Paying for A Fix to the VA Health System

Now that both chambers of Congress have passed bills aimed at improving the Department of Veterans Affairs (VA) health system, they will need reconcile their differences, likely via conference committee. Although both bills would allow the VA to contract with private health care providers to help address the backlog, the House bill would require the Office of Management and Budget (OMB) to estimate costs before appropriators give their approval, while the Senate bill would give the VA unlimited mandatory spending authority (in addition to a host of other provisions).

We warned yesterday that the Senate approach, as written, could be quite expensive. CBO's initial estimate suggested that just one part of the bill would cost $35 billion through 2016, and could cost $500 billion over the next decade if extended permanently. Instead of an uncapped mandatory appropriation set at "such sums as are necessary," we suggested that the bill should either leave it to the appropriators to decide spending levels or else offer a fixed appropriation.

Whether through a discretionary appropriation, a mandatory appropriation, or an uncapped entitlement, Congress is likely to increase VA health spending. Given the significant backlogs facing our veterans, this new spending may indeed be warranted. However, any new spending must be fully offset elsewhere in the budget, both for fiscal reasons and to reflect a real commitment to this program. If something is worth doing, it is worth paying for, and failing to do so leaves that program more vulnerable.

It is encouraging that many Senators and House members are talking about offsets, which could occur either within the appropriations process or by abiding by pay-as-you-go budget rules. They may also want to reduce the scope of the new program by targeting it more directly to those veterans affected by the backlog.

Below is a list of potential options to offset new VA spending. The discretionary options would make room under the current caps to pay for new discretionary spending. The mandatory and revenue options could be used to pay for any new mandatory spending under the bill, or to increase the discretionary caps if Congress decides such adjustments are necessary to increase VA discretionary funding.

Potential VA Funding Offsets
Provision Ten-Year Savings
Discretionary Spending Options
Making working-age military retirees ineligible for TRICARE Prime* $60 billion
End VA enrollment for groups with conditions less related to military duty* $25 billion
Cap basic pay raises for military service members at the growth of the Employment Cost Index minus 0.5% $25 billion
Increase enrollment fees, deductibles, and co-pays in TRICARE* $20 billion
Mandatory Spending Options
Eliminate concurrent receipt of retirement pay and disability compensation for disabled veterans $120 billion
Restrict exchange subsidies to income below 300% of the poverty line (instead of 400%) $110 billion
Restrict cost-sharing coverage for TRICARE for Life and Medigap $90 billion
Delay individual mandate enforcement until 2017 $60 billion
Bundle Medicare payments for inpatient and post-acute care $45 billion
Reduce Medicare coverage of hospital bad debts $30 billion
Exclude disabilities unrelated to military duty for veterans' disability compensation eligibility $25 billion
Reduce veterans' disability compensation to account for SSDI payments $25 billion
Use more accurate measure of inflation for federal retirement cost-of-living adjustments $25 billion
Restrict VA's individual unemployability benefits to disabled veterans below Social Security age $15 billion
Use highest five instead of highest three earning years to determine pensions $5 billion^
Extend reduced pension for certain veterans in Medicaid nursing homes $2 billion
Increase fees for guaranteed loans $2 billion
Extend round-down of cost-of-living adjustments $2 billion
Revenue Options
Eliminate exclusion of benefits and allowances for military personnel $130 billion
Eliminate exclusion of veterans' benefits $90 billion
Implement a 0.1% surtax on all wages
$85 billion
Enact a 30% minimum tax on millionaires ("Buffett Rule") $70 billion
Limit the value of the health insurance exclusion to 28 percent $70 billion
Close S corporation reasonable compensation loophole $40 billion
Start health insurance Cadillac tax two years earlier (2016) $15 billion
Tax carried interest as ordinary income $15 billion

Source: CBO, JCT, OMB, CRFB calculations
Note: Discretionary spending options can only be used to offset other discretionary spending unless spending caps are also lowered.
*Option also affects mandatory spending and revenue, whose effects are included in the total.
^Includes savings from both civilian and military retirement. Savings from just military retirement are $2 billion.

Importantly, the more Congress decides to increase spending, the tougher the choices will be to pay for these costs. For example, if Congress decided to enact the Senate bill on a permanent basis, it might need to identify more than $500 billion in offsets – which could be done, for instance, by increasing Medicare Part B & D premiums from 25 percent to 40 percent of costs, fully repealing the individual mandate in the ACA, or limiting the value of major tax preferences to 28 percent.

Taking care of our veterans should be among this country's highest priorities. Nonetheless, prioritizing is about making choices – and Congress must weigh the costs of new spending against alternatives, and reduce lower priority spending in exchange. The first step is to make decisions about what to spend, rather than providing the VA with a blank check. The next important step is to make sure all new costs are paid for so we aren't worsening our already unsustainable national debt. To budget is to choose, and we should choose to help our veterans responsibly.