PAYGO or No-Go: An Easy Way for Congress to Improve the SGR Bill

There's a simple way to make the $141 billion House-passed Medicare Sustainable Growth Rate (SGR) bill more fiscally responsible: don't exempt it from PAYGO.

As currently written, not only would the SGR legislation add $500 billion to the debt by 2035, but it includes a provision (in Section 525 of the bill for those reading along at home) exempting it from the pay-as-you-go law specifically designed to prevent Congress from adding to the debt over the course of a year.

This PAYGO loophole not only codifies the debt increases within the bill, but it also makes it more difficult for the Congress to follow through on achieving the Medicare savings in the House and Senate Budgets.

Luckily, there is an easy solution. By simply striking Section 525 and removing the PAYGO loophole, the Senate would effectively require Congress to identify $141 billion or more of deficit reduction by the end of the year.

This wouldn't require savings to take place immediately and wouldn't hold up passage of the SGR bill, but it would allow Congress the time it needs to identify savings and reforms to ensure they don't add to the nation's credit card over the long-run. And if Congress fails to find those savings, an automatic mandatory cut would reduce the cost of Medicare and (to a much lesser extent) several other smaller mandatory programs by about $15 billion per year until savings are identified.

Notably, striking the PAYGO Loophole would not impact any of the spending or savings currently in the bill.

Recent articles suggest that the Senate may consider an amendment to close this PAYGO loophole, which represents a huge improvement to the bill's fiscal responsibility.

A Detailed Explanation of the PAYGO Loophole

The Statutory Pay-As-You-Go Act of 2010 established new requirements to ensure Congress did not continue to add to the debt. Specifically, it is meant to ensure that over the course of a given year the total cost of enacted legislation is equal to or lower than total savings. In other words, policymakers can enact laws that increase deficits and still avoid triggering a sequester by passing bills later in the year with savings that mitigate the difference or go beyond it.

Closing the PAYGO loophole in the SGR bill by striking Section 525 would not prevent Congress from enacting the legislation, force a hasty effort to negotiate offsets in the 11th hour, or require immediate across-the-board spending cuts. Rather, it would require Congress to enact legislation offsetting the cost before it adjourns at the end of this year.

The Office of Management and Budget (OMB) enforces PAYGO via "PAYGO Scorecards" that sum up all of the costs and all of the savings incurred by legislation in a given year. They then average the costs over the first five and first ten years after enactment. If net costs exceed savings in a given fiscal year - resulting in a negative balance on the scorecard - when Congress adjourns at the end of the session, the President is required to issue a sequester order that uniformly cuts non-exempt mandatory spending by an amount that offsets the deficit shown on the scorecard.

 H.R. 2's PAYGO Effect Over the Next Decade (billions)
  2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Net Change in On-Budget Deficit $7.3 $17.8 $23.0 $15.2 $10.6 $8.8 $10.7 $12.9 $13.1 $11.7 $10.9
5-Year Scorecard  - $15.1 $15.1 $15.1 $15.1 $15.1  - -  -  -  -
10-Year Scorecard  - $13.5 $13.5 $13.5 $13.5 $13.5 $13.5 $13.5 $13.5 $13.5 $13.5

Were Congress to remove the PAYGO exemption in Section 525 of H.R. 2 and subsequently fail to enact offsetting savings in 2015, the result would be a $15 billion "sequestration" cut to non-exempt mandatory spending in 2016, with about 80 percent of it applying to Medicare through across-the-board cuts to providers and plans. Specifically, the cut each year is determined by the greater of the balances on the five- or ten-year scorecard, and the cut to Medicare annually is capped at 4 percent (although the actual prescribed cut would likely be closer to 2 percent). This process would then continue annually until sufficient deficit reduction is enacted or until the balance is paid off in full.

Unlike the similarly-named "sequester" currently in place as a result of the Supercommittee's failure, these cuts would fall entirely on mandatory spending programs, leaving defense and non-defense discretionary funding untouched (which are bearing the brunt of the current sequester). Similarly, though, most mandatory spending is exempt, including almost every program geared to assist lower-income individuals. For example, Social Security, Medicaid, Supplemental Security Income, unemployment insurance, veterans' benefits, food stamps, and Temporary Assistance for Needy Families are all exempt from the sequester. A full list of exemptions is available here, and they are spelled out in the Statutory Pay-As-You-Go Act of 2010.

Of course, the purpose of removing the PAYGO exemption is not to force an across-the-board cut primarily to the Medicare program, but rather to give lawmakers a strong incentive to come back to the table in order to enact reforms with sufficient savings to avoid adding to the debt. This action would allow Congress to enact H.R. 2 to avoid the cut in payments to doctors now and then take the time to carefully consider and develop legislation achieving offsetting savings.

Both the House and Senate budget resolutions called for significant reductions in Medicare spending below current law, complete with reconciliation instructions to the relevant committees that could be used to facilitate action on sufficient savings to pay for the rest of the SGR bill.

Ideally, lawmakers would maintain the precedent of offsetting doc fix bills with alternative savings. Exempting the legislation from the PAYGO scorecard would cement the fiscal irresponsibility in the House-passed bill by adding $141 billion to the deficit over the next decade. If lawmakers are serious about tackling the growing cost of Medicare, they should strike Section 525 from H.R. 2 and spend this year finishing the job of finally paying for a permanent SGR fix.