The Bottom Line
In light of our nation’s fiscal challenges, the National Coalition on Health Care (NCHC) has put together a report of policy options to address the long-term challenge posed by rising health care costs. The policy package, released yesterday, proposes 50 recommendations to reduce federal health care spending in the ten-year federal budget window, while building a sustainable and affordable health care system in the long-term. Some of the recommendations also overlap with some of the major fiscal plans in the discussion.
NCHC estimates these recommendations could save roughly $500 billion over the next ten years. This estimate includes only those recommendations that had existing scores by CBO, or, in a few instances, by MedPAC or another organization. Almost half ($221 billion) of the identified savings comes from reductions in federal spending by expanding current policies or enacting new delivery system reforms. The remaining half ($276 billion) of the savings comes from revenue raisers such as a tax on sweetened beverages and raising taxes on tobacco and alcohol. Several of their recommendations not included in the $500 billion estimate have unknown savings, are budget-neutral, or may require modest budgetary increases.
|Savings from NCHC's Recommendations (billions)|
|Implement "Centers of Excellence" for Certain Surgical Services||$0.45|
|Equalize Payments for Outpatient and Physician Office Services||$19|
|Reform Medicare Post-Acute and Home Health Payments||$37|
|Strengthen Penalties for Potentially Avoidable Acute Care Complications and Readmissions||$52|
|Implement a Value-Based Withhold for Medicare Providers to Backstop Unscoreable Reforms||$64|
|Use Competitive Bidding for Durable Medical Equipment||$9.8|
|Remove Barriers to Competition for Generic Drugs||$24.3|
|Double Increase in Health Care Fraud and Abuse Control Funding||$3.7|
|Subtotal, Spending Savings||$221|
|Equalize and Increase Tobacco Taxes||$88|
|Impose Penny-Per-Ounce Tax on Sweetened Beverages||$130|
|Equalize Alcohol Taxes and Index for Inflation||$58|
|Subtotal, Revenue Increases||$276|
Among the recommendations, NCHC highlights four "game-changers" that have significant potential to dramatically alter delivery of care and reduce costs in both the federal and private sectors. These include:
- Permanent repeal of the Sustained Growth Rate (SGR) formula -- the so-called "doc-fix" -- and a transition from Medicare fee-for-service system to a value-based payment system
- Value-based insurance design and quality-based tiering of providers
- Investment in training a full range of health professionals needed for team-based primary care
- Medical liability reforms such as disclose and offer, evidence-based safe harbors, and health courts
As we've mentioned before, part of the fiscal cliff includes steep cuts to Medicare physician payments. As a result, reforms to how we pay providers and improve delivery of care will play an important role in the weeks and months ahead. However, many delivery system reforms such as episodic bundled payments, care coordination, and value-based payments have faced hurdles in demonstrating to scorekeepers and policymakers that they can yield significant savings. In a report earlier this year, CBO found similar demonstrations currently in place have struggled to overcome the incentives inherent in today's fee-for-service payment system which reward quantity over quality. CBO's findings suggest considerable changes to payment and delivery are needed to result in any substantial savings.
One of NCHC's options that addresses this challenge is a recommendation to implement a value-based withhold to fee-for-service Medicare. Under a withhold, a percentage of provider payments would be withheld and given to providers only if savings and quality targets are met. If the savings targets are not achieved, Medicare would keep the withheld amount. This reform would have a five-year window for Medicare to achieve specified savings; if it doesn’t, then the percentage withhold would be applied to provider payments to make up the difference. Thus, the withhold can enforce savings from other delivery reforms which CBO may not otherwise score as countable. Although it is not the only approach on the table, a value-based withhold could be part of a comprehensive deal to generate real federal health savings.
Overall, NCHC’s recommendations exemplify the kind of innovative and transformative options policymakers should be considering. We’ve laid out other health care options in the past, some of which overlap and/or can be paired in numerous ways with NCHC’s recommendations. Some of their options have been used in other deficit reduction plans such as the soda tax, bundled payments, reductions in post-acute and home health care payments (see who they overlap with here). As Congress works on this issue in the weeks and months ahead, there is no shortage of options to put federal health spending on a sustainable path.
CBO has released two new reports that detail our short run problem of the fiscal cliff and the long term challenge of reducing the debt. Reading the reports together gives a good idea of the challenges lawmakers face as they work to replace the fiscal cliff with a "grand bargain."
CBO's economic analysis of the fiscal cliff is revealing because it is the first time CBO has published its multipliers specifically for the fiscal cliff policies. All together, the sudden and untargeted fiscal contraction is projected to send the economy into another recession, but individual fiscal policies have different effects.
CBO projects the economy would shrink by 0.5 percent in 2013 if we go off the fiscal cliff and 3 percent in the first two quarters. Among the various fiscal cliff policies, the sequester is particularly damaging. It has the highest fiscal multiplier and thus a greater impact on the economy relative to the amount it reduces the deficit. Overall, CBO shows that averting the fiscal cliff as a whole does not have a high multiplier, but the sheer size of the cliff means it would have a large effect on the economy.
Of course, simply repealing the policies of the fiscal cliff would send a strong signal to the markets and the public that we are unwilling or unable to to deal with our unsustainable debt. As we have mentioned before, it is important that policymakers "go smart" with deficit reduction, and rely on larger spending cuts and tax increases further down the road when the the economy is recovering.
CBO's Options for Deficit Reduction report shows how some of its March 2011 Spending and Revenue Options could fit together in a budget package by showing their effects in 2020. CBO lays out three different goals that could be achieved: balancing the budget, stabilizing the debt, and a middle option that would put debt on a downward path like the approach we advocate (although not quite reaching balance in the medium term). In order to put debt on a downward path, policymakers would have to generate $750 billion in deficit reduction to current policy in 2020, which may be done using a combination of changes to mandatory spending, discretionary spending, and revenues. The table below shows the health care and Social Security options CBO presents.
CBO emphasizes that policymakers should look at both the short run and long run impact of a fiscal consolidation plan. The budget is projected to look very different in 2020 than it does today, with health care spending the greatest driver of future spending growth. Along with tax reform, which is one of the best ways to reduce the deficit without disrupting the economy, there is a strong case for a comprehensive plan to address the debt.
Together, both reports provide a good overview of the challenge we face in the months ahead. Going over the fiscal cliff would reduce the deficit, but at the cost of unnecessary pain that we can avoid. A comprehensive plan can resolve the long-term problem while minimizing the impact on a recovering economy. We hope the recent statements from lawmakers in Washington are signs that Congress and the President are willing to work together toward this kind of deal.
Yesterday, the AARP published a report and sent an accompanying letter to members of Congress and President Obama in opposition to switching to the chained CPI for calculating cost-of-living adjustments (COLAs) for Social Security. In the letter, the AARP argues that the chained CPI is not an accurate or appropriate COLA calculation for Social Security and suggests that its effects are regressive -- including the tax portion. These points are simply not true.
We have written extensively on the chained CPI, including a full paper on the subject last May. As we have explained, economists of all stripes believe the chained CPI is the most accurate measure of inflation, as it is unbiased for consumer substitution between goods when relative prices change (for example, between apples and oranges). The AARP advocates going in the other direction by switching to the CPI-E (Experimental CPI for the Elderly). However, the CPI-E suffers from serious methodological flaws, including that it is only a sub-index, it has a small sample size, it doesn't account for certain elderly consumption patterns (use of catalogues, senior discounts, etc.), and it suffers from the same substitution bias as the unchained CPIs. Partly because of these concerns, CBO concluded that "it is unclear, however, whether the cost of living actually grows at a faster rate for the elderly than for younger people."
AARP also criticizes the chained CPI for being harder on older beneficiaries as the lower COLAs compound. It is true that the effect of the chained CPI grows as beneficiaries age, but this can be addressed in the context of Social Security reform -- for example, by bumping up benefits for those have been in the programs for 20 years, as the Domenici-Rivlin and Simpson-Bowles plans do.
AARP's claim that the tax impact would be regressive is also false, as we've pointed out before. The JCT study used in justifying the claim is based on percent change in tax burden rather than percent change in income as well as current law rather than current policy -- making the study virtually irrelevant for measuring the distributional impact. When one corrects those issues, as Tax Policy Center did, the distributional result is roughly even by income group.
Source: Tax Policy Center
At the end of the day, switching to the chained CPI would save more $200 billion over ten years through a combination of spending reductions and revenue increases while closing one-fifth of Social Security's funding shortfall. Being able to save that amount of money from a technical change that most experts believe should be happening anyway should be a no-brainer. Though groups from the left and right may criticize it, we hope policymakers can look past this and do the right thing.
As the President and leaders of Congress begin to look for a compromise to replace the fiscal cliff, the next step is to decide what a compromise would look like. Fiscal Commisson co-chair and Fix the Debt co-founder Erskine Bowles writes that lawmakers do not have to reinvent the wheel to find models for bipartisian alternatives:
What does that alternative look like? We already have the blueprints.
It’s the type of bipartisan package toward which the fiscal commission I co-chaired with former senator Alan Simpson, the Domenici-Rivlin group, the Senate’s “Gang of Six” and the Obama-Boehner negotiations all worked. It’s a package large enough to put the debt on a clear downward path, relative to the economy, and designed well enough to promote, rather than disrupt, economic growth. It’s a package that includes real spending cuts and structural entitlement reforms to make Social Security solvent while slowing the growth of federal health spending while protecting vulnerable populations. And it’s a package that institutes fundamental tax reform that simplifies the code and encourages economic growth by cutting spending in the tax code to reduce rates and generate additional revenue for deficit reduction.
Most important, it’s a package that can get bipartisan agreement. I was very encouraged by House Speaker John Boehner’s remarks Wednesday indicating his willingness to support increased revenue from tax reform if it were accompanied by meaningful entitlement reform. Based on my conversations with President Obama, I am confident that he is willing to do his part to put our fiscal house in order and would support a comprehensive plan based on the general framework the fiscal commission put forward. While there will undoubtedly be many honest disagreements about the specific elements of a plan, I believe that both leaders are willing to make the type of principled compromise necessary to reach an agreement.
Though we won’t be able to enact the entire plan in the few legislative weeks before year’s end, policymakers could agree in the lame-duck session on the basic framework of the deal. Congress could enact a “down payment” of savings from spending and revenue policies, along with a process for achieving the remaining savings by July 4, with enforcement mechanisms to ensure that the promised savings are achieved. Designed appropriately, such a package would be credible enough to allow for a temporary delay of the scheduled sequestration policies and extension of expiring tax cuts.
We know what needs to be enacted in the lame duck, and many people from across the country have said as much.
I am confident that the president and Congress can agree to such a plan. Nearly three years’ worth of work has gone into developing the policies and raising awareness on the need for a comprehensive plan. Members of both parties and both houses understand this. So do concerned citizens across the country — 300,000 of whom have signed a petition at FixTheDebt.org, demanding that Washington act.
The only ingredient missing is political will. Betting the country in the hopes of generating that political will is not the answer. Coming together for the greater good is.
The full piece can be found here.
"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.
Former Oklahoma 1st District Congressman and CRFB Board Member Jim Jones penned an op-ed in today's Tulsa World calling for policymakers to put everything on the table for a plan to replace the fiscal cliff. Many members of Congress have just come off tough races, but as we saw yesterday the leadership in both chambers appears to be looking for a compromise. Jones believes that compromise is both needed and possible given the tremendous fiscal challenges faced by our country.
For almost a decade and a half, I was honored to serve the great people of northeastern Oklahoma in Congress. Today, a centrist Democrat in Congress may be about as rare as a polar bear in northeastern Oklahoma, but through my experience as a fiscally-conservative Democrat on the Ways and Means and Budget Committees, I was able to see how much agreement there was between the two parties, and how deals can be struck when there's a common interest. Even in today's climate of hyper-polarization, this remains true, and even for this era's most important issue: the national debt.
Having hit $16 trillion with no signs of slowing, the national debt promises to eat away at your favorite government policy, regardless of your party or politics.
Whether you prefer to maintain spending levels on, say, transportation programs or scientific research, or you're more interested in keeping taxes low, your preferred policy is about to be swallowed up by what we need to pay to service our debt. Unless we act now.
And now really is the time to act. With the "fiscal cliff" - the club-footed combination of tax hikes and spending cuts, $500 billion in 2013 alone - looming come Jan. 1, our political leaders have been given a firm deadline to get something done.
It will not be easy though, Jones explains that the only way to solve this problem is by putting everything on the table.
Any deal worth the paper it's printed on must make sure to treat nothing as sacrosanct. Any promise made to keep a constituency's favored spending program or tax break is short-term thinking; unless we put everything on the table, we will never come close to plugging the hole we're in.
I've seen much agreement across party lines when it comes to fiscal issues. And I am optimistic that, even in this age of political polarization, that we'll be able to do so again.
The full piece can be found here.
"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.
Not long after Fitch sounded the alarm bells for the urgent need of a comprehensive debt deal, Senate Majority Leader Harry Reid (D-NV), House Speaker John Boehner (R-OH), Senate Minority Leader Mitch McConnell (R-KY), and House Ways and Means Committee chairman Dave Camp (R-MI) have indicated their willingness to work with both sides of the aisle in finding common ground to avoid the fiscal cliff. This is encouraging, given that both parties are coming off of a tough fought election.
Speaker Boehner identified replacing the fiscal cliff with a comprehensive debt deal as a serious matter that needs congressional action. He seemed to indicate his party was open to additional revenues as long as it was accompanied by serious entitlement reforms and fundamental tax reform.
Republicans have signaled a willingness to accept new revenue if it comes from growth and reform. Let's start the discussion there. I'm not suggesting we compromise on our principles. But I am suggesting we commit ourselves to creating an atmosphere where we can see common ground when it exists, and seize it....
There is an alternative to going over the fiscal cliff, in whole or in part. It involves making real changes to the financial structure of entitlement programs, and reforming our tax code to curb special-interest loopholes and deductions. By working together and creating a fairer, simpler, cleaner tax code, we can give our country a stronger, healthier economy. A stronger economy means more revenue, which is what the president seeks.
Senate Majority Leader Reid is also focused on the upcoming fiscal cliff and resolving our deficit problem. Reid believes a deal is possible in the next year and does not want to delay action any longer.
I’m not for kicking the can down the road. I think we’ve done that far too much. We know what the issue is; we need to solve the issue. Waiting for a month, six weeks, six months–that’s not going to solve the problem.
I think that we should just roll up our sleeves and get it done.
Both Leader McConnell and Chairman Camp echoed those thoughts. McConnell said that work on the fiscal cliff "begins by proposing a way for both parties to work together in avoiding the ‘fiscal cliff’ without harming a weak and fragile economy, and when that is behind us work with us to reform the tax code and our broken entitlement system." On tax reform, Camp said "I believe the House and Senate are prepared to act next year on reform and that not only means a fairer tax code and more jobs, but also more revenue to help solve our nation’s debt and deficit problems."
These leaders recognize that the outcome of the election means that both parties will have to work together -- nothing will get done otherwise. The willingness to come together and the apparent willingness to consider a wide array of options looks very encouraging for an attempt to steer around the cliff and to also address the debt. Speaker Boehner also discussed having a "downpayment" on deficit reduction to be a catalyst for the bigger pieces being enacted in 2013. Given the amount of time left, that may be the way a deal may have to go, but it is encouraging to hear the Speaker thinking about a comprehensive plan.
The leaders of both houses have set the tone for reaching a bipartisan and comprehensive fiscal plan. There's a bunch of work left to do, but given how soon these statements came after the election, the shift toward compromise is very encouraging.
Click here to read the Campaign to Fix the Debt's statement on the post-election action.
Video of Speaker Boehner's remarks
Video of Majority Leader Reid's remarks
First off, CRFB would like to congratulate President Obama and all of those who were elected and re-elected to the Senate and the House. CRFB is looking forward to continue working with policymakers from both sides of the aisle to help make deficit reduction a reality.
While the campaigns may be over, there's no time to waste in transitioning into governing mode. Lawmakers have a ton on their plate over the cmoing months and an incredible opportunity to make meaningful progress on controlling federal debt this decade and beyond. The lame duck session is going to be a busy and critical time of negotiations as we work to avoid the fiscal cliff and a mountain of debt. There will be plenty of work to do.
To get a sense of how big the fiscal cliff really is, here are all of its components:
- 2001/2003/2010 Tax Cuts: The 2010 tax cut will expire at the end of the year, taking with it many provisions originally enacted in 2001 and 2003. This will mean rate increases for earned income, capital gains and dividends, and large estates; reductions in refundable tax credits; the return of phaseouts of personal exemptions and itemized deductions for higher-income taxpayers; the elimination of reductions in marriage penalties; and reductions in education tax benefits. Extending these provisions permanently would cost $2.7 trillion over ten years.
- AMT Patch: The Alternative Minimum Tax is a tax intended to ensure that higher-income taxpayers pay at least a minimum amount of tax. However, the exemption from the AMT is not indexed for inflation, so Congress does so manually every so often to ensure the tax does not ensnare millions more taxpayers. The most recent patch expired in 2011, meaning that Congress would have to retroactively patch it for 2012. If the AMT is not patched, it would hit 30 million taxpayers, as opposed to the current four million who are affected. Permanently patching the AMT would cost about $860 billion by itself, but almost $1.8 trillion if the 2001/2003/2010 tax cuts are extended.
- Sequester: The sequester, enacted in August 2011 in the Budget Control Act, would make a 9.4 percent across-the-board cut to defense spending and a roughly 8 percent cut to non-defense spending on January 2. Neither party wants the sequester to go off then, but there are differences about how to pay for a delay and whether to keep some of the savings for the later years. The House Republican budget, for example, re-assigned the defense cuts to non-defense discretionary spending, keeping the total savings about the same (other than repealing the 2013 cuts). By contrast, the President's budget repealed the sequester entirely. Full repeal would cost about $970 billion over ten years.
- Payroll Tax Cut and Unemployment Insurance: The payroll tax cut was originally passed in the 2010 tax cut, reducing the employee tax rate by 2 percentage points. It was extended through the end of this year in February. There was initially little interest in extending it for 2013, but recently Democrats have started to jump on the bandwagon again. The White House reportedly has interest in bringing back the Making Work Pay tax credit, which the payroll tax cut replaced. Extended unemployment benefits will also expire at the end of the year, at which time the maximum number of weeks a person could collect benefits would fall from 73 weeks to 26 weeks. There has been less discussion about what will happen to UI benefits, but it will certainly be on the table in December, given the continued high unemployment rate.
- Doc Fix: Due to the Sustainable Growth Rate (SGR) formula, which was intended as a backstop to limit Medicare spending growth, Medicare physician payments will be cut by 27 percent at the end of the year. Congress has rolled back the SGR every few years since 2003, usually freezing physician payments but leaving a cliff in place for future years. Permanently repealing the SGR and freezing physician payments would cost $245 billion over ten years. There are also a number of small "health extenders," temporary provisions related to Medicare and Medicaid that are typically extended along with the doc fixes.
- Tax Extenders: Tax extenders are temporary provisions of the tax code that are routinely extended. Many of these extenders are business tax breaks, like the R&E tax credit, but there are also some individual tax breaks for things like education expenses and state and local sales taxes. Like with the AMT patch, the most recent extension ended in 2011, so a retroactive extension in 2012 would need to take place. So far, the Senate Finance Committee has passed a two-year extension (extension through 2013) of most of the extenders, but otherwise there has been little action. We'd expect that there will be by the end of the year. Extending all of the extenders permanently would cost $890 billion over ten years.
There are also many other fiscal-related issues that will come up in the lame duck session and into next year. They are:
- Debt Ceiling: The Treasury Department recently stated that the U.S. may breach the debt ceiling by the end of this year, although it will be before early 2013 before there is serious danger. As they did previously, Treasury will use "extraordinary measures" to create extra space under the ceiling. House Speaker John Boehner (R-OH) has reiterated his position from last year that any increase in the debt ceiling must be accompanied by an equal or greater amount of spending cuts. If all goes well, an increase in the debt ceiling would be rolled into a deal that responsibly replaces the fiscal cliff.
- Appropriations: In September, Congress passed a continuing resolution to fund the government through March 27. This setup is somewhat parallel to what happened in the spring of 2011, when there nearly was a government shutdown. Although the partisan make-up of Congress and the Presidency (is the same?), it does not seem likely that there will be another showdown. There may be a dispute over riders, however, which has been commonplace in the past few years.
- Farm Bill: The 2008 farm bill lapsed on September 30 with no Congressional action on either that or a discussed drought relief bill. Although the Senate passed a farm bill in June, the House did not take one up. The expiration means that we now revert to the 1949 law, the last time a permanent bill was passed. For now, the expiration means that certain conservation and other programs will no longer take new enrollees. In terms of commodity programs, the expiration will affect dairy products on January 1 and other crops sometime during the 2013 crop season, at which point commodity payments would soar and the target prices for many crops would be well above the market price.
|Cost of Various Provisions (billions)|
|2001/2003/2010 Tax Cut Extension||$2,736|
|Jobs Measures One-Year Extension||~$150|
|Tax Extenders Extension||$890|
|Debt Ceiling Increase||$0|
|Appropriations Bills Completion||$0|
|Farm Bill Completion^||-$23 to -$35|
*Includes interaction with 2001/2003/2010 tax cuts
^CBO has scored the leading House and Senate-passed farm bills as saving $35 billion and $23 billion, respectively, relative to CBO's baseline. CBO has estimated that these bills would authorize slightly less than $1 trillion of spending over ten years.
There are also, of course, many non-budget related items that Congress is also looking to deal with, so they have their work cut out for them to say the least. In these last couple of months, politics has dominated. But now it's time to govern and focus on policy. We hope lawmakers will use this election to give the country a comprehensive debt deal.
While last night election is still many people's mind, the rating agency Fitch reminds us of the tremendous stakes of these next couple of months. In a statement, Fitch warned that without a comprehensive deal, the U.S. could lose its 'AAA' rating, just as it did last year from S&P.
The economic policy challenge facing the President is to put in place a credible deficit-reduction plan necessary to underpin economic recovery and confidence in the full faith and credit of the US. Resolution of these fiscal policy choices would likely result in the US retaining its ‘AAA’ status from Fitch. As reflected in the Negative Outlook on the rating, failure to avoid the fiscal cliff and raise the debt ceiling in a timely manner as well as securing agreement on credible deficit reduction would likely result in a rating downgrade in 2013.
No doubt, those who have just been relected or elected for the first time have their own policy agendas that they would like to see through. But as Fitch reiterates, there will be no greater issue in the next year than the decisions we must make on fiscal policy.
Avoiding the fiscal cliff and a timely increase in the debt ceiling would support the economic recovery and send a positive signal that agreement can be reached on a credible plan to reduce the federal budget deficit and stabilise federal debt over the medium term, consistent with the US retaining its ‘AAA’ status. Conversely, failure to reach even a temporary arrangement to prevent the full range of tax increases and spending cuts implied by the fiscal cliff and a repeat of the August 2011 debt ceiling episode would mean that the general election had not resolved the political gridlock in Washington and likely result in a sovereign rating downgrade by Fitch.
From an economic and sovereign credit perspective, the most important policy priority for the President and Congress is reaching agreement on a deficit reduction plan backed by clear targets and specific tax and spending measures that would firmly place US public finances on a sustainable path over the medium to long term. In Fitch’s opinion, such a plan would significantly reduce the uncertainty that currently characterises federal tax and spending policies and underpin a sustainable economic recovery and confidence in the full faith and credit of the federal government.
Fitch has previously indicated that it could downgrade the U.S. if it does not address its fiscal situation, but so far we have not made any progress. We may already see Congress begin to focus its attention on the cliff, with the House Speaker, John Boehner (R-OH), set to hold a press conference in a few hours to possibly enumerate on ways to avoid a fiscal cliff. Hopefully, we can count on our politicians to resolve this pressing issue in a timely, efficient, and bipartisan manner.
Click here to read the statement.
The Urban Institute's Eugene Steuerle and Caleb Quakenbush have updated their estimates calculating lifetime Social Security and Medicare benefits and taxes. In order to compare contributions to benefits received, they assume that the contributions have a rate of return (discount rate) of inflation plus two percent. We previously presented inflation-adjusted numbers based on the older estimates.
Their new estimates show the same story as the old: Social Security and Medicare benefits exceed taxes for past, present, and future age groups. In reality, though, this difference is more about Medicare benefits and taxes.
For Social Security, lifetime taxes largely compensate benefits on average--with the exception of middle-income one-earner couples--for recent retirees with that trend projected to continue into future years. For Medicare however, benefits exceed taxes by a factor between 2.5 and 4 for the recently retired. This discrepancy is due to the fact that only Part A of Medicare is financed with a dedicated tax. Parts B and D, on the other hand, finance only 25 percent of their program costs (net of cost-sharing) from premiums, while the other 75 percent comes from general revenue.
Source: Urban Institute
Steuerle's and Quakenbush's estimates should dispel the myth that benefits, particularly in Medicare, are paid for and that we can avoid entitlement reform. With health care costs projected to keep rising and population aging, policymakers are going to have to look to make changes to the Medicare program, as this problem is not going away.
Decision Time – Election Day is tomorrow and the stakes are high. Not only is control of the White House and Congress at stake, but the election will also have repercussions for the federal budget and national debt. Although it will be the current group of policymakers that will address the fiscal cliff (or not) in a post-election lame duck session of Congress, the results of the voting will no doubt play a role in the deliberations, which could very likely spill into next year. Will our leaders pull the lever on a solution or will they elect to kick the can down the road again?
Down to the Wire – As the candidates eye the finish line, the bottom lines of their fiscal plans are getting more scrutiny. The Concord Coalition looked at the Obama and Romney budget proposals and called for more specifics. Wonkblog gives you the opportunity to fill in the blanks for both the Romney and Obama tax plans. And check out this video from Fix the Debt on the election debt discourse. The candidates have not been keen to detail how they would address the debt, but whoever sits in the Oval Office next year will quickly learn that the debt is getting in between all of their priorities.
Fiscal Cliff as Dark Horse – The looming fiscal cliff has been a dark horse in this campaign as it has been rarely discussed but always looming in the background. However, it will take center stage immediately after the votes are counted as Congress will attempt to address it before the year-end deadline, though House Speaker John Boehner (R-OH) says that the best scenario is a “bridge” over the cliff -- a temporary fix that delays the cliff until next year. The Financial Services Roundtable proposed a two-pronged “bridge” approach in an open letter last week. If policymakers push back the fiscal cliff, they should provide a down payment and credible approach for fully resolving the cliff in the first half of 2013. Leaders in Washington are learning that the cliff is not just a national problem, as more countries are expressing concern that it will impact the global economy.
Debt Ceiling May Be Fiscal Cliff’s Running Mate – The fiscal cliff will have a partner as the Treasury Department confirmed that the statutory debt ceiling will also be reached at the end of the year, though "extraordinary measures" can be taken to put off the need for a debt limit increase until early 2013. You can follow debt ceiling developments here.
Tax Reform Throws Hat Into the Ring – Lots of groups are making the case for tax reform in 2013, and lines are being drawn on Capitol Hill. Fundamental tax reform will be key to a comprehensive debt reduction plan. While tax reform won’t be easy, there is general agreement that reform should contribute to reducing the debt. The Business Roundtable is also pushing for corporate tax reform to be a part of the equation. To get an idea of how corporate tax reform can be accomplished, try out our corporate tax reform calculator.
Sandy Gets on the Ballot – Superstorm Sandy is gone, but its devastating effects still linger. As millions of people slowly recover, lawmakers are considering a supplemental appropriations bill to fund the cleanup and recovery efforts. Last week, we blogged that preparing for disasters should also include being fiscally prepared so that we can deal with such catastrophes without busting the budget.
Key Upcoming Dates (all times are ET)
- Election Day
- House and Senate due to convene for lame duck session
- Consumer Price Index for October released
- Second estimate of Third Quarter GDP figures released
- Unemployment statistics for the month of November released
- Consumer Price Index for November released
- Third estimate of Third Quarter GDP figures released
January 1, 2013
- The “fiscal cliff” occurs, including the expiration of the 2001/2003/2010 tax cuts and across the board spending cuts the following day
Richard Kogan at the Center for Budget and Policy Priorities has released a new report that argues that it may be a better goal for an upcoming budget deal to stabilize the debt as a share of the economy, rather than "Going Big" and coming up with a deal that will put the debt-to-GDP ratio on a downward path. Kogan agrees that a rising level of debt is a threat to the economy, but argues that stabilizing the debt, even at its current high levels, should be our current goal. As he says:
Nevertheless, by stabilizing the debt for the next decade, an additional $2 trillion in savings would give experts and policymakers time to figure out how to slow the growth of health care costs throughout the U.S. health care system without impairing the quality of care. An additional $4 trillion of deficit reduction over the next decade would, in contrast, result in a declining debt ratio (as Figure 1 shows) but would require policymakers to make decisions today on policies, particularly in health care, where desired solutions remain elusive.
There are major unknowns in the health arena. Health care cost growth has slowed appreciably over the past two years. Experts don’t yet know whether this slowdown is permanent or only temporary, and the answer will affect both the magnitude of the long-term fiscal problem and the extent to which further slowing of health-care cost growth is required.
More fundamentally, we currently lack needed information on how to slow health cost growth without reducing health care quality or impeding access to needed care. Demonstration projects and other experiments to find ways to do so are now starting, some of them government-funded and others being undertaken in the private sector. By later in the decade, we should have substantially more knowledge of what works and what doesn’t.
There's no doubt that stabilizing the debt should be the first step over the next few years, but stopping there would not be ideal. There are a number of reasons why "going big" would be preferable to "going medium":
- Economic Projections: The largest uncertainty in budget projections is always in the economic projections, and there is a good chance that we could be overestimating economic performance. For example, CBO does not attempt to predict when a recession will occur, so it projects steady economic growth over the next ten years. It is quite possible that there would be a recession by 2022; otherwise, we would be in the middle of the longest expansion in U.S. history by far. In general, CBO has been revising downward its economic projections in recent years, which could cause a much worse fiscal outlook as we have seen in the past decade. If the debt path was only stable, it would take only a slight downward revision to throw it off track.
- Budget Projections: It's very possible, indeed likely, that CBO will be wrong about certain projections in the budget. It is difficult to predict with great certainty the budget outlook for the next few years, let alone the next decade. CBO may find that they are underestimating the growth rate of health care spending, the number of people receiving benefits in a variety of programs, or the share of compensation going to taxable income is lower than they anticipated. Obviously, they could be doing the opposite as well, but prudent budgeting is wiser, especially in the current fiscal environment. If we were only to stabilize the debt, an unexpected surprise in CBO's projections would push debt unequivocally back up.
- Breathing Room: It is important to keep the budget flexible. We could have an unanticipated emergency such as a natural disaster or recession that presents a drain on the budget. In these cases, it would be wise to do what was necessary to combat the challenge, but a stabilized debt path would quickly turn upward, perhaps to dangerous levels. Putting debt on a clear downward path would provide space for lawmakers to overcome unforeseen emergencies without risking our fiscal standing. Merely stabilizing the debt at a high level may leave little margin for error.
- The Politics of Going Big: This is a point we have made frequently. Doing a medium-sized plan would take most, if not all, the low-hanging fruit off the table and may still require another bite at the apple if things go wrong. Then, the only solutions left would be painful policies that would be politically difficult to enact by themselves. Going big can make a plan more successful by allowing both palatable and unpalatable policies to be enacted together in a package that is much easier to swallow as a whole.
On the topic of health care cost containment, it is difficult and we do expect health care reform to be a work in progress as this decade goes on. But just because we may learn new ways to control health care costs in the upcoming years does not mean we should hesitate in putting policies in place that we believe could be successful in reducing health care spending. We have discussed some of these ideas (see here, here, and here) in the past. These may not be fundamental reforms to the way health care is delivered and financed, but they would certainly help.
Stabilizing the debt is a useful benchmark for early negotiations, but ultimately a deal needs to go beyond that. Deficit reduction is hard, and the opportunity for both Democrats and Republicans to come together on this issue might not always be there. Lawmakers have a real opportunity to act on fixing the budget as a result of the approaching fiscal cliff. We urge policymakers to "Go Big" in their approach.
The Hill reports that some lawmakers are supporting a supplemental bill to deal with the aftermath of Hurricane Sandy. Rep. Chaka Fattah (D-PA) recently introduced a $12 billion supplemental that would mostly go to the Federal Emergency Management Agency (FEMA), and a supplemental has the support of the Senate Appropriations Homeland Security Subcommittee chair Mary Landrieu (D-LA).
The clean up and restoration after Sandy will clearly take an enormous amount of effort and resources, both from state and local government, the federal government, and the private sector. If or when lawmakers enact supplemental emergency appropriations for recovery and reconstruction efforts, they should also be willing to offset those costs over a reasonable period, as CRFB has said in the past.
Budgeting is all about priorities, and it should not be difficult to find $12 billion that can be found to pay for the emergency supplemental. For example, we compiled a table full of policies that have been endorsed by multiple fiscal plans and by members of both parties. There are plenty of savings options to choose from if lawmakers want to be fiscally responsible.
On Wednesday the Tax Relief Coalition, a group made up of notable business councils including the U.S. Chamber of Commerce, National Associations of Independent Business and the National Association of Manufacturers, released a letter urging replace the fiscal cliff with a comprehensive deficit reduction plan using both tax reform and entitlement reform.
The looming fiscal cliff is growing closer and threatening and our economic recovery, so it is good to see more CEOs and business leaders call for action to replace the cliff. The Tax Relief Coalition writes:
TRC welcomes the recent action of corporate CEOs calling for action to avoid the looming fiscal cliff. We firmly believe that reforms of our tax code and entitlement systems is necessary to get our country back on a path to fiscal sanity.
They also called for a bipartisan debt reduction plan earlier this year in a letter to members of Congress:
TRC members believe that a credible bipartisan plan for long-term deficit reduction and economic growth would produce the immediate benefits of reducing uncertainty and improving financial stability and set the stage for long-term deficit reduction through comprehensive tax and entitlement reform.
The Tax Relief Coalition is worried about the increase in marginal rates that come with the fiscal cliff, arguing that it would be especially harmful for the millions of businesses that are organized as pass-through businesses and taxed through the individual code. Base-broadening, rate reducing tax reform could both raise more revenue and reduce tax rates, spurring more growth. Entitlement reform also needs to be included in the conversation, with health care spending as the greatest future driver of our unsustainable debt.
This is very much in line with what the Fix the Debt campaign argues; everything needs to be on the table with both revenue increases and spending cuts. Specifically, the campaign lists in its core principles that a plan should include reforming Medicare and Medicaid, strengthening the Social Security program by giving it solvency, and engaging in comprehensive and pro-growth tax reform that raises more revenue while broadening the base and lowering rates. If we are willing to put everything on the table, we can stabilize the debt and put it on a downward path without instituting the drastic spending cuts and tax increases in the fiscal cliff.
It's good to see both business leaders and citizens actively engaged in the current debate about the budget. We can replace the fiscal cliff with a plan that addresses all parts of the budget, but we are going to have to make the tough choices. With the stakes so high, everyone needs to be involved.
David Wessel, economics editor for The Wall Street Journal, has produced a fiscal cliff primer video. Wessel covers everything from why the cliff exists, what our current debt dilemma is, and where we could go next. It's a great introduction to the fiscal cliff and the current budget debate.
You should especially check it out if you enjoy some great whiteboard animation (we're fans.) If you want to learn more, check out our fiscal cliff paper.
Yesterday in a blog post, IMF's Fiscal Affairs Director Carlo Cottarelli stressed the need for fiscal transparency on the part of governments around the world in attaining a comprehensive debt-deal. By fiscal transparency, Cottarelli means the necessity for governments to make fiscal information accurate and readily available. By doing this, governments are able to set reasonable parameters for making "good budget decisions," while at the same time, citizens become well-informed and are able to hold their governments liable for those decisions. Cottarelli writes:
Without good fiscal information, governments can’t understand the fiscal risks they face or make good budget decisions. And unless that information is made public, citizens and their legislatures can’t hold governments accountable for those decisions.
Fiscal transparency—the public availability of timely, reliable, and relevant data on the past, present, and future state of the public finances—is thus to the foundation of effective fiscal management.
But how fiscally transparent have governments been? Citing a paper from the IMF, Cottarelli attempts to assess the gains governments have made, noting that there have been some improvements. In the same vein, he sets out ground rules governments must adhere to. Over the past few years, standards for reporting fiscal data have been enhanced significantly with the number of countries able to report data rising by over 50%. Many have also improved the timeliness of their reporting.
Of course, in the U.S., we have a wealth of budget information compiled by the CBO, OMB, Treasury Department, and the Social Security and Medicare Trustees, among other sources. They show not only historical data, but budget forecasts as far out as 75 years into the future. Information is readily available, and the sources that provide it are trusted to produce non-biased results. In terms of fiscal transparency, we're doing well compared to other countries. Still, Cottarelli has some advice that we could use with regards to our budget process:
Finally, the fiscal adjustment process requires, in many cases, governments to set ambitious targets for reducing deficits and debt. We know from experience that governments in these circumstances are often tempted to resort to creative accounting as a way of avoiding, albeit temporarily, the tough fiscal choices implied by those targets.
It is important that we have a blueprint for where our budget should go, and we should make sure that our accounting standards are up to the task.
Over at Wonkblog, Dylan Matthews and Ezra Klein have worked with analysts at Citizens for Tax Justice and the Institute for Taxation and Economic Policy to create an individual tax reform calculator. The calculator comes in versions for both Governor Mitt Romney's plan and President Obama's plan. In the Romney version, one must find revenue sources in the tax code to offset extending the Bush tax cuts, reducing tax rates across the board by 20 percent, eliminating the AMT, and reducing corporate tax rates. In the Obama version, one must find additional revenue above allowing the upper-income tax cuts to expire to meet either his revenue target (an additional $500-$600 billion over ten years, or $1.5 trillion total) or the Simpson-Bowles revenue target (about an additional $1.35 trillion over ten years, or slightly above $2 trillion total).
The user is given the option of choosing a broad-based tax expenditure reduction, specifically Gov. Romney's proposed itemized deduction cap and President Obama's limitation on deductions and exclusions for upper-income taxpayers. Beyond that, the user can also reduce or eliminate other tax expenditures, including a few large provisions such as the health care exemption and preferential rates for dividends and capital gains. The calculator also allows additional taxes like a VAT or a carbon tax, or returning the estate tax to pre-2001 levels.
Here's a sample of both of them.
Both calculators tell a similar story--that enacting comprehensive tax reform is very hard. This is especially true if one tries to a base-broadening rate-reducing tax reform that raises revenue. This is also apparent on the corporate side for those who have tried our own corporate tax calculator. We hope lawmakers look at tax reform as an opportunity to improve the tax code, but more importantly to raise the revenue we need to stabilize our debt.
We've shown before that it is possible to make the math add up, but not unless lawmakers are willing to make some difficult choices. We can reform the tax code to raise more revenue, be more progressive, and better promote growth, but it is going to require that every tax expenditure--and some non-tax expenditures--be given a serious look.
As the East Coast and other communities affected by superstorm Sandy begin the work of rebuilding and assisting those who need help, the CRFB and Fix the Debt teams are keeping everyone in our thoughts. Just as there are preparedness lessons we can learn from Sandy, there are very important takeways for the federal budget too.
The storm can remind us that country's need the resources to be able to step in and respond to unpredictable disasters like hurricanes, tornadoes, or deep recessions. But of course, it isn't easy to predict these events, whick makes it very difficult to budget for. In order to maintain the ability of our country to respond to unpredictable events in the future -- be it a natural, international, or economic crisis -- we must have the budget flexibility and healthy levels of debt.
The breathing room to respond to crises before debt levels become suffocating is known as fiscal space, and it has been an important factor in allowing us to avoid making deep and abrupt spending cuts or tax increases to assuage our creditors during the recent downturn. Other countries did not have a sufficient buffer.
However, as a result of the economic downturn, the aging of the population, rising health care costs, and unsustainable policies enacted in the past, our fiscal space won't be what it once used to be. We previously discussed a study based on IMF data showing that the U.S. has a comparatively low level of fiscal space relative to other countries. The study looked at the projected debt to GDP path of the U.S. and compared it to the IMF's estimate of the point at which it would be impossible to get debt back under control without default. According to the study, we have similar levels of fiscal space to countries like Greece and Ireland, who have had debt troubles in the aftermath of the Great Recession and have been unable to respond with fiscal expansion. Reasonable people can disagree as to what the exact number level of debt will prompt a crisis, but it is clear that our current fiscal path would bring us to ever-increasing debt levels and an eventual debt crisis.
When disaster does strike, we need resources to deal with the damages that do occur. Having fiscal space can allow us to properly and adequately deal with rare and unpredictable events. In order to have that space we need to put the debt on a stable and downward path as a share of the economy. It's always better to prepare in advance and not wait until a crisis forces action.
In order to avoid bumping up against the statutory debt ceiling, the Department of the Treasury has begun undertaking a number of so-called "extraordinary measures".
|Date||Extraordinary Measure||Headroom Given||
Debt (Gross / Subject to Limit)
Today, the Treasury Department re-affirmed that the Debt Ceiling, currently $16.4 trillion, will last until early 2013. Treasury will once again use extraordinary measures to prevent a breach of the limit. The debt ceiling and the fiscal cliff are thus expected to occur near one another. Read more here.
Today, Secretary Geithner said that the current $16.4 trillion debt ceiling will be sustainable until sometime in early 2013. The ceiling is expected to be hit sometime after the November elections and before the end of 2012, but due to extraordinary measures, such as the ones taken last summer, the ceiling would not be hit until early 2013. Read more here.
Today, the Debt Ceiling was increased to $16.4 trillion because the Congress failed to pass into law a measure to prevent the increase requested by President Obama earlier this month. This is a $1.2 trillion increase. The Treasury Department estimates that this latest increase will be sufficient until the end of 2012. Read more here.
Today, the Senate voted 52-44 to prevent a vote on blocking the debt ceiling increase. This comes after last weeks House vote where the House did vote to prevent the increase in the debt ceiling by $1.2 trillion as requested by President Obama. Because the Senate failed to block it, the debt ceiling will increase to $16.4 trillion at the close of business on January 27th. Read more here.
Today, the House of Representatives voted 239-176 to block a $1.2 trillion debt ceiling increase requested by President Obama, pursuant to the Budget Control Act. This is largely a symbolic vote because it is unlikely that the Senate would also vote to block the increase and the president can veto the measure if it does. The debt ceiling is scheduled to increase to $16.4 trillion at the close of business on January 27th. Read more here.
Today, the Treasury Department stopped issuing new securities for the retirement savings program for federal and postal workers, commonly known as the G-Fund.
Measures like this have been used in 1996, 2002, 2003, 2004, 2006 and 2011. Read more here.
Today, President Obama formally requested that the debt ceiling be raised by an additional $1.2 trillion. This is the legal limit set in the Budget Control Act that the president can ask for because the Super Committee did not find more than $1.2 trillion in savings. If the Super Committee had found more than $1.2 trillion, the maximum ask would have equaled that amount, up to $1.5 trillion. If the Congress does not disapprove this increase, which it has 15 days to do, the new ceiling would be $16.4 trillion. Read more here.
|$0 Billion||$15,236,332/ $15,193,976|
Today, the Treasury Department has announced that it has reached the statutory debt ceiling. Additionally, in order to prevent breaching the ceiling, Treasury suspended reinvestment of funds into the Exchange Stabilization Fund, an extraordinary measure.
Measures like this have been used in 1996, 2000, 2003, 2004, 2006 and in 2011. Read more here.
Urban Institute Fellow and CRFB Board Member Gene Steuerle points out the great confusion in the recent Medicare debate. Both President Obama and Governor Romney are accusing each other of seeking to cut Medicare to the great loss for seniors.
However, if both candidates are going to be fiscally responsible as they have promised, then health care spending, especially spending in Medicare, must be constrained. Both should and do seek to cut Medicare, but the disagreement is how to do it to minimize the pain. Steuerle writes:
Both presidential candidates claim to save money on Medicare without cutting benefits. President Obama says his reforms “will save Medicare money by getting rid of wasteful spending…that won’t touch your guaranteed Medicare benefits. Not by a single dime.” Meanwhile, Governor Romney promises that his “premium support” plan will save money while still providing “coverage and service at least as good as what today’s seniors receive.”
But politicians aren’t the only ones dispensing that free-lunch rhetoric. Even highly respected journalists and researchers get pulled into it.
Consider two New York Times stories. After the first presidential debate, Michael Cooper, Jackie Calmes, Annie Lowrey, Robert Pear and John M. Broder said that President Obama “DID NOT CUT BENEFITS by $716 billion over 10 years as part of his 2010 health care law; rather, he reduced Medicare reimbursements to health care providers.” A few days later, David Brooks cited an AMA study of a premium support plan put forward by vice presidential candidate Paul Ryan and Democratic Senator Ron Wyden, saying that “costs might have come down by around 9 percent with NO REDUCTION IN BENEFITS” [cap emphases mine].
Can you see what is going on? Politicians, reporters, and experts all recognize that cost growth must be brought under control. But they also want to suggest that benefits won’t be reduced—if only we go with a particular approach.
Steuerle argues that there is no magic bullet. There are many ways to make health care spending more efficient, but if were are going to contain costs we are also going to have to make some tough choices.
Ferreting out the truth in this Medicare debate also requires looking beyond health care. Benefit losses in health care must be contrasted with benefit gains elsewhere. Yet even health care will likely be much worse if we continue to borrow hundreds of billions of dollars more from unfriendly nations and let excessive debt inhibit economic growth.
Bottom line: both parties favor cutting Medicare benefits, or, more accurately, slowing down the rate of benefit growth. The issue isn’t whether but how this can best be done.
The full article can be found here.
"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.
Some commentators have pointed out that the fiscal cliff itself is a large deficit reduction package, one that would put the debt on a downward path as a share of GDP. But just because the cliff would reduce the deficit does not mean that it is good fiscal policy. Going over the cliff would also likely send the U.S. into another recession, seeing how the cliff would be among the largest single years of deficit reduction in the past 75 years. When compared with a comprehensive plan that would gradually put debt on a downward path, it is very frontloaded and often across-the-board in nature, eschewing the kind of targeted changes that a fiscal plan would make.
The CBO has previously estimated that the economy will contract by 2.9 percent in the first two quarters of 2013, but recent multiplier estimates from the IMF suggest that the contraction could be even greater. The IMF finds much larger fiscal multipliers for economies with interest rates that have reached the zero lower bound (as the currently the case for the U.S.), implying that the combined sudden tax increases and spending cuts could have a much larger impact on the economy than CBO's estimate anticipates.
Economist Barry Eichengreen tells The New York Times that it might be more realistic to double the CBO's 0.5 percent negative contraction projected for next year. Eichengreen argues that a large fiscal contraction could create more damage than normal because the economy is still weak, and the Federal Reserve is unlikely to be able to fully offset the cliff's economic impact. Countries that have been successful in substantial reducing their debt have strategically timed their deficit reduction with otherwise favorable economic conditions to minimize the damage.
As this chart from Tim Fernholz at Quartz shows, the fiscal cliff is quite large compared to other austerity measures--far greater than what was done by the U.K., and only slightly less than what Greece was forced to do a few years ago. As long as lawmaker's plans to reduce the debt are credible, they can backload the deficit reduction while giving confidence to the public and credit markets. The near-term pain caused by the fiscal cliff is not needed to make the budget sustainable over the long term.
This is why comprehensive plans like Simpson-Bowles and Domenici-Rivlin gradually phased in cuts, delaying much of the deficit reduction until when the economy has had more time to recover. Simpson-Bowles specifically put off cuts for a year and phased them in very gradually beyond that--and even then, most of the cuts that took place upfront were discretionary spending cuts which have already taken place. Domenici-Rivlin even included some additional stimulus in the form of a full payroll tax holiday. We have pointed out before that going big on longer-term deficit reduction allows room for short-term stimulus measures or at least slowly phased-in cuts.
We need to address our unsustainable deficits and we cannot wait to come up with a plan to do it. Repealing the sequester and extending the Bush tax cuts would almost assure the U.S. of another credit downgrade and leave us with an increasingly bigger problem. However the sudden cuts under the fiscal cliff are not an effective way to deal with the debt. If we enact a comprehensive plan, we can both put debt on a downward path and protect the economy as it recovers.