One of West Virginia Senator Joe Manchin’s consistent positions in recent months has been that a revised Build Back Better (BBB) measure should cut future budget deficits, preferably by a sizeable amount. At one point he was calling for $500 billion in reduced federal borrowing over the coming decade compared to current baseline projections. It is notable, therefore, that with all relevant factors taken into account, the bill he now may support could increase federal borrowing in the future rather than reduce it. Further, it is certain to increase federal borrowing in 2023 and 2024, and thus exacerbate the nation’s immediate inflation problem.
Manchin’s push for deficit reduction has been laudable, even if he now seems to be losing the fight. He correctly notes that inflation is the nation’s most pressing economic concern, and new legislation which narrows the excess of spending over tax receipts might help ease price pressures.
The problem comes from the translation of his wishes into an actual bill.
While the deal he is said to have struck with Senate Majority Leader Chuck Schumer remains a moving target, there is enough information in the public domain to piece together its likely budgetary effects. A fair reading points to an ambivalent result, at best.
The bill’s most significant provisions relate to the pricing of prescription drugs. The Senate Finance Committee has posted online the results of a months-long negotiation among key Democrats centered around new federal authority to set prices for products prescribed for Medicare beneficiaries. These provisions are likely in their final form absent modifications required by the Senate’s rules for considering budget-related legislation.
According to the Congressional Budget Office (CBO), the emerging plan would reduce the federal budget deficit by $288 billion over ten years, but 98 percent of the savings would occur after 2024. The fiscal benefits are also overstated because much of it — $122 billion, or more than 40 percent of the total — is from a provision prohibiting the implementation of an executive branch rule that is unlikely to ever take effect anyway. In other words, this is savings on paper only and would not ease inflation pressures even if it was a real offset.
The rulemaking in question dates back to the final weeks of the Trump administration and concerns drug rebate payments from manufacturers to pharmacy benefit managers (PBMs). Trump officials argued these payments only line the pockets of middlemen without cutting overall costs, but the agencies responsible for producing federal estimates disagreed. Both CBO and Medicare’s actuaries estimate the rule, if implemented, would increase federal spending because the foregone rebates would exceed the reduction in list prices for the affected drugs.
When the Biden administration took office, the rule was already in limbo because of litigation initiated by the industry. It also was clear that the incoming officials were far less enthusiastic about it than their predecessors. Just days after the inauguration, they decided to delay the rule’s implementation from January 2022 to at least January 2023 as part of a court proceeding.
The likely abandonment of the rule by the Biden administration created an opportunity for Congress. If a provision stopping the rule’s implementation were inserted into legislation, Congress would get credit from CBO for heading off the cost increasing effects of a policy that is assumed by all involved to be inoperative anyway. Predictably, this has proven to be an attractive “offset.” A section in the infrastructure investment bill that President Biden signed in November prohibited implementation of the rebate rule through 2025, which CBO estimated would “save” $51 billion. The gun-safety measure signed into law this summer delayed it by additional year, which CBO said would save an additional $21 billion.
The emerging prescription drug bill is now being credited with another $122 billion in savings by permanently prohibiting implementation of the rule, which, at this point, is a foregone conclusion anyway. Without this dubious offset, the savings from the prescription drug provisions drop to $166 billion over ten years.
The other major section of the Schumer-Manchin deal is an extension of the higher premium subsidies for insurance enrollment enacted in American Rescue Plan (ARP) in March 2021. The bump up in support provided more financial assistance to households buying coverage through the Affordable Care Act (ACA) exchanges in 2021 and 2022. The emerging Senate plan would extend these provisions for two years, through 2024. A recent analysis from CBO shows that the cost of permanent extension at about $20 billion per year.
Pushing back the cutoff by two years will allow Senate Democrats to claim the overall bill still reduces the deficit (by perhaps $120 billion or so), but only by employing a tactic — an artificial “cliff” — that Manchin had objected to during earlier negotiations. CBO estimates a permanent extension of the ARP subsidies would cost $248 billion through 2032, which is more than the prescription drug provisions would save when the halt of the rebate rule is excluded from the calculation.
Democrats will argue that the next bill extending the ARP subsidies beyond 2024 will have to be offset too, so there is no fiscal risk from the benefit cliff. But the example of the rebate rule demonstrates that Congress has a way of finding not-so-real savings to offset very real new spending.
Further, the emerging bill will increase the deficit through at least 2024 because the cost of extending the ARP subsidies for two years — roughly $34 billion — far exceeds the $4.8 billion in savings during these same years from the prescription drug provisions. The resulting $29 billion increase in the deficit through 2024 also could go up if the many Democrats who now are pressing Manchin to accept other new spending items are successful. The last thing Congress should be doing now, with inflation surging, is support more immediate fiscal stimulus.
Noting these problems with the emerging mini-BBB deal does not diminish the important role Senator Manchin has played over the past year in preventing a far worse bill from becoming law.
It’s just that the measure the Senate is poised to consider will be sold by Democrats as a turn toward fiscal responsibility when really it is just business-as-usual.
James C. Capretta is a Contributor at RealClearPolicy and a senior fellow at the American Enterprise Institute.