You can disagree with the budget resolution passed on March 29 under the leadership of House Budget Committee Chairman Paul Ryan (R-WI), but it’s hard to argue that the proposal is not visionary and surprisingly functional. It is intriguing as well. Republicans are looking to achieve additional, unspecified efficiencies in the Medicare and Medicaid programs.
The question most have is, does it matter? In our view, the answer is a resounding yes. The House-passed plan sets in motion a series of actions, including Committee mark-ups today, that will create a blueprint for an end of the year, must-pass, must-sign bill.
Turning the Titanic
The following graph comes to us courtesy of the Bipartisan Policy Center. BPC’s calculations support Republican claims that The Path to Prosperity, aka the Ryan budget, is the most fiscally responsible budget plan in Washington.
The most practical, and specific, aspect of Ryan’s blueprint is its bid to replace the potentially damaging sequestration of defense spending in Fiscal 2013 by using the reconciliation process to shift the burden of fiscal retrenchment on to social spending that ballooned during the recent recession.
The resolution repeals $78 billion of the $98 billion in scheduled sequestration set to take place on January 2, 2013, of which $55 billion is to come out of National Defense—reflecting a 10 percent cut. It leaves the original $16 billion of mandatory cuts (mostly to Medicare) in place along with an additional $16 billion in non-defense discretionary cuts.
Reconciliation would not affect sequestration beyond 2013. Essentially, the House-passed budget is a one-year patch. Unless Congress forges a longer-term deficit reduction plan, the Budget Committees may be revisiting sequestration every year as an annual rite of spring.
By way of background, readers will recall last summer’s debt limit standoff, which was resolved at the last minute by the passage of the Budget Control Act of 2011. Plan A under the Act had been for the Joint Select Committee on Deficit Reduction, aka the Supercommittee, to specify $1.5 trillion in savings before its authority expired on November 31, 2011; and for those savings then to pass in up-or-down votes on the floors of the House and Senate.
The Supercommittee’s failure to agree to any savings set in motion Plan B, which was sequestration. This is a collection of across-the-board cuts to specified budget categories, more or less evenly divided between defense and non-defense programs. It envisions cutting Medicare spending by two percent, while defense and other categories would suffer cuts of nearly ten percent.
The “meat ax” approach envisioned by sequestration is intentionally unpalatable. Its purpose is to spur bipartisan agreement—which is still likely. Indeed, nobody expects sequestration to go forward as required by current law, and both parties now plan to avert the potential damage in a post-election lame duck session of Congress this November. Even so, national security experts argue that even the off chance of deep unplanned cuts to military procurement and operations would hamper U.S. security policy by calling into question the seriousness of our overseas commitments.
The House-passed budget does more than simply lay down a marker in this inevitable negotiation. It instructs six committees to submit legislation to achieve reductions in domestic spending totaling about $19 billion less than the spending cap for 2013 in the Budget Control Act. Under budget rules, the resolution does not include legislative specifics, which are the authorizing committees’ purview.
However, the blueprint envisions that the committees of jurisdiction will achieve savings totaling more than $330 billion over 10 years “in the areas of making pensions for federal workers more like those for workers in the private sector, repealing recent expansions of the federal role in financial services, saving money in health care, means-testing entitlements, and reforming the medical liability system.”
Health Care Entitlements
The visionary part is that the House-passed budget tackles entitlement reform. According to the Congressional Budget Office, health programs will account for about 80 percent of new non-interest spending the over the next 10 years and virtually all new program spending after 2030. The vast majority of this growth would come from Medicare and Medicaid. That is where the Path to Prosperity budget looks for much of its savings.
Repealing ACA: While the accompanying report says that the House-passed budget “repeals the President’s health care law…” the numbers don’t add up that way. To be sure, almost all of health program savings during 2013–2022 come from repealing new spending authorized by ACA for Medicaid expansion and health exchange subsidies. In the table below—which compares the House blueprint to the President Obama’s FY13 budget—the projected health program savings are roughly consistent with CBO estimates of the new spending under ACA. Yet they are not consistent with outright repeal.
In February 2011, CBO estimated that full repeal actually would increase budget deficits by $210 billion during 2012–2021. This is because the ACA used a combination of new revenues and Medicare cuts to pay for about $1.5 trillion in new spending during 2012–2021. Nearly a third of that amount, $413 billion, comes from excise taxes and penalties. The House-passed budget would eliminate these revenue streams. Yet most of the savings used to pay for the ACA came from reduced payments to Medicare providers. That helps to partially explain why payments to hospitals under Medicare Part A grew more slowly than inflation in 2011. The House-passed budget reduces Medicare spending below the Obama projections—suggesting either that it does not fully repeal ACA’s provider reimbursement restraints, or that it achieves comparable savings through other, unspecified mechanisms. The blueprint also envisions additional provider cuts equal to two percent of Medicare spending under sequestration.
Medicaid block grant: In addition to repealing ACA’s 2010 Medicaid expansion, the House-passed Ryan budget would convert the existing Medicaid entitlement into a block grant that would grow at the rate of inflation—about 2.4 percent slower than real GDP and 3.9 percent slower than the CBO’s long-term budget baseline. The Center for Budget and Policy Priorities estimates that holding Medicaid growth to the CPI would save an additional $810 billion—or 22 percent—compared to the CBO baseline over the next ten years. Repealing the expansion would save $930 billion during 2014–2022, according to CBO.
Post–2022 savings: The House-passed budget envisions that the implementation of premium support would reduce Medicare spending growth to 0.5 percent faster than GDP growth after 2022. This would generate large savings relative to CBO’s baseline, which projects that excess cost growth will average 1.59 percent annually during 2023–2030.
Under premium support, private plans that meet Medicare’s quality and coverage criteria would bid for Medicare beneficiaries based on cost. While beneficiaries could choose any plan, they would bear out of pocket any costs over and above the second-least expensive plan in their bidding area. Cutting quality would not be an option, so price competition will center mainly on efficiency. Studies of geographic variation in treatment patterns suggest that up to 60 percent of Medicare spending is for supply sensitive care that produces no patient benefit. In other words, the potential savings from eliminating wasteful volume are very large.
Ryan’s resort to the Reconciliation process for FY 2013 gives the House a leg up in post-election negotiations over averting sequestration and helping to finance any fix to the Medicare physician payment issue. The Senate is now into its third year without a budget resolution. This year, Majority Leader Harry Reid (D-NV) has argued that the Budget Control Act obviated the budget process.
However, when the time comes to negotiate the details of compromise, the House will have fully formed positions ratified by floor votes. The old adage is, you can’t beat something with nothing. While the Senate will have veto power, to the extent preparation matters—and it usually does—the Ryan budget will have given House negotiators an important leg up. Perhaps this is why the Senate Budget Committee is moving to mark up a budget resolution this week, despite their being little to no chance of floor action.
Fiscal year budgets inevitably are specific for the budget year in question and increasingly fuzzier the farther they peer into the future. The longer the outlook, the more likely it is that the plan’s optimistic assumptions will compound to produce unrealistically positive outcomes. The House-passed budget shares some of these weaknesses. It envisions the emergence of unified budget surpluses by the 2040s that shrink the national debt to a mere 10 percent of GDP by 2050—compared to 68 percent in 2011. Everything we know about Congress suggests that such an outcome is improbable. Yet Ryan’s vision of a future in which the fiscal damage of decades of runaway health costs is gradually undone by market reforms is surprisingly realistic.
With the recent downgrade of U.S. Treasuries, it is tempting to lump America in with Greece, Italy and a host of other ne’er-do-well European welfare states, whose fiscal policies are colliding with demographic destiny. To be sure, our budget is in crisis. Yet unlike Europe, where fiscal imbalances stem from shrinking numbers of workers and consumers, our problems are almost entirely self-inflicted, the result of medical inflation vastly outstripping our ability to pay. Unlike population decline, which takes generations to remedy, excess health cost growth is treatable.