The White House Budget's Highly Convenient Long-Term Assumptions



In theory, President Obama's budget, if passed, would put the federal budget on a path to balancing in 2055. I say "in theory" because, as the conservative think tank E21 points out, that projection relies on three convenient but not particularly realistic assumptions.

The first is that federal tax revenues rise to roughly 23.8 percent of the economy, due in part to incomes growing faster than inflation.  As E21 notes, this is probably the most plausible assumption, in that it's easy enough to believe that President Obama, at least, might support raising taxes that high. But taxing that much of the economy would be unprecedented in American history. Federal tax revenues as a share of the economy have average about 18 percent since World War II—and have never once exceeded 20.9 percent of gross domestic product.

The second assumption is that discretionary spending simply holds flat at 2023 levels—essentially forever. Now, that may sound like an excellent idea to those of us who would prefer that the federal government exhibit restraint when it comes to discretionary spending. But given the White House's dire warnings about the threat posed by modest spending growth under sequestration, it does not seem particularly realistic.

Finally, the long-term budget projection rely on the Independent Payment Advisory Board (IPAB), a Medicare cost-control panel created by ObamaCare, to make Medicare's long-term budget problems disappear.

This is particularly fantastic, for a number of reasons. One is that it, politically, it's almost certain to be impossible. The budget might as well have assumed a magic Medicare fairy instead.

Instead, it tightens IPAB's cost-control target, reducing Medicare's allowable growth from GDP plus 1 percent to GDP plus 0.5 percent. Given that Republicans have already targeted IPAB for soon-as-they-can-get-it repeal, and given that there is already Democratic discomfort with the board and some explicit bipartisan support for repeal measures, it is wishful thinking to believe that there is any legislative majority that's going to be willing to vote to make IPAB stronger.

Another reason is that we don't really know whether IPAB will work, even if it manages to survive. The board is essentially limited to tightening reimbursements for health providers. But that sort of cost-control-by-payment-reduction has always been tough to sustain. We see it with the so-called "doc fix," a scheduled reduction to physician reimbursement rates that Congress overrides every year. We've also seen it recently with scheduled payments to Medicare Advantage providers, which the Department of Health and Human Services recently decided to override. There's even Congressional movement to override some of the sequester's cuts to Medicare reimbursements. 

Moreover, even if the reimbursement reductions went through a few times, it's hard to believe that, without other major changes, they could be sustained over time. Medicare's former chief actuary, Richard Foster, has repeatedly made clear that after a few years, ObamaCare's Medicare reimbursement reductions would probably result in serious access problems for Medicare enrollees—and if so, "Congress would have to intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result."

In some ways IPAB is just a giant magic asterisk for Medicare. We have good reason to believe that it would focus its cost-control efforts on the reimbursement system, but we don't really know what it would do. We do, however, know that if there are no easy, obvious changes to the program's payment system; we know that because if there were, they would have been done by now.

I am not entirely opposed to IPAB's existence; all else being equal, it's probably better to have a cost-control board attempting to reduce spending on the program than not. Congress has certainly proven that it is not capable of restraining spending within the program at all. That said, I'm quite skeptical that IPAB will end up being effective at restraining Medicare spending. The big-picture political dynamics will make it tough for the board to do anything at all; legislators will have a hard time being too supportive of any board of unelected experts whose job is to cut spending on Medicare. And the narrow interest group pressures will make it tough for the board to do anything specific; it's one thing to cut spending on Medicare generally, it's another to cut spending on a specific part of Medicare. So even if IPAB works, there's a good chance that IPAB still won't really work.