Prospects for a Permanent Doc Fix Improve

A popular secondary story from the newest CBO baseline centers on the "doc fix," the patch that prevents a large cut to physician payments due to the Sustainable Growth Rate (SGR) formula. The American Taxpayer Relief Act (ATRA) put off a 27 percent cut to physician payments for 2013, but left in place cuts for future years (now scheduled to be 25 percent in 2014). However, CBO's baseline estimated the cost of extending the doc fix permanently -- freezing physician payments at current rates rather than allowing them to be cut -- declined significantly. Whereas the August baseline scored the cost of a permanent doc fix at about $250 billion, the latest estimate now puts it at less than $140 billion, over a $100 billion change.

For background, the SGR was enacted in the Balanced Budget Act of 1997 as a backstop to control Medicare spending. It set out specific spending targets and increased or decreased physician payments if actual Medicare spending met or exceeded the target, respectively. For the first few years, spending did meet the targets, so physicians saw payment increases. However, starting in the early 2000s, spending exceeded the targets, and rather than allow scheduled cuts to take place, lawmakers continually put them off a year or two at a time, sometimes replacing it with other health care cuts. Because these fixes were only temporary and Medicare spending continued to exceed its targets, the scheduled cut grew larger year after year.

But in recent years, Medicare spending growth -- as well as total health care spending growth -- has slowed, and the trend has reversed. In fact, CBO is now estimating physician payment rates would increase in 2015 (assuming a 25% cut in 2014). As CBO explained in its latest baseline:

Actual spending has been lower than projected—and lower than the spending targets inherent in the sustainable growth rate—for the past three years. Because actual spending has been lower than spending targets, CBO now estimates that payment rates will increase beginning in 2015. Those higher payment rates narrow the difference between growth under current law and a freeze at current levels, thereby reducing the estimated cost of restricting the payment rates.

As a result, the recent decline in Medicare cost growth has had a big impact on the costs of doc fixes. The table below shows the projected cost of a permanent SGR repeal in 2018 fell from a high of $34 billion in August 2011 to $12 billion today.

^{Source: CBO}

Even though health spending growth has slowed, that is no reason to be complacent on health care spending. For one, future Medicare spending growth is uncertain and could end up being higher than CBO projects, making SGR repeal more expensive than it is currently (offsets may also increase, depending on how they are designed). More importantly, even if CBO's projections hold, simply offsetting the doc fix will still leave health care spending rising faster than the economy. Even after the Affordable Care Act's cost controls fully phase in, federal health spending will still rise from 5.7 percent of GDP in 2017 to 6.4 percent in 2023. The chart below shows the small difference between a deficit-financed doc fix and one that is offset.

^{Source: CBO}

Perhaps the most prominent SGR repeal bill right now is the Medicare Physician Payment Innovation Act, co-sponsored by Reps. Allyson Schwartz (D-PA) and Joe Heck (R-NV). The bill repeals the SGR, provides small payment increases for physicians instead of a freeze, and directs the Centers for Medicare and Medicaid Services (CMS) to develop options for a new physician payment system to be implemented in 2019. This bill was introduced in the last Congress, offsetting the cost of SGR repeal with the drawdown of war spending, a budget gimmick we opposed. While the reintroduced bill is silent on offsets, the much lower cost of repeal will make it easier for lawmakers to find them.

In addition, last week the House Ways and Means Committee released an SGR replacement outline containing principles for repeal that are very similar to the Schwartz-Heck bill. This outline calls for the SGR to be replaced with stable payment rates and a new physician payment system that better rewards quality and efficiency of care.

Overall, the lower cost of repealing the SGR should be welcome news for those eager to replace a flawed formula. However, lawmakers should remain aggressive on tackling federal health spending as the aging population and health care costs growing faster than the economy will continue to drive future deficits. As we detailed in a report last December, there is a wide variety of options that can offset the doc fix and go well beyond that to address increasing health spending. Lawmakers should explore all options, as controlling the growth of health care spending is a key element to getting our fiscal house in order.