01 August 2011

We are now the hostage

News today is all over the debt ceiling deal which is brewing in Congress. I'm less interested in the horse-race element of who won, who lost than I am in the policy implications of the deal as it is currently taking shape. And there's one thing there that I really don't like, and anybody in healthcare should be pretty apprehensive about.

Here's the broad outline:

  • The debt ceiling gets raised and economic Armageddon is averted. Good enough.
  • A panel of mutually agreed spending cuts of about $900 Billion is enacted.
  • A commission is formed to negotiate another $1.5 trillion in deficit reduction over the next year or so.
  • A trigger is placed: if the commission fails to agree on the $1.5T in deficit reduction, certain deep cuts automatically go into effect.

The land mine here is the trigger. It's supposed to be a package of unacceptably painful spending cuts, so heinous that neither party would be willing to let them go into effect. It includes deep defense cuts which probably will be blocked, deal or no deal. But it also includes deep cuts into medicare and medicaid. To avoid any accusation that either party is willing to reduce benefits, though, there is no reduction in eligibility or benefits. All the reductions are in provider compensation.

I find this pretty scary. Details are not out there, so I don't know whether these cuts would be from hospitals, physicians or some combination. But I recall the ten-year cost of the SGR fix is supposed to be about $300 billion and sources indicate that is about the amount that is supposed to come out of medicare if the trigger goes into effect. I kind of doubt that the whole amount would come onto the shoulders of physicians, but it's a concerning possibility.

I'll be very interested to see the detail of the deal when they become available -- probably after passage. It seems to me that this is a terrible deal for health care providers -- the nation's economy was held hostage to the debt ceiling and deficit hawks. Now that has been defused, but the health care sector has replaced the overall economy as the hostage, and one I fear policymakers will be more willing to sacrifice in the name of expediency.


  1. I came here to see what you knew about this. I noticed in a number of places the potential cuts to medicare and medicaid would be "harmless" cuts to providers.

  2. What's getting noticed is the flat line that is % of GDP collected as Federal tax revenue. That's right about 18.4% +/- 2% for the last 60 years. Tax rates go up, and more income is sheltered. Tax rates go down, and less is sheltered, but the % of GDP paid to the feds has been amazingly constant irrespective of tax rates, loopholes, policies, party in power, etc. So, doing the usual thing of tweaking the tax code to try to close the gap won't work over the long haul. There may be some temporary blip up if taxes are raised on short notice, but the system reacts and brings revenue back to the long-term line within a year or two.
    In order to pay for all the promises in the current law, the federal government needs about 23-27% of GDP, depending on how many folks you think will be getting subsidized through the insurance exchanges in 2014 and beyond. Even the war spending is a small component of the spending increases needed. For awhile, the government is borrowing the difference, or, when no one else is buying treasuries, having the fed print money to buy them. That game cannot continue much longer for all sorts of macroeconomic reasons, and the longer it goes one, the deeper the hole becomes, as that money will have to be paid back eventually (won't it?).
    So... the rules of the game will have to be changed. A new set of Federal revenue may be found, either by a federal sales tax (VAT) or by taxes or restrictions on pensions (e.g. 50% of IRA or 401K investment must be in Treasuries... to keep everyone "safe"). Or, the promised benefits will have to be reduced, through some combination of restricted eligibility (means testing?) or rationing via regulation or pricing. Or some combination of the two approaches. The numbers are HUGE... approaching the entire GDP of Ohio. Of course, no one knows if the new revenue sources will get factored in to individual income tax planning, or reduce economic growth so that the books won't balance anyway.
    I agree that doctors and all health care providers should be paid fairly for their skills and services. But where will the money to pay them be taken from?

  3. the incentives are way off here. the trigger should be that if the commission fails to agree on 1.5T of deficit reduction, politicians start seeing reductions in pay and benefits.

    instead we have politicians threatening other politicians that they'd better get their acts together... or else we'll start paying doctors less money! talk about an empty threat.

  4. Wow, all this talk of hostages? What happened to toning down the rhetoric and the civility of the left?

    Let me start by saying that I absolutely hate this deal - the cuts were not deep enough and the debt ceiling should never have been raised. But, that being said, this commission has the potential to seriously cut into Obamacare and start its demise. To me, that is the only good thing to come out of this. I seriously doubt that there would be any significant cuts to medicare or medicaid without a replacement plan in place, as this would be damaging to both parties.


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