Nothing Left to Cut?

Federal lawmakers lack the imagination to live within their means.

In September 2013, as Capitol Hill was bracing for a government shutdown over fiscal disagreements, House Minority Leader Nancy Pelosi (D-Calif.) declared that the $3.7 trillion federal budget had already been cut to the bone.

"The cupboard is bare. There's no more cuts to make. It's really important that people understand that," Pelosi said in an interview on CNN. "We cannot have cuts just for the sake of cuts."

Modern Democrats do not have the will to shrink the federal waistline. Sadly, modern Republicans are little better: Despite paying lip service to balanced budgets, the elephants of the Grand Old Party are too often just as gluttonous as their opponents, and averse to naming specific programs that deserve the ax.

In March 2012, for instance, GOP candidate Mitt Romney refused to get specific with The Weekly Standard. "I anticipate that there will be departments and agencies that will either be eliminated or combined with other agencies. I think of the programs to be eliminated or to be returned to the states, and we'll see what consolidation opportunities exist as a result of those program eliminations. So will there be some that get eliminated or combined? The answer is yes, but I'm not going to give you a list right now."

But you don't have to look very far at all to uncover areas where spending can and should be cut. According to the Office of Management and Budget (OMB), the federal government misspent more than $100 billion in 2012, on things like sending hospitals reimbursements for treatments they didn't provide or overpaying them for treatments they did provide. And that figure is comprised only of mistakes the OMB managed to catch.

According to the Government Accountability Office (GAO), from 2004 to 2012 the federal government improperly allocated somewhere between $38 billion and $121 billion in taxpayer funds each year, amounting to a total $799 billion over an eight-year period. Such misallocations range from misattributed tax credits to disability insurance payments being made to non-disabled people. And the problem is getting worse: Improper payments averaged $42 billion a year from 2004 to 2007, then jumped to $105 billion between 2008 and 2012.

These pockets of waste could be squeezed out by restricting program eligibility to those who needed it most, thus keeping the list of recipients small and manageable. This in turn would make oversight more effective. Waste could also be reduced by forcing programs to recover their own misspent funds through audits or more careful review systems. Unfortunately, not even a sharp increase in government mis-expenditure has provoked much reform beyond some tired political promises, usually accompanying proposals to jack up spending elsewhere, to magically get rid of "waste, fraud, and abuse." Especially in Medicare.

Medicare Fee-for-Service (FFS), Medicare Advantage, and Medicaid combined to waste $61.9 billion in 2012, according to the GAO, making government-run health care by far the biggest offender in the waste sweepstakes. Medicare FFS alone improperly spent $32 billion in 2012. This high error rate should worry us as the federal government expands its reach into the health care market. Is there any reason to believe the Affordable Care Act will have a better track record on squandering taxpayer money?

The problem is that nobody in the health care system has a real incentive to crack down on fraudulent or mistaken payments. In a piece published in the October 2013 edition of Citizens Against Government Waste's WasteWatcher, analyst Leslie Paige laid out the efforts by health care providers and their sidekicks in Congress to slow down the rate of improper payments through recovery audit contractors (RACs).

RACs were empowered by Republicans in Congress when they expanded Medicare spending through the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and again when they pushed through the Tax Relief and Health Care Act of 2006. The role of these contractors is threefold: First, identify improper payments to providers; second, expose the underlying flaws in the billing system as well as patterns of systematic fraud; and third, recover overpayments. Similar language was also included in the latest expansion of health care spending, the Patient Protection and Affordable Care Act, a.k.a. Obama­care.

The effort did pay off to some extent. RACs have recovered $8.2 billion since 2010, Paige found. This number pales in comparison to the $88.1 billion of improper payments made through Medicare FFS during that time, but it is a step in the right direction. Which is why major stakeholders in the existing bad system are fighting to remove even this small layer of auditing.

According to the Center for Medicare and Medicaid Services (CMS), 88 percent of the RAC-identified overpayments are to hospitals and, as such, hospitals are the ones who stand to lose most from an effective audit and recovery system. "Medicare providers, particularly hospitals, which have for years received billions in improper overpayments, now fully appreciate that new auditing and recovery techniques dramatically inhibit the flow of those overpayments," Paige notes.

So today, hospitals are teaming up with Congress to impose serious and unnecessary limits on recovery audits, through a Senate recovery audit "reform" bill, S. 1012, introduced by Sens. Roy Blunt (R-Mo.) and Mark Pryor (D-Ark.); and the Medicare Audit Improvement Act of 2013, H.R 1250, introduced in the House of Representatives by Reps. Sam Graves (R-Mo.) and Adam Schiff (D-Calif.). "The bills' authors claim that their legislation means to correct glitches in the RAC program," Paige explains. But "if enacted, the bills would have the effect of crippling one of the taxpayers' most potent and successful tools for squeezing billions in wasteful spending out of Medicare and lengthening the life of the Medicare Trust Fund, which is headed for insolvency by 2024."

The Graves bill in particular is a direct assault on the whole audit program. And yet it is having no problem collecting co-sponsorships from dozens of members of Congress, including Republicans. Meanwhile the CMS itself, without congressional authorization, has taken unilateral action to suspend RAC audits for a year while it purports to address confusion over inpatient-versus-outpatient rules. So far, five months have passed since the RAC suspension, with no new rulemaking.

The real solution to Medicare's improper payments problem is to terminate the fee-for-service system altogether and move to premium support. But while we wait for that unicorn, there is no excuse for lawmakers or bureaucrats to obstruct the recovery of taxpayer money.

Although Medicare Fee-for-Service is the biggest federal drain in absolute terms, it is far from the worst offender on a dollar-for-dollar basis. Rather, the IRS-administered Earned Income Tax Credit (EITC) gobbles up the biggest portion of its own budget on improper payments, wasting $12.6 billion in 2012, or almost a quarter of what the program spent. Because the tax code and the rules pertaining to the EITC are so complex, taxpayers who aren't actually eligible frequently wind up claiming the credit. And thanks to poor oversight by the IRS, those erroneous-or fraudulent-claims go undetected.

The tremendous EITC waste is even more infuriating considering that the credit was implemented as a way to alleviate the payroll tax burden on lower income families. Instead, people who should be ineligible wind up benefiting. And we are now stuck with a highly regressive payroll tax funding a Social Security program that is only a few years away from bailing on its promise to pay full benefits to seniors.

The bottom line is that Nancy Pelosi is just plain wrong. There is plenty of spending to be cut from the federal budget, even before you target for euthanasia such richly deserving agencies as the Department of Commerce. But politicians lack the willpower to change their bad habits. When lawmakers are ready to begin getting serious, improper payments are an easy place to start.