In his testimony to the Super Committee, Fiscal Commission co-chair Erskine Bowles floated a compromise plan which would, among other things, reduce health spending by $600 billion -- more than $100 billion more than the Fiscal Commission did. Some, such as the Center on Budget and Policy Priorities (CBPP), have suggested that this level of savings might be too big of a lift without hurting those who rely on the programs most. As they explain (emphasis added):
To his great credit, Bowles reiterated yesterday that a core principle of deficit reduction must be to “protect the disadvantaged.” Unfortunately, his “compromise” between a serious Democratic offer and a Republican stand-pat offer would lead almost inevitably to a significant violation of this important principle.
We don't agree -- it is possible to achieve well over $600 billion in Medicare savings while actually helping the most vulnerable. Here is one possible formulation of how:
|Policy||Savings||Effect on the Disadvantaged|
|Reduce Provider Payments||$175 billion||X|
|Prescription Drug Rebates||$112 billion||X|
|Restrict Medigap||$93 billion||X|
|Reform Cost Sharing||X|
|Raise the Eligibility Age||$125 billion||X|
|Medical Malpractice Reform||$62 billion||X|
|Increase Income-Related Premiums||$40 billion||X|
|Total Savings||$607 billion||$280 billion||$327 billion||$0|
Reduce Provider Payments -- $175 billion
Although the Affordable Care Act included significant reductions in provider payments, subsequent plans have shown that significant additional savings can be yielded by reducing and reforming payments to providers. For example, the Fiscal Commission identified $36 billion from reforming the Medicare Sustainable Growth Rate (savings compared to a freeze), $70 billion from reducing payments to hospitals for graduate medical education, and $26 billion from reducing payments for bad debts. On top of this, the President has proposed over $40 billion in savings from reducing and reforming acute care payments, along with billions more from rural hospitals and various other sources. Taken together, reductions totaling at least $175 billion could be put together. And though on the margins there may be some cases where access or quality of care might be indirectly affected, these lower provider payments will also mean lower Medicare Part B premiums for all beneficiaries. We score this as having little effect on the most disadvantaged.
Prescription Drug Rebates -- $112 billion
Applying the discounts that drug companies are required to provide in the Medicaid program to beneficiaries who are eligible for both Medicare and Medicaid and receive prescription drug coverage through Medicare Part D could save anywhere from $55 billion (Fiscal Commission) to $135 billion (President's submission) . Essentially, this policy would allow Medicare to better use its buying power to reduce drug costs, and these lower costs would be passed to the government in the form of a "rebate." We assumed enactment of the $112 billion CBO option which, as with reducing provider payments, would actually lower Medicare Part D premiums. Given that it could also lead to some cost-shifting outside of Medicare Part D, we'll again score this as having no large effect.
Restrict Medigap Policies -- $53 billion
Currently, many seniors buy supplemental coverage known as "Medigap" to cover their Medicare cost-sharing. Doing so not only increases utilization (and therefore Medicare spending) unnecessarily, but also turns out to be a bad deal for beneficiaries. Restricting the ability of Medigap plans to cover near first-dollar could save $53 billion (more if combined with the option below), while reducing costs for most Medicare recipients.
In fact, the Kaiser Family Foundation has studied the impact of Medigap restrictions and found that about 80 percent of Medigap users would face lower out-of-pocket costs under this reform -- by an average of $750 per year. Here is a graph, which should confirm that this policy indeed helps to reduce costs for most of the disadvantaged:
Lawmakers could also consider restricting the amount of Medicare cost-sharing that military retirees receive through TRICARE for Life, essentially a Medigap-style reform for military retirees, which could generate another $40 billion in savings.
Reform Medicare Cost-Sharing -- $32 billion
Currently, Medicare cost-sharing is a hodge-podge of deductibles, copayments, and other rules which both encourage overuse, create confusion, and fail to protect against catastrophic risk. CBO's Budget Options includes a policy that would rectify this -- replace those rules with a simple $550 deductible (combined for Part A and B), 20 percent uniform coinsurance, and a $5,500 cap above which Medicare covers all costs.
This change would save the government over $30 billion, but what about beneficiaries? According to a previous CBO analysis, the most vulnerable would actually be helped.
True, in a given year, most people (78 percent in their analysis) would experience higher cost sharing -- about $500 worth. But those with serious health expenses -- the top 9 percent in terms of health spending -- would see huge reductions in their out of pocket costs -- by about $4,500. If you do that math on that, it means that this option to reform cost-sharing would actually reduce mean cost sharing by $15 per person, due to the new protections being offered for those with high costs (which, though only a tenth of the population in a given year, will include the majority of beneficiaries at some point in their lifetime).
In other words, while beneficiaries cost-sharing expenses may be higher in any given year when they don't have major illnesses or medical conditions, beneficiaries would be protected from catastrophic health care costs, which are one of the leading causes of bankruptcy in the country. Now that's protecting the most vulnerable!
It is also important to remember that Medicaid covers the cost-sharing requirements for approximately 18 percent of Part B enrollees with low income and limited assets, so these beneficiaries would not be affected by cost-sharing changes.
Raise the Medicare Eligibility Age -- $125 billion
Gradually raising the eligibility age to 67 would boost savings by about $125 billion over ten years, and we've made a strong case for that option here -- arguing that doing so would both encourage work and better target scarce resources. What we didn't show, however, is that even according to the Kaiser study which opposes raising the age (and which CBPP cites), doing so would help the most disadvantaged. According to Kaiser, about 30 percent of total seniors age 65 to 67 (after full phase-in) and 60 percent of those without employer coverage would see their out of pocket costs reduced. That's because Medicaid and the health insurance exchange are in some cases more generous than Medicare.
So who is it that sees their costs go down? You guessed it -- the most vulnerable and disadvantaged. Those with no employer coverage making less than 150 percent of the poverty line see on average a $3,000 reduction in costs, those under 200 percent a $2,000 reduction, and even those under 300 percent of poverty ($33,000 for an individual) see a reduction in their out-of-pocket costs.
CBPP raises a fair concern that without ACA in place, raising the Medicare age would not protect these groups. But that's not an excuse not to pursue the policy. Policymakers could tie increases in the eligibility age to the implementation of ACA as Senators Lieberman and Coburn did in their health proposal.
Enact Tort Malpractice -- $62 billion
Reforming malpractice laws could save over $60 billion in health care programs, and would benefit nearly everyone who has health insurance --that is, except for trial lawyers. The current malpractice system increases both direct costs for doctors and hospitals (which they pass on), and encourages the overuse of defensive medicine. According to CBO, a robust set of reforms would not only save the government money, but reduce overall health care costs by 0.5 percent -- thus helping everyone, including the most disadvantaged.
Expanding Means-Testing -- $40 billion
Currently, higher earning Part B and Part D beneficiaries pay more in premiums than everyone else. This income-relating could be further enhanced both but increase their premiums more and by freezing or reducing the threshold against which the income-relating begins. By definition, strengthening the means-tested provisions in Medicare would ask those with more resources to pay a little more for health care while protecting the most vulnerable. Depending on how it is structured, such changes could also generate $40 billion over ten years.
* * * * *
Adding it all up gets you to over $600 billion in savings without putting any additional burden on the most vulnerable Americans, and in many cases reducing their burden. And, of course, there are many other options out there to reform Medicare, Medicaid, TRICARE, FEHB, and other health programs, and to do so without imposing large new costs on those who rely most on those program.
The worst thing we could do for the most disadvantaged, though, is nothing. In a fiscal crisis scenario, we would be forced to make immediate cuts to spending and/or tax increases to bring the budget under control. It would be much more difficult under that scenario to protect the most vulnerable from budget reforms.
According to The Hill, Senate Minority leader Mitch McConnell (R-KY) has signaled to Senate colleagues that he would be willing to support a $4 trillion plan. That sounds like a call for “Go Big” to us! This is a favorable change, given that earlier this week it was reported that he had favored a smaller $1.2 trillion package in savings.
Now with McConnell, hundreds of other lawmakers, hundreds of business leaders and associations, and many other experts pushing for comprehensive reform, we hope the Super Committee heeds the Go Big message!
Moody's issued a report the other day stating that failure by the Super Committee would not by itself cause them to strip the U.S. of its AAA rating, but that any outcome would factor into future ratings decisions. Essentially, failure can only hurt us, but success could greatly benefit us.
Apparently, Moody's is putting a lot of stock in the trigger that will be pulled if the Super Committee fails to meet its minimum mandate. A Wall Street Journal article on the report quoted the ratings agency as saying "As $1.2 trillion in further deficit reduction has already been legislated through automatic spending caps if no agreement is reached, failure by the committee to reach agreement would not by itself lead to a rating change." However, Moody's outlook on U.S. debt is already "negative," so overriding the trigger, which some lawmakers have already supported, could in fact prompt a downgrade.
Moody's also mentioned that exceeding the minimum goal of $1.2 trillion of deficit reduction would be viewed positively, since it would likely entail changes to mandatory programs. That sounds like more support for Going Big! Based on reasonable assumptions for the growth of future debt, the Super Committee should be aiming to at least double its savings mandate in order to put debt on a downward path as a share of the economy.
Of course, Moody's isn't the only ratings agency that has commented on the debt deal and the importance of the Super Committee. Of the three major rating agencies -- Moody's, S&P, and Fitch -- S&P, which lowered its U.S. rating to AA+ soon after the debt deal back in August, said the following in its report when it issued the downgrade:
"The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction -- independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners -- lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government's debt dynamics, the long-term rating could stabilize at 'AA+.'”
Again, Go Big! Soon after the downgrade, S&P's managing director underscored the importance of the Super Committee completing its work, noting that:
"Now is the time to reassure markets by putting forward a medium-term fiscal consolidation plan that will be credible...Now that we’re in the situation that we’re in, down to AA+, we’re gonna be looking for the actual goods to be delivered.”
Considering the emphasis they placed on political turmoil as one of the reasons behind the downgrade, S&P has indicated that further "political gridlock" could lead to another downgrade. Obviously, the outcome of that scenario would result in a clearly unsustainable debt trajectory as well. (For more analysis on the S&P downgrade, see CRFB's policy paper Understanding the S&P Downgrade.)
Finally, there is Fitch, who has the most optimistic rating of U.S. debt at AAA and with a "stable" outlook. Their report in August clearly stated that failure by the Super Committee to reach its mandate -- and, presumably, any override of the trigger -- would cause an outlook downgrade to "negative." Taking the longer view, they noted that the U.S. is "set to become an outlier relative to 'AAA' peers" in terms of debt burden. However, the United States' status as the global reserve currency and the very safe nature of Treasuries has led Fitch to be less harsh in its rating. Though Fitch also warned that “We give quite a lot of weight to the Budget Control Act that basically set out a plan for $4.1 trillion of deficit reduction. We will be watching pretty closely though, what happens with the Joint Select Committee, or the so-called Super Committee.”
The Take Away
There are a few things to take from the ratings agencies. First, they are hoping for Super Committee success. Second, they are taking the trigger seriously and would react harshly to an attempt to override it. Finally, if the Super Committee simply meets its mandate or the trigger takes effect, it seems that could satisfy the ratings agencies for a bit, but not for long, especially if the 2001/2003/2010 tax cuts are extended. In short, serious and credible debt reduction would give the ratings agencies confidence, not only in our debt path but in our political system.
At the end of Tuesday's Super Committee hearing, Fiscal Commission co-chair and CRFB board member Erskine Bowles offered up top-line numbers representing a compromise between the Democratic and Republican offers to the Super Committee. While Bowles did not offer specific policy choices that would reach those numbers, taking a closer look at the Gang of Six proposal, the Fiscal Commission plan, bipartisan negotiations, and other fiscal plans shows where there would be a consensus on policies to achieve these thresholds.
While Bowles noted in his testimony yesterday that other bipartisan plans have recommended larger savings, he recognizes that this is a real opportunity to get something accomplished and we should not let the perfect be the enemy of the good (transcript here: subscription required):
"[This plan] would give you an additional total of $2.6 trillion, added to the $1.3 trillion you've already done. That's $3.9 trillion in deficit reduction, and I think that would create a lot of excitement with people in the country, and I think it would go a long ways toward building up confidence that we really could stand up to our problems."
Discretionary spending: Bowles suggested a balance that could be struck between the Democratic and Republican offers for total savings of $300 billion. These savings could feasibly come from reducing the caps on both defense and non-defense programs (or alternatively, security and non-security), or could be achieved through an overall cap in later years.
Health Care: On health care, he put forward a balance between both offers at around $600 billion, suggesting that while the level of savings from the Democratic offer could be increased by roughly another $100 from gradually raising the eligibility age for Medicare -- noting that with the implementation of the Affordable Care Act, people 65 and 66 years old with serious health conditions or limited financial means could still be able to get health care insurance through the coverage provisions of the ACA. And you know how we feel about the eligibility age. The Fiscal Commission proposed about $500 billion in savings (now that the CLASS Act isn't moving anywhere), so this proposal could feasibly build on the cost-sharing reforms, reforms of provider payments, prescription drug rebates, other changes in Medicare, malpractice reforms, TRICARE, and Medicaid proposals contained in Bowles-Simpson plan.
Other Mandatory: On mandatory spending as well, Erskine looked at the savings between the Democratic and Republican offers and suggested a middle ground approach of about $300 billion. Erskine noted that there are plenty of other mandatory savings in the Fiscal Commission proposal and other plans to achieve that level of savings.
Revenues: On revenues, Erskine cited Speaker of the House John Boehner's statements concerning the $800 billion in new revenues that he and President Obama had agree to during the negotiations this summer leading up to the debt ceiling. Erskine made a point when discussing the need for revenues that estimates for revenues should not rely on dynamic scoring, advocating "a trust but verify" approach that did not count dynamic effects up front but allowed lawmakers to then decide whether to lower tax rates or further reduce the deficit if there were additional revenues from dynamic effects of tax reform.
|Comparison of Budget Proposals (Numbers in Billions)|
||Bowles Compromise Plan||Democratic Offer||Republican Offer||Gang of Six||Bowles-Simpson|
|Budget Control Act and CR Savings||$1,300||$1,300||$1,300||$1,300||$1,300|
Note: Numbers may not add due to significant rounding. Estimates off of a current policy baseline.
~Savings come from across the federal budget, including about $40 billion from revenues, $90 billion from Social Security, and $70 billion from other mandatory programs.
#Includes $87 billion from CLASS Act Repeal.
*From dynamic effects of future tax reform.
Compared to the set of discretionary projections included in the Fiscal Commission plan last December, which was based on the August 2010 CBO projections, legislative cuts to discretionary spending and associated interest savings have pushed down spending by about $1.3 trillion over ten years. All the short-term Continuing Resolutions put in place last fiscal year (including one last October, three in December, three in March, and a final one in April. Wow, that's a lot of CR's. Eight, in fact. What a broken budget process!) shaved about $350 billion from discretionary projections going forward, including $122 billion from the final spending deal reached in early April. The Budget Control Act in early August put in place about $760 billion in additional discretionary cuts, and adding in roughly $200 billion in interest savings brings the total savings already put in place up to about $1.3 trillion.
In terms of new savings, the numbers from the table above show that the Bowles compromise plan splits the difference in each budget area between the two partisan plans offered within the Super Committee and roughly corresponds to the bipartisan plans that involved sitting lawmakers. While Bowles' plan has less revenue than other bipartisan plans, notably the Fiscal Commission and the Domenici-Rivlin plans, it has notably more than the Republican offer but more health and other mandatory savings than the Democratic offer.
Bowles' plan certainly illustrates a path to a workable compromise, which would be effective in putting the country on a much more sound fiscal course. While the plan does not address each area of the budget, notably Social Security reform which would still have to be taken up, it would represent a huge step forward toward a strong fiscal future.
Today, Representatives Heath Shuler (D-NC) and Mike Simpson (R-ID) held a press conference to release a new letter to the Super Committee signed by 100 members of the House. The letter was a bipartisan effort, with roughly equal representation on each side, and calls for a $4 trillion package with everything on the table, including entitlement reforms and revenues. The letter comes in addition to the plethora of plans, letters, and support for a Go Big approach that we have been tracking over the past few months.
These 100 members of the House join 45 senators who have been calling on the Super Committee to also think big. Given the bipartisan nature of the signatories, this is a huge step forward as it means that members of both parties and both chambers of Congress are putting their sacred cows on the line for the good of the country. As we noted in a press release today:
"The Super Committee can now rest assured that if they are able to agree to a big package of reforms, which they so desperately need to do, they’ll have unprecedented support from many of their colleagues across the political spectrum."
The Super Committee has reached a crucial point in its negotiations as November 23 approaches. As Maya MacGuineas explains:
"This isn’t just a message for the members of the Super Committee themselves. It is also an urgent call to congressional leaders that Congress is ready to take up serious reforms to our entitlement programs and tax code to set the country on the right path...But it’s up to the Super Committee and congressional leaders to capitalize on this unique opportunity."
With bipartisan support from a substantial portion of the House membership, we do hope that the Super Committee capitalizes on the moment.
With reports that the Super Committee has been considering reforms to Social Security, rhetoric from all sides of the issue has been heating up. This past weekend, the Washington Post ran an interesting article on Social Security, its trust fund and funding system, and its future insolvency. As the article notes, 2010 was the first year ever that Social Security took in less revenue than the benefits it paid out, requiring the program to draw down some of its resources and the federal government to borrow additional money to fund the program.
As the article points out, there is still debate in Washington and around the country about how the program impacts the budget. Critics of the view that Social Security is part of the overall budget will argue that yearly shortfalls are not necessarily a bad thing as the program has a $2.5 trillion trust fund to cover any program deficits. But if you consider Social Security as part of the budget, yearly shortfalls threaten to push deficits and public debt even higher.
But as we've argued before in a policy paper earlier this year, no matter how you look at Social Security -- whether as part of a unified federal budget or as a stand-alone program -- it is in dire need of reform for the sake of both beneficiaries and the federal budget. Regardless of whether or not past Social Security surpluses have been "saved" by reducing past deficits or if they led to increased spending or lower taxes, the government will have to increase its borrowing in public credit markets to make good on the trust fund obligations.
According to the latest estimates from the program's own trustees, the trust funds are scheduled to run out in 2036. At that time, only about 78 percent of benefits would be able to be paid, in order for incoming revenues to match outlays, if no changes to the current system are made.
With modest reforms, however, lawmakers could shore up Social Security for the foreseable future. There are a number of ways to fix the program, such as those proposed by the Fiscal Commission and many other bipartisan plans. As Fiscal Commission co-chair Erskine Bowles has said:
The Bowles-Simpson plan would have righted the system’s finances with a combination of payroll tax increases and reductions in scheduled benefits, mainly years down the road. It would have hit upper-income workers while raising benefits for the most needy, those with average lifetime earnings of less than $11,000 a year. “By making these relatively small changes, you make it solvent and you make it be there for people who depend on it,” [Erskine] Bowles said.
To truly get our fiscal house in order, everything has to be part of the solution, including Social Security. Social Security reform can allow us to improve the retirement security of people who truly depend on the program while also helping to get our budget under control. CRFB hopes the Super Committee is able to tackle Social Security reform. The program's future is at stake.
At the end of the just-concluded hearing of the Super Committee, Fiscal Commission Co-Chair and CRFB Board Member Erskine Bowles presented his top-line numbers for a Go Big solution that could represent a compromise between both the Republican and Democratic offers on the Committee as its deadline draws near. By taking into account what is reportedly being discussed in the Super Committee from the Republicans' and Democrats' plans, Bowles took the numbers and found middle ground, without offering the specifics, on what a plan could look like.
Using the top-line numbers that Bowles released, this plan would likely stabilize our debt and put it on a downward path, something that the Super Committee should be trying to accomplish.
|Budget Area||Deficit Reduction|
|Discretionary Spending||$300 Billion|
|Health Care||$600 Billion|
|Other Mandatory||$300 Billion|
|Chained CPI||$200 Billion|
|Budget Control Act and CR Savings (Approximately)||$1,300 Billion|
For the health care savings, Bowles noted in the hearing that $100 billion in savings could come from raising the Medicare eligibility age, something that CRFB has said before would be a good idea.
CRFB recently made the argument that a Go Big approach can increase the chances for success for the Super Committee as opposed to an incremental approach. The blueprint offered today by Mr. Bowles illustrates how this could be possible, and it would be a significant accomplishment.
Today in Politico, all four of the CRFB Co-Chairs penned an op-ed entitled, To Deficit Panel: Go Big, Long and Smart. Bill Frenzel, Tim Penny, Jim Nussle, and Charlie Stenholm lay out the reasons why the Super Committee must Go Big, Go Long, and Go Smart (see our policy paper for a more in-depth view) and then explain why it is both smart economically and politically to do so. They argue that Going Big can also improve the chances of the Super Committee succeeding.
Going big, long and smart, isn’t just the right economic strategy. By putting the debt on a sustainable path and avoiding further downgrades from the rating agencies — it is the right political strategy.
First, it may actually be easier to agree to a $4 trillion package than $1.5 trillion. In a larger package, entitlement reform can put the country’s largest program on a sustainable path rather than rely on half measures. Revenues will come from a growth-enhancing overhaul of the tax system rather than just rifle shots that may close small tax loopholes but won’t fundamentally help the economy. While tough measures will be necessary either way, they are a lot easier to swallow if they are part of a package that fixes the problem. It would be politically appealing to declare final victory, instead of yet another budget showdown that ends in a punt.
Second, the American people are fed up with the political system. Even the most casual observer can see the inability of our leaders to make hard choices. Going big would show the public that Washington can work. Both parties in Congress and the White House need a reputational overhaul — and fixing the budget would do the trick. The public is hungry for real progress on reducing the deficit. Sixty percent of Americans say the Select Committee should compromise on a grand bargain to reduce the deficit, according to a recent poll, even if the deal includes policies they disagree with.
We only hope the Select Committee is up to the job.
Click here to read the full Politico op-ed.
Later today, the Super Committee will be holding another public hearing with Fiscal Commission co-chairs, Moment of Truth Project Advisors, and CRFB board members Erskine Bowles and Al Simpson testifying together with Alice Rivlin (another CRFB board member) and Pete Domenici, co-chairs of the Bipartisan Policy Center's Debt Reduction Task Force. This hearing will focus on the two commission's proposals, both of which stabilize and reduce the debt as a share of the economy and address all areas of the budget, including tax reform, health-care reform, and Social Security.
This hearing should be particularly useful in pushing the Go Big message by showing how both of these commissions were able to get both Democrats and Republicans to agree on a big plan and how Going Big actually made it easier for them the attract bipartisan support.
Click here to read Bowles and Simpson's testimony.