Editor's note: This post originally appeared in the New England Journal of Medicine's Perspective online series on April 22, 2015.

Congress has finally euthanized the sustainable growth rate formula (SGR). Enacted in 1997 and intended to hold down growth of Medicare spending on physician services, the formula initially worked more or less as intended. Then it began to call for progressively larger and more unrealistic fee cuts — nearly 30% in some years, 21% in 2015. Aware that such cuts would be devastating, Congress repeatedly postponed them, and most observers understood that such cuts would never be implemented. Still, many physicians fretted that the unthinkable might happen.

Now Congress has scrapped the SGR, replacing it with still-embryonic but promising incentives that could catalyze increased efficiency and greater cost control than the old, flawed formula could ever really have done, in a law that includes many other important provisions. How did such a radical change occur?  And why now?

The “how” was logrolling — the trading of votes by legislators in order to pass legislation of interest to each of them. Logrolling has become a dirty word, a much-reviled political practice. But the Medicare Access and CHIP (Children’s Health Insurance Program) Reauthorization Act (MACRA), negotiated by House leaders John Boehner (R-OH) and Nancy Pelosi (D-CA) and their staffs, is a reminder that old-time political horse trading has much to be said for it.

The answer to “why now?” can be found in the technicalities of budget scoring. Under the SGR, Medicare’s physician fees were tied through a complex formula to a target based on caseloads, practice costs, and the gross domestic product. When current spending on physician services exceeded the targets, the formula called for fee cuts to be applied prospectively. Fee cuts that were not implemented were carried forward and added to any future cuts the formula might generate. Because Congress repeatedly deferred cuts, a backlog developed. By 2012, this backlog combined with assumed rapid future growth in Medicare spending caused the Congressional Budget Office (CBO) to estimate the 10-year cost of repealing the SGR at a stunning $316 billion.

For many years, Congress looked the costs of repealing the SGR squarely in the eye — and blinked. The cost of a 1-year delay, as estimated by the CBO, was a tiny fraction of the cost of repeal. So Congress delayed — which is hardly surprising.

But then, something genuinely surprising did happen. The growth of overall health care spending slowed, causing the CBO to slash its estimates of the long-term cost of repealing the SGR. By 2015, the 10-year price of repeal had fallen to $136 billion. Even this number was a figment of budget accounting, since the chance that the fee cuts would ever have been imposed was minuscule. But the smaller number made possible the all-too-rare bipartisan collaboration that produced the legislation that President Barack Obama has just signed.

The core of the law is repeal of the SGR and abandonment of the 21% cut in Medicare physician fees it called for this year. In its place is a new method of paying physicians under Medicare. Some elements are specified in law; some are to be introduced later. The hard-wired elements include annual physician fee updates of 0.5% per year through 2019 and 0% from 2020 through 2025, along with a “merit-based incentive payment system” (MIPS) that will replace current incentive programs that terminate in 2018. The new program will assess performance in four categories: quality of care, resource use, meaningful use of electronic health records, and clinical practice improvement activities. Bonuses and penalties, ranging from +12% to –4% in 2020, and increasing to +27% to –9% for 2022 and later, will be triggered by performance scores in these four areas. The exact content of the MIPS will be specified in rules that the secretary of health and human services is to develop after consultation with physicians and other health care providers.

Higher fees will be available to professionals who work in “alternative payment organizations” that typically will move away from fee-for-service payment, cover multiple services, show that they can limit the growth of spending, and use performance-based methods of compensation. These and other provisions will ramp up pressure on physicians and other providers to move from traditional individual or small-group fee-for-service practices into risk-based multi-specialty settings that are subject to management and oversight more intense than that to which most practitioners are yet accustomed.

Both parties wanted to bury the SGR. But MACRA contains other provisions, unrelated to the SGR, that appeal to discrete segments of each party. Democrats had been seeking a 4-year extension of CHIP, which serves 8 million children and pregnant women. They were running into stiff head winds from conservatives who wanted to scale back the program. MACRA extends CHIP with no cuts but does so for only 2 years.  It also includes a number of other provisions sought by Democrats: a 2-year extension of the Maternal, Infant, and Early Childhood Home Visiting program, plus permanent extensions of the Qualified Individual program, which pays Part B Medicare premiums for people with incomes just over the federal poverty thresholds, and transitional medical assistance, which preserves Medicaid eligibility for up to 1 year after a beneficiary gets a job.

The law also facilitates access to health benefits. MACRA extends for two years states’ authority to enroll applicants for health benefits on the basis of data on income, household size, and other factors gathered when people enroll in other programs such as the Supplemental Nutrition Assistance Program, the National School Lunch Program, Temporary Assistance to Needy Families (“welfare”), or Head Start. It also provides $7.2 billion over the next two years to support community health centers, extending funding established in the Affordable Care Act.

Elements of each party, concerned about budget deficits, wanted provisions to pay for the increased spending. They got some of what they wanted, but not enough to prevent some conservative Republicans in both the Senate and the House from opposing final passage. Many conservatives have long sought to increase the proportion of Medicare Part B costs that are covered by premiums. Most Medicare beneficiaries pay Part B premiums covering 25% of the program’s actuarial value. Relatively high-income beneficiaries pay premiums that cover 35, 50, 65, or 80% of that value, depending on their income. Starting in 2018, MACRA will raise the 50% and 65% premiums to 65% and 80%, respectively, affecting about 2% of Medicare beneficiaries. No single person with an income (in 2015 dollars) below $133,501 or couple with income below $267,001 would be affected initially. MACRA freezes these thresholds through 2019, after which they are indexed for inflation. Under previous law, the thresholds were to have been greatly increased in 2019, reducing the number of high-income Medicare beneficiaries to whom these higher premiums would have applied. (For reference, half of all Medicare beneficiaries currently have incomes below $26,000 a year.)

A second provision bars Medigap plans from covering the Part B deductible, which is now $147. By exposing more people to deductibles, this provision will cause some reduction in Part B spending. Everyone who buys such plans will see reduced premiums; some will face increased out-of-pocket costs. The financial effects either way will be small.

Inflexible adherence to principle contributes to the political gridlock that has plunged rates of public approval of Congress to subfreezing lows. MACRA is a reminder of the virtues of compromise and quiet negotiation. A small group of congressional leaders and their staffs crafted a law that gives something to most members of both parties. Today’s appalling norm of poisonously polarized politics make this instance of political horse trading seem nothing short of miraculous.

In their recent blog for Social Mobility Memos, Brad Wilcox, Robert Lerman, and Joseph Price make a convincing case that a stable family structure is an important factor in increased social mobility, higher economic growth, and less poverty over time.

The interesting question is: what lies behind this relationship? Why is a rise (or a smaller decline) in the proportion of married families associated, for example, with higher growth in average family incomes or a decline in poverty? The authors suggest a number of reasons, including the positive effects of marriage for children, less crime, men’s engagement in work, and income pooling. Of these, however, income pooling is by far the most important. Individual earnings have increased very little, if at all, over the past three or four decades, so the only way for families to get ahead was to add a second earner to the household. This is only possible within marriage or some other type of income pooling arrangement like cohabitation. Marriage here is the means: income pooling is the end.

How do we encourage more people to share incomes and expenses? There are no easy answers. Wilcox and his co-authors favor reducing marriage penalties in tax and benefit programs, expanding training and apprenticeship programs, limiting divorces in cases where reconciliation is still possible, and civic efforts to convince young people to follow what I and others have called the “success sequence.” All of these ideas are fine in principle. The question is how much difference they can make in practice. Previous efforts have had at best modest results, as a number of articles in the recent issue of the Brookings-Princeton journal The Future of Children point out.      

Our success sequence, which Wilcox wants to use as the basis for a pro-marriage civic campaign, requires teens and young adults to complete their education, get established in a job, and to delay childbearing until after they are married. The message is the right one.

The problem is that many young adults are having children before marriage. Why? Early marriage is not compatible, in their view, with the need for extended education and training. They also want to spend longer finding the best life partner. These are good reasons to delay marriage. But pregnancies and births still occur, with or without marriage. For better or worse, our culture now tolerates, and often glamorizes, multiple relationships, including premarital sex and unwed parenting. This makes bringing back the success sequence difficult.

Our best bet is to help teens and young adults avoid having a child until they have completed their education, found a steady job, and most importantly, a stable partner with whom they want to raise children, and with whom they can pool their income. In many cases this means marriage; but not in all. The bottom line: teens and young adults need more access and better education and counselling on birth control, especially little-used but highly effective forms as the IUD and the implant. Contraception, not marriage, is where we should be focusing our attention.

The injustices faced by African Americans are high on the nation’s agenda. “Black Lives Matter” has become a rallying cry that has elicited intense feelings among both supporters and detractors. As William Julius Wilson has pointed out on this blog, the focus on policing and criminal justice is necessary but not sufficient. Concerted action is required to tackle systematic racial gaps in everything from income and wealth to employment rates, poverty rates, and educational achievement.

Ta-Nehisi Coates argues that financial reparations should be paid to all those who have suffered directly or indirectly from slavery and its aftermath, including present day injustices such as the targeting of subprime mortgages to minorities. The moral case is compelling, and Coates notes that there have been other instances in U.S. history when reparations have been paid—such as to some Native American tribes and to the Japanese-Americans thrown into internment camps during World War II.

Even if the moral argument for reparations is won, there are formidable obstacles in terms of policy, politics, and law. How would reparations work in practice? To be fair, Coates does support the bill from Congressman John Conyers establishing a commission to examine precisely these questions. Even if a workable policy can be found, the political opposition would, to put it mildly, be formidable. There are also doubts about constitutional legality. However, these are certainly questions worthy of better answers than the ones currently being made.

Reparations are a stark example of a race-based policy: targeting resources or an intervention at an explicitly-defined racial group. At the other extreme are “race-blind” policies, applied with no regard to race (at least in theory). But there is a middle ground, consisting of what might be labeled ‘race-conscious’ policies. These policies would be designed to close racial gaps without targeting racial groups.

What might race-conscious policies look like? Here are some ideas:

1. Professors William Darity at Duke and Darrick Hamilton of The New School propose to tackle race gaps in wealth by providing “baby bonds” to children born to families with limited wealth. In 2013, median net worth was $11,000 for black households compared to $141,900 for whites. Darity and Hamilton are supporters of reparations in principle, but are alert to policy and political feasibility. Their specific proposal is that every baby born into a family with below-median wealth receives a “baby bond” or trust fund. These would be worth $50,000 to $60,000 on average, but scaled according to the level of the family’s wealth. The money would be available at the age of 18 for certain expenditures such as paying for college or buying a home. This is a good example of a race-conscious policy. It is not explicitly targeted on race but it would have its greatest impact on African American families.
2. While racial wealth gaps are large and troubling, the disappearance of almost half of unskilled, young black men from the labor force may be an even greater problem in the long run. A comprehensive approach on jobs could include raising the minimum wage, expanding the EITC, and providing subsidized jobs in either the public or private sector for those unable to find jobs on their own. The job subsidies might be targeted on young adults from high-poverty neighborhoods where joblessness is endemic. The subsidized jobs would help people of all races, but especially African Americans. A jobs-based program is also likely to find greater political support than straightforward wealth redistribution. Granted, such jobs programs are hard to administer, but we now have a large number of workers whose job prospects are slim to nonexistent in a technologically-oriented and service-based economy.
3. An enhanced EITC could also help to increase wealth (or lower indebtedness). As Kathryn Edin and her colleagues note in It’s Not Like I’m Poor, the EITC is normally received as a lump sum refund at the end of the year. As a form of forced saving, it enables poor families to repay debt and make mobility enhancing investments in themselves or their children. According to Edin, recipients like the fact that, unlike welfare, the tax credit links them socially and psychologically to other Americans who receive tax refunds. A more generous EITC could therefore help on the wealth as well as income side, and narrow racial gaps in both.
4. A final example of a race-conscious policy is the Texas “top 10” law, which guarantees admission to any public university in the state for students in the top 10 percent of their high school class. This plan could be expanded to other states.

The “Black Lives Matter” movement has refocused the nation’s attention on mass incarceration and related injustices in the criminal justice system. But this problem exists side by side with racial inequalities in income, wealth, education, and employment. There are no easy answers to America’s stubborn race gaps. But jobs and wages seem to us to be of paramount importance. Implemented in a race-conscious way (by targeting them to areas suffering from high rates of poverty and joblessness), employment policy might be the most powerful instrument of all for race equality.

When Franklin Roosevelt delivered his second inaugural address on January 20, 1936 he lamented the “one-third of a nation ill-housed, ill-clad, ill-nourished.” He challenged Americans to measure their collective progress not by “whether we add more to the abundance of those who have much; [but rather] whether we provide enough for those who have too little.” In our new paper, One third of a nation: Strategies for helping working families, we ask a simple question: How are we doing?

In brief, we find that:

• The gulf in labor market income between the haves and have-nots remains wide. The median income of households in the bottom third in 2014 was $24,000, just a little more than a quarter of the median of $90,000 for the top two-thirds.
• The bottom-third households are disproportionately made up of minority adults, adults with limited educational attainment, and single parents.  
• The most important reason for the low incomes of the bottom third is a “work gap”: the fact that many are not employed at all, or work limited hours. 

The work gap

The decline in labor force participation rates has been widely documented, but the growing gulf in the work gap between the bottom third and the rest of the population is truly striking:

While the share of men who are employed in the top two-thirds has been quite stable since 1980, lower-income men’s work rates have declined by 11 percentage points. What about women?

Middle- and upper-income women have increased their work rates by 13 percentage points. This has helped maintain or even increase their family’s income. But employment rates among lower-income women have been flat, despite reforms of the welfare system and safety net designed to encourage work.

Many on the left point to problems like low pay and lack of access to affordable childcare, and so favor a higher minimum wage and more subsidies for daycare. For many conservatives, the problem is rooted in family breakdown and a dependency-inducing safety net. They therefore champion proposals like marriage promotion programs and strict work requirements for public benefits. Most agree about the importance of education.

Time to debate some more radical solutions 

It may be that the standard solutions to the problems of the bottom third, while helpful, are no longer sufficient. A debate about whether to make safety net programs such as Food Stamps and housing assistance conditional on work or training is underway. So are other solutions such as subsidized jobs (created by some states during the Great Recession as a natural complement to a work-conditioned safety net), more work sharing (used in Germany during the recession), or even a universal basic income (being considered by Swiss voters in June).

Event Information

For Cubans, “D17”—December 17, 2014—changed everything. On that day, the United States and Cuba announced that the two countries would renew diplomatic relations nearly 60 years after Fidel Castro came to power. For both countries, a new transformation has begun—but this time, it is the promise of Cuba’s insertion in the globalized economy and the crumbling U.S. embargo that is catalyzing change on the island.

On May 31, the Brookings Book Club hosted Nonresident Senior Fellow Richard E. Feinberg and NPR Correspondent Tom Gjelten for a discussion of Feinberg’s new book, “Open for Business: Building the New Cuban Economy” (Brookings Institution Press, 2016). The discussion focused on the factors that guided this monumental decision: international diplomacy; changes already underway in Cuba; successful Cuban entrepreneurs and foreign investments; and scenarios for Cuba’s future development path.

Three young Cuban leaders, including two whose vignettes appear in the book, “Open for Business,” joined the discussion and shared their personal experiences with the economic realities in Cuba today, as well as the opportunities created by the shift in Cuban-American relations.

Video

• Open for business: Building the new Cuban economy

Audio

• Open for business: Building the new Cuban economy

Transcript

• Transcript (.pdf)

Event Materials

• 20160531_cuba_economy_transcript