The 119th Congress of the United States convened on January 3. One of the most important pieces of legislation will be to finalize a Budget Reconciliation Act guiding federal spending for the next 10 years. The impact will reverberate with nearly all Americans and businesses in some way, whether through taxes, government benefits or economic conditions.
The budget reconciliation process was created more than 50 years ago under the 1974 Congressional Budget and Impoundment Control Act. It is an option that has been successfully used only 23 times according to the Bipartisan Policy Center. [1] So why does Congress use the reconciliation process at all? Reconciliation allows the Senate to proceed with a simple majority of votes (50/50 with the Vice President breaking the tie if necessary) rather than a three-fifths super majority (60 votes) to limit debate time and amendments. However, the “fast track” to passage still has guardrails and checkpoints.
The first official legislative action is to produce a Concurrent Budget Resolution which provides instructions to the respective House and Senate Committees of jurisdiction. These instructions are targets to change current law that impact the deficit, revenues, or spending – or a combination of the three. The instructed Committees must report back to their Budget Committees by a prescribed deadline. Both Budget Committees then package the committees’ responses into a bill for consideration by the full chamber.
If the process were to be compared to a novel, the Jules Verne classic, “Around the World in Eighty Days,” springs to mind, except the drivers must all arrive at the finish line at the same time. While the House and the Senate must both reach the destination set by the Concurrent Resolution, they likely will get there in very different ways. The two reconciliation bills will eventually be reconciled in a conference committee. House and Senate chairs will meet to produce a new, final version as a substitute for the previous bills. The final bill will go to the President to be signed into law. For simplicity’s sake, this brief overview will focus only on health care. The drivers are:
- the Chairs of the House and Senate Budget Committees,
- the Chairs of House Ways and Means (which has jurisdiction over Medicare and taxes) and House Energy and Commerce Committees (Medicaid),
- the Senate Committee on Finance (Medicare, Medicaid, and taxes).
They will be assisted by key crew members from the Congressional Budget Office (CBO), the Joint Committee on Taxation (JCT), and the Parliamentarians. CBO and JCT members also function as the official referees and scorekeepers who have the final say in what legislative text means expressed as numbers.
The Director of the Office of Management and Budget (OMB) and the Administrator of the Centers for Medicare & Medicaid Services (CMS) will be there to advise. But even they will be excluded from 2 a.m. legislative drafting sessions at the Office of Legislative Counsel (OLC) in the basement of the Cannon House Office Building. Professional staff members from the committees of jurisdiction will work directly with OLC on drafting their parts that will eventually be merged into a single, mammoth document.
If the budget act does not meet the budget resolution target, it will have to be amended to conform to the target before final passage. The Affordable Care Act (ACA) provides an example. Under the proposed bill, the cost of the tax credit subsidies for Marketplace plans and Medicaid exceeded the spending limit. The cost of the Medicaid expansion was based on an eligibility upper limit of 133 percent of the Federal Poverty Level (FPL). Therefore, the authors added a 5-percentage point income disregard to effectively raise the Medicaid limit to 138 percent FPL. Increasing enrollment in Medicaid, which is less expensive per person than commercial plans, reduces overall expenditures and helps meet budgetary goals.
The reconciliation process has already begun. CBO has produced two key documents that may be used on the journey. In December, CBO released a document, Options for Reducing the Deficit: 2025 to 2034 which describes 44 options to reduce spending and 32 options to raise revenue.[2] This is not to say Congress will use any of the options, only how CBO would score them.
Among the health care options, CBO estimated savings from:
- capping federal spending for Medicaid,
- limiting state taxes on health care providers, and
- reducing the federal match rate.
These options would shift costs to the states to make up for the loss of federal funds or result in states also reducing spending through changes in eligibility, payments to providers, or benefits. The CBO score is focused only on federal funds and does not produce a state-by-state financial impact statement that members of Congress will likely want to know. When CBO scores actual legislation, it will estimate the impact on enrollment in health coverage.
The second document, The Budget and Economic Outlook: 2025 to 2035, was released by CBO on January 17.[3] This is the foundational document that CBO will use to benchmark proposed changes to spending, revenues and impact on the deficit/debt.[4] A few of the key numbers based on current law as described in Table B-1: “CBO’s Baseline Budget Projections, by Category”:
- Gross Domestic Product (GDP) will increase from $31,341 billion in 2026 to $43,936 billion in 2035.
- The Debt held by the public will increase from $31,883 (101.7 percent of GDP) to $52,056 billion (118.5 percent of GDP).
- Total Revenues increase from $5,580 billion (17.8 percent of GDP) to $8,031 billion (18.3 percent of GDP).
- Total Outlays (mandatory, discretionary, and net interest payments on the debt) increase from $7,294 billion (23.3 percent of GDP) to $10,563 billion (24.0 percent of GDP).
- Mandatory Outlays (excluding net interest) increase from $4,386 billion (14.0 percent of GDP) to $6,456 billion (14.7 percent of GDP).
- Discretionary Outlays increase from $1,897 billion (6.1 percent of GDP) to $2,315 billion (5.3 percent of GDP).
- The annual federal budget Total Deficit (including net interest on the Debt) will increase from -$1,713 (-5.5 percent of GDP) to -$2,531 (-5.8 percent of GDP).
Table 1 below takes a closer look at health care spending between 2026 and 2035 and provides additional context by comparing mandatory spending categories and revenues at the beginning and end of the 10-year period. Social Security and most of Medicare are funded through payroll taxes. Medicare is also funded through contributions from beneficiaries and general fund revenues.
Table 1: Comparisons of Spending and Revenues [5]
Category | 2026 | 2035 | Change | Total 2026 - 2035 |
---|---|---|---|---|
Medicare (gross) | $1,216 | $2,166 | 78.1% | $16,429 |
Medicare Offsetting Receipts | ($215) | ($413) | 92.1% | ($3,065) |
Medicare (net) | $1,001 | $1,753 | 75.1% | $13,364 |
Medicaid (federal share only) | $695 | $1,025 | 47.5% | $8,579 |
Premium tax credits for Marketplace Plans | $115 | $155 | 34.8% | $1,324 |
Children’s Health Insurance Program | $21 | $15 | (28.6%) | $195 |
Health Spending (above categories) | $2,047 | $3,361 | 64.2% | $23,462 |
Discretionary [6] | $1,897 | $2,315 | 22.0% | $21,090 |
Old Age Survivors Insurance (OASI) | $1,493 | $2,377 | 59.2% | $19,251 |
Disability Insurance (DI) | $171 | $247 | 44.4% | $2,081 |
Net Medicare and OASDI | $2,665 | $4,377 | 64.2% | $34,696 |
Payroll Taxes | $1,840 | $2,605 | 41.6% | $22,078 |
Payroll Tax Shortfall | ($825) | ($1,772) | 114.8% | ($12,618) |
Total Revenue | $5,580 | $8,031 | 43.9% | $67,548 |
Table 1 shows (among other things) mandatory spending on health exceeds total discretionary spending. Moreover, payroll taxes are not sufficient to fund Medicare and Social Security obligations under current law.
Limitations of Reconciliation
The 1974 “Congressional Budget and Impoundment Control Act” may be used to change revenues, mandatory spending, and the debt limit. However, it prohibits the use of reconciliation authority for changes in discretionary spending that fall under the regular appropriations process, and it cannot be used to modify Social Security. Under the “Byrd Rule,” extraneous changes that are “merely incidental” to achieving the budget targets are subject to a “point of order.” The Senate requires 60 votes to waive the point of order.
Thus, while the reconciliation act is a powerful tool, other major issues such as addressing the solvency of Social Security and implementing the recommendations of the Department of Government Efficiency (DOGE) to reorganize the federal government are different journeys to be made at a different time in the future.
Now What – Supporting Impacted Programs and New Funding Streams
At HORNE, we pride ourselves on a proven history of partnering with federal and state programs to maximize impact and efficiency. Our team specializes in making every dollar count by optimizing resources and delivering measurable results. With extensive experience navigating pending program changes, we provide proactive solutions to ensure programs adapt seamlessly to evolving policies. HORNE supports numerous states with federal programs and funding resulting from the most recent American Rescue Plan Act (ARPA) and Inflation Reduction Act (IRA), helping agencies leverage these resources effectively. Through robust oversight and accountability measures, we empower agencies to achieve their goals while maintaining compliance and public trust.
[1] https://bipartisanpolicy.org/explainer/budget-reconciliation-simplified/#
[2] https://www.cbo.gov/system/files/2024-12/60557-budget-options.pdf
[3] https://www.cbo.gov/system/files/2025-01/60870-Outlook-2025.pdf
[4] Note: Federal Fiscal Year 2025 began October 1, 2024. The 5-year and 10-year budget estimates start with FFY 2026.
[5] CBO. Table B-1 p. 20 and Table B-4 p. 23, 24; author’s calculations of changes in percentages and Medicare net spending and payroll shortfall
[6] Note: in 2023, Defense spending accounted for 47% of discretionary spending. https://www.cbo.gov/system/files/2024-03/59729-Discretionary-Spending.pdf