Background of the Coming Medicare Cuts:

How This Began

In an effort to reign in federal spending, the Balanced Budget Act of 1997 enacted the Sustainable Growth Rate Formula (SGR) to link the growth in Medicare expenditures to growth in the overall economy. In 1998 Congress began using this complex formula to calculate Medicare physician reimbursement.

Because of robust economic growth in the late 1990’s, the formula appeared to work. However, by 2002, Medicare costs exceeded the established goal. By 2005, expenditures ran 17 percent over the SGR target. By 2010 cost overruns reached 21.3 percent. Now, beginning January 1, 2012, the SGR requires physician reimbursement cuts of 29.5 percent to meet budget.* (Recall, even without these cuts, Mayo quit accepting Medicare in one test clinic because reimbursement did not cover expenses.)

For the past decade Congress chose not to deal with the obvious structural problems of the SGR. Instead, it repeatedly kicked the can down the road. Each year, when the SGR called for a cut to physician reimbursement rates, Congress found non-Medicare dollars to pour into Medicare. This annual patch became known as the "doc fix."

Fiscal Slight-of-Hand

This budgetary sleight-of-hand creates the illusion of Medicare's fiscal viability. The Congressional Budget Office (CBO) estimates the budgetary impact of legislation according to how the law is actually written, not according to what the CBO believes Congress will actually spend. The fact Congress leaves the SGR on the books forces the CBO to underestimate the true ten-year cost of Medicare. That underestimation currently stands at approximately $298 billion for the next ten years.**

When Congress first began to debate national healthcare reform in 2009, it considered adjusting or replacing the Sustainable Growth Rate Formula to gain physician support for the bill.***, ****However, fixing the SGR would mean the CBO estimates would reflect the actual cost of Medicare. Because President Obama’s plan to overhaul the healthcare system became so expensive, Congress had to leave the SGR on the books to make Medicare spending appear $298 billion less that its actual cost when the CBO scored the program.

But even this “savings” was not enough. Not only did Congress need 10 years of new taxes to cover six years of new spending, they had to cut Medicare by an additional $575 billion. #*(Approximately half of this came in the form of cuts to Medicare Advantage and the other half came in the form of cuts to physicians and hospitals.) In reality, President Obama had to cut Medicare by well over three quarters of a trillion dollars before he could claim his signature legislation “reduced the deficit.”

The Pending Medicare Cut

Because the SGR was left on the books, it now calls for a 29.5 percent cut to physician’s Medicare reimbursement on January 1, 2012. However, given our $15 trillion national debt, it is fiscally imprudent to borrow more money to prevent this cut from taking place. The slight-of-hand the President and Congressional Democrats used to claim the PPACA “reduced the deficit” placed Medicare with its back against the wall.

Make no mistake. The coming SGR cuts are real. When Congress struggled to find money to cover the temporary “doc fix” in 2010, Medicare held payments to physicians on four separate occasions. This uncertainty, combined with Medicare under-reimbursement, is forcing physicians to abandon this government-run program. A recent survey done by the Texas Medical Association indicated half of 1,906 responding physicians would consider dropping Medicare if Congress did not effectively address the pending SGR cut. #**

Key point: Washington must find $300 billion (over the next ten years) to restructure or replace the Sustainable Growth Rate Formula (SGR). Unless this problem is solved, seniors risk losing access to their physicians.