Month: May 2023

An evaluation of the debt-limit deal

The debt limit deal is a big economic and political win for Republicans. It solidifies the Republican fiscal agenda and gives Republicans clout in future fiscal disputes including disputes involving Social Security. Moreover, the decision to schedule the next debt limit dispute at the same time as the presidential certification decision could help decide the next presidential election.


Introduction:  The Biden Administration is attempting to sell the debt limit deal as a valid compromise that maintains major achievements enacted in the first two years of the Administration.  The reality is that many of the most important Biden-era achievements have been or will be phased out and the continued existence of the debt limit will facilitate GOP domination of future fiscal debates including the response to automatic Social Security and Medicare benefit reductions under current law.

Moreover, the decision to schedule the next debt limit decision with the next presidential certification decision gives an additional lever to senators and congressmen who want to challenge the next presidential election result.

Major Aspects of the Debt Limit Deal:

The President of the United States and the Speaker of the House of Representatives have an agreement in principle on a deal that averts a default on the national debt.  The major features of the deal are as follows.

  • Suspends debt limit until January 1, 2025.
  • Flat non-defense discretionary spending in 2024 and 1.0 percent growth in 2025.
  • Protects spending on veterans health care and defense.
  • Expands work requirements for food stamps.
  • Claws back some Covid 19 funds
  • Cut funding for Internal Revenue Service contained in the Inflation Reduction Act.
  • Restarts student loan payments.
  • Maintains climate and clean energy.
  • Expedites an energy project in West Virginia and streamlines future energy project approval project.

Comments:

Comment One:  The Biden Administration has argued that the suspension of the debt limit until after the election is a win. Wrong!  The Republicans would have been foolish to threaten a debt default or government closure prior to the election.  The January 1, 2025, deadline in the middle of the certification requirement for the results of the election could provide the Republican an additional tool to overturn an election result.  It is difficult to understand why the Biden Administration would agree to time the next debt limit fight with the next presidential election certification decision.   

Comment Two:  Second-term honeymoons are brief, if they exist. The binding debt limit early in the first term of a second Biden Administration (should the President win reelection) would make it very difficult to achieve any of the President’s priorities.  This provision makes President Biden a lame duck in his second term even before his inauguration.

Comment Two:  The freeze in non-defense spending and the one-year 1.0 percent increase in non-defense spending is a significant real reduction in the current 5.0 percent annual inflation environment.

Comment Three:  An evaluation of the debt limit deal must account for the fact that it is occurring when many of the most important progressive priorities – the expanded earn income tax credit and additional health care subsidies have already been phased out or are in danger of being phased out. The lack of permanent progress on expanding and improving the ACA is especially startling.  The American Rescue Plan included a provision for short-term COBRA assistance instead of a major expansion of ACA insurance.  The expanded ACA premium tax credit will expire in 2025, when Republicans could demand its elimination in exchange for an increase in the debt limit.  The Covid-era Medicaid expansion has already been eliminated.   This deal does not include work-requirements for Medicaid and the Biden Administration has eliminated some Trump-era Medicaid work requirement.  However, the number of uninsured will likely increase in the next few years and will not return to pre-Trump levels. 

Comment Four:  The deal does not cut environmental tax credits, many of which benefit affluent households and could be prohibitively expensive.  The deal facilitates additional energy projects.  The deal also does not eliminate ethanol tax credits, which have, at best, a small positive environmental impact.  My view, expressed here, is that government subsidies, like tax credits for EVs, will not have a major environmental impact because these subsidies only impact a small fraction of household spending on energy and products that cause carbon emissions or pollution.  A comprehensive environmental policy requires a carbon tax and/or cap and trade regimes, policies that are currently not under consideration.

Comment Five:  The continued existence of a debt limit will give the Republicans the upper hand in future fiscal debates including the debates over the future of Social Security and Medicare.    The Republicans will be able to extract major concessions on Social Security and Medicare when the debt limit is binding and current law mandates automatic benefit reductions.  Go here for a discussion of projected automatic cuts to entitlement programs.

Comment Six:  The deal requires the restart of student loan payments but does not overturn the Biden Administration’s student loan discharge proposal.  This is a good deal for the Republicans if as expected the Supreme court rules the president rules the student discharge program is unconstitutional.  My preferred solution discussed here; the elimination of all interest payments for two years was never considered.

Five modifications to the Biden health care agenda

This post describes five policy changes, which would decrease the number of uninsured and underinsured, reduce financial exposure from high out-of-pocket medical costs, and help maintain continuous health coverage during employment transitions.

Introduction:

A previous post evaluated several of the Biden Administration’s domestic policy agendas, including the Administration’s proposals on health care and insurance, student debt and college costs, retirement savings, and the fiscal condition of Social Security.  

The evaluation of the Biden Administration’s record on health care found several persistent problems including a high number of uninsured or underinsured people, loss of insurance during economic downturns, and high levels of out-of-pocket costs leading to medical debt or decreased retirement savings have not been fully addressed.

This paper puts forward several new proposals to address these health insurance problems.

Five Health Care Proposals:

Proposal One:  Modify tax rules governing access to employer-based Insurance and state-exchange insurance:

Analysis:  Current tax rules and regulations result in around 156 million Americans obtaining health insurance through employer-based plans compared to around 16 million people who obtain health insurance through state exchanges.  The proposed changes facilitate greater use of state-exchange health insurance.  

New rules include:

  • Tax deductibility of employee benefits for 75 percent of the cost of state-exchange health insurance for each employee.
  • Modification of employer mandate to facilitate employer subsidies of state-exchange health insurance instead of firm-specific employer coverage.  All firms that pay 50 percent of employee costs on state exchanges would satisfy the employer mandate.
  • A premium tax credit similar to the existing premium tax credit to cover costs for workers without an affordable health insurance option.
  • Facilitate the purchase of retiree health insurance on state exchanges rather than through existing employer plans.

Advantages of new rules:

  • Proposal maintains tax-preferred employer payments for health insurance.
  • Proposal provides access to a wider range of state exchange policies allows workers to find a health plan that matches their needs.  Many workers with employer-based insurance have only one insurance option.
  • The use of state-exchange health plans allows workers to maintain the same health coverage during job transitions including periods of unemployment.
  • The automatic increases in the premium tax credit due to loss of income from the loss of job facilitate continuous health coverage when a worker becomes unemployed.
  • Greater use of state-exchange health insurance would make it more difficult for Republicans to initiate plans to weaken or eliminate state exchanges and other ACA innovations.

The possibility that a combination of employer-based and state exchange insurance markets facilitated through tax policy changes might lead to reduced disparities in insurance coverage and continuous coverage through job transitions was discussed here in this blog.

Proposal Two:  Modify the use-or-lose provision governing contributions to Flexible Savings Account.

Analysis: Under current rules, contributions to flexible savings accounts that are not used for qualified medical expenditures are forfeited by the taxpayer to the Treasury.  The proposed changes would allow the roll-over of unused fund to a tax-deferred retirement plan.

New Rules:  

  • Unused contributions to a flexible savings account will be automatically rolled over into either a 401(k) plan or IRA.  
  • The portion of the ACA that is rolled over into the retirement plan will be taxed as ordinary income.

Advantages:  

  • The proposal encourages greater use of flexible savings accounts, which will reduce the tendency for households to forego necessary health regimens and procedures.
  • The proposal adds additional retirement savings for workers and reduces the tradeoff between saving for retirement and savings for unanticipated health care costs.

Proposal Three: Replacement of tax deduction for contributions to a health savings account with a tax credit.

Analysis:  The current tax deductibility of contributions to health savings accounts provides greater benefits to high-income households than to low-income or middle-income households.

Potential New rules:

  • Create a tax credit equal to 20 percent of the annual contribution to a health savings account.
  • The tax credit will not be refundable.

Advantages:

  • The use of the tax credit will facilitate contributions to health savings accounts by low-income and middle-income people who are now less likely to contribute and may forego medical procedures and regimens due to lack of funds.
  • Refundable tax credits are plausible but monitoring costs would be high and Health Savings Accounts are probably not the best product for people without taxable income.

Go here for the literature on health savings accounts and high-deductible health plans.   It is possible that modification of flexible savings accounts as described in proposal two would be a more efficient approach. 

Proposal Four: Replace Short Term Health plans with a more comprehensive low-cost health insurance option.

Analysis:  Short-term health plans, which were expanded by executive order under the Trump Administration and remain in place provide suboptimal health coverage. Short term health plans often deny coverage for life-saving procedures, fail to cover many conditions including pregnancy and mental health conditions, and leave households with extremely large bills for short hospital stays. The replacement of short-term health plans with viable comprehensive health insurance would eliminate these situations.

Proposed New Rules:

  • A new health insurance product consisting of a private health insurance plan with an annual limit on total health care expenditures and automatic access to Medicaid once health expenditures reach their annual limit is created.
  • Private component of new health insurance product would be priced based on age like current state-exchange policies.
  • Private component of nee health insurance product would cover all essential health benefits like current state exchange health plans.  Reasonable deductibles and coinsurance obligations would be allowed and encouraged. 
  • Current short-term health plans which allow for underwriting based on health status, deny essential health benefits, and allow for exclusions based on previous health conditions would be prohibited.

Advantages:

  • The replacement of short-term health plans with this new low-cost private/public health option would reduce the number of people who were uninsured or underinsured.
  • The private/Medicaid option provides access to more doctors and specialists than a pure Medicaid option.
  • The private/Medicaid combination could prove to be less expensive to both federal and state taxpayers than the pure Medicaid option.
  • The premiums on the private health plan should be reasonable because of the annual limit and cost sharing obligations.  The lower premiums would reduce the loss of tax expenditures to the Treasury from government health insurance subsidies.

Go here for a short post on the problems with short-term health plans.

The idea of combining private insurance with an annual expenditure limit with automatic access to Medicaid for patients that exceeded the annual limit is conceptually similar to rules governing access to Medicaid benefits for nursing homes.  The proposal was outlined in this paper found at SSRN.

Proposal Five:  Facilitate necessary out-of-network treatments of difficult to treat conditions.

Analysis:  The passage of the Affordable Care Act (ACA) increased the need to control health care costs and insurance premiums.   Narrow network health plans are a popular option on state exchanges for people and plan sponsors seeking to reduce premium payments.  However, access to health services in narrow-network plans is often limited, especially in plans with few specialists and a narrow geographic scope. 

Proposed Reforms:

  •  Improved network adequacy regulations,
  • Expanded dispute regulation procedures to cover all medically necessary out-of-network procedures,
  • Additional government subsidies for certain high-cost medically necessary health care procedures

Advantages:

  • All three approaches have merit but the improvements in network adequacy and the expanded dispute resolution will increase costs to the insurance plan.
  • The proposal to expand existing state-level network adequacy regulations might be difficult in states with a relatively small number of providers.
  • The proposal for expanded dispute regulations procedures could be implemented through modification of the No-Surprises Act.
  • An additional limited government subsidy for high-risk high-cost cases would reduce insurance costs and premiums.

This issue could partially be addressed by expanding the No-surprises act but I argue here that additional subsidies for high-cost cases, which require an out-of-network specialists would also be beneficial.

Find more details on these policy proposals in a paper A 2024 Health Care proposal.  

An assessment of President Biden’s domestic policy record

This memo evaluates the Biden Administration’s record on policies impacting health care, student debt, retirement savings, and Social Security. The analysis presented here supports the view that progress has been limited and change is needed.


Introduction:   The Biden Administration can point to several legislative achievements and executive orders. However, actual long-term permanent progress in several areas including expansion and improvements in health coverage, reduction of student debt and the cost of college, increased incentives for retirement savings, and efforts to stabilize the Social Security and Medicare Trust funds has been small.

Health Care:

  • The number of uninsured is higher than in 2016 and will increase due to the phase out of the COVID era Medicaid extension.
  • The improvement in the state-exchange health insurance premium tax credit, enacted during the Biden Administration, is scheduled to phase out in 2025.
  • The continued high reliance on employer-based insurance will result in a rapid increase in the number of uninsured once an economic downturn occurs.
  • The long-term trend towards households having to pay an increased share of out-of-pocket health care costs persists and has not been addressed.
  • The growing use of high-deductible health plans has forced more Americans to reduce retirement savings to fund health savings accounts.
  • Many Americans remain reliant on short-term health plans, which do not insure people with pre-existing conditions, do not assure access to health care for essential health benefits, and do not protect household from large financial losses.  The Biden Administration has not rolled back the Trump-era expansion of short-term health plans.
  • Many Americans with narrow-network health plans do not have sufficient access to specialists and top hospitals.

This memo reviews some of the limitations of the Biden Administration’s health care record and proposes some modifications.

Student Debt and College Costs:

  • The one-time debt discharge proposed by the Biden Administration may not be upheld by the Supreme Court for a variety of reasons.
  • A one-time student debt discharge does not alter the trajectory towards higher student debt levels and higher college costs.
  • The payment shock from the termination of the COVID-era student loan payment freeze will reduce consumer spending and could facilitate a recession.
  • Low levels of on-time graduation remain an important factor in high student debt burdens.
  • Many student borrowers leaving school prior to the completion of a degree have a difficult time repaying their student loans.
  • The Biden Administration proposal for expanded Income-Driven loans is complex and less effective than interest rate reductions.
  • Proposals for increased assistance for students at two-year college are useful but could reduce access to four-year schools by low-income students.

Go here for a discussion of Biden-era student debt proposals.

Retirement Savings:

  • Recently enacted improvements to 401(k) plans in the Secure Act 2.0 do little to assist people at firms that do not offer a 401(k) plan.  
  • It would be useful to create an automatic savings option for workers at firms without a 401(k)-plan similar to the automatic 401(k) savings option.
  • An extremely high percentage of young adults have disbursed funds from their retirement plans early in their career.
  • Incentives for people to disburse funds in a 401(k) plan prior to retirement remain high and pre-retirement 401(k) disbursements are unlikely to fall.
  • The recently enacted automatic contribution rule may steer some workers into 401(k) plans even if a Roth IRA or some other savings vehicle is a better option. 
  • Many 401(k) plans have limited investment options and high administrative fees. 

This essay  describes ideas on how to expand private retirement savings and deal with the impending short falls in the Social Security and Medicare trust funds.

Go here for more details on why IRAs should be expanded.

Recent legislation on private retirement savings described here appears to do more for the investment industry than for savers.

Social Security:

  • A high percent of workers nearing retirement with low levels of retirement savings will be highly dependent on Social Security during retirement.
  • Projected shortfalls in the Medicare and Social Security trust funds would lead to automatic benefit cuts in 2031 and 2033 respectively under current law.
  • No one in Congress is working on a bipartisan solution to the impending Social Security and Medicare trust fund shortfalls.

This memo describes the linkage between Social Security reform and efforts to expand private retirement savings.  Work summarizing different Social Security reform proposal will be available shortly.

Concluding Remarks:  The case for renominating Biden largely hinges on the view that the President is the best candidate to defeat former President Trump.  However, as discussed here I do not believe former President Trump will be the Republican nominee in 2024 and President Biden does not match up well against a younger Republican challenger, especially one willing to break away from parts of the Trump agenda.

The 2024 election should be about how we move forward as a nation.  A candidate should talk about how issues like how we can change insurance rules so people don’t lose their health insurance during job transitions, how we can lower student debt burdens for the people who are most likely to experience payment problems, how we can assist workers in saving more for their retirement and how we can improve the financial condition of entitlement trust funds prior to the implementation of automatic benefit cuts.  I have reached the conclusion that Governor Whitmer or Governor Inslee are better able to move the country forward on these issues than our current president.