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Congressional leaders and the President have come to agreement on a deal to increase the debt ceiling, but the drama is far from over. The Budget Control Act of 2011 sets a precedent, eliminating forever the possibility that a debt ceiling increase could be treated as a routine matter. However, in every other respect, the debt deal adheres to tradition. It offers fiscal half-measures at best, setting the country up for a replay of this year’s contentious debate in 2013, and it forecloses serious policy consideration of reforms needed to put Medicare on a sustainable fiscal path.
“The debt deal kicks all the important decisions down the road and into 2013.” — Joseph Antos
Under the deal, the first debt limit increase of $900 billion triggers a cut in spending of $917 billion. It is worth noting that the additional borrowing authority would be exhausted in under a year, while the cuts are phased in over a decade. Discretionary spending, including defense spending, would be capped. Instead of the 8.5 percent average annual growth that we have seen in recent years, the deal would hold discretionary spending growth to 2.1 percent. Entitlement programs are exempt from this first round.
Those are real cuts. Public health programs, the National Institutes of Health, the Agency for Health Research and Quality, and others can expect to receive their share–but not until next year. The dealmakers actually increased the amount of discretionary spending permitted in the 2012 budget compared to the budget resolution passed by the House earlier this year. That gives appropriators ample time to find the substantial cuts called for in 2013.
The debt limit will increase by another $1.2 trillion even if Congress fails to take action. The special joint committee of Congress created by the Act is supposed to produce a plan to cut at least that much out of the budget, but it is hard to imagine that this new gang of 12 will be able to agree or that the House and Senate would both be able to pass such a plan.
The Fallback Sequester And Medicare
The fallback is a Gramm-Rudman-style sequester, which “pays for” the additional borrowing authority. Half the money would come from defense and the other half from nondefense programs–including Medicare.
The political positioning in the new budget act is clear. Republicans want to be able to say that Medicare would be part of the deficit reduction, and Democrats need assurance that Medicare would not be cut too much. Consequently, the negotiators held Medicare reductions to no more than two percent of outlays while other programs could sustain reductions up to four percent.
Providers would absorb all of the Medicare reductions, which could be as much as $120 billion in a program projected by the Congressional Budget Office to spend $6 trillion over the next decade. Benefits and beneficiary cost sharing would remain untouched, allowing policymakers to claim that seniors would not be affected. A nice campaign line, but it is not true. Seniors will bear some of the burden in the form of reduced access to services.
This looks like piling on to the provider community, which is already expecting major payment reductions from the Affordable Care Act. Richard Foster, Medicare’s chief actuary, has estimated that the “productivity adjustments” in the ACA will make 15 percent of Part A providers unprofitable by 2019. Additional cuts imposed by the budget act simply make the situation more difficult for providers.
The Problems With Across-The-Board Cuts
History and common sense tell us that across-the-board spending cuts do not work. Congress might go along with them for a year or two, but soon policymakers find ways to circumvent their own rules. There is nothing in the Budget Control Act that controls the behavior of Congress, which can increase program spending — or raise taxes — after the Act’s requirements have been satisfied.
What the budget act does not mention is the 29.4 percent cut in Medicare physician payments scheduled for January 2012. Although not explicitly prohibited by the new law, Congress will probably not enact the $300 billion “doc fix” this year. Once again, Congress will kick the can down the road with a small increase in the payment update.
The debt deal kicks all the important decisions down the road and into 2013. The sequester called for under the new Act gives Congress an excuse to avoid making tough policy decisions this year. Moreover, the sequester does not take effect until the President orders it — and the law says that happens on January 2, 2013.
Sometime after that, a new Congress and a new (or old) President will face all the problems that have not been resolved, and that list is long. Medicare will again be on the budget table. The ACA’s costly insurance expansions will also become candidates for downsizing. Regardless of who is President, federal health spending will probably be cut again, and the cuts are likely to be deeper.
The Affordable Care Act treated Medicare as its piggy bank, cutting payment rates to fund health insurance for people under 65. The Budget Control Act also cuts Medicare payment rates (through a sequester), but those savings are used to reduce the deficit. Neither legislation addresses the structural defects in Medicare that promote unrealistic expectations and drive up spending. We will come to this issue again in 2013. Maybe next time it will not be ignored.
Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy.
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