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Witness Testimony of Richard Kogan, Center on Budget and Policy Priorities, Senior Fellow

Mr. Chairman, Mr. Buyer, thank you for inviting me to testify on how health care for veterans should be funded in the future.  Let me start by acknowledging that I am not an expert on health care, much less veterans’ health care.  I am, however, an expert in the congressional budget process; the budget process was one of my portfolios during the 21 years I served on the staff of the House Budget Committee.

The question before this Committee is whether the amount of funding the Veterans’ Health Administration receives each year is more likely to be adequate and predictable if the funding is provided by the annual appropriation of discretionary budget authority – as is currently the case – or instead by a mandatory or entitlement payment of some kind. 

My answer is that we simply do not know for sure.  This answer is intended as a caution: a yellow light, not a red light.  Caution is advisable because of the law of unintended consequences.  Let me explain.

Under the current budget process, veterans’ health care must compete against a wide range of other discretionary programs – education, transportation, natural resources, scientific research, the Pentagon, the IRS, etc.  The total amount of funding available for all these discretionary programs is established annually in a congressional budget plan, which can decrease, freeze, or increase that dollar limit each year as it sees fit.  (A president, likewise, can freely advocate decreases, freezes, or increases.)

Converting veterans’ health funding into an entitlement is intended both to increase the amount of health care funding and to shield it from the competition I have just described.  But there is always competition for scarce resources – scarce tax dollars – and congressional budget rules are designed to mediate that competition.  Here’s how budget rules would apply if veterans’ health were converted into an entitlement.  In such a case, current budget rules would prohibit Congress from ever enacting legislation to make that entitlement payment more generous – unless Congress simultaneously made offsetting cuts in some other entitlement, such as Medicare or farm price supports or unemployment compensation or military retirement or even veterans disability payments, or unless Congress raised an equal amount of taxes.  This is the Pay-As-You-Go Rule. 

Let me play out some of the ramifications of the Pay-As-You-Go Rule. 

  • First, converting veterans’ health care into an entitlement would by itself violate the Pay-As-You-Go rule, regardless of the kind of entitlement or its funding level – unless of course you cut some other entitlement by an equivalent amount or raise taxes by an equivalent amount.  I assume you will not eliminate the Compensation and Pensions programs in order to establish a health care entitlement, nor should you; it is not in your jurisdiction to raise taxes or cut entitlements created by other committees; and it is unlikely that the Ways and Means Committee will volunteer a tax increase to cover the cost of the veterans health care entitlement.

Note that the elimination of discretionary funding for veterans’ health care does not count as an acceptable “offset” for the creation of entitlement funding.  And even if the Budget Committees and the Leadership were willing to bend the rules and allow the elimination of discretionary funding to count as an offset, that offset would only cover health care funding at levels in the existing baseline, which grows only with inflation, about 2% per year; you’ve done a lot better than that under the existing system.

  • Second, because the Pay-As-You-Go Rule puts high barriers in the way of any future enhancement of the entitlement formula you initially establish, you had better be sure that the formula is adequately generous to begin with.  (But as I have just noted, establishing a generous entitlement formula would also violate the Pay-As-You-Go rule). 
  • The proposal advocated by the Partnership for Veterans’ Health Care Budget Reform, embodied in HR 2514, certainly qualifies as a generous formula, so let’s imagine for the sake of argument that you are granted a one-time PAYGO waiver in the House and Senate, have the votes to overcome presidential opposition, and so enact that bill.  This leads to my third point: the Congressional Research Service, the Congressional Budget Office, the Government Accountability Office, and others will issue studies comparing the relative generosity of the new veterans’ health entitlement to, for example, the relative stinginess of Medicaid, which is the stingiest of all health care payers.  The governors unanimously and ardently desire greater federal matching payments for Medicaid, and may look to reductions in the new veterans’ health entitlement as a source of PAYGO offsets.

Or CRS, CBO, and GAO might compare the generosity of the veterans’ health entitlement with the stinginess of the Children’s Health Insurance Program – SCHIP – whose current funding cap is so tight that the program could lose 15 % of its enrollees this coming year simply for lack of funding, and whose proposed cap is so tight under the President’s budget that the number of children served by SCHIP will actually fall by 840,000 by 2012 at the same time that the number of uninsured children rises. 

And there are pressures to increase Medicare, as well – to provide a “physicians update” that would avoid the scheduled 10% cut in the Medicare reimbursement rate for physicians, or to help fill in the so-called “doughnut hole” in the prescription drug benefit, just to name two.

Most significantly, there is always pressure to cut taxes.  Under the Pay-As-You-Go rule, the standard against which entitlement increases or tax cuts is measured is current law.  Thus, any extension of the Bush tax cuts in whole or in part is a tax cut relative to current law, because those tax cuts were enacted as temporary provisions.   Extending any of the Bush tax cuts thus entails finding offsets – acceptable alternative tax increases or entitlement cuts.  So if you have succeeded in establishing a veterans’ health care entitlement formula that is as generous as the advocates hope, it will surely become a tempting target for those with other priorities, including those hoping to extend some or all of the Bush tax cuts.

In summary, under current rules, veterans’ health care competes for funding each year against other discretionary programs within a overall dollar limit that generally grows from year to year, sometimes by noticeable amounts.  It competes within the Appropriations Committees, whose members feel an institutional need to support each of the 12 appropriations bills.  Admittedly there is also competition among the 12 subcommittees, but the ethos of the Appropriations Committees limits the turf battles somewhat; it is considered wrong to lead fights against other appropriations bills in favor of your own.

If veterans’ health care becomes an entitlement, however, it will be on its own; each other committee could becomes a predator looking to the “overly generous” veterans’ health care entitlement as a source of possible PAYGO offsets.  There is no institutional loyalty that would mitigate such turf battles.  And potential predators would include interest groups and advocacy communities that are at least as powerful as those against whom veterans’ health now competes – for example, the health insurance lobby or especially the advocates of tax cuts.

As I see it, you would get a bigger boat to sail in, but by moving from the discretionary ocean to the Pay-As-You-Go ocean, the water may become deeper, your voyage stormier, and the sharks bigger and hungrier.

Now let us look beyond the Pay-As-You-Go rule.  Experts who examine overall budget trends are very concerned about the future; the budget situation starts to deteriorate significantly in roughly two decades.  The Comptroller General, the Director of CBO, experts at the Brookings Institution, nonpartisan budgeting groups such as the Concord Coalition, the Committee for Economic Development, the Committee for a Responsible Federal Budget, and my own employer, the Center on Budget and Policy Priorities, have all warned repeatedly about the unsustainability of existing budget policies over the long term.  Put simply, relative to a simple extension of existing policy, taxes will have to be raised or budget programs will have to be cut (or some combination of the two), and by very substantial amounts.  Our analysis shows that to get us through 2050 without increasing the ratio of debt to the economy, we would need to raise taxes or cut programs immediately, by an amount equivalent to 18 percent of projected revenues.  And the longer we delayed, the larger the tax increases or program cuts would need to be.

Respected columnists who popularize this grim long-term outlook – people such as David Broder or Robert Samueleson – habitually refer to the problematic long-term budget picture as an “entitlement problem.”  This is probably intended as a useful simplification, but I view it as a rhetorical trap. The Comptroller General sometimes falls into this trap, as well.  One effect of this simplified style of discourse is that it leads to simplistic and destructive so-called solutions.  One such example is the “entitlement cap” included in the Family Budget Protection Act, designed by Representative Jeb Hensarling and endorsed by the Republican Study Committee.  Most simply, this proposal would establish a statutory cap on the aggregate amount of entitlement expenditures each year; the cap would be so tight that very substantial cuts would be required in entitlements each year to avoid a breach; and if Congress did not voluntarily choose which entitlements to cut and enact those required cuts each year, then almost all entitlements would be automatically and permanently cut across-the-board.  Each successive year, the hunt for entitlement cuts would begin again.

I should add that the procedures under which Congress would voluntarily make the required entitlement cuts would presumably be the existing congressional budget process.  If entitlement cuts were needed to meet the Hensarling entitlement cap, the congressional budget resolution would surely contain a “reconciliation directive” in which selected committees, including this Committee, would be directed to cut entitlements in their jurisdiction by specified amounts.  By tradition, if a Committee doesn’t meet its reconciliation target, the Budget Committee makes the cuts instead.  All the cuts from each of the committees are then combined into an omnibus “reconciliation” bill, managed by the Budget Committees.  In the Senate, this reconciliation bill is protected from filibuster.  In short, in a world of entitlement caps, you run two great risks: you may lose control of your own programs, and in any case, the tide of required cuts may sweep over even a very popular program such veterans’ health care; cuts in the veterans’ health entitlement might become just a single title in an omnibus, fast-track, must-pass bill.

As I said, discussion of an “entitlement crisis” is over-simplified and proposals such as entitlement caps are misguided and simplistic.  But even the most sophisticated discussion of the long-term budget picture will focus, very appropriately, on the rising cost of health care.  After all, innately rising health care costs, more than the recent increase in the severity of the medical problems that veterans suffer, are the main reason that increased funding is needed.  According to our projections, if it were not for the fact that health care costs are rising faster than GDP throughout all of the society, there would be no long-term budget problems. The mere aging of the population is not by itself sufficient to overwhelm the budget.  It is health care costs, not demographics, that are already putting the US budget, the VHA’s budget, state budgets, and the budgets of businesses and families, under strain.

In this context, the current treatment of veterans’ health care might arguably provide the program with a sort of haven.  If an “entitlement commission” is established, or if the leaders of Congress sit down with a new President to negotiate a mega-deal including tax increases and entitlement cuts, the fate of discretionary programs might be viewed as a less important backwater.  Surely new discretionary caps will be negotiated, but a discretionary veterans’ health program will not be specifically targeted and will remain free to compete with other discretionary programs.  A veterans’ health entitlement, however, will be on the negotiating table along with Medicare, Medicaid, and SCHIP, and along with cuts in other entitlements and tax increases.  The funding for this veterans health care entitlement would be decided by the negotiators.

CONCLUSION:  Entitlement status for veterans’ health care on its surface appears likely to provide a substantial funding increase and a guaranteed and predictable level of annual funding.  This is what you strive for.  But 1) such a status will be difficult to achieve since it violates the House and Senate Pay-As-You-Go rules; 2) those rules will increase the importance of achieving a big increase in funding right from the start; 3) paradoxically, such a big increase could quickly make veterans’ health funding a target for “offsets” for other committees with PAYGO problems; 4) such PAYGO problems are certain to arise shortly, if only because many people desire that at least some of the Bush tax cuts be extended past their scheduled expiration date in 2010; 5) the long-term budget picture is sufficiently problematic that significant deficit reduction will need to be enacted in the future; 6) the Congressional Budget Act includes a special “reconciliation” process that is particularly effective in targeting entitlements for cuts and over which individual entitlement committees have little or no control; 7) over-generalized talk about an “entitlement crisis” can lead to wrongheaded ideas like entitlement caps and automatic entitlement sequesters; and finally, 8) any major bipartisan deficit reduction negotiation is bound to focus, quite appropriately, on health entitlements.  Given all this, I am sure that enactment of an entitlement formula for funding veterans health care will not guarantee predictable funding each year – at the least, you will have to fight off competitors looking to you for offsets.  I suspect that entitlement status, in the unlikely event that you could achieve it, will provide more funding than you would otherwise have gotten, but for only a limited number of years: eventually, budget forces will place all health care entitlements squarely in the cross-hairs of high-ranking leaders negotiating blockbuster budget deals.

One final thought: the long-term pressure on federal programs comes because of a threatened explosion of federal debt.  A debt explosion cannot be allowed, unless the US aspires to become a large banana republic.  Advocates of federal programs, including the Partnership for Veterans’ Health Care Budget Reform, must also become advocates of the taxes needed to finance these programs.  Even if there were no Pay-As-You-Go rule, simple arithmetic and elementary economics demands this outcome.  If you desire effective federal programs but are unwilling to pay for them, then you ultimately won’t get them.  You cannot be pro-veteran and anti-tax, at least not using honest arithmetic.