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AN ANALYSIS OF THE PRESIDENT'S
MID-SESSION REVIEW
OF THE BUDGET FOR FISCAL YEAR 2001  
 

Corrected September 6, 2000

 
 
ERRATA

This document supersedes the previous version of this report, dated July 28, 2000, which incorrectly estimated surpluses in Medicare's Hospital Insurance trust fund under the proposals in the Mid-Session Review. The corrections included here produce slightly lower on-budget surpluses and slightly higher off-budget surpluses but have no effect on total surpluses.

 

The President is required by law to submit a budget by early February of each year, as well as a supplemental update before July 16. The update, in general, has contained revised estimates of the budget surplus, receipts, outlays, and other summary information, with only minor changes, if any, in legislative proposals. However, both last year and this year, the Mid-Session Review has also contained significant new policy proposals. Therefore, as requested by the House and Senate Committees on the Budget, the Congressional Budget Office (CBO) has analyzed the Administration's Mid-Session Review of the fiscal year 2001 budget.

CBO estimates that the policies reflected in the Mid-Session Review would result in cumulative total budget surpluses of $1.4 trillion over the 2001-2005 period and $3.2 trillion over the 2001-2010 period (see Tables 1 and 2). Those estimates exceed the corresponding projections by the Administration by $0.2 trillion and $0.3 trillion, respectively, mostly because CBO projects slightly higher revenues over those periods. On-budget surpluses over the five-year and 10-year periods would reach $159 billion and $349 billion, respectively. (Revenues and spending for Social Security and the Postal Service are currently excluded from the on-budget totals; the Administration would do the same for Medicare's Hospital Insurance program.)
 
TABLE 1.
COMPARISON OF CBO'S AND THE ADMINISTRATION'S ESTIMATES OF THE PRESIDENT'S
MID-SESSION REVIEW (By fiscal year, in billions of dollars)
2000 2001 2002
2003		 2004 2005 2006 2007 2008 2009 2010 Total
2001-
2005 		 Total,
2001-
2010 
CBO's Estimate of the Administration's Mid-Session Review
Revenues 2,008 2,119 2,203 2,285 2,379 2,477 2,571 2,680 2,798 2,929 3,067 11,462 25,508
Outlays 1,788 1,845 1,924 1,979 2,057 2,140 2,195 2,264 2,357 2,450 2,549 9,946 21,761
Reserve for America's Future n.a. 20 25 25 26 27 49 75 83 85 85 123 500
Surplus 221 254 254 280 296 309 328 341 358 393 433 1,394 3,246
    On-budget 47 27 18 37 40 38 35 37 31 40 47 159 349
    Off-budgeta 174 227 237 244 256 272 293 305 327 353 385 1,235 2,898
Administration's Estimate of the Mid-Session Review
Revenues 2,013 2,096 2,168 2,245 2,339 2,440 2,537 2,661 2,790 2,916 3,065 11,288 25,256
Outlays 1,802 1,848 1,919 1,984 2,059 2,145 2,202 2,282 2,375 2,467 2,563 9,955 21,844
Reserve for America's Future n.a. 20 25 25 26 27 49 75 83 85 85 123 500
Surplus 211 228 224 236 255 268 286 304 332 364 416 1,210 2,912
    On-budget 39 9 1 6 10 1 1 1 2 4 14 27 49
    Off-budgeta 172 219 223 230 245 267 285 302 330 360 402 1,183 2,863
Difference (CBO minus Administration)
Revenues -5 23 35 40 40 37 34 20 9 13 2 174 252
Outlays -14 -3 5 -5 -2 -5 -7 -17 -18 -16 -14 -10 -82
Reserve for America's Future n.a. 0 0 0 0 0 0 0 0 0 0 0 0
Surplus 9 26 30 45 42 42 42 37 26 29 16 184 334
    On-budget 7 18 16 31 30 37 34 35 29 36 33 132 300
    Off-budgeta 2 8 14 14 12 5 7 2 -3 -7 -17 52 35
SOURCE: Congressional Budget Office.
NOTE: n.a. = not applicable.
a. Includes Medicare's Hospital Insurance program.
 
TABLE 2.
CBO'S ESTIMATE OF THE PRESIDENT'S MID-SESSION REVIEW (By fiscal year)
Actual 
1999a		 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
In Billions of Dollars
Revenues 1,827 2,008 2,119 2,203 2,285 2,379 2,477 2,571 2,680 2,798 2,929 3,067
On-budget 1,251 1,395 1,463 1,511 1,561 1,625 1,686 1,747 1,821 1,903 1,992 2,088
Off-budget 577 613 656 692 724 754 790 824 859 896 936 979
Outlays
Discretionary spending 575 616 637 657 672 688 707 718 732 754 773 791
Mandatory spending 978 1,028 1,080 1,178 1,254 1,342 1,434 1,506 1,593 1,696 1,805 1,924
Offsetting receipts -80 -80 -90 -117 -128 -134 -143 -152 -163 -175 -188 -203
Net interest 230 224 219 205 181 162 142 122 102 82 67 59
Proceeds from investing excess cash n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. -6 -22
Total 1,703 1,788 1,845 1,924 1,979 2,057 2,140 2,195 2,264 2,357 2,450 2,549
On-budget 1,272 1,349 1,416 1,469 1,493 1,555 1,619 1,654 1,702 1,781 1,858 1,945
Off-budget 432 439 429 455 486 502 521 541 562 577 592 604
Reserve for America's Future n.a. n.a. 20 25 25 26 27 49 75 83 85 85
Deficit (-) or Surplus 124 221 254 254 280 296 309 328 341 358 393 433
On-budget -21 47 27 18 37 40 38 35 37 31 40 47
Off-budget 145 174 227 237 244 256 272 293 305 327 353 385
Debt Held by the Public 3,633 3,421 3,184 2,938 2,670 2,386 2,088 1,769 1,436 1,084 887 830
Accumulated Excess Cash n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 189 558
As a Percentage of GDP
Revenues 20.0 20.6 20.6 20.4 20.2 20.1 20.0 19.9 19.8 19.8 19.8 19.8
On-budget 13.7 14.3 14.2 14.0 13.8 13.7 13.6 13.5 13.5 13.5 13.5 13.5
Off-budget 6.3 6.3 6.4 6.4 6.4 6.4 6.4 6.4 6.4 6.3 6.3 6.3
Outlays
Discretionary spending 6.3 6.3 6.2 6.1 5.9 5.8 5.7 5.6 5.4 5.3 5.2 5.1
Mandatory spending 10.7 10.5 10.5 10.9 11.1 11.3 11.6 11.6 11.8 12.0 12.2 12.4
Offsetting receipts -0.9 -0.8 -0.9 -1.1 -1.1 -1.1 -1.2 -1.2 -1.2 -1.2 -1.3 -1.3
Net interest 2.5 2.3 2.1 1.9 1.6 1.4 1.1 0.9 0.8 0.6 0.5 0.4
Proceeds from investing excess cash n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. * -0.1
Total 18.7 18.3 17.9 17.8 17.5 17.4 17.3 17.0 16.7 16.7 16.6 16.5
On-budget 13.9 13.8 13.7 13.6 13.2 13.1 13.1 12.8 12.6 12.6 12.6 12.6
Off-budget 4.7 4.5 4.2 4.2 4.3 4.2 4.2 4.2 4.2 4.1 4.0 3.9
Reserve for America's Future n.a. n.a. 0.2 0.2 0.2 0.2 0.2 0.4 0.6 0.6 0.6 0.5
Deficit (-) or Surplus 1.4 2.3 2.5 2.4 2.5 2.5 2.5 2.5 2.5 2.5 2.7 2.8
On-budget -0.2 0.5 0.3 0.2 0.3 0.3 0.3 0.3 0.3 0.2 0.3 0.3
Off-budget 1.6 1.8 2.2 2.2 2.2 2.2 2.2 2.3 2.3 2.3 2.4 2.5
Debt Held by the Public 39.9 35.1 30.9 27.2 23.6 20.2 16.9 13.7 10.6 7.7 6.0 5.4
Accumulated Excess Cash n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 1.3 3.6
Memorandum:
Gross Domestic Product
(Billions of dollars)		 9,116 9,758 10,303 10,814 11,322 11,834 12,370 12,933 13,521 14,137 14,797 15,495
SOURCE: Congressional Budget Office.
NOTES: Medicare's Hospital Insurance trust fund is considered off-budget, as proposed by the President.
* = between -0.05 percent and 0.05 percent; n.a. = not applicable.
a. Adjusted to place Medicare's Hospital Insurance revenues and outlays off-budget.

For the most part, the policies reported in the Mid-Session Review are the same as those proposed in the Administration's budget that was released in February.(1) However, some new policies have been added--mostly in the health area. Those new policies include:

Besides examining changes in the Administration's policy proposals, this analysis incorporates CBO's updated baseline estimates, as reported in The Budget and Economic Outlook: An Update (July 2000). Compared with the estimates that CBO issued in April, when it analyzed the President's initial budget, the projections of the cumulative total surplus for 2001 through 2010 for the three baseline variations have risen by between $1.4 trillion and $1.5 trillion.(2) Most of that increase occurred on the revenue side of the budget, and those higher revenue estimates have added to the surplus under the President's proposals as well (see Table 3).
TABLE 3.
ESTIMATES OF SURPLUSES UNDER THE ADMINISTRATION'S MID-SESSION REVIEW
AND CBO'S BASELINE PROJECTIONS (By fiscal year, in billions of dollars)
2000 2001 2002
2003		 2004 2005 2006 2007 2008 2009 2010 Total,
2001-
2005 		 Total,
2001-
2010 
CBO's Estimate of the Administration's Mid-Session Review
On-Budget Surplus 47 27 18 37 40 38 35 37 31 40 47 159 349
Off-Budget Surplusa 174 227 237 244 256 272 293 305 327 353 385 1,235 2,898
Total Surplus 221 254 254 280 296 309 328 341 358 393 433 1,394 3,246
CBO's Baseline Projections
Discretionary Spending Grows at the Rate of Inflation After 2000b
On-Budget Surplus 84 102 126 143 154 169 222 260 288 332 377 695 2,173
Off-Budget Surplusa 149 165 186 202 215 232 247 263 278 293 307 1,001 2,388
Total Surplus 232 268 312 345 369 402 469 523 565 625 685 1,696 4,561
Discretionary Spending Is Frozen at the Level Enacted for 2000b
On-Budget Surplus 84 116 157 195 231 270 346 410 466 541 618 969 3,349
Off-Budget Surplusa 149 166 187 202 216 233 248 263 279 294 309 1,003 2,395
Total Surplus 232 281 344 397 447 503 594 673 745 834 927 1,971 5,744
Discretionary Spending Equals CBO's Estimates of the Statutory Caps Through 2002
and Grows at the Rate of Inflation Thereafter
On-Budget Surplus 84 163 219 245 263 290 348 393 433 488 545 1,179 3,387
Off-Budget Surplusa 149 165 186 202 215 232 247 263 278 293 307 1,001 2,388
Total Surplus 232 329 405 446 478 522 595 655 711 781 853 2,180 5,774
Memorandum:
CBO's Estimate of the Administration's Mid-Session Review
Assuming that Medicare's Hospital Insurance Remains On-Budget
On-Budget Surplus 72 89 68 79 82 78 81 79 81 101 126 395 863
Off-Budget Surplus 149 165 186 201 215 232 246 262 277 292 307 998 2,383
Total Surplus 221 254 254 280 296 309 328 341 358 393 433 1,394 3,246
SOURCE: Congressional Budget Office.
a. Includes Medicare's Hospital Insurance program.
b. After adjustment for advance appropriations.

Revenues under the policies contained in the Mid-Session Review are projected to be $93 billion higher in 2001 and nearly $1.3 trillion higher from 2001 through 2010 than CBO previously estimated for the February budget (see Table 4). Overall, CBO's estimate of the cumulative total surplus in the Mid-Session Review is $519 billion higher over the 2001-2010 period than that estimated for the February budget. That figure represents an increase in projected baseline surpluses totaling around $1.5 trillion over the 10 years, offset by new policy proposals that would reduce the surplus by about $1 trillion over the period.

TABLE 4.
COMPARISON OF CBO'S APRIL 2000 ESTIMATE OF THE PRESIDENT'S BUDGETARY PROPOSALS
WITH CBO'S ESTIMATE OF THE MID-SESSION REVIEW (By fiscal year, in billions of dollars)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
CBO's Estimate of the Mid-Session Review
Revenues 2,008 2,119 2,203 2,285 2,379 2,477 2,571 2,680 2,798 2,929 3,067
Outlays
Discretionary 616 637 657 672 688 707 718 732 754 773 791
Mandatory 948 989 1,062 1,126 1,207 1,292 1,354 1,430 1,521 1,617 1,722
Net interest and excess cash 224 219 205 181 162 142 122 102 82 60 37
Subtotal 1,788 1,845 1,924 1,979 2,057 2,140 2,195 2,264 2,357 2,450 2,549
Reserve for America's Future n.a. 20 25 25 26 27 49 75 83 85 85
Total Surplus 221 254 254 280 296 309 328 341 358 393 433
CBO's April 2000 Estimate of the President's Budgetary Proposals
Revenues 1,946 2,026 2,097 2,171 2,262 2,352 2,443 2,547 2,659 2,781 2,912
Outlays
Discretionary 611 635 656 670 684 701 714 729 752 770 788
Mandatory 942 983 1,037 1,094 1,171 1,251 1,309 1,382 1,469 1,561 1,659
Net interest and excess cash 225 218 209 194 179 162 146 129 111 91 70
Subtotal 1,778 1,836 1,902 1,958 2,033 2,114 2,170 2,240 2,331 2,422 2,516
Reserve for America's Future n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Total Surplus 168 190 196 213 228 238 273 307 328 360 395
Difference (Mid-Session minus April Estimate)
Revenues 63 93 106 114 117 124 128 133 139 147 155
Outlays
Discretionary 5 2 1 2 4 5 4 3 3 3 3
Mandatory 6 7 25 32 37 41 45 48 52 56 63
Net interest and excess cash * 1 -4 -13 -17 -21 -24 -27 -29 -31 -33
Subtotal 10 9 22 22 24 26 24 24 26 29 33
Reserve for America's Future n.a. 20 25 25 26 27 49 75 83 85 85
Total Surplus 53 64 59 67 68 71 55 34 30 34 37
Memorandum:
Change in Baseline 58 90 108 125 133 146 158 171 187 205 223
Change in Policies -5 -26 -50 -57 -65 -74 -103 -137 -156 -171 -185
SOURCE: Congressional Budget Office.
NOTE: * = between -$500 million and $500 million; n.a. = not applicable.

The President's Budgetary Policies

The policy proposals contained in the Administration's Mid-Session Review would use the projected on-budget surpluses for various purposes: increased spending (mostly for health care), tax reductions, an unspecified "Reserve for America's Future," and debt reduction. The Administration proposes to devote to debt reduction those surpluses that are off-budget and to broaden the number of programs designated as such.

CBO estimates that the proposals in the Mid-Session Review would reduce the projected total surplus by $302 billion between 2001 and 2005 and $1.3 trillion between 2001 and 2010 relative to the inflated variation of the baseline (see Table 5). Relative to the freeze variation of the baseline, the corresponding reductions would be $577 billion and $2.5 trillion, respectively (see Table 6). Reductions under the capped baseline would be similar to those under the freeze baseline.
 
TABLE 5.
CBO'S ESTIMATE OF THE PRESIDENT'S MID-SESSION REVIEW PROPOSALS RELATIVE TO CBO'S
BASELINE PROJECTIONS ASSUMING INFLATED APPROPRIATIONS (By fiscal year, in billions of dollars)
2000 2001 2002
2003		 2004 2005 2006 2007 2008 2009 2010 Total,
2001-
2005 		 Total,
2001-
2010 
CBO's Estimate of the Total Budget
Surplus Under the Inflated Variation
of the Baselinea		 232 268 312 345 369 402 469 523 565 625  685 1,696 4,561
Impact of the President's Proposals
Revenues
Reductions * -5 -14 -21 -25 -35 -44 -47 -50 -54 -57 -100 -352
Increases 1 15 15 15 25 26 22 22 22 22 22 95 205
Total Impact on Revenues 1 10 1 -6 -1 -9 -23 -25 -28 -32 -35 -5 -147
Outlays
Discretionary spending
Defense 5 -2 -1 -3 -3 -4 -6 -6 -4 -4 -4 -14 -37
Nondefense 3 2 2 -1 -2 -2 -4 -6 -6 -8 -10 -1 -35
Subtotal 8 -1 1 -4 -5 -6 -10 -11 -10 -12 -14 -15 -72
Mandatory spendingb
Medicare outlays 0 6 30 32 40 43 47 52 58 65 72 150 443
Medicare premiums 0 -1 -10 -12 -14 -13 -14 -14 -16 -18 -20 -51 -133
Medicaid 0 1 1 3 5 7 * 4 9 10 12 17 52
State Children's Health Insurance Program 0 * 1 2 3 5 18 13 7 8 7 11 64
Supplemental Security Income 2 -2 * * * 1 1 1 1 2 2 -1 6
Earned income tax credit * 2 2 2 2 2 2 2 2 2 2 11 22
Child and dependent care tax
credit		 0 0 0 1 2 2 3 3 3 3 4 4 20
Other 2 -1 5 2 1 2 1 1 1 1 1 9 14
Subtotal 4 3 29 30 40 47 58 62 66 73 80 150 489
Net interestc * * 1 3 5 8 12 17 22 28 35 19 133
Total Impact on Outlays 12 3 32 30  41 49 60 67 77 90 101 154 550
Reserve for America's Future
Revenues or outlays 0 20 25 25 26 27 49 75 83 85 85 123 500
Debt service 0 1 2 4 5 7 10 14 19 25 31 20 118
Subtotal 0 21 27 29 31 34 59 89 102 110 116 143 618
Net Impact of the President's Proposals on the Total Budget Surplus -12 -14 -58 -64 -73 -92 -141 -181 -207 -231 -252 -302 -1,315
CBO's Estimate of the Total Budget Surplus Under the President's Proposals 221 254 254 280 296 309 328 341 358 393 433 1,394 3,246
SOURCES: Congressional Budget Office; Joint Committee on Taxation.
NOTE: * = between -$500 million and $500 million.
a. Assumes that discretionary spending grows at the rate of inflation after 2000.
b. Includes offsetting receipts.
c. Includes proceeds from investing excess cash.

TABLE 6.
CBO'S ESTIMATE OF THE PRESIDENT'S MID-SESSION REVIEW PROPOSALS RELATIVE TO CBO'S
BASELINE PROJECTIONS ASSUMING FROZEN APPROPRIATIONS (By fiscal year, in billions of dollars)
2000 2001 2002
2003		 2004 2005 2006 2007 2008 2009 2010 Total,
2001-
2005 		 Total,
2001-
2010 
CBO's Estimate of the Total Budget
Surplus Under the Freeze Variation
of the Baselinea		 232 281 344 397 447 503 594 673 745 834  927 1,971 5,744
Impact of the President's Proposals
Revenues
Reductions * -5 -14 -21 -25 -35 -44 -47 -50 -54 -57 -100 -352
Increases 1 15 15 15 25 26 22 22 22 22 22 95 205
Total Impact on Revenues 1 10 1 -6 -1 -9 -23 -25 -28 -32 -35 -5 -147
Outlays
Discretionary spending
Defense 5 5 15 21 30 37 44 52 63 73 83 108 424
Nondefense 3 7 15 22 35 45 52 60 70 79 87 125 473
Subtotal 8 12 30 44 65 82 96 113 133 152 170 232 896
Mandatory spendingb
Medicare outlays 0 6 30 32 40 43 47 52 58 65 72 150 443
Medicare premiums 0 -1 -10 -12 -14 -13 -14 -14 -16 -18 -20 -51 -133
Medicaid 0 1 1 3 5 7 * 4 9 10 12 17 52
State Children's Health Insurance Program 0 * 1 2 3 5 18 13 7 8 7 11 64
Supplemental Security Income 2 -2 * * * 1 1 1 1 2 2 -1 6
Earned income tax credit * 2 2 2 2 2 2 2 2 2 2 11 22
Child and dependent care tax credit 0 0 0 1 2 2 3 3 3 3 4 4 20
Other 2 -1 5 2 1 2 1 1 1 1 1 9 14
Subtotal 4 3 29 30 40 47 58 62 66 73 80 150 489
Net interestc * 1 4 8 13 21 31 43 58 75 94 47 347
Total Impact on Outlays 12 16 63 82 119 150 185 218 257 300 344 430 1,732
Reserve for America's Future
Revenues or outlays 0 20 25 25 26 27 49 75 83 85 85 123 500
Debt service 0 1 2 4 5 7 10 14 19 25 31 20 118
Subtotal 0 21 27 29 31 34 59 89 102 110 116 143 618
Net Impact of the President's Proposals on the Total Budget Surplus -12 -28 -89 -116 -151 -193 -266 -332 -386 -441 -495 -577 -2,497
CBO's Estimate of the Total Budget Surplus Under the President's Proposals 221 254 254 280 296 309 328 341 358 393 433 1,394 3,246
SOURCES: Congressional Budget Office; Joint Committee on Taxation.
NOTE: * = between -$500 million and $500 million.
a. Assumes that discretionary spending each year equals the level enacted for 2000, plus the amount already enacted for 2001.
b. Includes offsetting receipts.
c. Includes proceeds from investing excess cash.

The net reduction in revenues under the Mid-Session Review would be negligible over the first five years and would total $147 billion over 10 years. On the spending side of the budget, proposals for health care would have the largest effect. Over 10 years, the Administration's health care initiatives would increase Medicare spending by $310 billion (net of premiums). Spending for Medicaid and the State Children's Health Insurance Program would rise by an additional $116 billion. Much of the added spending for Medicare and Medicaid results from the President's proposals for coverage of prescription drugs--such proposals are estimated to cost $338 billion over 10 years. Debt service on policies specified by the Administration would add $133 billion to outlays between 2001 and 2010 under the inflated variant and $347 billion under the freeze variant.

In addition to the policies detailed by the Administration in the Mid-Session Review, $500 billion would be set aside through 2010 for a "Reserve for America's Future." The Administration has not specified whether that reserve would be used for tax cuts, spending increases, or some combination of the two. CBO has included the $500 billion in its analysis of the Mid-Session Review and estimates that such a reduction in the surplus would lead to additional debt-service costs of $118 billion between 2001 and 2010.

The Administration's policies would reduce on-budget surpluses by $300 billion over the 2001-2005 period and $1.3 trillion over the 2001-2010 period relative to the inflated variation of the baseline (see Table 7). Reductions relative to the freeze and capped variants would total $2.5 trillion over 10 years. In addition, shifting the HI trust fund off-budget would decrease the cumulative on-budget surplus (and increase the off-budget surplus) by $515 billion between 2001 and 2010.
 
TABLE 7.
IMPACT OF THE PRESIDENT'S BUDGETARY PROPOSALS IN THE MID-SESSION REVIEW 
ON CUMULATIVE ON-BUDGET SURPLUSES (In billions of dollars)
Inflated
                Appropriations        
Frozen
                Appropriations        
Capped       
        Appropriations                  
2001-2005 2001-2010 2001-2005 2001-2010 2001-2005 2001-2010
Cumulative On-Budget Surpluses Under CBO's Baseline       695  2,173       969  3,349      1,179      3,387
Impact of the President's Proposals on the Surplus
Changes in taxes         -5   -147        -5   -147         -5       -147
Changes in discretionary spending 15     71 -231   -891 -405       -850
Coverage of prescription drugs -98   -338 -98   -338 -98       -338
Other health care -30    -91 -30    -91 -30        -91
Reserve for America's Future -123   -500 -123   -500 -123       -500
Debt servicea -38   -250 -66   -464 -103       -543
Other -19    -55 -19    -55 -19       -55
Subtotal -300 -1,310 -573 -2,486 -784    -2,524
Moving Hospital Insurance Off-Budget -237   -515 -237   -515 -237     -515
Total Adjustments -536 -1,825 -810 -3,001 -1,021   -3,038
CBO's Estimate of the On-Budget Surpluses Under the Mid-Session Review 159    349 159    349 159       349
SOURCE: Congressional Budget Office.
a. Includes proceeds from investing excess cash.

Health Care Initiatives

The Mid-Session Review contains several changes to the health insurance package that was included in the budget released in February.(3) Of the changes, those with the largest impact include proposals to add catastrophic coverage to the prescription drug benefit for Medicare, to begin the benefit in 2002 rather than 2003, to maintain some of Medicare's payment rates that were previously targeted for reduction, and to increase other payments to Medicare providers.

CBO estimated that the health insurance initiatives in the President's initial budget for fiscal year 2001 would increase mandatory spending by $168 billion from 2001 to 2010.(4) The modifications in the Mid-Session Review would increase such spending by an additional $261 billion, CBO estimates (see Table 8). Changing the prescription drug benefit would account for $182 billion of the increase, maintaining some payment rates for providers and increasing others would account for another $75 billion, and various other changes would make up the remaining increase.
 
TABLE 8.
COMPARISON OF CBO'S ESTIMATE OF THE PRESIDENT'S HEALTH INSURANCE INITIATIVES 
IN THE FEBRUARY BUDGET WITH CBO'S ESTIMATE OF THE HEALTH INSURANCE INITIATIVES 
IN THE MID-SESSION REVIEW (By fiscal year, in billions of dollars)
2001 2002
2003		 2004 2005 2006 2007 2008 2009 2010 Total,
2001-
2005 		 Total,
2001-
2010 
CBO's Estimate of the President's February Health Initiativesa
Mandatory Spending
Family Care * 1 2 3 5 10 9 8 9 9 11 56
Prescription drug coverage
Medicare 0 0 7 11 13 15 17 19 22 25 31 129
Medicaid 0 * 1 2 3 3 4 4 4 5 6 26
Other * 3 -6 -4 -5 -6 -6 -6 -7 -7 -12 -44
  Subtotal * 5 4 12 16 23 25 25 28 31 36 168
Revenues 0 * -1 -1 -1 -1 -1 -1 -1 -2 -2 -8
Administrative Costsb 0 0 0 0 0 0 0 0 0 0 0 0
    Total Effect on Surplus * -5 -5 -13 -17 -24 -26 -26 -30 -32 -38 -176
Modifications to February Proposals
Mandatory Spending
Family care 0 0 0 0 0 0 0 0 0 0 0 0
Prescription drug coverage
Medicare 0 13 14 14 15 17 19 22 25 29 56 168
Medicaid * * 1 2 2 2 2 2 2 2 6 15
Other 5 5 6 7 8 9 9 10 10 11 31 79
  Subtotal 5 18 21 23 25 28 30 33 37 41 92 261
Revenues 0 * * * * * * * * * * -1
Administrative Costsb 1 1 1 1 1 * * * 1 1 3 6
    Total Effect on Surplus -6 -19 -22 -23 -26 -28 -31 -34 -37 -42 -96 -268
CBO's Estimate of the President's Mid-Session Review Health Initiatives
Mandatory Spending
Family care * 1 2 3 5 10 9 8 9 9 11 56
Prescription drug coverage
Medicare 0 13 21 24 28 32 37 41 47 53 86 297
Medicaid * 1 2 4 5 5 5 6 6 6 12 41
Other 5 8 * 3 3 3 3 3 3 3 19 35
  Subtotal 5 23 25 35 41 51 55 58 65 71 129 429
Revenues 0 * -1 -1 -1 -1 -1 -1 -2 -2 -2 -9
Administrative Costsb 1 1 1 1 1 * * * 1 1 3 6
    Total Effect on Surplus -6 -24 -26 -36 -42 -52 -56 -60 -67 -74 -134 -444
Memorandum:
May 2000 Reestimate of the Prescription Drug Benefita 0 * 1 1 1 1 1 1 1 1 2 6
SOURCE: Congressional Budget Office.
NOTE: * = between -$500 million and $500 million.
a. CBO's estimate of the February budget proposals reflects the estimate of the Medicare prescription drug benefit as revised in testimony presented before the Subcommittee on Health of the House Committee on Ways and Means on May 11, 2000.
b. Although CBO did not estimate additional administrative costs in February, the proposed drug benefit would necessitate additional administrative costs that would be subject to appropriations. Because the Administration did not request such additional appropriations as part of its discretionary totals, those costs are not included in CBO's calculation of surpluses under the policies of the Mid-Session Review.

In total, CBO estimates that the President's health insurance initiatives would cost $444 billion between 2001 and 2010--an increase in direct spending of $429 billion, a decrease in revenues of $9 billion, and additional appropriations of nearly $6 billion to administer the prescription drug benefit.(5) The Administration, by contrast, projects a $356 billion reduction in the total surplus--a difference of $88 billion--owing mostly to different cost estimates for the prescription drug benefit.

Accounting Changes and Intrabudgetary Transactions

The Administration proposes to assign an extra $115 billion in general government funds to the HI trust fund over the next 10 years. Adding to the trust fund balance may make the program appear more financially sound, but the fund's balance is not a good indicator of the government's ability to meet its future obligations to Medicare beneficiaries. That ability will depend on the government's overall fiscal condition rather than on the size of the balance.

The Administration would also change the budget categorization of the fund so that its receipts and outlays were considered off-budget (like those of the Social Security trust funds). Placing the HI trust fund off-budget would also, by itself, have no effect on the economy or on the resources available to meet future needs. But if lawmakers chose to adopt a goal of preserving off-budget surpluses for debt reduction, the proposed accounting change might make the amount of the HI surpluses (and transfers from the general fund) less vulnerable to proposals to increase spending or reduce taxes, thus enhancing the prospects for long-term economic growth.

However, there is a possible downside to making those two accounting changes. Pumping up balances to extend the trust fund's solvency on paper and moving the fund off-budget could provide lawmakers and the public with a false sense of security and deter needed reform.

Discretionary Spending

As a key component of its budget, the Administration proposes to increase and extend the statutory limits on discretionary spending that are in effect through 2002. (The Administration also proposes to extend the current pay-as-you-go requirements for mandatory spending and revenues.) It advocates setting caps on budget authority and outlays after 2001 at or slightly below levels that would allow future discretionary spending to keep pace with inflation through 2010. For 2001, CBO estimates that the Administration's proposed level of budget authority would be $13 billion above a level consistent with inflation and $83 billion above the current cap (see Table 9).
 
TABLE 9.
ESTIMATE OF DISCRETIONARY SPENDING UNDER THE MID-SESSION REVIEW
AND CBO'S BASELINE PROJECTIONS (By fiscal year, in billions of dollars)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
CBO's Estimate of Total Discretionary Spending in the President's Budget
Budget Authority
Defense 292 306 310 316 324 332 341 350 359 368 378
Nondefense 282 317 320 326 334 343 348 357 366 376 385
Total 575 624 630 642 658 676 689 707 725 744 763
Outlays
Defense 293 295 303 310 318 329 333 339 352 362 372
Nondefense 322 342 354 362 370 378 385 393 402 411 419
Total 616 637 657 672 688 707 718 732 754 773 791
CBO's Baseline Projections Assuming That Discretionary Spending Grows at the Rate of Inflation After 2000
Budget Authority
Defense 290 300 309 318 327 335 344 353 362 372 381
Nondefense 280 310 320 330 339 348 357 366 376 386 396
Total 570 611 629 648 666 683 701 719 738 757 777
Outlays
Defense 288 297 304 313 322 333 339 345 357 366 376
Nondefense 320 340 352 363 371 380 390 399 408 418 429
Total 608 638 656 676 693 713 728 744 765 785 804
CBO's Baseline Projections Assuming That Discretionary Spending Is Frozen at the Level Enacted for 2000
Budget Authority
Defense 290 290 290 290 290 290 290 290 290 290 290
Nondefense 280 296 296 296 296 296 296 296 296 296 296
Total 570 586 586 586 586 586 586 586 586 586 586
Outlays
Defense 288 290 288 289 289 291 289 287 289 289 289
Nondefense 320 335 339 339 334 334 333 333 332 332 332
Total 608 625 627 628 623 625 622 620 621 621 621
CBO's Estimate of the Current Caps on Discretionary Spendinga
Budget Authority 572 541 550 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Outlays 600 579 571 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
SOURCE: Congressional Budget Office.
NOTE: n.a. = not applicable.
a. The current statutory limits do not divide discretionary spending into defense and nondefense costs.

Under the policies of the Mid-Session Review, discretionary budget authority would grow from $624 billion in 2001 to $763 billion in 2010--an average rate of growth of 2.3 percent. Those levels are slightly higher than the ones proposed in February's budget; however, the effect on outlays is an additional $5 billion or less each year and totals about $30 billion over the 2001-2010 period (see Table 4).
 

Comparison of CBO's and the Administration's Estimates

Most of the differences between CBO's and the Administration's estimates of the proposals in the Mid-Session Review stem from differences in spending and revenues estimated under current policies. For the 2001-2010 period, CBO projects $259 billion more in revenues and $128 billion less in mandatory spending (excluding net interest) in its baseline than does the Administration in its current-services estimates.(6) Although such discrepancies may seem large, they represent differences of just 1 percent in both the total revenues and the mandatory spending projected for that period.

Overall, CBO's estimate of the cumulative surplus between 2001 and 2010 under the Mid-Session Review is $334 billion higher than that of the Administration. CBO's baseline surpluses (using the inflated variation) are $368 billion higher than those projected using the Administration's current-services baseline; however, CBO estimates that the policies in the Mid-Session Review will cost $33 billion more than the Administration calculates.

Differences in economic assumptions contribute little to those relatively small differences in budget estimates. The Administration's economic outlook is broadly similar to that of CBO (see Table 10). CBO assumes slightly slower growth of real (inflation-adjusted) gross domestic product (GDP) after 2000 and similar rates of inflation. Unemployment rates are lower in CBO's projections than in the Administration's until the second half of the decade, when the two estimates both average 5.1 percent. CBO forecasts higher interest rates than does the Administration for calendar years 2000 and 2001, but after that, the Administration assumes that short-term interest rates will average almost a percentage point more than CBO does.
 
TABLE 10.
COMPARISON OF CBO'S AND THE ADMINISTRATION'S ECONOMIC PROJECTIONS 
FOR CALENDAR YEARS 2000-2010
Actual               Forecast
           Projected Annual Average
1999 2000 2001    2001-2005 2006-2010
Nominal GDP (Billions of dollars)
CBO 9,256 9,907 10,433 12,508a 15,675b
Administration 9,886 10,407 12,660a 16,079b
Nominal GDP (Percentage change)
CBO 5.7 7.0 5.3 4.8 4.6
Administration 6.8 5.3 5.1 4.9
Real GDPc (Percentage change)
CBO 4.2 4.9 3.1 2.7 2.7
Administration 4.8 3.2 3.0 2.8
GDP Price Indexd (Percentage change)
CBO 1.4 2.1 2.1 2.0 1.8
Administration 1.9 2.0 2.0 2.0
Consumer Price Indexe (Percentage change)
CBO 2.2 3.1 2.7 2.7 2.5
Administration 3.3 2.6 2.6 2.6
Unemployment Rate (Percent)
CBO 4.2 3.8 3.7 4.3 5.1
Administration 4.1 4.1 4.5 5.1
Three-Month Treasury Bill Rate (Percent)
CBO 4.6 5.9 6.7 5.3 4.8
Administration 5.8 6.3 5.9 5.8
Ten-Year Treasury Note Rate (Percent)
CBO 5.6 6.5 6.8 6.0 5.7
Administration 6.3 6.3 6.3 6.3
Tax Bases (Percentage of GDP)
Corporate profitsf
   CBO 9.2 9.2 8.4 7.6 7.0
   Administration 8.9 8.2 8.1 7.5
Wages and salaries
   CBO 48.3 48.1 48.5 48.6 48.3
   Administration 48.2 48.4 48.1 47.8
SOURCES: Congressional Budget Office; Office of Management and Budget, Mid-Session Review: Budget of the United States Government, Fiscal Year 2001 (June 26, 2000).
NOTE: Percentage changes are year over year.
a. Level of GDP in 2005.
b. Level of GDP in 2010.
c. Based on chained 1996 dollars.
d. The GDP price index is virtually the same as the implicit GDP deflator.
e. The consumer price index for all urban consumers.
f. Corporate profits are book profits.

ATTACHMENT

CBO's Analysis of the Health Insurance Initiatives in the Mid-Session Review

July 18, 2000

The President's Mid-Session Review of the budget incorporates modifications to the health insurance initiatives that were included in the budget submitted in February.(7) The Congressional Budget Office (CBO) estimates that those initiatives, as modified, would increase direct spending by $4.7 billion in 2001, $129 billion over the 2001-2005 period, and $429 billion over the 2001-2010 period (see Table 1).(8) The modified proposals would also reduce revenues by $9 billion through 2010. Because the proposals would affect direct spending and revenues, pay-as-you-go procedures would apply to them.
 
TABLE 1.
TEN-YEAR ESTIMATES OF CHANGES IN SPENDING AND REVENUES IN THE PRESIDENT'S
HEALTH INSURANCE PROPOSALS (In billions of dollars)
                           Administration's
Estimate      		            CBO's
                 Estimate       
Direct Spending
Medicaid and SCHIP (Federal payments)
FamilyCare 76.0 56.2
Other Medicaid/SCHIP proposals 14.4 18.1
Effect of Medicare prescription drug benefit 20.3 40.7
Effect of higher drug prices on Medicaid 0 1.4
Subtotal 110.7 116.4
Medicare
Prescription drug benefit 232.4 297.0
Changes to traditional Medicare 17.9 26.8
Expanded eligibility for Medicare 2.9 0.2
Medicare competitive defined benefit -11.9 -13.7
Subtotal 241.4 310.4
Other Federal Programs
Diabetes research 0.3 0.3
Ricky Ray Hemophilia Relief Trust Fund 0.5 0.5
Effect of higher drug prices on FEHB program (For annuitants) 0 0.1
Subtotal 0.8 0.9
Social Security outlays for expanded eligibility for Medicare (Off-budget) 1.1 1.4
Total (Including off-budget) 354.0 429.1
Revenues
Tax Credits for Expanded Eligibility for Medicare -1.6 -8.4
Income Taxes and Medicare Payroll Taxes (On-budget) 0 -0.6
Social Security Payroll Taxes (Off-budget) 0 -0.3
Total (Including off-budget) -1.6 -9.2
Spending Subject to Appropriations
Medicare Administrative Costs for Prescription Drug Benefit 0 5.6
Total Budgetary Effect
Decrease in the Total Budget Surplus Over 10 Years 355.6 443.9
SOURCE: Congressional Budget Office.
NOTE: SCHIP = State Children's Health Insurance Program; FEHB = Federal Employees Health Benefits program.

The President's budget does not include a request for appropriations to cover the administrative cost of establishing and operating the prescription drug benefit proposed for Medicare. Assuming that the necessary amounts are appropriated, CBO estimates that administrative spending for the prescription drug benefit would total $0.9 billion in 2001, $3 billion through 2005, and $6 billion through 2010.
 

Policy Changes in the Mid-Session Review

The Mid-Session Review modifies the Administration's previous proposals for Medicare by:

The Mid-Session Review also includes new proposals to: Finally, the Mid-Session Review proposals do not include two provisions from the President's February budget that have become law: Other health insurance provisions proposed in February (including FamilyCare, expanded eligibility for Medicare, and the Medicare competitive defined benefit) have not changed, and CBO has not reestimated their costs.
 

Overall Estimates of the President's Initial and Mid-Session Proposals for Health Insurance Initiatives

CBO previously estimated that the health insurance initiatives in the February budget would increase direct spending for Medicare, Medicaid, and SCHIP by about $166 billion through 2010 (see Table 2). The policies in the Mid-Session Review would cost an estimated $261 billion more, for a total of $427 billion.(9) Changes in the Mid-Session Review would also increase direct spending by other agencies by $2 billion over 10 years. Outlays for Social Security, which are off-budget, account for $1 billion of that 10-year total. (The President proposes to move Medicare's Hospital Insurance Trust Fund off-budget as well.)
 
TABLE 2.
ESTIMATED EFFECT ON DIRECT SPENDING OF CHANGES IN THE PRESIDENT'S HEALTH 
INSURANCE PROPOSALS
Ten-Year Cost
(Billions of Dollars)
Medicare
CBO's Estimate of February Proposalsa 67.3   
Changes in Mid-Session Review
Expand prescription drug benefitb 167.6 
Drop policies to reduce payment rates 34.9 
Add policies to increase payment rates 40.5 
CBO's Estimate of Mid-Session Review Proposals 310.4 
Medicaid and SCHIP
CBO's Estimate of February Proposalsa 98.2 
Changes in Mid-Session Review
Expand prescription drug benefitb 14.6 
Other changes and interactionsc 3.6 
CBO's Estimate of Mid-Session Review Proposals 116.4 
Total (Medicare, Medicaid, and SCHIP)
CBO's Estimate of February Proposalsa 165.6 
Changes in Mid-Session Review
Expand prescription drug benefitb 182.2 
All other changes 79.0 
CBO's Estimate of Mid-Session Review Proposals 426.8 
SOURCE: Congressional Budget Office.
NOTE: SCHIP = State Children's Health Insurance Program.
a. CBO's estimate of the February budget proposals reflects the estimate of the Medicare prescription drug benefit as revised in testimony presented before the Subcommittee on Health of the House Committee on Ways and Means on May 11, 2000.
b. Consistent with the estimates in the Administration's Mid-Session Review, this estimate assumes that subsidies for low-income beneficiaries will cover all of their costs each year in excess of the initial coverage limit but less than the annual out-of-pocket cap. If the President's proposal does not include coverage of those costs, CBO estimates that the change in direct-spending outlays from expanding the prescription drug benefit would be $163.3 billion over 10 years for Medicare, $1.5 billion for Medicaid, and $164.8 billion in total. CBO has made minor technical changes to its estimating methods since preparing estimates of the February budget proposals. Those changes account for a very small portion of the estimated cost of expanding the prescription drug benefit.
c. Includes the effects of dropping the school lunch initiative (because it was enacted), freezing DSH allotments, and interactions with Medicare provisions and with a proposal to change rules regarding the treatment of income for veterans in nursing homes.

Expanding the Medicare prescription drug benefit to include coverage of catastrophic drug spending and beginning the benefit a year earlier account for $182 billion of that increase. Those changes more than double the $160 billion estimated cost of the original prescription drug proposal.

Most of the remaining cost increase from the proposals in the Mid-Session Review results from dropping provisions that would have reduced payments to Medicare providers and adding provisions that would increase Medicare payments. The dropped policies would have saved an estimated $35 billion over 10 years, and the added policies would increase program spending by $40 billion over the same period. Thus, compared with the President's February proposals, those changes would increase Medicare spending over the coming decade by an estimated $75 billion--with payments to providers rising by almost $84 billion and beneficiaries' premiums growing by more than $8 billion.
 

Comparison of CBO's and the Administration's Estimates

Taken together, and including effects on revenues and discretionary spending, the President's health insurance initiatives would reduce the total surplus by $444 billion over the 2001-2010 period, CBO estimates (see Table 1). Of that amount, $116 billion would be spending for Medicaid and SCHIP, $310 billion for Medicare benefits, $2 billion for other federal programs, and $9 billion in forgone tax revenues. In addition, CBO estimates that the Congress would have to appropriate enough money for the Department of Health and Human Services to establish and administer the prescription drug benefit; such costs would total $6 billion through 2010.

The Administration, by contrast, estimates that the health insurance initiatives would reduce the total budget surplus by $356 billion over the 2001-2010 period. That estimate is $88 billion lower than CBO's figure, mainly because of differences in the estimated cost of the prescription drug benefit (including CBO's assumption that sufficient funds would be appropriated to administer the benefit).

Although CBO estimates a higher cost for the prescription drug benefit than the Administration does, that difference is partially offset by CBO's estimate that net federal outlays under the FamilyCare proposal would be $20 billion lower over the 2001-2010 period than the Administration anticipates.(10)
 

CBO's Estimates of the Cost of the Medicare Prescription Drug Benefit

In February, the President proposed to create a voluntary outpatient prescription drug benefit under a new Part D of Medicare. As proposed in February, that benefit would begin in 2003 and be fully phased in by 2009. It would pay half of the cost of prescription drugs, up to a specified cap. The insured half of the benefit would be financed equally by premium payments from enrollees and by general tax revenues. After cost sharing and premiums are taken into account, enrollees would end up paying 75 percent of the cost of covered drugs and the government would pay 25 percent, up to the cap.

The premiums and cost-sharing payments of certain low-income Medicare beneficiaries would be subsidized through the Medicaid program. Subsidies would be available to beneficiaries who were fully eligible for both Medicare and Medicaid or had income below 150 percent of the poverty level. (People with income between 135 percent and 150 percent of the poverty level would receive only assistance with their premiums, on a sliding-scale basis.) The federal government would pay for subsidies for people who were fully eligible for both programs and for other beneficiaries with income below the poverty level at the normal Medicaid matching rate (57 percent, on average), with states paying the rest. Subsidy costs for other beneficiaries would be paid entirely by the federal government. The U.S. territories would not receive any additional funding for those subsidies.

In the Mid-Session Review, the President proposed to begin offering the prescription drug benefit in 2002 (so it would be fully phased in by 2008) and to add catastrophic coverage that would pay all of the cost of prescription drugs above a certain amount ($4,000 in out-of-pocket spending in 2002, increasing with inflation in drug prices thereafter). The cost of the catastrophic coverage would be financed entirely by general tax revenues. Consistent with the assumptions underlying the Administration's Mid-Session Review estimate, CBO's analysis assumes that Medicaid would subsidize drug spending between the initial coverage limit and the annual out-of-pocket cap for participating beneficiaries with income below 135 percent of the poverty level.

Medicare and Medicaid Spending for the Prescription Drug Benefit

As proposed in the Mid-Session Review, the prescription drug benefit would increase direct spending for Medicare and Medicaid by $0.1 billion in 2001, $98 billion over the 2001-2005 period, and $338 billion over the 2001-2010 period, CBO estimates (see Table 3). By contrast, the Administration estimates that the prescription drug benefit would increase federal spending by $253 billion through 2010.
 
TABLE 3.
CBO'S ESTIMATE OF THE PRESIDENT'S MID-SESSION REVIEW PROPOSAL FOR A PRESCRIPTION
DRUG BENEFIT IN MEDICARE (Outlays, by fiscal year, in billions of dollars)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total,
2001-
2005 		 Total,
2001-
2010 
Direct Spending
Medicare
Benefits 0 20.1 30.8 36.8 41.9 48.3 54.3 61.9 69.8 78.2 129.6 442.2
Part D premium receipts 0 -7.5 -10.4 -13.0 -14.4 -17.0 -18.6 -21.5 -23.9 -26.1 -45.2 -152.3
Subsidy to health plans for retirees 0 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 2.1 7.1
Subtotal
0
12.9 20.9 24.5 28.2 32.2 36.6 41.5 47.0 53.2 86.5 297.0
Medicaid (Federal)a
Part D benefits and premiums 0 2.3 4.1 5.8 6.7 7.5 8.3 9.2 10.2 11.3 18.9 65.4
Change to current-law drug spending 0 -2.4 -3.5 -4.1 -4.7 -5.5 -6.2 -7.1 -8.0 -9.0 -14.7 -50.4
Part A/B benefits and premiums 0 0.5 1.3 2.3 2.7 2.9 3.1 3.4 3.6 3.9 6.8 23.7
Administrative costs 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.9 2.0
Subtotal 0.1 0.6 2.2 4.1 4.9 5.1 5.4 5.7 6.1 6.4 11.9 40.7
Total 0.1 13.5 23.1 28.6 33.0 37.3 42.0 47.2 53.1 59.7 98.4 337.7
Spending Subject to Appropriations
Medicare Administrative Costs 0.9 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6 3.0 5.6
SOURCE: Congressional Budget Office based on the March 2000 baseline.
a. Consistent with the estimates in the Administration's Mid-Session Review, this estimate assumes that subsides for low-income beneficiaries will cover all of their costs each year in excess of the initial coverage limit but less than the annual out-of-pocket cap. If the President's proposal does not include coverage of those costs, CBO estimates that direct-spending outlays for the prescription drug benefit would be as follows:
Medicare Outlays 0.0 12.8 20.7 24.1 27.7 31.7 36.1 40.8 46.3 52.5 85.3 292.7
Medicaid Outlays 0.1 -0.1 0.9 2.8 3.3 3.7 3.8 4.2 4.4 4.6 7.0 27.7
Total 0.1 12.7 21.6 26.9 31.0 35.4 39.9 45.0 50.8 57.0 92.3 320.4

The bulk of estimated spending for the prescription drug benefit over 10 years ($297 billion) would come from Medicare. Payments for drug benefits would total an estimated $442 billion through 2010, but they would be partially offset by $152 billion in premiums paid by beneficiaries. In addition, Medicare would pay employers 67 percent of the premium-subsidy costs that it would have incurred if the retirees for whom employers are providing drug coverage had enrolled in Part D instead. CBO estimates that those subsidies would total $7 billion over the 2001-2010 period.

The President's prescription drug proposal would also increase net federal spending for Medicaid: by $12 billion through 2005 and $41 billion through 2010, CBO estimates. The premium and cost-sharing subsidies that Medicaid would pay for low-income Medicare beneficiaries would cost the federal government $65 billion over 10 years, but that increase would be partly offset by savings in Medicaid, because Medicare would replace Medicaid as the primary payer for drug spending for people who were fully eligible for both programs. The federal share of those Medicaid savings would total $50 billion through 2010, CBO estimates. In addition, Medicaid spending would rise by $24 billion over 10 years because the new drug benefit would induce more low-income Medicare beneficiaries to enroll in Medicaid and would require Medicaid to continue paying the Part B premium (at a 100 percent federal matching rate) for certain people who under current law would become ineligible after December 31, 2002. Finally, Medicaid's administrative spending would rise by $2 billion through 2010 because of the costs of administering subsidies and handling claims for new Medicaid enrollees.

In addition to direct spending for Medicare and Medicaid, the proposed drug benefit would necessitate additional administrative costs. If the benefit was implemented promptly, Medicare's administrative costs would amount to $0.9 billion in 2001, CBO estimates, to hire additional staff, promulgate regulations, contract with pharmacy benefit managers, buy computer systems, notify beneficiaries, and prepare the Social Security Administration to deal with millions of beneficiaries and the additional premium offsets against their Social Security benefits. Those administrative costs would total about $6 billion through 2010 if sufficient funds to establish and operate the benefit were appropriated.

Effect of the Prescription Drug Benefit on Other Federal Purchasers of Drugs

Medicare enrollees who spent enough on prescription drugs to trigger the catastrophic coverage would no longer have to be conscious of the price of drugs. As a result, demand would grow and prices would increase for some drugs used heavily by Medicare enrollees--particularly drugs with no close substitutes. CBO estimates that after 10 years, the average price of drugs consumed by Medicare beneficiaries would be 8 percent higher if the President's proposal was enacted.

Those higher prices would also affect spending for prescription drugs by other federal programs, such as Medicaid, the Federal Employees Health Benefits (FEHB) program, and programs of the Department of Defense (DoD), the Department of Veterans Affairs (VA), the Public Health Service (PHS), and the Coast Guard. CBO estimates that higher drug prices would add $1 billion over the 2001-2010 period to direct spending for Medicaid and for annuitants covered by the FEHB program. CBO has not estimated the higher discretionary spending needed by federal agencies (for current workers covered by FEHB) as well as by DoD, VA, PHS, and the Coast Guard. The net impact for active and retired postal employees over that period would be negligible.

Effect on Revenues

Higher drug prices would also lead to a loss of federal revenues from income and payroll taxes by raising the cost of employer-sponsored health insurance and correspondingly reducing the amount of taxable compensation. CBO estimates that the decrease in revenues would amount to about $1 billion through 2010. Social Security payroll taxes, which are off-budget, account for $0.3 billion of that total.
 

CBO's Estimates of the Costs of Changes in Medicare's Payment Rates

The Balanced Budget Act of 1997 holds the rate of increase in Medicare's payments for many services below the annual rate of inflation through 2002, with full adjustment for inflation resuming in 2003. In February, the President proposed to continue holding those payment increases below the rate of inflation through 2005. The Mid-Session Review proposals, however, dropped those provisions. They also eliminated provisions that would have reduced payments to compensate health care facilities for bad debt, that would have set up preferred provider organizations, and that would have modified the phase-in of improved methods of adjusting payments to Medicare+Choice organizations to reflect differences in financial risk based on the health status of their enrollees. Because those dropped provisions would have reduced Medicare spending by $35 billion through 2010, spending under the policies of the Mid-Session Review would be higher by that amount.

In addition, the new proposals would increase Medicare's payment rates to hospitals, skilled nursing facilities, home health agencies, dialysis providers, and Medicare+Choice organizations in the following ways:

The proposal also earmarks about $20 billion over 10 years for unspecified policies to increase payments to providers. The estimate assumes that the those policies would, in fact, increase payments to providers by the earmarked amounts. CBO estimates that those provisions would increase Medicare spending by $40 billion over the 2001-2010 period.
 

Estimates of Changes and Interactions in Medicaid and SCHIP

Other effects of the Mid-Session Review proposals would increase Medicaid and SCHIP spending by nearly $4 billion over the 2001-2010 period, compared with CBO's estimate of the President's initial budget proposals. That increase reflects the deletion of the school lunch initiative (because it was enacted in P.L. 106-224), the addition of a proposal to change Medicaid's DSH allotments, and interactions with other policies. (The net effect of the school lunch initiative on Medicaid and SCHIP was negligible.)

Medicaid DSH

The Balanced Budget Act limits total Medicaid spending on DSH payments to fixed annual amounts that decline through 2002. The Mid-SessionReview includes a proposal that would freeze each state's DSH allotment for 2001 at the 2000 level. That proposal would increase federal Medicaid spending by $0.3 billion in 2001, CBO estimates.

Veterans in Nursing Homes

The new proposals would also permanently extend a provision that allows people who receive both a veteran's pension and nursing home care from Medicaid to keep $90 of their pension each month instead of using it to defray nursing home costs. Under current law, that provision will expire at the end of 2002. CBO estimates that making the provision permanent would increase federal Medicaid spending by $0.9 billion over the 2001-2005 period and $2.5 billion through 2010.

Interactions with Medicare Provisions

Because Medicaid pays Medicare premiums and cost sharing for certain low-income beneficiaries enrolled in both programs, the proposed changes in Medicare's payment rates, which would affect premiums and cost sharing, would also have an impact on Medicaid spending. CBO estimates that those changes, in combination with the effect of higher prices for prescription drugs, would increase federal spending for Medicaid by $1 billion over 10 years (compared with CBO's estimate of the President's initial budget proposals).
 

Estimates of Other Provisions

In addition, the Mid-Session Review proposes to add $475 million in mandatory funding to the Ricky Ray Hemophilia Relief Trust Fund in 2001 and to increase mandatory funding of diabetes research by a total of $300 million from 2003 through 2007. Those provisions would boost direct spending by $774 million over the 2001-2010 period, CBO estimates.
 

Proposed Accounting Changes and Intrabudgetary Transactions

The Mid-Session Review also contains two proposals regarding the budgetary treatment of Medicare's Hospital Insurance (HI) trust fund. One would transfer additional funds from the general fund of the Treasury to the HI trust fund; the other would place the receipts and outlays of that fund off-budget.

Transfers to the HI Trust Fund

The Administration proposes to assign an extra $115 billion to the HI trust fund over the next 10 years: $31 billion in 2001, $14 billion in 2002, and $70 billion between 2008 and 2010, over and above the income the fund would ordinarily receive. (The President's budget in February proposed larger transfers, totaling $299 billion over the 2001-2010 period.) These transfers are described as "interest savings resulting from devoting the Medicare surplus to debt reduction"--although, under current law, the trust fund is already credited with interest earnings on the surplus it generates.

Since the transferred amounts would not be needed immediately to pay benefits, they would add to trust fund balances and make the HI program appear more "solvent." But the solvency of a trust fund is not a meaningful measure of the government's ability to meet its future obligations because the fund's balances are not assets of the government. Rather, the government's ability to meet its long-term obligations to Medicare beneficiaries will depend on its overall fiscal condition. Under current policies, as the population ages, payroll tax collections will become inadequate to finance Medicare, which will have to be funded through general revenues and, eventually, through proceeds from borrowing. That will be true whether or not trust fund balances exist on paper.

The only way that today's lawmakers can make a set of future obligations more affordable for future generations is to take actions that enhance long-term economic growth. By themselves, legislated changes in trust fund balances would affect neither the size of the economy nor the resources available to the government in the future. There is some risk, however, that larger trust fund balances could obscure the long-term fiscal threat posed by the aging of the population and deter needed reforms by giving lawmakers and the public a false sense of security.

Taking the HI Trust Fund Off-Budget

The Administration also proposes to change the budget categorization of the HI trust fund so that its receipts and outlays would be considered off-budget, like those of the Social Security trust funds. That change is intended to ensure that HI surpluses over the next 10 years "are not used for other purposes and therefore will be used to reduce the debt," according to the Mid-Session Review.

That proposed accounting change would have no effect on the economy. It would reduce on-budget surpluses while correspondingly increasing off-budget surpluses, but it would not, by itself, reduce the debt or change the government's financial position.

However, if the Congress and the President agreed to avoid on-budget deficits in future years, that accounting change might make the surpluses generated by the HI program (and any additional transfers from the general fund) less vulnerable to proposals to increase spending or reduce taxes. If taking the HI trust fund off-budget thereby increased the likelihood of maintaining projected budget surpluses and paying down debt held by the public, it would enhance long-term economic growth.

ADDITIONAL TABLES


SUMMARY OF CBO'S ESTIMATE OF THE PRESIDENT'S MID-SESSION REVIEW PROPOSALS FOR MEDICARE
(By fiscal year, in billions of dollars)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total,
2001-
2005 		 Total,
2001-
2010 
Gross Medicare Outlays (Direct Spending)
Prescription Drug Benefit 0 0 20.4 31.3 37.4 42.6 49.1 55.2 62.9 70.9 79.4 131.7 449.3
Changes to Traditional Medicare 0 5.5 8.1 -1.0 2.4 2.7 2.9 2.6 2.2 1.8 1.6 17.8 28.9
Expanded Eligibility for Medicare 0 0 1.8 3.3 4.0 5.0 5.8 6.5 7.1 7.9 9.1 14.1 50.4
Medicare Competitive Defined Benefit 0 0 0 -1.9 -4.2 -7.2 -11.0 -12.5 -14.2 -16.1 -18.1 -13.3 -85.2
Total 0 5.5 30.3 31.8 39.7 43.0 46.9 51.7 58.0 64.7 71.9 150.3 443.5
Offsetting Receipts (Premiums)a
Prescription Drug Benefit 0 0 -7.5 -10.4 -13.0 -14.4 -17.0 -18.6 -21.5 -23.9 -26.1 -45.2 -152.3
Changes to Traditional Medicare 0 -1.4 -0.6 -0.2 -0.1 -0.1 -0.1 * * 0.1 0.2 -2.4 -2.1
Expanded Eligibility for Medicare 0 0 -2.0 -3.2 -4.0 -5.0 -5.8 -6.4 -7.0 -7.9 -9.0 -14.2 -50.2
Medicare Competitive Defined Benefit 0 0 0 1.6 3.5 6.1 9.3 10.6 11.9 3.5 15.2 11.2 71.5
Total 0 -1.4 -10.1 -12.2 -13.5 -13.3 -13.5 -14.4 -16.5 -18.2 -19.9 -50.6 -133.1
Net Medicare Outlays (Direct Spending)
Prescription Drug Benefit 0 0 12.9 20.9 24.5 28.2 32.2 36.6 41.5 47.0 53.2 86.5 297.0
Changes to Traditional Medicare 0 4.1 7.5 -1.1 2.3 2.6 2.8 2.6 2.2 2.0 1.7 15.5 26.8
Expanded Eligibility for Medicare 0 0 -0.2 * * * 0.1 0.1 0.1 0.1 * -0.1 0.2
Medicare Competitive Defined Benefit 0 0 0 -0.3 -0.7 -1.1 -1.8 -2.0 -2.3 -2.6 -2.9 -2.1 -13.7
Total 0 4.1 20.2 19.6 26.2 29.7 33.3 37.3 41.5 46.5 52.1 99.7 310.4
Memorandum:
Administrative Costs for Prescription Drug Benefit (Subject to appropriations) 0 0.9 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6 3.0 5.6
SOURCE: Congressional Budget Office.
NOTE: * = between -$50 million and $50 million.
a. A reduction in offsetting receipts is equivalent to an increase in outlays.

DETAILS OF CBO'S ESTIMATE OF THE PRESIDENT'S MID-SESSION REVIEW PROPOSALS FOR MEDICARE: TRADITIONAL BENEFITS FOR CURRENT-LAW ENROLLEES (By fiscal year, in billions of dollars)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total,
2001-
2005 		 Total,
2001-
2010 
Fee-for-Service Updates
Prospective payment system update 0 0.6 0.6 0.6 0.7 0.9 1.1 1.1 1.1 1.2 1.2 3.3 9.1
Indirect medical education adjustment 0 0.1 * 0 0 0 0 0 0 0 0 0.1 0.1
Disproportionate share hospital adjustment 0 0.1 * 0 0 0 0 0 0 0 0 0.2 0.2
Puerto Rico prospective payment system 0 * * * * * * * * * * 0.1 0.3
Delay in therapy caps from 2001 to 2002 0 1.0 0.2 0.1 0 0 0 0 0 0 0 1.3 1.3
Home health adjustment 0 0 1.0 0.3 0.1 0.2 0.2 0.2 0.2 0.3 0.3 1.6 2.7
Skilled nursing facility adjustment 0 * 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.5 1.4
Dialysis adjustment 0 0 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.5 1.4
Fee-for-Service Modernization
Centers of excellence 0 0 * -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.3 -0.9
Disease management and primary care case management 0 0 * * * * * * * * * * *
Competitive acquisition 0 0 0 * -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.2 -0.2 -0.8
Contracting reform 0 0 0 0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.2 -0.8
Cost-Sharing Changes
20 percent copayment for laboratory services 0 0 0 -0.5 -0.7 -0.7 -0.8 -0.8 -0.9 -1.0 -1.0 -1.9 -6.4
Index Part B deductible to consumer price index 0 0 0 * -0.1 -0.2 -0.3 -0.3 -0.4 -0.5 -0.6 -0.3 -2.4
Eliminate cost sharing for preventive services 0 0 0 0.6 0.8 0.8 0.8 0.9 0.9 0.9 1.0 2.1 6.6
Other Fee-for-Service Provisions
Reduce EPO payment rate 0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.2 -0.2 -0.5 -1.2
MSP reporting by insurers 0 * -0.1 -0.1 -0.1 -0.1 -0.1 -0.2 -0.2 -0.2 -0.2 -0.5 -1.3
Restrictions on partial hospitalization 0 * * * * * * * * -0.1 -0.1 -0.1 -0.3
Clarify partial hospitalization benefit 0 * * * * * * * * * -0.1 -0.1 -0.3
Eliminate physicians' markup of outpatient drugs 0 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.3 -1.0 -2.1
Reduce payments for bad debt 0 0 0 0 0 0 0 0 0 0 0 0 0
Reduce payment rates for four lab tests by 30 percent 0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.2 -0.5 -1.2
National payment limit for prosthetics and orthotics 0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.2 -0.2 -0.5 -1.3
Eliminate certain HPSA bonus payments 0 * * * * * * * * * * -0.2 -0.4
Cover 48 months of immunosuppressive drugs 0 * * * * * * * * * * * 0.2
Medicare+Choice 
Eliminate BBRA slowdown of phase-in of risk adjustment 0 0 0 0 0 0 0 0 0 0 0 0 0
Shift timing of payment from October to September 2002 0 0 3.9 -3.9 0 0 0 0 0 0 0 0 0
Interaction with changes in fee-for-service spending 0 0 0.3 0.1 * * * * * -0.1 -0.2 0.3 0.1
Unspecified Policies
Amount earmarked for increases in Part A spendinga 0 1.2 1.3 1.4 1.4 1.5 1.5 1.4 1.3 1.2 1.1 6.7 13.0
Amount earmarked for increases in Part B spendinga 0 0.7 0.7 1.0 1.0 1.1 1.1 1.0 0.9 0.8 0.8 4.4 9.0
Total (Gross mandatory Medicare outlays) 0 5.5 8.1 -1.0 2.4 2.7 2.9 2.6 2.2 1.8 1.6 17.8 28.9
Offsetting Receipts (Premiums)b 0 -1.4 -0.6 -0.2 -0.1 -0.1 -0.1 * * 0.1 0.2 -2.4 -2.1
Net Medicare Outlays 0 4.1 7.5 -1.1 2.3 2.6 2.8 2.6 2.2 2.0 1.7 15.5 26.8
SOURCE: Congressional Budget Office.
NOTE: * = between -$50 million and $50 million; EPO = erythropoietin; MSP = Medicare as secondary payer; HPSA = health professional shortage area; BBRA = Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999.
a. After specifying the amounts earmarked for increases in Part A and Part B spending, the Administration added proposals to increase payment rates for hospitals in Puerto Rico and to increase funding for Ricky Ray grants. The Administration stated that the earmarked amounts would be reduced to offset the cost of those proposals. CBO adjusted the amounts earmarked for Part A and Part B to reflect its estimates of the Puerto Rico provision and the Ricky Ray provision, respectively.
b. A reduction in offsetting receipts is equivalent to an increase in outlays.

CBO'S ESTIMATE OF THE PRESIDENT'S MID-SESSION REVIEW PROPOSALS FOR MEDICAID AND SCHIP
(Federal outlays by fiscal year, in billions of dollars)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total,
2001-
2005 		 Total,
2001-
2010 
Medicaid
FamilyCare 0.2 -0.1 * * 0.2 -7.3 -3.6 0.7 1.0 1.5 0.3 -7.4
Medicare Prescription Drug Benefit 0.1 0.6 2.2 4.1 4.9 5.1 5.4 5.7 6.1 6.5 11.9 40.7
Restore Eligibility to Certain Legal Immigrants 0.0 0.1 0.3 0.5 0.8 1.0 1.3 1.7 2.0 2.4 1.7 10.2
Other Medicaid Proposals and Interactions 0.3 0.3 0.6 0.7 0.8 0.9 1.0 1.2 1.3 1.6 2.7 8.7
Total 0.7 1.0 3.1 5.3 6.6 -0.3 4.2 9.3 10.4 11.9 16.6 52.1
SCHIP
FamilyCare -0.3 1.4 2.4 3.1 4.4 17.5 13.0 7.3 7.7 7.2 10.9 63.7
Other SCHIP Proposals 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.6
Total -0.3 1.4 2.4 3.1 4.5 17.5 13.1 7.4 7.8 7.3 11.2 64.3
Total (Medicaid and SCHIP)
Total 0.4 2.4 5.5 8.5 11.1 17.2 17.2 16.7 18.2 19.2 27.8 116.4
SOURCE: Congressional Budget Office.
NOTE: * = between -$50 million and $50 million.

1. See Congressional Budget Office, An Analysis of the President's Budgetary Proposals for Fiscal Year 2001 (April 2000), for a discussion of the proposals included in the February budget.

2. As it did in previous reports this year, CBO has produced three variations of its baseline projections, which differ only in their treatment of discretionary spending (and the corresponding effect on net interest). The "inflated" variation assumes that budget authority for discretionary programs grows at the rate of inflation each year after 2000. The "freeze" variation assumes that discretionary budget authority each year equals the level enacted for 2000, plus the amount already enacted for 2001. The "capped" variation assumes that discretionary spending adheres to the statutory caps on such spending that are in effect through 2002 and increases at the rate of inflation thereafter.

3. For a more detailed discussion of those changes, see the attachment, CBO's Analysis of the Health Insurance Initiatives in the Mid-Session Review (July 2000).

4. CBO's estimate of the February budget proposals reflects the estimate of the Medicare prescription drug benefit as revised in testimony before the Subcommittee on Health of the House Committee on Ways and Means on May 11, 2000.

5. Because the Administration did not request additional budget authority to cover the costs of administering the prescription drug program in its proposals for discretionary spending, CBO has not included that spending in its estimates of the surplus.

6. See Congressional Budget Office, The Budget and Economic Outlook: An Update (July 2000), Chapter 1, for a comparison with the Administration's current-services estimates.

7. For details of the original initiatives and their cost, see Congressional Budget Office, An Analysis of the President's Budgetary Proposals for Fiscal Year 2001 (April 2000), and A CBO Analysis of the Administration's Prescription Drug Proposal, statement of Dan L. Crippen, Director, before the Subcommittee on Health, Committee on Ways and Means, May 11, 2000 (available at www.cbo.gov).

8. These estimates reflect the specifications of the President's proposals that underlie the estimates in the Mid-SessionReview. On July 11, the Office of Management and Budget informed CBO that some of the drug spending for certain low-income beneficiaries that was assumed to be subsidized in the Administration's estimate would not, in fact, be subsidized. That difference would reduce the cost of the proposals by $17 billion over 10 years. CBO estimates that without those subsidies, direct spending would total $123 billion over the 2001-2005 period and $412 billion over the 2001-2010 period.

9. CBO has made minor technical changes to its estimating methods since preparing estimates of the February budget proposals. Those changes account for a very small portion of the $261 billion difference.

10. See Congressional Budget Office, An Analysis of the President's Budgetary Proposals for Fiscal Year 2001.