The Bottom Line

March 4, 2015

Repeating a story heard many times before, in a speech at a Federation of American Hospitals conference, House Ways And Means Chairman Paul Ryan (R-WI) indicated (subscription required) that a permanent replacement for the Sustainable Growth Rate (SGR) formula was not likely to pass by the March 31 deadline, and instead that lawmakers would do a short-term "doc fix" to buy more time.

The expiration of the current doc fix, one of this year's Fiscal Speed Bumps, would cause a 21 percent cut in Medicare physician payments starting in April as dictated by the SGR. That lawmakers are doing a short-term doc fix is unsurprising -- it's been standard operating procedure since 2003 -- but it is disappointing because they are as close to enacting a permanent replacement as ever before. Congress just isn't willing or able to agree on offsets to pay for it at this time.

What makes this situation different than previous times where lawmakers had to deal with the doc fix is that there is a bipartisan and bicameral agreement on a replacement system that would promote alternative physician payment models, and help transition away from fee-for-service payment. But while coming up with the replacement may no longer be an obstacle, the $175 billion cost through 2025 (up from $140 billion previously) apparently is, despite the fact that there are countless health care savings options available.

Our PREP Plan came up with $170 billion of savings through 2024 (adding in 2025 would bring this easily above $175 billion) through a combination of improving provider and beneficiary incentives. The appendix of that report also provides several other options that can produce tens of billions more in savings. The fact that lawmakers may have to resort to another short-term patch shows the downside of waiting until the last minute to fix a problem: they will need to spend time to negotiate a package, thus waiting takes that option off the table.

Policies in the PREP Plan

March 3, 2015

October or November -- that's the deadline by which the nonpartisan Congressional Budget Office (CBO) predicts lawmakers must increase the debt ceiling to avoid default.

March 2, 2015

Every year, the Treasury Department releases the Financial Report of the United States Government, which provides a detailed picture of the government's finances over the next 75 years. This year's report, released last week, shows a similar outlook as previous years; we are on an unsustainable fiscal path.

The report presents budget numbers in slightly different ways than CBO does. For one, instead of reporting an annual deficit, which was $483 billion in FY 2014, it reports the net operating cost. This measure differs in a few key respects:

  • It includes changes in government asset values.
  • It measures the increase in debt held by the public, a cash-flow measure, in contrast to the deficit, which uses accrual accounting for credit programs.
  • It includes the net liabilities of federal retirement and veterans' benefits (and similar programs).

The net operating cost is usually higher than the deficit, but it was much higher this year at $791 billion. Most of this is reflected in the fact that debt increased by a lot more than the official deficit did.

The Financial Report also measures net liabilities of the federal government over 75 years. In addition to the "net position," which is the stock to the net operating cost's flow (like debt is to deficits), it also separately evaluates the net social insurance liabilities of Social Security and Medicare and total net liabilities for noninterest spending. The current net position is $17.7 trillion, and the total noninterest liability going forward is $4.7 trillion, or 0.4 percent of total GDP over the next 75 years. Within the total noninterest liability is the net social insurance liability of Social Security and Medicare, which is $41.9 trillion (4 percent of 75-year GDP), or $14.1 trillion (1.3 percent of 75-year GDP) if current trust fund balances and Medicare general revenue transfers are counted. These totals are larger in nominal dollars than last year's report but similar as percentages of GDP.

February 27, 2015

Dr. Elliott Fisher, former Senator Judd Gregg (R-NH), and Dr. James Weinstein penned an op-ed published in Modern Healthcare discussing the need to move away from fee-for-service and towards accountable and effective care in Medicare. They discussed findings of a collaboration between the Dartmouth Institute, Dartmouth-Hitchock Health, and the Campaign to Fix the Debt to create a number of suggestions for establishing better Accountable Care Organizations (ACOs) through improving the financial model and patient engagement. The full findings are available as a white paper, released yesterday.

They noted the quick timeline that the Department of Health and Human Services (HHS) has established for moving to new payment models and the difficulties ACO implementation has faced thus far:

HHS is seeking to tie 85% of traditional Medicare payments to quality or value by the end of 2016 and 90% by the end of 2018; and having 30% of Medicare payments in alternative payment models—such as ACOs—by the end of 2016 and more than 50% by 2018.

Transitioning away from fee-for-service payment at such a pace, however, will require major improvements to alternative payment models and additional reforms, some of which may require Congress to act.

ACOs in Medicare—the largest alternative payment model—continue to grow in number, with 424 organizations now serving roughly 7.8 million beneficiaries, mostly within the Medicare Shared Savings Program. However, while the early results of the Medicare ACO programs are in many ways promising, they also highlight the need for further changes. Initial data on financial performance show that only about one-quarter saved enough money to generate shared savings. Many ACO beneficiaries are unaware that they are receiving care from the ACO and seek it from non-ACO specialists or healthcare agencies, making it difficult for the physicians in their ACO to coordinate and improve their care.

The solution to fixing ACOs, they write, lies in two separate strategies.

First, the financial model for ACOs should offer them a greater share of their initial savings (to help fund start-up costs), provide stronger incentives to induce and maintain participation from low-cost provider organizations, and foster alignment of payment schemes across all payer types—not just in Medicare. This strategy will encourage the growth of shared-savings models and motivate high-performing healthcare systems to join the ACO programs.

The second strategy would improve patient engagement in ACOs by modifying how Medicare beneficiaries are assigned to an ACO: Beneficiaries should be given the opportunity to choose to join their ACO; for those not actively choosing, those eligible should be assigned at the beginning of the year (so that their ACO can contact them). Medicare should also test a benefit design that uses modest financial incentives to encourage patients to seek care within their ACO or from providers outside the ACO whom the ACO recommends. Simultaneously, to make such incentives possible, supplemental Medicare plans should be restricted from covering first-dollar beneficiary costs for non-ACO services.

February 27, 2015

Speculation over the next director of the Congressional Budget Office ended today as the House and Senate Budget Committees announced that Keith Hall would become the ninth director in the agency's history. He will succeed Doug Elmendorf, who has been the director since 2009, on April 1.

As a labor economist, Hall has a long history of service within the federal government and in academia. He served as Commissioner of the Bureau of Labor Statistics between 2008 and 2012 and Chief Economist for the Council of Economic Advisers between 2005 and 2008. He also worked in the Commerce Department and is currently the chief economst for the International Trade Commission. Hall has been a senior fellow at the Mercatus Center at George Mason University and has taught there as well as the George Washington University, Georgetown University, the University of Arkansas, and the University of Missouri.

February 27, 2015

Ed Lorenzen, Senior Advisor for the Committee for a Responsible Federal Budget, testified Wednesday in front of the Ways and Means Social Security Subcommittee on maintaining the solvency of the Social Security Disability Insurance Trust Fund.

Without congressional action, the trust fund reserves will be depleted next year. The exhaustion of the DI fund, one of the upcoming fiscal speedbumps, would result in a roughly 20 percent across-the-board benefit cut. The President has proposed reallocating money from the Old Age fund to bolster the DI fund. This measure, known as a reallocation, has sparked much debate after a new House rule was adopted requiring legislation implementing such a transfer to also include reforms.

Proponents argue that reallocation is a routine measure, enacted numerous times in the past, and is therefore adequate in the current situation. In his testimony, Lorenzen explained that previous reallocations have often been accompanied by reforms, a precedent that's particularly important to follow this time.

After a thorough review of past reallocations, Lorenzen reaches four major conclusions:

February 26, 2015

No matter how difficult the conversation, the national debt needs to be a top priority in the 2016 presidential election, and the next president needs to have a clear plan to bring down the debt in the coming years. Former Senators Judd Gregg and Evan Bayh explained this in an op-ed in Roll Call on Monday while promoting First Budget, an initiative committed to bringing the debt into the spotlight for the 2016 presidential primaries and demanding a debt plan from presidential candidates.

The Senators know how difficult it can be for politicians to discuss tough issues, writing:

As former — and maybe reformed — elected officials, we know how much politicians like to talk about good news: tax breaks, infrastructure improvements, job growth announcements.

But they are far less interested in talking about the bad news and hard choices on the horizon as the federal debt continues on an unsustainable upward path.

Politicians don’t see big constituencies for that kind of news, and no special interests score them on whether they discuss it with voters. Even the close cousin of bad news — blunt talk — is usually avoided in politics.

Yet, politicians and voters alike should understand sacrifices will be necessary in the years ahead as an aging population, rising health care costs and a deeply flawed tax system put more and more pressure on the federal budget.

February 26, 2015
Fix the Debt, Dartmouth College, and Dartmouth Hitchcock Release White Paper

Today, Fix the Debt, Dartmouth-Hitchcock Health, and Dartmouth College released a paper titled Medicare Slowdown at Risk: The Imperative of Fixing ACOs. At an event on Capitol Hill this morning, stakeholders from the Administration, private sector, and the academic community commented on the ideas in front of an audience of Congressional staff, press, and policy experts.

You can read the paper here, and a 2 page summary here. We also previously commented on accountable care organization (ACO) results that were released last September.

The paper represents the culmination of work that began this past September at the Dartmouth Summit on Medicare Reform, a conference that Fix the Debt, Dartmouth-Hitchcock Health, and Dartmouth College hosted in Hanover, NH.

February 25, 2015

In a little over one month, lawmakers will face their second significant Fiscal Speed Bump of the year when the one-year "doc fix" expires. At that point, Medicare physician payments will be cut by 21 percent because of the long-standing Sustainable Growth Rate (SGR) formula. Policymakers have avoided the cuts since 2003 through temporary doc fix patches, but the relatively low cost of a permanent fix and a bipartisan, bicameral framework for replacement in the last Congress have increased the prospects that a permanent doc fix could finally happen.

In the run-up to the lame duck session last Congress, we released the PREP Plan, which outlined tax and health savings options to pay for a two-year tax extenders and permanent doc fix package. Ultimately, lawmakers added the cost of one year of tax extenders to the debt, but they have the chance to keep with precedent and pay for a Medicare physician solution. The PREP plan divides savings equally between beneficiary and provider changes, focusing on reforms that can improve incentives.

The beneficiary changes in our plan would modernize Medicare's cost-sharing system by simplifying Part A and B deductibles and coinsurance, while creating a new out-of-pocket limit on cost-sharing. At the same time, the plan would restrict first-dollar coverage by supplemental insurance like Medigap to discourage over-utilization of care, and provide additional assistance to lower-income beneficiaries who need it most. Similar reforms have been proposed by Simpson-Bowles, the Bipartisan Policy Center, the Brookings Institution, and the Center for American Progress, among others.

February 25, 2015

Federal Reserve Chair Janet Yellen delivered testimony on the Semiannual Monetary Policy report to the Senate Banking Committee on Tuesday. Not surprisingly, the hearing focused on the economic outlook, the timing of an increase in the federal funds rate, and financial regulatory policy. But the topic of federal debt did come up, and Yellen corroborated our view on why debt should be put on a downward path.

In response to a question from Sen. Heidi Heitkamp (D-ND) about longer-term challenges facing the economy, Yellen responded that one was "longer-run issues with the federal budget."

I think Congress has made painful decisions that have now really stabilized, brought down the deficit very substantially and stabilized for a number of years the debt-to-GDP ratio. But eventually debt-to-GDP will begin to rise, and deficits will increase again as the population ages and Medicare, Medicaid, and Social Security get to be a larger share of GDP under current programs. And there are lots of ways in which these are problems we've known about for a long time.

February 25, 2015

This afternoon, Ed Lorenzen, Senior Advisor for the Committee for a Responsible Federal Budget, will testify in front of the Ways and Means Subcommittee on Social Security on maintaining the solvency of the Social Security Disability Insurance Trust Fund.

February 24, 2015

The Council of Economic Advisers released its 2015 Economic Report of the President last week, discussing several recent economic developments and how the President's policies fit into them. One chapter of particular interest given its possibility of being on the policy agenda in this Congress is on business tax reform. The chapter discusses the problems with the current system—notably, its high marginal tax rate, relatively narrow tax base, and economically distorting incentives—and how the President's approach would help the economy, productivity, and living standards.

For background, the Administration's policy on business tax reform can be summarized between the specific policies laid out in the budget, with additional detail in its business tax framework. The budget calls for the corporate tax rate to be reduced from 35 to 28 percent and extensions/expansions of some existing tax breaks, like a permanent extension of the R&E credit and new or extended tax breaks for clean energy. The budget also contains a number of revenue-raisers that would pay for them, including a 19 percent minimum tax for income earned abroad, the elimination of tax incentives for fossil fuel producers, and the changing of inventory accounting rules.

The revenue-raisers would pay for the tax breaks but would leave only $140 billion of revenue to pay for the rate cut, only about one-fifth that is needed. However, the framework states that additional revenue could come from addressing depreciation schedules and limiting the deductibility of interest. Finally, the budget dedicates revenue to the Highway Trust Fund from a 14 percent temporary tax on earnings held abroad by U.S. companies.

Components of President Obama's Business Tax Reform Plan
Policy Savings/Cost (-) Through 2025
Reform the international tax system $238 billion
Change inventory accounting rules $84 billion
Eliminate fossil fuel tax preferences $50 billion
Reform financial and insurance industry tax treatment $34 billion
Enact other revenue raisers $40 billion
Extend and expand R&E credit -$128 billion
Enact/extend small business tax cuts -$94 billion
Enact/extend manufacturing and clean energy incentives -$58 billion
Enact infrastructure and regional growth tax cuts -$26 billion
Total, Business Tax Reform Reserve $141 billion
Make unspecified changes to depreciation and interest deductions ~ $560 billion*
Cut corporate rate from 35% to 28% ~ -$700 billion
Implement 14% transition tax on earnings held abroad $268 billion
Dedicate revenue to Highway Trust Fund -$238 billion

Source: OMB, CBO, CRFB calculations
*Numbers represents roughly the additional revenue needed to finance the rate cut. Actual revenue may be larger since depreciation changes raise less in the long term than the short term

The chapter includes four interesting discussions of elements of business tax reform:

February 24, 2015
Dynamic Scoring Won't Be Perfect But it is Worth Doing

Rudolph Penner was the director of the Congressional Budget Office from 1983 to 1987, and he is an Institute Fellow at the Urban Institute and a member of the Committee for a Responsible Federal Budget. He wrote a guest post that appeared in the Tax Policy Center blog. It is reposted below.

February 23, 2015

CBO unofficially closed the books on the American Recovery and Reinvestment Act (ARRA, or the 2009 stimulus), putting out its final report on the economic and fiscal effects of the legislation. ARRA passed in February 2009 during what ended up being the deepest output and employment decline of the Great Recession; the economy had shrunk by 8 percent in the last quarter of 2008 and was in the process of shrinking another 5 percent in early 2009, while hundreds of thousands of people were losing their jobs each month. The legislation, originally scored as costing $787 billion, included a number of different provisions intended to stimulate the economy, including increased safety net spending, fiscal aid to states, infrastructure projects, and tax cuts for both individuals and businesses. CBO's latest report includes an updated score of ARRA ($836 billion) and adds economic effects for 2014 to the effects they already reported for previous years.

Not surprisingly, CBO finds that ARRA had limited effect on the economy in 2014 given that only 2 percent of the total deficit impact took place in that year. It boosted real GDP by between 0 and 0.2 percent in 2014 and lowered the unemployment by between 0 and 0.2 percentage points. The economic effect peaked in 2010, when nearly half of the deficit impact of the legislation took place, raising real GDP by between 0.7 and 4.1 percent and lowering the unemployment rate by between 0.4 and 1.8 percentage points. Compared to its projections at the time, CBO found much less of a boost to real GDP in 2009 but a greater boost in 2010 and 2011. It also found less of a reduction in unemployment in 2009 and 2010 but a greater effect in 2011 and 2012 than they thought at the time.

February 23, 2015
Congress Can't Dodge Social Security Disability Insurance Trust Fund's Approaching Insolvency

Jim Kolbe and Charlie Stenholm are former members of Congress and members of the Committee for a Responsible Federal Budget. Jim Kolbe (R-AZ) served from 1985 to 2007, while Charlie Stenholm (D-TX) served from 1979 to 2005. They wrote a commentary that appeared in Roll Call, which appears below.

February 20, 2015

Next Tuesday will be the 40th anniversary of the beginning of the Congressional Budget Office, and University of Maryland Professor Phillip Joyce has begun the celebration early, publishing a Brookings working paper reflecting on CBO's growth as an agency and its role in the budget process. The CBO, which was created in the 1974 Budget Act, started on February 24, 1975, when Director Alice Rivlin officially took office.

Joyce notes that CBO's visibility and reputation have grown significantly since its establishment to the point that it is central not only to the budget process but any major legislation:

CBO was created, in large part, to give Congress more leverage over the White House in key policy debates. Time and again Congress has made use of that capacity to place its own stamp on overall fiscal policy and to respond to particular Presidential policy proposals. In fact, the key events that have established and enhanced CBO’s credibility have virtually all involved its response to Presidential initiatives, such as the Carter energy policy, the Reagan budget proposals, or the Clinton and Obama health reform efforts.

February 18, 2015

As we've mentioned frequently, budget projections and economic forecasts are inextricably linked in determining both the nominal dollar budget numbers and their size compared to GDP. Naturally, the ten-year projections that budget agencies like the Congressional Budget Office and Office of Management and Budget make are very uncertain, so deviations from those forecasts can have profound effects on the budget. A recent CBO report helpfully provides some background on how they make their economic projections and in particular, why they assume that the economy will never actually reach potential GDP.

For background, potential GDP is the amount of output the economy would produce if it was at full capacity but not at a level which would risk accelerating inflation. Thus, it does not represent literally the maximum possible output at the time but rather a trend line around which actual GDP moves during the business cycle. Thus, the growth rate of potential GDP and its relationship to actual GDP are very important in longer-term budget projections.

Of course, actual GDP is currently below potential by more than 2 percent, and it has been below it since mid-2006 and for 12 of the past 13 years. Here's how CBO describes its incorporation of cyclical effects:

For roughly the first half of its 10 year projection period (which currently runs through 2025), CBO projects the growth of actual output by estimating both the potential and the cyclical components of economic activity. For the latter part of the projection period, however, CBO does not estimate cyclical components.

In other words, CBO attempts to project economic growth in the first five years of its budget window but relies on a simplifying assumption that the economy is in “steady-state” in the second five years, rather than trying to predict booms or busts. In the past, CBO assumed that actual GDP would be exactly equal to potential GDP in this steady state. However, recently CBO adjusted that assumption.

Starting in last year's February baseline, CBO assumed that the economy would only reach 0.5 percent below potential and grow at the same rate as potential GDP thereafter. As before, CBO does not attempt to project the business cycle in the second five years, instead assuming an average of likely outcomes.

February 13, 2015

We've written extensively about the President's budget since it was released, both in our analysis of the budget and in our blog series. Also notable about this budget is that it is the first to include a chapter on “climate risk.” The chapter explains the direct and indirect financial costs of climate change, both in recent years and well into the future, illustrating how the President sees climate change as a fiscal issue, not just an environmental one. The budget includes several proposals intended to avoid climate change and the associated perceived financial dangers.

In the budget, OMB explains why climate change is a fiscal issue:

The federal government has broad exposure to escalating costs and lost revenue as a direct or indirect result of a changing climate. For example, the federal government plays a critical role in protecting  American families, businesses, and communities against the effects of extreme weather. As economic damages from such catastrophic weather grow, so do the liabilities for the federal government. At the same time, extreme weather exposes federal facilities and federal lands to increased risk.

According to OMB, over $300 billion has been spent on weather-related disaster relief in the past decade. That number includes $179 billion in domestic disaster relief, $24 billion in debt incurred by flood insurance (which was self-sustaining until the last several years), and $61 billion in costs for crop insurance. While the administration says it is “not possible” to know how much of this has been caused by man-made climate change, it believes that these costs “have been increasing and can be expected to continue to increase as the impacts of climate change intensify.”

February 13, 2015

The President proposed last week, through his FY 2016 budget, a number of proposals to reform Social Security in small ways, including measures to shore up the strained Social Security Disability Insurance (SSDI) Trust Fund by shifting funds from the Old-Age and Survivors' Insurance (OASI) Fund and to improve data sharing and coordination with other agencies. Overall, the Office of Management and Budget (OMB) estimates that these measures would save money through better program integrity and increased payroll revenues for the program. OMB expects that over the next 10 years these changes will cut Social Security's costs by $14 billion and increase revenue by roughly $46 billion. 

Here is a summary of the President’s proposed changes to the SSDI program:

    • Reallocating payroll taxes from OASI to SSDI. The budget proposes reallocating an additional 0.9 percent of the payroll tax from the old-age program to the disability program for five years in order to extend the life of the SSDI trust fund to about 2033.
    • Completing Continuing Disability Reviews (CDRs). The budget proposes mandatory funding for CDRs starting in 2017. Annual funding would be determined through a formula rather than the appropriations process. The budget proposes $15.2 billion of new spending for CDRs through 2025 which would generate estimated savings of $37.7 billion. About 80 percent of the spending and a similar proportion of the savings would go to and come from the Supplemental Security Income (SSI) program, leaving $7 billion of net savings to the SSDI program.
February 12, 2015
Cost of Ten Bills Would Be Added to the Deficit

The House of Representatives is considering this week whether to revive several tax breaks known as the "tax extenders" and add their cost to the deficit. The bills under consideration, which include extensions of previously renewed tax breaks in addition to new and expanded tax breaks, would cost almost $320 billion, or almost $385 billion with interest.

The tax extenders are a set of temporary tax breaks that have typically been continued for a year or two at a time. Most recently, about 55 extenders expired at the beginning of 2014 and were renewed retroactively for one year last December, before expiring a few weeks later at the end of 2014.

The House Ways & Means Committee today approved renewing and permanently extending two of these provisions, including a drastically expanded research tax credit and a deduction for sales taxes paid, as well as new modest expansions to 529 education savings accounts. The three approved bills being considered would cost about $225 billion, or $265 billion with interest.

The House is also voting today and tomorrow on permanent extensions of six more provisions, as well as a policy from last year's Tax Reform Act that would reduce taxes paid by private foundations on their investment income.

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