By Robert Margolis, J.D., and Kayla R. Bryant, J.D.
The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) reviewed draft tax reform legislation being considered in the Senate and House. They concluded that the version advanced by the Senate Finance Committee will result in billions of dollars in reduced spending for Medicaid, cost-sharing reduction (CSR) payments, and the Basic Health Program (BHP), and lead to billions of dollars in increased Medicare spending, while the House-passed bill would result in $111 billion to be sequestered from mandatory accounts in 2018 due to limits on Medicare reductions (CBO Report, November 17, 2017).
Senate bill. In a letter to Sen. Ron Wyden (D-Ore), Ranking Member of the Senate Committee on Finance, the CBO wrote that the bill, which the Finance Committee passed on November 16, 2017, would result in:
- $18 billion less spending for Medicaid;
- $4 billion less spending for CSR payments;
- $1 billion less spending for the BHP; and
- $4 billion more spending for Medicare, due to changes in payments to hospitals serving disproportionally low-income patients.
The CBO found that the distributional effects of the Act over the next decade would be a reduction in spending allocated to people in tax-filing units having less than $50,000 in income, compared to the CBO’s baseline projections throughout the next decade. The CBO attributes that largely to the reduction in Medicaid spending allocated to those in that income level. The allocation of federal spending would increase for those having greater than $75,000 in income over that same period, resulting from the allocation to them of part of the increase in Medicare spending.
Last week, the JCT published its analysis of the distributional effects of the Act, which examined most effects on revenues and the portion of refundable tax credits recorded as outlays, including the effect of eliminating the individual mandate from the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148). The CBO and JCT then analyzed the distributional effects of changes in spending under the Act, using income categories consistent with JCT’s analysis.
Distributions. The analysis of the distribution by income levels of changes in federal spending under the Act shows the largest allocation of federal spending reductions through 2027 will occur for income levels below $20,000. The largest allocation of spending increases will occur for those with incomes between $100,000 and $200,000.
Allocation methods. According to the letter, the CBO allocated Medicaid, CSR, and BHP spending to tax-filing units based on the number of persons in a unit projected to be enrolled in a program and the average cost per enrollee. Age, income, disability status, and Medicaid eligibility under the ACA are among the factors affecting the average cost per enrollee.
The CBO allocated Medicare spending for hospitals serving low-income populations using the same methods previously used to allocate goods and services not linked to specific beneficiaries. Half was allocated in proportion to each tax-filing unit’s share of the population, and half was allocated in proportion to each tax-filing unit’s share of total income.
The amounts allocated to tax-filing units are measured by the cost to government of the spending, not the value that recipients place on the spending, according to the letter. Nor did the CBO make distributional allocations for people who would choose to obtain unsubsidized health insurance in nongroup markets with higher premiums compared to what would occur absent eliminating the individual mandate.
The CBO also allocated all federal spending on health care transfers to program enrollees, rather than providers who also benefit from the transfers.
House bill. The House passed the Tax Cuts and Jobs Act (H.R. 1), which would raise deficits by an estimated $1.5 trillion, would result in $111 billion to be sequestered from mandatory accounts in 2018 due to limits on Medicare reductions. The CBO noted that the Pay-As-You-Go Act (PAYGO) (P.L. 111-139) limits Medicare reductions to four percentage points and excludes many accounts entirely from sequestration, leaving the Office of Management and Budget (OMB) with too few resources to cover the bill’s deficit increase through sequestration.
Sequestration requirements. The OMB is required to maintain two PAYGO scorecards to report changes caused by new legislation over the next five and ten years. If either scorecard indicates a deficit increase, OMG must eliminate this overage through sequestration. Legislation that would increase deficits by $1.5 trillion over 10 years would be recorded on the ten-year scorecard showing deficit increases of $150 billion per year.
According to the CBO, because current balances on the PAYGO scorecard for 2018 show a positive balance of $14 billion, the OMB would be forced to reduce spending by $136 billion for 2018. No more than $25 billion may be taken from Medicare, and many other large accounts, such as social security and low-income programs, are exempt. The CBO believes that the annual resources available to the OMB range from about $85 billion to $90 billion, while $111 billion would be needed to fully offset the deficit increase.
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