Covid relief bill may trigger $36 billion cut to Medicare, higher student loan fees

A Covid relief bill backed by Democrats could trigger billions of dollars in cuts to Medicare and other federal programs, like ones that support unemployed workers and student-loan borrowers, if it’s ultimately passed.

The funding cuts would take effect in 2022 and last for several years.

Republicans are using the specter of pullbacks to argue against issuing more pandemic aid, which includes $1,400 stimulus checks and more jobless benefits.

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It’s unclear lawmakers would allow them to occur. Even if they survive, the exact impact of cuts on consumers is uncertain.

The cuts may automatically increase fees on federal student loans, for example, according to the Office of Management and Budget.

Some doctors and hospitals may opt not to accept Medicare due to lower cost reimbursements from the federal government, according to budget experts. Providers may also try to pass extra costs to consumers.

The cuts are due to a rule — the PAYGO Act — that corrects for additions to the federal deficit by automatically pulling back funding from certain departments and programs.

The pandemic aid measure would raise the federal deficit by $1.9 trillion over a decade, according to a Congressional Budget Office memo issued Thursday by director Phillip Swagel.

As a result, Medicare funding would be trimmed by 4%, or $36 billion, starting next year, said Swagel. His estimates were in response to a question from House Minority Leader Kevin McCarthy, R-Calif.

Another $345 billion in cuts would come from a swath of other areas earmarked as “mandatory” federal spending. (That means they don’t involve annual appropriations from Congress.)

At stake is funding for items like student aid, housing programs, tax collection, investor protection and state unemployment operations. The reductions generally amount to a few million dollars or less for each line item.

Programs like Social Security, Medicaid and food stamps are exempt from cuts.

Rep. Jason Smith, ranking member of the House Budget Committee, suggested Medicare cuts would harm consumers.

“This bill will directly harm America’s working class,” Smith, a Missouri Republican, said Monday during a committee hearing on the legislation.

Democrats, including President Joe Biden, believe the federal government should send more assistance to Americans immediately to prop up a sluggish economy and continued financial pain for households.

Experts are skeptical lawmakers would ultimately let the budget measures take effect.

For one, they typically don’t. Congress overrode the automatic cuts that would have been triggered by former President Donald Trump’s signature tax cut in 2017, for example. It also did so last year to cancel the deficit effect of earlier pandemic aid measures.

Waiving them this year would require Republican support. It’s likely the GOP will opt to do so, experts said. Otherwise, they’d also be choosing to reduce funding for things like farm subsidies, defense, and customs and border protection.

Further, the deficit from Covid relief would essentially wipe out all funding for the aforementioned programs, CBO said. (Medicare is an exception — its cuts are capped at 4% whereas other programs don’t have a limit.)

“That ain’t gonna happen,” said Barry Anderson, an independent consultant who formerly served as a senior official at the Congressional Budget Office and Office of Management and Budget. “They’ll waive it.”

The Statutory Pay-As-You-Go Act of 2010 — also known as PAYGO — is the mechanism meant to protect against ballooning deficits.

Deficits are tallied at the end of the year and averaged over a five- or 10-year window. Those averages are canceled out by automatic pullbacks in other areas each year, with the goal of reducing a bill’s deficit impact to $0.  

In the case of Medicare, reimbursement rates that hospitals, doctors and other providers had expected to receive from the federal government would fall by 4% across the board, according to William Hoagland, a senior vice president at the Bipartisan Policy Center.

That cut would be in place each year for five years, CBO said.

“Over time, more and more doctors may say, ‘I’m not willing to operate under the constraints and reimbursements of Medicare,'” Anderson said.

Affected providers may somehow raise their costs to compensate, he said.

Ironically, consumers would likely see cheaper premiums, said Marc Goldwein, senior vice president and senior policy director for the Committee for a Responsible Federal Budget.

That’s because premiums are calculated based on cost, which would have fallen, Goldwein said.

A 4% cut, if it occurs, is small enough that many providers are unlikely to leave the Medicare network, he added.

The precise impact of PAYGO rules on student loan fees also isn’t entirely clear.

But there are examples to how it might work. For example, PAYGO rules triggered an automatic 5.7% increase in loan fees this year, according to the Office of Management and Budget.

That helped counterbalance $1.2 trillion in spending from the American Taxpayer Relief Act of 2012. The fee increase corresponded with a 5.7% across-the-board reduction in nondefense mandatory programs.

Students may also find it more difficult to get loans if certain Department of Education programs receive less funding, Anderson said.

“There would be a lot less money to provide loan guarantees,” he said. “So a whole pile of students wouldn’t be able to get loans.”

The Department of Education didn’t return a request for comment.