Last month, as Congress and the President resolved the FY2011 federal budget – six and a half months after the start of the fiscal year – their proclamations set the stage for next fall’s FY2012 budget showdown that will focus the nation again on how it manages, among other things, health care’s rising costs.

The tip of the iceberg is the Patient Protection and Affordable Care Act (PPACA), the controversial package of health care legislation that is now moving toward a 2012 determination of its constitutionality by the Supreme Court.

The rest of the iceberg came into focus last month when House Budget Committee Chair Paul Ryan (R – WI) announced the Republican budget proposal for FY2012 (which begins October 1, 2011). It intends to reduce federal spending over the next decade by $4 trillion. President Barack Obama followed a few days later with a different proposal that would cut $4 trillion over the next 12 years.

Both Ryan and Obama accept that cutting the federal deficit is a vital objective. However, they differ sharply on how that should be done. The key differences are in three areas: Medicare, Medicaid and taxes.


Where Do Your Taxes Go?

All interactive calculators oversimplify the budget with their arbitrary groupings. This one is from the Third Way, a think tank of former Clinton Administration budget officials (0.0 means the allocation is less than half of a tenth of a percent of the total budget). At the site, you can enter the amount of your taxes and see how much you contribute to these categories of the federal budget.

Social Security20.4
Low-Income Assistance9.3
Unemployment Compensation4.7
Veterans’ Affairs3.1
Law Enforcement & Homeland Security2.4
Management Federal Employees & Buildings1.4
Health (not Medicare or Medicaid)2.0
Environmental Protection & Natural Resources1.0
Space & Science0.7
Foreign Aid0.6
Housing & Community Planning0.6
Social Services0.6
Workplace Safety & Rights0.5
Diplomacy & Embassies0.4
Statistics & Weather0.3
Trade & Economic Development0.3
Native Americans0.2
Post Office0.1
Arts & Culture0.1
District of Columbia0.0
White House0.0
Bailouts, Currency & Financial Regulation-3.7

Because many Laborers care for elderly parents or are nearing retirement themselves, they may already be familiar with Medicare. It is an entitlement program, meaning that, by law, citizens have a right to benefits under the program. In this case, the benefit is government-financed health care for those over 65, funded by a 2.9 percent payroll tax that is paid half by employers and half by employees. The specific range of benefits is designated by law and regulation, and payments for services go directly to the health care provider.

Because the cost of health care continually rises (health care inflation), government obligations under Medicare also rise, putting strain on the federal budget. According to the President, these rising costs will be constrained by a variety of wellness benefits that are mandated by PPACA. He asserts that the savings will amount to $500 billion a year by 2023.

Critics doubt the President’s projections, and Ryan’s budget proposal would constrain Medicare liability through a much different approach. He would defund PPACA, saving $725 billion that the act would use to help low-income Americans acquire health insurance, and he would restructure Medicare. Under his proposal (which would exempt anyone already age 55 or older), seniors would receive a government voucher, and they would buy their health insurance in the private market. Ryan asserts that competition among insurers for this vast, new market would drive down the cost of insurance, but critics raise other concerns. They point out that value of the vouchers would be linked to the cost-of-living (general inflation – currently, very low) so whatever savings Medicare achieves would be gained by passing the difference between the two inflation rates on to seniors. In his criticism of the Ryan plan, the President said he would never endorse such cost shifting.


Medicaid is health insurance for low income people, run by the states but mostly funded by the federal government. Under current law, during a recession such as today’s, when more people lose their livelihoods and need health care assistance, federal transfers to the states increase. Ryan’s plan would make Medicaid a block grant program, meaning that the federal contribution would be predetermined, with no increase possible without specific legislation. That would cap federal responsibility but put more burden on the states or the Medicaid recipients themselves. Without going into specifics, the President rejected Ryan’s approach, saying he would not balance the budget on the backs of people without financial resources or political clout in Washington.


As a budget is a reconciliation between money in and money out, it can be balanced by increasing revenue as well as cutting spending. Taxes are the government’s revenue source.

Ryan favors an overhaul of the tax system that would consolidate brackets and reduce some present rates while eliminating certain deductions and other mechanisms that currently allow some people to lower their tax obligations. The highest tax rate would drop from 35 to 25 percent. His critics question whether reduced rates for the wealthy are in the nation’s best interest. In contrast, the President said he would raise taxes on Americans making over $250,000 from 35 to 39 percent (by letting the Bush-era tax cuts expire, as scheduled, in 2012) to increase overall revenue and lessen the need for cuts in spending, most of which, he asserts, are important for jobs and the economy. He also favors rewriting the tax code to eliminate some currently-legal tax avoidance.

Discretionary Spending

Medicare, Medicaid, Social Security and interest on the national debt come to about 68 percent of the total budget. The remaining 32 percent constitutes “discretionary” spending, the only portion of the budget which Congress can adjust from year to year. Within this, about two-thirds is for defense spending (see sidebar for comprehensive list). For the first time in memory, both Republicans and Democrats are proposing some cuts in Defense, $400 billion by Ryan and twice that by Obama. Still, in the big picture of things, this is not much. And while both parties squabble over other possible discretionary cuts, significant fiscal reform cannot come mainly from this sector.

Thus, the FY2012 budget battle is shaping up as a kind of health care reform redux, tethered this time to a sharpening debate over fiscal reform. The two sides appear diametrically opposed on PPACA, Medicare, Medicaid and taxes. Like the first round in 2009-2010, this round will test the nation’s stamina and creativity…and its political process.

[Steve Clark]