Doctors Need a Permanent Fix to Medicare Payment Problem

Budging the Budgets


In the battles over the federal budget (and in many state budgets as well), we often hear that we don’t have a revenue problem, but rather have a spending problem. And this is then used as justification for cutting both taxes and spending.

I’ll save for a later article the analysis of how both taxes and spending as a percentage of GDP have changed over the years, and what we can infer from those changes. For this article, I’m talking about the way different types of budgets get conflated as a means of confusing the issues, in order to better drive ideological positions. This, by the way, is extensively done by both major parties.

So let’s look at the different types of budgets. For the purposes of this discussion, we can boil them down to two primary categories:

  1. General fund
  2. Special fund

Special funds have income earmarked for the specific project. Some common examples of these are Social Security, Medicare, and Superfund. We run into trouble when we start conflating the two different types of budgets, because the solutions to deficits in each require different approaches. For this reason, I will start with the special funds, and then shift to the general fund.

Ideally, special funds should be self-sustaining. That is, whatever method is used to fill it should be sufficient to cover the outlays over time. If not, the special fund must cut outlays, increase funding directly, or draw from the general fund. The first two options are the least popular politically, which leads Congress to the third option. However, that third option is the most popular precisely because it hides the true nature of the fund.

Medicare is the poster child for this problem. Medicare Parts A and B are self-sustaining, because payroll deductions cover the outlays. Medicare Parts C and D are where things get messy. The outlay costs rise for those who enroll in Parts C and/or D. Part C was supposed to be revenue-neutral, paid for by a decrease in the fees paid to doctors. In practice, though, the fee reductions have been “temporarily stayed” on an annual basis (this is often called the “doc fix”). The net result is that the increased costs are being covered by the general fund. Part D has an especially high outlay associated with it, because of subsidies for those below 150% of the poverty level. Like Part C, Part D funding comes from the general fund.

In order to treat Medicare more like a proper special fund, Parts C and D need to be funded by an increase in Medicare payroll taxes, or their funding needs to be cut (or some combination of the two). As part of the PPACA, Medicare taxes were raised 0.9% for high-income households, which helps somewhat. It’s worth discussing what sort of coverage we want as a society to guarantee for seniors, and how we want to fund it. It’s clear, though, from looking at the trend on Medicare spending, that the majority of the growth is in Parts C and D. It’s also clear that Medicare payroll taxes would have to go up at an alarming rate if we can’t get the costs of those two (particularly Part D) under control. That’s where the cuts will probably provide the greatest value, because the costs can drop significantly before the cuts start to have a noticeable impact on the benefits.

Similar conversations can be had regarding the other special funds. But what’s most important is that special funds be discussed (and fully funded) independently of the general fund.

The general fund has two different types of expense categories:

  1. Static
  2. Dynamic

Static expenses are budget based. A certain number of dollars are allocated, and those dollars get spent on goods and services. This covers things like the military, transportation infrastructure maintenance, regulatory agencies, and the services that keep government itself running. It also includes long-term investments in the nation’s future, such as education and infrastructure growth.

Static expenses have the advantage of being predictable, which also makes it easy to understand the immediate effects of growing or cutting those budget items. Aside from the military, they also tend to be very small portions of the budget, so changes in static expenses tend to have minimal impact on immediate budget surpluses or deficits.

Static expenses in the investment category are typically the easiest targets for spending cuts, because the expenses are incurred in the short term, with the benefits unrealized until much later. Given the frequent elections of members of Congress, short-term costs with long-term gains are politically losing strategies, provided the long-term extends beyond the office term. The greatest political benefits in either funding or cutting these line items, then are in ideological alignment, which is why you hear these days about Republicans wanting to eliminate funding for Planned Parenthood and the Corporation for Public Broadcasting.

Dynamic general fund expenses are the most poorly understood by the American public (though special fund budgets are close behind). Examples of these are welfare programs, including Medicaid and extended unemployment benefits. Income-based subsidies (such as those in PPACA) apply here, too. These are often listed as part of “mandatory spending.” They are essentially manifestations of Keynesian countercyclical economics. As such, they cause the expense side of the budget ledger to balloon at exactly the same time as the income side drops, and thus cause substantial deficit spending during economic downturns.

The thing to understand about the dynamic general fund expenses is that they need to be designed to be balanced over the long term, rather than for each year. But this means that these expenses need surpluses during the good years (say, annual per-capita private GDP growth at or above 2%), so that they can be tapped during the bad years.

But when times are good, the Congressional temptation to use these funds to increase static expenses is overwhelming. There are always “needs” to address. For example, crime will never be zero, so spending more money on fighting crime is an easy political win. Saving that money to cover the future recession (which looks certain to not be coming…a year or so before it shows up) is politically unpopular.

But as far as I know, nobody here is running for Congress, so we can be intellectually honest here. As long as we have dynamic general fund expenses, we need a “rainy day fund” whose specific purpose is to cover those dynamic general fund expenses during bad times. This means we need to convert the dynamic general fund expenses into special funds, if we wish to be honest about solving the budget issues in the long run.

So, as should be clear by now, there are three different budget categories that need three different funding models and thus are three completely different discussions. When we mix them, we all spend our time trying to find a single solution that addresses all three. Instead, we end up with no solutions at all, and we, as a nation, continue to kick the can down the road for the next generation to deal with.

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The site, “beawaretoday”, is a unique prospective, as if looking down from 30,000 feet at the world of Local, National, and Foreign Affairs. Most people go through each day only seeing what is immediately affecting them and most only have a vision for dealing with their issues of only about 5 to 7 days. With, “beawaretoday”, we look at what is happening around the World and what I call the Domino Effect, to project problems that are forthcoming so that people can plan ahead to deal with them vs. dealing the alternative. I created the blog, “beawaretoday” so that I could share a forum to discuss, Current, Domestic and Foreign Affairs that affect us all through the Domino effect. I encourage you to join the Discussions or at least enjoy reading the content. Thank you, Tom Campbell
This entry was posted in 112 Congress, debt, Domestic Polocies, Economy, GDP, Government Spending, Health Care, Money, National debt, President Obama, Spending, Unemployment. Bookmark the permalink.

One Response to Doctors Need a Permanent Fix to Medicare Payment Problem

  1. Pingback: Health care reform can’t work without more doctors, CNN Money, 4/11/2011 « – Physician Online Publication Resource

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