Budget Process

The ACA’s Cost Sharing Reduction Program and the CBO Baseline

Section 1402 of the Patient Protection and Affordable Care Act (ACA) establishes a program that was intended to reduce out-of-pocket costs for low-income people purchasing qualified health plans as defined by the law.

The program is intended to work like this.... The Department of Health and Human Services (HHS) pays the administrator of a qualified health plan (i.e., insurance companies) some amount of money to cover what would otherwise be out-of-pocket costs for individuals who enroll in a silver plan from the exchanges established by the law. If they enroll in the gold or bronze plan there is no subsidy.  

Silver plans have an actuarial value of 70 percent. That means that the plan will cover about 70 percent of the covered health care costs for the typical enrollee. The plan enrollee has to cover the rest in the form of deductibles, copays, etc. However, section 1402 of the ACA says that if you enroll in a silver plan and have an income between the poverty line and 150 percent of the poverty line, HHS will cover 80 percent of the 30 percent of costs not covered by the plan (this would bring the total actuarial value of the plan up to 94 percent). Likewise, HHS will cover 57 percent of your remaining out of pocket costs if your income is between 151 and 200 percent of the poverty line, and 10 percent of remaining costs if your income is between 201 and 250 percent of the poverty line. 

Silver plans (specifically the second lowest cost silver plan) are also used to determine the benchmark premiums used in setting the value of the premium assistance tax credits. This part is important. You'll want to remember this later on in the post. 

However, there was a big omission in the drafting of section 1402. Specifically, the law tells HHS to make the payment, but it doesn't tell them where to get the money to make the payment. In other words, it provides a direction to pay but not a source of payment. According to Federal appropriations law, both are needed in order to have an appropriation (source: GAO "Red Book").

Therefore, another bill would have to provide the appropriation. And without an appropriation HHS shouldn't be making obligations and insurance companies cannot get paid. Doing so would be in violation of the Antideficiency Act and unconstitutional (agencies cannot spend money without an appropriation). This is the argument at the core of the House's lawsuit. And in October, HHS stopped making payments after a review of the program concluded that the House was right.   

The timing of the payments ending allowed insurers to adjust their rates for 2018 to account for the lost cost sharing reduction payments under section 1402. This had several effects on the insurance market. First, insurers increased premiums for silver plans to drive up the benchmark premiums used to set the value of the premium assistance tax credits. This resulted in a number of areas with $0 premiums available for all qualifying individuals with incomes less than four times the poverty line. Preliminary information suggests that the number of enrollees in subsidized plans didn't change much between 2017 and 2018 -- a factor likely driven by the new $0 premiums. 

The Congressional Budget Office (CBO) anticipated many of these changes last summer when they produced an estimate of the budgetary effects of eliminating the cost sharing reduction payments. At the time, CBO estimated that eliminating the cost sharing subsidies would increase the deficit by $201 billion over ten years. This is because premium tax credits would get about $365 billion more expensive while the cost sharing reductions would cost $118 billion. 

However, the Administration’s decision to stop making the cost sharing reduction payments doesn’t necessarily indicate whether CBO will now remove the cost sharing reductions from the baseline. If CBO believes that the law creates an entitlement to the cost sharing reductions (this is different from deciding whether there is an appropriation) it may keep the payments in the mandatory baseline. Therefore, if Congress appropriates money for the program at some point in the future they will not get “credit” for reducing the deficit. Rather, Congress would simply legalize what CBO believes would happen anyway. 

If instead CBO believes that the law does not entitle the insurers to the payments and they are removed from the mandatory baseline, a new appropriation would score on paper as reducing the deficit by hundreds of billions of dollars. CBO will likely be taking imput from the House and Senate Budget Committees in helping to make this determination

The answer to the question will be extremely relevant if Congress looks to attach a new appropriation for the cost sharing reductions to a budget deal to lift the Budget Control Act spending caps later this month.  

Will War Funding Be Used as a Release Valve?

The President’s FY 2018 budget asks Congress to increase defense spending over the statutory spending caps. Specifically, the President has asked for another $54 billion in new base funding for 2018. Meanwhile, the 2018 defense authorization bill signed by the President would increase defense spending by $85 billion over the statutory spending caps. 

The $54 to $85 billion in new budget authority in 2018 cannot be put into base funding without amending the statutory limits on defense spending pursuant the Budget Control Act of 2011 (BCA). Furthermore, there is a point of order in the Senate on any budget resolution that supports spending in excess of that statutory spending limits (see section 312(b) of the Congressional Budget Act of 1974 (CBA)). Waiving this point of order would require 60 votes. This is why the Congressional budget resolution used for tax reform assumes current law spending on defense (the budget also includes is a "deficit neutral reserve fund" that would allow for an increase in defense spending if paid for). 

However, there is a way of getting around these restrictions by using designated war funding to pay for base activities! Section 251(b)(2)(ii) of the Balanced Budget and Emergency Deficit Reduction Act of 1985 (BBEDCA) allows Congress to designate any funding that it sees fit for Overseas Contingency Operations (OCO). As long as the President also agrees with the designation (as notified by the Office of Management and Budget) the spending limits will be changed accordingly. 

Many members of Congress have been critical of this approach in the past because it’s a budget gimmick (“war” funding is being used to pay for ongoing expenses that the government would incure without combat). There's another political constraint in that the OCO designation needs the support of 60 in the Senate. Therefore, to secure support, Senators would likely demand that OCO should also be increased for programs that may not be traditionally thought of as defense but still receive war funding (like the State Department). This would allow the appropriators to shift budget authority out these programs and towards other non-defense programs.

However, this is the most likely approach to increasing discretionary spending in the absence of a grand bargain to amend the BCA.


A Loophole in the Earmark Moratorium?

The post is bound to be controversial! But I can't help it given that the argument is so interesting. 

Legislative earmarks are directives in bills to fund specific projects or activities. Without getting into the efficacy of the process, the House and Senate Republican Conferences have adopted rules preventing congressional earmarks. Specifically, the Republican Conference rules place a moratorium on earmarks as defined by the standing rules of the House and Senate.

The moratorium applies to the text of the bills or the committee reports accompanying the bills, as well as conference reports and joint explanatory statements. That pretty much includes all legislative vehicles either authorizing programs or appropriating money. 

However, a congressional earmark has a very specific definition. Rule XXI clause 9 of the House defines an earmark as:

... a provision or report language included primarily at the request of a Member, Delegate, Resident Commissioner, or Senator providing, authorizing or recommending a specific amount of discretionary budget authority, credit loan authority, or other spending authority for a contract, loan, loan guarantee, grant, loan authority, or other expenditure with or to an entity, or targeted to a specific State, locality or congressional district, other than through a statutory or administrative formula driven or competitive process.

Senate Rule XLIV clause 5 defines an earmark as:

... a provision or report language included primarily at the request of a Senator providing, authorizing or recommending a specific amount of discretionary budget authority, credit loan authority, or other spending authority for a contract, loan, loan guarantee, grant, loan authority, or other expenditure with or to an entity, or targeted to a specific State, locality or congressional district, other than through a statutory or administrative formula driven or competitive award process.

However, the President of the United States is explicitly excluded from the list of offices that can request an earmark. But you may be wondering how can the President request an earmark? Through the President's annual budget and supplemental appropriations requests. 

For instance, if the President wants Congress to include an earmark for a specific project all they have to do is include it in a budget request and Congress can fund that activity by as much as they choose. By awarding the President a requested earmark, Members of Congress who are aligned with the earmark would potentially avoid the limitations in place under the rules. 

Why may this process potentially avoid the earmark limitations? At the end of the day, the moratorium is a conference rule (not a House or Senate rule) without a point of order. If members of the conference decide that the moratorium applies to the President too, well, then it applies. 

However, it could easily be argued that the earmark moratorium offers a tremendous amount of power to the President who, through the Office of Management and Budget, could control the earmark process. 

What You Need to Know About the 2018 (BCA) Spending Caps

The Budget Control Act of 2011 (BCA) reinstated limits on discretionary spending that were in place from 1991 through September 2002. The new limits on discretionary spending went into effect in 2012 and will expire after 2021. There are no limits on discretionary spending after 2021. 

Specifically, the limits were established by section 101 of the BCA that amended section 251(c) of the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA). For instance, limits on total discretionary spending as set by the section 101 of the BCA are $1.156 trillion in FY 2018 and $1.182 trillion in FY 2019

However, section 401 of the BCA also established the Joint Select Committee on Deficit Reduction (aka the “Super Committee”) tasked with the goal of achieving at least $1.5 trillion in deficit reduction. The law also specified that if the Super Committee could not agree to at least $1.2 trillion in deficit reduction, section 302 of the BCA would revise the aggregate spending limit by splitting it between security and non-security thereby creating a firewall between defense and domestic discretionary spending. For instance, the new security category would be $603 billion in FY 2018, while the non-security category would be $553 billion (the sum of which is $1.156 trillion). 

Furthermore, if the Super Committee failed to reach agreement by December 9, 2011, each category would be reduced by the amount equivalent to the difference between whatever deficit reduction that the Committee agreed to and the $1.2 trillion (minus debt service) spread over the period covering 2013 to 2021. As you know, the Super Committee did fail to achieve agreement on any deficit reduction, therefore triggering a $1.2 trillion reduction in the spending limits that has been referred to as The Sequester

This comes out to an additional reduction in the discretionary spending limits of $54 for defense and $37 billion for domestic spending applied each year until 2021 (once a special mandatory sequester is applied that we will not go into here in any detail). The difference in the two numbers is that domestic program spending has more to give through the mandatory sequester, but at the end of the day the cut is spread equally between the two categories.

President Obama's budgets called for an increase in both defense and domestic discretionary by $37 billion each year. In other words, his budget proposed cancelling the additional reduction in domestic discretionary with an increase in defense by an equal amount (but leaving about a third of the defense reduction in place). Democrats have referred to this principle of $1 in domestic spending for $1 in defense spending as "parity" in previous budget negotiations. President Trump's first budget, on the other hand, called for cancelling the additional reduction in defense spending paid for with an equal reduction in domestic discretionary spending. 

It is uncertain how much further Congress will increase discretionary spending as part of a "budget caps deal" in the next few weeks. However, budget analysts should look to the defense authorization bill (NDAA) for signals on where we are headed. The 2018 NDAA signed by President Trump on December 12 authorizes $634 billion in total defense base spending. This is $85 billion more than the BCA's spending limit for that year as well as $31 billion more than Trump's budget and $48 billion more than Obama's budget. 

This sends a strong signal that Congress is considering a cap adjustment that would exceed simply rolling back the additional spending reductions. 

The CBO Could be More Transparent

It's common for the Congressional Budget Office (CBO) to come under fire for the cost estimates that it produces. Usually it's when CBO is under fire that you see legislative reactions calling for transparency or budget cuts to the agency. 

There are lots of reasons for why folks should be frustrated with CBO's cost estimates and ways they can be improved. Exploring this is worthy of its own set of posts. But cutting CBO's budget (and especially the division that prepares the cost estimates) is generally a bad idea.  

However, CBO could be improved through additional transparency. 

A well-functioning CBO is critical to maintaining an effective check on the administration. We cannot expect the legislative branch responsible for maintaining the "power of the purse" to rely totally on budget information from the executive. 

CBO's existence is derived, in part, from the need for Congress to have access to independent analyses of budget information so as not to rely on the administration's Office of Management and Budget (OMB). Therefore, faith in the efficacy of CBO's estimates is not only critical, but core to the agency's very being.

CBO can improve faith by increasing the transparency of how its estimates are produced. Below are a number of ways that CBO can increase transparency.

  1. We essentially want to encourage the replication of CBO's estimates by independent sources. Therefore, CBO should publish detailed descriptions of how it arrived at the published cost estimates (e.g., what assumptions were made and what weights were put on those assumptions). Divulging models is less important than publishing how the agency arrived at an assessment of the costs of legislation considered by Congress. 
  2. CBO should provide a formal assessment of how comfortable it is with the cost estimates produced. For instance, is CBO very comfortable with a cost estimate or does the agency think it's just a shot in the dark?
  3. CBO should provide some qualitative assessment of how important the baseline was in developing its cost estimates. Some cost estimates are entirely driven by baseline assumptions. Others are less constrained. For instance, CBO often acknowledges that the policy world has changed when new information becomes available. But cost estimates for new legislation are often provided against an outdated baseline to remain consistent in evaluating all proposals over the course of a legislative session. The difference is important to policymakers. 
  4. The House and Senate Budget Committees are responsible for providing oversight of CBO and reviewing its activities. Budget Committee staff are routinely invited to sit down with analysts, ask detailed questions about the estimates CBO has produced, and are invited to the meetings with outside advisers. The Budget Committees should be required to produce a report every year (or two) with a review of CBO's models, activities, staffing, etc. In that report, the Budget Committees can publicly highlight weaknesses or concerns in advance of the consideration of major legislative initiatives.

CBO would likely argue that transparency would make their job more difficult. Transparency requires resources. And CBO worries that transparency will cause people on the outside to question its analyses. Sometimes the agency is under significant pressure by Members of Congress to produce cost estimates quickly and without all the necessary information needed to be absolutely comfortable. Other times CBO is asked to provide a cost estimate for a new program that fundamentally changes the policy environment -- an inherently difficult task. However, this is exactly why we should have a more transparent CBO. 

Senator Lee has a proposal that would take an important step with increasing transparency in the CBO Show Your Work Act of 2017 (S. 1746 with H.R. 3822 as the House counterpart). Specifically, it would require CBO to publish their models for the purpose of replication. This is largely based on the American Economic Association's (AEA) Data Availability Policy that requires authors of accepted papers to provide "the data, programs, and other details of the computations sufficient to permit replication." This data and other information is published online when the paper is published by an AEA journal. 

More transparency is needed to improve the confidence in expert agencies like CBO. CBO can and should take steps to increase transparency of its estimates. These moves would only help to further solidify the importance of the institution within the budget process.