March 2012

The House Republican Approach to the Sequester

One of the more complicated aspects of Rep. Paul Ryan's (R-WI) budget is what he does with the sequester that will take effect on January 2, 2013 due to the failure of the Super Committee. From 2013-2021, the sequester is scheduled to reduce the deficit by $984 billion, with $66 billion coming in 2013. The sequester essentially has three parts: cuts to defense spending, cuts to non-defense spending, and cuts to mandatory programs, including Medicare (limited to two percent).

The Ryan budget takes a different approach to each of the three parts sequester. In FY 2013, it repeals $78 billion of the $94 billion in discretionary cuts called for by the sequester--leaving $16 billion of non-defense discretionary cuts and the entirety of the $16 billion of mandatory cuts--and then uses "reconciliation" instructions to pay for the cost. In particular, it calls for savings from six committees which together would be sufficient to pay for the $78 billion deficit increase over only a few years. By 2017, those instructions call for $116 billion in cuts (150% of the cost) and by 2022 it calls for $261 billion in savings (336% of the cost).

The budget does not explicitly endorse any policies for reaching these savings, but options such as increasing federal employee pension contributions, enacting medical malpractice reform, and means-testing entitlements are mentioned.

As for 2014 and beyond, the budget essentially leaves the sequester fully in place. On the mandatory side, the sequester is allowed to cut spending across-the-board to various programs. On the discretionary side, the budget retains the overall levels of the sequester but keeps them classified as "allowances" -- which is budget speak for unspecified savings. In this way, it allows the apparent defense numbers to substantially exceed sequester levels (and BCA levels as well), while counting all of the sequester savings on the non-defense side.

Discretionary Spending, Ryan vs. BCA (billions of budget authority)
  2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Ryan Budget
Defense $554 $567 $580 $594 $610 $626 $644 $662 $680 $699
Non-Defense $474 $406 $414 $421 $430 $439 $449 $458 $466 $477
Total $1,028 $973 $994 $1,016 $1,040 $1,066 $1,093 $1,120 $1,147 $1,176
BCA With Sequester
Defense $491 $501 $511 $522 $535 $548 $561 $575 $589 $605
Non-Defense $458 $472 $482 $493 $505 $517 $531 $545 $557 $572
Total $949 $973 $994 $1,016 $1,040 $1,066 $1,093 $1,120 $1,147 $1,176
BCA Excluding Sequester
Defense $546 $556 $566 $577 $590 $603 $616 $630 $644 $661
Non-Defense $501 $510 $520 $530 $541 $553 $566 $578 $590 $605
Total $1,047 $1,066 $1,086 $1,107 $1,131 $1,156 $1,182 $1,208 $1,234 $1,266

Note: Numbers may not add up due to rounding

The True Size of Government?

It is often said that tax expenditures operate as "spending through the tax code" and often obscure what the true size of government is. With the amount of tax breaks exceeding $1 trillion, that obfuscation has become increasingly important. To clarify things, Donald Marron and Eric Toder of Tax Policy Center have attempted to quantify what government spending would equal if we counted tax expenditures that substitute for spending as outlays in the federal budget.

A difficult question is determining which tax expenditures are truly "spending in the tax code" and which are simply features of the tax code or broad tax structure choices. Normally, tax expenditure analyses count the standard deduction and personal exemptions as part of the tax code rather than tax expenditures. Beyond that, Marron and Toder exclude some tax preferences that they label as structural choices rather than faux-spending. These include:

  • Preferential rates and other treatment for long-term capital gains and qualified dividends
  • Accelerated depreciation
  • Deferral of income for controlled foreign corporations
  • Retirement savings provisions (which could be said to move the tax code closer to a "consumption tax" rather than representing a particular preference)
  • Exclusion of some Social Security benefits from income taxation

What's left? Big ticket items include the mortgage interest deduction, the exclusion for employer-paid health insurance premiums, the charitable deduction, and the Earned Income Tax Credit. These four items alone are estimated to cost over $2 trillion from 2012-2016. 

Another difficult question is how to account for various items like premiums or user fees. These items count as negative spending in the federal budget (for example, Medicare premiums net against Medicare spending) instead of revenue. Marron and Toder argue that while the traditional method is appropriate to account for the amount of spending that must be financed by general revenue or borrowing, for the purpose of determining the size of government, it is better to use the gross cost. Nonetheless, they present their measures of government spending both including and excluding user fees and premiums. The chart below is from the report, detailing spending as a percent of GDP in FY 2007 when you include tax expenditures (labelled SLTP or "spending-like tax preferences").

Thus, the report finds that spending would have been shown as 20 percent higher in FY 2007 if the spending-substitute tax expenditures had been accounted in that way and 30 percent higher if offsetting receipts are counted. 

In other words, the government might be 6 percent of GDP larger than we think.

Click here to read the full paper.

The Affordable Care Act At 2 Years Old

On this day two years ago, President Obama signed into law the Patient Protection and Affordable Care Act, the first of two pieces of legislation that would make up the full health care law. The Health Care and Education Reconciliation Act would follow a week later, making some changes to PPACA while also containing changes related to student loans.

We know many of the things that will happen because of this law (barring a ruling against it from Supreme Court, which soon will hear oral arguments in a legal challenge). Millions more people will get insurance, mostly through either Medicaid or the new health insurance exchanges that will become a major source of non-employment private insurance coverage. Small businesses will receive tax credits for the provision of health insurance, while larger businesses will be penalized if they don't offer coverage. All individuals, with some minor exceptions, will be required to purchase adequate health insurance. Medicare Part D cost-sharing will be reduced via closing of the donut hole.

In addition, there will be many avenues of savings in public health programs or the system overall. Payments to Medicare Advantage plans will be reduced, while provider payments in traditional Medicare will grow more slowly. In a few years, the Independent Payment Advisory Board (IPAB) may be required to make recommendations for changes to provider payments if Medicare spending growth exceeds a certain target. Next year, a new 0.9 percent HI surtax will take effect for people making more than $200,000/$250,000 and the full 3.8 percent HI tax (the old 2.9 percent plus the surtax) will be applied to investment income as well. In 2018, high-cost health insurance plans will be hit with a 40 percent tax. Many changes to the health care delivery system will be made to emphasize quality over quantity, including penalizing hospitals for re-admissions, bundling payments to hospitals and doctors, and creating "accountable care organizations" to better coordinate care.

It will be very interesting to see how reform plays out. On paper, ACA will significantly reduce Medicare spending over the long-term, but it is questionable whether the provider reductions will be sustainable over the long-term (the chief actuary at the Center for Medicare and Medicaid Services believes the combination of the SGR and the other adjustments will be too much at some point). Of course, the bigger uncertainty is whether the delivery system reforms will slow health care cost growth overall.

So far, there has been little change in CBO's projections of the effects of the Affordable Care Act since the original score of the final legislation. It was originally scored as reducing the deficit by $124 billion from 2010-2019 (excluding the student loan provisions) and was scored last year as doing so by $119 billion from 2012-2019. Over a comparable period of 2012-2019, the net cost of coverage provisions has gone down by $6 billion from the original score to the most recent score.

As we said before, we must be vigilant to make sure the cost-control reforms stick and that the coverage provisions don't grow too rapidly. They must also not let political pressure get the better of lawmakers in regards to these things. In addition, we should stand ready to expand on the demonstrations and pilot projects that prove to be working. Still, the Affordable Care Act is only a start on controlling health care costs. There must be more done on Medicare and Medicaid in the context of an overall fiscal plan that makes certain their spending levels will be reasonably sustainable.

It Turns Out Ryan and Obama Agree on Putting Medicare in a Budget

With Congressman Paul Ryan's (R-WI) new budget comes an interesting piece of good news: an apparent agreement between House Republicans and President Obama on the need to hold Medicare cost growth to GDP plus 0.5 percent per beneficiary in the long-term.

Within his FY 2013 budget, President Obama proposes to expand the powers of IPAB and lower the cost growth per beneficiary target for the board from GDP plus 1.0 percent to GDP plus 0.5 percent per beneficiary in order to ensure that long-term Medicare spending is controlled. At the same time, Ryan's budget aims to hold Medicare spending growth per beneficiary to the same number -- GDP plus 0.5 percent per beneficiary -- through a competitive bidding approach with Medicare competing alongside private insurance plans and through the limit on spending growth if needed.

Of course, we have already heard the mud-slinging about premium support shifting costs to beneficiaries and IPAB leading to the rationing of care by reducing access. The main concerns themselves about each approach may be legitimate, but lawmakers cannot pretend that their preferred option is painless while the other side's option would be excessively destructive. Sticking to these limits will be difficult no matter what approach we take, but it is a critical element of controlling rising debt given that health care costs will grow to extraordinarily high levels unless we act.

Both approaches hope to control the growth in spending on health care through more efficient delivery of care -- either through competition among plans to identify the most cost effective ways to deliver care or an expert panel empowered to implement delivery system reforms insulated from political pressures. But in the end, limiting the growth in government spending on health care will require people paying more or getting less.

The country needs an honest discussion that acknowledges the pros and cons of each approach and the tradeoffs that must be made. It would be much more constructive if both sides recognized that, in the end, beneficiaries, doctors, hospitals, drug companies, and other providers will likely all have to share in efforts to control health costs and control rising debt. This would lead to a much more productive debate than we're seeing today, which hopefully would lead to solutions lawmakers can agree on.

Even though the methods for achieving a target growth rate of GDP plus 0.5 percent in the President's budget and Ryan's budget are quite different, let us hope that this first step of indirectly agreeing on a target will lead to a bipartisan agreement on how to contain Medicare, and other health spending, cost growth. 

MY VIEW: Erskine Bowles

In a blog post entitled "Don't Let the Perfect Be the Enemy of the Good" on the Committee for Economic Development's new blog Back in the Black, Fiscal Commission co-chair Erskine Bowles states that shared sacrifice will have to be an integral part of any budget plan. Both political parties will have to give ground and citizens across the country will need to give up some things they like to get it done. As he says:

The problem in finding a solution to these deficits has rarely been with the economics, it has been with the politics. Most political leaders know what needs to be done; they just have not been able to summon the collective political will to do it. Any serious bipartisan proposal to deal with the deficit will be savaged by special interests and the defenders of partisan purity on the left and the right. If we in the private sector of the economy allow members of Congress to think that doing nothing is OK, then that’s exactly what they’ll do. All of us in the private sector must put aside our individual wish lists and think about what’s really important for our country. If we’re unwilling to do that, then future generations, and I believe our own generation, are going to be in a world of hurt.

Click here to read the full blog post.

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

The Ryan Budget in the Long Term

According to CBO’s report on the budget targets specified by Chairman Ryan and his staff (not a more traditional scoring of policies for whatever results those yield), Ryan’s budget targets would reduce the federal debt to 10 percent of GDP by 2050. By our calculations, these targets would transform deficits into surpluses starting in 2035.

Chairman Ryan's plan would do so through dramatic reductions in most federal spending. At the same time, Ryan would largely leave current policy revenue projections in place, albeit under a reformed tax system, and he would make no specific changes to Social Security spending, although he does propose a process for Social Security reform.

The Ryan budget has the following long-term features:

  • Revenue: The budget has a revenue target of current policy, although it would cap revenues at 19 percent of GDP (which would happen by around 2025). However, as we noted yesterday, to achieve revenue-neutrality under his proposed rates, Ryan would have to eliminate virtually all tax expenditures, such as the mortgage interest deduction, the Child Tax Credit, and employer-provided health insurance exclusion. According to Tax Policy Center's analysis, he has to make up $4.6 trillion in lost revenues through 2022 to make his proposal revenue-neutral.
  • Medicare: Ryan proposes to slow Medicare spending growth from current projections, resulting in five percent less spending in 2022, about 25 percent less in 2035, and larger reductions thereafter. Chairman Ryan instructed CBO to assume a gradual increase in the Medicare eligibility age, from 65 to 67, phased in from 2023 to 2037, although this increase is not mentioned in his published budget. Without it, annual Medicare spending would cost about another 0.1 percent of GDP by 2030, another 0.2 percent by 2036, and another 0.25 percent by 2045 above CBO’s forecasts for Chairman Ryan’s targets. Chairman Ryan’s reforms would establish a competitive bidding process for Medicare, with federal premium payments fixed at growth rates slower than projected for national health spending (GDP plus 0.5 percent per beneficiary).
  • Other Health Spending: Chairman Ryan’s plan would repeal the 2010 Affordable Care Act, but would keep the Medicare cuts in the law, besides IPAB. Also, he would block grant Medicaid and CHIP spending while limiting their growth to inflation plus population growth, a much lower rate than currently projected.
  • Other Mandatory and Discretionary Spending: All remaining mandatory, defense, and other discretionary spending would grow at the rate of inflation over the long-term, which differs from CBO's long-term assumption of GDP growth. As a result, combined spending on these budget categories would decline from 12.0 percent of GDP in 2011, to 8.9 percent in 2014, 6.6 percent in 2022, 5.0 percent in 2035, and 3.7 percent in 2050. By contrast, since 1970, the lowest combined spending for these categories was 8.5 percent in 1999.

Below is our projection of the composition of spending under the Ryan budget. The one striking difference, not surprisingly, is that health care spending would grow only slightly as a percent of GDP, rather than growing dramatically as expected under current projections. Also, with much lower debt, interest payments stay subdued and start falling as debt shrinks.

 

Also, here are our extrapolations of the debt projections under the budget (CBO only gives debt numbers for every ten years). As you can see, assuming the numbers in the budget hold up, debt would fall to low levels by mid-century, likely to be paid off sometime in the 2050s. 

 

Note that these debt numbers do not incorporate the adjustments we mentioned yesterday for the rest of the sequester or doc fix or the revenue-neutrality assumption.

Budget Process Reforms in the Ryan Budget

The FY 2013 House Republican budget resolution, which has now been passed by the Budget Committee 19-18, contains a number of sweeping changes to the federal budget. And budget process is no exception. Congressman Ryan's budget seeks to bring in a number of changes from existing House Republican legislation (some of which we summarized here).

Many changes would affect the way that the baseline is calculated or how legislation is scored. The budget endorses fair-value accounting for all federal credit programs, explicitly brings the GSEs on-budget, and eliminates the inflation adjustments that CBO generally assumes in its discretionary spending baseline. Also, it would require CBO to provide an alternate baseline that assumes the extension of current policies (which they just started doing this year), and it would require CBO to provide an alternate estimate for major legislation to incorporate dynamic scoring (the macroeconomic effects of legislation). 

The budget also contains a lot of changes that would create hard caps on spending. It would create a new FY 2013 cap and reflect the sequester in future caps. It would cap total spending and "major categories" of mandatory spending at the levels in this budget resolution, extending the usual caps that would apply to discretionary spending only. In addition, it would seem to extend these caps over the long-term, although it isn't clear. Other actions to make the budget process more long-term-oriented would allow for the reconciliation process to be used beyond the ten-year window for savings in Social Security, Medicare, and Medicaid; create a point of order against any legislation that increases direct spending beyond ten years; and require that budget resolutions include long-term numbers.

The focus on long-term spending control in the budget is a positive step, but lawmakers also need to apply the same kind of limits and oversight on tax expenditures -- the spending in the tax code. The House budget would seek to limit them as part of broader tax reform efforts, but the details still need to be filled in. 

Tax Reform in the Ryan Budget

As the House Republican budget resolution has come out and alternatives will be sure to follow, CRFB is rolling out a blog series looking at all the budget resolutions that come up and taking a closer look at the one that's out there now. In this blog, we will look at Chairman Paul Ryan's (R-WI) tax reform plan.

One important component of Chairman Ryan's budget is the inclusion of a couple of detailed parameters. Whereas last year's budget simply called for reform with a 25 percent top rate, this year's budget includes some more specifics. In particular, the budget calls for reform that would:

  • Renew the tax cuts set to expire at the end of 2011
  • Reduce individual income tax rates to two brackets of 10 and 25 percent
  • Repeal the AMT
  • Reduce the corporate tax rate to 25 percent
  • Switch to a territorial system of international taxation
  • Broaden the tax base "to maintain revenue growth consistent with current tax policy"

Worth noting in these parameters is that Chairman Ryan is far more specific about his tax cuts than about how he will pay for them. His numbers and descriptions make it clear that his target is revenue neutrality with current policy (including the revenue provisions scheduled to go into effect as a result of the Affordable Care Act). Under this approach, revenue would rise to 19 percent of GDP sometime in the 2020s -- where Congressman Ryan would cap it thereafter.

However, no specific measures have been proposed to achieve these targets. Yesterday, Tax Policy Center estimated the cost of enacting the policies proposed in the Ryan budget. According to TPC, these policies (in addition to repealing the taxes in the Affordable Care Act, which is at least implicit in the document) would cost more than $4.6 trillion relative to current policy and about $10 trillion relative to current law. That makes these tax cuts relative to current policy about as large as the spending cuts specified in the budget.

TPC Estimate of Provisions in the Ryan Budget (billions)
  2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013-2022
10/25 Brackets -$151 -$211 -$224 -$237 -$251 -$265 -$280 -$294 -$310 -$326 -$2,549
Repeal AMT -$34 -$49 -$54 -$60 -$65 -$70 -$75 -$81 -$88 -$94 -$670
Corporate Provisions -$62 -$110 -$114 -$112 -$119 -$118 -$117 -$114 -$116 -$118 -$1,101
Repeal PPACA Taxes -$7 -$12 -$26 -$31 -$34 -$37 -$39 -$42 -$45 -$47 -$321
Total, Tax Cuts
-$255 -$383 -$418 -$440 -$470 -$491 -$511 -$531 -$558 -$585 -$4,641
            
Unspecified Base Broadening $255 $383
$418 $440 $470 $491 $511 $531 $558 $585 $4,641
Total as Claimed in Budget
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

 

If these tax cuts were enacted without base broadening, according to TPC's analysis, revenue would only reach about 16 percent of GDP by 2022, well below the 18-19 percent targets from the budget document. 

 

 

Of course, TPC's estimate doesn't include Congressman Ryan's plan of "getting rid of distortions, loopholes and preferences that divert economic resources from their most efficient uses." Though he hasn't named specifics, it is possible to reduce the tax rates to the levels described in the budget and still achieve revenue neutrality. On the corporate side, as we've shown, it would require wiping out virtually all tax expenditures and then either using money from pass-through businesses or taxing certain normal business expenses such as interest or advertising.

On the individual side, it would require moving very heavily in the direction of something like the "zero plan" put forward by the Fiscal Commission. That approach showed it was possible to enact revenue-positive tax reform with rates of 8 percent, 14 percent, and 23 percent by eliminating all tax expenditures in the code. Given his revenue targets are lower than the Fiscal Commission's, Congressman Ryan wouldn't have to go quite that far to achieve revenue neutrality. But he would need to go pretty far in that direction and couldn't avoid eliminating or deeply reducing popular deductions and exclusions for mortgages, charitable giving, employer health care, and retirement, to name a few. His task would also be made slightly harder since the zero plan taxes capital gains and dividends as ordinary income, while the Ryan budget would keep the preferential rates (or at least has not indicated that it would change those rates).

The bottom line is that while the tax plan in this budget can be achieved as a matter of policy, it would require many hard choices which have yet to be spelled out. And if policymakers do try to enact the dessert without the vegetables, the deficit and debt numbers from the Ryan budget would look quite different and far less responsible.

Ryan Reprise: House Budget Committee Chairman Releases New Budget

This morning, House Budget Committee chairman Paul Ryan (R-WI) presented the House Republican budget, one that is similar to last year's budget resolution but contains some key differences. In an op-ed in the Wall Street Journal, Rep. Ryan billed his plan as "reforming and modernizing government to prevent an explosion of debt from crippling our nation and robbing our children of their future." In a press release today, CRFB agreed that in terms of overall fiscal impact, it was "an impressive achivement."

Overall, according to the budget, debt as a percent of GDP would fall to 62 percent of GDP in 2022 (compared to 85 percent in the CRFB Realistic baseline). Spending would come down to 20 percent of GDP in that year, while revenue would remain on its current (2001/2003 tax cuts-extended) path at 18.7 percent of GDP.

 

The most visible and controversial component of last year's budget -- turning Medicare into a premium support system--returns in an altered form. As expected, the plan is more similar to the Ryan-Wyden or Coburn-Burr premium support proposals than last year's plan. In this budget, traditional Medicare is kept as an option to compete with private plans and Medicare spending per beneficiary growth is held to GDP plus 0.5 percent instead of inflation. Also, the start date is pushed back to 2023 to ensure that people over age 55 would not be affected. In the op-ed, Rep. Ryan contrasts his plan with the Independent Payment Advisory Board, the 15-member board that is charged with making recommendations to hold Medicare spending growth to GDP plus one percent -- a board that the House (and the budget) is looking to repeal.

Fiscal Parameters in the Ryan Budget (Billions)
  2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013-2022
Spending $3,624 $3,530 $3,476 $3,536 $3,690 $3,824 $3,977 $4,199 $4,409 $4,605 $4,888 $40,135
Revenue $2,444 $2,734 $2,980 $3,232 $3,449 $3,642 $3,811 $3,986 $4,184 $4,388 $4,601 $37,008
Deficits $1,180 $797 $496 $304 $241 $182 $166 $213 $225 $217 $187 $3,127
                         
Debt (% GDP) 73.2% 77.0% 77.6% 75.3% 72.7% 70.4% 68.4% 66.7% 65.1% 63.5% 62.3% N/A

 

One intriguing part of the budget was speculation about what level they would set for discretionary spending and how they would deal with the sequester. On the second question, they would replace one year of the sequester ($78 billion) with reconciliation instructions to the committees to save $260 billion over ten years. On the first question, they would replace the BCA caps with new caps that would have lower spending levels.

On tax reform, the budget reduces tax rates to 10 and 25 percent, down from the six brackets with a top rate of 35 percent today. The plan would also repeal the AMT, reduce the corporate tax rate from 35 to 25 percent, and switch to a territorial system. Although the document states that the reform plan would be revenue-neutral, no specific base-broadening measures have been named; at first look, it would seem that reform with these parameters would require eliminating virtually all tax expenditures.

In terms of other spending measures, the budget would block grant Medicaid, SNAP (food stamps), and other low-income programs and limit their growth. Also, it would enact medical malpractice reform, increase Medicare Part B and D premiums for high earners, reduce and reform Pell Grants, consolidate the many job training programs that currently exist, privatize Fannie Mae and Freddie Mac, reduce farm subsidies, reduce federal workforce costs, and repeal the Dodd-Frank Act. The budget repeals the Affordable Care Act's coverage provisions, but it keeps the Medicare cuts (besides IPAB) and appears to keep the tax increases as well.

CBO's report on the long-term impact of Rep. Ryan's proposal--which essentially takes the spending and revenue levels that he and his staff have specified--shows that his plan would halt spending growth, especially in health care programs, and it would put debt on a path to be paid off around 2050. Revenue would be capped at 19 percent of GDP while spending would be projected to fall to about 15.5 percent by mid-century.

Although the plan contains many constructive proposals, it also appears to contain some gimmicks or magic asterisks. First, it looks as if it would repeal the sequester for only one year, leaving it in place for the remaining years despite their intention to repeal it entirely. Second, it either assumes no doc fix (which would result in a Medicare physician payments by 27 percent at the end of the year) or assumes it is offset. Adding in the rest of the sequester repeal and the doc fix would add (including interest) about $1.4 trillion to ten-year deficits.

Adjustments to the Numbers in the Ryan Budget (billions)
  2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013-2022
Old Deficits $797 $496 $304 $241 $182 $166 $213 $225 $217 $287 $3,127
Sequester $21 $72 $93 $101 $104 $106 $105 $105 $105 $94 $904
Doc Fix $11 $18 $21 $24 $26 $28 $31 $34 $37 $41 $271
Interest $0 $2 $4 $8 $14 $21 $29 $37 $45 $53 $214
New Deficits $828 $588 $422 $375 $327 $321 $378 $401 $404 $475 $4,520
                       
Old Debt (% GDP) 77.0% 77.6% 75.3% 72.7% 70.4% 68.4% 66.7% 65.1% 63.5% 62.3% N/A
New Debt (% GDP) 77.2% 78.3% 76.6% 74.7% 73.0% 71.6% 70.6% 69.6% 68.6% 68.0% N/A

 

As with last year's budget, Chairman Ryan deserves a lot of credit for his proposals to get spending under control over the long-term. Even taking out any claimed savings from no doc fixes and leaving in the sequester, the House Republican budget still looks better than most other prominent plans out there by putting debt on a clear downward path -- a very encouraging element of the plan.

Fiscal Fact Checker: What Has Happened to CBO's Estimate of the Affordable Care Act?

CBO's most recent estimate of the insurance coverage provisions of the Affordable Care Act has sparked a debate about how CBO's estimate of ACA has changed over time. Some lawmakers (see here for example) claim that CBO's cost estimate has doubled in the two years since the bill's passage, while others claim that the bill's cost is now lower than we previously thought (see here and here). Let's examine these competing claims.

The recent claim arguing that costs have doubled cites the gross cost of coverage provisions as CBO estimated in 2010 and 2012: $938 billion and $1.76 trillion, respectively. However, the time windows differ: the initial estimate covered 2010 through 2019, while the latest estimate covers 2012-2022. Since most of the law's provisions don't kick in until 2014, the 2012 estimate includes three additional years where the coverage provisions are fully in effect. With that three-year shift in the projection window, one would expect the ten-year cost to increase significantly.

Also, we would quibble with using the gross cost, since it is a less comprehensive measure than the net cost estimate given that the bill also included penalties on people who do not have insurance or employers who do not provide it to help reduce costs (and these policies are closely related to the coverage expansions). When looking at net costs and using a common projection window (2012-2019), the cost of the coverage provisions has remained roughly the same in the two estimates.

The table below shows this comparison, along with the two other estimates that CBO did in February 2011 (the repeal of the health care law, HR 2) and in March 2011.

CBO's Estimate of the Net Cost of the ACA Coverage Provisions (billions)
  2012 2013 2014 2015 2016 2017 2018 2019 2012-2019
March 2010 $9 $10 $49 $87 $132 $154 $164 $172 $778
February 2011 $6 $9 $55 $92 $131 $149 $145 $146 $733
March 2011 $9 $9 $59 $104 $142 $157 $155 $158 $793
March 2012 $3 $5 $58 $110 $143 $154 $150 $149 $772

 

The second claim that the bill's costs are now lower is based on the difference between the March 2012 and March 2011 estimates over the comparable period of 2012-2021. The 2011 estimate projected the cost of the coverage provisions to be $1.13 trillion, while the newest estimate projects a cost of $1.08 trillion. Thus, using the comparable budget window and net cost, that claim is correct.

Overall, the cost of the Affordable Care Act has not doubled since its initial estimate two years ago; in fact, it has remained roughly the same when you use a comparable projection window. Also, the cost of the coverage provisions has declined by about $50 billion since the last estimate in March 2011. Still, all of the noise about the most recent estimate comes with the caveat that there still has not been an updated full score of Afforable Care Act since last year. Until that happens, a lot of the talk about its budgetary effects could be much ado about nothing. 

As CBO said in a comment about their estimate:

For the provisions of the Affordable Care Act related to health insurance coverage, CBO and JCT’s latest estimates are quite similar to the estimates we released when the legislation was being considered in March 2010.

Washington Post Editorial Board Makes the Case for IPAB

With the House of Repressive getting ready to vote on a full repeal of the Independent Payment Advisory Board (IPAB), the Washington Post Editorial Board has come out in defense of the board and against the repeal bill. IPAB, created under the Affordable Care Act, is a mechanism to try to limit Medicare's spending growth - something that has to be done if we are to get our fiscal situation under the control.

The 15-member Board would be required to make recommendations to reduce Medicare provider payments in years when Medicare spending per beneficiary grew faster than a specified target (GDP plus one percent after 2019). Congress would have the opportunity to enact alternative changes, but absent Congressional action, the recommendations would go into effect automatically.

The editorial notes:

The attack on IPAB reflects a depressing reality of the current Medicare debate and of the broader debate over entitlement reform. Politicians of both parties are fond of proclaiming their willingness to make hard choices, but reluctant, when the time comes, to do anything that would discomfit those who voted for them or helped finance their campaigns. The history of congressional oversight of Medicare underscores the willingness to spend and the reluctance to impose cuts. So Republicans attack President Obama for cutting Medicare spending and rail against an effort that promises to save even more, even as they piously assert their commitment to fiscal discipline. For their part, Democrats denounce Republicans for pushing premium support plans that would, they assert, “end Medicare as we know it,” even though all rational observers agree that the existing program, with its ever-mounting costs, cannot go on.

Perhaps enough cost savings can be achieved through innovations such as electronic medical records and delivery system reform to avoid the need to resort to more painful measures. But that happy result cannot be assumed, which is why repealing IPAB would be a mistake. An even bigger mistake would be to pretend that the current arrangement is sustainable.

The editorial makes a number a great points and is well worth the read

Line Items: March to Madness Edition

Mad, Mad World – There’s enough madness in DC to go around. Lawmakers from opposite parties seem perpetually angry at each other, yet they are moving in lockstep towards what Federal Reserve Chairman Ben Bernanke recently called a “fiscal cliff” at the end of the year. And expecting Congress to adopt a budget has become akin to picking a 16th seed to win. Unlike the big tourney, there doesn’t seem to be an end in sight to this madness. Think you can do better? Check out our newly updated online budget simulator and give it a try.

House GOP to Enter Budget Pool – House Republicans will unveil their budget resolution on Tuesday and mark it up in the House Budget Committee the following day. The blueprint reportedly will hold federal spending below the $1.047 trillion cap for FY 2013 in the Budget Control Act. It may also seek to diminish the defense cuts under sequestration by finding cuts elsewhere in the budget. The plan will have little hope of passing the Senate. Compare various fiscal plans here.

Budget Madness Spreads to States – Washington, DC isn’t the only place where lawmakers seem stymied in producing a budget. Some states, namely Virginia and New York, are also struggling to adopt budgets.

Will Budget Reform be This Year’s Cinderella Story? – The Senate Homeland Security and Governmental Affairs Committee held a hearing last week where several ideas for improving the budget process were discussed. One proposal would withhold pay for members of Congress until a budget and appropriations bills were adopted. Another bill would move from an annual budget and appropriations process to a two-year cycle. See our thoughts on biennial budgeting and check out more budget process reform ideas here.

GOP Rep. Suggests a Pairing – March is all about match-ups and one legislator has proposed an intriguing one. Last week Rep. Rick Crawford (R-AR) introduced legislation coupling a five percent surtax on income above $1 million with a balanced budget amendment. Will we see more tax increase ideas from Republicans?

Beware of the End of March – We survived the Ides of March, but the end of the month looms with yet another deadline for Congress. Legislators have until March 31st to approve of new surface transportation funding. The Senate passed a two-year, $109 billion bill last week that does not adequately address the shortfall in the Highway Trust Fund. However, Politico reports that the House won’t consider a bill until next month, meaning yet another extension or a disruption in highway funding.

Medicare Reform Ideas March On – The Medicare Payment Advisory Commission (MedPAC) last week issued its annual report with recommendations for reigning in the unsustainable cost growth of the vital program. Ideas include paying the same rate for services whether they are performed in a hospital or a doctor’s office. Currently, Medicare pays more for the same services if they are administered in a hospital. Meanwhile, a group of Republican Senators put forward a far-reaching proposal to move Medicare beneficiaries to the same health plan provided to federal employees. The House GOP budget will also likely include Medicare changes. See more health care reform ideas here.

 

Key Upcoming Dates (all times ET)

March 19

  • House Appropriations hearing on the FY 2013 budget for the Federal Communications Commission at 3 pm.

 

March 20

  • House Budget Committee Chair Paul Ryan (R-WI) holds a press conference at 10:30 am to unveil the House GOP FY 2013 budget. He will then give remarks at a forum at the American Enterprise Institute at 11:30 am.
  • House Appropriations hearing on the FY 2013 budget for the Smithsonian Institution at 9:30 am.
  • House Appropriations hearing on the FY 2013 budget for the Dept. of Commerce at 10 am.
  • House Appropriations hearing on the FY 2013 budget for the U.S. Mission to the United Nations at 10 am.
  • House Appropriations hearing on the FY 2013 budget for farm and foreign agricultural services at 10 am.
  • House Committee on Foreign Affairs hearing on U.S. foreign assistance at 10 am.
  • House Appropriations hearing on the FY 2013 budget for the National Institutes of Health at 10:30 am.
  • House Ways and Means hearing on securing the future of the Social Security Disability Insurance Program at 10:30 am.
  • House Appropriations hearing on the FY 2013 budget for the Office of Management and Budget at 2 pm.
  • Illinois Primary

 

March 21

  • House Budget Committee marks up the FY 2013 budget resolution beginning at 10:30 am.
  • House Appropriations hearing on the FY 2013 budget for NASA at 9 am.
  • House Committee on Government Oversight and Reform hearing on Europe's sovereign debt crisis, consequences for the U.S. and lessons learned at 9:30 am.
  • House Appropriations hearing on the FY 2013 budget for the IRS at 10 am.
  • House Appropriations hearing on the FY 2013 budget for the Dept. of Housing and Urban Development at 10 am.
  • House Committee on Education and the Workforce hearing on the FY 2013 budget for the Dept. of Labor at 10 am.
  • Senate Homeland Security and Governmental Affairs Committee hearing on the President's government reorganization plan and ending duplication at 10 am.
  • Senate Appropriations hearing on the FY 2013 budget for the U.S. Army at 10:30 am.
  • House Appropriations hearing on the FY 2013 budget for the Dept. of Veterans Affairs at 2 pm.
  • House Appropriations hearing on the FY 2013 budget for the Small Business Administration at 2 pm.
  • Senate Homeland Security and Governmental Affairs Committee hearing on the Dept. of Homeland Security budget at 2:30 pm.
  • Senate Appropriations hearing on the FY 2013 budget for the National Nuclear Security Administration at 2:30 pm
  • Senate Appropriations hearing on the FY 2013 budget for the Commodity Futures Trading Commission at 2:30 pm.
  • House Armed Services Committee hearing on the FY 2013 budget for defense health programs at 3 pm.

 

March 22

  • Senate Appropriations hearing on the FY 2013 budget for the Dept. of Commerce at 10 am.
  • House Appropriations hearing on the FY 2013 budget for the Dept. of Education at 10 am.
  • House Appropriations hearing on the FY 2013 budget for the Commodity Futures Trading Commission at 10:30 am.

 

March 24

  • Louisiana Primary

 

March 28

  • Senate Homeland Security and Governmental Affairs subcommittee hearing on combating waste and fraud in government programs at 2:30 pm.

 

March 29

  • US Dept. of Commerce's Bureau of Economic Analysis releases its third and final estimate of 2011 fourth quarter GDP.

 

April 3

  • Presidential contests in DC, Maryland, Wisconsin, and Texas

 

April 6

  • Dept. of Labor's Bureau of Labor Statistics releases March 2012 employment data.

 

April 13

  • Dept. of Labor's Bureau of Labor Statistics releases March 2012 Consumer Price Index (CPI) data. 

 

April 17

  • Tax Day! Federal income tax returns are due.