Congressional Budget Office
Director's Blog

Today CBO released a letter on the changes in Medicare Part D premiums that would result from certain provisions of H.R. 3200, America’s Affordable Health Choices Act of 2009, as introduced on July 14. According to CBO’s estimates, enacting those changes would lead to an average increase in premiums for Part D beneficiaries of about 5 percent in 2011, rising to about 20 percent in 2019. However, beneficiaries’ spending on prescription drugs apart from those premiums would fall, on average, as would their overall prescription drug spending (including both premiums and cost sharing). The net effect on drug spending would differ among beneficiaries depending on the amount of their purchases in a year. As with CBO’s other estimates related to this bill, this analysis is preliminary and does not reflect any modifications or amendments made after July 14.

Under current law, the standard outpatient prescription drug benefit under Part D of Medicare has the following features: an annual deductible for which the beneficiary is responsible; a dollar range of coverage in which the beneficiary pays 25 percent of the cost of covered drugs; and a catastrophic threshold above which the beneficiary pays about 5 percent of the cost of covered drugs. In the gap between the end of the initial coverage range and the catastrophic threshold—commonly referred to as the “doughnut hole”—beneficiaries generally are liable for all of their drug costs. For their Part D insurance coverage, most enrollees pay premiums that finance about 25 percent of the cost of the coverage (on average); the federal government pays the remaining 75 percent. For low-income individuals, however, the federal government subsidizes a larger share of their prescription drug costs, including their premiums and their spending in the doughnut hole.

H.R. 3200 proposes several changes to the Medicare Part D program that would affect federal spending: creating a new rebate program, phasing out the doughnut hole, and requiring pharmaceutical manufacturers to provide beneficiaries who are not eligible for the low-income subsidy program a discount on their spending in the doughnut hole for covered brand-name drugs. CBO estimates that enacting the proposed changes would collectively save the federal government about $30 billion over the 2010–2019 period. CBO has not estimated the impact of each provision separately because their effects are so closely connected.

Those provisions would also increase beneficiaries’ premiums for two reasons. First, prescription drug plans would be covering some costs in the doughnut hole and above the catastrophic level that they are not required to cover under current law—and those higher insured costs would raise premiums. In return for those higher premiums, enrollees would receive greater protection against incurring high drug costs. The reduction in cost sharing would outweigh the increase in premiums, on average, because of the subsidies provided by the federal government, so beneficiaries’ total prescription drug spending would fall on average. The effect on total spending would vary among beneficiaries: Those who ended up purchasing a relatively small amount of drugs in a year would pay more in additional premiums than they would gain from lower cost sharing, while those who purchased a relatively large amount of drugs in a year would gain more from lower cost sharing than they would pay in higher premiums.

Second, the responses of pharmaceutical manufacturers to these provisions of the legislation would also increase Part D premiums. Drug manufacturers would probably charge higher prices for new drugs and lower the rebates they pay to prescription drug plans. Those responses would lead to an increase in beneficiaries’ premiums and an increase in beneficiaries’ payments for cost sharing.

CBO released updated economic and budget projections today, showing baseline (i.e., current law) budget deficits of about $1.6 trillion for the current fiscal year that ends on September 30 and roughly $7.1 trillion for the 2010-2019 period. That 10-year total is about $2.7 trillion higher than the baseline projection CBO published in March 2009. As noted in our report, about half of that revision is attributable to legislation enacted since March (primarily from extrapolating the Supplemental Appropriations Act of 2009), while the other half stems from technical factors and updates to our economic forecast.

These baseline estimates were developed using procedures established by the Balanced Budget and Emergency Deficit Control Act, which defines the baseline used by Congress for legislative scorekeeping purposes. Broadly speaking, that baseline follows current law. For example, the tax cuts enacted in 2001 and 2003 that are scheduled to expire at the end of 2010 are assumed to expire for purposes of constructing the baseline.

In contrast, some of the numbers released by the Administration today in its Mid-Session Review assume enactment of the President’s policy proposals. The Administration currently projects that, under those policies, deficits over the 2010-2019 period would total about $9.1 trillion. Comparing that total to CBO’s baseline deficit total of $7.1 trillion over the same period is an “apples-to-oranges” comparison. An “apples-to-apples” comparison can be made by looking at the Administration’s new baseline projection that follows the same procedures as CBO’s projection (the so-called “BEA baseline” reported in Table S-7 of the Mid-Session Review) and removes the effects of the President’s policy proposals. As shown in the attached table, OMB’s projection of the BEA baseline deficit is roughly $6.3 trillion over the 2010-2019 period, or about $0.9 trillion lower than CBO’s baseline total for that period.

In June, CBO estimated that deficits under the President’s budget would total $9.1 trillion over the 2010-2019 period—an amount that is roughly in line with the Administration’s current estimate. However, we have not updated our analysis of the President’s budget to reflect our new economic and technical assumptions, so comparing our earlier estimate and the Mid-Session Review estimate published by the Administration today is also not an “apples-to-apples” comparison.

Today CBO issued its annual summer update of the budget and economic outlook.  CBO estimates that the federal budget deficit for 2009 will total $1.6 trillion, which, at 11.2 percent of gross domestic product (GDP), will be the highest since World War II. That deficit figure results from a combination of weak revenues and elevated spending associated with the economic downturn and financial turmoil. The deficit has been boosted by various federal policies implemented in response, including the stimulus legislation and aid for the financial, housing, and automotive sectors.

CBO estimates that, as the economy recovers, if current laws and policies remained in place, the deficit would shrink but remain above $500 billion per year, or more than 3 percent of GDP, throughout the 2010–2019 period. As a result, debt held by the public would continue to grow as a percentage of GDP during that time. That debt, which was as low as 33 percent of GDP in 2001, would reach an estimated 54 percent of GDP this year and grow to 68 percent of GDP by 2019.

Those projections generally follow the rules, originally established in law, that have traditionally governed baseline projections.  However, some of the resulting assumptions may underestimate potential deficits. Because they presume no changes in current tax laws, the projections incorporate increases in revenues that would result from the expiration of tax reductions enacted earlier in this decade and provisions that have kept the alternative minimum tax (AMT) from affecting many more taxpayers.  They also assume that future annual appropriations grow each year at the rate of inflation.  Those assumptions result in projected revenues that, as a percentage of GDP, would be high by historical standards, and projected discretionary spending that, relative to GDP, would be low by historical standards. Many other outcomes are possible.  If, for example, those tax reductions were continued, the parameters of the AMT were indexed for inflation, and future annual appropriations were to remain at their 2009 share of GDP, the deficit in 2019 would reach 8.5 percent of GDP, by CBO’s estimates. 

Since it last issued baseline projections in March, CBO has reduced its estimate of the deficit for 2009 by $80 billion. Both outlays and revenues are now expected to be lower in the current year than previously estimated, by $165 billion and $85 billion, respectively. A large drop (of $203 billion) in the estimated subsidy cost of the Troubled Asset Relief Program (TARP) dominates the change in projected outlays for 2009; other changes (mostly in revenues) offset much of that decrease.

Although various indicators suggest that the recession may have ended or is likely to end within the next few months, CBO’s economic forecast anticipates a relatively slow and tentative recovery. A number of forces, including global economic weakness, continued strains in financial markets, and households’ desire to rebuild their savings, are expected to restrain economic growth for the next few years.

Specifically, CBO estimates positive economic growth during the second half of calendar year 2009, at an annual rate of 1.6 percent, following declines at an annual rate of 6.4 percent in the first quarter and 1.0 percent in the second quarter. In CBO’s forecast, real GDP grows by 2.8 percent between the fourth quarter of 2009 and the fourth quarter of 2010, by 3.8 percent in 2011, and by an average of 4.5 percent in 2012 and 2013. With the economy functioning well below its potential level, inflation is projected to remain very low; the consumer price index for all urban consumers, with food and energy prices excluded, is expected to increase by 1.6 percent this year, by 1.1 percent in 2010, and by 1.0 percent in 2011 (as measured by the change in the index from the fourth quarter of one year to the fourth quarter of the next year).

Beyond the 10-year budget window, the nation will face further significant fiscal challenges posed by rising health care costs and the aging of the population. Continued large deficits and the resulting increases in federal debt would, over time, reduce economic growth. Putting the nation on a sustainable fiscal course will require some combination of lower spending and higher revenues than the amounts now projected.

Today CBO released a study that examines the Veterans Health Administration’s (VHA’s) experience with quality improvement and health information technology. The assessment also examines how VHA’s system serves its patients.  The information contained in this report may prove useful to private-sector health providers who are working to improve the quality of care in their own facilities as well as to analysts and decision makers considering how veterans’ health care might be affected by proposals for health care reform.

Two decades ago, the veterans’ health system focused largely on inpatient hospital care and had a poor reputation for quality.  Beginning in the mid-1990s, the agency undertook a major transformation effort aimed at improving the quality and efficiency of the care it provides to its patients. VHA eliminated underutilized inpatient beds and facilities, expanded outpatient clinics, and restructured eligibility rules. A major focus of the transformation was the tracking of a number of performance indicators—including quality-of-care measures—and holding senior managers accountable for improvements in those measures.

Since then, VHA has achieved improvements in the quality indicators it measures and for which it holds its staff accountable.  The agency has relied increasingly on electronic health records and other information technology to support efforts to coordinate health care delivery.  Many of VHA’s quality improvement programs use data from computerized clinical records to track both process and outcome measures, including risk-adjusted mortality and morbidity.  Those programs have helped VHA to recognize problems in specific health care facilities as well as to improve performance throughout the agency.  Additionally, much of its own research has focused on the importance of putting evidence-based medicine into practice.

Most veterans who use VHA facilities also seek care from other providers, and this can make it difficult to analyze the quality of care and ensure that patients are receiving services recommended by clinical practice guidelines.  These patterns of health care utilization also highlight the importance of expanding efforts to share health information not just between VHA and the Department of Defense, but also with private providers.

Determining whether VHA is a cost-effective provider of care is not simply a matter of comparing spending per enrollee. VHA spending per enrollee does not reflect the full amount of medical care received by those veterans from all sources.  In this assessment, CBO took into account changes in the mix of enrollees and their reliance on VHA care and found that VHA’s spending per enrollee was relatively flat from 1999 through 2002, but since then it has risen about as rapidly as spending per enrollee in the Medicare program. It is likely that rapid increases in annual appropriations for VHA, efforts to reduce waiting lists within the system, and expansion of mental health and other specialized services have contributed to the recent growth in spending per enrollee.

On Friday CBO released a letter that discusses how the agency’s budget estimates reflect potential reductions in federal costs from improvements in health that might result from expanded governmental support for preventive medical care and wellness services.

Preventive medical care includes services such as cancer screening, cholesterol management, and vaccines. In making its estimates of the budgetary effects of expanded governmental support for such care, CBO takes into account any estimated savings to the government that would result from greater use of preventive care as well as the estimated costs of that additional care. Although different types of preventive care have different effects on spending, the evidence suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall.

That result may seem counterintuitive. For example, many observers point to cases in which a simple medical test, if given early enough, can reveal a condition that is treatable at a fraction of the cost of treating that same illness after it has progressed. But when analyzing the effects of preventive care on total spending for health care, it is important to recognize that doctors do not know beforehand which patients are going to develop costly illnesses. To avert one case of acute illness, it is usually necessary to provide preventive care to many patients, most of whom would not have suffered that illness anyway. Judging the overall effect on medical spending requires analysts to calculate not just the savings from the relatively few individuals who would avoid more expensive treatment later, but also the costs of the many who would make greater use of preventive care.

Of course, just because a preventive service adds to total spending does not mean that it is a bad investment. Experts have concluded that a large fraction of preventive care adds to spending but should be deemed “cost-effective,” meaning that it provides clinical benefits that justify those added costs.

Even in cases where the provision of preventive medical care saves money, potential savings from expanded federal support might be limited depending on how frequently that service is currently provided. Many studies of preventive care compare the costs and benefits of a preventive service to the costs and benefits of doing nothing; in practice, a great deal of preventive medicine is already being performed, and many insurance plans already cover certain preventive services at little or no cost to enrollees. So a new government policy to encourage prevention could end up paying for preventive services that many individuals are already receiving—which would add to federal costs but not reduce total future spending on health care.

Wellness services include efforts to encourage healthy eating habits and exercise and to discourage bad habits such as smoking. As with preventive care, CBO’s estimates of the budgetary effects of expanded governmental support for wellness services endeavor to account for any savings that would result from greater use of those services as well as the costs of those services. However, evidence regarding the effect of wellness services on subsequent health spending is limited, and CBO is continuing to evaluate the evidence that does exist.

Designing government policies that are effective at inducing people to be healthier is challenging. Even successful efforts might take many years to bear fruit and could involve significant costs. Moreover, many employers already support some wellness services for their employees, and new government efforts to encourage such services could end up paying for services that some individuals are already receiving—which would add to federal costs but not reduce total future spending on health care. As with preventive medicine, the net budgetary effect of government support for wellness services depends on the balance of two factors—the reduction in government health spending for people who reduce their future use of medical care, and the costs to the government of providing or subsidizing wellness services.

Although some case studies suggest that certain employer wellness programs reduce subsequent medical care, little systematic evidence exists. The findings from case studies may not be applicable to programs that would be implemented more broadly. Because the evidence about such programs continues to evolve, CBO will continue to examine that evidence closely in evaluating specific proposals—the effects of which could depend very importantly in the proposal’s design.

Today, CBO released an update of its long-term Social Security projections. The projections are qualitatively similar to those in previous CBO reports: Social Security’s annual revenues currently exceed its annual outlays, but as the baby-boom generation continues to age, growth in the number of Social Security beneficiaries will pick up, and absent legislative changes, outlays will increase much faster than revenues.

Total outlays (benefits plus administrative costs) equaled 4.4 percent of gross domestic product (GDP) in 2008, whereas the program’s dedicated revenues—from payroll taxes and from income taxes on the Social Security benefits of higher–income beneficiaries—equaled 4.8 percent of GDP. In the absence of legislative changes, spending for the program will climb to 6.1 percent of GDP by 2033, CBO projects.

The current recession is resulting in lower earnings and therefore lower Social Security revenues than would otherwise have occurred, but is not having as large an effect on benefit payments. Consequently, for the next few years, Social Security’s annual surpluses will be smaller or deficits larger than they would have been if economic growth had remained steady. In the long term, the recession will have little effect on revenues and outlays as a percentage of GDP, but the trust funds’ balances will be permanently lower. Primarily because of the worsened short-term economic outlook, CBO’s projection of the 75-year actuarial imbalance in the program is 0.5 percent of GDP, rather than the 0.4 percent we projected in 2008. As a share of taxable payroll, the projected shortfall is 1.3 percent. In other words, CBO estimates that if the Social Security payroll tax rate was increased immediately and permanently by 1.3 percentage points—from the current rate of 12.4 percent to 13.7 percent—the trust funds’ balance at the end of 2083 would equal projected outlays for the subsequent year.

Without changes in law, CBO expects that the Social Security trust funds will be exhausted in 2043. If that point is reached, the Social Security Administration will not have the legal authority to pay full benefits and the amounts that could be paid would be about 17 percent less than those scheduled under current law.

Many of the factors that will affect Social Security’s long-term finances are subject to significant uncertainty. Thus, a full exposition of projected finances includes both the expected outcomes and the inherent uncertainty surrounding such projections. In the report, CBO presents the range of outcomes for which there is an 80 percent chance that the actual value will fall within that range. For example, although CBO projects that Social Security outlays will equal about 6.1 percent of GDP in 2033, our uncertainty analysis indicates a 10 percent chance that outlays will be less than 5.4 percent of GDP in that year and a 10 percent chance that outlays will exceed 6.8 percent of GDP.

In addition to the more familiar projections of total Social Security outlays and revenues, the report includes analysis of the distribution of Social Security taxes and benefits. CBO groups individuals by their 10-year birth cohort—for example, people born in the 1940s—and by the quintile of their lifetime household earnings. (The top one-fifth of earners, for instance, compose the highest earnings quintile.) CBO analyzes the first-year annual benefit received, lifetime benefits received, the ratio of that benefit to average lifetime earnings, and lifetime taxes paid. CBO’s analysis indicates that, on average, future Social Security beneficiaries are likely to receive higher first-year annual benefits than today’s beneficiaries (adjusted for projected inflation). Additionally, CBO projects that each birth cohort will receive greater average lifetime benefits (the present value of all benefits that a worker gets from the program) than the preceding cohort. The analysis also shows that people with lower earnings have lower average benefits than do higher earners, but those benefits replace a higher portion of the average earnings for lower earners.

Today CBO released its estimates of federal revenues and outlays for the first 10 months of fiscal year 2009. The budget deficit through July 2009 reached $1.3 trillion, CBO estimates, close to $880 billion greater than the deficit recorded in the 10 months through July 2008. Outlays rose by almost $530 billion (or 21 percent) and revenues fell by more than $350 billion (or 17 percent) compared with the amounts recorded during the same period last year.

The estimated deficit reflects outlays of about $169 billion for the Troubled Asset Relief Program (TARP), recorded on a net-present-value basis adjusted for market risk, and net cash payments of $83 billion in support of Fannie Mae and Freddie Mac. CBO believes that Fannie Mae and Freddie Mac should now be considered federal operations and that the full scope of their activities should be incorporated in the federal budget. The Treasury statements, however, are just recording the cash infusions from the Treasury as federal outlays. CBO estimates that spending increases and revenue reductions stemming from the American Recovery and Reinvestment Act of 2009 (ARRA) have totaled more than $125 billion so far this year (excluding the impact on the budget from the effects that the legislation has had on the economy).

According to CBO’s estimates, receipts were about $8 billion (or 5 percent) lower in July 2009 than they were in July 2008, marking the 15th consecutive month in which receipts were lower than those in the same month of the previous year. Withholding for income and payroll taxes was about $11 billion (or 8 percent) less than that in July 2008, CBO estimates; about half of that decline resulted from provisions in ARRA, primarily the Making Work Pay tax credit.

Outlays were $71 billion higher this July than in the same month last year because of growth in spending and the effects of the calendar. August 1, 2009, fell on a weekend, which shifted about $24 billion in outlays from August to July. Without that timing shift, the growth in outlays this July would have totaled $46 billion (or about 18 percent). TARP spending of $22 billion was the largest contributing factor to that increase. In addition, unemployment benefits and Medicaid outlays rose by $8 billion and $5 billion, respectively, boosted by stimulus spending from ARRA.

For the first 10 months of the fiscal year, receipts from individual income and payroll taxes are down by almost $200 billion (or 12 percent) compared with collections during the same period last year. Receipts from corporate income taxes have declined by 57 percent. Spending for unemployment benefits is more than 2 1/2 times what was spent in the first 10 months of 2008, because of higher unemployment and legislated increases in the amount and duration of benefits. Medicaid outlays have risen by 24 percent, largely because of a provision in the stimulus bill that temporarily increases the federal government’s share of that program’s costs.

The Department of Defense’s (DoD’s) proposed budget for fiscal year 2010 includes a number of significant changes in planned military programs. Many of the issues addressed in the budget have been apparent for some time to analysts in CBO’s National Security Division. (J. Michael Gilmore led this division from 2001 until earlier this year; Matthew S. Goldberg is CBO’s Acting Assistant Director for National Security.) Indeed, many of the programmatic changes just proposed have been examined by CBO in recent publications, including:

• Budget Options, Volume II (August 2009)
• Options for Combining the Navy’s and the Coast Guard’s Small Combatant Programs (July 2009)
• The Effects of Proposals to Increase Cost Sharing in TRICARE (June 2009)
• An Analysis of the Army’s Transformation Programs and Possible Alternatives (June 2009)
• Alternatives for Modernizing U.S. Fighter Forces (May 2009)
• Options for Deploying Missile Defenses in Europe (February 2009)
• The Army’s Wireless Communications Programs (February 2009)
• Long-Term Implications of the Fiscal Year 2009 Future Years Defense Program (January 2009)
• Resource Implications for the Navy’s Fiscal Year 2009 Shipbuilding Program (June 2008)

Here are some examples of relevant CBO analysis:

• Based on the five-year plan that accompanied last year’s budget request, DoD was planning to expand the active Army from 42 combat brigades to 48 combat brigades by 2011. In a budget option that has long been under formulation (Option #050-1, page 6), CBO noted that the Army would probably be unable to identify 23,000 additional soldiers (beyond those already identified) to fully populate six new brigades under the current cap on total Army personnel. One option analyzed by CBO would explicitly relax the cap and add 23,000 soldiers to the force, at a total cost of about $16 billion over the next five years.
• The Army has been developing its Future Combat System (FCS) program which would encompass eight new models of manned combat vehicles as well as new unmanned aerial and ground vehicles, sensors, and munitions. All of these components would be linked by advanced communications networks into an integrated combat system. Starting with a report released in August 2006, CBO has evaluated several alternatives to the FCS program that would forgo the development of new combat vehicles and instead “spin out” FCS improvements in communications and other systems to upgrades of existing tanks and fighting vehicles. Most recently, CBO estimated in a budget option that these changes to the FCS program could save the Army roughly $5 billion in outlays over the next ten years (Option #050-4, page 10).
• CBO evaluated DoD’s practice of hiring contractors to provide decision-makers with analyses and various other support activities—so-called contract advisory and assistance services. CBO analyzed an alternative that, in conjunction with “spinning out” the FCS program and curtailing or cancelling selected other weapon-system procurements, would reduce the volume of advisory and assistance services by 20 percent. Along somewhat similar lines, Secretary Gates announced a plan to reduce the number of support service contractors from the current 39 percent of DoD’s total workforce to the pre-2001 level of 26 percent and replace them with full-time government employees.

CBO regularly presents compendiums of budget options to help inform Members of Congress about the effects that various policy choices would have on spending or revenues. For the current budget cycle, CBO has issued Budget Options in two volumes. The first volume, released in December 2008, focused on options regarding health care and its financing. The second volume, released today, includes options that address other areas of federal spending and revenues. Estimates for most of the revenue options were supplied by our colleagues at the Joint Committee on Taxation. In keeping with CBO’s mandate to provide objective, impartial analysis, these volumes make no recommendations.

Today’s report presents 188 illustrative options that cover an array of programs and policy areas—from defense to energy to entitlement programs to provisions of the tax code. The options include some changes that would decrease spending and others that would increase it, as well as some changes that would reduce revenues and some that would raise them. The options come from legislative proposals, the President’s budget, Congressional and CBO staff, other government entities, and private groups, among others. They are intended to reflect a range of possibilities, not a ranking of priorities, and the selection or omission of a potential policy change does not represent an endorsement or rejection by CBO.

The budgetary effects shown for each option span the 10 years from 2010 to 2019 (the period covered by CBO’s March 2009 baseline budget projections). Some options would have significant effects beyond that horizon. For each option, a table shows its estimated effect on spending or revenues in each year from 2010 to 2014 and summary projections for 5 and 10 years. The accompanying discussion provides background, describes the policy change envisioned in the option, and summarizes arguments for and against the change.

Today CBO released a brief that discusses how activities with emissions that are not subject to limits in a cap-and-trade program might lower the burden of reducing the concentration of greenhouse gases (GHGs) in the atmosphere. Both existing climate policies, such as the European Union’s Emission Trading System, and policies under consideration, such as the American Clean Energy and Security Act (ACESA) of 2009, which was recently passed by the House of Representatives, have recognized the potential for actions— such as disposing of waste in different ways, changing methods of farming, and reducing deforestation— to “offset” the extent to which the use of fossil fuels must be reduced to meet a chosen target for total GHG emissions.

If such offsets—which can be defined as reductions in GHGs from activities not subject to limits on emissions—are less expensive than reductions from limiting the use of fossil fuels, they can reduce the overall economic cost of meeting a target for emissions. But the difficulty of ensuring that offset activities result in verifiable, permanent and incremental reductions in global emissions raises concerns about whether the specified emissions target will actually be met. Those concerns may be especially acute when, as under ACESA, allowable offsets include actions taken outside of the country setting the target for emissions.

Although experience with offsets is not extensive, preliminary evidence suggests that they can significantly lower the economic cost of a cap-and-trade program, even after accounting for the costs of steps taken to increase confidence that the use of offsets represents true incremental reductions in GHGs. CBO estimates that the average annual savings from offsets could be about 70 percent under ACESA. Of course the intended environmental benefit would be fully realized only if the offsets provided the full reduction in global emissions of GHGs for which they are credited.