'Doc Fix' Easily Covered by War Savings, Says CBO

January 31, 2012

January 31, 2012 — Politicians looking to solve the Medicare reimbursement crisis heard some tantalizing numbers today from the Congressional Budget Office (CBO).

The news? There is more than enough in projected war savings to pay for a repeal of the sustainable growth rate (SGR) formula, used to set Medicare rates for physicians, according to a budget and economic outlook published online January 31 by the CBO.

The SGR formula will trigger a 27.4% reduction in Medicare reimbursement on March 1 unless Congress acts to avert it. Legislative options include postponing the cut for 1 or 2 years, or eliminating the SGR formula entirely and replacing it with something considered more equitable for physicians.

However, lawmakers so far have been unable to swallow the cost of a long-term "doc fix" of the SGR problem. The CBO puts the cost of merely freezing Medicare rates at their current level through 2022 at $316 billion (up from a $290 billion price tag calculated last year).

Organized medicine and some members of Congress have proposed paying for this huge expense with money currently budgeted for overseas military operations that will not be spent because of troop pullouts in Iraq and Afghanistan. The CBO report estimates those savings to be $838 billion through 2022 — enough for a "doc fix" that even includes raises for physicians as opposed to a pay freeze.

In a recent letter to Congress, leaders of organized medicine wrote that this war-savings solution "amounts to 'cleaning the books' by eliminating one flawed budget gimmick with another."

Budget Deficits Will Decline, but by How Much?

The CBO report goes beyond Medicare reimbursement rates to analyze fiscal matters that concern all Americans. It forecasts declining federal budget deficits and a slowly mending economy, although the degree of progress depends on how Congress handles controversial taxation and spending issues on its plate.

Future congressional decisions are the wildcard in CBO projections, which are based on current federal law and policies. For example, tax cuts enacted during the George W. Bush administration are supposed to expire at year's end, producing trillions of dollars in revenue. The CBO took that into account when it projected the federal deficit to decline from nearly $1.1 trillion in fiscal 2012 (which began on October 1, 2011) to $339 billion in 2022. From 2013 to 2022, these deficits on average will represent 1.5% of the annual gross domestic product (GDP).

This baseline projection also assumes that other deficit-reducing measures will take effect as planned:

  • The 27.4% cut in Medicare reimbursement set for March 1;

  • Automatic spending cuts required by the Budget Control Act of 2011 in lieu of any congressional legislation to reduce the deficit by at least $1.2 trillion; and

  • The indexing of the alternative minimum tax for inflation.

The CBO prepared an alternative budget projection based on Congress writing new laws that undo these taxation and spending assumptions. In this scenario, budget deficits still decline, but not as dramatically, and account for 5.4% of annual GDP on average from 2013 to 2022.

According to the CBO baseline projection, federal spending on healthcare, including the Medicare and Medicaid programs, will increase from $847 billion in 2012 to $1.8 trillion in 2022. Higher Medicare outlays account for half of the increase. The single largest driver of Medicare spending growth is the tsunami of baby boomers entering the program.

Again, the projection assumes a 27.4% Medicare pay cut on March 1. If Congress freezes Medicare rates through 2022, federal spending on healthcare will grow by another $316 billion.

Expiration of Tax Cuts Will Slow Down Economic Recovery

The nation's economic outlook is neither dire nor rosy, according to the CBO. It expects the economy to grow sluggishly over the next 2 years just as it has since the last recession ended in June 2009. After 2013, growth will pick up, but "the economy's output will remain below its potential until 2018, and...the unemployment rate will remain above 7% until 2015," the CBO report stated. As growth accelerates, interest rates and inflation will "rise to more normal levels."

One reason why the CBO expects the economy to continue recovering at a slow pace is the higher taxes that Americans will pay if the Bush tax cuts are allowed to expire. Preserving them would hasten the recovery, the CBO says.

On an ominous note, the CBO warns that if the European banking and budget problems go from bad to worse, the spillover effect could "greatly weaken" the US economy.

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