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Donald Marron

What is medicare 'double counting,' and why are budget experts fighting over it?

A new study of the Affordable Care Act finds peculiar Medicare budgeting practices, including counting spending cuts and revenue increases twice. It's causing a stir among budget experts.

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Social Security operates differently. It faces the same operational limitations as Medicare Part A if its trust fund balance falls to zero. But Congress enacted special rules that forbid any Social Security spending cuts or revenue increases being used to pay for other programs. Such savings therefore accrue in the trust fund. The trust fund thus matters for operations, and savings cannot be directed to other parts of the government. (Social Security actually involves two programs, one for retirement and one for disability, and two corresponding trust funds; these comments apply equally to both.)

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Donald B. Marron is director of economic policy initiatives at the Urban Institute. He previously served as a member of the President's Council of Economic Advisers and as acting director of the Congressional Budget Office.

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Medicare Parts B and D operate in a third way. Like Part A and Social Security, their spending is determined by eligibility and payment rules and gets paid out of a trust fund (the Supplementary Medical Insurance or SMI trust fund). But that fund has unlimited right to draw on general tax revenues. A zero balance thus results in general revenue transfers, not operational disruptions. Reforms don’t increase the life of the trust fund (since it can never go broke), and savings can be used to finance other programs.

The National Flood Insurance Program operates in yet another way. The NFIP is required to finance itself out of its insurance premiums; if its costs exceed those premiums, it can borrow from the federal government up to a specified limit. Once that limit is reached, payments can’t exceed its revenues, and operations are disrupted. The borrowing limit thus acts like the trust fund balance in Medicare Part A or Social Security, except that it allows the program to go a fixed amount into the red.

Congressional budget rules treat the borrowing limit as a fundamental restraint on NFIP spending. If the program is expected to run annual deficits, as it is today, those deficits exist only until the borrowing limit is reached. After that, the NFIP is projected to break even, with spending restrained to equal revenues. If Congress reduces the annual deficits in the NFIP (e.g., by increasing premiums), those savings allow the program to operate longer before reaching its borrowing limit. Any temporary budget savings thus get offset by increased NFIP spending in later years. Those temporary budget savings thus cannot be used to offset spending in other programs (unless hitting the borrowing limit is pushed beyond the budget window).

The debt limit, finally, acts as a “suspenders” restraint on deficits incurred by the entire federal budget. As we saw last summer, the debt limit threatens real operational restraints. Spending reductions and revenue increases can delay when the debt limit is reached. But they cannot be used to pay for other programs. Why? Because there are no other programs. The debt limit thus operates like the Social Security trust fund: it imposes an important operational restraint, and budget actions used to avoid it cannot pay for other programs.

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