Obama's Deficit Reduction Proposal

President Obama called for cutting the nation’s combined budget deficit by $4 trillion over the next 12 years. . . . The president vowed not to extend tax cuts for the wealthy or to dismantle the government-run health care systems for the elderly and poor. . . . Among his proposals is a “debt fail-safe” mechanism that would force lawmakers into much more severe action if the deficit has not contracted significantly by 2014. The provision would impose across-the-board cuts on most government programs, officials said. . . . there would be $3 in spending cuts and interest savings in the president’s proposals for every $1 that comes from increased tax revenue. . . . "we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society. And I refuse to renew them again.” He said people like him “don’t need a tax cut,” and added, “Not if we have to pay for it by making seniors pay more for Medicare, or by cutting kids from Head Start, or by taking away college scholarships that I wouldn’t be here without.” . . . Along with allowing the lowered tax rates to expire, Mr. Obama suggested limiting itemized deductions for the top 2 percent of taxpayers. . . . Rather than change Medicare to a voucher program, Mr. Obama proposes broad reforms that he says would save hundreds of billions of dollars over the next 12 years and more than $1 trillion in the following decade. In the speech, the president embraced some of the proposals of his own debt commission, including $770 billion worth of cuts in nonsecurity related spending by 2023. Cuts to defense programs would be increased to nearly $400 billion over the next 12 years, officials said. The president stayed away from proposing changes to Social Security, saying that it was not a significant piece of the country’s deficit problem.

From here

A look at the details shows a proposal that allocates deficit reductions by category, is big on cutting "fraud, waste and abuse," and with some notable exceptions, particularly in the area of health care cost reductions, is short on specifics, but big on having a process to get the job done.

The White House offers more details here:

the President is calling for:

•A debt failsafe that will ensure that our nation’s debt is on a declining path as a share of our economy. If by 2014, budget projections do not show that the debt-to-GDP ratio has stabilized and is declining in the second half of the decade, the failsafe will trigger an across the board spending reduction, including on spending through the tax code.
•The trigger will ensure that deficits as a share of the economy average no more than 2.8% of GDP in the second half of the decade.
•Consistent with prior fiscal enforcement mechanisms put in place by Presidents Reagan, George H.W. Bush and Clinton, the trigger should not apply to Social Security, low-income programs, or benefits for Medicare enrollees.
•The trigger should also include a mechanism to ensure that it does not exacerbate an economic downturn or interfere with our nation’s ability to respond to a national security emergency.

Discretionary non-defense spending would be cut $200 billion over 10 years ($20 billion per year) in addition to $400 billion ($40 billion per year) in the President's budget, and would cut $770 billion over 12 years.

Defense spending would be cut by $400 billion by 2023 ($33.3 billion per year) by "pushing harder to not only eliminate waste and improve efficiency and effectiveness, but conduct a fundamental review of America’s missions, capabilities, and our role in a changing world. . . .(The President will make decisions on specific cuts after working with Secretary Gates and the Joint Chiefs on the comprehensive review.) . . . in addition to the savings generated from ramping-down overseas contingency operations."

Health care cost reductions in projected Medicare and Medicaid spending over the next twelve years is to be reduced by $40 billion per year on average ($34 billion per year on average in the first ten years), by a variety of means. A blue ribbon commission would be given the power to implement cost savings proposals when health care cost inflation is above a target unless an alternative is developed by Congress.

•Building on the Affordable Care Act, the President is proposing additional reforms to Medicare and Medicaid designed to strengthen these critical programs by reducing waste, increasing accountability, promoting efficiency, and improving the quality of care, without shifting the cost of care to our seniors or people with disabilities.
• . . . This framework includes . . . an amount sufficient to fully pay to reform the Medicare Sustainable Growth Rate (SGR) physician payment formula while still reducing the deficit.

The President’s framework proposes specific reforms to strengthen Medicare and Medicaid over the long term, including: . . .

The President’s framework would strengthen the Independent Payment Advisory Board (IPAB) created by the Affordable Care Act. . . . Under the Affordable Care Act, IPAB analyzes the drivers of excessive and unnecessary Medicare cost growth. When Medicare growth per beneficiary exceeds growth in nominal GDP per capita plus 1 percent, IPAB recommends to Congress policies to reduce the rate of growth to meet that target, while not harming beneficiaries’ access to needed services. Congress must consider IPAB’s recommendations or, if it disagrees, enact policies that achieve equivalent savings. If neither acts, then the Secretary of Health and Human Services would have to develop and implement a proposal to achieve the savings target.
•Set a new target of Medicare growth per beneficiary growing with GDP per capita plus 0.5 percent. This is consistent both with the reductions in projected Medicare spending since the Affordable Care Act was passed and the additional reforms the President is proposing.
•Give IPAB additional tools to improve the quality of care while reducing costs, including allowing it to promote value-based benefit designs that promote proven services like prevention without shifting costs to seniors.
•Give IPAB additional enforcement mechanisms such as an automatic sequester as a backstop for IPAB, Congress, and the Secretary of Health and Human Services.

. . . Under current law, States face a patchwork of different Federal payment contributions for Medicaid and the Children’s Health Insurance Program (CHIP). The President’s framework would replace the current complicated Federal matching formulas with a single matching rate for all program spending that rewards States for efficiency and automatically increases if a recession forces enrollment and State costs to rise.

. . . The President also supports reform of Medicaid to incentivize more efficient, higher quality, care for high-cost beneficiaries, including those who are eligible for both Medicaid and Medicare. These nine million beneficiaries comprise 15 percent of Medicaid enrollment but consume nearly 40 percent of total Medicaid spending.

. . . . Together with employers, States, hospitals, physicians and nurses, the Administration has launched a new public-private partnership called Partnership for Patients that will help improve the quality, safety and affordability of health care for all Americans. The two goals of this new Partnership are: preventing patients from getting injured or sicker while they are in the hospital and helping patients heal without complication. Achieving the initiative’s goal would mean more than 1.6 million patients will recover from illness without a preventable complication, reducing costs by up to $50 billion in Medicare and billions more in Medicaid over the next 10 years.

. . .. limit excessive payments for prescription drugs by leveraging Medicare’s purchasing power – similar to what was called for by the bipartisan Fiscal Commission. It would speed up the availability of generic biologics, and prohibit brand-name companies from entering into “pay for delay” agreements with generic companies. And, it would implement Medicaid management of high prescribers and users of prescription drugs.

. . . clamp down on States’ use of provider taxes to lower their own spending while not providing additional health services through Medicaid; recover erroneous payments from Medicare Advantage; establish upper limits on Medicaid payments for durable medical equipment; and take other actions to improve program integrity.

Non-health care mandatory spending would be cut by $360 billion over 12 years ($30 billion per year) through "measures to reform agricultural subsidies, shore up the federal pension insurance system, restore solvency to the federal unemployment insurance trust fund, and enact anti-fraud measures. . . . The Fiscal Commission and other bipartisan efforts have put forward additional proposals that should be considered as part of a comprehensive deficit reduction effort to meet this target. Reforms to mandatory programs should protect and strengthen the safety net for low-income families and other vulnerable Americans."

A key piece of the plan is tax increases:

He also supports efforts to build on the Fiscal Commission’s goal of reducing tax expenditures so that there is enough savings to both lower rates and lower the deficit. Reform should be designed to ask more of those who can afford it while protecting the middle class and promoting economic growth. . . . the President is continuing his effort to reform our outdated corporate tax code to enhance our economic competitiveness and encourage investment in the United States. By eliminating loopholes, reducing distortions and leveling the playing field in our corporate tax code, we can use the savings to lower the corporate tax rate for the first time in 25 years without adding to the deficit.

He does not include Social Security in the package:

The President does not believe that Social Security is a driver of our near-term deficit problems or is currently in crisis. . . . The President in the State of the Union laid out his principles for Social Security reform which he believes should form the basis for bipartisan negotiations that could proceed in parallel to deficit negotiations:

•Strengthen retirement security for the low-income and vulnerable; maintain robust disability and survivors’ benefits.
•No privatization or weakening of the Social Security system; reform must strengthen Social Security and restore long-term solvency.
•No current beneficiary should see the basic benefit reduced; nor will we accept an approach that slashes benefits for future generations.

Analysis

The President is a bit light on taxes to close the deficit gap (a 50-50 split between taxes and spending cuts, rather than a 25-75 split would have been better). The defense cuts are overly modest, because they are arbitrary and don't spell out cost saving changes in the scope of our missions and procurement approaches. The non-discertionary savings cuts seem fairly high given the many rounds of cuts that they have been subjected to already. The "other mandatory spending" cuts seem appropriate.

The cuts to health care are about right in magnitude but assume cuts are possible in spending without really demonstrating that it is possible to sensibly bend the curve on health care cost inflation, leaving that problem to experts who may have little more of an idea about how to do it than the politicians do.

Thumbs up:
* Repeal of Bush Tax Cuts for those making more than $250,000 a year.
* Reducing tax expenditures.
* "reform agricultural subsidies, shore up the federal pension insurance system, restore solvency to the federal unemployment insurance trust fund, and enact anti-fraud measures."
* "clamp down on States’ use of provider taxes to lower their own spending while not providing additional health services through Medicaid; recover erroneous payments from Medicare Advantage"
* "limit excessive payments for prescription drugs by leveraging Medicare’s purchasing power. . . speed up the availability of generic biologics, and prohibit brand-name companies from entering into “pay for delay” agreements with generic companies. And, it would implement Medicaid management of high prescribers and users of prescription drugs."
* Defense spending cuts.

Neither Here Nor There:
* "incentivize more efficient, higher quality, care for high-cost beneficiaries, including those who are eligible for both Medicaid and Medicare." But how?
* "launched a new public-private partnership called Partnership for Patients that will help improve the quality, safety and affordability of health care for all Americans." How will this happen?
* "IPAB recommends to Congress policies to reduce the rate of growth to meet that target, while not harming beneficiaries’ access to needed services." What can they recommend that would meet that standard?
* Discretionary non-defense spending cuts. Where?

Thumbs down:
* Lowering corporate income tax rates.
* Limiting itemized deductions based on AGI.