Budgeting 101

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The Bush administration and congressional Republicans broke out their trumpets last week and heralded some legitimately good news on the budget deficit, with red ink forecast 30 percent lower than projected in the president's budget in February. The drop, due largely to a surge in tax revenues, reinforces the validity of pro-growth policies promoted by the White House and most congressional Republicans.

Yet, not surprisingly, The Washington Post voiced a sour note. In a July 12 editorial, The Post wrote that the "White House's budgetary back-patting misses the point." The goal should be long-term reform, the paper argued, not a quick revenue windfall. "What's important is getting the federal budget on a sustainable fiscal course for the long term," The Post editorial said. "Yesterday's news doesn't get the country closer to that objective."

Perhaps. There is no doubt that many conservatives believe the administration and Congress deserve a "needs improvement" grade on budgetary control. While this is not the place to adjudicate a complicated spending equation, the surge in outlays is a fiscal transgression that includes numerous culprits — some guiltier than others.

But buried deeper in the administration's Budget Mid-Session Review (MSR) were other underreported nuggets about entitlement reform that provide some clues for long-term change.

No doubt slowing the rate of growth in entitlement spending is both a bitter political pill and necessary budgetary medicine. As the administration said in the MSR: "No plausible amount of cuts to discretionary programs or tax increases can avert this major fiscal challenge." Yet two of the largest entitlement programs — Medicare and Medicaid — have seen hints of reform in the last several years. Certainly not the kind of full-bodied change ultimately required, but whiffs, intimations and first steps toward broader transformation. And when programs that have undergone some reform are compared to those that have not, interesting contrasts emerge.

Consider Medicaid, for example. Surprisingly, the administration reported that spending growth in this entitlement program is actually slowing. A July 11 statement from the Center for Medicare and Medicaid Services (CMS) noted, "For the fiscal year 2006-2015 period, projected Federal Medicaid costs are $224 billion lower than had been projected just a year ago" — a reduction of 8 percent. This reflects a slowdown in Medicaid spending growth from over 12 percent per year in fiscal 2000-2002 down to 4.6 percent projected for fiscal 2006-2007. A slower rate of growth in a federal health entitlement program, previously viewed as "exploding," should deserve major media coverage. But this news was buried.

On the same day, CMS issued another release about a different program — Medicare Part D, which is part of the new prescription-drug legislation. Here again, cost projections are on the decline. "The costs of Medicare Part D continue to turn out to be much lower than had been expected," CMS reported. In fact, the program costs are $34 billion less for 2006-2011 than projected in the president's budget less than six months ago. CMS also notes that the reductions from last year's MSR are even larger ($110 billion less over 5 years and $302 billion less over 10 years).

But some bad news also emerged on the entitlement front. Two other programs, Medicare Part A and Part B (primarily fee-for-service payments for physicians and hospitals) continue to grow faster than expected — nearly $50 billion higher for five years than projected in the president's budget earlier this year.

So, what's the difference? Why are some health entitlement programs growing faster than projected while others are not? The answer is reform. Medicaid, according to CMS, benefited from "greater use of private sector health plans rather than government-run 'fee for service' plans that reward providers for driving demand and creating incentives for over utilization." Medicare Part D is more complicated because it's a new program. But unlike government-run, fee-for-service plans, the new drug program also relies on private-sector principles, including consumer choice and competition. This approach is bearing fruit, demonstrating that assumptions about health care economics developed under a government-run model were wrong.

Congress has a lot of work to do to slow government entitlement spending and reform programs. Yet in a rare opportunity for a real-world comparison, spending is slowing in programs where reform principles are applied while those doing things the old way continue to balloon. Coincidence?