A Fix for the Doc Fix?

by Yuval Levin

The House will soon be considering a bill to end the Medicare “Sustainable Growth Rate” and replace it with a series of payment rules and modest structural reforms of the program. The full bill in question was just released yesterday, and the CBO score for it came out today. It makes for an interesting study in how the structure of the welfare state distorts today’s policy thinking, and I think it also makes for a pretty close call for conservative legislators. There are serious, plausible arguments on both sides of the question. But ultimately, I’d vote against it. 

I don’t think the annual SGR patches constitute a terrible crisis, but I think the fiscal trajectory of the Medicare program does. This bill seems premised on the opposite assumptions. 

Some thoughts (mostly suitable for nerds) below the fold about how to approach a decision on this proposal and why I think it’s a close call, with apologies for the inexcusable length. 

The SGR is what you might call a blunt technocratic instrument. It is a rule enacted as part of the 1997 budget deal that requires that per-beneficiary spending in fee-for-service Medicare not grow faster than the economy as a whole. Originally, the rule required (more or less) that if such spending grew more quickly than GDP in a particular year, then Medicare payments for physician services would be cut the following year in accordance with a formula designed to keep overall spending on the same path as economic growth. Since 2003, Medicare cost growth has been compared to a 10-year average of GDP growth, rather than just the prior year’s growth. Either way, the SGR has required that Medicare payments to doctors be cut pretty substantially each year for more than a decade. 

Of course, doctors are a powerful constituency and don’t just sit still when their pay is cut. So each year since 2003, Congress has put off the required payment cuts—in some cases several times a year, for a total of 17 “doc fix” bills. Each accumulating delay has made the return of the rule less and less likely, since it has meant that its implementation would require increasingly draconian payment cuts to return to the required trajectory, and these would likely drive many physicians out of Medicare. This has also meant that the relationship that the SGR tried to create between payment-rate changes and cost growth in Medicare is no longer really part of the equation: If the SGR were to go into effect this year, for instance, doctors would see a cut of more than 20 percent in their pay, even though Medicare cost growth was relatively slow last year. 

So the SGR has not worked as intended for over a decade, instead putting Congress through the disgraceful charade of pretending the cuts will happen next year and then bowing down before a sacrosanct business constituency and delaying again with a now-annual “doc fix” ritual that combines pretty much everything that is wrong with the contemporary welfare state. 

But it’s not quite that simple. Most of these “doc fix” delays have involved offsets of the cost involved. Some of them have been pure gimmickry, like moving costs just past the final year of CBO’s 10-year budget window to make it look like the deficit is cut. Others have been tweaks to Medicare’s price controls, which distort prices throughout American health care and make the development of a functional consumer market all the more difficult. They do save the government money, but they’re generally bad policy. Others, meanwhile, have involved some real if very modest structural reforms allowing some more market pricing here and there. The latter two kinds of offsets, whatever their merits as health economics, are real cost cutters, and they have saved more than $150 billion over the past decade, according to CBO. In this sense, although the SGR itself has not worked, and although it has put Congress through an annual shaming, it actually has saved a significant amount of money—in fact it is probably the most successful cost-reduction mechanism in Medicare’s 50-year history. That isn’t saying much, but it’s something. 

These offsets, however, have been getting progressively weaker and more gimmicky, and Congress has been losing its will to keep doing them. A permanent end to the SGR has been coming for some time, and there are a lot of members (in both parties) who have been willing for several years to just end it without offsetting the cost at all. That nearly happened last year. 

All of this makes it difficult to judge the likely cost and consequences of the replacement bill the House is now looking at, because it’s hard to say exactly what the alternative would have been. And that, after all, is how the effects of legislation are generally analyzed—against “baseline” assumptions that consider what would have been likely to happen in the absence of the proposed law. No one can say with much confidence what the right baseline is in this case. 

CBO is required to score proposals like this against the current-law baseline, and therefore to assume that the SGR actually would take effect starting next year and to judge this proposal as killing those SGR cuts and replacing them with significantly smaller offsets. It therefore scored this bill as increasing the deficit by about $141 billion over the next ten years. CBO also estimated the bill’s effects in the following decade, while acknowledging that such longer-range projections are even less reliable than 10-year estimates, and found that, relative to current law, the bill would increase the deficit in that second decade too. 

Others have tried to assess the proposal with the opposite assumption. For instance, Douglas Holtz-Eakin, the former CBO director who now runs the American Action Forum, assumes that retaining the SGR at this point would yield virtually no meaningful savings—especially beyond the first ten years—since Congress wouldn’t really pay for putting it off each year, and so sees this new proposal as significantly reducing the long-term deficit. That is a plausible (and has become an increasingly plausible) assumption. It’s what CBO’s “alternative fiscal scenario” (which tries to make more realistic assumptions about Congress’s likely choices) has long assumed, and as of the past year it is also what the trustees of the Medicare program have assumed. In their 2014 annual report, for the first time, the trustees have assessed Medicare’s fiscal situation on the assumption that the SGR cuts will never happen. 

In its report on the bill, CBO also offers a score against another kind of baseline, which assumes that Congress would end the SGR and simply freeze physician payment rates at this year’s levels for a decade (rather than enact modest increases) but enact no other changes or offsetting provisions. Under that assumption, the agency scores this proposed bill as having a basically neutral effect on the deficit—it would reduce the deficit by just under $1 billion over ten years. (This suggests, by the way, that the offsets in this bill cover the cost of instituting regular increases in physician pay and of all the non-SGR provisions in the bill, but effectively do not pay at all for eliminating the SGR itself.) 

The most plausible baseline for assessing this new proposal is probably somewhere between the first two options. It’s surely true that the SGR cuts will never happen, but it’s also probably the case that if Congress continued to put them off annually it would also continue to partially offset the cost of doing so. It’s therefore probably reasonable to assume, very roughly, that this proposal will increase the deficit a fair bit in the first decade and increase it somewhat less (or perhaps even out) by the end of the second. Entitlement reforms should be judged above all by their medium- and long-term effects, since they always take time to accumulate, but immediate effects can’t be ignored. This proposal should therefore be given a modest thumbs down on its fiscal effects, but it doesn’t necessarily live or die on that score as it’s genuinely hard to say what the alternative is. 

To settle the question, therefore, we also have to ask whether the proposal is a net benefit as a set of reforms: whether it changes the Medicare program in constructive ways, and whether the benefits of ending the annual “doc fix” charade are worth the cost of permanently eliminating the modest leverage that the threat of the SGR has at times (like, well, this time) given reformers. 

In this respect, there are basically three elements of this proposal to consider: the new payment rules for doctors, the additional means testing in certain parts of Medicare, and the elimination of first-dollar supplemental coverage. 

The bill has a fair number of further elements that aren’t really about Medicare, most of which just offer proof that “temporary” means “permanent” when it comes to federal benefit programs. And it has several other Medicare provisions that are meaningful as sources of scored savings but are not really reforms to the program. For instance, the proposed bill would slow the growth of payment rates to hospitals and long-term care providers. CBO says this would save more than $15 billion in the first decade (making it the second largest cost offset in the bill’s 10-year score, after the means testing discussed below). But it doesn’t change the structure of Medicare and just offsets a small part of the cost of the rest of the bill. I don’t think the bill stands or falls on that basis either. The three Medicare-reform elements are really how it should be judged. And these offer a mixed bag. 

The first of these involves replacing the SGR formula in two steps. For the next five years, physician payment rates in fee-for-service Medicare would increase by 0.5 percent per year. After that, physician payments in Medicare are supposed to be determined by a new payment system that’s meant to move away from paying for volume toward paying for quality and outcomes. This is basically a replacement of a blunt technocratic instrument with a fine technocratic instrument—and fine technocratic instruments are very often even worse, indeed much worse, than blunt ones. 

The portion of the bill laying out how this is supposed to work adds up to a 120-page demonstration of why the government should not be acting as a health insurer. It draws precisely the wrong lesson from the SGR experience, concluding in essence that, because the Medicare bureaucracy could not manage a crude price-control mechanism without rewarding volume over quality in counterproductive ways, that same bureaucracy should now be assigned to define quality, measure it, and reward it. 

The bill text brims with confidence in the capacity of central planning and public-interested management (“In order to involve the physician, practitioner, and other stakeholder communities in enhancing the infrastructure for resource use measurement, including for purposes of the Merit-based Incentive Payment System under subsection 1833(z), the Secretary shall…), in the clarifying power of federal information management (“In order to classify similar patients into care episode groups and patient condition groups, the Secretary shall…”) and in the potential of the bureaucracy to stand above American health economics and render objective assessments of the relative performance of its parts (“Not later than January 1, 2017, the Comptroller General of the United States shall submit to Congress a report examining whether entities that pool financial risk for physician practices, such as independent risk managers, can play a role in supporting physician practices, particularly small physician practices, in assuming financial risk for the treatment of patients.”) 

The core insight underlying the conservative approach to Medicare reform in recent years points in precisely the opposite direction from this proposed payment system. It suggests that the way to contend with the unavoidable complexity of health economics in a free society is not to internalize that complexity in a bureaucracy that seeks to manage the whole but to externalize it in individual consumer decisions that never seek to manage more than small, individual parts. Judgments of value should be made, as much as possible, by the individuals receiving a service—in this case health insurance. They should be offered different options by different providers of coverage who are free to experiment with different business models, and their assessments of the relative appeal of these options (given what they offer in terms of coverage and care and at what price) would amount to assessments of value and would aggregate into overall judgments of the same. No centralized system can be expected to know enough to handle this kind of complexity, but a relatively competitive consumer market can often do it fairly well by enabling experimentation by providers, evaluation by consumers, and a process of continuous evolution in which the popular (and therefore valuable) options thrive and those that are rejected (and so judged to lack value) are left by the wayside. 

A fair number of Democrats used to be open to that sort of approach to Medicare reform, but the party has been radicalized on the entitlement question in this century and Democrats today want to double down on technocratic fantasies. Rather than take the centralized fee-for-service Medicare system in a market direction by at least moving to a somewhat less centralized premium-support system, they have worked to take the rest of the American health-care system in a technocratic direction—pointing to a captured-market premium-support model not to move Medicare in the direction of the under-65 market but to move that under-65 market in the direction of Medicare (through Obamacare). This proposed payment system reinforces that perversity. Perhaps it wouldn’t be much worse than Medicare is now (though I tend to agree with Scott Gottlieb that it probably would be), but indulging liberals in this technocratic fantasy is not a step toward the Medicare reforms we need. 

The other two sets of Medicare reforms in this proposal are much better. The first would make Medicare more like the need-based aid program it ought to be by increasing means testing in Medicare parts B and D.  Starting in 2018, premiums for those parts of Medicare would increase for the wealthiest seniors and starting in 2020 the threshold for incomes subject to these new rates would fall a little (so that means-testing affected more seniors).

Real means testing (in which people who have more get less) isn’t really possible in a centralized fee-for-service insurance system because the value of the benefit provided by the government is basically the same for everyone. For that reason, means testing in Medicare has generally taken the form of charging wealthier seniors more in premiums rather than giving them less in benefits. This doesn’t much help address the perverse effects Medicare has on our larger health-care system: It doesn’t make Medicare’s footprint any smaller or federal spending any lower, it just raises more of the revenue to fund that spending from beneficiaries and less from other taxpayers. So it effectively takes money from wealthier seniors (who have no real choice but to participate in the program) and gives it back to them in the form of a highly inefficient health-insurance benefit. In a premium-support system, you could just give wealthy seniors less money. But for now, given what Medicare is, this kind of means testing is definitely a move in the right direction, and a meaningful structural reform of the program that helps (a little) to ready the ground for the bigger reforms that will be needed down the road. It improves the government’s finances (by about $34 billion in the first decade and much more in later decades as the effects compound, according to CBO), it makes some beneficiaries feel a little more like consumers, and it combats the fiction that Medicare is an earned benefit. All to the good. 

The second of these substantive reforms would prevent so-called “Medigap” plans (private insurance products that Medicare beneficiaries can buy to cover out of pocket costs not covered by Medicare) from offering first-dollar coverage. Some of these plans now pay for the entirety of the Medicare beneficiary’s deductibles and copayments, leaving them facing no out of pocket costs and therefore no pressure to restrain their use of the health-care system. This proposal would allow Medigap coverage to start only after a beneficiary has reached the level of the deductible for Medicare part B. This would mean introducing some modest but important consumer pressures and price signals into the Medicare system. This new policy would only start in 2020, and only for new Medicare beneficiaries, so the savings it would involve would be very small at first (less than $1 billion in the first decade) but they would increase quite a bit in the second decade and beyond, according to CBO. This, too, is a good and valuable step in preparing the way for the premium-support reforms to come.

The question, then, is whether these two significant benefits—in fiscal terms and in policy terms—are worth the proposal’s significant costs. I think the answer is not obvious, and so I don’t think it makes sense to think of this bill as a test of principle or a do-or-die moment one way or another. 

As I see it, the most relevant question is about whether the bill as a whole makes a larger reform toward a premium-support system more or less likely, rather than what even its long-term fiscal effects are as written. It’s true, I think, that if these changes are adopted and kept as they are for 20 years or more, they will yield some very significant savings against a baseline that assumes we scrap the SGR without offsetting the costs. But even these would not be enough to sustain the existing fee-for-service program for that long. Medicare’s actuaries project that the key Medicare trust fund will be exhausted around 2030, 15 years from now. The SGR has been in place for 18 years, but this replacement for it is unlikely to last nearly that long. Some much more dramatic reform of the program will need to happen by then, and we should judge steps like this one by whether they make that more or less likely. 

More aggressive reform-minded offsets for the cost of this bill could have yielded a clear affirmative answer. But Democrats in the Senate and President Obama would not have put up with them. It may be that this is as much as Republicans could get at this point—though the closed-door Boehner-Pelosi process that yielded this bill makes it hard to say. But even if it is, it’s not at all obvious that the resulting bill is better than another doc fix and another try would be. 

On the whole, the modest reforms in this proposal seem to me to be outweighed by the fiscal effects, the entrenchment of some very bad habits and assumptions, and the loss of future opportunities to force Medicare-reform discussions to happen. 

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