The budgetary impact of proposed health reform initiatives – whether through legislation, rules, or waivers – significantly affects the likelihood of success. The following provides a concise briefing on some key players and processes affecting cost estimates of federal health care initiatives.

Congressional Budget Office (CBO):

The Congressional Budget Office (CBO), a nonpartisan agency of Congress, provides Congressional committees with budgetary information and analyses. CBO’s mandate is to provide Congress with objective and impartial analysis, with no policy recommendations.

Specifically, CBO prepares fiscal estimates for pending legislation, forecasts federal revenues and expenditures, independently re-estimates the President’s proposed budget, and conducts various analyses for Congress. Therefore, CBO determines the official cost/savings estimate or “score” used by Congress in considering proposed legislation or the President’s proposed budget. For estimating the impact on revenues of legislation involving income, estate and gift, excise, and payroll taxes, the Congressional Budget Act directs CBO to use exclusively the revenue estimates of the Joint Committee on Taxation.

CBO frequently calls on outside experts for advice on specific analytic matters, such as the outlook for health care spending, spending projections for Medicare and Medicaid, and the fiscal impact of major programmatic or regulatory changes. For its economic forecasts and assumptions, CBO draws on the advice of a distinguished panel of advisers that meets twice a year. CBO also has a panel of outside experts, mostly academics, to advise CBO on health care issues.

All CBO estimates and analytic products are reviewed internally for technical competence, accuracy of data, and clarity of exposition. Draft studies are also reviewed by experts outside CBO, and the preface to each study cites the many contributors who helped shape the final product. Although outside experts and advisers provide considerable assistance, CBO is solely responsible for the accuracy of its estimates and analyses. Due to its nonpartisan status and mandate to provide objective analysis, CBO does not make explicit policy recommendations in any of its analyses.

White House Office of Management and Budget (OMB):

The Office of Management and Budget (OMB), part of the Executive Office of the President, is the focal point of policy and budget oversight in the Executive Branch. OMB’s mandate is to ensure policymaking by cabinet departments and agencies is consistent with the policies and priorities of the President.

In addition to making policy recommendations and preparing the President’s proposed budget, OMB reviews and approves a wide range of policy and budget activities of federal agencies. This includes the authority to review and approve or disapprove proposed and final rules, waivers (e.g., Medicare or Medicaid demonstrations), legislation proposed by agencies, major “sub-regulatory” policy (e.g., program guidance, interpretations, and instructions by CMS), congressionally mandated reports, and Congressional testimony by Executive Branch officials.

OMB provides the Administration’s official estimate of the cost/savings of policies contained in regulations, waivers, and the President’s proposed budget, and the Administration’s position of the cost/savings of legislation under consideration in Congress. OMB also estimates the impact of federal regulations on businesses and state and local government. However, in estimating Medicare or Medicaid related costs and savings of legislation, rules, and waivers, OMB works closely with the Office of the Actuary (OACT) at the Centers for Medicare and Medicaid Services (CMS). While OMB may occasionally revise estimates provided by CMS/OACT and request refinements or recalculations, it most cases OMB adopts CMS/OACT estimates without major changes.

PAYGO:

PAYGO – short for “Pay as You Go” – refers to rules in the House and Senate requiring that legislative changes to mandatory programs or taxes do not increase the federal deficit. To comply with PAYGO, new mandatory spending programs, changes to existing mandatory programs (most notably, Medicaid, Medicare, SCHIP, and Social Security), and tax cuts must be offset by an equal amount of tax increases or cuts to mandatory programs. In determining the net effect of proposed changes to mandatory programs and taxes, Congress uses CBO’s projections of baseline spending and fiscal effects of individual legislative provisions.

PAYGO is a parliamentary rule, with some differences in the House and Senate. PAYGO may be overridden in the House if the House Rules Committee adopts a special order governing how a bill is considered on the floor. This allows the Majority to disregard PAYGO with support of the House leadership. The Senate may dispense with the PAYGO rule with a vote of at least 60 senators. While there are other rules applying to funding bills, PAYGO does not apply to discretionary programs funded through the annual appropriations process. In the Senate, PAYGO also does not apply to changes made through an annual budget resolution.

The effect of PAYGO is to impose some modest degree of spending discipline on new legislation affecting Medicare or Medicaid. Since offsets are required, it means major legislative changes to Medicare and Medicaid are carried out through massive reconciliation bills.

Budget Reconciliation and Budget Offsets:

Because of PAYGO and the practical demands of political “horse trading,” passage of major changes to Medicaid or Medicare typically requires offsetting changes elsewhere in the same programs. PAYGO makes stand-alone bills increasing net federal spending difficult to pass, even with White House support. Further, tactically it makes little sense to enact stand-alone legislation that reduces Medicare or Medicaid spending. Sponsors of savings initiatives lose the fiscal “credit” that could be used to offset higher spending elsewhere in mandatory programs.

Therefore, budget reconciliation bills – which allow Congress to make a large number of simultaneous changes to mandatory programs and taxes to meet five-year spending targets set in the annual budget resolution process – are the primary vehicles for federal health care legislation. Enacting major changes through budget reconciliation bills has a variety of other practical benefits in the political process. For example, the massive bills make possible a large number of trades and compromises between key lawmakers, committees, and the two chambers. Budget reconciliation bills are also exempt from filibusters in the Senate.

Given this, budget offsets are often critical to the ultimate success of provisions to increase Medicare or Medicaid spending. Therefore, it is often important to identify, develop, or otherwise support offsetting provisions – changes that would reduce mandatory health spending in some way. For example, proponents of a Medicaid funding increase could support legislation to permit new versions of expensive biologic drugs that are off patent (commonly called “biosimilars”). CBO projects biosimilars could reduce Medicare Part B spending by about $5-6 billion over five years. Through a reconciliation bill, the Medicare savings from biosimilars could be used to offset the desired higher spending elsewhere in Medicare (e.g., physician reimbursement), in Medicaid or SCHIP.

Medicare-Medicaid Waivers:

While budget offsets between mandatory programs are routine in legislation, similar offsets are not permitted in combined Medicare and Medicaid waivers. Under longstanding policy, Medicare and Medicaid waivers must be budget neutral to the federal government. OMB, with advice from the CMS Office of the Actuary, determines if a proposed waiver is likely to be budget neutral to the federal government. Combined Medicare-Medicaid waiver projects are permitted and increasingly used to test major reforms, especially for dual eligibles. However, proposals for combined Medicare-Medicaid waivers may not use projected federal savings in one program to offset projected higher spending in the other.

For example, a waiver project could propose Medicaid care management to reduce hospital admissions by dual eligibles. The federal shared of the cost of Medicaid care management would be more than offset by lower federal Medicare hospital spending. However, OMB policy does not allow such cross-program offsets when determining whether budget neutrality is met. This policy, coupled with the widely different funding and programmatic characteristics of Medicare and Medicaid, make many innovative, cost-saving waiver-based initiatives impossible.

Like the budget neutrality policy, the policy against cross-program offsets in waivers is longstanding OMB policy but not required by statute or rule. Therefore, a new Obama Administration could easily alter or abolish the limitation – dramatically increasing the ability of states and HHS to design and test major health reforms.