CBO has evaluated the Administration’s legislative proposal to create an “Independent Medicare Advisory Council” (IMAC) in the Executive Branch. The IMAC would be a group of five doctors or people with “specialized expertise in medicine or health care policy,” appointed by the President and confirmed by the Senate. They would have two tasks:

  1. Recommend how much to increase payment rates for different types of Medicare providers (hospitals, doctors, home health care providers, medical equipment, nursing facilities) each year; and
  2. Recommend “broader Medicare reforms” that “improve the quality of medical care” or “improve the efficiency of Medicare.”

In both cases, the Council would be limited to making recommendations that do not increase Medicare spending. There is no requirement that the IMAC’s recommendations save any money.

The proposal creates a fast-track process in which the President has to send the council’s recommendations to Congress with a binary yes-or-no recommendation. If the President approves the recommendations, he would have the authority to implement them unless both Houses of Congress voted to stop him within 30 days. The details of the Congressional disapproval procedure mean that you would effectively need at least one more vote than 2/3 of the House and 2/3 of the Senate to overrule recommendations made by the IMAC and approved by the President.

This would be an enormous transfer of policymaking authority and power from Congress to the Executive Branch. There are all sorts of fascinating balance-of-power and interest group politics dynamics to analyze, and I’m going to completely ignore them to focus on the money.

The Administration proposed this because moderate/conservative House Democrats (aka “Blue Dogs”) told the President they would not support the House Tri-Committee health care bill unless it were changed to more aggressively address the long-term federal health spending problem (which the Tri-Committee bill would exacerbate).

In addition, the President frequently talks about the need to “bend the health cost curve down” in the long run. There are two related health cost curves – one for government health spending, and one for private health spending by individuals, families, and businesses. The Blue Dogs focused primarily on bending the long-term government health cost curve down, and so the President gave them the IMAC. The Administration has been playing with the idea for a while, but it got legs last week because Speaker Pelosi needs Blue Dog support for the Tri-Committee bill.

And yet the Administration’s IMAC proposal is drafted in a way that does not force any spending cuts, but instead sets a goal only of not increasing Medicare spending. In addition, Budget Director Orszag’s letter to the Speaker contains a weaker deficit reduction goal than previously stated by the President. Here’s Director Orszag’s new language:

We agree that it is critical that health care reform is not only deficit neutral over the next decade, but that it does not add to our deficits thereafter.

What happened to bending the long-term cost curve down? Director Orszag’s letter weakens the test to “We won’t increase the deficit.” This means that if a bill “raises the health cost curve,” as Director Elmendorf says about the pending legislation, the Administration is OK, as long as they increase taxes so that the net does not increase the long-term budget deficit. The Administration’s legislative proposal matches this rhetoric. They are lowering the bar.

I will guess that there is a struggle both within the Administration and among Capitol Hill Democrats between the small deficit reduction crowd and the much larger “don’t cut health care providers” crowd, and that this weakened language represents a new balance point in that struggle. It’s odd, because it’s in an Orszag letter, and it’s inconsistent with the President’s and his consistent message that we need long-term deficit reduction, aka “health care reform is entitlement reform.”

CBO concluded the President’s IMAC proposal would save very little money in either the short run or the long run.

Here is CBO Director Elmendorf in a letter to House Majority Leader Steny Hoyer:

CBO estimates that enacting the proposal, as drafted, would yield savings of $2 billion over the 2010-2019 period (with all of the savings realized in fiscal years 2016 through 2019) if the proposal was added to H.R. 3200, the America’s Affordable Health Choices Act of 2009, as introduced in the House of Representatives.

To put $2 billion of Medicare savings over four years in perspective:

  • It would be a 0.07% reduction. That’s seven-hundredths of one percent. CBO estimates Medicare spending over that same four-year period to be $2.87 trillion.
  • It’s five times as large, on an annual basis, as the much-mocked $100 million of savings the President asked his Cabinet Secretaries to find. (Where are those savings, by the way? Still waiting.)

CBO’s estimate is a “probabilistic score.” They look at various possible scenarios and figure out how much money would be saved under each. They then guess at how likely each outcome is, and the $2 B is the probability-weighted average (the “expected value”) of the savings under the various possible scenarios. CBO explains it this way:

This estimate represents the expected value of the 10-year savings from the proposal: In CBO’s judgment, the probability is high that no savings would be realized, for reasons discussed below, but there is also a chance that substantial savings might be realized.

OMB Director Orszag has attempted to portray CBO’s analysis as a win: (emphasis added)

In part because legislation under consideration already includes substantial savings in Medicare over the next decade, CBO found modest additional medium-term savings from this proposal — $2 billion over 10 years. The point of the proposal, however, was never to generate savings over the next decade. (Indeed, under the Administration’s approach, the IMAC system would not even begin to make recommendations until 2015.) Instead, the goal is to provide a mechanism for improving quality of care for beneficiaries and reducing costs over the long term. In other words, in the terminology of our belt-and-suspenders approach to a fiscally responsible health reform, the IMAC is a game changer not a scoreable offset.

Director Orszag is correct that the Administration’s stated goal of the IMAC proposal, as expressed in both his letter to Speaker Pelosi and the substance of the proposal, is not to generate significant short-term savings. The constraint on the council does not require them to reduce spending at all.

House Democratic leaders, however, need two things from the IMAC proposal:

  1. They need scorable short-term savings so they can pay for their $1+ trillion of proposed new spending.
  2. They need to convince the Blue Dogs to support their bill. The Blue Dogs didn’t ask the President for a proposal that would transfer enormous authority from Congress to the Executive Branch so that quality of care could be improved. They asked him for a proposal that would bend the government health care cost curve down – a proposal that would produce scorable long-term savings to make it easier for them to vote for a health care bill that would increase government spending, taxes, and deficits.

Director Orszag says one goal of the IMAC proposal is “reducing costs over the long term,” even though there is no requirement in the language that the council’s long-term recommendations do anything other than not increase Medicare spending. At the same time, his claim that IMAC is a game changer that would reduce costs over the long term contradicts CBO.

Here’s Director Orszag: “Instead, the goal is … and reducing costs over the long term. … the IMAC is a game changer not a scoreable offset.”

And here is CBO Director Elmendeorf’s letter to House Majority Leader Hoyer:

Looking beyond the 10-year budget window, CBO expects that this proposal would generate larger but still modest savings on the same probabilistic basis.

This is a direct contradiction. Director Orszag says the proposal is a long-run “game changer” whose goals include “reducing costs over the long term,” while CBO says the proposal “would generate larger but still modest savings” beyond the 10-year budget window. In this context, “larger” means “larger than 0.07%.”

The Elmendorf letter explains in further detail why CBO believes the IMAC proposal will generate only “modest” savings in the short and long run.

The proposed legislation states that IMAC’s recommendations cannot generate increased Medicare expenditures, but it does not explicitly direct the council to reduce such expenditures nor does it establish any target for such reductions.

As proposed, the composition of the council could be weighted toward medical providers who might not be inclined to recommend cuts in payments to providers or significant changes to the delivery system.

Outside influence on the council and the President, however, might make it politically difficult to recommend and implement reforms that could be viewed as undesirable by interested parties. Medical providers, beneficiaries, and Members of Congress would probably exert considerable pressure on both IMAC and the President to balance recommendations for savings against beneficiaries´┐Ż concerns about the costs and availability of medical services and the interests of those receiving Medicare payments for delivering services.

Expected savings from the IMAC proposal would grow after 2019, but many of the above points would still apply, reducing the likelihood of attaining large annual savings. The considerable uncertainty about the amount of savings that might occur within the first 10-year projection period would compound in future decades. Although it is possible that savings would grow significantly after 2019, CBO concludes that the probability of this outcome is low for the proposal as drafted, particularly because there is no fall-back mechanism to ensure some minimum level of spending cuts beyond those already included in H.R. 3200.

Director Orszag calls the lack of a fall-back mechanism to ensure some minimum level of spending cuts a “tweak,” and cleverly but misleadingly implies that CBO says the Administration’s IMAC proposal would be effective:

With regard to the long-term impact, CBO suggested that the proposal, with several specific tweaks that would strengthen its operations, could generate significant savings. … The bottom line is that it is very rare for CBO to conclude that a specific legislative proposal would generate significant long-term savings so it is noteworthy that, with some modifications, CBO reached such a conclusion with regard to the IMAC concept.

No, they did not reach such a conclusion. Note his use of the word “concept” rather than “proposal.” Here’s what CBO actually said:

Looking beyond 2019, a much stronger IMAC-type proposal could reap considerably more savings, depending on which specific features identified above were included and how those features were crafted in legislation. In particular, if the legislation were to provide IMAC with broad authority, establish ambitious but feasible savings targets, and create a clear fall-back mechanism for instituting across-the-board reductions in net Medicare outlays, CBO believes the council would identify steps that could eventually achieve annual savings equal to several percent of Medicare spending. In the absence of a fall-back mechanism, CBO expects that the probability that the President would approve recommended changes that would lead to such significant savings would be lower.

CBO is describing a fundamentally different kind of proposal. The Administration’s proposal would give the IMAC authority to reshuffle spending, and authority to cut spending, but would not require it to cut spending. CBO is saying that if legislation requires spending cuts and specifies the amounts of those spending cuts, and if it creates an automatic mechanism to enforce those spending cuts in case the IMAC does not recommend any cuts, then an IMAC can be effective. In this kind of proposal, the IMAC’s recommendations don’t cause the long-term savings. The other parts of the bill do.

As a friend said to me, “At some point the advocates of this reform package need to realize that the only way to cut spending is to cut spending.”

With this letter CBO has killed the President’s IMAC proposal. It almost certainly would have died even without CBO’s letter. The proposal would have transferred an enormous amount of power from Congress to the Executive Branch. Turf-conscious Congressional committee chairmen would have fought it to protect their power base. Medicare provider interest groups (hospitals, doctors) were starting to lobby against it. They prefer Congress making these decisions because they’re easier to lobby and influence.

The only chance IMAC had was if CBO had said it would save gobs of money, allowing House leaders simultaneously to make Blue Dogs happy for being fiscally responsible, and to remove from their bill other, more politically painful, spending cuts or tax increases. IMAC was drafted so weakly that it became a budget gimmick. On Friday I wrote:

Congress usually looks first to gimmicks, but the President’s unintentional elevation of the actually honest CBO Director makes that harder than usual.

Yes, the Administration could submit a fundamentally different proposal and call it a “tweak” of their existing one. To achieve the stated goals of bending the government health cost curve down and reducing future deficits, such a proposal would need to actually cut spending in an enforcable and unavoidable way. If they want to throw in a new council to shuffle money around within the mandated lower levels, that’s a separable question. The President’s advisors know, however, that a proposal like this with real teeth would never get off the ground in Congress. That’s too bad, because we desperately need the long-term deficit reduction.

The death of IMAC is a black eye for the Administration and another step backward for the pending health care reform bills. This result was both predictable and avoidable.

(Photo credit: That 70’s Crime Show Opening Sequence by jcoterhals)