Gimmick in Doc Fix Patch Should Be Replaced with Real Savings

Congress is considering another 12-month doc fix, averting a 24 percent cut in Medicare physician payments scheduled for April 1. While the SGR patch contains several serious reforms that would reduce future health care costs, it contains one big accounting gimmick that accounts for about one-fifth of the bill's savings. The gimmick takes advantage of CBO's ten-year budget window to essentially move savings from 2025 (outside the window) into 2024. Though the bill is scored as saving $1 billion, the legislation would actually cost about $4 billion through 2024, after removing the fake savings from this gimmick.

A little background: due to the 2011 Budget Control Act, the 2013 Ryan-Murray deal and a 2014 bill affecting military COLAs, certain mandatory programs are subject to sequestration through 2024, and Medicare providers and plans are subject to a 2 percent payment cut. Some of the 2024 cuts, however, actually occur in Fiscal Year (FY) 2025 (FY 2025 runs from October 1, 2024 through September 30, 2025).

The recent SGR legislation would replace a 2 percent payment cut for the whole year in 2024 with a 4 percent payment cut for the first half of the year.  The effect of this would be to reduce Medicare spending in FY 2024 – a year which CBO measures in its ten year budget window – but increase Medicare spending by almost the exact same amount in FY 2025. This produces no savings overall, but by shifting cuts that would otherwise occur in FY 2025 into CBO's ten-year window, it appears to save $5 billion, offsetting approximately one-fifth of the bill's cost. This timing shift is rightly likely prohibited by PAYGO rules.

We've warned about this type of gimmick before, because it undermines fiscal responsibility.

Luckily, there is still time to replace this gimmick with real savings. Any number of relatively modest health care changes could replace the $5 billion cost (see the table below). Alternatively, the duration of the doc fix could be shortened – enacting a doc fix through the end of December instead of the end of March would reduce the cost of the legislation so it is roughly budget-neutral.

Possible Offsets to Replace the Gimmick in the Protecting Access to Medicare Act of 2014

Policy 2015-2024 Savings (Billions)
Impose Part A premium on people making above $200K/$250K beginning in 2020 $5
Extend freeze for means-tested Part B and D premium thresholds for one year $4
Post-Acute Care
Freeze home health payments for one year $8
Freeze Skilled Nursing Facility (SNF) payments for one year $4
Freeze Inpatient Rehabilitation Facility (IRF) and Long-Term Care Hospital (LTCH) payments for one year $3
Implement 75% rule for IRFs $1
Equalize certain payments in IRFs and SNFs $1
Make site-neutral payments for evaluation and management $10
Equalize payments for certain procedures conducted in hospital outpatient departments and freestanding physician's offices $10
Better align graduate medical education with costs $7
Reduce Medicare coverage of bad debts from 65% to 55% $5
Reduce Critical Access Hospital (CAH) payments to 100% of reasonable costs $1
Prohibit CAH designation for facilities within 10 miles of nearest hospital $1
Medicare Advantage
Align employer group waiver plan payment with average MA plan bids $6
Increase levy authority for payments to Medicare providers with delinquent tax debt $1
Move up Cadillac tax start date to 2017 $6
Change ASP+6% reimbursement for Part B drugs to flat fee equivalent of ASP+3% $5
Accelerate brand drug discounts in closing Part D donut hole $5
Ban "pay-for-delay" agreements $4
Change payment formula for biosimilars in Part B and modify exclusivity available under approval pathway $3
Increase prescription drug rebates for Medicaid $10
Limit Medicaid durable medical equipment reimbursement $4
Reduce provider tax threshold to 2011 levels $10
Reduce duplicative administrative funding already covered by TANF $3
Reduce waste, fraud, and abuse in Medicaid $2
Increase TRICARE enrollment fees and pharmacy copayments $6
Exclude certain services from in-office ancillary services exception $2
Freeze Prevention and Public Health Fund at current level $4
Cap rental period for oxygen concentrators at 13 months $10
Offer an FEHBP+Self One option and domestic partner benefits $1

Source: OMB, CBO, MedPAC, CRFB calculations

For all the problems with the current SGR, it has at least led Congress to enact real health care reforms over the years. In fact, lawmakers have enacted $140 billion of deficit reducing policies, almost entirely health savings, while paying for the cost of the annual doc fixes. Partially relying on gimmicks instead of real savings represents a step backwards, and one that should be avoided.


March 31: 2014: The graph in this post was updated to show only savings sequestered from Medicare sequester. A previous version showed sequestered from all mandatory programs.