Health Care

Defunding Health Care Innovation Jeopardizes the Budget

In a move that could stall promising health care delivery system reforms and drive up entitlement spending, the House Appropriations Committee last week voted to defund the Center for Medicare and Medicaid Innovation (CMMI) and the Agency for Healthcare Research & Quality (AHRQ) in their 2016 Labor, Health and Human Services, and Education bill.

Abandoning CMMI, in particular, would increase deficits this decade by $45 billion (or by $37 billion before incorporating the additional interest payments needed to service the higher debt), according to the Congressional Budget Office (CBO), and potentially by much more over the long run. The Innovation Center, created by the Affordable Care Act (ACA), is in charge of testing new approaches to improve quality and reduce cost within Medicare and Medicaid, including promising programs such as Accountable Care Organizations (ACOs), bundled payments, and initiatives to increase care coordination among low-income seniors and people with disabilities who are dually-eligible for Medicare and Medicaid.

Rescinding CMMI’s remaining $6.8 billion ($6.5 billion of outlays) in funding through 2020 (funding beyond 2020 is not eliminated) would put these initiatives and many more in jeopardy or delay them significantly, and severely curtail CMMI’s ability to fine-tune them as time progresses. Moreover, they would no longer be able to undertake new delivery system reform efforts with the potential to improve quality and lower costs, which is part of the reason CBO finds that defunding would increase mandatory federal health care spending by about $37 billion over the next ten years.

The rescission also represents an egregious budget gimmick, and is perhaps the worst CHIMP  – or change in mandatory programs – we have seen so far. As we’ve explained before, CHIMPS allow policymakers to cut mandatory spending in order to pay for discretionary spending increases. More often than not, the discretionary spending increases are real, but the mandatory cuts are fake – and for one reason or another do not general actual savings. In this case, the situation is far worse – rather than failing to generate savings, this CHIMP creates significant future costs.

CBO's Outlook for Long-Term Health Care Spending

Health care spending is arguably the most important part of CBO's long-term outlook, being a key driver of our nation's growing debt over the long term. Little has changed, though, since CBO's outlook last year, with similar assumptions for excess health care cost growth but a small improvement towards the end of the 75-year period due to a change in an assumption about Medicaid.

As a result of the fiscally-irresponsible physician payment law passed this year and slightly higher assumed long-term cost growth, Medicare spending is projected to be higher than last year's outlook by about 0.1 percent of GDP per year for the next ten years and by increasing amounts in later years. CBO expects Medicare spending to grow from 3 percent of GDP this year to 5.1 percent by 2040 (about as much as all federal health care spending this year), 7.2 percent by 2065, and 9.6 percent by 2090.

Other major health care spending – including Medicaid, the Children's Health Insurance Program, and the Affordable Care Act's (ACA) health insurance subsidies – has improved both as a result of short-term revisions to spending in CBO's ten-year projections and a change in CBO's assumption about Medicaid eligibility over the long term. CBO now assumes that, since Medicaid eligibility is largely determined by the poverty line, which grows with inflation, as real wages increase, more and more of the currently eligible would eventually lose eligibility. In the past, CBO assumed that states would either expand eligibility, increase outreach to the currently eligible, or expand benefits in order to offset this effect, but now it assumes they will only offset one-half of the effect. This assumption reduces their Medicaid eligibility projections by 4 percent over the next 25 years.

ACA Repeal Could Add $5 Trillion to the Debt Within 20 Years

Much of the focus on the Congressional Budget Office's (CBO) score for repealing the Affordable Care Act (ACA) naturally has focused on the ten-year budgetary and economic feedback effects, which showed that repeal would increase deficits by $353 billion on a static basis, or by $137 billion if macroeconomic effects were incorporated. As we pointed out in our write-up, though, CBO also provides an estimate of the second-decade effects, finding that repeal would increase deficits over the second decade in the broad range of one percent of GDP (which implies around a $3.5 trillion deficit increase).

CBO doesn't provide a detailed year-by-year score beyond the first ten years because those estimates, as it explains, "would not be meaningful because the uncertainties involved are simply too great." However, the report does provide enough information for a reasonable estimate to be made based on the growth rates of the broad categories of policies, which show the savings generally rising much faster than the costs.

To estimate the long-term impact of the legislation, CBO divides the bill into parts and assigns simplifying growth rates to each part. Specifically, CBO assumes the following:

  • Savings from repealing coverage provisions – including new spending as well as revenue from the mandates and Cadillac tax – will grow by about 2 percent per year
  • Costs of repealing Medicare and Medicaid savings – including reduced growth rates for provider payments -- will grow by about 15 percent per year
  • Costs of repealing non-coverage tax increases – the biggest being the Medicare investment income tax  – will grow by about 6 percent per year

Shoring Up Trust Funds Greatly Improves Debt

The main focus of CBO's long-term budget outlook is rightly on the unified budget numbers regarding spending, revenue, deficits, and debt. But it is also important to look at trust funds, both in what CBO estimates for their insolvency date and how CBO's assumptions about trust funds can affect debt.

CBO's ten-year projections also project insolvency dates for three trust funds: the Highway Trust Fund (later this summer), the Social Security Disability Insurance (SSDI) trust fund (FY 2017), and the Pension Benefit Guaranty Corporation's (PBGC) multiemployer pension fund (FY 2024). The PBGC's trust fund exhaustion is reflected in the budget numbers, meaning that spending is automatically limited to incoming revenue, but the other two much larger trust funds are assumed to continue spending at scheduled levels despite not having the resources to do so.

The same goes for the two trust funds whose exhaustion dates will come after ten years and thus are only discussed in the long-term outlook: the Medicare Hospital Insurance (HI) trust fund and the Social Security Old Age and Survivors' Insurance (OASI) trust fund. CBO does not specifically project an insolvency date for HI, which finances Part A of Medicare, because it doesn't do long-term projections for each part of Medicare. It does say that exhaustion would likely come shortly after ten years, and by the looks of the ten-year projections, that date would likely be around 2027.

As for OASI, CBO projects the trust fund to run out in 2031, the same as it projected last year. But on a combined basis, the Social Security trust funds would be depleted in 2029, one year earlier than CBO projected last year.

New Affordable Care Act Repeal Estimate Still Shows Deficit Increase

For the first time in nearly three years, the Congressional Budget Office (CBO) released a new estimate of the budgetary effect of repealing the entire Affordable Care Act (ACA). Just like in its previous estimates, CBO finds that repealing the ACA would increase ten-year deficits -- and this time, they come to that same conclusion even with the economic effects included.

CBO's static estimate of repeal, which excludes macroeconomic effects, shows a ten-year deficit increase of $353 billion, the net effect of $1.174 trillion of tax cuts and $821 billion of spending cuts. Repeal would save money in the first three years of the budget window by $40 billion, but then increase deficits in subsequent years and by $118 billion in 2025 alone. Using this static score, debt would be about 1.4 percentage points higher in 2025 as a result of repeal.

Incorporating the dynamic macroeconomic effects into the budget score reduces the resulting ten-year deficit increase by $216 billion, making the total deficit increase with dynamic scoring $137 billion. The macroeconomic effects peak at $29 billion in 2019 and fall slightly to $20 billion by 2025. The main economic effects include: the decrease in labor supply due to a greater availability of insurance outside employment and from the implicit marginal tax rate increases from the insurance subsidies, as they diminish with income; the decrease in the capital stock from increased tax rates on investment income; and the decrease in aggregate demand from repeal of the insurance subsidies. CBO estimates that ACA repeal would boost GDP by an average of 0.7 percent in 2021-2025.

House IPAB Repeal Vote Would Damage the Long-Term Outlook

Isn’t it ironic, mere days after the Congressional Budget Office (CBO) warns about our nation’s long-term fiscal challenges in its annual report, the House of Representatives is set to vote on repealing a key mechanism put in place to constrain the core driver of our growing debt?

The Independent Payment Advisory Board (IPAB), scheduled for a repeal vote tomorrow, is a 15-member board of Senate-confirmed experts created by the Affordable Care Act (ACA) for the purpose of controlling Medicare costs. If Medicare per-beneficiary cost growth is projected to exceed GDP per capita growth plus one percentage point (GDP+1%), IPAB (or the Secretary of Health and Human Services if no Board members have been appointed) must make targeted recommendations to provider payments – which cannot affect Medicare benefits, eligibility, or cost-sharing – to bring per-beneficiary spending back in line. These recommendations then automatically take effect unless a majority in Congress votes to replace them with equivalent savings or a three-fifths majority of Congress overrides them entirely.

This last protection is valuable given how difficult it is for lawmakers to enact fiscally-responsible reforms otherwise. That repealing IPAB now has broad support in Congress just reinforces its importance.

Budget Issues Abound in the Senate Defense Authorization

Update: The Reed amendment was rejected in floor consideration by a 46-51 vote.

The Senate is currently considering the National Defense Authorization Act (NDAA), and there are a number of issues at stake. Most notably, this bill has the potential to bring the issue of sequester relief to a head, with Senate Democrats and the White House threatening to block passage of the bill due the use of war spending (Overseas Contingency Operations, or OCO) to allow defense spending to rise above sequester levels. There are also military compensation reforms in the bill, although there is less controversy there since the White House generally supports them.

The NDAA, largely reflecting the Congressional budget resolution, would authorize defense appropriations totaling $605 billion for FY 2016, including $516 billion for regular defense spending, in line with the sequester-level caps, and $89 billion in OCO funding, which is not subject to spending caps. CBO estimates that $50 billion of this OCO funding would be used for war-related activities, with the remaining $39 billion to be explicitly used to backfill regular defense spending (actually slightly larger than the budget resolution's $38 billion slush fund). We’ve written many times about the problem with using this slush fund to get around the spending caps and how it is much more preferable to lift the spending caps and offset them with other savings as they did in 2013. Although this has been a growing trend on the margins, this year's budget and appropriations utilize this gimmick to an unprecedented degree, increasing war spending well above the President's request as opposed to past years when appropriations typically matched the request.

$12 Billion Cures Bill Advances in House

Update: This blog was updated on June 30 to reflect a CBO estimate published on June 23. Our original estimate was $13 billion, based on staff calculations and information published in The Hill.

The House Energy and Commerce Committee recently advanced a bill (H.R. 6) unanimously intended to facilitate research into and the development of medical cures. The bill finds savings from elsewhere in the budget to pay for its $12 billion cost, abiding by pay-as-you-go (PAYGO) rules.

The 21st Century Cures Act intends to promote biomedical research, streamline drug and device development, and make the development of cures more efficient. Among other things, it reauthorizes the National Institutes of Health (NIH) through FY 2018, creates a $2 billion per year NIH Innovation Fund through 2020, makes several changes to facilitate drug development and Food and Drug Administration (FDA) approval, utilizes health IT and telehealth to increase access to new developments, and creates a flexible $110 million per year Cures Innovation Fund through 2020.

House Set to Target Deficit-Reducing Parts of ACA

Update (6/12/15): A new CBO score estimates that repealing IPAB will cost $7.1 billion over ten years, with all of the cost recorded after 2021. The text has been updated to reflect this score.

The House Ways and Means Committee today will markup several bills, including repeal of the Independent Payment Advisory Board (IPAB) and the medical device tax. You can find out more about the markup on the Ways and Means Committee website.

Unlike full ACA repeal, these policies stand a chance of overcoming a Presidential veto due to the bipartisan support already exhibited for each: as of this writing, the medical device tax repeal bill in the House (HR 160) has 281 cosponsors while the IPAB repeal bill (HR 1190) has 233 cosponsors. However, repealing these policies without offsetting savings from health care or revenue would be a mistake. IPAB, in particular, should not be abolished without a replacement that can similarly restrain long-term Medicare cost growth.

The Joint Committee on Taxation (JCT) has estimated that repealing the 2.3 percent medical device tax would cost $26.5 billion over ten years. However, JCT estimates that the amendment in the nature of a substitute that is expected to replace the bill in markup will reduce revenues by $24.4 billion over the same period.

Although the original co-sponsors of the bill, Reps. Erik Paulsen (R-MN) and Ron Kind (D-WI), said they expect the bill to be offset, no cost-savers have been produced yet. We suggested bundling payments for inpatient care as one option, which not only would produce enough savings to fully offset repeal but also achieve much of its savings from providers cutting their medical device costs. Thus, the medical device industry would still be asked to contribute to deficit reduction, but in a more efficient manner. There are many other options available as well, as we showed at the time and in our latest health care options.

Potential Offsets for Medical Device Tax Repeal
Policy Ten-Year Savings
Memo: Repeal Medical Device Tax -$24 billion
Health Options
Expand bundled payments for inpatient care $25 billion
Reduce state Medicaid provider taxes to 4.5 percent of patient revenues $35 billion
Reduce Medicare coverage of hospital "bad debts" $30 billion
Encourage use of generic drugs by low-income Part D beneficiaries $20 billion
Equalize payments for similar services performed in different settings $20 billion
Increase Medicare Advantage coding intensity adjustment $20 billion
Increase Medicaid drug rebates $10 billion
Revenue Options
Move up "Cadillac tax" by one year to 2017 $35 billion
Eliminate tax breaks for oil and gas companies $40 billion
Increase cigarette tax by 50 cents $35 billion
Close "John Edwards/Newt Gingrich" loophole $35 billion
Limit tax benefit of retirement accounts $30 billion
Eliminate tax exclusion for private activity bonds $30 billion
Require Social Security numbers for refundable portion of child tax credit $25 billion
Eliminate the mortgage interest deduction for second homes and yachts $15 billion

Source: CBO, JCT

Sanders Takes Aim at Generic Drug Prices in Medicaid

Earlier this week, Senate Budget Committee Ranking Member Bernie Sanders (I-VT) introduced the Medicaid Generic Drug Price Fairness Act, a bill designed to hold down spending on generic drugs in Medicaid. The bill, which has also been introduced in the House by Rep. Elijah Cummings (D-MD), is a reprise of similar legislation introduced in the last Congress.

Skyrocketing Generic Drug Prices

The legislation comes in the wake of a huge jump in generic drug prices in 2014 -- even among certain drugs that have been on the market for a considerable amount of time -- without a clear cause. In some cases, the generic drug is now barely cheaper than the brand-name equivalent that benefited from patent protection. Forbes cites a report showing that several drug groups at least doubled in price and some jumped by much more than that. A few drugs whose prices jumped by an order or two of magnitude drew the particular ire of Sen. Sanders and Rep. Cummings last year.

Some of the price increases are almost certainly the result of raw material shortages or price markups for specific compounds needed in production, but many experts suspect that consolidating market power among generic drug producers and decreasing competition may be playing a significant role. Generic drug-makers, including during testimony at Sen. Sanders' Subcommittee hearing late last year, have generally refused to clarify what the causes have been.

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