Proposed Spending Cuts

by Chris Edwards

September 2010

The Department of Health and Human Services encompasses a giant and sprawling collection of agencies and programs. Its 2010 budget of $869 billion represents almost one-quarter of total federal spending. The department operates more than 400 different subsidy programs, including the massive and fast-growing Medicare and Medicaid programs.

The projected growth in Medicare and Medicaid will create a national fiscal disaster in coming decades unless the programs are restructured and cut. Unfortunately, the 2010 health care law expanded federal health spending and will likely make America’s looming fiscal crisis worse.¹

Eventually, policymakers will have to control rising federal debt, and that means they will have to downsize HHS programs. Medicare should be converted to a system based on individual vouchers and competitive coverage options. Medicaid should be turned into a state block grant with a fixed level of federal funding. The 2010 health care law should be repealed and other HHS programs should be terminated, as listed below.

Medicare and Medicaid

Rep. Paul Ryan (R-WI) has proposed a detailed plan to convert Medicare and Medicaid into consumer-directed health systems by replacing current programs with tax credits and vouchers.² Rather than the government reimbursing doctors and hospitals, the government would provide payments directly to individuals, who would purchase health insurance in private markets. The Ryan plan incorporates refundable tax credits for all Americans under age 65 and vouchers for the elderly and low-income populations. The budget effects of the proposal were examined by the Congressional Budget Office, and so the plan provides a useful illustration of the cost savings possible from market-oriented health reforms.³

The Ryan plan would repeal the current tax exclusion for employer-provided health insurance and replace it with a refundable tax credit of $2,300 per adult, $1,700 per child, and a maximum of $5,700 per family. The tax credit would be used to cover the costs of either individual or employer-based health insurance for people under age 65.

Individuals age 65 and over would purchase private health insurance with the aid of a federal voucher. Individuals with lower incomes would purchase private health insurance with the aid of the federal tax credit and a voucher. The reforms would essentially convert Medicare and Medicaid from defined benefit to defined contribution plans. That would allow policymakers to directly restrain program costs without having the government ration health care services.

If individuals receiving tax credits and vouchers purchased health insurance costing less than the federal payment, they would put the excess in a tax-free medical savings account. If individuals purchased an insurance plan costing more than the federal payment, they would chip in the extra. Either way, individuals would be encouraged to make efficient purchasing decisions.

To restructure Medicare, the Ryan plan would provide retirees with a voucher averaging $11,000, which is the current average Medicare spending per beneficiary. The reform would only affect people who are age 55 and younger today. When those individuals start reaching age 65 after 2020, they would receive the Medicare voucher instead of benefits under the current program structure.

The Medicare voucher would grow in value after 2010 based on the average growth rate of general inflation and medical inflation. The dollar values of the vouchers would be adjusted to reflect the age of a beneficiary, income level, and health status. Poorer and sicker persons would receive higher subsidies. The low-income elderly under the Ryan plan would receive an additional payment to their medical savings accounts to cover out-of-pocket health expenses.⁴

To restructure Medicaid, the Ryan plan would provide low-income individuals with both a refundable tax credit and a voucher to purchase private health insurance. People below the poverty line would receive a $5,000 voucher, while those with incomes between the poverty line and twice the poverty line would receive a smaller voucher amount. State taxpayers—who currently pay a portion of the costs of Medicaid—would pay a portion of the costs of the new Medicaid vouchers.

An alternative approach to reforming Medicaid would be to convert it to a block grant for the states. The states would receive a fixed grant from the federal government with few strings attached, allowing them to experiment with more efficient ways of delivering health subsidies to low-income families. This approach is probably preferable to the Ryan voucher approach because it would likely result in less federal micromanagement of state health care markets and more state innovation.

However, both the voucher and block-grant approaches to reforming Medicaid would create strong incentives to improve efficiency in health care markets, and both reform approaches would allow federal policymakers to directly clamp down on explosive Medicaid spending growth.

Other HHS Spending

Aside from Medicare and Medicaid, HHS operates a huge array of health and nonhealth programs. Essays on this website describe the problems with some of these programs and the advantages of terminating them. As Medicare and Medicaid spending expand, taxpayers will be less able to afford funding all the other HHS subsidy programs.

Table 1 lists HHS programs aside from Medicare and Medicaid that could be terminated. These programs have one thing in common: they are all state grant programs. The federal government raises the money from taxpayers who live in the 50 states and then dispenses it back to the states to administer these programs. That roundabout way of financing government programs makes no sense. Why don’t the states just fund their own programs and cut out the inefficient middleman in Washington?

Elsewhere I have examined why federal grants to state governments are an ineffective and bureaucratic way to try and solve society’s problems.⁵ For example, an authoritative HHS report on Head Start in 2010 conceded that the program produced few if any long-term benefits to participating children.⁶ The HHS activities listed in Table 1 that are worthwhile would be better handled by state and local governments or the private sector.

The proposed terminations in Table 1 would save taxpayers $81 billion annually. Even with these cuts, HHS would still spend about $61 billion annually aside from Medicare and Medicaid. Remaining HHS activities would include the Centers for Disease Control, the National Institutes of Health, and the Food and Drug Administration. These agencies could probably use reforms as well, and thus the cuts in Table 1 are not the only possible reforms to the HHS budget.