Last week the Office of the Medicare Chief Actuary came out with their "Estimated Effects of the Patient Protection and Affordable Care Act," as amended by reconciliation. The document estimates the financial and coverage effects through FY 2019 of selected provisions of the recently passed health care reform bill. There has been some confusion regarding the Medicare Actuary's report and how it lines up next to Congressional Budget Office (CBO) estimates of the same bill, with many believing the Medicare Actuary projects greater costs than CBO. 

The confusion stems from the fact that CBO and the Medicare Actuary are actually measuring different things. Whereas CBO's bottom line number focuses on deficit impact ($143 billion in deficit reduction over the next decade), the Actuary looks at federal spending impact and also includes the "mandate" penalties. However, it excludes the tax increases used to finance the plan. Below is a true "apples to apples" comparison of the two estimates, which shows that they are indeed not all that different:

The reason CBO estimates the bill will reduce the deficit is that it includes a number of tax increases -- mainly higher payroll taxes, an excise tax on high-cost insurance, fees on certain medical industries, and reductions in some health care tax expenditures. These revenues more than offset the costs. However, the Actuary only looks into revenue provisions which directly effect the Medicare trust funds (and looks at them separately, so they are not included in the table above).

There is a second issue, which is that the Actuary projects the effect of the bill on overall national health expenditures. Here, they find that total health spending -- both private and public -- would be $311 billion higher over ten years as a result of this bill. At the same time, though, these additional costs appear to be declining over time. One way to think about it is that the bill would shift the curve up, but then bend it down.

That said, both CBO and the Actuary do warn that some of the cost cutting provisions -- particularly those which slow the growth of provider payments -- may be unsustainable. But that's another story for another blog.

Yesterday the Peterson Foundation hosted the Fiscal Summit: America's Crisis and a Way Forward, convening an all-star line-up of fiscal, economic, and health care experts to discuss our fiscal challenges and to help develop solutions. Of the 18 featured speakers and panelists at the event, each one agreed that we face serious fiscal problems and that every option to address medium- and long-term deficits must be on the table -- echoing the sentiments of yesterday's first hearing of the National Commission on Fiscal Responsibility and Reform.

Opening remarks by Peter Peterson set the stage for the summit by offering some tough choices on how to reduce future deficits, highligting the potential savings from a progressive consumption tax, an energy or carbon tax, the defense budget, the $1 trillion plus in tax expenditures, among other areas of the budget.

The first panel, including the President's fiscal commission co-chairmen Alan Simpson and Erskine Bowles, again stressed their promise to put all possible solutions on the table, and they seem optimistic on the commission's ability and desire in the months ahead of hearings and debates to find real, sensible solutions to our country's fiscal outlook. 

The second panel, comprised of Alice Rivlin, Congressman Paul Ryan, Lawrence Mishel, Bob Greenstein, and Neera Tanden, focused on the nature of our fiscal problem and how to approach dealing with it. All panelists agreed that health care costs will be the principal drivers of future deficits, but disagreement emerged over how to address these costs. Congressman Paul Ryan reaffirmed his position that spending (notably, health care spending) is set to rise way above historical norms and should be the focus of solutions to reign in deficits. Other panelists largely agreed, but, as Bob Greenstein argued, controlling health care cost growth will take time as we experiment and learn how to reduce spending on health, so in the medium-term, at least, revenue adjustments will have to be part of the solution if we are to avoid massive reductions in government services and investments.

Following up on Paul Ryan's quote yesterday at the first fiscal commission hearing that this will be "the most predictable crisis we've ever had," Alice Rivlin added that "it may be a predictable crisis, but it's not a necessary crisis."

Bob Greenstein also offered some advice to the members of the fiscal commission. He warned against fiscal targets that are too severe, because then there would be greater risk that they "get blown away," citing the doc fix as an example. He stated that he would rather see smaller changes over a longer period so that they have a better chance of happening. While CRFB belives this would probably increase the chance of actual reforms taking hold, we can't forget the severity of our fiscal imbalances and the truly difficult tradeoffs we will be required to avert a fiscal crisis. 

Former Treasury Secretary Robert Rubin and former President Bill Clinton also spoke about the need to address NOW our federal finances. Rubin warned that market "psychology can change quickly and dramatically" and can happen at unpredictable times. All the more reason for us to get our fiscal house in order. Clinton argued for the need to refocus on our future, warning that "older socieities are obsessed with security" -- namely, defense, social security, and Medicare in the U.S. -- to the detriment of forward-looking investments and opportunities.

The third panel, featuring Senator Judd Gregg, Congresswoman Allyson Schwartz, John Castellani, John Rother, Elliott Fisher, and John Podesta, focused on the role of health care costs in future fiscal projections, and ways to help control costs.

Former Federal Reserve Chairmen Paul Volcker (via a taped interview) and Alan Greenspan also contributed valuable insight from economic and market viewpoints. Volcker urged, as President Obama has recently done, that spending be scrutinized first to make sure that if any additional fiscal adjustments are needed, the impacts on the economy through any revenue changes will be minimized. He also argued that a carbon, energy, or VAT tax would be more efficient than income or corporate tax changes, and should be on the table.

Greenspan brought up recent sovereign debt crises in Europe, noting that Greece is showing the world that a major and advanced country can get itself into trouble. Put simply, Greenspan stated that "we don't have the resources. We have to make choices."

All in all, it was a great summit and included a wide array of opinions and options on how to improve our federal finances. Although there was disagreement at times about how to address future deficits, there was unanimous consent on why this is an issue. CRFB has been excited to see public debate moving in recent months from whether or not fiscal issues are very serious to how do we deal with them. 

The Blue Dog coalition is pushing for further spending cuts beyond what is in the President’s and Senate’s budget proposals. Specifically, the coalition would like to see non-defense domestic discretionary spending cut by 2 percent a year for three years, and then frozen for an additional two years. This goes further than the Senate budget bill, which embraces the President's three year non-security discretionary spending freeze, and includes even more cuts beyond that.

For FY 2011 spending alone, this would mean a cut somewhere around $10 billion. In comparison, the budget drafted last week and reported out of the Senate Budget Committee would cut non-defense domestic discretionary by about $1 billion for the year.

This amount – roughly $10 billion – is more than Democratic leaders and Appropriations Chairman David Obey may be able to swallow, which is why it is less likely that the House will be able to come up with a budget resolution that would get enough Democratic support to pass.

While CRFB would like to see the House be able to pass a budget resolution this year, we applaud members of Blue Dog coalition for pushing for strong policies to help reach a fiscal goal. Attitudes like those of Allen Boyd, who recently said, "I don't think in Washington people have come to grips with the fiscal crisis we've got yet," are too few and far between.

Last week the Chairman of the Senate Budget Committee, Kent Conrad (D-ND), released his Democratic budget plan (see our analysis of the Chairman’s Mark here, and a discussion of the amendments accepted and rejected by Committee here). The budget plan would result in deficit levels of about 3 percent of GDP ($545 billion) by 2015, a whole $250 billion below the President’s budget. A large part of this difference, though, is due to the assumption that the Alternative Minimum Tax (AMT) patch and the estate tax fix would be fully paid for after the next two years. (Note: because the AMT was not indexed for inflation, it affects increasingly more people every year; the AMT “patch” alters the tax so that those people are not hit by the tax).

The question of how they would be paid for, though, is left to Congress. In other words, the lawmakers will have to find savings or revenues in other areas of the budget to pay for AMT patches, beginning two years down the road. Conrad hopes the new fiscal commission will be able to identify these offsets. As the document explains:

The Chairman’s Mark ensures that the cost of AMT relief does not have to be offset while the economy is recovering from the recession, and creates an opportunity for the President’s bipartisan fiscal commission to develop tax reform proposals to address the AMT permanently in a way that does not increase the deficit.

Conrad is right to attempt to force Congress into making some tough choices regarding the AMT. It is true that in many ways it makes the budget less realistic; getting to 3 percent of GDP is dependent on a (fiscally responsible) policy with very little support that may never materialize.

But rather than capitulate, those who support finding offsets have to push for that policy. Widespread support for patching the AMT doesn’t make borrowing to do so any less damaging to the fiscal health of the country. If policymakers want to extend the tax break, they need to pay for it. Identifying specific offsets for the AMT patch and estate tax fix would be preferable; but drawing a line in the sand declaring that they must be paid for is a good start.

And paying for the AMT doesn’t have to include tax increases; it can be done all through cutting spending. Or by raising taxes. Or by both. It just shouldn’t be done by adding to the debt. In fact not one strong case has been made as to why we shouldn’t borrow hundreds of billions of dollars to offset a middle class tax cut, and we would challenge that there just isn’t one.

In previous blogs, we have discussed how the three credit rating agencies have hinted that the United States needs to get its debt under control (see these blogs on Moody's, U.S. debt, and sovereign risk jitters).  Well, today, Standard and Poor’s lowered the boom on Greece by giving its government debt “junk status” (as well as lowering Portugal’s rating, but not nearly to junk status). Greece has already taken measures to cut spending drastically and it faces huge public outrage, including public employee strikes, at the necessary and severe cuts.  And the New York Times  reports that the vice president of the European central bank, Lucas D. Papademos, is warning that Greece may have to take even harsher measures to get its debt under control quickly.

While the United States does not face an immediate crisis, now is the time for the United States to act.  By announcing a credible plan to lower its debt, the United States can signal that it is serious about reducing its debt and avoid the crisis that Europe (and in particular, Greece) faces. In addition to giving the United States credibility with rating agencies and investors about its debt, it may also help stimulate U.S. economic growth.  And by implementing policies slowly to lower our debt, the United States can avoid having to make drastic and severe cuts quickly as Greece has been forced to do in recent weeks.