Fast Facts: Medicare Doc Fix

Blog Articles · Mar 17, 2015 · Budget and Spending

The Medicare "Doc Fix"

Status: Congress periodically overrides a 1997 law that attempts to contain the cost of Medicare payments to doctors. Congress prevents the cuts from going into effect with legislation, called the "doc fix." This year, Medicare payments to physicians will be reduced 21 percent if no doc fix passes by March 31st.

Background: When a physician treats a patient on Medicare, the government pays for the services he performs. In 1997, Congress became concerned with the growing cost of these payments to physicians. In response, lawmakers included in the Balanced Budget Act a restriction on growth in Medicare payments to doctors. This cap is called the "Sustainable Growth Rate" (SGR). The increase in payments could not be larger than the overall growth of the economy.

Since 2003, Congress has passed 17 bills stopping these payment cuts from going into effect. If Medicare payments are cut too much, physicians may stop accepting Medicare patients. This creates a major incentive for Congress not to allow the cuts to go into effect. However imperfect, the SGR acts as a needed brake on exploding Medicare costs. When it overrides the SGR, Congress normally offsets the cost with spending reductions in other areas. The bipartisan Committee for a Responsible Federal Budget states that "since 2004, 98 percent of doc fixes have been paid for. And although these doc fixes have cost about $175 billion, the pay-fors have generated roughly $165 billion worth of savings."

Bipartisan Irresponsibility: According to Politico, the bill in the House being negotiated between John Boehner and Nancy Pelosi would include roughly $200 billion in increased entitlement spending, with only $70 billion offset with spending entitlement cuts elsewhere. The bill would eliminate the SGR and replace it with a new payment system. Another program, CHIP, is also reauthorized for two more years at "the elevated payment rates approved under Obamacare." CHIP provides health insurance for children and families with incomes above the poverty line.

The deal would be only partially paid for with "structural" changes to Medicare spending. The specifics of the plan are unclear. However, reforms are likely to include a reduction in Medicare benefits for the wealthy (an approach known as "means-testing") and a reform of Medicare supplemental insurance offerings (known as Medigap). Both reforms are of uncertain size and impact. What is known is that the up-front savings of the plan are minimal. Historical patterns of Congressional policymaking suggest that a spending-now, cuts-later approach is ineffective at reducing spending.

House Republicans are trading the repeal of a massive leverage point with a long history of reducing government spending for limited structural reforms. The extension of CHIP is a major priority of the Left, despite the fact that the program is largely irrelevant within the context of the current healthcare safety net, which currently includes Obamacare and an enhanced Medicaid program.

Long-Term Solutions: Reform is needed to ensure seniors have access to care as well as ensure that Medicare operates in a fiscally sustainable way. The Heritage Foundation argues that "[a]ny permanent Medicare "doc fix" must be financed with permanent Medicare savings." The changes to the SGR must also balance in size and scope with structural changes to Medicare. A large change to the SGR with only small changes to Medicare is fiscally irresponsible.

While the House proposal does contain reforms, the changes it suggests are hugely disproportionate to the changes it makes to the SGR. The elimination of the SGR should be paired with major changes to Medicare. After all, beyond the program's 10-year costs, SGR actually has a long-term structural impact of $2.3 trillion. The proposal's $200 billion price tag, bipartisan backing and the fact that the House plan's savings only begin at the end of the 10-year budget window indicate strongly that its changes to Medicare are minor.