CBO report links debt reduction to Medicare pay cuts

Washington -- The nation's debt as a share of the economy could be reduced several percentage points by 2021, but only if Congress allows a number of current-law policies to take effect, including a 29.5% Medicare physician pay cut in 2012.

The U.S. will run a fiscal year 2011 deficit of nearly $1.3 trillion -- the third-largest shortfall of the last 65 years. Only the 2009 and 2010 deficits were larger, according to an update of the Congressional Budget Office's budget and economic outlook published on Aug. 24. The federal fiscal year ends on Sept. 30.

During the next decade, CBO expects annual federal deficits to shrink beginning in 2013, thanks in part to the recently enacted Budget Control Act. The law increased the nation's statutory debt ceiling by at least $2.1 trillion but offset the increase with an equal amount in spending cuts, including at least $1.2 trillion that must be identified by Nov. 23 by the new Joint Select Committee on Deficit Reduction. Under these and other current-law policies, the nation's debt as a percentage of the economy could shrink to 61% by 2021, down from a projected 67% in December 2011.

However, the CBO's 10-year forecast is based on current law and has revenue-generating assumptions that few expect to happen. In addition to the assumption that Congress will allow the full Medicare physician pay cuts to occur under the sustainable growth rate formula, the forecast assumes that the 2001 and 2003 Bush tax cuts will expire in 2012.

If that doesn't happen, the debt forecast is much gloomier, wrote CBO Director Doug Elmendorf in an Aug. 24 blog post. "If that higher level of spending is coupled with revenues that are held close to their average share of [the economy] for the past 40 years ... the resulting deficits will cause federal debt to skyrocket." In this scenario, the nation's total debt would increase to 82% of the economy by 2021, a larger percentage than in any year since 1948, he wrote.

If the bipartisan committee in the Budget Control Act fails to identify enough cuts to meet its $1.2 trillion goal, the act would trigger a corresponding amount of cuts to Medicare, defense spending and many other areas of the federal budget, with certain exceptions. Medicare spending as a whole could be reduced by as much as 2%.

Beyond the next decade, federal spending probably will grow due to higher health care expenditures driven by an aging population and increased health care costs, according to the report.

Meanwhile, the co-chairs of the bipartisan Joint Select Committee on Deficit Reduction -- Sen. Patty Murray (D, Wash.) and Rep. Jeb Hensarling (R, Texas) -- are preparing for their task of identifying deficit reduction measures.

"Most of the committee members are reviewing the deficit reduction work that many others have engaged in over the past several years," Murray and Hensarling said in a joint Aug. 24 statement.

The American Medical Association, the American Academy of Family Physicians and others are calling on committee members to prevent the 29.5% Medicare pay cut and the potential across-the-board Medicare reduction of up to 2%, which would reduce physician rates even further.

The CBO forecast is available online (link).