason is not because the savings grow faster over time, but because these policies don’t begin for a number of years and therefore generate savings over less years in the first decade than the second).
According to one estimate by Doug Holtz-Eakin of the American Action Forum, Medicare means-testing and Medigap reform could save $230 billion in the second decade. Notably, these numbers appear to us to be significantly higher than likely savings, but even accepting these numbers, total savings over two decades would be about $300 billion. Meanwhile, the total costs could total more than $550 billion.