The CBO's Dubious Health Care Cost Estimates
by 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.”
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.”