12 November 2010

Better Approaches To Cutting the Deficit: Part Three

This post looks at better way to cut domestic spending. Previous posts looked at the interest on the national debt and tax policy, and cuts in defense spending. Here are $60 billion of domestic spending cuts:

Farm Subsidies

The deficit reduction commission proposed a $3 billion cut to $16 billion in farm subsidies. This is too timid. A cut of at least $10 billion is in order.

Criminal Justice

The federal government spends about $40 billion a year on criminal justice, including law enforcement, federal prisons and the criminal part of federal court docket. Much of this spending is duplicative of state criminal justice spending, or a product of excessive incarceration terms for select federal offenses. A variety of measures could be taken to reduce this expense:

1. Stop using the very expensive tool of incarcerating people whose only offense is repeatedly trying to illegally immigrate to the United States, just deport them.

2. Reduce sentences for people whose only offense is watching child pornography for free, who federal judges have made clear face inappropriately high sentences, and devote federal criminal justice enforcement resources instead to those who create child pornography.

3. Stop using the federal criminal justice system to prosecute intrastate drug offenses and end mandatory minimums for drug offenses.

4. Allow early release of those serving extremely long sentences for drug crimes, especially low level drug dealers.

5. Stop using the federal criminal justice system to prosecute bank robberies.

6. Stop using the federal criminal justice system as the primary method of prosecuting intrastate firearms violation.

Anticipated savings about $10 billion


End Amtrak service except (1) the Northeast Corridor (and beyond to Charlotte, NC), (2) Autotrain service to Florida, (3) the Pacific Coast where the operating subsidies are lowest. Adjust fares to limit the operating subsidy on any given route to 40%. Allow selected routes to be reinstated with state, local or nonprofit funding sufficient to limit operating subsidies to 40%.

Anticipating savings about $1.5 billion.

K-12 Education

K-12 education is primarily a state and local function, and if voters want federal spending to be reduced to balance the federal budget, then state and local governments are going to have to figure out how to fund it at that level. Grant funding for K-12 education (such as ESEA and Race To The Top) could be cut except in cases where there is a direct federal impact.

Funding should be retained for for English Language Learners, where federal immigration policy influences state expenditures, Impact Aid for schools impacted by military bases and other facilities that don't pay local taxes on federal property, and for IDEA (special education) where there is a federal mandate to provide services.

Anticipated savings about $24 billion.


NASA's budget is about $19 billion. Money is tight. The pace of NASA projects could be slowed to do the projects anticipated over the next four years over five years.

Anticipated savings about $4.5 billion.

Community Development Block Grants

The Housing and Urban Development Department provides a little under $5 billion a year in community development block grants to help local governments address local needs. These could be narrowed and prioritized and reduced by about two-thirds.

Anticipated savings about $3 billion.

Rural Development and Agricultural Marketing

The Agriculture Department spends about $7 billion a year on rural development and agricultural marketing programs. These can be cut substantially.

Anticipated savings about $3 billion.

Housing Supply

The Housing and Urban Development Department spends about $5 billion a year to increase the supply of affordable housing. Given the current glut of housing this is an appropriate time to greatly reduce this spending.

Anticipated savings about $4 billion.

Transportation Funding

A previous post noted that the gas tax should be increased. Funds other than gas tax funds should not be used for highways.


Medicare is a $447 billion program, and growth in Medicare and Medicaid funding are major drivers of increased federal government spending.

Medicare isn't horribly broken. It has very low administrative costs relative to the volume of claims that it processes. Much of Medicaid is funded with payroll taxes and that tax base was strengthened in the health care reform law. Provider reimbursements are a sustainable 100% of actual cost. There are active efforts underway to reduce provider fraud. There are active efforts underway to control provider costs.

The problem for Medicare, as it is for health care in the private sector, is how to control growth in provider costs, and there is no easy answer to this problem.

Probably the best thing that can be done is to authorize Medicare administrators to negotiate more aggressively with health care providers for lower rates. In the short run, this is not a very workable place to cut, although obviously in the long run, even modest reductions in Medicare cost growth have a big budget impact.


Unlike Medicare, Medicaid is a broken program. Despite costing $265 billion (and an equal match in high income states and less than equal match in low income states), it pays providers significantly less than the actual cost of the services provided causing a large share of physicians to opt out of the program and making benefits illusory to many people entitled to it. Health care provider costs are soaring, and as is the case in Medicare, there are no easy ways to control this problem. It is funded from general revenues, and does not have a dedicated funding source. Medicaid's means tested eligiblity format makes it more expensive to administer relative to the volume of claims that it handles, and is largely administered at the state level.

Medicaid is also really several different programs. One program is a health insurance substitute for poor famillies. A second is a health insurance substitute for disabled people who aren't senior citizens. A third is a buy in health insurance option for children in moderate income families (CHIP). A fourth is nursing home care assistance for low asset, moderate income older people.

As Wikipedia explains:

Medicaid funding has become a major budgetary issue for many states over the last few years, with states, on average, spending 16.8% of state general funds on the program. If the federal match expenditure is also counted, the program, on average, takes up 22% of each state's budget. According to CMS, the Medicaid program provided health care services to more than 46.0 million people in 2001. In 2002, Medicaid enrollees numbered 39.9 million Americans, the largest group being children (18.4 million or 46 percent). Some 43 million Americans were enrolled in 2004 (19.7 million of them children) at a total cost of $295 billion. In 2008, Medicaid provided health coverage and services to approximately 49 million low-income children, pregnant women, elderly persons, and disabled individuals.

Medicaid payments currently assist nearly 60 percent of all nursing home residents and about 37 percent of all childbirths in the United States. The Federal Government pays on average 57 percent of Medicaid expense.

Medicaid costs for nursing home care for the elderly and care for disabled beneficiaries is very high, on the order of $15,000 per beneficiary per year. Medicaid costs for low income children, pregnant woman and the poor is far lower than the cost of health insurance, on the order of $2,000 per beneficiary per year.

Medicaid covers about 4 million elderly nursing home residents, about 8 million blind and disabled beneficiaries, about 37 million people who are simply poor. Nursing home care is a little less than a quarter of the program's cost, health care for the disabled is about 45% of the program's cost, and health care for the poor (a little less than half for children) accounts for about a third of the cost of the program.

Medicaid, pays about $60 billion a year, nearly half of the nation’s total costs for long-term health care. In contrast, long term care insurance. pays about $4 billion in claims per year, about a quarter of which are for nursing homes and the rest of which are for home health care and assisted living costs. The rest is simply paid out of pocket.

Planning for Medicaid nursing home eligibility supports a cottage industry of elderly law attorneys, and the Medicaid estate recovery system is a poor man's estate tax that impacts many times more families, all of moderate income, than the federal estate tax. This is the only major government probate claim in most people's estates at their death.

One of the main problems with Medicaid is that the American public isn't sure how it wants to handle the issues it addresses. Medicaid was a compromise that provided health care to the poor and disabled, but not to many people who couldn't afford it. Like Medicare, it pays private providers, but unlike Medicare, it doesn't pay them the full cost of providing the care; it simply subsidizes charity care.

The Medicare nursing home care program really has nothing to do with the rest of the Medicare program at all. The people it serves mostly have Medicare to cover their health care costs. But, since the nation has not committed to providing a universal long term care benefit in the way that it providees a universal health care benefit, it has a generous means test that never the less is a severe financial burden on many families that are eligible for some nursing home care. The result is a half-socialized long term care system that is ill understood, expensive, and full of paperwork.

Long term care insurance, which could be an alternative to government funded nursing home care, is eligible for an itemized tax deduction, subject to the 7.5% of AGI floor for medical expenses and maximum premium level deductions, but can also be obtained as a tax free fringe benefit if provided by employers. It isn't cheap and unlike most forms of insurance where you pay a certain deductible or copay and the insurance company takes a risk on the balance, it pays only a fixed amount with risks associated with rising prices remaining a problem of the beneficiary. Most people get partial insurance for a limited period of time, in a wide variety of combinations, relying on Medicaid if they underestimate their insurance needs.

Long term care services are extremely expensive (in excess of $70,000 a year for a true nursing home, around $45,000 a year for a home health care aid, about $40,000 a year for assisted living and about $15,000 a year for "adult day care." Part of the cost amounts to room and board. But, often someone needing long term care has a spouse in a home that must also be maintained that doesn't need long term care.

Most people (70%-75% according to some numbers I've seen) need long term care, but it usually ends badly. An average long term care insurance claim lasts three years, and rarely lasts more than six years. An average nursing home stay is about a year.

The last year of life, between long term care costs and medical expenses, is often extremly expensive and accounts for a large share of both Medicare and Medicaid costs. About a 28% of Medicare costs come in the last year of life. Medicaid spends about a quarter of its budget on the last year of life. Thus, state and federal governments combined spend about $250 billion a year on medical care and long term care facilities for the elderly in their last year of life.

As difficult as it is, however, controlling costs in the long term care context seems a more viable proposition than controlling costs on the medical expense side, where providers are already undercompensated. It is probably possible to design a better program for long term care coverage that can save money and provide a more satisfactory outcome, while creating better incentives for people who might need it to plan ahead for it, rather than relying on a means tested government program.

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