Wednesday, January 9, 2013

One Fiscal Cliff Down and Three To Go––But No Real Solution On the Horizon

Last week's deal to avert the "fiscal cliff" settled very little.

For those in the health care market, I will suggest the big takeaway is that we should expect very little will be settled in the coming months and we will continue to face a great deal of uncertainty for years to come.
Without an agreement to alter the course we are on, it is estimated that we will add more than $10 trillion to the national debt over the next ten years. Most experts agree that we need to reduce that amount by about half in order to put our nation's fiscal course on a sustainable track. The Simpson-Bowles Debt Commission, for example, called for $4 trillion in deficit reduction––a fourth in new revenue and three-fourths in spending cuts.

We've heard lots of talk about a "Grand Bargain" between Republicans and Democrats to finally put our fiscal house in order. To be a grand bargain the two sides would have to agree to a deal that at least equaled the $4 trillion Simpson-Bowles proposal in its scope.

But Republicans and Democrats never came close to that kind of solution in the run-up to the recent fiscal cliff deal.

In the end, the two sides agreed to about $600 billion in tax increases. They also spent hundreds of billions more by agreeing to put off the sequester cuts for just two months, fix the Alternative Minimum Tax (AMT) problem, extend some business tax benefits, and extend unemployment benefits. They separately found $30 billion in Medicare savings, mostly from hospitals, to grant the Medicare doctors only a one-year delay in their 27% fee cuts.

Now, Obama says he wants $600 billion in more revenue by limiting tax breaks.

If the President were to be successful, he would increase revenue by a total of $1.2 trillion––about what Simpson-Bowles would have increased revenue toward their $4 trillion package. During negotiations between President Obama and Speaker Boehner, the President offered about $900 billion in spending cuts, including $600 billion in entitlement reforms.

At best Obama hasn't put more than about half of the $4 trillion we need on the table––a junior "Grand Bargain."

Republicans, feeling that they were jammed at the brink of the fiscal cliff into voting for the tax increases, are now adamant that they will not make any deals that don't address spending––particularly the entitlements.

The Republicans have pledged to use the next three cliffs––hitting of the debt ceiling sometime in February, the expiration of the $1.2 trillion sequester spending cut patch on March 1, and the expiration of government funding authority on March 27th––as the leverage they need to "get serious" about cutting government spending.

In fact, I see no evidence the Republicans have any plans to cut spending by anything close to the $4 trillion needed for a real grand bargain. All last fall, Boehner never put anything on the table that proposed spending cuts above $1 trillion over ten years. Boehner and Obama never considered anything with more than $2 trillion in combined spending cuts and revenue raisers during their discussions, and the number was more like a combined $1 trillion at the end.

Both sides rightly recognize that Social Security and the health care entitlements are at the heart of the nation's fiscal challenges. But the most we have seen either side discuss is the raising of the Medicare retirement age and adjustments to the Social Security inflation formula. These would have only a modest impact on the debt––only a small fraction of what is needed.

Both sides are avoiding the real entitlement cuts that would need to occur.

Yes, Republicans have offered a fundamental––and controversial––reform of Medicare, the Ryan defined contribution scheme. However, the Ryan plan, in order to give people time to plan for the big changes, would not even begin to be implemented for ten years––outside the 10-year budget window requiring the $4 trillion in deficit reduction. Therefore, the Ryan plan would have a zero impact on any ten-year deal.

What this means for those in the health care markets is that there is almost no chance of any real grand bargain this year. More likely, we might see a junior grand bargain––perhaps totaling $2 trillion over ten years. Such a partial solution would mean this deficit debate will just roll on from one deadline or cliff to another over years not months.

That means more Medicare doc fixes at the last minute, as well as likely more cuts, or threats of cuts, to hospitals, other providers, Medicare Advantage and Medigap plans as far into the future as I can see. The Affordable Care Act and its $100 billion a year in spending will also come online as a target for cuts. It will also mean a continuing debate about how to finally fix the health care entitlements in a fundamental way, as well as contain the new Affordable Care Act's costs.

I'd like to tell you I watched both sides engage in a way that makes it likely we will get the $4 trillion solution that finally puts all of this behind us and gives the health care market, and every other market for that matter, the certainty everyone wants. But that did not happen.

With Medicare, Medicaid, and the new health law so important to any final solution to the debt problems, the past few months only indicates to me that the uncertainty over what we will do with these programs will continue for years to come.
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