Issue Brief

March 2002

All Budgets Tell a Story    

What will the Health Care Story be in the Federal Budget for 2003?

"At a time when there is increased understanding of the importance of clear financial presentations, the integrity of a budget requires more than simple arithmetic.  A budget must accurately detail demand for government services and likely sources of revenue."       Jacob Lew, former OMB Director, in testimony before the Senate Budget Committee, February 6, 2002.

I.  Introduction
On February 4, President Bush sent his budget proposals to Congress.  The Budget Committees of both the House and Senate have held hearings on these proposals and they are now in the process of moving their own versions of a budget for 2003 through the legislative process.  There are some serious differences of opinion about what the federal budget should and can include in 2003.  The Congress works off estimates of likely program costs and revenue streams that are made by the Congressional Budget Office (CBO).  The CBO is the nonpartisan budget office headed by Dan L. Crippen, which provides Congress information and estimates required for the Congressional budget process.

The President presents his ideas using estimates of costs and revenues made by the office of Management and Budget (OMB) under the direction of Mitch E. Daniels, Jr.  These two offices often disagree on the numbers and those disagreements can have serious ramifications for the political decisions-makers who must develop a final budget.

The fundamental starting point in constructing the federal budget is called the “baseline”; that is, the number that the professionals believe most closely reflects what a given program will cost or a given tax will produce under existing law.  Sometimes it is the current year's cost increased to reflect estimates of inflation.  Sometimes it is the current year's cost increased to reflect inflation and increases in the number of people participating in the program.  And, sometimes it is the current years number changed to reflect inflation, changing numbers of participants, and changes in the law that are scheduled  to take effect in the year of the estimate.

The estimate of baseline for some programs is simple and straightforward.  For others it is convoluted and controversial.  The law requires that all these estimates be made not only for the year ahead, but also for a five-year time frame and in some cases ten years as well.  Obviously, the farther out into the future the estimates project, the more likely they are to be off.  At the end of the day, however, a baseline is established and all budget proposals are made in terms of changes to that baseline.

It is not necessary for the layman to understand all the technicalities of the baseline.  But it is helpful to be aware of its existence and have some general understanding of what it is when reading various articles about the budget.  This year, for instance, CBO estimates a $225 billion higher cost for the Medicare program over the next ten years than the White House OMB shows.  This obviously creates a problem for Congress when it tries to construct a budget for that program. 

II.  General Overview for 2003 
Fiscal year 2003 provides the first opportunity for President George W Bush to present a complete budget to the Congress.  As could be expected, his budget generated some controversy and a certain amount of heated rhetoric when it arrived last month.  Now that there's been some time to study it, analysts and pundits are realizing that it's a little more complex than they originally thought.

The first and most striking feature of this budget is the shift from a world of surpluses far into the future to deficits now and for the next few years. According to the President's 2001 budget document, the baseline projected last year for 2002 showed a surplus of $283 billion.  A year later that number had turned into a $9 billion deficit -- a loss of $291 billion. 

Some of this change is due to increases in spending ($54 billion) and the cost of a tax cut ($40 billion).  However, the largest portion ($197 billion) is due to changes in the economy.  These estimates are being modified again as new information comes in.  This simple example ought to show everyone how difficult it is to construct a budget with certainty.  The federal budget is vulnerable to external shocks and at the same time large enough to alter the very forces that are affecting it.

The basic overview of the Bush budget for 2003 is simple:

     Total Revenues --$2,048 billion
     Total Outlays    --$2,128 billion
     Total Deficit      --$     80 billion

Within these very large numbers are the details that give so many people fits. 

First the government must pay the interest on the national debt and that is estimated to go from $178 billion in 2002 to $181 billion in 2003.  This cost has been going down in recent years because of budget surpluses and declining interest rates, but it is starting to inch back up now that the budget is returning to deficits.

The largest category of federal spending is in the area called "mandatory spending".  The term mandatory spending refers to those bills the government must pay because of prior commitments.  Social Security and the two largest health care programs, Medicare and Medicaid, are treated as mandatory spending.

These programs can be changed in the law and future obligations can be altered but until changes are made in the law, previous commitments must be honored.  The President's budget assumed total "mandatory spending" going from $1,133 billion in 2002 to $1,159 billion in 2003 - an increase of $26 billion.   Medicare and Medicaid together accounted for $22 billion (84%) of that increase.

After all the "mandatory" requirements are met the remainder of the budget is categorized as "discretionary spending."  This is the portion that contains appropriated spending which is decided on every year.  Discretionary is projected to go from $718 billion in 220 to $773 billion in 2003.  (These numbers do not include the special emergency response fund established last year in response to the disaster on September 11.)

The largest single category of discretionary spending is national defense at $336 billion this year and that is the area that is scheduled for the largest increase next year.  The President has proposed increasing defense spending by $32 billion next year and that is unlikely to be changed much by Congress.  It is interesting to note that defense is probably the least controversial part of the 2003 budget even though it is growing so much. While there may be some squabbles over the details of individual defense programs.  The larger arguments are likely to revolve around the long-term costs of various alternatives within that total.

III. Health Program for 2003

A.  Discretionary Programs 
What is of most interest in the remainder of the discretionary budget are the dramatic increases proposed for health-related programs and the Department of Health and Human Services (HHS).  The President's budget proposed increasing appropriated health programs (this does not include Medicare and Medicaid) by $2.5 billion in 2003.  This is 3% more than CBO estimates is necessary to maintain these programs at their current purchasing power. 

While these increases look promising within the context of a budget that will be very tight for non-defense programs, when looked at closely they present some very real problems.  For instance, the budget assumes an increase of $3.7 billion for the National Institutes of Health (NIH) and an increase of $1.3 billion for anti-bioterrorism activities.  Obviously, if health programs are given a total increase of $2.5 billion and $5 billion are allocated to NIH and bioterrorism, other health programs will have to be cut by $2.5 billion. 

In order to accomplish his priorities, the President eliminates the Community Access Program and state planning grants.  He makes very large cuts in rural health activities, health professions training programs, children's hospital graduate medical education, and drug prevention programs.  He also freezes several other health programs at 2002 levels, including such programs as the maternal and child health block grant, Title X family planning programs, the Healthy Start program, and mental health activities within the Substance Abuse and Mental Health Services Administration. It will certainly come as no surprise if Congress does not go along with all his proposed reductions.

B.  Mandatory Programs 

   1. Medicare
While the challenges and differences in the discretionary programs will be difficult to handle, they will not be nearly as large or long ranging as the challenges in funding Medicare and Medicaid.  This year, Medicare at $223 billion and Medicaid at $145 billion represent two of the federal government’s larger commitments

The Balanced Budget (BBA) of 1997 made significant revisions in provider payment formulas for Medicare and these changes are just starting to take effect.  According to recent news accounts, the cuts required by the BBA of 1997 are beginning to cause disruption in the Medicare program.  These accounts contain several anecdotes about physicians who will no longer take new Medicare patients because they feel Medicare reimbursements are too low to meet their costs.

The President's budget provides a small amount to increase payments to some Medicare managed care plans that received only minimum updates in the past, but it remains silent on the rest of the problem.  Congress’ Medicare Payment Advisory Commission (MedPAC) recently made several recommendations to increase payments for providers to keep the program running smoothly.  After the President's budget came out in February, the Chairman of the House Ways and Means Committee (Congressman Bill Thomas) sent a letter to the Secretary of HHS complaining that the Administration's budget falls far short of the $174 billion that MedPAC says is necessary to restore provider payments over the next ten years.  Obviously, this will be a source of difficulty as the President's budget moves through the legislative process in Congress.

Another source of conflict between the President and Congress could arise in the area of prescription drug coverage.  The President's budget includes $190 billion over the next ten years to reform Medicare with $77 billion to provide immediate assistance to states providing prescription drug coverage for low-income seniors.  The President's proposal does not say how it would reform Medicare so it is not clear how much money its reforms would free up for a new drug benefit.  Last year, however, the President's own party in Congress included $300 billion in its budget over the next ten years for these purposes so again there is likely to be controversy. 

And, last but not least, the $225 billion difference in the ten-year baseline assumptions between the Administration and CBO for this program have the potential to present a very thorny funding problem for Congress.

2.  Medicaid
The problems in Medicaid don't involve as much money but will be difficult, nevertheless.  The President's budget contains only enough funds to extend transitional medical assistance for one year.  Since this program is an essential part of welfare reform, it is unlikely that Congress will limit it to one year as it extends the welfare reform law in 2002.  Obviously, if this happens more funds will have to be found for the program over the next several years. 

The budget also cuts Medicaid relative to current law by changing the formula used to calculate the Medicaid drug rebate.  These savings are not plowed back into the Medicaid program so it is likely that Medicaid advocates in Congress and the public will oppose this proposal.

Another area of difficulty for the Congress will arise as it deals with coverage for children.  The President's budget projects that 900,000 children will lose their SCHIP coverage between 2003 and 2006.  It allows states to retain $3.2 billion in expiring SCHIP funds to help meet this need but Congress is likely to want to spend more money on this problem.

C.  Tax Credits
The President has proposed several health-related initiatives for the tax code in his budget.  He has proposed a new refundable tax credit for people who do not have their own health insurance either through an employer sponsored plan or a public program.  The credit provides a credit of $1000 per adult and $500 per child up to two children.  A two-parent family with two children would be eligible for a maximum credit of $3000.  This proposal costs $245 million in 2003 and $10.5 billion over the next five years.

He also proposed an above the line deduction (this means it is not subject to the floor of 7.5% adjusted gross income currently applicable to deductions for health care) for people who purchase qualified long term care insurance or pay at least half the cost of employer provided long term care insurance.  This proposal will cost $328 million in 2003 and $4.7 billion over the next five years.

He proposes to provide an additional personal exemption for taxpayers who care for certain qualified family members in their own homes.  This provision will cost $314 million in 2003 and $1.8 Billion over the next five years.

The President proposes to make the Archer Medical Savings Account (MSA) program permanent after it expires at the end of this year.  Further, he proposes to modify and expand the program at a cost of $1.6 billion over the next five years.

IV.  Conclusion
It is too soon to know what the final story will be for health care in this year's budget.  The President has outlined his health care priorities in the discretionary portion of the budget and in the tax code.  But he has left a blank slate for Medicare “reform.”  It remains to be seen if Congress will fill in these blanks to his satisfaction.

Note:  This Policy Brief was written by Eileen Baumgartner, NIHP Senior Researcher and former Democratic Staff Director of the House Budget Committee. The data used in this document were taken from the Budget of the United States Government for 2003 and documents presented to the House and Senate Budget Committees by the CBO, Administration officials and the committee staffs.