Brookings: Topics - The Federal Budget and Sequestration

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

Sequestration and U.S. Defense Spending: Healing the Wounded Giant

Michael E. O'Hanlon — Mon, 13 May 2013 12:50:00 -0400

Sequestration cuts to the U.S. defense budget have started to affect military contracting and training. Such changes may be fine in the short term, but costly in ways beyond dollar figures in the long term. In his new book Healing the Wounded Giant, Senior Fellow Michael O’Hanlon focuses on the question of how much could be cut from the defense budget if done right. In this video Q&A, O'Hanlon provides examples of two areas where cuts can be made: ground forces and procurement of the F-35 combat jets. He also predicts what Secretary Hagel will propose for the defense budget and how it has the potential to help strike a fiscal deal.

Video

Sequestration and U.S. Defense Spending: Healing the Wounded Giant

Authors

Michael E. O'Hanlon

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

Bending the Cost Curve in Health Care the Right Way—Through Better, More Person-Centered Care

Mark B. McClellan — Thu, 09 May 2013 13:54:00 -0400

The United States spends about 17 percent of GDP annually on health care, a figure that is projected to grow substantially in the years ahead, despite the recent slowdown in health care spending growth. Rising costs mean insurance coverage keeps getting more difficult to afford. Those rising costs, plus the aging demographics of the nation, account for most of the spending side of our nation’s long-term fiscal challenges at both the federal and state level. They mean higher expenditures on Medicare and Medicaid, and the tax subsidies for employer-provided coverage and the new subsidies for private insurance in the individual marketplaces. At the same time, biomedical innovation using genomics, systems biology, information technology, and innovative and convenient ways to deliver care holds the potential for much more effective, personalized care – if we can afford to develop and use it. That’s not the case so far: patients often do not get treatments we know to be effective, innovative treatments and ways of delivering care are hindered by payments that are tied more to the site of services and what we’ve paid for in the past than the value of these treatments for particular patients, and we often pay more for complications than for the coordination of care and person-focused support that could help health care providers and patients get much better results for the money they spend. Something has to change, not just to make sure that healthcare costs can be contained, but also to make sure that the quality of health care gets better by providing better support for what patients need.

Our new report, “Person-Centered Health Care Reform: A Framework for Improving Care and Slowing Health Care Cost Growth” is a system-wide framework to address our cost problems by improving care – by leveraging the large and growing opportunities for more person-focused care. We have developed a set of proposals for saving $1 trillion over 20 years and improving care at the same time. Written in collaboration with leading experts from across the academic and political spectrum, our report proposes a framework for how to improve health care financing and regulation so that we can achieve better, higher-value care for each person. The report describes a specific series of steps to improvement the way care is delivered in each part of our health care system, including Medicare and Medicaid, the employer and individual insurance markets, antitrust enforcement and other regulatory reforms. Focusing on person-level quality of care as the fundamental strategy for addressing health care cost growth is in some ways new, but it builds on promising ideas and trends throughout our health care system. It is an idea whose time as come, and which we should start to adopt as our long-term approach to addressing the health care quality and cost problems now.

This report is the third in our “Bending the Curve” series. While building on the past reports, it also differs from our previous work in some very important ways. First, we have broadened our group of authors. Still with us is the core group of experts who participated in previous reports – people like Joe Antos from AEI, Mike Chernew and David Cutler from Harvard, Mark Pauly from University of Pennsylvania, Dana Goldman from USC, Steve Shortell from UC Berkeley, and others who have a tremendous amount of health policy expertise and experience. We’ve also benefitted from some new expert perspectives, including Kate Baicker from Harvard. And along with that expertise, our group now includes some other experts with extensive policy and political experience – including NGA director Dan Crippen, former Senate Majority Leader Tom Daschle, former CEA chair and Columbia dean Glenn Hubbard, former Utah Governor and former HHS Secretary Mike Leavitt, former HHS Secretary and University of Miami President Donna Shalala, and former budget directors Peter Orszag and Alice Rivlin. Together, this unique group sparked a new and welcome level of discussion about reform. In particular, as Mike Leavitt put it, if Republicans and Democrats were at the point where they had to reach an agreement on reforming care and addressing the challenge of rising costs, what would they agree on – and how could we make sure it would work?

As we worked to answer these very practical questions, we were forced to consider the full range of key technical and political issues involved in health reform. We reviewed the kinds of reforms that we have considered before to improve quality and lower costs, along with new evidence on how those reforms and others being implemented now are working (with different degrees of success) in the public and private sectors. We combined that with consideration of how best to move forward in a way that avoids the need for disruptive short-term payment cuts, provides the policy certainty needed to accelerate the trends toward the availability of much better, more personalized care, and addresses serious short-term weaknesses in in Medicare, including unstable physician payments and a lack of support for beneficiaries to save money when they get better care These considerations led to a plan that involves implementing reforms that are not disruptive in the short term while supporting better quality and coordination of care, leading to a large impact over time on supporting improvements in care that can sustain slower cost growth in the years ahead. Our conclusion is that enacting these health care reforms will not be easy, but we agree that this is the best path forward.

We do need to act now. If enacted, our framework is able to avoid the more aggressive steps that will almost certainly be needed in the years ahead to achieve more urgent reductions in federal spending, like cuts in payment rates as in sequestration, or restrictions in coverage for vulnerable populations and in access to new types of innovative care. And even more importantly, it will speed up the innovations in health care and biomedical technology that lead to better results and lower costs for patients. The bottom line is that the best way to control health care costs is to have health care policies now that do as much as possible to support better care for each patient.

We have a window of opportunity right now for implementing thoughtful health care financing and regulatory reforms that improve care today and promote much better, person-centered health care for the future. This is the best way for the country to achieve its overall deficit reduction targets. We should act now before the window closes, and we are left only with policy options that shift costs, reduce quality, and most importantly, diminish the ability of patients and health care providers to achieve better care and better health.

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Download the report

Authors

Mark B. McClellan

Image Source: © Keith Bedford / Reuters

A Bipartisan Case for Chained CPI

Martin Neil Baily and Glenn Hubbard — Thu, 09 May 2013 00:00:00 -0400

Over the last few days, politically driven critics have called on the president to abandon his support for changing the way the government indexes provisions in the budget to inflation by switching to “chained CPI.” Looking beyond politics, we’re here to say that these critics’ arguments are wrong on their merits.

As economists from opposite ends of the political spectrum, we would strongly urge the president and leaders in Congress to continue to support moving to chained CPI, which represents the most accurate available measure of inflation and cost-of-living increases. Switching to this more accurate measure of inflation represents the right technical, fiscal and retirement policy—and policymakers should not delay any further in making this improvement.

From a technical sense, the current CPI—or consumer price index—that is used to index many parts of the budget and tax code is widely understood to overstate inflation. This is because it fails to account for so-called “substitution bias,” in which consumers reallocate their purchases depending on the relative prices of similar goods. For example, if the price of apples goes up, consumers will buy more oranges. However, this behavior is not accounted for in standard CPI measurements.

The Bureau of Labor Statistics, which calculates the CPI, is very aware of this shortcoming, which is why it has developed and refined the chained CPI for more than a decade. The nonpartisan Congressional Budget Office states that the chained CPI “provides an unbiased estimate of changes in the cost of living from one month to the next.”

Some argue that using the chained CPI to index Social Security benefits is inappropriate because it does not reflect inflation for retirees, which critics suggest is higher than it is for working-age adults because of the elderly’s higher rate of spending on healthcare. However, the CBO has said that based on the available research, it is unclear whether the cost of living actually grows at a faster rate for the elderly than for younger people, and that the CPI-E —“E” for “experimental”—which was intended to provide a more accurate measure of inflation for seniors, has several methodological flaws that overstate inflation, including underestimating the rate of improvement in healthcare.

Beyond the technical case for the chained CPI, there is a strong fiscal case. Because current measures currently overstate inflation by about 0.25 percent per year, moving to a more accurate measure would result in real deficit reduction. Measuring inflation more accurately would generate savings from throughout government: about $390 billion in the first decade alone. Roughly one-third of those savings would come from slower growth in Social Security benefits, another third from revenue increases (as certain tax provisions such as the cutoff points of income tax brackets are indexed to inflation) and the remaining savings from a combination of other spending programs and lower interest payments on the debt. Given the very real need to begin to put our debt on a sustainable path, this would be a small but important contribution. The savings would be gradual, with only a small amount in the near term, thus protecting our fragile recovery from immediate austerity.

Finally, switching to chained CPI is the right retirement policy—or rather, a small piece of it. The Social Security program is on a path to exhaust its trust fund. Current projections indicate that this will occur in 2033, threatening cuts for all beneficiaries, including the very rich and the very poor, the very young and the very old, veterans, disabled workers and others. Improving the way we measure inflation won’t prevent the program’s looming insolvency, but it will eliminate a full fifth of the long-term funding gap.

To the extent that the overpayments under the current formula offset the shortcomings of our current retirement system for the lowest-income and most-elderly beneficiaries, a switch to chained CPI can and should be accompanied by targeted policy changes providing benefit enhancements designed to help the affected populations, rather than providing higher-than-justified inflation adjustments for all beneficiaries.

The federal government should not knowingly continue to measure inflation inaccurately, especially given the costs to the budget and to the Social Security program. Changes that cut Social Security benefits are a tough sell for Democrats, and changes that increase revenue are a tough sell for Republicans. But if they cannot even agree to a technical correction to those areas of the budget, how will they be able to make the hard choices to control our debt and reform our government over the long term?

Authors

Martin Neil Baily
Glenn Hubbard

Publication: The Hill

Image Source: © Fred Prouser / 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

Healing the Wounded Giant : Maintaining Military Preeminence while Cutting the Defense Budget

Michael E. O'Hanlon — Fri, 03 May 2013 00:00:00 -0400

Brookings Institution Press 2013 120pp.

Video

Sequestration and U.S. Defense Spending: Healing the Wounded Giant

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Sequestration and U.S. Defense Spending: Healing the Wounded Giant

Synopsis:

Barack Obama may have survived a tenuous economy and a bitter political campaign to secure another four-year term as president, but major partisan debate and division remain. As a Democratic White House and a (majority) Republican House of Representatives tangle perilously close to a “fiscal cliff,” vital priorities hang in the balance. In this, the newest entry in Brookings’ long line of defense budget analyses, Michael O’Hanlon considers the best balance between fiscal responsibility and national security in a period of continued economic stress.

O’Hanlon believes that savings in the range of what Obama proposed in 2012 are the right goal for defense cost reductions in the coming years. He explains why cuts of the magnitude required by sequestration, and those suggested by the Bowles-Simpson and the Rivlin-Domenici plans for greater fiscal health, are too deep on strategic grounds, particularly in light of America’s rebalancing toward Asia and ongoing turbulence in the Middle East.

Excerpt from the book:

"It is important not to latch onto some strategic fad to justify radical cuts in the U.S. Army or Marine Corps. For two decades, since Operation Desert Storm, some have favored “stand-off” warfare featuring long-range strikes from planes and ships as the American military’s main approach to future combat. But it is not possible to address many of the world’s key security challenges that way—including scenarios in places like Korea and South Asia, discussed further below, that could in fact imperil American security. In the 1990s, advocates of a so-called “military revolution” often argued for such an approach to war. But the subsequent decade proved that even with all the progress in sensors and munitions and other military capabilities, the United States still needed forces on the ground to deal with complex insurgencies and other threats."

Op-ed:

Read an op-ed on U.S. Defense Spending from Michael E. O'Hanlon, in The Washington Post »

ABOUT THE AUTHOR

Michael E. O'Hanlon

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New Analysis of Who Pays What in Obama’s Budget

William G. Gale — Tue, 23 Apr 2013 12:57:00 -0400

The budget recently released by President Obama proposes a balanced path toward more fiscal responsibility, containing both spending cuts and tax increases. Although the president has proposed smaller changes than in previous budgets (even after adjusting for the recent tax act), his proposals do offer several helpful ways to move forward, most particularly the proposal to cap individual income tax expenditures at 28 percent.

However, I would have liked to have seen more ambition in his proposals. Given low interest rates and a listless economy, this is an opportune time for the government to borrow money and invest in the economy in the short-term. It should also do more to restructure its debt toward longer-term obligations to protect it from sharply increasing net interest payments when interest rates do start rising. Moreover, now is the time to implement reforms that can improve long-run growth and are consistent with the long-term revenue needs of the government, such as reforming the income tax code, implementing a VAT, and introducing a carbon tax. All of ideas, both short- and long-term, should be considered in order to put our economy on the optimal growth path going forward.

The Tax Policy Center has more on the president's budget.

Authors

William G. Gale

Image Source: © Joshua Roberts / Reuters

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

State and Local Leaders Double Down on Infrastructure

Robert Puentes — Tue, 16 Apr 2013 10:35:00 -0400

Cautious optimism followed President Obama's FY2014 budget request to rebuild and reinvest in America's infrastructure.

The proposal highlighted infrastructure as a fundamental driver of the nation's economy and critical asset for its long-term recovery. Specifically, the request reiterates the determined proposals to create a national infrastructure bank, build-out an American high-speed rail system, invest in clean energy, modernize the air traffic control network and the electrical grid, and reinvest in state-of-good repair projects, among other things.

The president's infrastructure package has a lot of good ideas. What it does not have is a lot of money.

Undaunted, state and metropolitan leaders are coming to Washington this week with their own ambitious and creative strategies to make their infrastructure goals a reality and looking to the federal government to engage in new partnerships with government, labor, and institutional investors to accelerate the construction and deployment of new infrastructure.

In many ways, Washington is acknowledging this renaissance and moving to embrace it. Also included in the president's request are plans to cut regulatory red tape in order to prioritize projects and enable better use of public/private partnerships. These are welcome acknowledgments of the principal role state and local leaders play in selecting, financing, and building infrastructure and, given their miniscule price tag, ought to be legislative slam dunks.

Without a doubt, unfunded pension obligations and other debt burdens facing state and municipal governments limit the availability of public funds to pay for necessary infrastructure. And though interest rates remain at historically low levels, the ability of many governments to borrow from the capital markets is limited by debt caps and weak credit ratings.

So states and metros are looking beyond traditional municipal debt markets to find new lower cost, lower risk, and higher impact ways to pay for essential infrastructure projects:

Increasingly, public infrastructure investment occurs through state revolving loan funds and so-called "infrastructure banks." These institutions fund and finance a broad array of projects, ranging from local road maintenance and highway construction (e.g., Florida’s State Infrastructure Bank) to essential water infrastructure (e.g., New York’s state revolving funds) to energy efficiency (e.g., Connecticut's green bank.) While they are not for-profit institutions in the traditional banking context, they rely on principal repayments, bonds, interest and fees to, ideally, re-capitalize and replenish the fund as a perpetual source of debt financing. The model has also gained traction at the sub-state level in Chicago and in the District of Columbia.

At the same time, state officials are also working to design innovative governance and institutional tools capable of overcoming the bureaucratic and technical barriers that can slow or even derail projects. These efforts are clearing the way for new infusions of private capital and streamlined project delivery. States like Virginia, Michigan, Colorado, and Georgia have new offices designed to tackle bottlenecks in public/private partnerships, develop innovative project ideas, and protect the public interest.

To develop consistent and predictable deal flow and ensure private investors’ continued engagement with U.S. infrastructure markets, stakeholders from California, Oregon, Washington State, and British Columbia created the West Coast Infrastructure Exchange (WCX.) The WCX seeks to establish a common market for infrastructure projects on the West Coast by coordinating cross-border infrastructure investments, facilitating procurements, and creating a project clearinghouse for regional infrastructure investments. WCX aims to create a robust market for the nearly $1 trillion in infrastructure projects that the region needs to develop.

Such efforts can be replicated elsewhere around the country. One common thread to the flurry of activity is the idea that stakeholders from all levels of government and the private sector (plus bi-partisan campaigns like Building America's Future and innovative collaboratives like Living Cities) can catalyze a new field of practice, get states ready for new kinds of investment, and explicitly connect long-term economic strategies with infrastructure planning and prioritization.

Our competitors, in mature and emerging economies alike, are in the process of making these kinds of investments and, by so doing, catalyzing productive and sustainable growth. In the United States, it looks like we are finally ready to start moving.

Authors

Robert Puentes

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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Authors

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.

Authors

An American Future Filled with Promise

Michael E. O'Hanlon and Gen. David Petraeus — Mon, 08 Apr 2013 12:29:00 -0400

As politicians in Washington focus on reining in America’s worrisome deficit, they tend to have attitudes of doom and gloom. They convey fears of shortchanging future generations, overtaxing workers, depriving the needy, killing the fragile economic recovery and failing to make crucial investments.

This narrative contains elements of truth. But it is too pessimistic and contributes to our psychological and political paralysis, reinforcing convictions held by members of both parties that they must not yield on core principles, lest the country’s future be compromised. There is, however, a more positive and more accurate reality. The United States could be on the threshold of a period of remarkable progress. It has a number of unique opportunities, including:

An energy revolution. We are the world’s largest producer of natural gas, with a 100-year supply, and we are on track to become among the largest producers of crude oil.
A manufacturing revolution. We are rapidly developing robotics and 3-D printing, areas in which the United States is among the world’s leaders.
A revolution in life sciences. Genetics and stem-cell technology offer great potential in fields such as agriculture and pharmaceuticals and fundamentally new approaches in medicine.
The IT revolution and the transition to cloud computing, in which we are also leading.

Read the full article »

Authors

Michael E. O'Hanlon
Gen. David Petraeus

Publication: The Washington Post

The President’s Budget: A Good Strategy for Difficult Times

Isabel V. Sawhill — Mon, 08 Apr 2013 15:08:00 -0400

The President’s budget will be released on Wednesday and its outlines have already been revealed to the media. According to most accounts, he will offer to slow the growth of entitlements, make some new productivity-enhancing investments in infrastructure and early childhood education, and insist on raising some new revenues by curbing deductions for the wealthy.

The big question is what will this accomplish in our current deeply polarized environment?

He has clearly chosen a more centrist approach than the two parties in Congress. His plan is more liberal than the House Republicans’ but more conservative than the Senate Democrats’. Democrats will be especially upset that he is proposing to change the inflation adjustment used for Social Security benefits and Republicans will continue to insist that new revenues are unacceptable. Finding a compromise in this environment will be almost impossible, especially if Republicans remain wedded to their mantra of no (more) new taxes.

At the same time, he may have moved far enough away from the usual Democratic position to interest some Republican senators in a deal. His plan to meet with members of the Senate right after the budget is released suggests that he plans to continue his so-called “charm offensive” and that he wants to find a way to make this budget work politically. If he is successful, and can get a plan agreed to in the Senate, he and his allies will be able to present such a plan to the House, putting them in the difficult position of either agreeing with most of the plan or looking even more recalcitrant than usual.

The House Republican budget plan involves abolishing the Affordable Care Act, making draconian cuts to Medicaid and other programs for the poor, shifting Medicare to a premium support plan a decade from now, and not only retaining, but adding to, the deep cuts to domestic discretionary spending included in the sequester. It says more about Republican ideology than it does about what the public supports. The voters favor a more balanced plan and one that protects the poor and avoids terminating many parts of the health care reform bill.

If I’m right that the President’s plan is much better aligned with public preferences than anything the House is contemplating, then even if he loses the political battle, he can win the public opinion war. Some Democrats argue that it is a mistake for him to compromise so soon in the process, but that argument ignores the impact his positions can have on how the voters judge his performance. There will be more battles to come with the expiration of the debt ceiling in May and the need to fund the government in 2014, not to mention the mid-term elections in the fall of that year.

With the public at his back, the President may ultimately prevail, as he did post-re-election with his plan to raise taxes on the wealthy. Whether he does or not, he has no other choice than to try to find a reasonable compromise. His willingness to talk about entitlements and to make specific proposals to reduce their growth needs to be part of the strategy. He can do this without giving up on the equally-important need to reform the tax system in a way that produces some new revenues.

Authors

Isabel V. Sawhill

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