Issue Brief 12-40
November 26, 2012

Congress has convened a lame duck session to consider a number of major issues, including the Budget Control Act (BCA) sequester scheduled to occur on January 2, 2013, and the expiration of the Bush-era tax cuts, the payroll tax holiday, extended unemployment benefits, and a number of other programs. If Congress acts on a long-term solution to avert this “fiscal cliff,” such action is expected to include comprehensive deficit reduction.

Many observers believe that a “grand bargain,” which would include a detailed plan that identifies specific ways to achieve deficit reduction, is a long shot during the lame duck session. If a deal is reached, it is more probable that the agreement will establish a broad framework for achieving deficit reduction, with specific cuts and reforms left to the new Congress to decide. While the outcome of the lame duck session is uncertain, if and when a deficit reduction agreement is reached, it will likely contain changes to entitlement programs, such as federal health programs. Mandatory programs comprise more than half of the budget, and the share is expected to increase over time. The Congressional Budget Office (CBO) projects spending for federal health programs to rise from an estimated 5.4% of gross domestic product (GDP) in 2012 to 9.6% of GDP in 2037.

Medicaid is exempt from the BCA sequester. However, it is a likely target if Congress enacts comprehensive deficit reduction, with many recommendations included in previous deficit-reduction proposals. The approach to reducing Medicaid spending is less clear. Will the proposals improve the program while lowering overall costs or just reduce the federal share by shifting costs to states? Will a grand bargain include modest changes to the program or fundamental reforms? To date, many of the proposals represent minor changes that shift costs to states. The most far-reaching proposal is changing Medicaid from an open-ended entitlement to a block grant.