Happy Fourth of July!
Just wanted to let our loyal BudgetBlog readers know we're going on a short hiatus next week. With Congress heading out of town for a short summer recess and the upcoming Fourth of July holiday next week, the Fiscal Policy team is heading out of town in order to escape the heat for some well-deserved vacation. This means, though, that the BudgetBlog will be dormant next week.

But don't despair. Craig and I will return in one short week on July 7 to continue to bring you all the news, gossip, information, and analysis on federal fiscal policy you've come to expect.

Hope everyone has a safe and festive Independence Day next week - be careful with those fireworks.

A recently released GAO report finds that (surprise!) Medicare Advantage providers predicted lower profit margins in 2005 than actually materialized.

[Medicare Advantage (MA)] organizations, on average, reported spending 85.7 percent of total revenue on medical expenses in 2005, but had projected medical expenditures of 90.2 percent of total revenue. Because organizations spent less revenue on medical expenses than projected, they earned higher average profits than projected. On average, MA organizations' self-reported actual profit margin was 5.1 percent of total revenue, which is approximately $1.14 billion more in profits in 2005 than MA organizations projected.

And while these MA providers would have been paid the same regardless of their projections, they would have been required to provide beneficiaries either more services or lower premiums had they accurately projected their profit margins.

File this one under "W" for "Well, Duh." A system that depends profit maximizing firms to divulge information that would result in lower profits will, time and time again, result in less-than-accurate information.

If you want to bring the Magic of the Marketplace^TM to government services, transparency matters -- it matters a lot. Just because the government pays a firm to provide services doesn't mean the government won't get taken.

Our friends over at the Government Accountability Office released another great report a week or two ago concerning how Medicare providers (hospitals, nursing homes, and doctors) are failing to pay federal taxes to the tune of at least $2 billion a year. Findings from the report:

Our analysis of data provided by CMS and IRS indicates that over 27,000 health care providers (i.e., about 6 percent of all such providers) paid under Medicare during calendar year 2006 had payroll and other agreed-to federal tax debts totaling over $2 billion. The $2 billion in unpaid tax debts only includes those debts reported on a tax return or assessed by IRS through its enforcement programs. This $2 billion figure is understated because some of these Medicare providers owed taxes under separate tax identification numbers (TIN) from the TINs that received the Medicare payments or they did not file their tax returns.

GAO found some pretty crazy stuff in their investigation, including abusive and potentially criminal activity, and found that many individuals associated with their investigation used the proceeds of their tax evasion for personal profit. Again from GAO:

Furthermore, individuals associated with some of these providers at the same time used payroll taxes withheld from employees for personal gain. Some of these individuals accumulated substantial wealth and assets, including million-dollar houses and luxury vehicles, while failing to pay their federal taxes.

While the actions of these providers is pretty bad, the failure of the Centers for Medicare and Medicaid (CMS) to take any actions to prevent these abuses might be worse:

CMS has not developed a policy to require contractors (1) to obtain consent for IRS disclosure of federal tax debts and (2) to screen providers for unpaid taxes. Further complicating this issue, absent consent by the taxpayer, which CMS does not require, federal law generally prohibits the disclosure of taxpayer data to CMS or its contractors.

IRS can continuously levy up to 15 percent of each payment made to a federal payee—for example, a Medicare hospital—until that tax debt is paid. However, CMS has not incorporated most of its Medicare payments into the continuous levy program. As a result, for calendar year 2006, the government lost opportunities to potentially collect over $140 million in unpaid taxes.

Health care providers receiving federal resources should be treated no differently than contractors who fail to pay their taxes. Congress recently passed legislation to prevent contractors from using off-shore tax havens to avoid paying federal taxes. They should do the same to make sure all entities who benefit from our common resources pay the taxes they owe.

One-Page Summary of GAO Report
Full Report: Thousands of Medicare Providers Abuse the Federal Tax System

A "Brookings Alert" in my inbox this morning directs me to an op-ed by Brookings Senior Fellow Alice M. Rivlin and U. Mich Prof. John W. Kingdon entitled "Next President and Congress: Tackle Social Security First." Oy.

I'm going to outsource this one to Shawn Fremstad over at Inclusion.

What's missing from Rivlin and Kingdon's op-ed is any reality-based account of why Social Security should even be on the list of problems that the next administration needs to tackle over the next four years. According to CBO, the Social Security surplus a decade from now will be around $250 billion. Moreover, Social Security is fully solvent, under current projections, until 2046.

There are real crises out there. Social Security just isn't one of them.

The good folks over at the Congressional Budget Office (CBO) released their monthly budget review yesterday. Some highlights of the number crunching in the report are below:

The federal government incurred a deficit of about $317 billion during the first eight months of fiscal year 2008, CBO estimates, $168 billion more than the shortfall recorded through May of last year. About $50 billion of that change is due to the distribution to individuals of the tax rebates enacted in the Economic Stimulus Act of 2008. That amount is just under half of the total rebates expected for this year; most of the remainder will be disbursed during the next two months.

...

CBO estimates that the federal government recorded a deficit of $165 billion in May, about $97 billion more than the deficit recorded in May 2007. About half of that increase was due to rebate payments, which are recorded as either reductions in revenues or increases in outlays. (When a rebate exceeds an individual's federal income tax payment, the excess is classified as an outlay in the budget.)

...

Outlays were $174 billion higher than in the October-May period last year, far outpacing the $6 billion growth in net revenues...

The broad category of other programs and activities accounted for almost half of the increase in outlays through May. Spending for that category was up by 12.6 percent on an adjusted basis, reflecting an estimated $19 billion in rebate payments as well as double-digit growth in outlays for refundable tax credits, veterans' health programs, unemployment benefits, and food and nutrition services. Defense outlays have also grown rapidly in recent months, rising by 10 percent through May, compared with 7 percent in fiscal year 2007. Much of the growth this year has been driven by a 14 percent increase in spending for military operations, maintenance, and procurement, well above last year's average gain of 8 percent for those activities.

CBO: Monthly Budget Review

Below are blog and news stories discussing the introduction yesterday of a new transparency bill cosponsored by Sens. Barack Obama (D-IL) and Tom Coburn (R-OK). Given the bill was introduced at the same time as Obama was wrapping up the Democratic nomination for president, the coverage was not bad.

The bill will likely be marked up in Sen. Carper's (D-DE) subcommittee of the Homeland Security and Governmental Affairs Committee sometime in the next few weeks and then hopefully move to the floor before the August recess. Sen. McCain (R-AZ) joined this bill shortly before it was introduced as an original cosponsor, dramatically increasing the chance of it passing this year before election year pressures impose gridlock in Congress. Perhaps Obama and McCain will promote the bill in their potential series of town hall meetings - that would definitely give it a boost in Congress.

The Hill: Rivals Obama and McCain work together behind scenes
Sunlight Foundation: USASpending.gov 2.0
OMB Watch: Obama-Coburn Continue Transparency March
POGO: Obama for...Transparency
Chicago Tribune: Obama, McCain agree on transparency
CongressDaily: Obama, McCain Give Boost To Contract Data Legislation

Updated:
DC Examiner: Another revolutionary leap forward for federal spending transparency
Talking Points Memo: Nugget from Behind the Scenes
ThinkProgress: June 5 Think Fast summary

Update II:
Obama and McCain Agree on Transparency
Federal Times: Obama-McCain bill would post federal contracts online

Sens. Barack Obama (D-IL), Tom Coburn (R-OK), Tom Carper (D-DE), and John McCain (R-AZ) introduced new legislation on June 3 as a follow-up to the 2006 Transparency Act. The bill, the Strengthening Transparency and Accountability in Federal Spending Act (S. 3077), would augment the 2006 law but go further, making important new data more easily accessible to the public and making it easier for citizens to hold our government accountable for the fiscal stewardship of our shared resources.

It should be interesting to see if this new bill will generate the same amount of chaos, confusion, and excitement that the first bill did that Obama and Coburn worked together on. Stay tuned...

In a post over at inclusionist, Shawn Fremstad makes a crucial point about federal health care spending.

In fact, the 2nd biggest health care entitlement isn't Medicaid, it's the $200+ billion tax break for employer-sponsored health insurance. The health insurance tax break costs around $30 billion more than Medicaid and, if my recollection is correct, is increasing at a faster rate than either Medicaid or Medicare. It's also, unlike Medicare or Medicaid, a regressive tax subsidy that provides more benefits for the wealthy.

As much sweat and tears have been spilled by former Comptroller General David Walker and others pleading American lawmakers to — for the love of Pete — do something! about the coming "entitlement crisis," rare (if ever) is the tax expenditure subsidy for private health care considered part of the problem. This strikes me as a $168 bn oversight (I'm using the number in the Analytical Perspectives in President's FY 2009 budget [Ch. 19].).

But this oversight isn't limited to tax subsidies health insurance. No one seems aware of the other massive entitlement programs like the $100 billion housing subsidy that helps higher-income families buy homes (Filers earning more than $100,000 represent 11% of all filers, but they see 60% of the benefit.).

Crafting policies aimed at reducing per-unit costs of health care would not only allow all Americans to access more and higher-quality health care, but it would also help avert the a doomsday debt scenario (AKA The Entitlement Crisis^®). And as long as we neglect to consider the health insurance subsidy part of the federal health care system, this solution will remain obscured.