Brookings: Topics - U.S. Budget Deficit

Politics, Higher Education and Health Care in the Austerity Era

Wed, 22 May 2013 09:00:00 -0400

Event Information

May 22, 2013
9:00 AM - 12:00 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

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The A. Alfred Taubman Forum on Public Policy

Since the onset of the Great Recession, public discussion has centered on whether spending or austerity is the best path to economic recovery. As evidenced by the sequestration, recurring debt ceiling fights and the ongoing euro crisis, clear policy prescriptions to kickstart anemic economies remain elusive. Often lost in the public discussion surrounding government budgets, though, is consideration of austerity’s implications for national politics and how policy is enacted and implemented. How has the debate surrounding spending versus budget-cutting shaped the political conversation in the United States? What has been austerity’s impact on the policymaking process?

On May 22, the Governance Studies program at Brookings will host a half-day forum centered on the changed political and policy conversations in the austerity age. The fourth annual A. Alfred Taubman Forum on Public Policy will convene leaders from academia, the media, government, and business to explore the far-reaching implications of austerity reform and philosophy on the American political landscape and today’s most pressing policy challenges, specifically in the areas of higher education and health care.

After each panel, participants will take audience questions.

Audio

Politics, Higher Education and Health Care in the Austerity Era

Supporting Broad-Based Economic Growth and Fiscal Responsibility Through Tax Reform

Adam Looney — Wed, 22 May 2013 02:30:00 -0400

Chairman Murray, Ranking Member Sessions, and Members of the Committee: Thank you for inviting me to share my views on the role of tax reform in supporting broad-based economic growth and fiscal responsibility.

The United States faces a daunting outlook for budget deficits, an increasingly challenging global economy for many American workers and businesses, and rising income inequality.

Improvements in tax policy could help address these challenges by making our tax system more fiscally sustainable, more efficient, and more fair. Indeed, any tax reform will be evaluated based on how it affects each of those three criteria.

But improving on all three dimensions simultaneously is increasingly difficult because of tradeoffs between competing goals of efficiency, revenues, and equity.

Today’s long-term budget outlook means that we’re likely to need higher tax revenues in the future. And rising inequality means that changes in policy will be increasingly scrutinized for how they affect the progressivity of the tax schedule. But a tax reform that devotes revenues to deficit reduction and retains our progressive system would have much more difficulty achieving other goals—such as lowering tax rates.

In my testimony today, I want to describe some of these tradeoffs and some potential paths forward.

Tax Reform and the Budget

Much of the energy surrounding tax reform focuses on the model of the Tax Reform Act of 1986. In that reform, tax rates were lowered substantially and the lost revenue was restored by cutting tax breaks, deductions, exclusions, and other so-called tax expenditures. That reform enhanced economic efficiency without increasing the deficit. In the 27 years since then, however, the economic context has changed, making such a reform harder to achieve.¹

First, we face a dire long-run budget outlook; most believe that putting the budget on a sustainable path will require contributions from both spending cuts and revenue increases. Many hope that tax reform can help produce those revenues.

This makes tax reform more difficult because revenues allocated to deficit reduction are revenues that cannot be used to reduce rates, and vice versa.

Moreover, raising revenues and cutting rates at the same time is a tall order. At first glance, the list of tax expenditures is projected to add up to $1.4 trillion in 2015.² But that figure dramatically overstates the revenue gains that are available from cutting expenditures.

Some expenditures, including obscure items like imputed rent, would be difficult to eliminate for practical or administrative reasons; others, like credits and deductions for working families with children are integral to combating poverty and encouraging employment. These categories account for roughly one quarter of all tax expenditures.³ An additional one-third of the tax expenditures arise from the preferential treatment of savings and investment. And the largest non-savings-related expenditures include those for health insurance, mortgage interest, state and local taxes, and charitable contributions. These, and many others, tend to serve substantive goals, remain on the books because they were too difficult to eliminate in 1986, and, as you well know, are backed by popular constituencies.

In addition to political difficulties, there are basic practical issues to consider. Certain tax expenditures exist for the purposes of simplifying the tax system, to reduce record keeping, or to minimize the filing burden on taxpayers. Eliminating those provisions or scaling back others could make the system more complicated and onerous.

Because of such considerations, the Congressional Research Service warns that “it may prove difficult to gain more than $100 billion to $150 billion” each year from reducing tax expenditures.⁴ And those estimates are based on a 35 percent top rate; if marginal tax rates were reduced, eliminating a dollar’s worth of deductions would raise proportionately less revenue. In other words, if eliminating a dollar of mortgage interest today raised 39 cents, under a top rate of 25 percent, it would raise only 25 cents—37 percent less.

To put these numbers in perspective, in order to be revenue-neutral, the tax plan included in House Budget Committee Chairman Ryan’s budget would require eliminating roughly $450 billion worth of tax expenditures each year just to balance out the individual income tax rate cuts targeted in his plan.⁵ The plans initially developed by the Domenici–Rivlin Task Force and the Bowles–Simpson Commission, which reduce rates and contribute to deficit reduction, likely require reductions in tax expenditures of a similar or larger magnitude.

The gap between the reductions in tax expenditures required by such plans and those that could be agreed upon illustrates the challenge of formulating a plan that achieves both lower rates and higher revenues.

Tax Reform in a Progressive System

A second consideration is the issue of rising income inequality and its relationship to the tax code. Earnings have risen dramatically at the top—by more than 250 percent over the past 30 years for households in the top one percent of the income distribution. At the same time, many households at the middle and bottom have experienced stagnating or even declining earnings. Changes in the tax system over the past 30 years have exacerbated these problems; the very people who have received the biggest income gains in the past three decades have also seen the largest tax cuts. A progressive tax code is perhaps the most significant and powerful tool available to counteract income inequality. Indeed, there are increasing calls for policymakers to use the tax code for that purpose.

Such concerns were much less salient the last time we did tax reform. In 1986, the phenomenon of rising inequality had yet to be fully discovered or understood, and the technical expertise to measure how the tax system affected inequality had yet to be developed.

Today not only are concerns about the progressivity of the tax schedule heighted, but so is our ability to measure how tax changes affect different groups. That raises the level of scrutiny directed to reform and also reveals a substantive tradeoff: that any changes in rates and tax expenditures must balance out within income groups in order to retain a progressive tax structure.

In a series of papers, colleagues at the Tax Policy Center and I analyzed these tradeoffs by examining a hypothetical reform with the stated goals of maintaining tax revenues, lowering marginal tax rates, while at the same time ensuring a progressive tax system.⁶ We took as an example a plan that lowered the top rate from 35 to 28 percent and continued the low rates that apply to savings and investment. These rate reductions are roughly the same levels specified in earlier plans from Bowles–Simpson and Domenici–Rivlin, but are substantially smaller than those specified in Chairman Ryan’s plan. We asked what it would take to achieve other goals of revenue and progressivity.

In that analysis, we estimated the revenue losses due to lower rates, and then tried to pay for those revenue losses by eliminating tax expenditures. We assumed that certain tax expenditures were off the table because of the administrative difficulty of closing certain breaks; others were off the table because they provided preferential treatment for savings and investment.

Overall, the available tax breaks were enough to offset revenue losses from lower rates. But this resulting tax schedule, we found, was less progressive. Even when we implemented the most progressive way of reducing the remaining tax breaks, there was simply not enough revenue from these breaks in the top brackets to offset the revenue losses from lower marginal tax rates.

This result—that this sort of base-broadening reform led to a less progressive tax system—was true even when we incorporated revenue feedback, not just according to the standard dynamic effects used by Tax Policy Center, Treasury, and the Joint Committee on Taxation, but also additional feedback effects from optimistic estimates of potential economic growth, drawn from theoretical models.

The implication is that such a tax reform must give up on at least one of its stated goals: either higher-income taxpayers would receive a tax cut and middle- and lower-income taxpayers a tax increase; the deficit would go up; preferences for savings and investment would have to be reduced; or marginal tax rates would need to be higher.

Prospects for Reform

Of course, these considerations don’t rule out tax reform; indeed, many experts have put forward plans that provide more incremental reforms that simultaneously achieve efficiency gains, higher revenues, and a more progressive tax system. But such plans require substantial compromises.

For instance, certain plans proposed by the Domenici–Rivlin Task Force and the Bowles–Simpson Commission achieve their distributional goals by eliminating preferential rates for capital gains and dividends and curtailing other savings and investment-related tax breaks.

A host of other incremental reforms propose improving the efficiency of the tax system not by reducing rates but by reducing inefficient or wasteful tax expenditures. For example, deductions and exemptions—like for mortgage interest, that currently provide tax savings of up to 39.6 percent—could be replaced with flat credits of, say, 15 percent, providing continued support for homeowners but in a less-costly and more progressive way.⁷ An overall limit on the value of tax expenditures at 2 percent of income would provide an across-the-board reduction in costly tax expenditures.⁸ The President’s Budget includes a provision to limit the amount that certain tax deductions and preferences can reduce tax liability by to 28 percent. And at a meeting convened by the Hamilton Project last February, a bipartisan group of tax experts presented proposals to reduce benefits from the mortgage interest deduction, subsidies for fossil fuels, preferences for retirement savings, and the overall value of deductions.⁹ A common thread is that all of these proposals enhance economic efficiency, raise revenues, and increase progressivity.

Beyond economic appeal, proponents of this approach hope for political appeal. To paraphrase Harvard Professor Martin Feldstein: if Republicans want to reduce the deficit by cutting spending and Democrats want to increase revenues, by focusing on tax expenditures we should find a middle ground.¹⁰

1. For a further discussion see: Greenstone, Michael, Dmitri Koustas, Karen Li, Adam Looney, and Leslie B. Samuels. “A Dozen Economic Facts About Tax Reform,” The Hamilton Project (May 2012).

2 Marron, Donald B. “How Large are Tax Expenditures? A 2012 Update,” Tax Notes (April 9, 2012): 235.

3. For a description of these expenditures, see Nguyen, Hang, James Nunns, Eric Toder, and Roberton Williams. “How Hard Is It to Cut Tax Preferences to Pay for Lower Tax Rates?” Tax Policy Center (July 10, 2012): Table 1.

4. Gravelle, Jane G. and Thomas L. Hungerford. “The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening,” Congressional Research Service (March 22, 2012): 3.

5. Tax Policy Center Table T13-0110

6. Brown, Samuel, William Gale, and Adam Looney. “On the Distributional Effects of Base-Broadening Income Tax Reform,” Tax Policy Center (August 1, 2012); Brown, Samuel, William Gale, and Adam Looney. “TPC’s Analysis of Governor Romney’s Tax Proposals: A Follow-Up Discussion,” Tax Policy Center (November 7, 2012); Marron, Donald. “Understanding TPC’s Analysis of Governor Romney’s Tax Plan,” Tax Vox (August 8, 2012); and Nguyen et al. (2012).

7. Batchelder, Lily L., Fred T. Goldberg, Jr., and Peter R. Orszag. “Reforming Tax Incentives into Uniform Refundable Tax Credits,” The Brookings Institution Policy Brief 156 (August 2006).

8. Feldstein, Martin, Daniel Feenberg, and Maya MacGuineas. “Capping Individual Tax Expenditure Benefits,” NBER Working Paper 16921 (April 2011)

9. See Alan Viard, “Replacing the Home Mortgage Interest Deduction,” Joseph E. Aldy, “Eliminating Fossil Fuel Subsidies,” Karen Dynan, “Better Ways to Promote Saving through the Tax System,” and Diane Lim “Limiting Individual Income Tax Expenditures” in 15 Ways to Rethink the Federal Budget, The Hamilton Project (February 2013).

10. Feldstein, Martin. “A Simple Route to Major Deficit Reduction,” The Wall Street Journal (February 20, 2013).

Authors

Adam Looney

Image Source: Chris Maddaloni

Federal Tax Reform? Don't Bet The Rent Money On It

Bill Frenzel — Tue, 14 May 2013 11:52:00 -0400

In some years there are no budgets. This year we have been presented with thre dueling budgets, one from each house and one from the president. Neither house has picked conferees, and neither has any current inclination to do so. Each prefers to glare at the other until the next election day.

The “Grand Bargain” on the Federal budget this year is still possible, but it seems less and less likely. The prospect is for another year of small deals, recurring crises, and several continuing resolutions.

As hopes for the big fiscal fix recede, tax reform moves to center stage. Ideally, tax reform ought to be a part of a larger budget agreement. But, with that agreement now slipping out of reach for 2013, tax reform seems to some observers to be a more promising suspect.

Tax reform appeals to both parties for different reasons. Democrats need it for new spending to stimulate growth. Republicans want to use it for lowering tax rates for the same reason. Those differences may be irreconcilable, but members of Congress seem to want to give tax reform a try.

Perhaps the best reason for tax reform optimism lies in the fact that the chairmen of both tax-writing committees really want to do it. Dave Camp, chair of the House Ways & Means Committee, is now serving his last term as chair under caucus rules. Max Baucus, Camp’s Senate Finance Committee counterpart, is in a similar position. He is retiring from Congress after this term.

Both of these leaders are strongly motivated to produce a tax bill before they slide into history. Both are able veterans who know the tax code. They meet regularly. Both have held hearings on tax reform, and have given it much study over the past two years. In addition, Camp has the blessing of the House Republican leadership including Speaker Boehner, who has saved the precious number, HR 1, for a tax reform bill.

Some business interests, led by the U.S. Chamber of Commerce, want to see reform of the tax code, too. Many of them see advantages in potentially lower rates, and in reform of U.S. taxation of their foreign income. American business is by no means unified on this subject, but there clearly is plenty of interest.

There is, however, another side to the tax reform story. Historically, it is a rare event. The last successful effort was in 1986. Before that one has to backtrack to 1958 to identify a major tax reform enactment. In the 1986 version, both Congressional parties, (with Democrats in the majority) and the President, Ronald Reagan, strongly supported it. Even so, the process took two years. Nobody believes that the 1986 political consensus can be duplicated today.

In 1986, the American people polled strongly in favor of tax reform. Nowadays, they are not so sure. They saw the 1986 act substantially altered by amendment in the years immediately thereafter. Today, the public is not sure that tax reform will help them. And, even if it does help, they are pretty sure it will soon be amended beyond recognition. Trust in the government has all but faded away in the last three decades.

In the end, the biggest hurdle for tax reform will be to overcome the opposition of interests who are unwilling to part with their tax preferences peaceably. Unsurprisingly, many individuals and corporations just love their tax preferences. Some of them would be worse off with a system that abolished those preferences even if their basic tax rates were lowered.

This group is sophisticated. It knows how to make strategic political contributions, and it knows how to lobby successfully. It also knows how to maneuver in the current political environment where polarization is the rule, and in which members of Congress do not often trust one another. For these interests, the conditions on the playing field are just about perfect for defending their preferences.

Just as the country needs a Grand Bargain, it also needs tax reform. It would be wonderful if tax reform could be achieved this year. The two chairmen and many members will give the good old college try. But, if a budget compromise is not possible, it also seems unlikely that a good tax reform bill can be enacted. Cheer for tax reform; pray for it; just don’t bet the rent money on it.

Authors

Bill Frenzel

Publication: Forbes

Image Source: © Kevin Lamarque / Reuters

Advancing Reform: Medicare Physicians Payments

Kavita Patel — Tue, 14 May 2013 10:00:00 -0400

Chairman Baucus, Ranking Member Hatch and members of the Committee, thank you for this opportunity to highlight ways to advance physician payment reforms in Medicare. The Medicare program retains a strong commitment to provide care to approximately 50 million beneficiaries across the country; a key partner in the provision of this care are the 900,000 healthcare providers who see beneficiaries in medical offices, hospitals, skilled nursing facilities and other settings.[1] Each day, providers work hard to deliver the best care for their patients yet our current payment system falls short time and time again, with financing mechanisms that perpetuate fragmented care and volume over coordination and value. Fortunately, there are better ways to pay physicians that can enable them to improve care, enhance the patient experience and potentially achieve greater savings for the Medicare system overall. I am honored to present some solutions from my work at the Engelberg Center for Health Care Reform at the Brookings Institution and our Merkin Initiative on Clinical Leadership, as a Commissioner on the National Commission on Physician Payment Reform and perhaps most importantly, as a practicing internal medicine physician.[2]

Current Payment Policies in Medicare

Currently, Medicare pays physicians primarily by a fee-for-service (FFS) schedule that is informed by relative value units (RVUs). Relative value units are determined from the Resource Based Relative Value Scale (RBRVS) which defines the value of a service through a calculation of physician work, practice expense and practice liability.[3] A relative value unit is assigned to every medical service that physicians carry out during a clinical visit. [4] The RVU is then adjusted by geographic region (so a procedure performed in Miami, Florida is worth more than a procedure performed in Salem, Oregon). This value is then multiplied by a fixed conversion factor, which changes annually, to determine the amount of payment to the physician. As the number of billable service codes have grown over time, an extensive regulatory process was enacted to develop RVU weights and update them year over year.

Over time, the RVU updating system has placed an increasing importance, evidenced by RVU weights, on procedures, scans, and other technical services that fix certain ailments or problems. Emphasis on technologies and interventions have resulted in a marked disparity between reimbursement for specialties which emphasize procedures such as cardiology and gastroenterology and those that do not such as primary care, endocrinology or infectious diseases, thus exacerbating shortages and the hierarchical culture within medicine.

The 1997 Balanced Budget Act exacerbated the problem with the introduction of the sustainable growth rate or SGR. The SGR was intended to keep the growth in Medicare physician-related spending per beneficiary in line with growth in the nation’s gross domestic product (GDP). In the early years of the SGR, this worked fine, as spending growth was lower than the calculated GDP target and payment rates for physician services increased. But starting with the recession in 2002, spending growth per beneficiary began to exceed GDP growth. In 2002, payment rates were reduced accordingly, by 4.8 percent.

Every year since then, the scheduled SGR payment rate reductions have not taken full effect. Instead, because of concerns about access to care and the sufficiency of payments, Congress has headed off the full payment reductions on a short-term basis. Typically, this has involved offsetting at least some of the budgetary costs with payment reductions affecting other Medicare providers. As Figure 1 illustrates, actual updates as well as the SGR formula update still grow at rates far below input costs (MEI) and payment rates for other providers, thus exacerbating systemic flaws. In short, our system is broken.

Payment Reforms in the Affordable Care Act

The Affordable Care Act included over 100 policy changes in Medicare provider payments, many of which are currently being phased into the current delivery system and affect physicians directly. [5] These reforms include Medicare Accountable Care Organizations (ACOs), Value-based payment modifiers, the Bundled Payments for Care Improvement initiative as well a number of broader efforts for statewide level innovation, multipayer efforts to promote primary care and alignment of payments for Medicare-Medicaid beneficiaries (dual eligibles). These reforms are incredibly effective at encouraging providers to delivery high-quality, coordinated care at a lower cost and enable Medicare to pay for value. As Jonathan Blum, Acting Deputy Administrator and Director of the Center for Medicare recently pointed out in his testimony before this committee, “the Medicare program has been transformed from a passive payer of services into an active purchaser of high-quality, affordable care.” [6] While these reforms will offer a great deal of insight into how we can improve Medicare physician payment through authorities granted in the Patient Protection and Affordable Care Act, they are still largely based on a fee-for-service payment system. We must acknowledge the limitations in implementing payment reforms in the face of a dominant fee-for-service system. One early large-scale Medicare pilot implemented in oncology in 2006 serves as a good example: in conjunction with reductions in Part B drug payments, oncologists received an additional payment to report on whether the chemotherapy care provided by them adhered to certain evidence-based guidelines. This promoted comparisons to the published guidelines and also supported the development of evidence on how widely published guidelines were being followed in practice. [7] However this pilot did not make any changes in the underlying structure of fee-for-service payments and did not explicitly tie payments to measured improvements in performance, resulting in limited feasibility and adoption. In order to move away from our current system and build on the promise of ongoing efforts we must remove the SGR as a constant impediment to true systemic change.

Recommendations of the National Commission on Physician Payment Reform

In an effort to explore new ways that to pay for care that can yield better results for both payers and patients, the Society of General Internal Medicine convened the National Commission on Physician Payment Reform in 2012. Our commission, composed of a broad range of leadership and expertise spanning the public and private sectors, adopted twelve specific recommendations for reforming physician payment:

The SGR adjustment should be eliminated
The transition to an approach based on quality and value should start with the testing of new models of care over a 5-year time period and incorporating them into increasing numbers of practices, with the goal of broad adoption by the end of the decade.
Cost-savings should come from within the Medicare program as a whole. Medicare should where possible, avoid cutting just physician payments to offset the cost of SGR repeal, but should also look for savings from reductions in inappropriate utilization of Medicare services.
The Relative Value Scale Update Committee (RUC) should continue to make changes to become more representative of the medical profession as a whole and to make its decision-making more transparent. CMS has a statutory responsibility to ensure that the relative values it adopts are accurate and appropriate, and therefore it should develop alternative open, evidence-based, and expert processes beyond the recommendations of the RUC to validate the data and methods it uses to establish and update relative values.
For both Medicare and private insurers, annual updates should be increased for evaluation and management codes, which are currently undervalued, and updates for procedural diagnosis codes, which are generally overvalued and thus create incentives for overuse, should be frozen for a period of three years. During this time period, efforts should continue to improve the accuracy of relative values, which may result in some increases as well as some decreases in payments for specific services.
Fee-for-service contracts should always include a component of quality or outcome-based performance reimbursement.
Higher payment for facility-based services that can be performed in a lower cost setting should be eliminated. Additionally, the payment mechanism for physicians should be transparent, and should reimburse physicians roughly equally for equivalent services.
In practices having fewer than five providers, changes in fee-for-service reimbursement should encourage methods for the practices to form virtual relationships and thereby share resources to achieve higher quality care.
Over time, payers should largely eliminate stand-alone fee-for-service payment to physicians because of its inherent inefficiencies and problematic financial incentives.

10. Because fee-for-service will remain an important mode of payment into the future even as the nation shifts to fixed-payment models, future models of physician payment should include appropriate elements of each. Thus, it will be necessary to continue recalibrating fee-for-service payments, even as the nation migrates away from that method of paying physicians.

11. As the nation moves from a fee-for-service system to one that pays physicians through fixed payments, initial payment reforms should focus on areas where significant potential exists for cost savings and higher quality.

12. Measures should be put into place to safeguard access to high quality care, assess the adequacy of risk-adjustment indicators, and promote strong physician commitment to patients.

Moving Beyond the SGR

Eliminating the SGR is a principal recommendation of many expert reports, including our Commission’s Report, MEDPAC, The Brookings Institution, Simpson-Bowles and the Bipartisan Policy Center, but the question remains, repeal and replace with what? [8][9]^,[10]As stated above we (and other clinical groups and societies) recommend a five year transition to newer models of payment which move away from FFS as the dominant payer. But the devil is in the details, and proposals to move towards new models over a period of time leaves policymakers and physicians wondering what their practices will look like next month, next year and beyond. In moving from principle to practice, it is also important to acknowledge that while there will be no one payment model that applies to all physicians, payment models must be relevant to primary care physicians and specialists alike. Additionally, given the growing complexity of caring for Medicare beneficiaries, payment models should encourage collaborations between specialists and primary care physicians rather than focus on a model that is suited for one clinical specialty alone.

Short-Term Steps in Advancing Payment Reforms

To facilitate providers’ transition to alternatives to fee-for-service payments, CMS should harmonize current payment adjustments and quality improvement initiatives and apply those funds towards a care coordination payment which could give physicians more support for broader long-term reform pathways. Medicare has implemented quality reporting systems and payment adjustments for physicians, hospitals, and other providers. But these payments are generally administered as either a flat percentage or adjuster to all FFS payments. In contrast, shifting some existing FFS payments into a care coordination payment would give providers more support in moving toward condition-based, episodic payments, or global payments that allow for management of a population of payments that would otherwise be impossible in the current payment setting.

Table One highlights current efforts within the Medicare to increase value in care; each initiative is important but in isolation results in marginal financial gains and at times and each of these initiatives is limited in scope. For example, quality measures for the Physician Quality Reporting System (PQRS) have flexible annual submission options, with qualification through registries, electronic health records etc. However, the program has suffered from criticism that measures are not as relevant to specialists. And at best, providers will gain approximately an average of $1059 for participation per year, which some might say is not worth the effort, even in a penalty phase of the program. With the passage of the American Taxpayer Relief Act of 2013, a mechanism will be in place by 2014 for specialty specific efforts to satisfy CMS’ reporting requirements for PQRS, which will encourage higher specialist participation in quality improvement efforts and help align clinician-developed quality measures with CMS’ mandate to examine quality of patient care. Applying these measures to help physicians understand how registries can not only benefit their patients but lead to better predictability in a changing payment landscape will facilitate entry into pathways of reform.

Meaningful use measures are also quite detailed with important process metrics but physicians will likely also “perform to the measure” and may have difficulty going beyond unless there are linkages to payment reform. This is reflective of the sentiment that many providers express that they are constantly being asked to measure and perform, all while trying to see just as many patients in a day of work with little to no reward for doing less or changing workflows in order to reduce inappropriate utilization of resources. For example, proposed Stage 2 meaningful use measures include 17 core measures and six additional menu objectives from which a physician would choose at least three. This adds up to a total of 20 distinct actions that often involve all office staff. Rather than adding to these measures, CMS should consider how existing measure components could be applied to a payment update overall or a care coordination payment for the care of a patient with a chronic disease.

In the case of a care coordination payment, providers who opt to enter into a care coordination pathway in the first year can receive a lump sum of payment. This payment would be roughly equivalent to the potential bonus payments for all programs in table one. In return they would have to demonstrate that they are improving clinical practice and implementing outcomes-based clinical measures which are germane to their practice. In this example, a cardiologist would receive a population level care coordination payment derived from bonus payments and some FFS payments who does the following:

Participates in a care coordination pathway for chronic cardiac disease (atrial fibrillation, congestive heart failure, etc)
Subscribes to a cardiac specific registry (thus meeting PQRS requirements)
Implements patient engagement tools for electronic care coordination, medication reminders, therapeutic lab monitoring for anticoagulation (meeting requirements for meaningful use, value-based modifier program, e-prescribing)
Implements a significant practice transformation (potentially a new component which allows for a physician in a small, medium or large practice to individualize their approach to innovation)

The cardiologist would satisfy program requirements and would receive the maximum bonus payments.

Implementing this kind of approach involves potentially supporting CMS and additional entities to provide data on performance measures and quality improvement at more regular intervals along with technical assistance to understand how to translate incoming data into practice transformation. This process can begin in the year following a SGR repeal and can be supported through the assistance of existing clinical societies and quality improvement organizations. In this manner, assumption of clinical and performance risk becomes more commonplace for physicians. Simply put, physicians understand that they need to be held accountable for payment in a standard fashion, but want to feel that they can bring some degree of personalization into their practice in order to meet the needs of their populations.

Finally, I encourage CMS to continue implementing important changes through the Physician Fee Schedule including recent changes for care coordination.[11] These changes are an important acknowledgment that while we migrate from a payment system dominated by fee-for-service, we need to also enhance the existing system to be aligned with the expected outcomes of policy changes. Recent calls for evaluating the distribution of evaluation and management codes and determining the accuracy and appropriate valuation are also an important step in the short term.

Movement from The Short Term to Longer Term Sustainable Payment Reforms

As clinicians of all specialty types realize that there is a viable pathway to care for patients and work across silos. The appetite for a more attractive option is evidenced by the overwhelming response to applications for the CMMI Challenge Grants, BPCI initiative, Medicare Shared Savings Program and other efforts. Clearly, physicians want an alternative.

Through my work at the Brookings Institution’s Engelberg Center for Health Care Reform and the Richard Merkin Initiative on Clinical Leadership, we have been meeting with physicians in primary care and specialties as well as other healthcare stakeholders. With iterative feedback from clinicians in practice, we have proposed a longer term payment model that takes into account the currently uncompensated critical elements of patient care, the need for more flexibility in the way physicians are able to use their time and treatment resources in the best interest of their patients’ individual circumstances, and the need to implement care reforms in a way that recognizes the intense and growing cost pressures in our health care system.

Our model, outlined in Figure 2, would build on the short term payment advances above with incorporation of a payment for care coordination that is derived from the programs in Table One and identify additional opportunities to improve care and lower costs that are not reimbursed well in traditional fee-for-service payment systems. For example, a common procedure in the outpatient cardiac practice is the echocardiogram (echo), or ultrasound of the heart. This procedure is sometimes performed in place of preventive counseling or watchful monitoring of a patient in coordination with a primary care physician, in large part because a hospital-based outpatient cardiology practice receives up to $450 for an echo compared to $53 for a visit without the procedure. Imagine paying both the cardiologist and primary care physician a fixed payment of $400 that allows for longer term communication and conservative monitoring in return for reporting on clinical outcomes at a population level. The clinicians are take the financial risk involved in the clinical care of their patient using the investments previously made by clinically driven pathways, registries and care coordination solutions.

Column A represents total spending on health care and reflects the current state of physician payment: exclusive reliance on the FFS model for physician payments, with waste and inefficiency in the form of redundant and unnecessary care, breakdowns in coordination, escalation of preventable complications etc. This leaves the total cost of physician care high.

Column B illustrates total spending in our alternative payment model. First, a set of services currently reimbursed for a particular episode of care or part of chronic care management are bundled together into a single payment to physicians as a case management payment. For example in clinical oncology a case management payment would include after hours phone care for breast cancer or a palliative care counselor for patients with lung cancer. This enables clinicians to focus less on volume and more on tighter coordination among providers and settings for patients. In addition, we continue the aforementioned care coordination payment paid to physicians, which is built on concepts such as PQRS/ MU and actually increases the current level of physician payment relative to the fee-for-service baseline in Column A. Care coordination payments allow flexibility for physicians to invest in clinical practices and infrastructure through practice transformations that maximizes their ability to treat patients in clinically appropriate ways while not reducing their income due to reductions in billable procedures that would otherwise occur. The investments in clinical practice can include infrastructure/HIT investments or in the case of a small practice, an investment in a shared clinical social worker with other small practices with similar patient populations.

Continuous quality improvement resulting from adherence to clinician-driven process and outcomes measures and the increased flexibility in income will push physicians to decrease and ultimately eliminate the waste and inefficiencies that plague the current system. Overall physician payments increases, offset by reductions in total Medicare spending and system wide savings. Care coordination payments that enhance total physician income tied to quality measures would encourage physicians to collaborate and focus on elements of patient care that reduce cost and inefficiencies across the spectrum. In oncology, for example, we do not specify which metrics should be used in which case but comment that target metrics would change over time and as efficiency is maximized in certain areas of care (i.e. ED visit rates) bonus payments would not cease because of lack of room for improvement. Measures would have to be selected with flexibility to accommodate various provider circumstances and changes in the long term improved performance in certain areas.

Physicians who enter into broader accountable care arrangements in which there is a shared savings component will likely find that this model could lead to an increased proportion of shared savings beyond the 2% threshold; therefore our described model would not be mutually exclusive to ACO arrangements, but could enhance them given the decreased reliance on fee-for-service reimbursement.

Tools that Enable Financial, Clinical and Performance Risk

As I have mentioned earlier, physicians will need tools to better understand risk- these are not lessons we had in medical school or in clinical training. Financial metrics (such as those available to ACOs), performance metrics in the form of actionable and regular data feeds as well as peer-led initiatives should be considered essential components of a payment reform package.

Conclusion

Our nation is in a sustained period of constrained finances and while the cost to repeal the SGR has been decreased to $138 billion, finding the offsets and mechanism to pay for such a solution will not be easy. But it is essential that this Committee seize the opportunity to finally dispel the notion that we allow for a system that rewards the balkanization of our patients through a payment mechanism which promotes volume over value. I commend Senators Baucus and Hatch in their recent call for proposals and specific suggestions from the clinical community and look forward to working with the Committee to identify a tangible path forward. Thank you for this opportunity and I look forward to your questions and comments.

[1] Report to the Congress: Medicare Payment Policy. Medicare Payment Advisory Commission. http://www.medpac.gov/documents/Mar12_EntireReport.pdf

[2] Frist W, Schroeder S, et al. Report of The National Commission on Physician Payment Reform. The National Commission on Physician Payment Reform. http://physicianpaymentcommission.org/wp-content/uploads/2013/03/physician_payment_report.pdf

[3] The RBRVS has three components. Physician work accounts for the time, skill, physical effort, mental judgment and stress involved in providing a service and is approximately 48 percent of the relative value unit. Practice expense refers to the direct costs incurred by the physician and includes the cost of maintaining an office, staff and supplies and accounts for 48 percent. Professional liability insurance takes into account the malpractice insurance essential for maintaining a practice and is 4 percent of the calculation. Overview of the RBRVS. American Medical Association. http://www.ama-assn.org/ama/pub/physician-resources/solutions-managing-your-practice/coding-billing-insurance/medicare/the-resource-based-relative-value-scale/overview-of-rbrvs.page

^{^[4]}The Centers for Medicare and Medicaid Services (CMS) uses Current Procedural Terminology (CPT) codes to determine services that it will reimburse for Medicare enrollees and each CPT code has an assigned relative value unit.

[5] Policy Options to Sustain Medicare for the Future. January 2013. Kaiser Family Foundation. http://kaiserfamilyfoundation.files.wordpress.com/2013/02/8402.pdf

[6] Statement of Jonathan Blum on Delivery System Reform: Progress Report from CMS Before the Senate Finance Committee. 28 February 2013. Full transcript available at: http://www.finance.senate.gov/imo/media/doc/CMS%20Delivery%20System%20Reform%20Testimony%202.28.13%20(J.%20Blum).pdf

[7] Doherty J, Tanamor M, Feigert J, et al: Oncologists’ Experience in Reporting Cancer Staging and Guideline Adherence: Lessons from the 2006 Medicare Oncology Demonstration. J Oncol Pract. 6(2): 56–59. 2010.

[8] Antos J, Baicker K, McClellan M, et al. Bending the Curve: Person-Centered Health Care Reform. April 2013. Full report here: http://www.brookings.edu/research/reports/2013/04/person-centered-health-care-reform

[9] Bowles E, Simpson A, et al. A Bipartisan Path Forward to Securing America’s Future. Moment of Truth Project. April 2013. Full report available here: http://www.momentoftruthproject.org/sites/default/files/Full%20Plan%20of%20Securing%20America's%20Future.pdf

[10] Daschle T, Domenici P, Frist W, Rivlin A, et al. A Bipartisan Rx for Patient-Centered Care and System-Wide Cost Containment. Bipartisan Policy Center. April 2013. Full report available here: http://bipartisanpolicy.org/sites/default/files/BPC%20Cost%20Containment%20Report.PDF

[11] Bindman A, Blum J, Kronick R. Medicare's Transitional Care Payment — A Step toward the Medical Home.N Engl J Med 2013; 368:692-694

Authors

Kavita Patel

Publication: U.S. Senate Committee on Finance

How to Cut the Pentagon Budget Better Than Sequestration Does

Michael E. O'Hanlon — Mon, 13 May 2013 15:16:00 -0400

A deeply flawed conventional wisdom is developing that despite warnings from former defense secretary Leon Panetta and others that the sky would fall if sequestration occurred, automatic spending cuts are not so bad after all. By this logic, not only should the cuts in defense as well as domestic “discretionary” accounts continue, but it would also be okay to implement automatic and across-the-board cuts in the next fiscal year, too, starting in October.

Yet the path we are on is far from acceptable.

While some of this year’s roughly $46 billion in defense cuts from sequestration reflect reasonable pruning, many of the reductions are not sustainable. Savings from policies such as dramatically reducing training for most military units this summer are not catastrophic if done once, but they cannot be continued without fundamentally jeopardizing military readiness.

Then there are savings that appear real but are not, such as deferred overhauls of major weaponry and deferred maintenance at bases. We can put off some repairs, but most will have to be done eventually — and may be more expensive if deferred. Then there are savings made on the backs of those with limited ability to make their voices heard: furloughs of civilian government employees top this list. In addition to being highly disruptive to government operations, these furloughs suggest that federal workers are second-class citizens (even as members of Congress can keep their entire paychecks for the year). Graduating students at public policy schools and other worthy individuals are being denied opportunities to work for the federal government due to hiring freezes.

Together, these temporary savings, faux savings and unfair savings represent at least half the $46 billion in cutbacks that the Defense Department is experiencing.

The military budget can be cut beyond the initial reductions from the 2011 Budget Control Act. But continued sequestration or reductions of comparable magnitude such as those resulting from the Simpson-Bowles proposals go too far. Such plans tend to make sweeping claims that, because defense spending remains reasonably high by historic and international standards, it can be cut much further. This reasoning is too vague for a world in which crises continue throughout the broader Middle East, U.S. forces remain engaged in Afghanistan, North Korea continues to nuclearize, and China continues its rise. It is time to get specific about further defense cuts.

Read the full article »

Authors

Michael E. O'Hanlon

Publication: The Washington Post

Image Source: © Romeo Ranoco / Reuters

How to Avoid Another FAA Fiasco

Clifford Winston — Wed, 08 May 2013 00:00:00 -0400

In the aftermath of last month’s air traffic control fiasco, many people are probably wondering how there could be a budget pinch since travelers pay for air traffic control every time they buy an airline ticket. Current fees amount to a 7.5% ticket tax per flight and $3.90 per flight segment, which generates some $10 billion in annual revenues. Assuming that user fees fund the service, it made no sense that the sequester would affect air traffic control. But that assumption is wrong.

What Americans experienced in April was a classic example of how federal transportation deficits can reduce the nation’s productivity. Millions of man-hours were wasted on planes that were delayed, and hundreds of thousands of travelers postponed or canceled trips that generate work for people at their destinations. Unfortunately, the United States will experience more costly disruptions to its transportation system unless its deficits are curbed by efficient policy reforms or by privatization.

Travelers’ user fees do not bear a close relationship to an aircraft’s contribution to the cost of air traffic control. Why? Because there is no variation in price for airspace congestion that increases traffic control’s workload. The gap between passengers’ user fees and the cost of air traffic control is even greater for unscheduled general aviation (corporate jets and other private flights). General aviation causes unpredictable peaks in demand for airspace, and their preferred altitude approaches create additional complexity and cost for controllers. Overall, revenues from user fees do not cover costs, and the difference is covered by a subsidy from the general federal fund.

The Federal Aviation Administration has been unable to figure out the real costs of air traffic control services and thus has underpriced it since its founding in 1958 as the Federal Aviation Agency. The inadequacy of the ticket tax to cover costs over time has been compounded by the intensity of airline competition that has driven down real airline fares. The costs of air traffic control also have undoubtedly been inflated by the delays and cost overruns attributable to the FAA’s inability to adopt new technology to upgrade and modernize the system. The long-anticipated next generation satellite-based air traffic control system, known as NextGen, is billions over budget and years behind schedule. It may need to be renamed PastGen at the rate of its deployment.

FAA’s involvement with public airports is also characterized by pricing and cost inefficiencies. The charge that an aircraft pays public airports to land—they are not charged to take off—is based on weight and generally does not vary by time of day. But the time at which an airplane lands clearly affects airport congestion and an airport’s capacity to reduce delays. Building new runways has turned into multiyear projects with a price tag in the billions of dollars due to various regulations that can take decades to meet, especially Environmental Protection Agency environmental impact standards.

As part of a federal agency that depends on taxpayer funds to cover a deficit caused by its inefficiencies, air traffic control is at the mercy of Congress. So when the sequester hit, the FAA’s already troubled budget was cut—including funding for air traffic control.

To be sure, the 10% cut in air traffic control was politically efficient from the White House’s perspective, because it delayed more than one-third of all flights and drew the immediate attention of the public and Congress. But FAA’s pricing and operating inefficiencies led to the deficits that rendered air traffic control operations subject to manipulation.

Air traffic control is not an isolated case. Evidence in my forthcoming Journal of Economic Literature paper indicates that the nation’s highways, ports, urban bus and rail transit systems are also characterized by prices that are below costs and by inefficiencies that inflate operating costs, which have resulted in large and growing budget deficits that make those services vulnerable to politics. Cuts in their funding could adversely affect the nation’s productivity by, among other things, increasing commuting and shipping delays.

One way to insulate the nation’s transportation system from the threat of costly political shocks is to efficiently reform its pricing policies so services are financially supported by real, cost-based user charges. Alternatively, the U.S. could follow the lead of countries such as Canada, England, Australia and New Zealand and explore privatizing its transportation services.

All of America’s transportation modes and infrastructure services were initially developed and operated by the private sector. Over the past centuries, they were brought into the public sector by financial crises—some that the government arguably helped create by interfering in the market. Now that the government’s political crises are becoming ever more disruptive, it may be time to return the transportation system back to where it started.

Authors

Clifford Winston

Image Source: © Larry Downing / Reuters

Should the United States Have 2.2 Million More Jobs?

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 03 May 2013 10:30:00 -0400

Employers added 165,000 jobs in April, according to the Bureau of Labor Statistics, following upwardly revised gains of 332,000 in February and 138,000 in March. The three-month average pace of job gains of 211,000 was slightly above the average pace of 173,000 jobs over the last twelve months. The unemployment rate edged down to 7.5 percent, and the fraction of the population reporting a job edged up. The unemployment rate has now declined 0.6 percentage point since last April, although much of this change can be attributed to declining rates of labor-market participation rather than increases in employment.

These numbers continue a pattern of steady growth in the labor market, but they also confirm that America’s recovery from the Great Recession is still very much a work in progress. The public sector, especially, has been a drag on the economy in recent months. While the private sector has added roughly 2.2 million jobs over the past year, employment in state, local, and federal governments has declined by 89,000, including significant losses to teachers and emergency responders. In this challenging economic climate, there is growing concern about how sequestration—the across-the-board budget cuts to discretionary spending that took effect on March 1—may negatively impact the recovery even more. Indeed, forecasters at the Congressional Budget Office project that the sequestration could reduce overall GDP growth in the United States by 0.6 percentage point and cost the economy 750,000 jobs by the end of 2013.

In this month’s employment analysis, The Hamilton Project examines the trajectory of public-sector employment since the onset of the Great Recession and contrasts this decline to periods of economic recovery after previous recessions. We find that the last several years’ policy choices are starkly different from those following previous recessions. Specifically, there are 2.2 million fewer jobs today, relative to what would have occurred with the policy response typical of the five preceding recessions. We also continue to explore the “jobs gap” and find that the country needs to add about 10.0 million jobs to return to pre-recession employment levels.

Government Employment Since the Recession

The downward trend in public-sector employment, described in a Hamilton Project report last summer, has continued into the opening months of 2013. While the private sector has added jobs to the economy in every month since March 2010, a total increase of approximately 6.8 million jobs, the public sector has contracted. To put this in perspective, federal, state, and local governments added jobs in only twelve of the thirty-eight months since March 2010 and have lost more than 625,000 jobs over this period.

The graph below shows the ratio of government employment to the civilian non-institutional population (every civilian in the United States sixteen and older who is not in prison or a live-in care facility) going back to 1980. For the twenty years prior to the Great Recession, this ratio stayed relatively constant, but since then it has dropped precipitously, except for the temporary uptick in 2010 when government employment rose to accommodate demand for U.S. Census workers.

This figure shows that the percentage of individuals working for federal, state, and local governments is at a decades-long low. In fact, the ratio of government employment to population has not been below 9 percent since the mid-1960s. The result, as detailed in last summer’s Hamilton Project report, is over 200,000 fewer teachers, 50,000 fewer policemen, and 6,000 fewer air-traffic controllers since 2009.

Government Policy: It's Different This Time

By cutting jobs during a period of already high unemployment, budget policies have contributed to the tepid pace of labor-market recovery and stand out as a departure from typical policy responses after recessions. The figure below shows the change in government employment forty-six months after every recession in the United States going back to 1970. (The double-dip recessions of 1980 and 1981, which ended in November 1982, are counted as a single event.) The bars are scaled by the population of the United States in June 2009 so that the magnitudes of employment changes are comparable.

The ongoing recovery, which began when the Great Recession ended in June 2009, dramatically deviates from the usual pattern. In the forty-six months following the end of the five other recent recessions, government employment increased by an average of 1.7 million. During the current recovery, however, government employment has decreased by more than 500,000. Put together, the policy differences have led to 2.2 million fewer jobs today. Such a large contraction of the public-sector during a recovery is unprecedented in recent American economic history.

The April Jobs Gap

As of April, our nation faces a jobs gap of 10.0 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until April 2020 to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by December 2016.

To explore the outcomes under various job creation scenarios, you can try out our interactive jobs gap calculator by clicking here. You can also view the jobs gap chart for each state here.

Conclusion

Policymakers are currently faced with the unenviable task of simultaneously increasing employment and addressing America’s long-term budget deficits, but—at a time when the rate of government employment is at a historic low—sequestration threatens to further slow the growth of the public sector and lengthen the time it will take to close America’s jobs gap. Even when ignoring any indirect impacts, a typical policy response to the Great Recession would have led to a jobs gap that is 2.2 million jobs smaller than current gap of about 10.0 million and commensurately reduced the amount of time until the economy returns to full employment.

It is critical to achieve both employment gains and fiscal stability. The textbook approach is for government to continue to support the recovery and credibly enact deficit reduction that will not take hold until the employment crisis has been mitigated substantially. With respect to deficit reduction, The Hamilton Project recently released a collection of fifteen proposals that seek to reduce the deficit while improving efficiency and promoting broad-based economic growth. To see how these proposals could impact the long-term deficit, you can try our interactive budget calculator here. The Hamilton Project also continues to explore policies to boost employment, including a recent discussion paper on improving worker training programs.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: © Mike Segar / Reuters

Fund - Don't Cut - U.S. Soft Power

Michael E. O'Hanlon and Gen. David Petraeus — Tue, 30 Apr 2013 00:00:00 -0400

The president’s budget proposal is now on the streets of Washington, D.C. Currently, it would protect funding for the State Department and the Agency for International Development and related activities from further cuts. The combined annual budget for development aid, security aid and diplomacy has averaged close to $60 billion over the past half decade. That is now slated to decline to about $50 billion, partly due to reduced war-related costs. But this amount could come under intense scrutiny. Moreover, if there is no grand bargain between the president and the Congress, sequestration could force reductions of a further 10 percent.

Such an outcome would be bad for our nation’s security. As each of us has testified on Capitol Hill in past years America’s ability to protect itself and advance its global interests often depends as much on its “softer” power as it does on our nation’s armed forces. For example, though Latin American countries were themselves primarily responsible for their progress, the headway many of them made in stabilizing their countries in recent years has been a big plus for American security, too — and American aid had a role in that progress. That is part of why we have supported a budget deal that would repeal sequestration and achieve most further deficit reduction through savings in entitlement spending with similar increases in revenue generation. Implicit in our approach was the thinking that lawmakers should avoid the temptation to gut foreign aid just because it generally lacks a strong constituency in the United States.

America’s spending on development and diplomacy and security aid — the so-called 150 account — has strengthened under Presidents George W. Bush and Barack Obama. That has been a positive and long overdue development. Funds for diplomacy and development were starved in much of the 1990s. Some of the reductions in that earlier period were warranted, admittedly, as aid then was not always as productive as it might have been.

Today, we are arguably doing a good deal better. Various forms of development assistance and aid have, in fact, produced impressive results on a host of fronts in recent years. The President’s Emergency Plan for AIDS Relief, a major initiative of Presidents Bush and Bill Clinton and now President Obama, has played a significant role in helping to turn the tide against the HIV/AIDS epidemic — even if more work remains to be done. Development assistance has also helped more than 600 million people move out of extreme poverty, achieving one of the United Nations Millennium Development Goals several years before the 2015 target date.

Moreover, as John Podesta has recently written, in this century alone, aid has helped reduce the global childhood mortality rate by one-third — impressive, even if only halfway toward the U.N. goal for 2015. The maternal mortality rate has been reduced by almost half, as well. And progress has been seen in other sectors — such as agriculture, energy and other realms, including many in the combat zones where each of us spent considerable time in the past decade.

America deserves considerable credit for much of this progress, as the U.S. is the world’s largest aid contributor, at roughly $30 billion in 2012. The United Kingdom, Germany, France and Japan round out the rest of the top five donors, each providing from $10 billion to $15 billion a year. But relative to our economy’s size, America does not do more than its fair share; it provides just 0.19 percent of gross domestic product in development aid, similar to Japan’s level but less than half that of the three big European donors listed above, and less than a third the U.N. goal of 0.7 percent of GDP. Private donations improve our net national position somewhat, but only to an extent. The State Department budget is still less than 5 percent of the military’s — and the number of Foreign Service officers worldwide is less than half the number of soldiers in a single Army division.

Given our military contributions to international stability and the global economic growth that results from that stability in various areas, American foreign aid doesn’t need to grow substantially. But it should not be cut further. Consider some of the ideas we might want to consider in the years ahead. These should not be unconditional offers of help but would require the right kind of cooperation from key nations abroad whose future stability is central to our own security:

A possible deal to help Egypt revive economic growth and service its debt after a two-year economic downturn following its Arab Spring; this would be contingent on President Mohamed Morsi respecting the Egyptian constitution and helping us with Middle East peace;

A possible proposal to help Pakistan reinvigorate its energy sector, which currently holds back the country’s growth and compromises its quality of life; this would be contingent on Pakistan contributing more to security in the region and to pursuing reforms that reduce disincentives for significant private initiatives in the energy arena;

A major push with other donors to help countries like the Democratic Republic of the Congo reform and strengthen their security forces;

Aid for transitional governments in Libya, Yemen and Mali, and perhaps someday Syria, to get on their feet so they can stabilize, develop security forces, police their own territories and prevent terrorists from establishing sanctuaries;

Ongoing help in future years for Afghanistan’s government provided that it takes steps toward better governance and a sound election in 2014.

This agenda need not break the bank; even taken together, development aid and assistance and these initiatives would not remotely add up to another Marshall Plan. But this discussion suggests that our security will be improved by sustaining foreign aid in the years ahead rather than by making further cuts.

Authors

Michael E. O'Hanlon
Gen. David Petraeus

Publication: POLITICO

Image Source: © Akhtar Soomro / Reuters

Reforming Medicare: Fiscal Challenges and Policy Solutions

Mon, 22 Apr 2013 14:30:00 -0400

Event Information

April 22, 2013
2:30 PM - 4:00 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue, N.W.
Washington, DC 20036

In recent years, Medicare has moved to the center of public debate about the future of health care and fiscal policy. The retirement of the baby boomer generation, now in its initial stages, will expand the number of beneficiaries significantly over the next two decades, and program costs will continue to rise. There is broad, though not universal, agreement that changes in Medicare are needed, but there is little consensus about the direction of those changes. The most recent report from The Boards of Trustees for Medicare indicates that the program’s long-term problems are worsening and that “lawmakers should not delay” in addressing these financial challenges.

On April 22, Governance Studies at Brookings hosted a forum to analyze Medicare’s problems and explore possible policy solutions and reforms to one of the country’s largest and important social programs. A panel of experts discussed possible future changes to Medicare, implementation challenges and how reforms could affect the current system.

How to Build a Better Health-care System

Tom Daschle, Bill Frist, Pete V. Domenici and Alice M. Rivlin — Thu, 18 Apr 2013 07:00:00 -0400

The four of us came together to change the conversation around how to improve health care and constrain cost growth. What we learned is that, until better care is prioritized over more care, our nation will continue to face a problem with health-care costs. The good news is that, through thoughtful policy, health-care practitioners can be encouraged through rewards to focus far more on what is best for their patients and less on the number of tests and procedures they can order. The even better news is that such a health-care vision can not only produce better care but also cost less.

With the Bipartisan Policy Center, we will release a report Thursday with more than 50 recommendations to achieve the critical goal of improving the quality and affordability of care for all Americans while containing high and rising health-care spending. This report is the culmination of nearly a year of work, including stakeholder outreach, thorough research and substantive analytics to quantify the impact of our proposed policies.

Too often we in Washington talk about health care as though it is little more than a line item on a budget table. Those of us who have experienced the best of health care know that is not how care should be delivered or policy crafted in this most personal of issues. Our country can achieve a higher-value health-care system—meaning both higher quality and greater efficiency.

Health-care cost drivers are complex and interwoven, but the most problematic ones we identified are the inefficiencies, misaligned incentives and fragmented care delivery in the current fee-for-service reimbursement system. To address these, we seek to promote coordinated and accountable systems of health-care delivery and payment, building on what has proved successful in the private and public sectors. Organized systems of care emphasize the value of care delivered over the volume of care. These systems are often better able to meet patients’ needs and desires and are able to effectively reimburse providers and practitioners for delivering high-quality care.

In all our proposals, we sought to avoid simple cost-shifting as a means to generate federal budgetary savings, instead promoting transparency and protecting patient choice. We also focused on reforms that will incite transformation across the health-care system, not limited to Medicare. We believe, however, that the power of Medicare can be leveraged to lead the way in transforming U.S. health care.

In brief, our recommendations:

Preserve the promise of traditional Medicare while adding more choices and protections for beneficiaries, including accountable systems of care and a stronger, more competitive Medicare Advantage program.
Strengthen and modernize the traditional Medicare benefit, including adding a catastrophic cap, rationalizing cost-sharing and premiums and expanding access to assistance programs for those with low incomes.
Reform the tax treatment of health insurance to limit the taxfavored treatment of overly expensive insurance products.
Empower patients by promoting transparency that is meaningful to consumers, families and businesses, and streamline quality reporting.
Advance the nation’s understanding of potential cost savings from prevention programs, through support for research and innovation on effective strategies to address costly chronic conditions.
Offer incentives to states to promote policies that will support a more organized, value-driven health-care delivery and payment system, such as supporting medical liability reform and strengthening their primary-care workforce.

All of these policies are designed to improve the quality and value of our nation’s health care. That is where every health-reform effort should start. The savings that we achieved — $560 billion over 10 years in debt and deficit reduction — is the outgrowth of our work, not the goal.

No single set of recommendations can fix the health-care system or the nation’s debt and deficit crisis overnight, but we hope this report can start a constructive, pragmatic dialogue among policymakers and political leaders. By presenting this report to federal, state and private-sector leaders, we hope to promote a collaborative dialogue and a shared understanding of strategies to put our nation’s health system, as well as its economic outlook, on a sounder, healthier and more sustainable path.

Authors

Tom Daschle
Bill Frist
Pete V. Domenici
Alice M. Rivlin

Publication: Washington Post

Image Source: © Jim Young / Reuters

On the Budget, Obama's Opening Bid Was Reasonable

Ron Haskins — Tue, 16 Apr 2013 15:26:00 -0400

It would be difficult to imagine an uglier process of enacting legislation on important issues than the last two years of attempts by federal policymakers to reduce the size of the nation's deficit. Although no single explanation would suffice to account for the difficulty of making bipartisan progress, a major philosophical difference between the political parties stands out as the major culprit.

Broadly speaking, Republicans want smaller government and lower taxes; Democrats want more government and higher taxes. Since enactment of the Social Security Act in 1935, the story of the federal government has been one of expanding programs, increasing federal spending, and increasing taxes. Republican denials notwithstanding, Republicans have often supported the thousands of laws that expanded government relentlessly over the years and even in raising taxes to support the programs, although they have often kept in check the higher levels of spending proposed by Democrats. Even so, for the last several years Republicans have talked more vigorously about the philosophy of small government and low taxes. Necessity met opportunity when the nation entered a slow-burning deficit mess, aggravated by a severe recession that soon convinced almost everyone that the federal government had to balance its books by cutting spending, raising taxes, or both. Roughly speaking, the need to reduce the deficit, combined with the fact that cutting spending would move the nation toward the Republican goal of smaller government, has given Republicans an opportunity to cut spending to an extent that would have otherwise been impossible.

By contrast, the deficit puts Democrats in a defensive posture because, as President Obama's budgets show, they typically propose increased government spending. Ironically, Democrats also have been able to seize on an external force to support their cause. That force was the Great Recession that began in December 2007 with effects, especially high unemployment, that continues today. In 2009, Democrats were able to pass an $800 billion plus stimulus bill to fight the recession and that bill expanded a host of programs for the poor and unemployed. Some of those changes have been made permanent, which has had the effect of permanently boosting government spending.

The recession and the stimulus have allowed Democrats to advance their agenda; the deficit and the compromise legislation Congress has passed to reduce it over the past two years have allowed Republicans to advance their agenda, although the fiscal cliff agreement in January did contain a $600 billion tax hike on the rich.

Now comes President Obama with his budget proposal for 2014. He proposes to increase taxes by imposing a minimum tax rate of 30 percent on earnings over $1 million, limiting itemized deductions for those in the top tax brackets, and increasing the federal tax on cigarettes to pay for expanded spending on preschool. Republican leaders have been scathing in their rejection of the tax increases. But the president also proposes changes in health care, primarily Medicare, by encouraging more Medicare recipients to use generic drugs and by making elderly couples with incomes over $170,000 pay for more of their care. And most importantly, Obama proposes to change the inflation adjustment in Social Security benefits in a way that would reduce spending by about $130 billion over the next decade and even more after that.

Although Republican leaders have been hostile to many features of the Obama budget, the Medicare and Social Security proposals are important and would both cut spending. It is even possible to see the inflation adjustment proposal as a breakthrough because a Democratic president has, at the cost of infuriating his political base, proposed to reduce spending on the program that is the greatest policy achievement of the Democratic Party. In the past, Republican leaders have urged the president to make the specific inflation adjustment proposal he now offers in his budget. Republicans should take it.

The President makes a number of new spending proposals in his 2014 budget, notably on infrastructure, preschool expansion, support for manufacturing, and making permanent several existing tax credits that help low-income families. But the Office of Management and Budget estimates that as a percentage of GDP, the nation's debt would decline from 76.6 percent in 2013 to 73 percent in 2023. Many analysts and politicians think the debt should be reduced more, but this reduction, if the OMB estimates are correct, would represent continued progress on the deficit and a major breakthrough on Social Security.

The opening question for serious negotiations about the 2014 budget and deficit reduction is whether both sides have shown enough give to justify serious bargaining. Whatever else it might do, the Obama budget proposal, by offering an important reduction in Social Security spending and a cut in Medicare spending that could be expanded in the future, shows considerable give on the president's side. So far the response from most Republicans has been dismissive. Maybe Republican leaders should take a second look and make a counterproposal that falls between the Ryan budget and the president's budget while retaining the Social Security and Medicare savings. If they have to offer something in taxes, which they will to get a deal, remind Democrats that the Social Security inflation adjustment would also increase income taxes by around $100 billion over ten years and accept the president's cigarette tax proposal. Something along these lines would allow both Democrats and Republicans to achieve part of their traditional agenda.

Authors

Ron Haskins

Publication: Real Clear Markets

Image Source: © Jason Reed / Reuters

Rethinking the Federal Budget: Build Your Own Deficit Reduction Plan

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 12 Apr 2013 11:25:00 -0400

Just over a month ago, The Hamilton Project released a menu of options for achieving responsible deficit reduction while promoting broader economic benefits in a new report, 15 Ways to Rethink the Federal Budget. Through a new interactive feature on The Hamilton Project’s website, you can build your own deficit reduction plan by choosing different combinations of these proposals and see how this package could affect the ten-year budget picture.

Click here to try your hand at rethinking the federal budget »

The proposals address topics ranging from immigration to transportation to tax deductions and were written by leading budget and tax experts from a variety of backgrounds, including academia, the private sector, and a range of NGOs such as the American Enterprise Institute, the Brookings Institution, and Pew Charitable Trusts. Each expert was asked to share his or her proposal for reducing spending or raising revenue in a way that also promotes broad-based economic growth. The individual proposals offer discrete, innovative ideas for achieving budgetary savings and broader economic benefits. However when viewed in combination, they could contribute meaningful deficit reduction and help the country confront its most pressing economic challenges. Of course, a balanced approach to deficit reduction might require other changes but a package of these proposals can serve as a starting point for illustrating what is possible.

The new interactive feature allows you to see the potential budgetary effects of implementing these proposals—either individually or several at a time. Additionally, you can see the total deficit reduction produced by the proposals you select and the Budget Control Act of 2011 (BCA) and the American Taxpayer Relief Act of 2010 (ATRA). The feature also provides a breakdown of what fraction of the deficit reduction comes through increased revenues, decreased spending, and lower interest payments.

It is important to bear in mind that no fiscal policy occurs in a vacuum. While the feature displays the ten-year deficit reduction and projected debt-to-GDP ratio in 2023 given your selection of proposals, these calculations are estimates that do not take into account budgetary interactions or macroeconomic effects that some of the proposals may have.

Michael Greenstone is the director of The Hamilton Project and Adam Looney is its policy director. For more about the Project, visit www.hamiltonproject.org.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Entering the National Conversation: President Obama’s 2014 Budget

William A. Galston — Thu, 11 Apr 2013 12:45:00 -0400

President Obama’s proposed budget for FY 2014 represents an important contribution to a desperately needed national discussion about our long-term fiscal future. As such, it deserves a careful examination—not the reflexive chorus of cheers and boos (mostly the latter) that it has received so far.

Let’s begin with the basics. Over the next decade, the president’s budget would take total revenues from 16.7 percent to 20.0 percent. Outlays would fall from 22.7 percent in FY 2013 to 21.8 percent in FY 2015 and remain at roughly that level over the next eight years. The debt held by the public would rise by $6.6 trillion, from $12.4 trillion to $19.0 trillion, but would fall modestly as a share of GDP from 76.6 percent to 73.0 percent.

As foreshadowed in a week of selective leaks, Obama reaches this result by putting last December’s proposed compromise package back on the table and offering other proposals, for total deficit reduction of $2.5 trillion over the next decade. A portion of this total would offset the elimination of the sequester, which would add $1.1 trillion to outlays, leaving a net deficit reduction of $1.4 trillion between now and 2023.

No doubt there will be a robust debate about both ends and means. Some Keynesian Democrats will say that Obama is taking deficit reduction too seriously; Paul Ryan Republicans will say the opposite. Liberals have already protested proposed cuts to Medicare and Social Security, while conservatives have flatly rejected proposed tax increases.

But before we even reach these matters, there is a prior question: Does the president’s budget rest on realistic assumptions? In some respects, yes. For example, as the economy continues to recover from the lingering effects of the Great Recession, interest rates on Treasury bills and notes will move up from today’s artificially low levels to their historical averages. Unemployment falls slowly but never goes below 5.4 percent. Inflation remains stable at roughly 2 percent per year.

On the other hand, the budget assumes that there will be no recession between now and the end of FY 2023. GDP growth rises from 2.3 percent in 2013 to 3.6 percent in 2016 before subsiding to today’s levels. To be fair, no budget ever forecasts a recession in the out-years. Still, achieving the objective of stabilizing the debt to GDP level relies on fourteen consecutive years (2010-2023) of uninterrupted economic growth, which would be unprecedented.

The president’s spending projections are even less realistic. Between 2013 and 2023, defense spending is projected to fall by 40 percent as a share of GDP, from 4.0 percent to 2.4 percent, while non-defense discretionary programs fall by one third, from 3.7 percent to 2.5 percent. This is barely imaginable, but highly unlikely. During the past half-century, defense spending has never gone below 3 percent of GDP, not even in the years between the fall of the Soviet Union and September 11, 2001. Non-defense spending has never gone below 3.2 percent, a level it reached near the end of the Clinton administration. (During the Reagan era, it never went below 3.5 percent.) It is hard to believe Obama’s proposals would allow us either to meet our basic security needs or to afford the level of public investments that have helped sustain economic growth throughout our national history. It’s up to senior administration officials to make the case that their numbers are realistic, and they’ll face a heavy burden of proof.

Meanwhile, even with proposed cuts in Medicare and Social Security, these programs continue to expand inexorably as a share of GDP while Medicaid’s share rises by 25 percent over the next decade and the burden of interest on the debt doubles from 1.4 percent to 2.9 percent.

In short, even with substantial increases in revenues, the swelling pressure of entitlements and debt is leading our country to shortchange its future. Is that the course we want, or are we backing into it because we aren’t willing to challenge the assumptions that are producing it? Before we get mired in technicalities, that’s the threshold argument we should be having.

Authors

William A. Galston

Publication: The New Republic

Brookings Expert Roundtable on President Obama’s Federal Budget Proposal for FY 2014

Ron Haskins, Isabel V. Sawhill and Bill Frenzel — Thu, 11 Apr 2013 16:00:00 -0400

President Obama’s FY 2014 budget proposal offers a blueprint that will cut the deficit by $1.8 trillion dollars over the next decade, invest more in infrastructure and early childhood education and is intended to improve the nation’s failing fiscal health. But can it really do that? And more? We examine the budget proposal and its impact in this discussion.

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Around the Halls: The Obama Administration's Budget Release

Alice M. Rivlin, Isabel V. Sawhill and Bill Frenzel — Wed, 10 Apr 2013 12:00:00 -0400

With the release of the Obama administration's FY 2014 budget, Brookings experts weigh in on the president's proposals:

Alice Rivlin, Senior Fellow, member of the President’s Debt Commission:

The President’s budget offers specific proposals for creating jobs and investing in productivity while simultaneously reining in the rising debt. It creates the opportunity to jumpstart serious bipartisan negotiation on how to accelerate the recovery in the context of balanced comprehensive tax and entitlement reform that will put the budget on a sustainable path for the long-run future.

Isabel Sawhill, Senior Fellow and Co-Director of the Brookings Budgeting for National Priorities Project:

This budget begins the difficult process of reallocating funds from more affluent seniors to lower-income families and their children. Much more needs to happen on this front over the coming decade but the President's proposals to limit spending on Medicare and tax-favored forms of retirement saving for the most affluent, slow the growth of social security benefits for non-vulnerable seniors and invest in Pre-K programs are all steps in the right direction.

Read Sawhill’s related blog post: The President’s Budget: A Good Strategy for Difficult Times

William Frenzel, former House Budget Committee Ranking Member and Brookings Guest Scholar:

It does not pass muster as a Budget because it does not get us where we want to be in ten years. But, as an invitation to Republicans to re-engage in ‘grand bargain’ discussions, it demonstrates real leadership by the President.

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Short-Term Congressional Budget Fixes Only Prevent Total Disaster

Bill Frenzel — Wed, 27 Mar 2013 00:00:00 -0400

In a pleasantly surprising move, the normally moribund Congress passed a Continuing Resolution (CR) to fund the government for the last 6 months of FY 2013. The President obligingly signed it. What’s more, the usual nasty and dilatory process was completed on time without excessive name-calling.

That made the CR a multiple winner. It got the country past 2 more cliffs. One was the blunt and thoughtless cuts of the sequester. The other was the expiration of the current CR. While mitigating some of the worst effects of the sequester, it maintained the total savings of the sequester. That’s a double win for a Congress that rarely scores victories.

That’s fine for now, but the CR is just one more short term stand-off between the warring Democrats and Republicans. They proved they can, when pressured, keep the Ship of State moving past cliffs, sequesters, debt ceilings, and other crises. But their short term fixes only prevent a total disaster. They give no long term certainty or direction to the country.

CRs are, in fact, a clumsy way to conduct the people’s business. They include all functions of government in one ugly package. They include some reviews of some spending, but they lack the careful scrutiny that is applied when all 13 appropriations bills are passed separately. Lacking a common budget target, legislators are forced to bundle all spending in to a CR.

In the past few years, frequent budget crises have become the rule for Congress. This year we avoided the cliff, dodged the debt ceiling, and now have eased the effect of the sequester. We will face another debt ceiling expiration in August, and probably have another CR in September. All of these could have been avoided had our political leaders agreed on a long term budget plan to stabilize the debt ratio at a reasonable level.

This year both the Republican House and the Democratic Senate have passed budgets. The Senate budget was the 1^st in 4 years, and was a cause for public celebration. The bad news is that the House and Senate versions are poles apart. A compromise is considered highly unlikely.

The Republican budget balances after 10 years, and stabilizes the debt ratio at 55%. It raises no new taxes, and makes drastic cuts in health care spending. The Democratic budget lowers debt slightly, but does stabilize it. It increases taxes by $1 trillion, and makes small spending cuts. These budgets are reconcilable, but only if the politicians regard each other as the opposition, instead of the enemy.

Without a reconciliation, our budget process will move the country backwards into more CRs and more cliffs in 2014. We will survive, but continue to lurch from crisis to crisis.

Our economy will be denied the certainty it requires for a faster recovery.

What is lacking here is the Grand Bargain, a 10-year program to tame the long term deficit-drivers, and stabilize the debt so we can deal effectively with future emergencies. Every budget observer has a personal favorite version of the big compromise. The well-known Bowles-Simpson Plan is just one of many possible models.

Republicans are determined to raise no more taxes, and to reduce entitlements that are the long term debt-drivers. Democrats are equally determined to defend entitlements, and to impose more taxes.

Neither side can get everything it seeks. Yet, both sides remain adamant. Each believes that it can ultimately defeat the other, despite contrary historical evidence. Meanwhile, our economy underperforms at sub-standard levels. Uncertainties caused by the stalemate continue to confound markets and business decisions.

There is still time for compromise, but, so far, the will has been absent. The political parties and their leaders have to make an agreement. Nobody can do it for them. One day the light will dawn. They will begin to understand that compromise is strength, not weakness. The sooner that day comes, the better.

Authors

Bill Frenzel

Publication: Forbes

Image Source: Kevin Lamarque / Reuters

Do Budget Commitments to the Old Shortchange the Young?

Gary Burtless — Tue, 26 Mar 2013 00:00:00 -0400

Federal spending on children edged down last year. As a result of the phase-out of stimulus programs as well as budget cuts imposed by the sequester, federal spending on children’s programs is expected to drop still further this year and next. Meanwhile, outlays on federal programs for the elderly continue to rise. Most of this spending consists of transfer payments under Medicare, Medicaid, and Social Security. Virtually all that spending is protected against cuts connected to the sequester.

According to recent estimates published by the Urban Institute, the average American older than 65 now receives $6.66 in federal outlays for every $1.00 received by a child under age 19. Moreover, an overwhelming share of the spending on the aged is determined by benefit formulas that boost spending per person in line with increases in the cost of living or medical prices. Because medical costs have risen without interruption in recent decades and the share of the population past age 65 is increasing steadily, child advocates fear that kids’ programs will become orphans in a storm. Government spending on children will inevitably be squeezed as more public resources are diverted to fund programs for the elderly.

This fear is not without foundation. Based on the historical record, however, it appears wildly overblown. Core programs for children – providing public schooling and health insurance – have proven to be surprisingly resilient. Despite budget pressures to fund programs for the aged and for national defense and to pay interest on the national debt, per capita government spending on public schools and child health insurance programs has continued to climb. Big public programs for the aged may appear to operate on automatic pilot and hence to be immune to budget cuts. But presidents, governors, and legislators have also displayed an enduring regard for programs that educate and protect the health of children.

For example, per pupil spending on K-12 education has increased with virtually no interruption over the past 120 years. In the three decades between 1980 and 2009 real spending per pupil increased 2.3% a year (see Chart 1). True, per pupil spending on public schools climbed more slowly in the most recent decade than it did in the previous two. It only increased 2.1% a year between 2000 and 2009. Still, this rate of increase is considerably faster than the growth in per capita personal income during the same period. Notwithstanding the impact on government budgets of two recessions and two wars, per pupil spending on K-12 education continued to rise. The end of federal stimulus payments to state and local governments combined with state and local revenue problems have undoubtedly slowed educational spending growth since 2009. Nonetheless, it is hard to see evidence in the historical record that legislators will savagely cut outlays on public schools.

Government spending on child health insurance has also climbed steeply in recent years. The Census Bureau estimates that almost 4 in 10 children under 18 now obtain health coverage under a public insurance program. This represents a major increase in public coverage compared with the situation in the late 1990s. Rising rates of public health coverage have more than offset losses in child health insurance obtained under private insurance. In fact, since 1999 children under 18 and young adults between 18 and 24 are the only age groups in the population that have seen an increase in health coverage. All of the improvement has been due to expansions in government coverage. Meanwhile, Americans older than 25 have seen health coverage rates fall (see Charts 2 through 4).

Much of the concern over the future prospects of children’s programs arises from an understandable confusion over the source of funding for these programs. Since establishing the Social Security program in the great depression, the federal government has assumed a major role in assuring Americans’ old-age income security. Because personal savings and private pensions proved inadequate to assure safe retirement incomes in the 1930s, the national government established a contributory pension system that provided predictable, but modest, public pensions. The federal government has thus assumed the leading role in collecting contributions and disbursing benefits for old-age income security.

It has not assumed a similar role in assuring public benefits for children. The primary source of income support for children is parental earnings. State and local governments continue to play the leading role in education and public health insurance, though federal aid to states and localities is increasingly important in funding state and local commitments. Whereas the federal government spends $6.66 on each aged American for every $1.00 it spends on a child, state and local governments spend $8.88 on each child under 19 for every $1.00 they spend on a person older than 65. Since the federal government spends considerably more than states, total per capita public spending on the aged is higher that per capita spending on the young.

The crucial point, however, is that state and local governments are the primary source of funds for programs that provide education and other benefits to children. It is conceivable that budget pressures arising from increased health costs and an aging population will eventually cause public spending on youngsters to fall. The historical record provides little evidence to support this view, however. Long-term spending trends, both at the federal and local levels, suggest that core programs for children receive roughly the same budget protection as programs for the aged.

Authors

Gary Burtless

Publication: Real Clear Markets

A Balanced Budget Should Take a Backseat to Real Reforms

Isabel V. Sawhill — Thu, 14 Mar 2013 14:28:00 -0400

Both houses of Congress have now submitted their budget plans. The House plan is the handiwork of Republican Rep. Paul Ryan and balances the budget within 10 years by cutting spending. The Senate plan, offered by Democratic Sen. Patty Murray, puts the debt on a downward trajectory relative to the economy but is far less draconian. It includes a balanced mix of spending cuts and revenue increases but does not aim to balance the budget.

No one who has looked at the numbers thinks it's realistic to balance the budget within 10 years while simultaneously increasing defense spending and reducing the top tax rates (personal and corporate) to 25 percent. The only way Ryan is able to achieve this feat is by eliminating Obamacare and slashing funding for Medicaid and other domestic programs, including those targeted on low-income families.

That said, getting our fiscal house in order should be a high priority. The issue is not only how to do this—but also how quickly. Too much fiscal austerity in the near term could tank the economy. The spending cuts enacted in 2011 after the debt ceiling crisis and the tax increases agreed to in early 2013 will, in combination, halve the growth rate of the economy in 2013, according to the Congressional Budget Office. The Democrat's budget includes $100 billion of short-run spending on infrastructure, education and technology to help the economy recover more rapidly. Whatever one thinks of such stimulus measures, the fact remains that without stronger growth, businesses and households will not thrive, revenues will not recover and debt will continue to grow even if spending is reduced.

In my view, we should enact reforms to both taxes and entitlements now but phase them in gradually so as not to undermine the recovery. Whether we balance the budget at the end of 10 years is less important than whether Democrats and Republicans can set aside their starkly different priorities and enact these painful but much needed reforms. The big challenge is not balancing the budget; it's restoring confidence that our government can work.

Authors

Isabel V. Sawhill

Publication: US News and World Report

Growing the Economy and Stabilizing the Debt

Alice M. Rivlin — Thu, 14 Mar 2013 09:00:00 -0400

Chairman Brady, Vice Chairman Klobuchar, and members of the Committee:
This hearing is called: “Flirting with Disaster: Solving the Debt Crisis” I would like to suggest an alternative title: “Avoiding Disaster: Growing the Economy and Stabilizing the Debt.” I make this suggestion because I believe strongly that future American prosperity requires bipartisan cooperation to achieve two goals at once:

Faster economic growth that will create more jobs and bring the unemployment rate steadily down at least to the 5-6 percent range.
A sustainable long-run budget plan that will halt the projected rise in the debt/GDP ratio and put it on a downward trajectory by the end of the decade.

The two goals reinforce each other and neither can be achieved without the other. Weak economic growth—or worse, sliding back into recession—will reduce revenues and make it much harder to reduce or even stabilize the ratio of debt to GDP. But the prospect of debt growing faster than the economy for the foreseeable future reduces consumer and investor confidence, raises a serious threat of high future interest rates and unmanageable federal debt service, and reduces likely American prosperity and world influence.

Stabilizing and reducing future debt does not require immediate austerity—on the contrary, excessive budgetary austerity in a still-slow recovery undermines both goals—but it does require a firm plan enacted soon to halt the rising debt/GDP ratio and reduce it over coming decades. Financial markets will not provide advance warning of when such a plan is required to avert negative market reactions. At present the United States appears to have unlimited access to world markets at low interest rates But this market confidence could evaporate quickly, possibly because of developments elsewhere around the world and beyond our control. The sooner we enact such a plan, the better the prospects for our economy. There is no valid argument for delay.

Putting the budget on a sustainable path and reducing the debt/GDP ratio will require bipartisan agreement on entitlement reform that slows the growth of health care spending and puts Social Security on a firm foundation for future retirees. It will also require raising additional revenue through comprehensive tax reform. I have spent much of the last several years participating in two high-profile bipartisan groups that crafted plans to grow the economy and stabilize the debt—the Simpson-Bowles Commission and the Domenici-Rivlin Task Force. That experience convinced me that bipartisan problemsolving is possible when participants are willing to confront facts objectively, listen to each other, and seek common ground. An updated version of Domenici-Rivlin is attached (For the attachment, download the testimony. -Ed.).

Although detailed recommendations of the two groups differed, each involved three elements: (1) restraining discretionary spending; (2) reducing the growth of Medicare, Medicaid and stabilizing Social Security: and (3) comprehensive tax reform to cut spending in the tax code and raise additional revenue. Indeed, the arithmetic of the problem makes all three elements necessary. More than enough discretionary spending restraint has already been accomplished. The task remaining is to find agreement on an acceptable set of entitlement and tax reforms.

Why Sequestration is Bad Policy and Should be Replaced

Sequestration is a mindless across-the-board cut designed to be such bad policy that it would never happen, and they should not be continued. Cutting discretionary spending will add to the restraining effect that the declining federal deficit is already having on the still-slow recovery, will reduce job creation, and will possibly even trigger a new recession. Domestic discretionary spending has already been reduced by more than the two bipartisan groups recommended and is scheduled to fall to historic lows. Such low levels of domestic discretionary spending endanger the government's ability to perform essential functions that the public wants and needs. Indeed, higher investment in science, education, and modern infrastructure is needed to foster future productivity and job creation. While savings in defense can be made over time, they should result from serious planning, not meat-ax proportional cuts regardless of priorities. Since discretionary spending is not a driver of future deficits, cutting it contributes next to nothing to slowing the projected increases in spending that will push the debt/GDP ratio upward over the next several decades. Sequestration weakens both the economy and the government's ability to do its job. It should be replaced by gradually phased in tax and entitlement reforms that will stabilize the debt. I am concerned that Chairman Ryan's budget blueprint released on Tuesday continues to target nondefense discretionary spending, cutting it substantially more than the current sequester.

Why Entitlement Reforms are Necessary Now

Over the coming decades federal spending is projected to increase faster than the economy can grow, because a tsunami of older citizens are reaching retirement age and living longer than their predecessors, and spending for health care, disproportionately consumed by seniors, is likely to rise faster than other spending. This combination of demographics and health spending growth makes Medicare, Medicaid and Social Security drivers of unsustainable federal spending in future years. Social Security should be the easiest to reform, because it involves only money—without the complexity of health care delivery—and requires fairly minor, well understood tweaks in benefits and revenue to regain fully funded status. Social Security is an extremely successful program, which keeps millions of seniors from destitution in old age. Workers now in the labor force need to know that Social Security will be there for them when they retire or if they become disabled and that they can plan their retirement around it. The Domenici-Rivlin Task Force recommended indexing benefits to longevity (rather than further increasing the age of full retirement beyond 67); adding a bend point in computing initial benefits to reduce payments to high income people, switching to a chained CPI for indexing benefits, while protecting the lowest income and most aged recipients; and raising the cap on wages faster than under current law. Taken together, the Domenici-Rivlin Social Security recommendations increased benefits for low-income seniors while reducing those for affluent beneficiaries in order to achieve solvency.

Enactment of such a bipartisan package now would reassure current workers, demonstrate that our democracy works to solve problems before they reach crisis proportions, and contribute to stabilizing the debt. Fixing Social Security would send a strong signal to the financial markets that the nation was addressing its long-term budget problem, and, because its effects would be felt in future years, it would not threaten the current economic recovery.

Some have suggesting waiting until the Social Security Trust Fund runs out of money around 2033 before instituting reforms. This would be shortsighted and irresponsible. Workers who will be retiring in 2033 are already in their mid-forties. We owe it to them to fix Social Security now, so that they can plan their retirement with the confidence that their Social Security benefits will be there. This motivation for early action is even more important than the modest contribution that a Social Security fix will make to stabilizing the debt.

Medicare raises more complex issues than Social Security, but bipartisan compromise to slow Medicare growth without depriving seniors of needed health care is also possible. Indeed, sensible reforms of the Medicare reimbursement regime could lead the way to slowing the unsustainable growth of spending in the whole healthcare sector, relieving pressure on state, local, business, and family budgets¡Xnot just federal programs.

American health care is expensive compared to that in other developed nations and its quality is uneven. Part of the reason is that so much health care is compensated on a feefor- service basis, which encourages providers to deliver more services, but does not reward quality, efficiency, or positive health outcomes. Medicare is the most important payer of health providers. It should be possible to shift the Medicare reimbursement regime toward bundled payments for episodes of care, reimbursement of Accountable Care Organizations, and capitated payments to integrated health systems—all designed to reward delivery of effective care, meeting quality standards, and keeping beneficiaries healthy.

There are two possible approaches to improving the performance of health providers along these lines. One is to change incentives in traditional Medicare by regulation. The other is to foster competition among health plans on a regulated exchange or market place. In the original Domenici-Rivlin plan we recommended doing both¡Ximproving traditional Medicare by regulation, but also introducing the option of competition among integrated health plans in a premium support model. Subsequent analysis has suggested that it may be possible to introduce the competitive element more smoothly by ensuring that Medicare Advantage plans compete in a more transparent market place with effective incentives to improve health outcomes and lower costs. The recent slowing of healthcare spending suggests that it may be possible to keep the increase in spending close to the rate of growth of GDP without enforcing a cap.

Changing health care reimbursement and delivery practice will take time. That is why it must start soon if it is to make the necessary future contribution to stabilizing and eventually reducing the debt/GDP ratio.

Why Tax Reform Must Raise Additional Revenue

Even extremely successful efforts to deliver health care more efficiently and slow the growth of health spending will not make it possible to absorb the coming avalanche of seniors without additional revenues. Benefits for older people are already crowding out investment in knowledge and skills of young people and modernization of infrastructure needed to increase future productivity.

Our tax code contains enormous amounts of spending that is poorly designed for its ostensible purpose, disproportionately benefits upper-income people, and narrows the tax base. Reducing spending in the tax code could raise additional revenue at lower rates and make the tax system more progressive at the same time. Both Simpson-Bowles and Domenici-Rivlin recommended drastic comprehensive reform of both the individual and corporate income taxes to broaden the base and lower the rates.

The Domenici-Rivlin plan did away with almost all deductions, exclusions and other special provisions. It had two individual income tax rates—15 and 28 percent—gradually phased out the exclusion of employer-paid health insurance from taxable income, taxed capital and earned income at the same rates, converted the home mortgage and charitable deductions to credits at the 15 percent rate, and retained earned income and child credits. The result was a fairer, simpler, more pro-growth tax system that increased progressivity and raised more revenue. Such a drastic revamping of our current code would have multiple opponents, but might be easier to accomplish than a more incremental approach—which could have as many losers but no winners, without nearly as much of the potential benefit for the economy.

Importance of Both Growth and Debt Stabilization

Those of us who advocate near-term action to curb future debt increases have been called “debt scolds” and “deficit hawks.” We have been unfairly accused of favoring immediate austerity and not understanding the need for accelerating job growth and improving productivity. But pursuing the double goal of growth and debt stabilization is possible, provided we get the timing right. We should not have austerity now, but we should take immediate steps to slow the growth of entitlement spending in the future and raise more revenue through a more progressive and pro-growth tax system.

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Avoiding Disaster: Growing the Economy and Stabilizing

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Alice M. Rivlin

Publication: Joint Economic Committee, U.S. Congress

Brookings: Topics - U.S. Budget Deficit

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Around the Halls: The Obama Administration's Budget Release

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Short-Term Congressional Budget Fixes Only Prevent Total Disaster

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Do Budget Commitments to the Old Shortchange the Young?

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A Balanced Budget Should Take a Backseat to Real Reforms

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Growing the Economy and Stabilizing the Debt

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