CBO Wrong on Health Care Reform Cost Numbers

Filed in Proposed Legislation by on August 30, 2009 8 Comments

Just as opponents of  the current Health Care Reform plans often cite reports from The Lewin Group, which, as we posted the other day, turns out to be wholly owned by one of the Nation’s leading insurers, UnitedHealth; they also cite to recent reports by the Congressional Budget Office (CBO) as to the relative fiscal impact of the various plans. Although the CBO does not seem to be owned by UnitedHealth (though recent statements by the CBO (as made clear by Professor Frank Pasquale here) they are certainly susceptible to being labeled “partisan” for exceeding the scope of their role), CBO is prone, it seems, to being wrong.

Professor Pasquale’s post, “Politicized Prognostication at CBO,” details and quotes a number of experts who have expressed grave doubt as to the methodology of the CBO as well as the resultant numbers. For example

Bruce Vladeck: “The CBO’s track record in predicting the effects of health legislation is abysmal. Over the last two decades, the CBO has routinely overestimated the costs of expanded government health care benefits and underestimated the savings from program changes designed to reduce expenditures.

Mr. Vladeck, Maggie Mahar, Timothy Jost, Frank Pasquale and Timothy Westmoreland have more company for their doubts regarding the CBO’s numbers.  The rather politic but wholly effective Commonwealth Fund reports 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, says Jon Gabel in an op-ed published in today’s New York Times.

Drawing on Commonwealth Fund-supported research, Gabel, a senior fellow at the National Opinion Research Center of the University of Chicago, analyzed CBO’s forecasts of three major changes in the Medicare program relative to their ultimate outcomes.

What he found was alarming:

In the first, 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%.

In the second, Commonwealth Fund reports that 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, 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.

According to the Commonwealth Fund,

Gabel explains that when CBO analyzes initiatives aimed at reducing costs, it requires considerable evidence that similar previous policy changes have saved money. When there is a lack of historical examples, the “unknown” variable often becomes zero. The task for the budget office becomes even more challenging when it considers the impact of more than one change simultaneously-changes that might have synergies.

Considering that we are entertaining unprecedented Health Care Reform which relies upon  the manifold synergies of numerous changes for cost reduction, the CBO process which ascribes a numerical dollar value of  zero to that which is new, seems particularly ill-equipped to assess the fiscal impact of the proposed changes.

The Commonwealth Fund reports that

Gabel observes that underestimating savings that can come from cost-control initiatives in Medicare and throughout the health system could undermine efforts to pass health reform legislation. “As Congress now works on its greatest push for health care reform in generations, the budget office needs to revise the methods it uses to make predictions about costs,” he says.

Failing the methodology revisions requisite to make the CBO’s estimate’s  of cost reduction a valid measure of fiscal impact, the least they could do is preface their lofty and dire pronouncements with an accurate disclaimer: “Historically, Give or take, roughly 50%.”

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  1. David Crofts says:

    Thank god for a dialogue that isn’t so damn idealistic. In terms of addressing demand, the gov missed the boat on some critical reforms. One area I’m very disappointed not to see addressed is reform of our food system. An epidemic of obesity has closely correlated with explosive growth in health costs over the last several decades. The consumer market for food is already established and requires no reform and if the gov would scale back the subsidies, support a move of agriculture back to the family farm, and institute taxes on foods with no nutritional value, it could go a long way towards reducing demand and increasing the productivity of the American workers.

    Another great point is the channeling of resources and energy towards local efforts to address population health issues. A similar effort is underway in the UK to reform local economics in support of communities and away from the individual. Truth be told we are a social creature and this obsession with individual rights in the free market is damaging our ability to exist successfully as a society. Our founding fathers were about creating equality among people as part of a perfect union. The notion of equality seems to be lost in today’s politics in favor of a focus on the self.

  2. 2/25/1010
    Now somebody is not telling the truth, on both side. So I did a little number check with my friends on the net and I was right, so enjoy the truth, of force pay through the Bill and the freedom of choice offered By me and my friends in and for FASC Concepts….

    A Prime Directive
     For Health Care
    In all things there must be a guideline in order to prevent diversity within that issue. As it would seem, after 50 years or more this Health Care issue is still without a moral value and it is not in the best interest of man kind. This word Man Kind, should be the building block for Health Care.
    Health Care Insurance Companies;
    The merger of HCIC = Health Care Insurance Co., to show that when these companies put 95% of the intake of funds into a United Health Care Forum The balance left over could be all most tax free, but in our view should be tax free, for their income because of this 95% is considered a donation to the Rebuilding the National Security Of The United States Of America.
    This statement of rebuild the National Security Of The United States, it is because of the tax forum in place that has failed because the tax dollar was calculated as a constant figure. The economy reports is in support of this statement….
    The early released reports that this Health Care Bill would not increase the National Debt, as 6 months have past the new reports are stated at a $1.2 trillion dollars, plus a extra 6.2 billion dollars for economic recovery. And at the same a new tax forum against the Health Care System.The balancing is not shown because of over lapping reports and concepts for Bill to Law.

    {report from page 89.New Taxes in the Senate Health-Care Bill }
    Tax on high-end health insurance plans: $149.1 billion
    Capping flexible spending accounts at $2,500: $14.6 billion
    Fees for drug makers: $22.2 billion
    Fees for medical device makers: $19.3 billion
    Fees for health insurance companies: $60.4 billion
    Higher floor for deducting medical expenses: $15.2 billion
    Higher payroll tax for top earners: $53.8 billion
    Tax on cosmetic surgery: $5.8 billion

      page 87.The President’s Proposal for Health Reform
    It puts our budget and economy on a more stable path by reducing the deficit by $100 billion over the next ten years – and about $1 trillion over the second decade – by cutting government overspending and reining in waste, fraud and abuse.
     page 92.17 Tax Increases in Senate Health Care Bill
    1.40% excise tax on health coverage in excess of $8,500/$23,000 ($149.1 billion)
    2.Employer W-2 reporting of value of health (negligible revenue effect)
    3.Conform definition of medical expenses ($5.0 billion)
    4.Increase penalty for nonqualified health savings account distributions to 20% ($1.3 billion)
    5.Limit health flexible spending arrangements in cafeteria plans to $2,500 ($14.6 billion)
    6.Require information reporting on payments to corporations ($17.1 billion)
    7.Additional requirements for section 501(c)(3) hospitals (negligible revenue effects)
    8.Impose annual fee on manufacturers & importers of branded drugs ($22.2 billion)
    9.Impose annual fee on manufacturers & importers of medical devices ($19.3 billion)
    10.Impose annual fee on health insurance providers ($60.4 billion)
    11.Study and report of effect on veterans health care (no revenue effect)
    12.Eliminate deduction for expenses allocable to Medicare Part D subsidy ($5.4 billion)
    13.Raise 7.5% AGI floor on medical expenses deduction to 10% ($15.2 billion)
    14.$500,000 deduction limitation on taxable year remuneration to health insurance officials ($0.6 billion)
    15.Additional 0.5% hospital insurance tax on wages > $200,000 ($250,000 joint) ($53.8 billion)
    16.Modification of section 833 treatment of certain health  organizations ($0.4 billion)
    17.Impose 5% excise tax on cosmetic surgery ($5.8 billion)
           See CCH’s Special Report.

     As stated By President Obama, this reform will not increase the National Debt, but it looks a lot like borrowing from Petter to pay Paul.

       Now lets look at this……
     Lets Use The 10 Largest Health Insurers
    (by revenue)
    AARP was not on the list for top ten,
    1.UnitedHealth Group
    3.CIGNA Corp.
    5.Anthem, Inc.
    7.Health Net
    8.PacifiCare Health Systems
    9.Oxford Health Plans
    Just with the top ten Health Care Insurance Companies we can show a income of around 100 million people x $100.00 per month at a low ball figure = $ 10,000 000 000 { $10 Billion Dollars.} To show a basic scale below In the US the progression is:
    Hundred – 100
    Thousand – 1,000
    Million – 1,000,000
    Billion – 1,000,000,000 as a low ball figure $10 billion per week at 100,000000 people
    Trillion – 1,000,000,000,000
    Quadrillion – 1,000,000,000,000,000

    I a sure you that this $10 billion dollars is chump change even at $10 billion x 12 months. This does not even cover .5% of the revenue. This Health Care system is all most a $100 Trillion dollar package per year.
    As a part of Law when a Company is built , as HCIC and people invest money into that system and the amendments of Laws allow the continue lack of representation then the failure falls on Law Makes for the United States. One further failure is according to Law, that when Laws are written and the lack of a people to read this Law, is further supported by the conman need of the Peoples Right To Understand that Law. “In other words it must be in English.”
    As stated before the Age of Health Care Insurance Companies have ended, they had their chance and now nature have selected them to be no more. In order not to further burden a troubled economy I did change my mind 3 months ago and offer a way out in the best interest of the People and employees Of Insurance Companies.{ A Merger}
    The Prime Directive Of HCIC has become as a Factor of profit and the calculus of the birth of a child by sophisticated testing for their A.I. So as these Officials Of HCIC fixed a system by their Artificial Intelligence, within a Health Care Matrix and now all they can do is see us as variables in a equation as dollar numbers, I do not believe they try to see any more, because without that Mathematical A.I. They can not insure just anybody. Our Health Care Insurance Companies,watch as A.I. shows the way for D.N.A testing and other inventive forms of how to calculate the dollar as a human input. {This is all so documented}

  3. Bill Stewart says:

    So embarrassed about the misuse of ironic that I shall eschew any sarcasm in this response to your response. Note: I will not be upset or accusatory if you don’t respond, although I would welcome a response. Thanks for spending so much of your time responding to my first, rather huffy comment.

    Re: Dems vs. Reps – of course most politicians quote or cite that which supports their positions (usually pre-established, but sometimes honestly arrived at). I think that the CBO is useful not for its conclusions, but for its unputs – they have easy access to all the available statistics.

    Re: Health care costs – At the end of your response you addressed the point of our dialogue – reducing health care costs. I would ask you to take a deeper look at the cost reductions you cited in your initial blog. You’ll find, in the case of Hospital DRGs and Nursing Home PPS that costs began to rise dramatically after a short period of adjustment to the paperwork and the rules of the new payment systems. [As a lawyer, you may know that the details of these administrative regimes are worked out over time and subject to both reversal and calls for payback of moneys already disbursed]. Again, the trend has remained upward, with short periods of plateau or slight decline.

    So . . . I honestly cannot find a time in history when government or other bureaucracies (the military, school systems, courts, cartels or monopolies) effectively reduced prices. That has always been the role of innovation and competion in a free market. The only exception would be the price of food after several years of great harvests – but that is not an analogous situation.

    Please note that in my I did not say “private market,” but “free market.” I’m not sure there’s a distinction, but perhaps your substitution here betrays a prejudice? In any event, I didn’t refer to the “best” allocation of resources, but the “fairest and most efficient.” My use of “fairest,” like your use of “best,” introduces an infinite variable. The free market allocates goods and services efficiently – best combination of price and quality. “Fair” and “best” are something we have to do for ourselves, either through law, government regulation, or private charity. History shows that the most comprehensive charity for the poor and ill takes place in relatively free economies.*

    *”Re: “relatively free” – Your point that any government regulation means that a market is not truly free is techinally correct, but beside the point. We all know the difference between the USDA and a Soviet-style central economy. It’s useful to think of the USDA, the FDA and others as substitutes for industry policing organizations. Their purpose is not to control free enterprise, but to give people enough confidence in the safety and uniform quality of its output so that the industries will prosper. [Caveat: As these organizations grown in power – one thinks of the FDA – they become subject to serious lobbying efforts as well as distortions caused by internal, bureaucratic agends]

    Your piece arguing against a free-maket in kidneys reminds me of the debate over Labor laws in the U.S. – we don’t want children to become slaves to the work place and so we pass a law outlawing child labor. We don’t then decide on structure, pricing, quality, quantity and the other variables of industry. Likewise, we can restrict the market in kidneys, without dictating administrative or clinical rules regarding transplants. But that dictation is precisely what the States through Medicaid and health insurance regulation, and the Federal Government through Medicare and the Veterans Administration, and Medical School regulation, do. The result is the misbegotten systems of health care we now have.

    I am not an original thinker in this area and would refer you to the call for reform from the CEO of Whole Foods, or any number of op-eds in the Wall Street Journal. But the outlines of how to reduce costs are clear and logical:

    1. Control Medical malpractice awards. (Moreso for the defensive medicine they elicit than for the awards)
    2. Force insurance companies to compete. (Do away with state regulations guaranteeing monopolies to the Blues and other insurers, loosen restrictions on what must be covered, allow individuals to purchase insurance across state lines so that insurers can create actuarially sound risk pools for individualls, either eliminate subsidies for employer-purchased care or extend them to individuals, encourage risk pools to help the chronically ill, or those involved in new therapies or clinical trials.)
    3. Encourage, through extensions of current tax law, charitable giving that allows corporations and individuals to underwrite the charity care that so many hospitals provide as a matter or principle or legal obligation.
    4. Allow experimentation with new ways to compensate doctors and hospitals. (HMOs were a grand experiment back in the day. They were a true answer to the procedure-based reimbursement system. But pubic misunderstanding of HMOs and the political hay that state politicians could make by regulating them added back into the HMO system many of the elements that had been stripped out as unnecessary. The end result was a horrible hybrid – capitated care that could control costs only by forcing doctors to see more patients or by denying necessary care.)
    5. I’m sure that you could add many further points.

  4. Michael Ricciardelli says:

    I had rather assumed that referring to the CBO as the “Congressional Budget Office” would suffice for attributing the Office to its source. The reference to United Health was of course a sarcastic– not ironic (there’s a difference), reference to CBO’s “politicized prognostication” being aligned with the interest of Private Insurers– thus the next sentence regarding CBO’s susceptibility to being termed “partisan.” As it would seem that such prognostication, complete with its history of rather woeful inaccuracy– is aligned with– and often quoted by– Republicans opposed to Dem Health Reform Proposals–perhaps most telling in the opposition to a Public Option. The CBO guesstimates, along with the owned by UnitedHealth Lewin Group reports, being the favored weapons in the Republican Arsenal. But yes, I managed to graduate from Law School with the knowledge that the Congressional Budget Office is an arm of Congress.

    Having said that, I should probably thank you for the scathing compliment. Your comment was both well written and informative. I would agree that my article is not an in depth look at any of the particulars (I rather think that each of the authors I either quoted or linked to do an able job of that–allowing the reader predisposed to such to avail themselves of a more in depth look with just a few clicks). The article, I would hope, serves as an aggregation and a means of contextualizing that which is there– making it available for those who have interest– and, one would hope, as a starting point for informed thought & discussion. Judging by your response, it was at least partially successful. Having said that, if you would like to make some aspect of your knowledge of health care finance issues and systems (I agree by the way with your “pluralization” of the concept– it has struck me that the seemingly singular “Health Care Reform” is somewhat deceptive in its failure to convey the many complex, separate but inter-related parts/issues), available to a larger audience, I’d be interested in publishing it. Just drop me an e-mail– my contact info is in the masthead under Managing Editor.

    As for Medicare, it’s interesting point you make, and I have in fact been thinking that Medicare– with it’s various component parts– is too little understood–and have actually been thinking of putting together a post–or two or three– which would serve, one would hope, to clarify.

    As for the idea that government should not remove itself from health care, but that the private market is best suited to the allocation of resources– I disagree, http://www.healthreformwatch.com/2009/07/26/kidney-sales-a-free-market-approach/ and would suggest that to the extent one approves of regulatory power in a market, it is not free. Therefore we speak only of extent, not principle.

  5. J Thomson says:

    You claim OBM estimates are high buy 40-18%. I would rather deal with that than Congress estimates that are typically low by 500%.

  6. Bill Stewart says:

    I trust that you’re being ironic when you write that the CBO “does not seem to be owned by United Health Care.” I presume you know and I think you should have said for the over-serious, that the CBO is an independent arm of Congree, which has been run by Democrats since since they won both houses late last year.

    The first two instances of savings that you cite involved fundamental changes in reimbursement which were slam-dunk savings. Prior to DRGs, Medicare paid hospitals on a cost plus basis. An entire segment of the accounting industry was devoted to “grossing up,” i.e. amassing as much allowable cost under certain key cost centers to drive up reimbursement. When the government went to a set fee – which, of course, had always been the way that hospitals charged before Medicare was created -costs dropped. Go figure.

    The second instance was simply the application of a set price (PPS – the Prospective Payment System) for nursing home reimbursement – a second instance of the earlier hospital charge reform.

    You might have noted something more relevant to our current problems – in spite of better cost savings than first expected, the Medicare allocations for both hospital and nursing home care have been grown to the point that they will outstrip the taxes meant to support them within a few years.

    There has not been an adequate analysis or explanation of the lower than expected cost of the Drug program so far as I know. In any event – the Drug entitlement wasn’t a cost savings, it was extra cost, since prior to Bush’s plan the government did not offer to pay senior’s drug bills. It simply turned out that the estimated cost for the program was not as high as CBO thought it would be. It too, will continue to grow.

    What is astonishing to me is that you are cherry-picking something that has already been cherry-picked by the op-ed writer. And it seems obvious that you have not even a shallow understanding of the details. How sad that debates in this country are so full of ideological checklists and so devoid of detail or reality.

    Why, for instance, did you not mention that the long-term trend of Medicare is into significant deficit (in spite of the numerous other attempts at cost-saving, the majority of which were over-estimated by the CBO). It is hard for anyone, other than an ideologue who cares more for his argument than he does for the truth not to have noticed that the overall cost of Medicare has been shooting through the roof and outpacing the tax base created to fund it.

    If you wished to step out of your propaganda-bubble, it is not impossible to ask around and learn the details of our fairly complex public-private health systems. (I say systems because Medicare, Medicaid, HMOs and PPOs, standard private insurance, the VA, and county and charitable health care groups all represent separate, though interlocking systems of care.) You certainly won’t learn about the various systems by reading op-eds, or eds, in the Times or the Wall Street Journal. You can, of course, reinforce your ideological bent this way – but what a waste of time and, judging from your writing ability, talent.

    It is true, of course, than the kind of flat-variable projections used by the CBO do not reflect the real world. Flat-line projections from 2005 would have had the cost of housing in the U.S. more than double what it is now, all other things being equal. But, of course, everything in a national economy is moving at the same time.

    Experience would strongly suggest, however, that experts in D.C. will never stop or even slow the growth of spending for anything, from health care to defense. The marketplace is the only way to adjust scarce resources to infinite demands that has ever worked both efficiently and fairly at the same time. NOTE: That does not mean that the government should get out of health care – it simply means that human beings work the same way now as they did last year, or during the cold war, or the Renaissance.

  7. Terry Brauer says:

    I am invariably amused by the efforts by government and academicians to project savings from healthcare reform. It is literally impossible. The current chaos has so little accountability … the insurance companies and healthcare providers have so many opportunities to profit … it is ludicrous to even attempt the feat.

    What is incontrovertible is that once they start ratcheting down a system … if they design it well … if they can keep politics from inhibiting honest implementation and vigilant enforcement of controls … the numbers will be too embarrassing to publish. It will be more outrageous than the corruption and waste that occurred in Iraq for the past 8 years. Those thieves of American treasure will look like choir boys in comparison.

    Healthcare financial abuse is so broad and so deep that even the most narcissistic of those fretting about their taxes will be appalled …. if they ever shut up long enough to study the waste. Their money …. our money … is being wasted so fast and with such fury that we are desensitized to hurricanes of fraud and tsunamis of loss.

    It is poliitically incorrect to tell it like it is … but then some of us neither need nor want to be bought like hookers and sold like slaves.

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