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An Analysis of the President's Budgetary Proposals for Fiscal Year 1998 March 1997

President Clinton's 1998 budget offers two sets of revenue and spending proposals. Under the economic and technical assumptions of the Administration, the basic set of policies yields a modest budget surplus in 2002. The alternative set of budgetary proposals is designed to reach balance in 2002 under the slightly less optimistic economic and technical assumptions of the Congressional Budget Office.

CBO estimates that the President's basic set of spending policies would reduce spending by a net $168 billion over the 1998-2002 period (relative to projections that assume that discretionary outlays for 1998 are held to the levels of the existing spending cap and grow with inflation thereafter). The largest spending reductions are found in the Medicare program, the nation's health care program for the elderly and disabled, followed closely by discretionary spending, the one-third of federal spending that is subject to annual appropriations by the Congress. Medicare savings amount to $82 billion, and discretionary savings are set at $79 billion, for a total of $160 billion of the $168 billion in net outlay reductions that the President proposes. Other savings of $45 billion are largely offset by new spending initiatives such as providing health insurance for children and the unemployed and rolling back benefit restrictions in the Food Stamp and Supplemental Security Income programs that were enacted as part of last year's welfare reform package.

The President's alternative spending proposals reduce spending by an additional $57 billion in 2001 and 2002 combined, yielding a total net decrease in outlays of $224 billion over the 1998-2002 period. Under the set of alternative policies, the largest spending cuts come from discretionary spending (a total of $112 billion over five years), followed by reductions in the Medicare program ($88 billion over five years). In addition, a new fee would be imposed on television broadcasters to eliminate any difference between actual receipts from auctioning certain portions of the electromagnetic spectrum and the amount budgeted by the Administration (estimated by CBO at $9 billion for 2002).
 

The President's Basic Spending Proposals

Federal spending will increase from $1.6 trillion in 1997 to $1.9 trillion in 2002 under the President's plan. As a percentage of gross domestic product, outlays will increase to 20.8 percent in 1998 (up from 20.7 percent in 1997) before beginning their descent to 19.5 percent in 2002 (see Table 6). The bulk of that decline in spending as a percentage of GDP is attributable to very slow growth in discretionary spending. Mandatory spending (other. than net interest) rises as a share of the nation's output despite policies to achieve budgetary balance.
 

Discretionary Spending for 1998

Under current law, discretionary spending is subject to caps on both budget authority and outlays. (Budget authority confers the ability to commit the government to pay money, and outlays are the money paid to meet those commitments.) Separate caps apply to spending from the Violent Crime Reduction Trust Fund (VCRTF) and other general-purpose spending. Those caps expire at the end of fiscal year 1998.

CBO calculates that outlays flowing from the budget authority proposed by the President would exceed the estimated 1998 outlay limit on general-purpose discretionary spending by $6.1 billion. The VCRTF outlays, by contrast, fall $1.3 billion below their cap. Budget authority as proposed by the Administration is comfortably within the limit on general-purpose spending, and is equal to the budget authority cap for VCRTF spending (see Table 7). The Administration estimates that its discretionary spending proposals will not exceed either the budget authority limit or the outlay cap.
 

CBO has adjusted the current statutory levels of the cap to reflect changes that the Administration proposes in calculating the discretionary spending limits. The largest adjustment to the budget authority limits under the President's proposals is the result of his request for a $5.8 billion reserve of contingent emergency appropriations for Presidential response to disasters. The Office of Management and Budget would count as new budget authority only the amounts actually released by the President and would adjust the cap accordingly. CBO counts the entire amount of contingent emergency appropriations when they are appropriated by the Congress and adjusts the cap by that amount. Outlays, however, are not expected to flow from those appropriations until 1999. Other adjustments required under current law include the 1998 effect on outlays of proposed 1997 emergency supplemental appropriations and funding for additional reviews to determine the eligibility of beneficiaries required under legislation enacted last year.

In addition to those increases in the caps required under current law, the President proposes that certain existing and new fees counted as revenues be used to increase discretionary spending through an adjustment to the caps. Examples of those fees include existing State Department passport and visa fees and proposed Food and Drug Administration user fees. CBO estimates that those proposals would add more than $900 million in 1998 budget authority and more than $800 million in outlays. Other proposed adjustments include additional spending on reviews of eligibility for Unemployment Insurance and housekeeping items such as reclassifying the expenses of the Federal Reserve Board as discretionary spending instead of as an offset to revenues generated by Federal Reserve earnings.

In total, the President's proposed 1998 discretionary budget authority is $27 billion higher than was enacted for fiscal year 1997. Outlays flowing from that increase in budget authority are $4.9 billion higher than anticipated for the current year (see Table 8). The biggest bump in outlays is found in the education, training, employment, and social services function, and reflects the President's education initiatives--the largest being his proposed increase from $2,700 to $3,000 in the maximum Pell grant for undergraduate students. That total also reflects the Administration's plan to restructure the federal government's budgetary relationship with the District of Columbia, which is discussed in more detail in Box 2.
 

Discretionary Spending After 1998

The priorities reflected in the President's budget cannot be compared with CBO's baseline projections because the baseline includes unspecified spending reductions to ensure compliance with the discretionary spending caps. Accordingly, CBO's analysis in this section uses its calculations of discretionary spending that are not constrained by those caps.

The President's discretionary proposals yield total outlays that are somewhat higher than those that result from a spending freeze at 1997 levels of discretionary budget authority, and yet they are below those that are necessary to adjust 1997 budget authority fully for the effects of inflation. For 1998 and 1999, the Administration spends somewhat more than the midpoint between a freeze and full compensation for the effects of inflation, and spends at about the midpoint for 2000 and 2001. For 2002, outlays proposed by the President are $34 billion higher than the level suggested by a freeze, but are $49 billion lower than the level that is necessary to adjust spending authority for inflation (see Table 9).
 

The increases in discretionary spending largely accrue on the nondefense side of the ledger sheet, at least until 2002. Nominal defense outlays decline slightly in the near term, then remain level for 2000 and 2001. Even though outlays increase in 2002, the increase in 2002 in contrast to 1997 levels is less for defense than for nondefense programs. Defense overall receives $77 billion less than is necessary to offset the effects of inflation. That decline in purchasing power is greater than the decline in purchasing power received by nondefense spending.

The President's request for defense spending is similar to the levels contained in last year's Congressional budget resolution. For the 1998-2001 period, the President's proposal seeks defense outlays that are only $3 billion lower than called for in the budget resolution. The Administration's plan slightly boosts those outlays compared with the Congress's plan for 2002. For defense and nondefense combined, however, the 1998 budget proposal spends a cumulative total of $211 billion more on discretionary programs than would be allowed under the 1997 budget resolution in 1998 through 2002. Of that amount, $206 billion benefits nondefense programs.

Mandatory Spending

CBO estimates that the President's basic spending proposals for mandatory spending will decrease the deficit by a net $90 billion over the 1998-2002 period. Reductions in the growth of Medicare and Medicaid--the government's health care programs for the elderly and poor--account for $89 billion of that decline. Cuts in other programs and receipts from the sales of government assets largely offset mandatory spending initiatives proposed by the President--principally, expanded health insurance coverage for unemployed workers and their families and the rollback of welfare reform (see Table 10).
 

Medicare. Under current policies, CBO projects that gross mandatory spending for Medicare will increase from $209 billion in 1997 to $314 billion in 2002, an average annual increase of 8.5 percent (see Table 11). Net mandatory spending, which takes into account premiums paid by Medicare beneficiaries, will increase at an average annual rate of 8.8 percent. CBO's baseline projections of Medicare spending are virtually the same as those of the Administration.
 

The budget contains many proposals intended to reduce the growth of spending in Medicare. Those proposals for savings reduce Medicare outlays by $99 billion over the 1998-2002 period. At the same time, the Administration is proposing to expand some benefits, increasing costs by $17 billion during that period. On balance, CBO estimates that the President's basic proposals would lower Medicare spending by $82 billion over five years and slow the growth of net Medicare spending to 6.6 percent a year. The depletion of the Medicare Hospital Insurance Trust Fund would also be prevented throughout CBO's 10-year projection horizon (see Box 3).
 

CBO's estimate of the savings that result from the budget's basic Medicare proposals is $19 billion lower than the Administration's. CBO estimates that the President's proposed expansions of benefits would cost $4 billion more and that the proposed reductions would save $15 billion less than the Administration assumes. CBO's estimate of reductions in payments to fee-for-service providers is $11 billion smaller than the Administration's, and its estimate of savings in payments to managed care plans is $4 billion less.

Over half of the savings in the President's proposals would stem from curtailing payments to providers of health care services in Medicare's fee-for-service sector. The President proposes limiting growth in aggregate payments to physicians to the rate of growth in national income, adjusted for changes in the number of beneficiaries. That limit would slightly reduce the rate of growth compared with current law. Increases in payments to hospitals for both inpatient care and outpatient care would be limited through changes in the formulas used to adjust reimbursement rates. Caps on the number of residents per hospital would limit growth in spending for graduate medical education. Prospective payment mechanisms for skilled nursing facilities and providers of home health care would be established to slow the growth of spending in those sectors. New competitive payment mechanisms for laboratory services and suppliers of durable medical equipment are proposed; the budget would ensure that those mechanisms reduced payment rates by at least 20 percent. Overall, payments to fee-for-service providers would be pared by an estimated $53 billion over the 1998-2002 period.

Another $30 billion in savings would arise from reduced payments to risk-based health maintenance organizations (HMOs). Because payments to HMOs are linked to spending in the fee-for-service sector, much of that reduction would result from slowing the growth in payments to fee-for-service providers. In addition, the budget proposes to reduce the HMO payment rate from 95 percent to 90 percent of Medicare's adjusted average per capita cost (AAPCC) beginning in 2000.

The Administration further proposes to remove payments for disproportionate share hospitals (DSH) and graduate medical education from the AAPCC. That change would reduce average payment rates by an additional 5 percent. Removing those special payments from the AAPCCs would have little net budgetary impact, however, because the funds would be returned directly to DSH and teaching hospitals based on the number of HMO enrollees served. (Those direct payments are included under payments to fee-for-service providers in Table 11.)

The Administration's proposal would also narrow the gap between counties with high and low payment rates by phasing in a blend of local and price-adjusted national rates by 2002, and by setting a minimum payment rate of $350 per month. It would guarantee that no county's payment rate in 1998 and 1999 was cut from its level in the previous year. However, counties with high payment rates would face reductions from current-law levels to finance increases to counties with low payment rates. The budget includes a computation to ensure that the hold-harmless provision and the $350 floor on payment rates do not increase overall federal payments to HMOs. The new payment rates would be updated annually by the growth in national Medicare spending per capita, with a minimum update of 2 percent a year, beginning in 2000.

The Administration's proposal also contains several features intended to make HMOs more attractive to beneficiaries. It would allow Medicare to contract with additional types of plans (including preferred provider organizations and provider-sponsored networks), establish an annual open-enrollment period, provide beneficiaries with standardized comparative materials about plans, and guarantee that medigap coverage would be available at community rates for beneficiaries choosing to disenroll from a Medicare HMO.

CBO estimates that the Administration's proposal would not significantly increase or decrease enrollment in managed care plans. Some elements of the proposal--such as using a coordinated enrollment period and contracting with new types of plans--would tend to expand the managed care program. But enhancing the benefits package in fee-for-service Medicare and reducing HMO payments relative to those in the fee-for-service sector would discourage enrollment.

The largest expansion of benefits proposed by the President would reduce the out-of-pocket cost of Supplementary Medical Insurance (SMI) beneficiaries for services provided in hospital outpatient departments. Under current law, the effective coinsurance rate paid by beneficiaries for those services is much higher than the 20 percent rate applied to other SMI benefits. The reason for the difference is that the coinsurance rate is based on hospital charges rather than on Medicare's allowed payments, which generally are lower. As part of its proposal to restructure payments for hospital outpatient services, the Administration proposes to phase in a reduction in the coinsurance rate for services provided in hospital outpatient departments from the nearly 50 percent projected under current law in 1998 to 20 percent by 2007. That provision would cost $7 billion over the 1998-2002 period--and more than $10 billion a year by 2007 when fully phased in.

In addition, the President proposes increased coverage of preventive services. The budget would provide Medicare coverage for annual screening mammography and would waive cost sharing for both screening and diagnostic tests. Screening tests for detecting colorectal cancer would be covered, as would training and supplies for managing diabetes. Reimbursement rates would be increased for administering Medicare-covered preventive injections. Respite care of up to 32 hours a year would be provided for the families of Medicare beneficiaries with Alzheimer's disease or other severe mental impairments. Those new benefits would increase Medicare spending--net of any savings attributable to avoided illness--by about $7.5 billion over the 1998-2002 period.

The Administration also proposes to reduce the penalty for late enrollment. Under current law, people who do not enroll in the SMI program on turning 65 pay a premium that is 10 percent higher for each year that they delay enrollment and are not covered by a group health insurance plan. Reducing that penalty would encourage people to enroll in the program who would not have done so otherwise. Medicare costs would increase by $3 billion over the 1998-2002 period, principally because the additional premiums paid by those people cover would only 25 percent of the additional benefits.

Under the President's proposals, premiums paid by beneficiaries would increase relative to current law. Such premiums now cover 25 percent of spending for Supplementary Medical Insurance. Under current law, however, SMI premiums may increase by no more than the Social Security cost-of-living adjustment after 1998, and the share of costs covered by premiums will then begin to shrink by about 1 percentage point a year. The Administration would maintain the share of SMI spending covered by premiums at 25 percent after 1998. In conjunction with other proposals in the budget, that change would boost receipts by $8 billion over the 1998-2002 period. Premium receipts would grow by 8 percent a year, up from 5 percent a year under current law. In 2002, the projected SMI monthly premium would be $61.20 under the Administration's proposal compared with $51.50 projected under current law.

Medicaid. CBO projects that federal outlays for Medicaid will grow from $99 billion in 1997 to $144 billion in 2002 under current law--an average annual increase of just under 8 percent (see Table 12). Medical assistance payments, the largest component of spending, are projected to rise from about $84 billion in 1997 to $123 billion by 2002.
 

The President's basic budget includes proposals that would produce savings in Medicaid, as well as several measures that would increase Medicaid spending. The net effect of those policies is to reduce Medicaid spending by $7.5 billion over the 1998-2002 period compared with current law. In addition, the budget makes a number of proposals that increase the flexibility of states in administering the Medicaid program. Although CBO's baseline projections for Medicaid are slightly higher than those of the Administration, CBO and the Administration have similar estimates of the President's proposals.

The President's budget would achieve savings in Medicaid by placing caps on federal payments to states for each beneficiary and by limiting the growth in those caps to slightly more than the rate of economic growth per person. Separate caps would be established for the four main groups of people eligible for Medicaid--the aged, disabled, children, and other low-income adults--but states whose average spending for one group was below the cap could apply the savings to other groups. CBO estimates that the per capita caps would save $9 billion over the 1998-2002 period--with most of the savings occurring in the last two years.

The President also proposes to limit Medicaid's payments to disproportionate share hospitals to $10 billion in 1998, $9 billion in 1999, and $8 billion in 2000 and thereafter. That change would save $17 billion over the 1998-2002 period compared with current law. The savings are partly offset by almost $3 billion in supplemental payments for federally qualified health centers, rural health clinics, and other purposes.

The President's budget would expand Medicaid spending in several ways. First, the budget proposal would add more children to the program by allowing states to guarantee at least 12 months of continuous eligibility after a child becomes eligible for Medicaid. It would also increase Medicaid enrollment among children who are already eligible for benefits as a by-product of giving states grants to expand children's health insurance coverage. CBO estimates that those changes would cost $6 billion over the 1998-2002 period. Second, the budget proposes to repeal provisions in last year's welfare reform law that removed certain legal aliens and disabled children from the Medicaid rolls. Reinstating those beneficiaries would cost $7 billion over five years. Finally, other changes in Medicaid--including the effects on Medicaid of the Administration's proposals for Medicare--would increase costs by $3 billion over the 1998-2002 period.

Other Health Insurance Proposals. The President's budget would create three new federal grants to states for the purpose of expanding health insurance coverage. First, the budget would provide nearly $10 billion over the 1998-2001 period for programs providing health insurance to certain unemployed workers and their families. The budget includes no funding for those grants in 2002. (CBO also estimates that those grants would increase Unemployment Insurance costs by $1 billion during the duration of the grant program since the availability of health insurance will increase the average length of unemployment. That amount is not included in the $10 billion figure given above.) Second, grants of $750 million a year would be made available to expand health insurance coverage among children. As noted above, CBO estimates that the resulting outreach efforts would also generate additional costs for the Medicaid program. Finally, $25 million a year would be devoted to helping to establish health insurance purchasing cooperatives. In total, those three grants would cost $14 billion over the next five years.

Supplemental Security Income. The President's proposed changes to the Supplemental Security Income (SSI) program would exempt aliens who became disabled after entering the United States from the new restrictions on SSI and Medicaid benefits contained in last year's welfare reform legislation. In addition, the President proposes to extend from five to seven years the period that refugees and asylees may receive SSI benefits after being admitted to the United States. Because of the difficulty in establishing the onset of disability for immigrants and because determining disability for the aged is problematic, CBO estimates that nearly all aliens who would otherwise be barred from SSI disability benefits and two-thirds of the aged would be able to secure eligibility for SSI benefits under this proposal. The two proposals would increase SSI spending by $9 billion over the 1997-2002 period.

Education and Training. The President's major mandatory spending proposals in the education and training areas are a new initiative to provide interest subsidies to certain school districts so that they can increase their level of improvements to infrastructure and a temporary, five-year initiative to use the Americorps and college work-study programs to provide tutoring services to children in grades K-3. In addition, the budget requests mandatory appropriations of $0.8 billion in 1998, $1.0 billion in 1999, and $1.2 billion in 2000 for state and local governments to help long-term welfare recipients obtain jobs.

Electromagnetic Spectrum Auctions. The authority of the Federal Communications Commission (FCC) to conduct auctions of the electromagnetic spectrum expires in 1998. The President proposes extending and expanding the authority of the FCC to conduct spectrum auctions during the 1998-2002 period. OMB estimates that additional auctions would raise $36 billion over that period; CBO, however, estimates that those auctions would raise only $24 billion.

CBO expects that prices for additional spectrum will not hold firm in future auctions. Although CBO's estimated prices for the spectrum reflect adjustments for inflation, CBO expects that the price of FCC licenses will fall as more spectrum is brought to the market. Three factors support that conclusion. First, an increase in the supply of licenses will depress prices. Second, a regulatory trend permitting current licensees to put their spectrum to the most profitable use will reduce demand for new licenses. Third, new technologies that increase the information-carrying capacity of the spectrum will further depress demand. The differences in price largely account for the difference in savings estimates for the President's proposals.
 

The President's Alternative Spending Proposals

The President's budget briefly mentions an alternative set of proposals that are designed to result in a balanced budget estimate in 2002 under CBO's current economic and technical assumptions. The spending components of that plan would reduce outlays by an additional $14 billion in 2001 and $43 billion in 2002 relative to CBO's estimate of the budget's basic proposals (see Table 13).
 

The President's alternative spending proposals add four components to his basic spending proposals. First, it directs an across-the-board cut of 2.25 percent that would reduce Medicare spending in 2002 by $6 billion, Medicaid spending by $3 billion, and other nonexempt mandatory spending by $1 billion. Second, cost-of-living increases for federal benefit programs (excluding Social Security) would be limited to 0.46 percent in 2002 instead of the 3 percent projected under current law. CBO estimates that the proposal would save $3 billion in 2002. Third, a fee on television broadcasters would be assessed in 2002 in the amount of the short fall between the amount anticipated by the budget for certain spectrum auctions in that year and actual receipts; CBO expects that the fee must generate $9 billion. Last, the Administration proposes that discretionary spending levels be reduced in both 2001 and 2002 to wipe out the remaining deficit.

The Administration proposes that the magnitude of the supplemental discretionary spending cut equal the additional savings needed to eliminate the deficit in 2002 under CBO's current economic and technical assumptions. CBO estimates that discretionary outlays would need to be $20 billion below the levels of the President's basic proposals for 2002 to achieve the savings necessary to eliminate the deficit. Achieving that level of outlay reductions would require cuts in budget authority of $22 billion in 2001 and $23 billion in 2002. Those amounts represent a cut in budget authority of about 4 percent from the level of the President's basic policies, significantly larger than the 2.25 percent the Administration has suggested might suffice.

Total spending would still increase in 2001 and 2002 under the President's alternative proposals (see Table 14). Nondefense discretionary spending, by contrast, will decrease in nominal terms in each of those years.
 

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