CONGRESS
HAS A NUMBER OF OPTIONS TO PAY FOR EXTENDING
HEALTH COVERAGE TO MORE LOW-INCOME CHILDREN
There is growing consensus that SCHIP reauthorization
should make substantial progress toward covering all uninsured low-income
children. The cost, however, will be substantial. Immediately enrolling the
roughly 6 million children who are eligible for publicly funded coverage but
are unenrolled would cost the federal government more than $50 billion over
five years. (This amount is in addition to the $7.9 billion in federal
funding that CBO estimates will be needed just to sustain existing state SCHIP
programs.)
In the House and, most
likely, in the Senate as well, SCHIP reauthorization legislation will be
subject to “pay-as-you-go” rules, which require that the cost of increases in
mandatory programs (such as SCHIP) be fully offset through entitlement
reductions and/or revenue increases. Some have argued that the goal of
reaching many of the eligible uninsured children should be shelved because the
cost cannot be “paid for.” Others have argued that Congress should not try to
offset the cost of SCHIP legislation because it is too difficult. (Since
legislation without offsets would have to overcome substantial procedural
obstacles, such as the need to get 60 votes in the Senate, the latter course
could undermine hopes for significant progress in covering more low-income
children.)
In fact, however, ample offsets exist on both the
spending and revenue sides of the budget to cover the costs of SCHIP
reauthorization several times over — if there is political will to
pursue them. These offsets have strong justification on their merits, and the
Senate passed some of them in 2005. The potential offsets include:
-
Reducing Medicare overpayments to private health plans. Private plans were brought into Medicare to save the
program money. Instead, the Medicare Payment Advisory Commission (MedPAC),
Congress’ expert advisor on Medicare payments, has documented that private
plans are costing the Treasury tens of billions of dollars because they are
significantly overpaid. According to MedPAC, Medicare payment rates to
private plans average 12 percent higher than the cost of providing
fee-for-service Medicare to comparable beneficiaries. MedPAC recommends that
Medicare level the playing field by adjusting the payment formula to
essentially pay private plans the same amounts it would pay to treat the same
patients under fee-for-service. CBO estimates this would save $54 billion
over five years (and $149.1 billion over ten years).
-
Adopting other MedPAC recommendations regarding overpayments to private plans
and the Medicare “stabilization fund.” Because teaching hospitals
offer a wider array of services than other hospitals and generally serve
sicker patients, Medicare reimburses them for the “indirect medical education”
costs they incur when treating Medicare beneficiaries. However, Medicare also
builds in extra payments to private managed care plans so they can reimburse
teaching hospitals for these same costs. This means Medicare essentially pays
for indirect medical education twice: directly to the teaching
hospitals themselves, and indirectly through private plans. To remove the
double payments, MedPAC recommends eliminating indirect medical education
costs from the payments made to private plans. CBO estimates this would save
$5.2 billion over five years (and $12.9 billion over ten years).
Another MedPAC
recommendation concerns regional Preferred Provider Organizations (PPOs),
created by the 2003 Medicare drug law to provide care to Medicare
beneficiaries. To encourage PPOs to enter regional markets, the law established
a $10 billion stabilization fund to provide additional funds to PPOs, beyond the
regular Medicare payments these PPOs receive. MedPAC recommended eliminating
the stabilization fund in order to eliminate unnecessary costs and level the
playing field for competing types of Medicare plans. Last year Congress
eliminated about $6.5 billion of the fund; by eliminating the rest, Congress
could comply fully with the MedPAC recommendation in this area. This would save
$1.6 billion over five years (and $3.5 billion over ten years), according to
CBO.
- Increasing the rebates that drug manufacturers
pay under Medicaid. Drug manufacturers must pay rebates to the federal
government and the states for the prescription drugs that Medicaid dispenses.
Some states have been able to negotiate additional rebates with manufacturers,
which suggests that the federal government is not making the most of
Medicaid’s large purchasing power. Strengthening the rebate program,
such as by increasing the size of the minimum rebate manufacturers must pay
and by extending the rebate to drugs dispensed through Medicaid managed care
plans, would reduce federal and state Medicaid costs without harming
beneficiaries. These two reforms — which have been endorsed by the
National Governors Association and were passed by the Senate in 2005 — could
save over $4 billion over five years (and over $11 billion over ten years),
based on CBO estimates.
- Allowing the Food and Drug Administration to
approve generic versions of biological drugs. Derived from living cells,
these drugs treat a variety of medical conditions, including anemia,
hepatitis, rheumatoid arthritis, some forms of cancer, and multiple sclerosis.
But since there is no FDA-approved process to bring generic versions of these
drugs into the market, manufacturers usually have permanent monopolies on
them, and the drugs can remain very costly for long periods of time.
Allowing generic versions of biological drugs would make such drugs more
affordable and reduce federal and state costs for Medicare, Medicaid, and
SCHIP, as well as costs for private insurance. (No estimate of the
savings is currently available.)
- Canceling two high-income tax cuts enacted in
2001 that have not yet taken effect. These tax cuts, related to the
value of itemized deductions and the personal exemption, are aimed exclusively
at high-income taxpayers and take effect in three stages: in 2006, 2008,
and 2010. Canceling the portions of the tax cuts scheduled for 2008 and
2010, while leaving the 2006 portion in place, would save approximately $13
billion over five years, according to the Urban Institute-Brookings Tax Policy
Center.
Such a step would not
deprive a single taxpayer of a dollar in tax cuts he or she now receives.
Households with incomes over $1 million, for example, will receive an average
tax break of $146,000 in 2010 even if the two tax breaks are canceled. And the
effect on people with incomes between $100,000 and $200,000 would be miniscule;
they would forgo an average additional tax cut of just $7 in 2010. Virtually no
households below $100,000 would be affected.
- Reducing the capital gains “tax gap.”
Capital gains taxes are based on the sales price of an asset minus the
purchase price. Many taxpayers are believed to overstate the purchase
price of their financial assets to the IRS, thereby understating their capital
gains tax liability, in part because financial institutions are not required
to report the purchase price of these assets to taxpayers or the IRS.
(In contrast, firms are required to report dividends, interest payments, and
sales prices of financial assets.) To address this problem, the
Administration’s budget would require firms to report the purchase price of
financial assets to taxpayers and the IRS; similar legislation has been
introduced in both houses of Congress. The Joint Committee on Taxation
estimates that this would save $465 million over five years (and $3.3 billion
over ten years).
- Raising federal tobacco and/or alcohol taxes.
The federal excise tax on cigarettes has remained at 39 cents per pack since
2002. Simply adjusting it for five years of inflation would justify an
increase to 46 cents in 2008, which would raise close to $4 billion over five
years — and also reduce smoking, which in turn would reduce tobacco-related
health costs. A recent proposal by Senator Gordon Smith would go
further, raising the cigarette tax by 60 cents per pack. CBO estimates
that increasing the tax by 50 cents per pack would raise $26.6 billion over
five years (and $53.2 billion over ten years).
Like the cigarette tax, taxes on alcoholic beverages are fixed in nominal
terms; they have not been adjusted for inflation since 1991. Moreover,
alcohol use, like smoking, creates external costs such as higher health care
costs and lower productivity. (Alcohol-related accidents also cause
extensive loss of lives and property.) CBO estimates that increasing the
federal excise tax on all alcoholic beverages to $16 per gallon would raise
$28 billion over five years (and nearly $60 billion over ten years).
Other potential offsets also could be considered, including
additional MedPAC recommendations to curb excess Medicare payments and Joint Tax
Committee recommendations to close unproductive tax breaks and improve tax
compliance. The issue is not whether options exist to offset the cost of
covering uninsured low-income children, but whether Congress has the political
will to undertake this task.
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