Deficit-Neutral Health Proposals May Make Fiscal Fixes Trickier

• Jed Graham
• On 7:09 pm EST, Tuesday November 3, 2009

Fiscal watchdogs are warning that Democrats' health care plans -- notably the bigger House bill -- would make America's unsustainable budget problems even harder to solve.

In part, the conclusion reflects three new projections from the Congressional Budget Office:

Both the House and Senate bills would increase federal health spending in the coming decade.

Neither would cut budget deficits by more than 0.5% of GDP in the second decade, even if politically tough choices occur.

The House and Senate plans do not include the roughly $250 billion, 10-year cost of repealing scheduled cuts in Medicare's physician payment rates. Democrats now hope to pass that separately.

Adding the cost of the Medicare payment fix -- nearly $40 billion in 2019 alone -- would leave the House and Senate Finance Committee bills in the red.

Can't Be Neutral Now

With analysts expecting $10 trillion in deficits over this decade, they see even a budget-neutral health care bill as insufficient and counterproductive.

"Even if it's deficit neutral, it still leaves us on an unsustainable track," said Robert Bixby, executive director of the Concord Coalition. "An awful lot of things that could be used for deficit reduction would be needed to finance increasing health care commitments."

If lawmakers finally try to tackle long-term budget woes, much of the low-hanging fruit will already be picked.

The White House has said a health care overhaul is central to its plan for getting control of the deficit. The CBO projects that federal spending on Medicaid and Medicare will grow nearly twice as fast the economy, rising from 4.3% of GDP in 2008 to 8.5% in 2030. Spending on the health care entitlements is seen rising to 12.2% of GDP by 2050. "It is fiscally irresponsible not to do health care reform," Christina Romer, chairwoman of the Council of Economic Advisers, said last week. She added that "reform must be at least budget neutral over the next decade and significantly budget improving in the longer run."

Based on CBO projections, the House and Senate bills appear to fall short of that latter goal.

"Given the argument that the growth of health care costs is the single largest problem facing the budget and those problems are mammoth, to make real progress they should do a lot more on slowing cost growth," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. She added, "I'd like to see more deficit reduction and see it sooner."

The danger of delaying deficit action was highlighted in the CBO's June long-term outlook. Stabilizing federal debt as a share of the economy without tax hikes would require a quick spending cut equal to 8.1% of GDP. That's roughly 40% of the entire budget in a typical year, including interest on the debt. Waiting until 2020 would require an annual cut equal to 9.7% of GDP, nearly half of annual outlays.

Senate Plan Not As Bad

While the House and Senate Finance bills' deficit impacts don't differ much, budget analysts see the Senate plan as more responsible.

Gross spending in the House bill tops $1.2 trillion vs. about $900 billion for the Senate bill.

The more a bill costs, the more it requires "spending offsets that could otherwise be used to reduce deficits," MacGuineas said.

Another reason budget analysts prefer the Senate approach is that it would primarily pay for new health insurance subsidies by redirecting resources -- including tax breaks -- that would be tied to health care spending anyway.

About $400 billion would come from Medicare savings. An additional $340 billion would come via limiting tax-exempt health spending. This includes $200 billion from a 40% tax on high-cost health plans.

Excluding those funding sources, the Senate Finance plan would increase federal health care spending by $85 billion over the decade.

By comparison, the House plan would boost the budget commitment to health by close to $600 billion, the CBO says. Most of that is tied to the House's 5.4% tax on incomes above $500,000 for an individual and $1 million for a couple.

That's on top of the expiration of Bush tax cuts at the end of 2010.

Buzz up!