The “Doc Fix” and Related Lessons for Fixing the CBO Rating System

President Obama is urging everyone in Congress to vote in favor of the “doc fix” this week – deferring scheduled cuts in physician reimbursement for Medicare services rendered. On one level, this request is simply routine.  After all, these  “automatic annual reductions” in compensation have been postponed by majority vote very year since 2003. What’s new? This year, deferral requires the Congressional Budget Office  (CBO) to re-tabulate the fiscal consequences of the nation’s history-making health-care reform legislation.  This year, Republicans also insist that the “doc fix” be paid for.

The results from recalculation aren’t pretty.  Faced with the strong likelihood of yet another doc fix, the CBO announced last Friday that the subsequent increase in costs would be $208 billion over the next ten years. That’s a lot to pay for. Reality tends to be expensive. It would also push the new health-care program $59 billion in the red.

In the calculations that made the health-care bill seem like one that not only expanded access to medical treatment but also shrank deficits, the CBO was required to act as if it believed that, after seven years of nixing annual cuts in payments for doctors taking care of Medicare patients, Congress would now approve reducing their remuneration by 21% — the cumulative total of not only 2010’s scheduled reduction but also all those cuts postponed in prior years.  A reduction of more than one-fifth after seven years of nothing?  Whom were we kidding?  Ourselves, for starters.

Did anyone inside or outside the CBO really believe that we could, and would, drastically reduce physician pay at a time when more and more of their services are needed as the population of Medicare patients continues to soar with aging baby boomers? The forces of supply and demand cannot be overturned like this. Shouldn’t we be as outraged about the CBO misleading and mistaken rating as we have been by the blunders of private agencies that so foolishly gave stocks, bonds, and mortgages favorable risk ratings when their futures turned out to be anything but?

Financial corporations appear to have encouraged their employees to give strong ratings to the stocks and bonds of companies who generated millions in business fees.  Our government appears to have encouraged its employees to assign good numbers to fiscally irresponsible program expansion.  What’s the difference?

What role has President Obama played in all this? “Now, I realize,” he said Saturday, “that simply kicking these cuts down the road another year is not a long-term solution to this problem. I’m absolutely willing to take the difficult steps necessary to lower the cost of Medicare and put our budget on a more fiscally sustainable path. But I’m not willing to do that by punishing hard-working physicians or the millions of Americans who count on Medicare. That’s just wrong. And that’s why in the short-term, Congress must act to prevent this pay cut to doctors.”

Obama’s right about the short term. “[P]unishing hard-working physicians or the millions of Americans who count on Medicare” is indeed  “just wrong”. Including these cuts in the budget was accordingly “just wrong” as well.  Why, then, were they ever part of the health-care bill the majority passed?  Will there be consequences for those culpable?

What are we supposed to do in the long term?  The only ways to get more doctors without raising medical fees are to reduce admission standards for medical schools, subsidize their education, or engage in tort reform to lower malpractice-insurance premiums.  The first is scary, the second is costly, and the third requires more political guts than politicians in general and Democrats in particular can muster. So, Mr. President, what ‘difficult steps’ are you going to propose and support?

Based on several additional and equally shady assumptions, the CBO said that the health-care reform bill passed by the Senate would not just be fiscally sound, it would actually operate in the black and help solve our deficit and debt problems. This endorsement gave elected officials political cover, and the bill became law with ease that would otherwise have been surprising earlier this year.  Now the bill has been scored a budget buster in even its first decade of operation. So much for deficit reduction, now, over the next decade, or at any time in the future.

None of the long-term and more discouraging budget figures is official, however, because the CBO is not allowed to project beyond the first ten years to a future when not just program revenues but program services and their expenses will be in full force.  (It apparently will take four years for benefits to be up and running, well after new taxes are imposed to pay for them.)

Another dubious assumption involves balancing the federal budget by fobbing off some of its Medicare’s expenses to the states. The maneuver was never real budgetary relief for the country as a whole, but this little detail may become irrelevant.  Obama is back-peddling and now talks about giving states and even localities addition money to help cope with their additional costs.

And then there are the much-touted savings from reducing waste, fraud and abuse in Medicare.  We should question why such savings would be part of the health-care bill instead of something the government should pursue on its own merit and without the necessity of a new bill to inspire them. Medicare, after all, is statistically bankrupt – big time.

We should also question the ability to cut the nasty triplets in Medicare at all – substantial percentages of these totals are probably really the high cost of information and paperwork for bureaucracy, as well as political paybacks and income redistribution.  Last Tuesday, however, our President raised the sums involved in this form of cost saving when he announced a new initiative to reduce waste, fraud and abuse in the Medicare program 50% by the end of 2012.  “I want to send a notice to all who would swindle and steal from seniors and the Medicare system,” he said. “We are going to find you, we will prosecute you, and we will ultimately prevent those crimes from happening ever again.” Is this his response to Republican demands for financing the doc fix?  It’s not enough.  It’s not even 10% of the requisite payment demanded by Republicans.

But it’s still good news that the Department of Health and Human Services (HHS) and the Department of Justice have jointly recovered $2.5 billion of waste and fraud in 2009.  This sounds promising – although we don’t know how much the recovery cost.  One might even think the two government agencies are on course to reach Obama’s goal of savings up to $18 billion of misuse and crime in 2012.  Alas, HHS is also responsible for incorrect payments of about $35 billion in Medicare’s fee-for-service program.  This is 12.4% of the total.  Will HHS be prosecuted for these mistakes?  Will it have to pay for them?  Alas, the money comes from us taxpayers.  We pay.

If the CBO must continue to operate under the constraint of accepting assumptions as unrealistic as those discussed above, it should also be empowered to grade them.  Transparency is a good thing. The CBO should be obliged to footnote various figures, noting the assumptions that lie behind them.  Perhaps it ought also to provide alternative figures, ones based on assumptions with higher probabilities of actually happening.  It should be obliged as well to note that the first ten years of a program may not well represent the next ten and beyond.

Americans are properly outraged about the poor jobs private-sector professionals have done in rating financial assets like stocks, bonds and mortgages.  Many of the pros were ill informed.  Perhaps they also lacked skill. Others had good information but bad incentives – they worked for corporations who wanted to keep themselves and the firms with whom they did big business happy with rosy prognostications of rising stocks and safe bonds.  Still others were open to bribes, probably the most infamous incidence of which was Jack Grubman’s upgrading AT&T stock from a “hold” to a “strong buy” in exchange for getting his twins into 92^nd St. Y pre-school.

The financial reform bills that passed the House and  Senate  have yet to be reconciled, but both include regulation of private credit-rating agencies.  Standard & Poors, Moody’s and Fitch are all considered at fault for giving investment-grade ratings to mortgage-backed securities that proved worthless or close thereto. The Senate wants to eliminate the freedom of those who issue securities from choosing the agency that will rate them the highest.  The House wants all the rating agencies to register with the Securities and Exchange Commission and to face stiffer standards for liability.

Americans should also be outraged about the poor job the government-sector CBO has been doing in rating the fiscal consequences of Senate and House bills.  In this case, the problem may not be due to lack of preparation or proper skills.  Nor may it be the result of poor incentives or bribes. But the consequences are equally damaging, and they affect all of us. We deserve better information, we need it, and we must demand it.  Minimally, we deserve transparency.  We must be able to evaluate the assumptions that underlie the figures and their specious precision. When and how will accountability be imposed on the CBO?

Good regulation is far more difficult than it may seem.  For the private sector, Wharton Finance Professor Marshall E. Blume properly identifies the real issue: “How do you regulate what we don’t yet know is going to happen?”  For the government sector, the real issue is this: “How do you regulate the regulators?”  Finding the right answers to these questions may be the only way to fix the financial health of our nation.