CBPP: Savings Will Stick

Cross-posted from the OMB blog.

One of the criticisms leveled by skeptics of health insurance reform is that the hundreds of billions of dollars in Medicare savings being proposed won’t actually be implemented since efforts to cut waste never stick. "Congress is notorious for passing Medicare savings, and then after the cuts take place and the political groups get activated, we restore all the money," one Republican congressman told the Wall Street Journal last month.

A new report by two former CBO officials – James Horney and Paul Van de Water – now working at the Center on Budget and Policy Priorities shows that this criticism is, in their words, a "mistaken belief."

"Virtually all of the Medicare cuts enacted in 1990 and 1993, which accounted for a significant portion of the savings in those large deficit-reduction packages, were implemented," they wrote. "And most of the savings enacted in 1997 other than the SGR cuts – nearly four-fifths [emphasis theirs] – were implemented as well."
 
The Balanced Budget Act of 1997 was a huge success. So much so that over time, one-fifth of the cuts from that year’s deficit-reduction legislation (other than the SGR cuts) was restored. But as Horney and Van de Water point out, this was done because Medicare spending slowed dramatically from an average rate of about 10 percent per year in the previous decade to an actual reduction in the year-to-year rate from 1998 to 1999. Also, the federal budget was in surplus from 1998 to 2001; in this environment, Congress chose to ease some of the cuts. Needless to say, after the past eight years and the economic crisis, we are unlikely to be so fortunate.
 
Moreover, with PAYGO policies in effect any rollback of the cuts would have to be balanced with another offset. This will be a powerful incentive for Congress not to tinker with the savings package.

Finally, the authors point out the inherent flaws with the SGR provisions in the 1997 legislation that led the President and Congress to prevent the measure from taking effect over the past seven years. Fundamentally, the blunt cut in physician reimbursement rates was just that – done without any of the systemic reforms needed to actually bring down the cost of health care. In contrast, Horney and Van de Water write "the Medicare provisions in the health reform bills seem well designed to accomplish their assigned tasks and are not based on crude formulas likely to result in unanticipated, unacceptably large cuts."

The rest of the report details the other key elements of fiscally-responsible health reform – all contained in the bills under debate. Check it out; it’s worth the read.

Peter Orszag is Director of the Office of Management and Budget

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