The Foundry

Forget the President’s rhetoric about bending the health care cost curve.

The House of Representatives will soon vote on legislation (H.R. 3961) that effectively repeals the cost control mechanism included in the Medicare physician payment update formula back in 1997.

Passage of H.R. 3961 would add another $210 billion to the Federal government’s ballooning deficit — and even more importantly — it would demonstrate that Congress is not serious about actually enforcing any new Medicare spending cuts included in its pending health care bills.

The result could be another half-a-trillion dollars — or more — added to the federal deficit over the next ten years if Congress passes new health care legislation. The experience with Medicare physician payment “reform” perfectly illustrates why the spending cuts that finance much of the new health legislation are likely to never happen.

In 1997 Congress included in the formula for calculating Medicare physician payments a provision — called the “sustainable growth rate” (SGR) — designed to limit the growth of spending on physician services in Medicare. The SGR was designed to work as follows:

Medicare set the per-service fees it would pay doctors. However, if doctors provided more services to Medicare patients — thereby increasing Medicare spending above Congressionally set targets — the per-service fees paid by Medicare would be cut to keep total Medicare physicians spending in line. Furthermore, by embedding this arrangement in the physician payment formula, Congress made the future cuts automatic so as to insulate itself from political pressure to keep increasing entitlement spending.

The only problem was that it didn’t work.

As soon as the “automatic” cuts threatened to actually take effect Congress faced political pressure to rescind them. The result is that year after year Congress has enacted single-year “doc fixes” to prevent the cuts occurring.

Thanks to compounding spending growth, over time the gap between the original spending targets and actual spending grew wider and wider. The difference this year now stands at 21 percent — meaning that if Congress now allowed the SGR provision to take effect Medicare’s physician payment rates would be automatically slashed by 21 percent. Of course, this ever-growing gap between theory and reality has translated into ever-growing political pressure on Congress to abandon the theory of restraining spending and instead surrender to the reality of unchecked Medicare growth.

Enacting H.R. 3961 would mean that Congress has thrown in the towel on its previous attempt to control Medicare spending. It will also mean that no rational person can believe that Congress will actually enforce any new Medicare spending cuts included in pending health care legislation. That, in turn, would mean that new health care legislation would actually result in further, massive increases in either Federal borrowing or taxes.

Case in point. The Congressional Budget Office estimates that the health care legislation passed last Saturday in the House would result, over ten years, in $1.3 trillion in new spending, plus $29 billion in tax cuts (mostly new tax credits to small business that offer coverage), offset by $767 billion in new taxes and fees, and $693 billion in spending cuts, mainly in Medicare.

But if Congress won’t enforce its previous Medicare cuts, how realistic is it that they will actually enforce these new Medicare cuts?