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September 03, 2009

The CBO's Dubious Health Care Cost Estimates

Maggie Mahar

The Congressional Budget Office (CBO) has warned that progressive proposals for reforming health care will add to the deficit that looms over our economy. But when you stop to think about it, just how likely is it that CBO can accurately predict the cost of health care reform—and the savings that it will generate-- over a ten year period?  Virtually any economic predictions that attempt to go out ten years are, at best, guesstimates. Only a very foolish investor would attempt to project a single company’s earnings out over ten years: how can one “score” the effect of very complicated legislation on a $2.6 trillion industry?

"The CBO’s track record in predicting the effects of health legislation is abysmal,” observes Bruce Vladeck, the man who ran Medicare while serving as administrator of the Health Care Financing Administration from 1993 to 2997.  “Over the last two decades, the CBO has routinely overestimated the costs of expanded government health care benefits,” Vladeck adds, “and underestimated the savings from program changes designed to reduce expenditures.”

Writing on Roll Call, Vladeck added: “These mistakes arise neither from a hidden partisan agenda nor a shortage of competence or commitment. The CBO’s reputation for scrupulousness, thoroughness, and nonpartisanship is well-deserved. But the very processes in which it is asked to engage, and the ways in which its results are used, make serious misjudgments almost inevitable.”

Vladeck is not alone.

On Health Reform Watch, law professor Frank Pasquale notes: “The Congressional Budget Office could torpedo health reform. The CBO dealt Clinton-care a heavy blow by saddling it with huge cost projections — and failing to take into account the savings the program would realize for individual citizens and the private sector.”   As I noted in an earlier post,   Douglas Elmendorf, who is now CBO director, was involved in nixing the Clinton plan.

Over the week-end  Michael Ricciardelli  offered an extremely  useful round-up of the CBO’s history of errors on HealthReform Watch.   Ricciardelli calls attention to a Commonwealth Fund report which came out last week. It points out that “over the last 30 years, the Congressional Budget Office (CBO), which assesses the costs of health reform and other legislation as it moves through Congress and is widely respected for its competence and integrity, has underestimated the amount of savings and overestimated the costs that major changes in the health care system would bring.”

Drawing on Commonwealth Fund-supported research, Jon Gabel, a senior fellow at the National Opinion Research Center, analyzes CBO’s forecasts of three major changes inthe Medicare program relative to their ultimate outcomes:

What he found suggests that we should not swallow CBO estimates whole.

In the early eighties, Congress adjusted the way in which Medicare would pay hospitals-under the new law paying a fixed amount per admission based upon primary medical condition. “CBO predicted that by 1986 total spending would be $60 billion. Actual spending in 1986 was $49 billion.”

That’s $11 billion on 60. That’s wrong by more than 18%,” Ricciardelli observes.

In the second case, Gabel “found that savings from the Balanced Budget Act of 1997, which changed the way skilled nursing facilities and home health services were reimbursed under Medicare, turned out to be 50 percent greater in 1998 and 113 percent greater in 1999 than the budget office forecast.”

“Wrong by 50% and by 113%.”

In the third instance, the  Commonwealth Fund reports that “CBO predicted that drug prices would rise following the Medicare Modernization Act of 2003, which added prescription drug benefits to Medicare, estimating that spending on the drug benefit would be $206 billion." Actual spending was nearly 40 percent less than that, Gabel found.

Wrong by nearly 40%.

“Combining the error rates for the two years stated in regard to the Balanced Budget Act of 1997, that’s three major Health Reform changes with an average error rate of  more than 46%. That’s nearly half. Wrong by nearly half.”

Why CBO Can’t “Score” Savings

Bruce Valdeck explains why, despite its best efforts, CBO fails to predict savings: “To start, health care is very complicated . . .” and  “its financial dynamics  are never fully defined.” Too many factors are involved, including “fallout effects from the larger economy, and mass psychology among health care providers and insurers, all of which defy predictive models.”

For example, the House legislation now on the table recommends using financial carrots and sticks to reward health care providers for high-quality, efficient care which protects patients and saves dollars,  while penalizing them for behavior that hurts patients—and wastes health care dollars. (For instance, Medicare would stop paying hospitals for an excessive number of preventable readmissions.)  How much money will this save?

“The economists who dominate the CBO assume that health care providers will respond to changing economic incentives as though they were rational, profit-maximizing firms, but hospitals, managed care plans and large group practices are complex organizations with multiple, competing objectives,” Vladeck observes. (I would add that economists are the only social scientists who believe that humans are consistently rational. Psychologists, sociologists and anthropologists know better.)

The truth is that there is no way to “model” how tens of thousands of health care providers will react to dozens of financial incentives --and CBO doesn’t even really try.

Perhaps most importantly, Vladeck points out “the CBO is now routinely expected to project the impacts of policy changes over 10 years, an absurdly long time to predict what will happen in so large and complex a sector as health care.”

         Meanwhile, “CBO’s most basic forecasting assumption is ceteris paribus: nothing else, other than the policy it is evaluating, will change during the forecast period. Technically, it’s hard to imagine forecasting any other way,” Vladeck acknowledges, “but everything always does change, most notably policy itself. Ten years gives us a lot of time to fix mistakes.”

Often, the policy CBO is trying to “score” is revised.  “When the Balanced Budget Act  affected health care providers more severely than had been forecast, Congress restored most of the money in 2000 and 2002,” Vladeck notes. And today, it’s likely that health care reform will fill the much-maligned “doughnut hole” in the Medicare drug benefit.

As I have said in the past, health care reform will be a process, not an event.  We will pass some legislation this year. Then, over the next three years, policy-makers will flesh out the details of the plan before rolling out  reform in 2013. (There will be no subsidies, no mandate and no public sector option until 2013.)  In the years that follow, many adjustments will no doubt have to be made, to subsidies, premiums, fees to providers, and a financial incentives to encourage higher quality and more efficient and affordable care.  At the same time, as we rein in health care inflation it is likely that both Medicare and a public sector plan will be negotiating discounts on drugs and devices. At this point, it would be foolish to pretend that we can project total costs and savings.

 “So, instead of treating CBO estimates like the Ten Commandments, we should treat them like the informed wild guesses they actually are,” Vladeck concludes.

 Meanwhile, many of the Obama administration’s critics claim that the progressive plans for reform outlined in the House bill and the Senate HELP bill include no real cost savings. They are simply  wrong.

 The legislation asks both Medicare and a public sector plan to begin changing the way they pay providers by moving away from fee-for-service (which encourages “doing more”) while providing incentives to doctors and hospitals to collaborate in reducing waste while improving outcomes.

We now know that when it comes to healthcare, lower spending and higher quality care go hand in hand. When you think about it, this makes sense. If a patient is admitted to the hospital and the doctors there are able to arrive at a diagnosis without running 10 tests—and without calling in eight specialists— that means that  the patient’s hospital stay will be shorter. This saves money. If the doctors caring for him work as a team, treatment proceeds smoothly, and the patient doesn’t pick up an infection while in the hospital, that saves money. If the hospital communicates with the physician who will be following up after the patient is discharged, making sure the physician and the patient have all of the information they need, that makes it much less likely that the patient will need to be re-admitted.

The Institute for Healthcare Improvement (IHI) has identified some 70 U.S. communities that already have managed to do what progressives claim health care reform can do: change how care is delivered so that it is both less expensive and more effective. As I reported here, I spotlighted 10 of those communities at a recent conference where IHI president Don Berwick stressed: “We don’t have to ration needed care. We don’t have to raise taxes” for the middle-class or the upper-middle class. Structural changes in our health care system can ultimately provide the savings needed to pay for universal coverage. This is not a theory dreamed up by ivory-tower academic physicians. It is a fact.

Can we calculate, today, just how much will be saved, in communities across the U.S if  they follow the recommendations in the House legislation  and incorporate the lessons learned in these most successful communities.  No, we are talking about changes in how health care providers think about their goals; we are talking about cultural changes; we are talking about changes in how doctors and hospitals view each other.

Each of these 10 communities highlighted at the conference approached the task differently.  Legislation cannot proscribe, in detail, exactly how doctors and hospitals should or will respond when financial incentives are re-aligned.  There are no 15 easy steps to reducing health care spending. Only the very literal-minded would think that success depends on following a fixed formula. Or that every community should be able to reduce costs by 15% or 11% or 17% across the board. As I have said in the past, the fat in our health care system is marbled through the meat: you cannot set a numerical goal and instruct health care providers to whack spending by that amount. The waste needs to be removed with a scalpel, not an axe.  The Mayo Clinic did not set out to save money. It set out to make sure that “the patient always comes first.”  The savings followed because better care is cheaper. . In the end, what is required is not a financial formula, but a creative effort, by a community that says “It can be done. We can do it.”

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HSR0601

Theme : 6 Main Lies Have Nothing To Do With This Promising Reform / Without reform, Medicare system doomed.

If the findings of CBO over inaction had been released earlier, Ted Kennedy could've seen his lifetime wish come true.

Inaction cost, $9trillion over the next decade, can not be compared to the balance between estimate and outcome in a worst case of scenario, and this balance could be adjusted each year. ((Some of CBO analysis : While the costs of the financial bailouts and economic stimulus bills are staggering, they are only a fraction of the coming costs from Social Security, Medicare, and Medicaid. Over the next decade, the Congressional Budget Office (CBO) projects that each year Medicaid will expand by 7 percent, Medicare by 6 percent, and Social Security by 5 percent. These programs face a 75-year shortfall of $43 trillion--60 times greater than the gross cost of the $700 billion TARP financial bailout)). Time does not fix endless greed and energy depletion.

When the public health is also one of commodity like a house, we come to a tragic and unthinkable conclusion : As to for-profit business, the more and longer ills patients get, the more profits they make, and it will debilitate the overall economy involving education for the future, not to mention continued bankruptcy of middle class.

Of young adults ages 19 to 29, 13.2 million, or 29 percent, lacked coverage in 2007, and that implies the total of this promising reform will be cheaper than expected, I guess.

In case of an unexpected injury or ill, they might give up their learning or aspiration, in this regard, this reform means liberty, job opportunity, competitiveness for them and future.

Today is the time to boost health mileage just like Nissan Leaf and GM Volt.

Faced with unsustainable insurance premiums, the auto industry has little chance to roll out affordable products as the premium inflation plunged it into insolvency before.

With this promising reform that comes in with a balancing function for price in operation, Chevy Volt, too, could earn competitive edge in price along the way, together with Nissan Leaf.


1. The contents of savings (below) in this reform 'have nothing to do with' limit to medical access, rationing, tax raise, and deficit etc.

Rather, without wiping out these wastes and roots of bankruptcy for middle class, all fronts are sure to face larger financial ruin than this recession, which leads to more limit to medical access, more rationing, more tax raise, and more deficit etc than today.

$1.042trillion (cost of reform) + $245bn (cost to reflect annual pay raise of docs) = $1.287bn (actual cost of reform).

$583bn (the revenue package) + $80bn (so-called doughnut hole) + $155bn (savings from hospitals) + $167bn (ending the unnecessary subsidies for insurers) + 129bn(mandate-related fine based on shared responsibility) + $277bn (ending medical fraud, a minimum of 3% , the combined Medicare and Medicaid cost of $923.5bn per year, as of July,) = $1.391trillion + the reduced cost of ER visits (Medicare covers some 40% of the total) + the tax code on the wealthiest more reduced than originally proposed = why not ? (except for a magic pill, an outcome-based payment reform & IT effects and so forth).

As lawmakers debate how to pay for an overhaul of the nation's health care system, a new report from The Commonwealth Fund claims that including both private and public insurance choices in a new insurance exchange would save the United States as much as $265 billion in administrative costs from 2010 to 2020.

"Health reform can help pay for itself, but both private and public insurance choices are critically important," said Commonwealth Fund President Karen Davis, who coauthored the new report. "A public insurance plan can help drive new efficiencies in the system that will produce large cost reductions. Without a public plan, much of those potential savings will be lost."

Unlike high fuel price and mortgage rate in recent years as the roots of great recession and bankruptcy of middle class, the severity in the high cost of health premiums has come to light lately. Similarly, in an attempt to hide these deficit-driven corruptions and wastes, the greed allies struggle to turn the savings via removing these wastes into limit to medical access, rationing, tax raise, and deficit etc.

In contrast, not to mention a wide range of consumer protection, options across state lines, this promising reform takes initiatives in more primary care docs and improved long-term care. And the bill expands coverage for mental health services, and defines what will be covered. It also prohibits co-payment charges for wellness and preventive medical care. There is no mention of rationing. The use of this term is, again, a gratuitous distraction aimed at feeding fear

2. Greedy insurers with no competitors by consolidation have nothing to do with the law of price, demand & supply.

Under the free market theory and the premise that the public health is also one of commodity like a house, if the demand decreases on a large scale, accordingly the price tends to reflect it, as in the case of house price, and it never happens for the price to spiral up. One step forward, in case the price is spiraling up, to be sure, the remaining clients should withdraw the contract or choose the other options. In practice, runaway premiums with no competitors by consolidation drive the enrollees out, and 4C + 2R (canceling, capping, cherry-picking, cash for special lobby, rationing, rapid premium hike) guarantee multiple times as much profit. Sadly, no way-out other than the prohibitive ER is allowed in America. Therefore, the victims today and tomorrow deserve long overdue protection from non-profit Government.

3. The plans to stem inflation in the House have nothing to do with crowd-out.
With the heartbreaking tears in mind (In no other industrialized country do 20,000 people die each year because they can’t afford to see doctor. Nearly 11 Million Cancer Patients Without Health Insurance), private market also needs changes and should join together to complete this reform , as promised, otherwise, the runaway premium only has itself to blame while new firms are filling the void with competitive deals.
And It can be said that fair competition starts with a fair, sustainable market value.

However, the plan in the House is designed to keep people in an employer-based health insurance system, and the public option would be offered to those for whom employer-provided insurance is not available. And job-based coverage (indirect payment), some mandate code, ample capital, the reduced exorbitant ER costs, IT base to streamline the administrative processes and trim the costs might be favorable to the private market. Over time, supposedly, the public plan will concentrate more on basic, primary cares, and the private insurers will provide their clients with differentiated services. And focus should be on the uninsured, the underinsured.

-- Except For The Underinsured, The Uninsured Alone Outnumber The Entire Population In Canada --

In an attempt to avert innovation, moderation, and social responsibility, accusing essential affordability, citing take-over, will be a dirty play.

4. Profit-driven markets have nothing to do with affordable, sustainable public health.

When the public health is also one of commodity like a house, we come to a tragic and unthinkable conclusion : As to for-profit business, the more and longer ill patients get, the more profits they make, and it will debilitate the overall economy involving education for the future (Of young adults ages 19 to 29, 13.2 million, or 29 percent, lacked coverage in 2007).

Under the most wasteful structure on the planet like no coordinated preventive care program waiting until people get ill, about 50% of idle world's best practices, a pay for each and every service reimbursement and frequent readmissions, no e-medical record and deaths, crushing litigations and the more profits via the unnecessary, risk-carrying procedures, and the most inefficient paper billing systems imaginable, overpriced pharmaceuticals, bloated insurance companies, incredible medial fraud, exorbitant costs by the tragic ER visits etc, it might be no wonder with the comprehensive, systematic reform in the pipeline, just one attitude of patient-oriented value in 10 regions has attained 16% of savings in Medicare while their quality scores are well above average.

Aside from the already allocated $583 billion and the savings of this reform package, 16% of $923.5bn (the combined Medicare and Medicaid cost per year, as of July) is around $147.76bn per year and 1.4776trillion over the next decade, and this patient-oriented value alone could be enough to meet the goal.

Please be 'sure' to visit http://www.nytimes.com/2009/08/13/opinion/13gawande.html?hp for credible evidences !

Today, another innovative, fundamental change in payment system, or patient's outcome based payment reform that is able to turn the profit-oriented malpractices and volume into the patient-oriented value and quality is waiting for a final decision.

Now that Minnesota spends "20 percent" less per patient than the national average and 31 percent less than in the highest cost state, under a pay for patient's outcome pack, this promising reform could be successful along the way, I believe.

Aside from the already allocated $583 billion and the savings of this reform package, "20%" of $923.5bn (the combined Medicare and Medicaid cost per year, as of July) is around $184.7bn per year and 1.847trillion over the next decade, and this patient-oriented value alone could be sufficient to meet the goal.


5. Inflation-driven greedy allies backed by the insurers have nothing to do with deficit-neutral.

When some part of our body is ailing seriously, we are going to lose competitiveness, equally, when some part of a nation is ailing servery, it is going to loose competitiveness, too. In case somebody in the house gets ill, health will be put over house, in practice.


6. The analyses of CBO have nothing to do with common sense and practice.

Costs of Preventable Chronic Disease account for around 75% of the nation’s $2.4 trillion medical care costs. U.S. health care spending is also expected to double in the next 10 years. and they are largely preventable -- 80 percent of the risk factors are behavior-related.

Unlike the analyses of CBO, world-wide outstanding public programs put heavier emphasis on preventive program equally, and preventable swine flu pandemic is expected to cost about $2trillion dollars world-wide for the lack of prepared vaccines. (Genes included in the new swine flu have been circulating undetected in pigs for at least a decade, according to a team led by Rebecca Garten of the federal Centers for Disease Control and Prevention who have sequenced the genomes of more than 50 samples of the virus).

If CBO asks the profit-driven interests about why they have hindered the budget request for preventive program in Medicare and Medicaid, they will say, " just look at the health Katrina special lobbying has made, the more and longer ills, the more profits, we are professional, and we are obstructing this reform right now, too " .

7. Conclusion : The public health is a fundamental human right.

As I said above, patient-oriented value alone could be enough to meet the goal, and another innovative, fundamental change in payment system, or patient's outcome based payment reform that is able to turn the profit-oriented malpractices and volume into the patient-oriented value and quality is waiting for a final decision.

If At least, some media pay attention to this flower of reform, people will feel empty as the past and current discussion has been time-consuming for sure.


Thank You !


















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