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Eye on the News

Paul Howard and Yevgeniy Feyman
Republicans and the Budget
Where to bargain, where to resist
8 May 2013

Last month, President Obama released his $3.77 trillion budget for fiscal year 2014. Not surprisingly, it doesn’t do nearly enough to put the United States on a sound economic footing, particularly when it comes to debt. Over its ten-year window, Obama’s budget would barely reduce total U.S. debt as a percentage of GDP, from 76 percent now to about 73 percent by fiscal year 2023. Under the Congressional Budget Office’s alternative and probably more realistic budget scenarios, debt would hit 87 percent of GDP within 11 years. Even that figure, dire as it is, assumes no major natural disasters, wars, or economic downturns that would push the debt toward even more unsustainable levels.

For Republicans, who have been waging trench warfare with the president for years over taxes and spending, the most natural response is to reject Obama’s latest blueprint out of hand. Instead, they should resist this temptation and highlight areas of agreement, explain what they reject and why, and provide an alternative template for economic growth, entitlement reform, and entrepreneurial revitalization. Proceeding in this way would constitute not squishy compromise but rather a framework for debate that, even if it doesn’t create a grand bargain, would move policy in the right direction.

On the plus side, the president’s budget includes several modest cost-control provisions. To the chagrin of many Democrats, for instance, Obama proposes to change the official measure of inflation used for federal programs from the Consumer Price Index to the chained CPI, an alternate measure that would shrink cost-of-living adjustments. Using the chained CPI would reduce the growth of benefits paid to Social Security beneficiaries and yield an estimated $230 billion in savings over ten years, according to the Office of Management and Budget.

One of the budget’s most important accomplishments is a straightforward fix to Medicare’s Sustainable Growth Rate. Each year, Medicare’s physician-payment rates fall—nearly 30 percent this past year alone. This trend, if unaddressed, will drive doctors away from the program and imperil care for Medicare beneficiaries. As a result, every year Congress overrides the rate cuts in what is commonly known as the “doc fix.” But the situation has led to uncertainty for physicians who treat Medicare patients and created an unrealistic budget “baseline” that encourages Congress and the administration to play shell games. The president’s budget proposes to hold the line on physician-payment rates while ordering the Department of Health and Human Services to develop a new Medicare payment model at a ten-year cost of $250 billion—not measurably more than the cost of ten more years of the doc fix, which the new model effectively institutionalizes, thus eliminating the need for the congressional overrides.

The budget contains other modest Medicare reforms that conservatives should embrace. For example, it increases the means-testing of premiums for Medicare Parts B and D; requires home-health beneficiaries to make co-payments; imposes a “surcharge” on supplemental policies that virtually eliminates Medicare deductibles designed to encourage smarter health-care spending; and simplifies and makes permanent the R&D tax credit for research-intensive industries.

In too many other areas, though, the president’s budget leaves a lot to be desired—particularly in its adverse policies toward the biopharmaceutical industry, one of the jewels of America’s high-tech economy. The budget resurrects a dreadful idea: price controls for low-income Medicare beneficiaries, with savings estimated at $123 billion over ten years. Republicans should take a strong stand against price controls, which would harm one of the most successful federal programs, the Medicare Part D drug benefit. Part D’s costs have repeatedly come in under projections, partly by encouraging beneficiaries to use cheaper generic drugs. Competition among prescription-drug plans helps keep down premiums. Numerous studies have shown that pharmaceutical price controls have a strong negative effect on innovation; if applied to the Part D program, they would likely result in fewer drugs made available to the most vulnerable populations.

With the exception of the permanent R&D tax credit, Obama’s budget does little to support innovation. It devotes just $274 million to the National Institutes of Health, after a decade of flat budgets that have eroded NIH support for basic science research. By comparison, the president proposes spending an additional $17 billion over ten years in renewable-energy tax credits to fund inefficient and expensive technologies, like solar and wind power. For a country facing a tsunami of new health-care costs from Alzheimer’s and other chronic diseases, that money would be much better spent at the NIH. Republicans should seize the high ground and advocate for greater NIH funding targeted at the most expensive and devastating diseases, which affect millions of Americans.

The Obama budget also fails to address the growing burden that Medicaid—the joint federal-state low-income health insurance program—imposes on state and federal budgets. Nationally, Medicaid spending averages about 24 percent of state expenditures; a number of states spend even more. Florida and New York devote about 30 percent of all spending to Medicaid. Since 1965, the program’s share of the federal budget has grown by over 600 percent. But Obama’s budget ignores Medicaid, because it is so crucial to his massive health-care coverage expansion. Under Obamacare, 12 million people will gain coverage through the program.

Compromise, of course, is a two-way street. To achieve meaningful reform of the government’s health programs, Republicans will likely have to shelve their hopes of repealing Obamacare, at least in the near term, and instead work on delaying its most dangerous provisions—such as community rating—where they may find some bipartisan support. They should also propose reforms to the state exchanges that would make them more competitive and affordable, target Obamacare subsidies to lower income levels, and level the playing field between employer and individual-insurance markets through a flat, means-tested tax deduction for anyone who purchases health insurance. This might appeal to Democrats, since it would in effect raise revenue (by reducing the amount needed for subsidies) while eliminating the disparities that currently exist among employer coverage, the exchanges, and small businesses. Reforming the tax treatment of health insurance would also represent a progressive tax change; currently, wealthy Americans get the most benefit from the deduction.

In return for declaring a truce on Obamacare, Republicans should demand that Democrats put Medicaid reforms—such as growth caps and rewards for managed-care implementation—back on the table. Both sides should commit to a global cap on growth in general government health-care spending (say, GDP plus 1 percent). Republicans should also continue to push for premium support for Medicare; if it’s good enough for Obamacare, they can argue, it should be good enough for seniors.

President Obama insists that he’s serious about tax and entitlement reform. Republicans should take him at his word and offer smart proposals of their own. And if they can’t get a broader deal that institutes better policies, they should make it clear that it is the president, not they, who is walking away from important incremental reforms.

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