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CBO: A public option in Obamacare would save enough money to pay for a permanent “doc fix.”

doctor and patient

For months now we’ve only been covering Obamacare, but turns out that’s not the only thing happening in the world of healthcare. In fact, while we’ve all been focused on the new marketplaces, members of both parties have been working together(!) on a permanent solution(!!) to a problem Congress has been avoiding for over a decade: a seriously flawed Medicare payment formula that– if it ever took effect– would mean such a large pay cut it could drive doctors out of the program (if not out of business altogether).

Don’t celebrate just yet though, because they still haven’t figured out the hardest part: how to pay for it. They have options– the Congressional Budget Office has released a list of health-related ways Congress could reduce the deficit– and there was one that jumped out at us. The cost of repealing the flawed formula is almost exactly the same amount that a public option for Obamacare would save.  

Why is such a giant pay cut to doctors scheduled to happen?

The problem started in 1997, when Congress changed Medicare’s formula for reimbursing doctors. This new “sustainable growth rate formula,” tied health care costs to the overall economy: if health care costs grew at a faster rate than the GDP, it would trigger automatic cuts in Medicare payments. If the GDP grew faster than health care costs, doctors would get paid more.

This approach sort of made sense back when the economy and health care costs were growing at roughly the same rate. But beginning around 2001, health care costs started to take off, while GDP growth dropped. That should have triggered cuts in Medicare payments, but as Newsweek explains:

When it came time to make that cut, nobody seemed to want to go through with it. The reason was obvious. If doctors suddenly had to eat a substantial part of the cost of treating Medicare patients, they might drop those patients. “That would cause an uproar from a large voting bloc,” says Lori Heim, president of the American Academy of Family Physicians. “So Congress just postponed dealing with the inevitable.”

Meanwhile, because of the way the formula is constructed, the potential cut got bigger every time it was delayed- way bigger than what Congress originally envisioned. When Congress passed the latest in a long line of temporary fixes last January, doctors were looking at a 24% drop in reimbursements if the cuts had gone through.

[BTW, for long-time readers some of this might look familiar.]

Why doesn’t Congress just repeal that formula? Problem solved.

The short answer is money. Every year, the difference between what the SGR formula gives Medicare and what Medicare actually costs gets bigger and bigger. It’s a lot easier for Congress to find a few billion dollars once or twice a year than it is to find the hundreds of billions that the Congressional Budget Office estimates it will cost to repeal the formula permanently:

doc fix old graph

If it’s so expensive, why is Congress working on a fix now? This Congress can’t agree to spend money on anything.

Back in 2011, when the graph above was made, the price tag for permanent repeal was around $300 billion, and by 2016 it was expected to be nearly $600 billion. But something kind of remarkable has happened over the past few years: the growth of healthcare costs has slowed dramatically. That led the CBO to revise its earlier estimates, and they now say it will only cost $153 billion to repeal the flawed formula. However, there’s no guarantee that the recent slowdown in cost growth will continue– if healthcare costs start rising, a permanent fix could get very expensive very quickly. With the cost of fixing the formula the lowest it’s been in years, now might be the perfect window.

If they do repeal the flawed formula what will they replace it with?

The deal that lawmakers have announced would first replace the flawed formula with a system that gives doctors a 0.5% annual raise for the next five years, before transitioning to a system that pays doctors more for quality rather than quantity. The Washington post explains how that would work:

What Congress wants to do differently this time around is, by 2021, put as much as nine percent of doctors’ reimbursements at stake if providers can’t hit certain quality standards. It would also include a bonus pool of $500 million for the doctors who do provide really great care.

The idea is to use metrics, such as whether they’re adopting electronic medical records and hitting certain medical quality targets, to adjust upward or downward what doctors’ earn. That’s quite different from the current, largely fee-for-service system, where doctors get a flat fee regardless of whether their patients get any better.

This arguably is a more significant move toward pay-for-value than is the Affordable Care Act, where those efforts are either limited to pilot programs (like the Accountable Care Organizations) or, if they are system-wide, tend to limit providers’ risk to two percent or three percent of their reimbursements. Going up to nine percent would step up the incentives in a pretty major way.

How might Congress pay for the permanent fix?

The CBO has released a list of health-related things Congress could do, along with how much each option would bring in.

cbo health options

That said, they’re not all great options (also most of the things that Republicans would go for, Democrats never would, and vice-versa):

  • Over half of them (options 3, 4, 6, 7, 8, 9, 12, 14 if you’re interested) would simply shift the cost of paying for healthcare from the government onto individuals in the form of higher insurance premiums and out-of-pocket costs.
  • Number 1: Imposing caps on Medicaid does the same thing, but in a roundabout way. It would shift the cost of Medicaid to the states who would then either have to drop people from the program, increase out-of-pocket costs, or raise taxes (for more on why block-granting Medicaid is a bad idea, check out our post on it here).
  • Number 15: Taxing health benefits is something we looked at in our last post— in the long run in might not be the worst idea, but in the short run it means a big tax hike on the middle class.
  • Number 4: Limiting medical malpractice torts again might not be the worst idea… depending on how its done. The type of tort reform the CBO looked at involved simply capping punitive damages and pain and suffering, which has big drawbacks and doesn’t raise enough money to cover the doc fix.
  • Number 16: an additional 50-cent per pack tax on cigarettes is a great idea– it would raise money while bringing down cancer rates– but unfortunately also doesn’t raise enough money to pay for a permanent fix.

The solution that really caught our eye is one you might remember from when Congress was working on passage of the Affordable Care Act. The public option is simply an insurance plan run by the government that would be sold on the Obamacare marketplaces, and unlike almost all the other options it saves money without simply passing the cost onto individuals. Instead it negotiates for low rates with doctors and hospitals, and it provides other insurers an incentive to keep their rates low in order to stay competitive.

Liberals obviously love the public option and conservatives should love it since it saves the government a bunch of money. Unfortunately, of all the options on the list, the public option is perhaps the least likely to pass… even though it might be the smartest.

{ 2 comments… add one }
  • Nagle JF February 23, 2014, 10:36 am

    Informative and interesting.

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