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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Guest Post by Avik Roy: Not All Medicare Cuts Are Created Equal



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My friend and sometime Agenda co-blogger Josh Barro says in Bloomberg View that Jim Capretta and I (Avik Roy) are partisan shills for supporting Mitt Romney’s proposal to repeal Obamacare, along with that law’s $716 billion in cuts to Medicare. “They want to have it both ways on Medicare,” says Josh. “The political impulses behind this strategy are clear. Why any policy experts would try to offer a substantive defense of it is not.”

The temptation to believe that people who disagree with you do so for sinister reasons is common in public policy debates. In this particular case, Josh has failed to consider an alternate possibility: that the authors he criticizes have spent considerably more time thinking about Medicare policy than he has.

Let’s step back and understand a key concept of Medicare budgeting. Congress does not appropriate money for Medicare, the way Congress appropriates money for roads, bridges, and bumblebee farms. Medicare is an entitlement: if granny has a heart attack, and needs to undergo coronary artery bypass surgery, Medicare pays for it, regardless of what Congress may have projected for Medicare spending in that particular year.

Hence, when Congress produces its budget each year, it does so by predicting how much we will spend on Medicare that year, not by appropriating a specified amount, above which the program cannot spend.

Congress has tried, in the past, to adopt a “global budget” for Medicare that would help constrain its spending growth. The best example of this is the program’s Sustainable Growth Rate, or SGR, which was enacted as part of the Balanced Budget Act of 1997. The SGR requires the government to adjust payments for physician services each year, so that growth in Medicare spending does not exceed GDP growth.

However, global budgets don’t work. An individual physician offers his patient the best possible care he can, without regard to cost, because he has every incentive to do so. Medicare pays the bills. It’s only after the fact that Congress wakes up and realizes that Medicare spending growth exceeded the targeted rate.

Hence, the cost of health care has continued to grow at a rate exceeding GDP growth. As a result, physicians are faced with the prospect of steeply declining reimbursement for caring for Medicare patients, which, if taken too far, lead doctors to drop out of the system, and stop seeing Medicare patients. As a result, in the years since the 1997 BBA, Congress has overruled the SGR-dictated Medicare fees, and instituted costly “doc fix” legislation that allows Medicare’s fees to keep better pace with health costs. The consequence is that the SGR has not been enforced, and Medicare spending continues to grow.

Obamacare’s method for restraining Medicare spending builds directly on top of the SGR system. ACA institutes the Medicare Independent Payment Advisory Board to ensure that Medicare stays on the law’s intended course. The primary mechanism by which IPAB is empowered to govern Medicare spending is to further reduce payments to doctors and hospitals. This has not been a successful mechanism in the past, as I have just noted.

The 2012 House GOP budget, authored by Paul Ryan, repealed Obamacare but retained that law’s projections of future Medicare spending, in effect “preserving” the ACA’s Medicare cuts. But the House budget did not specify any mechanism by which to enforce those cuts. IPAB, as currently constructed, is unlikely to lead to better outcomes than SGR did. The House budget, by not specifying a mechanism, is also far from guaranteed to bend the cost curve downward.

The Wyden-Ryan and Romney proposals, by contrast, are substantially more likely to result in modulated Medicare spending, because they generate efficiencies driven by competition and choice. Structural improvements to Medicare, like these, are the only realistic way to curb Medicare spending over the long term.

There are other ways to address Medicare spending growth in the near term. One possibility, raised by Philip Klein, is to allow individuals above the age of 55 to voluntarily opt in to the reformed program. There are technical issues that would have to be considered before committing to that approach, such as the possibility for adverse selection (healthy seniors joining the reformed program, while sicker seniors stay in the traditional one).

In conclusion, then, Mitt Romney’s decision to not preserve Obamacare’s Medicare cuts discards a law that has dubious policy merit, in order to ensure that he is in a position to enact far superior structural reforms to the Medicare program down the road. We can consider other near-term reforms. But it is the long-term reforms that are paramount.

Disclosure: Avik Roy is a member of Mitt Romney’s Health Care Policy Advisory Group.

UPDATE: Josh responds here (we also had a back-and-forth on Twitter on Thursday). I don’t have anything further to add, except to say that we’ve made a lot of progress in America if Mitt Romney is a wuss for endorsing Paul Ryan’s Medicare reforms.



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