The Bottom Line

April 14, 2015

This morning, Governor Chris Christie (R-NJ) delivered an important speech in New Hampshire on the need for entitlement reform. The speech not only focused on the need to address the rapid growth of Social Security, Medicare, and Medicaid but actually put forward a plan to begin addressing these issues. By our rough estimate -- and depending on many of the details -- this plan would save over $1 trillion in the next decade alone while significantly improving the solvency of Social Security and Medicare.

Below is a short summary of Governor Christie's plan.

Social Security Reform

In his speech, Governor Christie called for Social Security reform, explaining that the program "is slowly working its way to insolvency – which the actuaries say will come in the early 2030s, less than 20 years from now... as the number of workers relative to the number of beneficiaries continues to shrink."

To address Social Security's looming insolvency, Christie proposes a number of changes. The most significant policy, in terms of savings, would be to raise the normal retirement age by two months per year from age 67 in 2022 (as under current law) to age 69, and then index it for life expectancy. At the same time, his plan would raise the earliest eligibility age from 62 to 64.

In addition, Christie proposes to calculate COLAs based on the more accurate chained CPI (with a benefit bump-up for 85 year olds), to phase out Social Security benefits for the highest earning seniors (phased out between $80,000 and $200,000 of non-Social Security income), and to eliminate the payroll tax for senior workers.

April 13, 2015

We have described at length the fiscal irresponsibility of the Sustainable Growth Rate (SGR) reform bill (H.R. 2) working its way through Congress -- both its significant near-term and long-term costs and its exemption of the cost of the bill from pay-as-you-go (PAYGO) rules. But the PAYGO exemption is not the only way the bill violates budget rules intended to enforce fiscal discipline.

The bill also runs afoul of several points of order (POOs) under the Congressional Budget Act and Senate rules that will require 60 votes to override. The most significant budget points of order that apply to H.R. 2 as passed by the House are:

  • Senate PAYGO Point of Order: The Senate provides a point of order against bills that increase deficits over the Congressional Budget Office’s (CBO’s) ten-year budget window. This rule is distinct from the statutory PAYGO rule that would automatically recoup costs that are not offset with a sequester if the bill was not exempted. By contrast, this point of order prohibits consideration of legislation that would increase the deficit unless 60 Senators vote to waive the prohibition.
  • Senate Long-Term Deficit Point of Order: Although some advocates of H.R. 2 have suggested that the legislation would be fully offset or even reduce the deficit beyond the ten year window, CBO wrote in its estimate of H.R. 2 that “Taken as a whole, H.R. 2 would raise federal costs (that is, increase budget deficits) relative to current law in the second decade after enactment.” As a result, the bill would be subject to the Senate’s long-term deficit point of order, which prohibits legislation increasing deficits by more than $5 billion in any of the following four decades beyond the ten-year budget window.
April 10, 2015

There's a simple way to make the $141 billion House-passed Medicare Sustainable Growth Rate (SGR) bill more fiscally responsible: don't exempt it from PAYGO.

As currently written, not only would the SGR legislation add $500 billion to the debt by 2035, but it includes a provision (in Section 525 of the bill for those reading along at home) exempting it from the pay-as-you-go law specifically designed to prevent Congress from adding to the debt over the course of a year.

This PAYGO loophole not only codifies the debt increases within the bill, but it also makes it more difficult for the Congress to follow through on achieving the Medicare savings in the House and Senate Budgets.

Luckily, there is an easy solution. By simply striking Section 525 and removing the PAYGO loophole, the Senate would effectively require Congress to identify $141 billion or more of deficit reduction by the end of the year.

This wouldn't require savings to take place immediately and wouldn't hold up passage of the SGR bill, but it would allow Congress the time it needs to identify savings and reforms to ensure they don't add to the nation's credit card over the long-run. And if Congress fails to find those savings, an automatic mandatory cut would reduce the cost of Medicare and (to a much lesser extent) several other smaller mandatory programs by about $15 billion per year until savings are identified.

Notably, striking the PAYGO Loophole would not impact any of the spending or savings currently in the bill.

Recent articles suggest that the Senate may consider an amendment to close this PAYGO loophole, which represents a huge improvement to the bill's fiscal responsibility.

April 10, 2015
This Gimmick is Bananas

The Senate budget by Chairman Mike Enzi (R-WY) contains an important provision to limit a gimmick often used to increase spending using phony savings from CHIMPs, which stands for Changes In Mandatory Programs. While we have written extensively about the abuse of the Overseas Contingency Operations account to allow for defense spending above the caps established by the Budget Control Act, Congress has also relied on CHIMPs to provide non-defense discretionary spending above spending limits. CHIMPs are scored as savings on paper despite often producing no real savings, but are still used to pay for real increases in spending.

What are CHIMPs?

CHIMPs are provisions in appropriation bills making changes in mandatory spending programs, usually to reduce or limit mandatory spending. The savings are then available to be used to offset an increase in discretionary spending. This can be perfectly acceptable when the savings created are real, but it does create the opportunity to game the system.

April 9, 2015

The Congressional Budget Office (CBO) has released its Monthly Budget Review for March, rounding out the first half of Fiscal Year 2015. The report shows a first half deficit of $430 billion, $17 billion higher than the deficit reported for the same period in FY 2014. In its March baseline, CBO projected the FY 2015 deficit would be $486 billion, $1 billion higher than FY 2014; CBO doesn't indicate whether the actual totals so far are better or worse than expected.

Between FY 2014 and FY 2015, spending has grown by 6.6 percent while revenue has grown by 7.4 percent. Driving the growth in revenue are sizeable increases in individual and corporate income taxes as a result of economic growth. On the spending side, growth is driven by the Affordable Care Act's (ACA) coverage provision being in effect for the entirety of FY 2015 - unlike FY 2014, where it was not in effect for the first three months - and by lower offsetting receipts from profits received by Fannie Mae and Freddie Mac.

The Federal Budget in the First Half of FY 2015 (Billions of Dollars)
Area FY 2014 FY 2015 $ Change % Change Full-Year Projection*
Individual Income Tax $585 $642 $57 9.7% 8.0%
Corporate Income Tax $118 $133 $15 12.8% 2.2%
Other Revenue $620 $646 $25 4.2% 4.0%
Total Revenue $1,323 $1,420 $98 7.4% 5.6%
Social Security $415 $434 $19 4.5% 4.5%
Medicare $244 $268 $23 9.4% 4.3%
Medicaid $140 $172 $31 22.3% 13.9%
Defense $294 $284 -$10 -3.5% -2.3%
Fannie/Freddie -$57 -$11 $46 N/A N/A
Interest $122 $105 -$17 -13.7% 0%
Other $578 $600 $22 3.8% 3.1%
Total Spending $1,736 $1,851 $115 6.6% 4.9%
Deficit -$413 -$430 -$17 4.1% 0.2%

Source: CBO
*Full-year projection taken from CBO's March 2015 budget outlook

April 8, 2015

Lawmakers often lament the difficulty of reforming Medicare and other health care programs, but the difficulty is not a lack of viable options. One particularly lush source of ideas to examine is the President’s budget.

His budget offers $435 billion in health care savings, which would pay for reforming the Sustainable Growth Rate (SGR), new health initiatives (some of which are in the SGR bill), and repealing the Medicare sequester while leaving an additional $100 billion for deficit reduction. On top of many reforms found in previous budgets, it also includes efforts to improve the delivery system and enact payment reforms – as well as new spending – not seen in previous budgets.

Here are a few highlights of the proposed savings:

  • Allow the Health and Human Services (HHS) Secretary to negotiate certain drug prices: Although this item is budget-neutral, it would let the Department negotiate with pharmaceutical manufacturers to lower the price of high-cost prescription drugs and biologics for Medicare Part D. This policy is in addition to other proposed drug payment reforms in the budget that save $165 billion.
  • Equalize payments for similar care performed in different sites of service: A trend in Medicare is the shift of ambulatory care from doctors' offices to hospital outpatient facilities, the latter of which receives a higher reimbursement from the government. The budget proposes to equalize payments for services that can be well provided in physician offices, regardless of whether that care is provided in a hospital outpatient department, physician's office, or an Ambulatory Surgery Center. CBO estimates that this would save $13 billion over the next decade.
April 6, 2015

The Congressional Black Caucus (CBC) has released an alternative budget proposal highlighting their policy goals and preferred fiscal path for the coming years. The budget reduces the deficit relative to current law, bringing it to 2.3 percent of Gross Domestic Product (GDP) in 2025. The deficit reduction in the budget would result in a lower debt-to-GDP ratio, which would be just under 72 percent in 2025 - about 7 percentage points of GDP lower than under current law (CBC estimates it to be 68 percent with dynamic effects, or 11 percentage points of GDP lower than under current law). This budget supports many progressive policies focusing on programs intended to reduce poverty, also includes significant tax increases, and is very similar to the Democratic budget and the President's budget.

April 3, 2015

The Republican Study Committee (RSC) has released an alternative budget proposal that outlines their vision for the country’s fiscal future. Their plan aims to balance the budget after only six years and reduce the ten-year deficit by almost $7 trillion. As a result, debt would decline faster than under any of the other budget resolutions, with debt at 48 percent of GDP by the end of the 10-year window, down from nearly 74 percent today.

By their own estimates, the plan would cut spending from 19.4 percent of Gross Domestic Product (GDP) in 2016 to 17.5 percent by 2025. Revenues would remain at current law levels, falling slightly from 18.4 percent in 2016 to 18.3 percent in 2025.

April 2, 2015

The Sustainable Growth Rate (SGR) formula returned yesterday with 21 percent cuts to Medicare physician payments, although the actual effect won't be felt for a few weeks because of Medicare's ability to withhold payments for a period of time. Lawmakers have come up with a solution that is expected to be voted on when the Senate returns from recess, but it would add about $500 billion to debt by 2035. 

The legislation replaces the large and blunt SGR-prescribed cuts with 0.5 percent payment increases for five years before freezing payment growth through 2024 alongside a new, consolidated quality incentive program for Medicare physicians, called the Merit-Based Incentive Payment System (MIPS). In a budget-neutral manner, the MIPS program would reward or penalized physicians based on quality, resource use, meaningful use of electronic health records, and clinical practice improvement activities. Simultaneously, the bill would also provide payment incentives for physicians to utilize alternative payment models (APMs), such as Accountable Care Organizations (ACOs), that reward quality of care over quantity of care delivered. From 2019-2024, physicians earning a significant share of their revenue from models that involve risk of financial losses and have quality measurement would get a 5 percent bonus payment each year. Over the long run, physicians in APMs would also receive annual updates of 0.75 percent while non-APM professionals receive 0.25 percent updates.

This new system is estimated to cost $175 billion through 2025 by the Congressional Budget Office, but lawmakers are choosing only to offset the $35 billion amount by which this policy exceeds the cost of a permanent payment freeze. There is at least some hope, though, that the reformed physician payment system can begin to slow costs and improve quality of care in Medicare.

In addition, the bill extends several "health extenders" that are often included with doc fixes. Most of the extensions run through 2017, but two policies -- the Qualified Individual (QI) program, which provides Medicare premium assistance for certain low-income beneficiaries, and Transitional Medical Assistance (TMA), which allows low-income workers whose income rises to temporarily keep Medicaid eligibility -- get permanent extensions. These extenders cost $19 billion through 2025 and are fully offset.

April 2, 2015

We've already provided topline comparisons of the budget metrics in the FY 2016 Congressional budgets and the President's budget, showing that most of the budgets would put debt on a clear downward path as a share of GDP. But it is also interesting to see how the major budgets presented match up with another plan: the Bipartisan Path Forward (BPF) put forth by Erskine Bowles and Al Simpson in April 2013.

For context, the BPF was presented after the fiscal cliff negotiations yielded only small deficit reduction and no lasting solution to the projected rise in debt. The plan replaced most of the sequester, which had taken effect the prior month, with significant mandatory savings and revenue from tax reform to put debt on a downward path to 69 percent of GDP by 2023.

Our re-estimate of the plan updates the BPF by moving the start dates of most policies to 2016 or 2017, accounts for policies that have already been enacted, and most importantly, accounts for changes in CBO's budget baseline since February 2013. Overall, compared to a "PAYGO baseline," CBO's concept of current law but excluding savings from drawing down war spending, the BPF (including Step 4) would save $2.2 trillion over ten years and leave debt in about the same place as the original estimate.

Compared to CBO's estimate of the President's budget, the BPF would provide for more deficit reduction and put debt on a downward path as opposed to a slightly upward path. Despite having slightly more sequester relief and less revenue, the BPF saves much more in health care on net, while not having the other mandatory spending increases that the President's budget contains.

April 2, 2015

Rep. Mick Mulvaney (R-SC) wrote a commentary published in The Wall Street Journal on Monday in which he decried the recently-passed budgets in the House and Senate for their irresponsible approach to defense spending. The budgets use a gimmick to provide higher defense spending than allowed by the spending limits in the Budget Control Act without having to pay for it.

Mulvaney called for any increases in defense spending to be offset with spending cuts elsewhere. This principle of offsetting sequester relief with savings elsewhere in the budget has been followed by most sequester relief plans, whether in the President's Budget, the 2013 Ryan-Murray budget agreement, or the Senate amendments to this year's budget. If lawmakers are going to relax the sequester, they should replace it with other savings, preferably smarter savings that are more focused on long-term deficit reduction.

April 1, 2015

Update: Director Hall has written an introductory blog post.

Today marks not just April Fool's Day but also the end of Doug Elmendorf's six-plus year tenure as director of the Congressional Budget Office (CBO) and the beginning of Keith Hall's tenure. Hall was appointed at the end of February to be the ninth director in CBO's history after a long career in government and academia. Elmendorf's time as director saw CBO be a key player in several pieces of legislation - including the 2009 stimulus, the Affordable Care Act, and the Budget Control Act - and economic debates involving things like the health care slowdown, the post-recession labor market, and the minimum wage.

April 1, 2015

With the Murray-Ryan deal expiring at the end of September, the sequester will once again be a hot topic as lawmakers will be prompted to deal with the discretionary spending reductions it prescribes. Despite the House and Senate being controlled by the same party, their budgets take very different approaches to the sequester. The two budgets have large differences in the amount of defense and non-defense discretionary spending and slight differences in their approach to war spending. Although both only get a small portion of their deficit reduction from discretionary spending, the two budgets get there in different ways. In addition, the Senate budget provides a more realistic method for a future sequester relief deal, by establishing a deficit-neutral reserve fund for that purpose.

Both budgets abide by the sequester levels for non-war spending for FY 2016, although they would also effectively raise defense spending by creating a $38 billion slush fund in war spending so that their total defense requests equal the President's budget, which instead provides sequester relief through the normal channel, offset with other savings. After 2016, the budgets would remove the slush fund and make changes to the cap themselves.

 Changes in Discretionary Spending in the House and Senate Budgets (billions)
 Budget 2016 2017
2019 2020 2021
House NDD $0 -$44 -$63 -$71 -$79 -$84 -$92 -$100 -$108 -$117 -$759
Defense $0 +$38 +$50 +$49 +$47 +$45 +$43 +$41 +$38 +$36 +$387
Senate NDD $0 -$9 -$12 -$15 -$17 -$19 -$28 -$37 -$46 -$55 -$236
Defense $0 $0 $0 $0 $0 $0 -$14 -$14 -$14 -$14 -$56

March 31, 2015

Now that the Senate and House have passed their respective budget resolutions, a budget conference committee is right around the corner. One aspect of the competing resolutions that will have to be dealt with are provisions related to the budget process. Both budgets include provisions to address issues with the budget process that our Better Budget Process Initiative (BBPI) has identified. While we have previously written on both budgets' treatments of reconciliation instructions, below we’ll go further and highlight some of the other budget process provisions. 

The House

The House’s resolution embraces both the dynamic scoring rules put into place at the start of the 114th Congress as well as the rules prohibiting a general fund transfer from the Social Security Old Age and Survivors' Insurance (OASI) trust fund to the Disability Insurance (DI) trust fund that does not also improve overall solvency. In addition, the House’s budget scores general fund transfers to the Highway Trust Fund as new spending. This is significant given the impending insolvency of the Highway Trust Fund on May 31, one of the upcoming fiscal speed bumps.

We have advocated that the budget process should better focus on the long term. The House budget partially addresses this by including a long-term spending point of order.

The House budget also adds rules regarding so called fair-value estimates of government credit programs.  Specifically it provides for supplemental analysis from the Congressional Budget Office (CBO) at the request of the Chair or Ranking Member of the Budget Committee. Further, it allows the Chair of the Budget Committee to use this supplemental estimate as the official score for budget enforcement.

March 27, 2015
A Compilation of Doc Fix Offsets

We have spent much space on this blog highlighting the fact that temporary delays of the cuts dictated by Medicare's Sustainable Growth Rate (SGR) formula have almost always been offset (98% of the time since 2004), producing $165 billion in deficit reduction all told, almost entirely from health care programs.

And despite assertions to the contrary, these health savings shouldn’t be dismissed lightly. There have been numerous recommendations put forward by the Medicare Payment Advisory Commission (MedPAC), Health and Human Services' Office of the Inspector General (OIG), the Government Accountability Office (GAO), and others that likely would have been ignored but for the need to replace savings from the SGR.

MedPAC, for instance, has warned for years that Long-Term Care Hospitals (LTCHs) and Inpatient Rehabilitation Facilities (IRFs) are paid more than is necessary for many of the cases they handle. To offset the 10% cut dictated by the SGR in 2008, Congress adopted MedPAC recommendations to reduce payment updates for both IRFs and LTCHs, and also modified the prospective payment system for LTCHs. Then again in the 2013 “doc fix” bill, in line with recommendations under discussion by MedPAC at the time, Congress applied site-neutral payments for certain conditions treated in LTCHs.

The latest “doc fix” exemplifies this trend. The largest savings in the bill, from allowing the Department of Health and Human Services (HHS) to collect and use data on values of physician services to more accurately set Medicare payments, is a variant of a direct recommendation from MedPAC the last two years.

March 27, 2015

The bipartisan duo of Reps. John Delaney (D-MD) and Tom Cole (R-OK) have reprised a bill from last year to create a Social Security Commission. The bipartisan and bicameral commission would be required to come up with a plan to make Social Security solvent for 75 years.

The commission would involve 13 members, with 3 each appointed by the party leaders in the House and Senate and a Chair appointed by the President. It would have to report its recommendations within one year of its first meeting, and it would take 9 votes for the report to be sent to Congress. At that point, the legislation would get expedited consideration and an up-or-down vote in Congress.

Both Congressmen stressed the need to make changes to Social Security to avoid a large across-the-board cut in benefits when the program goes insolvent, currently projected to happen in 2033 according to the Social Security Trustees. Both also noted the need to move quickly, a smart move because the needed changes get larger the longer we wait.

March 26, 2015

The Senate is undergoing vote-a-rama, an annual event where the Senate considers hundreds of amendments before voting on the budget resolution. Of the dozens which are normally voted on, most are typically policy statements or messaging documents, rather than changes to the underlying numbers in the budget.

One of the few amendments that would actually lead to savings will be offered by Senator Mark Warner (D-VA). The amendment would restore $1.6 billion in funding on “program integrity” activities to reduce overpayments and fight fraud and abuse in Medicare, Medicaid, and disability programs. Program integrity funding is currently not included in either the House or Senate budgets, despite the fact that the Budget Control Act allows funding of up to $1.6 billion for these activities in FY 2016.

March 26, 2015

A big discussion has ensued in both the House and Senate about defense spending, and for the FY 2016 budget, that has meant how much to increase war spending (Overseas Contingency Operations) above the President's request which would effectively provide a defense slush fund. The original Senate budget had no slush fund at all, setting war spending at $58 billion and creating a point of order against exempting more than that amount from statutory spending caps that could only be overcome with 60 votes. However, an amendment in the committee markup increased war spending by $38 billion so that total defense plus war spending would match the President's budget, with the difference being that the President's budget provided $38 billion of sequester relief in 2016 and paid for it.

For background, the Budget Control Act established statutory caps on discretionary spending which have subsequently been reduced by sequestration, with any spending above the caps offset by an across-the-board cut in spending. For FY 2016, the limit on defense discretionary spending set by sequester is $523 billion, an increase of just $2 billion above the FY 2015 level. However, any spending designated as being for “Overseas Contingency Operations” is effectively exempt from those spending limits, creating temptation to use the OCO designation as a way to circumvent spending limits. The budget resolutions reported by the House and Senate legitimize this gimmick by setting defense spending levels that purport to comply with the spending limits under sequestration but blatantly create a slush fund by providing for substantially higher spending levels for OCO than the President requested.

The amendment offered in committee increased the amount of OCO spending in the Senate budget resolution, but it did not remove the point of order against the amount of spending that could be designated as OCO funding exempt from the statutory budget caps created by the Budget Control Act. This meant that an appropriations bill which used the $38 billion slush fund for "war spending" above the President's request could not exempt that extra spending from the BCA spending caps without 60 votes to get around the point of order. Otherwise, lawmakers would have to increase the normal defense spending caps by $38 billion and offset that spending or simply live within the current spending cap and $58 billion of war spending.

March 26, 2015

Despite official estimates tabbing the Medicare Sustainable Growth Rate (SGR) formula replacement bill at a cost of $141 billion this decade and implying it would add upwards of $500 billion to the debt over 20 years, lawmakers have taken to fuzzy math – or simply ignoring math altogether – in order to pretend that the bill is fiscally responsible.

Needless to say, applying that label requires some generous assumptions. Take, for example, a press release from the House Energy and Commerce Committee, which deserves a point-by-point refutation:

March 26, 2015

The Congressional Progressive Caucus (CPC) threw their hat into the budget ring last week with the release of their “People’s Budget”. This is the fifth time the CPC has released an alternative to the official House budget. The progressive budget offers a more liberal alternative than that proposed by either party or the President.

The CPC's budget proposes both higher taxes and greater spending in most areas. The budget calls for $7.4 trillion of savings via revenue and spending changes and $5.1 trillion in investments over ten years, resulting in $2.3 trillion of deficit reduction over the next decade, including interest savings. This deficit reduction would be sufficient to put debt on a downward path from 74 percent of GDP today to 66 percent of GDP in 2025. By contrast, CBO estimated that debt under the President's budget would be 73 percent, or about where it is today.

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