Why the Bill to Fix Medicare Keeps Soaring

A perennial congressional battle over Medicare is about to erupt. And the result is likely to be a steep increase in the program's long-term costs—with older Americans eventually paying many of those bills.

As of April 1 fees paid by Medicare to participating doctors will be slashed by a steep 21%. This cut is the result of a 1997 budget formula, called the Sustainable Growth Rate (SGR), which should have been junked years ago. Physicians have already been complaining about Medicare's low level of reimbursement, and if the cut happens, there could be a mass exodus of physicians from the program.

Congress has had plenty of opportunities to reset the the SGR formula to permit fair fees and annual adjustments but instead has opted for short-term fixes 17 times. Last year lawmakers agreed on a long-term plan to set physician rates—a so-called "doc fix"—and this consensus proposal has been reintroduced in the new Congress. But the long-term price tag for the adjustment threatens to make it a non-starter.

How much would a long-term doc fix cost? The Congressional Budget Office (CBO) estimated the 10-year budget hit of a permanent reform at $138 billion in early 2014. A year later, the 10-year bill has risen to nearly $175 billion. For perspective, the agency’s latest 10-year price tag for the Affordable Care Act is “only” $142 billion.

It’s hard to believe that Congress will be able to find $175 billion in spending offsets in the next couple of weeks, or that Republicans would agree to boost the deficit in order to pay the long-term tab. So expect another one-year fix—number 18. It would cost an estimated $6 billion, which would not have much of an immediate impact on consumers.

If Congress doesn't vote in a fix, higher Medicare costs would slam older Americans and their families. As a new Kaiser Family Foundation analysis points out, under current law beneficiaries would automatically absorb their share of Part B Medicare costs if the formula is changed. That out-of-pocket price tag would be nearly $60 billion over 10 years, Kaiser estimates.

That's just for physician fees. Consumer out-of-pocket costs are likely to rise even higher once other effects of the change are factored into Part B premiums and co-insurance payments. “One option under discussion would require beneficiaries to assume a portion of the $175 billion federal price tax, above what they will automatically pay in premiums and cost-sharing,” the Kaiser analysis says.

Other major Medicare service providers, including insurers and drug companies, could also be asked to take a haircut to finance high doctor payments. Of course, those costs are likely to be passed along to consumers eventually.

Paying higher Medicare costs is asking a lot of most older Americans. Half of all Medicare recipients live on incomes of about $23,500 or less. And seniors already spend triple the amount of money on health care, as a percentage of their household budgets, compared with younger households.

Still, a permanent doc fix has to happen at some point. And Kaiser's report notes that Congress has been getting closer to a serious response to the problem.

So if you depend on Medicare, you would do well to set aside what savings you can to meet those inevitable health care bills. And at the very least, expect a big increase in Washington rhetoric over Medicare.

Philip Moeller is an expert on retirement, aging, and health. He is the co-author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

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