LSA Analysis of the Bipartisan Budget Act of 2015

On November 2, President Obama signed into law a two-year budget and debt ceiling agreement, the Bipartisan Budget Act of 2015 (BBA, 114-74). The measure lifts the federal borrowing limit – also known as the debt ceiling - through March 2017, and provides a framework for federal spending in fiscal years 2016 and 2017.  The deal includes $80 billion in sequestration relief, split evenly between defense and nondefense discretionary (NDD) programs – a major win for NDD advocates like LSA.  The legislation also addresses a looming increase in Medicare Part B premiums, and makes legislative changes to extend the solvency of the Social Security Disability Insurance trust fund.  To comply with parliamentary requirements, the BBA also includes program and policy changes to offset the cost of these sequester and health care provisions. 

Impact on LSA Members

LSA is pleased that the budget deal takes a positive step in restoring funding for programs critical to LSA members and those you serve.  However, we don’t yet know what federal programs will receive extra funding under the deal. That’s because the agreement does not actually fund government programs, nor does it specify how the sequester relief should be distributed among the programs subject to it.  These decisions lie with the House and Senate Appropriations Committees, whose members determine specific funding levels for individual federal government programs through the annual appropriations process.  Their work is currently underway, and additional advocacy will be needed to ensure the NDD programs you administer realize these potential funding increases.  

Below, we explain more about what’s in the deal, what’s next, and how you can make a difference!  In particular, our analysis focuses on the following aspects of the agreement: the Partial Sequester Relief, the Debt Ceiling Suspension, changes to Social Security and Medicare, the Offsets, and Next Steps for Congress and LSA.  

Please contact LSA's Director of Public Policy and Advocacy, Lindsey Copeland, with any questions or information requests, and we invite you to check out our FY16 Appropriations Process Campaign for the latest news and member advocacy opportunities.

Partial Sequester Relief

The deal lifts the Budget Control Act's (BCA, 112-25) spending caps by $50 billion in FY16 (which began on October 1) and $30 billion in FY17, effectively eliminating about 90 percent of the sequestration budget cuts for domestic programs in FY16 and about 60 percent of the cuts in FY17.  In both years, the increase will be split evenly between defense and nondefense programs. The sequester cuts were already slotted to be less in FY17, so total funding for domestic programs in FY17 will be roughly the same as in FY16 – which means another year without accommodation for inflation or population growth.  Notably, even with the sequestration relief provided, funding for domestic programs in FY16 will be 12 percent below the 2010 level, adjusted for inflation.  By 2017, domestic spending will fall to its lowest level on record as a share of the economy, with data back to 1962.

While this deal is an important first step, it represents only a partial restoration of resources that have been lost due to several years of budget austerity; it does not represent a significant new investment. LSA will continue to advocate for a full elimination of the sequester.

Debt Ceiling Suspension

The debt ceiling is a cap set by Congress to limit how much outstanding debt the government may have. In theory, setting the debt ceiling is supposed to help Congress control spending.  The BBA temporarily raises – technically, suspends - the debt ceiling until March 2017.  This will allow the US government to borrow whatever it needs to finance authorized government spending, effectively eliminating the threat of default during this time period.

Significantly, increasing the debt limit merely covers previous expenses; it does not authorize any new spending.   This is because lifting the debt ceiling lets the US Treasury Department borrow the money it needs to pay the country’s bills in full and on time. Those bills are for services already performed and entitlement benefits already approved by Congress.  

Further, lifting this cap is not uncommon, as raising the statutory borrowing limit prevents the US from defaulting on its debt.  The ceiling is raised, on average, more than once per year; since 1940, Congress has enacted 95 such measures, the most recent of which expired in March 2015.  Since then, Treasury has used accounting maneuvers to conserve cash while meeting its obligations. On October 15, the Treasury Secretary informed Congress that those "extraordinary measures" would be exhausted no later than November 3, 2015 – just one day after the BBA was signed into law.  

By temporarily suspending the debt ceiling, the BBA allows the government to borrow whatever it needs until March 2017,  and eliminates the risk of default on the US debt - and the potential for a government shutdown over this increasingly political issue. The upfront resolution of these fiscal battles will provide LSA members with increased budgetary certainty during the period of suspension. 

Social Security

Prior to the BBA, the Social Security Disability Insurance Trust Fund was on track to run out of money next year.  With depleted reserves, the Disability Insurance (DI) fund would have had to rely entirely on incoming payroll taxes to make payments, resulting in drastic benefit cuts.  The BBA addresses this projected shortfall, and makes programmatic changes necessary to adhere to budgetary requirements.

Solvency

To extend DI solvency – and avoid a 20 percent cut in disability benefits for 11 million Americans in 2016 – the package temporarily allocates a higher portion of Social Security payroll  taxes to the Social Security Disability Insurance trust fund, instead of the Old-Age and Survivors Insurance (OASI) Trust Fund.  

For three years (2016-2019), the DI portion of Social Security payroll taxes will be increased by .57 percent (from 1.8 percent to 2.37 percent), resulting in a transfer of $117 billion, according to the Congressional Budget Office. The projected 2035 depletion date for the OASI fund - which pays retiree, spousal, and child benefits -  remains unchanged under the plan.

Program Changes

Along with the reallocation, the deal makes several changes to Social Security that are projected to reduce spending by $4.4 billion over a decade. By curbing the cost of the program, the package allows the House and Senate to comply with a GOP-controlled parliamentary rule which bars transfers to the disability fund unless they are accompanied by other changes that strengthen the actuarial balance of the combined trust funds.

Under the BBA, most of the DI savings come from ending a pilot program underway in 20 states, while the OASI fund savings are the result of changes to benefit claiming strategies. The bill also includes measures to combat fraud, and will create a pilot program to examine opportunities to make it more financially appealing for disability recipients to return to work. The deal does not contain any changes to the DI eligibility criteria or benefit structure.

Single Decision Maker Pilot - As noted above, most of the DI savings come from ending a ‘single decision maker’ 20-state pilot program that is being used to test the impact of allowing disability examiners to make initial disability determinations without a medical consultant’s signature.  Data suggests these states have a 5 – 8 percent higher approval rate and .8 percent more individuals receiving DI benefits than the other 30 states that do have medical review.   Eliminating this pilot is projected to decrease the payroll tax shortfall of the DI trust fund by .02 percent over 75 years. This provision will go into effect in one year from enactment.  

Claiming Strategies - Under the Social Security claiming strategy known collectively as "file-and-suspend",  one wage-earning spouse ("claimant") files for his or her Social Security worker benefit at full retirement age (FRA), currently 66.  Upon filing, the claimant's spouse becomes eligible for a separate spousal retirement benefit, which is based on the claimant's work record.  Once the spouse files for this benefit, the wage-earning spouse immediately suspends his or her claim, delaying the retirement benefit beyond FRA. The claimant then re-files for the worker benefit later, and is therefore able to take advantage of Social Security's Delayed Retirement Credits, which increase benefits by a certain percentage for those who delay retirement beyond FRA and up to age 70.  

Under current law, the claimant's delay of his or her worker benefit does not also delay the corresponding spousal retirement benefit. Accordingly, this strategy allows the claimant's spouse to collect a spousal benefit during the period of suspension.  Further, if the claimant's spouse is also a wage earner, he or she is able to begin claiming a benefit as a spouse for several years while building up his or her own delayed retirement credits. 

Essentially, these strategies allow a worker who reaches FRA to file for and immediately suspend his or her benefits, while still allowing the spouse to receive a spousal benefit based on the worker’s earnings record. The worker - and the spouse - are then free to continue working and receive delayed retirement credits, which increases not only his or her monthly benefit but also the spouse’s survivor’s benefit.  Notably, Congress did not intentionally create these loopholes.  They are a result of changes made to Social Security in 1983 and 2000, and were only discovered years later.

The BBA eliminates these claiming strategies.  Under the deal, once an individual files for any of their Social Security benefits, they are ‘deemed’ to have filed for all of the Social Security benefits for which they are eligible.  Suspension of their benefits will still allow for Delayed Retirement Benefits to accrue, but any benefits based on the claimant’s work record (including spousal benefits) are also suspended.  When the wage earning claimant re-files, no retroactive benefits will be available. 

This provision will be phased-in, and will begin to affect those who turn 62 in 2016 and thereafter. Those who start a file and suspend strategy by April 30, 2016 will be grandfathered in.  According to the 75 year projections, these changes are expected to save the OASI trust fund $1.3 billion per year, and decrease the OASI payroll tax shortfall by .02 percent.

Medicare Part B

The two-year budget agreement also prevents the expected increases in premiums and out-of-pocket costs for millions of Medicare Part B beneficiaries. 

By statute, Part B premiums must cover 25 percent of projected Part B costs. Medicare law also includes a ‘hold harmless’ provision that prevents Part B premiums for 70 percent of beneficiaries from rising more than their Social Security paychecks.  In a typical year, this hold-harmless provision has a limited impact. However, in a year in which Medicare Part B premiums increase but Social Security COLA benefits do not, the effects of the hold-harmless provision are larger and more complex.  In such circumstances, premiums for those not held harmless are higher than they would have been had the provision not been in effect, because the Part B premium increase is necessarily spread out among fewer enrollees.

2016 was projected to be one such year.  Consequently, 30 percent of Part B enrollees (those not held harmless) were facing a 52 percent premium spike (from $104.90 to over $150), and all beneficiaries were slated to face a 52 percent jump in the Medicare Part B deductible, to about $223.  The fix passed in the budget deal will make the premium for next year about $120 for all beneficiaries, and it also reduces the projected deductible to $167. To limit the magnitude of the premium increase, the fix looked to what the premium would have been had the hold harmless provision not been triggered, and it “loans” the difference from the Medicare trust fund to the 30 percent of beneficiaries affected by the increase. These beneficiaries as a group will have to repay that loan by paying a $3 per month surcharge until the trust fund is replenished.

Offsets

Under current Congressional rules, the law’s $80 billion in partial sequester relief – as well as its  changes to mandatory programs – must be offset.  In the agreement, these initiatives are paid for by a mixture of policies, including selling oil from the US strategic petroleum reserve, extending the sequester of mandatory programs for one year, and repealing the Affordable Care Act’s ‘large employer’ provision. The BBA also provides additional funding for defense and homeland security activities through an off-budget overseas contingency operations (OCO) fund that is not required to be offset.

Extension of the Mandatory Sequester

The single largest offset is savings from extending – for one more year, to 2025 – sequestration of the limited number of mandatory programs that are subject to it.   This provision is expected to save $14 billion. The bulk of these savings come from continuing a 2 percent cut in Medicare provider reimbursement rates.  First passed under the BCA and extended as an offset in each subsequent sequester relief package, the Medicare payment cut is limited to 2 percent each year; these cuts are not cumulative, and have no impact on Medicare's benefit structure. The BBA also replaces the arbitrary dips and increases in the Medicare sequester percentages in 2023 and 2024 with the standard two percent cut.

Medicare Site Neutrality

The BBA also takes a step toward Medicare site-neutral payments by reducing Medicare rates for off-campus outpatient centers owned by hospitals.  This provision creates more parity in payment between hospital-owned and free-standing outpatient centers.

Generally, medical services delivered by physicians are reimbursed at higher rates in a hospital setting than they are in a non-hospital setting.  One exception has been the way Medicare reimburses hospital-owned physician practices that are “off campus” – defined as more than 250 yards from the main hospital campus.  

Currently, hospitals can bill Medicare for routine services performed at their offsite provider practices through the outpatient prospective payment system (PPS), which offers a more lucrative reimbursement rate than does the regular Medicare physician fee schedule. However, this higher payment rate is not available for care provided in non-hospital owned physician practices, which are instead reimbursed at the lower rate. As a result, Medicare has been paying hospitals more than physicians for identical care provided in outpatient settings.   

The BBA aims to address this longstanding discrepancy by prohibiting PPS payments to newly-created or acquired provider-based off campus facilities, beginning in January 2017. Existing (as of the date of enactment, November 2) off-campus departments are grandfathered in, and stand-alone emergency departments are also excluded. The Congressional Budget Office estimates this will save $9.3 billion over the next 10 years.

Changes to this Medicare policy have been widely anticipated, but were not expected to be included in the budget deal.  Additional implementation details will be determined through the regulatory process.

Medicaid Rebate Policy

Under the Medicaid drug rebate program, manufacturers who participate in Medicaid provide a rebate for certain drugs if the price of the drug rises faster than inflation in a given year.  This policy currently applies to branded drugs, but not to generics.  The budget deal expands this “inflation-based” rebate provision to include both brand name and generic drugs.  It will go into effect one year after the legislation was signed into law, and the savings will generally be shared between states and the federal government.

ACA Large Employer Provision

The deal repeals a not-yet-implemented Affordable Care Act (ACA, PL 111-148) reform designed to increase enrollment in employer-based plans. The provision would have required employers with more than 200 workers to automatically enroll their employees into a health plan (with the option for the employees to opt out). The Congressional Budget Office projects this repeal would reduce the number of people covered by employer-sponsored insurance by 750,000 beginning in 2017 (when the provision might first be enforced), and that 90 percent of these people would remain uninsured.

Repeal reduces the budget deficit by $7.9 billion over the 2016-2025 period because employees would receive more taxable income rather than health benefits, which are not taxable, and because of increased individual responsibility penalty payments.

Next Steps

Importantly, this budget deal is just the first step in setting spending levels for FY16, which began on October 1, 2015.  Now the annual appropriations process – which typically spans over several months – is being tightly compressed into a few weeks.  

Leadership in the House and Senate have already divided the $33 billion in domestic sequester relief among the 12 Congressional subcommittees whose members are responsible for setting individual program funding levels.  Now that these allocations - known as 302(b)s - have been made, appropriators must re-write their FY16 spending  bills to adhere to the revised topline number, and negotiate the spending level, policy, and language differences between the House and Senate versions of each bill.

Lawmakers hope to compile all 12 bills into one comprehensive spending package, or omnibus, at the end of the year. Their goal is to pass legislation funding the federal government for the remainder of FY16 before the current Continuing Resolution (CR) expires on December 11. 

To meet this deadline, the appropriations subcommittees will work through the Thanksgiving recess, making the majority of program-level funding decisions before Congress returns on November 30, and leaving only the major sticking points - controversial policy riders - to be resolved among House and Senate leaders.  Should negotiators fail to strike deals on some or all of the 12 individual bills that collectively fund the federal government, lawmakers will need to advance one or more CRs in December to avoid a partial government shutdown. 

By setting clear spending targets, the BBA sharply reduces the risk of  government shutdown this year, but it does not eliminate it entirely, as lawmaker attempts to attach policy riders – politically-charged funding restrictions, policy limitations, and statutory guidance – to the omnibus could derail negotiations. To ensure budgetary certainty, program sustainability, and avoid a lapse in federal funding, LSA will work to support ‘clean’ FY16 spending bills that are free of riders and provide the highest possible funding levels for programs and initiatives important to LSA members and those you serve. 

You can find updates on our efforts, as well as member advocacy opportunities and the latest news on our FY16 Appropriations Process campaign website. Please contact LSA's Director of Public Policy and Advocacy, Lindsey Copeland, with any questions or information requests, and our full analysis of the BBA is available online here.