AMERICAN.COM

Governor Haley Barbour of Mississippi and Governor Deval Patrick of Massachusetts recently testified before Congress on Medicaid and state healthcare reform. Governor Barbour detailed how, in just two years, Mississippi’s Medicaid program brought drug costs down from nearly $700 million to $279 million. He testified that Mississippi achieved these gains in part by limiting adult beneficiaries to two brand-drug prescriptions per month and the total number of prescriptions to five per month.

But there is more good news to tout in Mississippi’s management of their Medicaid pharmacy program that wasn’t discussed by Governor Barbour. According to my research in a study released today by AEI, Mississippi is among the most effective Medicaid programs in the country at ensuring that beneficiaries get the lowest-cost versions of multi-source drugs. Such steps do not require limiting access to prescription drugs, just ensuring the lowest cost version is utilized.

While Governor Patrick’s testimony did not address pharmacy benefits, Massachusetts is another extremely successful state in this regard. An aggressive policy promoting utilization of lower-cost generics has resulted in a highly efficient Medicaid pharmacy program.

“Overspending on Multi-Source Drugs in Medicaid” tracks state utilization of brand and generic versions of 20 top multi-source products in Medicaid in 2009. The report estimates that Medicaid spent over $300 million extra that year by paying for brand drugs when lower-cost generics with the identical active ingredient were available. In terms of waste per Medicaid enrollee, the worst offenders were Vermont ($31/enrollee), Iowa ($31/enrollee), Maine ($18/enrollee), New Hampshire ($17/enrollee), and Georgia ($15/enrollee).

In Mississippi, overspending on brand versions of multi-source drugs is estimated at just less than $1 per enrollee. In Massachusetts, overspending averages only $1.23 per enrollee. If every state were as efficient as these two states, total spending could have been reduced by hundreds of millions of dollars.

Image by Gage Skidmore.

Yesterday, the Congressional Budget Office released its updated budget outlook and reiterated a reality about the debt limit that Treasury Secretary Timothy Geithner recently expressed in a letter to Congress—that the debt limit will likely be reached this spring and, if left unaddressed, will become serious in the months thereafter. What to do about this problem has been a popular topic of discussion in Washington. In the Washington Post last week, former Minnesota Governor Tim Pawlenty advocated for entitlement reform as a critical component of tackling the serious fiscal challenge embodied in the debt limit debate.

In another recent op-ed, I offer my own views on the debt limit conundrum and note that the current rules do not measure anything of any economic value; before fighting about what the limit should be, we need to make the debt limit a meaningful metric. Debt limit reform should exclude economically irrelevant intragovernmental borrowing, and instead should apply a limit only to the debt held by the public—the debt that matters. First set the rules correctly, then set the limit appropriately.

For better or worse, this proposal hasn’t yet come under attack from Democrats, but another worthwhile proposal has. In a recent blog post on the Treasury Department’s website, Deputy Secretary Neal Wolin attacks an idea Senator Pat Toomey (R-Pennsylvania) recently proposed in the Wall Street Journal. Senator Toomey recommended that Congress ”require the Treasury to make interest payments on our debt its first priority in the event that the debt ceiling is not raised.” The senator clearly explains that while reaching the debt limit would certainly be disruptive to the economy, it does not mean that the U.S. government need default on its debt obligations. “Next year, for instance, about 6.5% of all projected federal government expenditures will go to interest on our debt, and tax revenue is projected to cover about 67% of all government expenditures. With roughly 10 times more income than needed to honor our debt obligations, why would we ever default?”

Wolin calls the proposal “unworkable,” arguing that it would “protect only principal and interest payments, and not other legal obligations of the U.S., from non-payment.” But, in fact, that is exactly the purpose of the proposal, and it is completely workable. Nobody wishes for the scenario whereby the U.S. government cannot meet all of its obligations because the debt limit has been reached. But the reality is that if such were to occur, the Treasury Department would need to make hard decisions about which obligations to honor and which payments not to make. Senator Toomey should be commended, not criticized, for addressing the reality of the difficult choices such an event would require and for proposing to assure our lenders that our debt obligations face no risk. I would hope that the Treasury Department would think more carefully about this proposal and others (mine!) as Congress prepares to address this issue, and I would hope that the administration, instead of blogging false criticisms, try to engage in positive dialogue with Congress on finding a solution so that all financial obligations of the U.S. government can be honored.

Image by Richard Masoner.

President Obama announced Monday that a bipartisan “framework” on tax cuts had been reached. The plan not only ensures that no one’s taxes are going up before the next election, but also includes an additional, temporary tax break intended to spur new investment. And it throws in a retroactive extension of dozens of expired provisions, including the research and development tax credit and a two-year (2010 and 2011) alternative minimum tax patch. While lamenting the fact that the agreement includes an extension of the 35 percent rate for married couples with incomes above $250,000 (singles above $200,000), the White House is spinning this as the “cost” for getting unemployment benefits extended and for extending certain smaller tax policies created in the stimulus bill.

There is a line from the president’s remarks that is particularly notable. He said:

In exchange for a temporary extension of the tax cuts for the wealthiest Americans, we will be able to protect key tax cuts for working families—the Earned Income Tax Credit that helps families climb out of poverty; the Child Tax Credit that makes sure families don’t see their taxes jump up to $1,000 for every child; and the American Opportunity Tax Credit that ensures over 8 million students and their families don’t suddenly see the cost of college shooting up.

It is an impressive statement because it is so amazingly misleading. First of all, it suggests that the deal includes some temporary provisions in exchange for some permanent ones. In reality, all the provisions will be temporary, including those for the middle class. Second, the tax cuts for the “wealthiest” to which he refers are income tax provisions. Their applicability is not a function of wealth, but rather annual income. Perhaps this is a quibble, but for those who believe that tax rates affect the decision to earn income, it is an important distinction. Third, the Earned Income Credit (EIC) is a permanent policy costing roughly $50 billion a year and not expiring nor at risk of being repealed. The tax deal being finalized now includes an extension of a modification to that permanent policy that expands the availability of the EIC and costs roughly one-seventh the annual cost of the permanent policy. Similarly, in the absence of an extension, the $1,000 Child Tax Credit does not go to $0; rather, it drops from $1,000 to $500. The president is overstating the impact of the deal on families by claiming that it saves $1,000 per child. Furthermore, “every child” is not accurate either, as the Child Tax Credit is not available for taxpayers with incomes greater than $130,000 (married filers) and $95,000 (single).

Will avoiding tax increases help spur the economy? Likely it will. Ironically, however, the deal on unemployment benefits—continuing for 2011 a provision to allow unemployed workers to receive up to 99 weeks of benefits—may have the opposite effect, as it will discourage some workers from re-entering the workforce. But, in terms of the political calendar, those benefits will end just as the next campaign gets into full swing.

Image by Alan Cleaver.

The Senate is struggling to move legislation to extend (actually, now reinstate) a host of expired tax and spending policies. On the surface, the inability to pass the extenders bill looks like a display of incompetence by Congress. For example, the federal extended unemployment benefits program lapsed in June, affecting over 1 million individuals, and the reimbursement rate Medicare pays for services rendered by doctors and other healthcare professionals was cut 21 percent on June 1. Furthermore, the bill would extend a host of narrow tax policies ranging from a tax break for films and TV production to a special tax incentive for the donation of canned food that expired December 31, 2009. But in terms of economic impact, failure to enact this legislation could mark Congress’s greatest accomplishment since President Obama took office. The bill contains far more bad ideas than good ones, and overall it makes a bad deficit even worse.

The bill being considered includes highly publicized tax increases on “carried interest,” S corporations, and income earned abroad by U.S. multinationals. But despite this additional revenue, the legislation digs a still deeper hole for the U.S. deficit. While lawmakers’ increasing budget gimmickry (e.g., permanent tax increases to offset temporary tax breaks) may be causing the reported deficit cost to decline, it does nothing to diminish the true budget impact.

Another potentially positive effect of Congress’s failure to pass the extenders bill is that the expiration of extended unemployment benefits could produce a positive jolt for the labor market as more unemployed workers look more aggressively for work. In addition, not enacting the proposed tax increases on private equity firms, S corporations, and foreign-source income would be a positive development for entrepreneurs, small businesses, investors, and U.S. multinationals.

Unfortunately, political pressure is building, and eventually the Senate will pass a bill. The House will be afraid to alter the Senate’s product and will be sure to send it off to President Obama, who will gladly sign it. Thus, the success that could have been achieved by Congress’s failure to get its act together is unlikely to be realized. But for the next few days, at least, we can keep hoping.

Image by krossbow

Last week the Congressional Budget Office’s blog had a post that described their analysis of the performance of the stimulus bill for fiscal year 2009. The analysis closely mirrors the information contained in an article I co-authored with Rachel Forward last month. The CBO confirms that the total federal spending was close to the original forecast but that estimates of the underlying categories of spending were significantly off in many areas.
 
Specifically, the federal government spent $18.2 billion more than was expected through the Department of Labor (unemployment benefits) and the Department of Education (Pell grants) and spent $16.7 billion less than was expected on all other departments. Spending by the Department of Transportation was 26 percent less than the original forecast; Department of Commerce was 54 percent less than forecast; and Department of Energy was 56 percent less than forecast. In CBO’s words, “infrastructure-related spending fell short of CBO estimates. For example, spending by the Departments of Transportation, Energy, and Commerce totaled just over $5 billion, compared with CBO’s original estimates of about $8 billion for those three agencies. Funding for a broad range of other federal agencies has [also] been spent considerably more slowly than originally estimated.”
 
In October, the Department of Transportation (DOT) did spend an additional $1.2 billion to bring their total spent from $3.65 billion to $4.85 billion, and the Department of Energy (DOE) pushed out an additional $381 million last month to raise their total to $1.16 billion. However, the stimulus bill provides DOT with $48.1 billion and DOE with $38.4 billion to spend, so “trickle” still seems an apt description of the performance of a bill intended to quickly combat a faltering economy.
 
The difference between the original CBO numbers and the actual numbers raises an additional issue about forecasting budgets in general. How should one grade the performance of CBO when they did such an excellent job on the top-line number but missed by so far on so many department-level estimates? From a macro perspective, some economists may say only the total number of dollars spent matters for the purpose of measuring the impact of the stimulus and give CBO an A+. For analysts (or politicians) concerned about “green energy” and employment in that sector or infrastructure more generally, the CBO’s forecast is quite disappointing. While it is important to remember that these numbers are just the first snapshot of the first fiscal year, the question that may matter most is will the numbers “catch up” to the CBO forecast and, if so, when? Or, will the infrastructure spending laggards be laggards forever?