The Doc Fix and the AMT Patch: Add a Trillion to the Debt and Call Me in the Morning

Congress is absolutely right to end the decade-old fantasy that it wants to trim Medicare payments to doctors. This law has been on the books for 12 years and is annually ignored. Lawmakers should stop pretending. But I fear they will make this change without paying for it–adding $250 billion to the national debt over the next decade.

Failing to pay the bill will only perpetuate the dangerous illusion that we can have unlimited health care at no extra cost. This thinking helped bring us to the health care mess we face today. And at just the moment when it is trying both to reform the medical system and confront a $1.4 trillion deficit, Congress is setting an extremely dangerous precedent by closing its eyes to a huge and very real expense.

Next stop: the Alternative Minimum Tax. The AMT patch is the tax policy analogue to the doc fix. It exists under a similar illusion: Each year the AMT is poised to hammer an increasing number of middle-class taxpayers. And each year, like a latter day Perils of Pauline hero, Congress steps in at the last moment to save those voters by indexing the income levels at which the tax kicks in. But it never makes up a dime of the lost revenue.

I fear that one day soon, lawmakers will permanently index the AMT at a 10-year cost of $450 billion (nearly double the doc fix), and not pay for any of it.  President Obama has already started that ball rolling by including the lost revenue from AMT relief in his budget baseline. From there, it will be easy enough for Congress to wave its fiscal wand and permanently index the tax since it will show as costless, at least relative to the Obama’s artificial numbers.

But fiscal legerdemain aside, if those tax revenues are not made up somehow, the nation’s debt will continue to grow. And keep in mind that the 10-year costs of the doc fix and the AMT patch underestimate the long-run price tag. In 2019 alone, the changes would increase Medicare payments by $47 billion, and cut tax revenues by $70 billion.       

Pretending money grows on trees is what Washington does. Not so many years ago, President George W. Bush and a Republican Congress passed the Medicare Part D drug benefit, fought two wars, and slashed taxes without worrying about what any of it would do to the national debt. Now it is the Democrats' turn. Led by Senate Majority Leader Harry Reid (D-Nev.), and with the acquiescence of the Obama Administration, Congress is about to make the physician payment mess go away by wiping a decade of proposed spending cuts off the books, much like a business might write down a really bad investment.

But this isn’t just an accounting exercise. Medicare will need real money to pay the docs those additional fees—cash government will have to borrow from somebody.

Senators Kent Conrad (D-N.D.) and Chuck Grassley (R-Iowa) among others are looking for ways to pay for the doc fix. I hope they find one and can sell the idea to Obama and the Congress. Because if they don’t, this business could go viral, like some sort of fiscal swine flu.