The Budget Deal's List of Offsets Includes Many Familiar Gimmicks

It was bad enough that the Republicans and Democrats yet again crashed through the Budget Control Act’s caps, but to add insult to injury, the Bipartisan Budget Act (BBA) of 2018 contains many highly-questionable policies that are ostensibly meant to “offset” the nearly $300 billion in spending hikes. The list contains gimmicks like phantom cuts that only exist on paper, extension of user fees at the end of the ten-year budget window, and repurposing user fees covering specific services into general tax receipts. When President Trump talked about the Administration’s efforts to control the cost of prescription drugs during the State of the Union Address, Members of Congress rose to applaud. However, the BBA includes “reforms” that could ultimately drive up the cost of medicine. The BBA’s gimmicks include:

  • Customs User Fees: The BBA would temporarily extend the authority to assess certain customs user fees that are currently set to expire in 2025 and 2026. User fees are normally intended cover the costs of the goods or services provided through a federal program. Extending the customs fees far in advance is an oft-repeated gimmick to increase offsetting receipts years out from now in order to “offset” current year spending hikes.

  • Aviation Security Fees: These fees are supposed to offset the cost of aviation security programs and are currently set to expire in 2025. The budget deal from 2013 increased the fees and directed additional amounts to the general fund of the Treasury. The BBA would extend the fees for an additional two years, and increase the amount directed to the general fund in each year.

  • Travel Promotion Fee: Currently set to expire after FY 2020, the fee is assessed on all travelers to the U.S. from visa-waiver countries. The BBA bill would extend it for an additional seven years. This fee was established starting in 2010 to finance the new Corporation for Travel Promotion, which was since renamed as Brand USA.

  • Strategic Petroleum Reserve Drawdown: In order to boost revenues, the BBA would sell off stockpile in the reserve by 30 million barrels of crude oil in FY 2022 through 2025, and by 35 million for the next two years. The Reserve was established as an emergency stockpile but has often been used a political tool to manipulate oil prices. This drawdown was also employed in the Bipartisan Budget Act of 2015.

  • Federal Reserve Surplus Elimination: The Fixing America’s Surface Transportation Act of 2015 set a cap on the amount of Federal Reserve aggregate capital surplus at $10 billion, which required the Fed to transfer $19.7 billion in additional surplus capital to the Treasury. The BBA will reduce the cap to zero. The Federal Reserve Chairman in 2015 warned at the time that there would be no net change in federal revenues as result of this policy: “Drawing on the Fed’s capital creates no new government revenue on net, since the revenue the Treasury 'gains' by this action would be exactly offset by reduced remittances from the Fed in the future.” This shift in the timing of federal receipts will ultimately be reflected in future deficits.

  • Modifying Reductions in Medicaid Disproportionate Share Hospital Allotments: Allotments are made to states for payments to hospitals with a high share of uninsured and patients on Medicaid. Under the Affordable Care Act, the allotments are adjusted annually for inflation, but aggregate amounts were scheduled to be cut annually beginning in 2014. The reductions were delayed until 2018. The BBA would further delay the cuts to 2020, starting at $4 billion and then doubling to $8 billion over each of the next five years. A higher savings on paper relative to current law, but given recent history of the allotments, there is a high likelihood that the cuts would again be punted further down the road before 2020.

  • Medicaid Improvement Fund: The purpose of this Fund is to “improve the management of the Medicaid program by the Centers for Medicare & Medicaid Services, including oversight of contracts and contractors and evaluation of demonstration projects.” It was established in a 2008 law that authorized $100 million for FY 2014 and $150 million for each of the next four years, but all of that funding was subsequently rescinded through the Affordable Care Act. On January 22, 2018, Congress enacted H.R. 195, a continuing appropriations for FY 2018, which provided $980 million per year for the Innovation Fund starting in FY 2023. The BBA strips away the funding.

  • Physician Fee Schedule Update: The current payment rate in the Medicare physician fee schedule will rise by 0.5 percent each year through 2019. The BBA will reduce the 2019 amount to 0.25 percent. This is reminiscent of the Medicare physician payment cuts that were enacted in the Balanced Budget Act of 1997. These cuts were never allowed to take effect and eventually replaced in a permanent “doc fix” bill enacted in 2015 that revised the formula.

  • Medicare Improvement Fund: Like the Medicaid Improvement Fund, it was established in 2008 and funds were to be provided starting in FY 2014. But Congress has continually altered the funding levels and pushed the spending further out in the budget window. To date, no outlays have occurred from the Fund. The BBA would strip $220 million provided to the Fund for FY 2021.

  • Closing the Medicare Part D “Donut Hole” for Seniors: The donut hole refers to a temporary limit on the costs covered by the Medicare Prescription Drug program. The ACA phased out the donut hole by 2020, when 25 percent of the costs of medication are to be borne by beneficiaries, 25 percent by health plans, and 50 percent by drug companies. The BBA ends the gap a year earlier and increases the drug companies’ share to 70 percent of the cost. This could lead to adverse impacts that increase the overall costs of prescription drugs and reduce the amount of research and development investments into life-saving medications. Decreasing the amount of coverage financed by the health insurance providers raises additional concerns that incentives to manage plan costs will be undermined.

  • Medicaid Line Extension Drug Rebate: Pharmaceutical manufacturers that participate in the Medicare Part D program are required to pay “rebates” to the federal government. The BBA modifies the calculation of the rebate for Line Extension drugs, estimated to increase offsetting receipts by $5.6 billion over the next ten years. The rebates are akin to a tax that will lead reduce investment in research and development of new drugs and cause new drugs to be released at a higher price.

On the other side of the ledger, the repeal of the Medicare Independent Payment Advisory Board (IPAB) is scored on paper as a spending increase. However, this is misleading. It was initially enacted through the ACA and its authority to enforce cuts in Medicare would be triggered if the growth in the cost per beneficiary exceeded the growth of the economy. It was scored as a savings in CBO’s initial estimates of the ACA, and proposals each year since then to repeal IPAB have been scored as increasing spending even though its authority was never triggered and it was highly uncertain when it would have ever been triggered.

Congress ended 2017 on a high note with the passage of the Tax Cuts and Jobs Act. While tax reform laid a solid foundation for future economic growth, it did also reduce the amount of revenue expected to flow into the Treasury. Now just one month into 2018, the spending caps instituted by the Budget Control Act have been obliterated, adding on new deficit spending in the short term, with offsets and gimmicks spread over the next ten years. Without spending discipline, the staying power of the tax cuts -- and the economic growth it triggered -- could be at risk.