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

Peter Suderman on the Doc Fix on the Fiscal Cliff in Miniature



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To understand the so-called “fiscal cliff,” Peter Suderman of Reason argues that we should pay close attention to the doc fix. The “doc fix” is a term that refers to ongoing efforts to fix the Sustainable Growth Rate (SGR), which was itself a 1997 effort to fix a 1989 system that established a “resource-based relative value scale” that aimed to contain Medicare cost growth through the centralized administration of physician payments. Peter recounted this larger story of how Congress’s efforts to address Medicare’s flaws have in many cases created new, more difficult problems late last year.

Zeroing in on the doc fix, Peter explains the logic of the SGR and why it has unraveled. Basically, the SGR rested on rosy assumptions about the medium-term economic future. The following is drawn from the Centers for Medicare and Medicaid Services:

The statute specifies a formula to calculate the SGR based on our estimate of the change in each of four factors. The four factors for calculating the SGR are as follows:

(1) The estimated percentage change in fees for physicians’ services.

(2) The estimated percentage change in the average number of Medicare fee-for-service beneficiaries.

(3) The estimated 10-year average annual percentage change in real gross domestic product (GDP) per capita.

(4) The estimated percentage change in expenditures due to changes in law or regulations.

Prior to enactment of the Medicare Prescription Drug, Improvement and Modernization Act (also known as the Medicare Modernization Act, or MMA), the statute required the SGR to be calculated using estimated projected growth in real GDP per capita.  That is, the Secretary was required to use an estimate of a single year’s real GDP per capita to determine the SGR.  However, section 1848(f)(2)(C) of the Act, as amended by section 601(b) of the MMA, requires the Secretary to calculate the SGR using the 10-year annual average growth in real gross domestic product per capita.

Back in 1997, many legislators believed that tying physician payments to increases in real GDP per capita would be perfectly fine, as we were living in a new era of robust economic growth. But robust growth failed to materialize and physicians were alarmed at the prospect of stingy payment hikes. Rather than allow the SGR payment schedules to go into effect, Congress has patched Medicare payments year after year. Physicians know that the SGR is essentially dead, but they expend considerable effort every year to make absolutely sure it’s dead. And the Congressional Budget Office knows SGR is essentially dead, but it builds the assumption that it is not dead into future budget projections. That is, when we factor in doc fixes as far as the eye can see, the long-term fiscal trajectory of the federal government looks quite a bit worse than the current law baseline.

According to Peter, this is a paradigmatic example of how Congress approaches fiscal consolidation:

[T]he fiscal cliff consists in no small part of both policies designed to reduce spending that Congress would like to ignore and allegedly-temporary policies that Congress would like to be permanent, but doesn’t want to include in long-term budget projections. The sequester mechanism, for example, was designed to hold down spending in defense, Medicare, and other areas. But just as with the SGR cuts, few in Congress or the White House really want to see most of those reductions enforced.

Other policies are of the permanently temporary variety: a fix to the Alternative Minimum Tax, the corporate tax extenders, and the bulk of the Bush tax cuts. No one thinks of these as policies that are likely to expire. But they are repeatedly passed on a temporary basis in order to help hide their long term cost.

The fiscal cliff exists in large part because of the confluence of a slew of these permanently temporary policies. They aren’t likely to go away. Should there be a deal to avert the fiscal cliff, it’s likely to simply extend many of these policies—including the doc fix itself—for another year or so.

Which means that come this time next year, we could be facing another fiscal cliff. Indeed, just as the doc fix has become a yearly congressional ritual with no end in sight, it may be that many of the temporary policies of the fiscal cliff become permanent fixtures on our policy calendar.

This was a really outstanding column that everyone who is interested in the politics of the fiscal cliff and America’s fiscal future more broadly should read.



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