November 21, 1995

November 21, 1995 | FYI on

Bridging the Budget Gap on Medicare

(Archived document, may contain errors)

November 21, 1995


By Stuart M. Butler Vice President and Director of Domestic and Economic Policy Studies The Congress-White House budget agreement reached on Sunday would incorporate a slightly modified Congressional Budget Office (CBO) baseline against which to measure competing ways to balance the budget in seven years. This is important because it means both ends of Pennsylvania Avenue will be using the same "benchmarW' to compare proposals with current law. Until now, the White House has insisted on using baselines developed by its own Office of Management and Budget (OMB). Congress uses the nonpartisan CBO, as required by statute. Since the OMB's forecast for the economy and spending under current law generally is more optimistic than CBO's (that is, assumes faster economic growth and a slower increase in many federal programs), achieving any proposed federal budget requires smaller savings according to the White House than according to CBO. Using the same CBO scorecard will make it much easier to reach compromise in a number of policy areas where the White House and Congress hitherto appeared too far apart for an agreement. Perhaps the most important of these areas is Medicare. The White House and congressional Demo- crats in recent weeks have attempted to draw a stark distinction between the Medicare savings pro- jected in the House-Senate conference budget resolution and President Clinton's budget plan, released in June. Americans have been told that, while the President's plan seeks to achieve only $128 billion in savings over the next seven years, the conference budget resolution seeks to achieve $270 billion in savings. Hence, the impression is created that Congress intends to reduce projected Medicare spending by more than double the amount favored by the White House. Using the same CBO baseline for both Medicare proposals sharply reduces the gap. Specifically: 9w Comparing the two budget plans with the CBO baseline indicates that the White House wants savings of $192 billion, not the $128 billion it claims when comparing its plan with that of Congress. This makes the difference between the two plans $78 billion over seven years, not the $142 billion claimed by the White House. But even this overstates the gap between the two positions in terms of reducing the outlays for Medicare. The reason: Congress's budget includes new revenue into the program from raising Part B premiums in two ways. In the arcane accounting of Washington, bringing new revenues into the Medicare program is considered identical to cutting the growth of projected spending on health care services. It obviously is not, however, since adding revenues to fund the program does not reduce spending, even though it does reduce the growth in net outlays. Under the congressional plan, the first way Part B premium revenues are increased, compared with current law, is by maintaining premiums at 31.5 percent of costs instead of allowing them to fall to 25 percent of costs, as current law would do (meaning an actual reduction in premiums). This raises $48.7 billion over seven years. Under the second change, an affluence test would be applied to Medicare recipients, and upper-income beneficiaries would face an additional increase in prerni- ums, reducing the subsidy these individuals currently receive from taxpayers. This second change raises $8.6 billion over seven years. Thus, the combined revenue generated by the premium adjust- ments-which is classified as a reduction in spending by Washington, but actually funds more Medicare services-is $57.3 billion over seven years. The Clinton budget contains no premium increases, even on the wealthy. So to compare the effect of the two Medicare proposals on actual spending for services, it is necessary to add the mislead- ingly classified $57.3 billion revenue increase to the congressional budget numbers. Ew If Medicare spending under the two budgets is compared with the CBO baseline, after correct- ing the congressional figure for the additional premium revenue, the difference in spending falls to a gap of just $20.7 billion over seven years in a program which is projected to spend $1,900 billion over that period. Thus, the gap between the White House and Congress on Medicare spending is just one percent of current projected outlays.

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