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. Few investors 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 in the 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 Medicare woudl pay 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.”
M 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 themuch-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 financial incentives aimed at encouraging 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 wasteand 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, IHI 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 an idea that has been realized in some 70 communitites. .
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 towns and citiets.. 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 20% 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.”
In part 2 of this post I will talk in more detail about the different ways those 10 communities have begun to realize their goals.
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Blindly listening to the CBO about its cost projections of health care reform is incredibly irresponsible. This is not the only time the CBO has been wrong in a really big way. They often miss major economic turning points. And it’s not just economic turning points they tend to miss. They sometimes badly misjudge the impact of specific programs. The CBO does make mistakes and often they are large and important mistakes. The fact that the CBO is fallible should be an important factor for how members of Congress view its analysis and projections. They would be irresponsible if they treated their healt care reform analysis as the final word.
Has anyone done projections on what costs will be in 10 years if we do nothing? It seems to me that is the valid pragmatic comparison to make between proposed changes and the status quo.
On the moral question I have no doubt — our present system is unfair, even immoral. That immorality carries its own cost, though one difficult to measure in dollars.
As a psychologist I envy the economist. He is allowed to make predictions based on a rational actor, and alas I only seem to find creatures of conditioning, desires, and fears. I include myself as one of those creatures. If we are honest, we’ll admit that we possess the capacity for rational thought, but more often than not when the donut speaks, we listen.
The CBO’s projections can not be taken literally. But the more important issue is the moral one. How sad it is that we willingly rubber stamp trillions for discretionary wars yet are unwilling to bear the cost of caring.
It is certainly true that Health Care is a very complex “creature” and doesn’t respond simply to stimuli. I also have grave doubts about the ability of economists to forecast anything. In the first place you can probably get the forecast you want by getting the economist who matches your prejudices/political affiliations to do the forecasting. In the second place, I don’t recall reading a lot of forecasts from economists about the mortgage crisis/financial meltdown that recently occurred BEFORE it happened, only explanations AFTER.
Having said that, it doesn’t take a genius to figure out what will happen to total health care costs if we add 40 million people to the roles of the insured and don’t do anything else.
I am surprised that Maggie and others have such confidence that (mostly unproven) cost saving measures in a bill that hasn’t even been completely written yet will be effective. This seems to me to be the “triumph of hope over experience”.
If the CBO record of projection is historically inaccurate, then why are their predictions given any attention? Again, the citizens deserve responsible change in the current status quo.
I have yet to see a government program get smaller. Why would this be any different?
That’s the arguement, its a strong one, and it is working to sink health care reform. Worse yet, reform watered down so much it simply becomes a bigger hog trough than is currently offered.
Sadly, the American public is short on faith in their government.
Chris Johnson,Legacy Flyer, Kristi, Ed
Chris Johnson–
You ask the right question. That’s why I put up Joe Paduda’s post.
My rough estimate of costs if we do nothing. Today, insurance company reimbursements to doctors hostpials and patients are rising by roughly 8% a year–and they’ve been rising by 8% a year for the past 10 years. That’s why our premiums have spiraled.
If we continue in this track and health care rising climbs by 8% a year for the next 9 years, then spending–and our premiums-double over those 9 years.
Our salaries won’t double. Many of us won’t be able to afford insurance.
Legacy– If you didn’t see any predictions of the mortgage meltdown, then you don’t read the same economists that I read.
For example:
–Robert Shiller ( As Bruce Bartlett wrote in 2005 : The Housing Market: In a Bubble?. August 24, 2005.
“Today, many of the same economists who correctly predicted the bursting of the stock market bubble, such as Yale University’s Robert Shiller, are saying that the housing market is in a bubble. If it should collapse as the stock market did, the impact could be even more painful.”)
–Paul Krugman “That Hissing Sound. By Paul Krugman. New York Times. August 8, 2005
“This is the way the bubble ends: not with a pop, but with a hiss. Housing prices move much more slowly than stock prices. There are no Black Mondays, when prices fall 23 percent in a day. In fact, prices often keep rising for a while even after a housing boom goes bust . . ”
John Mauldin also saw it coming, as did Marc Faber, Jim Grant, Richard Russell and many,many others who pointed out that people were taking mortgages that they couldn’t afford,at a time when rates were historically low. They also predicted the collapse of Fannie and Freddie.
Even I predicted the recent stock market crash at the end of the paperback version of Bull! which I published in 2004.) When I published the hardback in 2003, I told people to buy gold, oil, commodities and Asian stocks.
I knew that the 2000 crash hadn’t wrung out the waste in the U.S. stock market . The market didn’t fall far enough, and the bear market did not last long enough. I knew that it was just a matter of time until a second shoe dropped. I pointed out that the economy was sitting on the “mountain of debt” – including mortgage debt (I’m not claiming that I saw all of this myself; I was again relying on very intelligent sources as well as the history of markets.
In the late 1990s, when I was writing a column on international economics and markets for Bloomberg, I predicted the 2000 stock market crash, relying on sources like Shiller, Marc Faber, Steve Leuthold, Joe Stiglitz, etc.
Bottom line: if you find one or two very intelligent people who understand a subject very well, they lead you to 4 or 5 other brilliant people who know also know the subject. (Typically they all know each other.)
Part of a jouranlist’s job (or a blogger’s job) is to find people very intelligent who know what they are talking about. But you have to be willing to read books–not just newspaper articles– dig into the material, and think it through.
In the case of health care reform, the 200-250 page reports that MedPac has issued twice a year over the past 4 years, the Dartmouth Research, the white papers that Peter Orszag wrote after reading MedPac reports and the Dartmouth reserach , Dr. Don Berwick’s book (Escape Fire)and his research at IHI, plus Atul Gawande’s writings all describe how we can rein in health care spending –and lift quality– by eliminating waste.
(I bring much of their research and thinking together in Money-Driven Medicine.)
As Medpac has pointed out, that means changing how we pay for care, what we pay for, and how it is delivered.
The House bill does all of those things. (Again, to appreciate what it does you have to read the 1000 -plus page bill. Or, if you don’t have time, you have to trust people like me who have read the bill.)
If we know what has to be done, why didn’t we do it sooner?
Because conservatives have been in control of Congress for most of the past 30 years, and they allowed corporations, and corporate lobbyists to take over our health care system, turning it into a system designed to generate huge profits–putting profits ahead of patients.
One man’s overtreatment is another man’s revenue stream. The lobbyists don’t want us to rein in spending.
With the election of Barack Obama, we reached a turning point — much like the turning point of 1980, when Ronald Reagan was elected, which lead to 30 years of largely conservative government.
This time,we may be read for progressive reform. A “new” New Deal. The politicians who put together the House bill (and it is completed, by the way) are willing to stand up to the lobbyists.
The House bill give Medicare the power to negotiate for discounts on drugs; it regulates insurers; it tells insurers they can’t charge co-pays for preventive care; it tells insurers that they can’t cap how much they will pay out to a given customer over the course of a year, or over the course of a lifetime. (On an annual basis, an individual cannot be asked to pay more than $5,000 out-of-pocket, $10,000 for a family. No more medical bankruptcies)
The House bill tells insuers it can’t refuse to cover someone–or charge them more–because of pre-existing conditions.
The House bill also lets Medicare–and the public option– adjust how much it pays doctors (this will mean slicing fees for some specialists’ procedures as Medicare has already announced that it will begin to do). The House bill says Medicare can to pay hospitals for readmissions of they report an excessive number of preventable readmissions.
Lobbyists are not happy about any of these provisions. This is the first time in a great many years that a chamber of Congress has stood up to the for-profit health care industry.
The bill passed by the HELP bill in the Senate is quite similar.
The only obstacle: Sen Baucus’ Finance Committee and his gang of six.
Kristi–
When we embark on passing legislation we have to do some back-of-the-envelope projections as to what the likely outcome will be in terms of costs and savings–just as you would try to make some projections if you bought a new home in terms of what it would cost you to repair it, to pay property taxes, to pay the mortgage, to pay energy bills, etc. over the next 10 years.
But we also have to understand that these estimates are just that –estimates that will have to be constantly revised .
It’s a matter of holding two ideas in your mind at the same time– this is our best estimate of likely costs and savings, and we understand it is a guesstimate and will be wrong in many ways.
The same thing would happen if you sat down to make up a 10 year budget for your family. On the one hand, you can’t predict the many things that will happen over 10 years– raises, job losses, birth of a child, real estate prices going up or down, interst rates (and your mortgage) going up or down, college tuition ten years from now, etc.
Yet, making a 10-year budget can be very useful in helping you organize your thoughts about your finances and think clearly about how much you should be trying to save each year.
Ed– evidence for your statement that no government program has ever gotten smaller or saved money? I’m afraid you are mistaken.
Maybe things will have to get worse before that happens. (Maybe we’ll be ready for progressive reform only after the recession deepens, unemployement hits 15% or higher, and the average upper-middle class family has no heath insurance–or only bare-bones Medicaid- like insurance that many doctors won’t take.
Dr. Calm–
Yes, economists assume that we are rational actors who normally act in our own self-interest.
Yet the history of the wars we wage on each other (and ourselves) stands as proof that this just isn’t true.
Maggie,
You said: “If you didn’t see ANY (emphasis added) predictions of the mortgage meltdown, then you don’t read the same economists that I read.”
I said: “I don’t recall reading A LOT (emphasis added) of forecasts from economists about the mortgage crisis/financial meltdown that recently occurred BEFORE it happened, only explanations AFTER.”
Please note your substitution of “ANY” for my “A LOT”. (In fact I have read several economists who can rightly claim to have predicted the housing bubble; Robert Schiller and Peter Schiff come to mind. I am sure there were several others.) But in order for Economic advice to be useful, a non-Economist shouldn’t have to pick which of a few Economists to listen to from the larger number saying the opposite – even the broken clock is right twice a day.
In the case of Health Care reform there are Economists on both sides of the issue. People who oppose Health Care Reform will trot out Economic “experts” like the head of the CBO to support their opinions (which were actually formed before they even heard what the CBO had to say) Similarly, those who favor Health Care Reform will latch on to other Economic “experts” who support their views. For a person in the middle who hasn’t made up his mind, listening to Economists is likely to be more frustrating than illuminating.
Legacy–
Dr. ATul Gawande points out that doctors, like everyone else, live on a bell curve.
On the far right, the excellent doctors. On the far left, the doctors who really shouldn’t be practicing medicine.
The vast majority– the mediocre middle.
The same can be said of ecnomists –and journalists who write about economists.
I’m afraid a “non-Economist” DOES ” have to pick which of a few Economists to listen to from the larger number saying the opposite.”
One tip– usually the conventional wisdom is wrong–which is why only a few people get rich. And secondly, if the economists are saying what most people WANT to hear, it’s very likely that they’re wrong.
(For instance, the people now saying that the recession is over If you read economic history, you know that long spells of prosperity are followed by long, deep recessions. )
Sorry, but that’s just the way it is. You need to pay attention to economic history and the economist’s track record.
At least listening to the wrong ecnoomist is not as dangerous as listening to the wrong doctor. . . .
Another tip– follow the people who make money. Warren Buffett got out of the stock market in the late 60s–gave his investors their money back–and stayed out until after the crash of ’73-74.
He got out of the U.S. stock market again in the late 1990s, putting viritually all of his money in bonds (via insurance companies).
Who was he listening to? The same people I was listening to.
I “follow” Buffett and a number of other brilliant economists and investors who are very good at “calling” markets and the economy. Anyone can be lucky one or twice.
What one looks for are people who have been consistently right for 25- 45 years.
Often they are “early”–they see a truck heading for them before others do, but it never hurts to step out of the way a little early. Being late is fatal.
Finally, the way, no one thinks of Elmendorf as a brilliant economists. Not recogized by his peers as one of the top economists–never received awards–i.e. he’s not Krugman, not STiglitz, not Orszag, not Victor Fuchs, not Reinhardt . . .
There isn’t a top-flight health care economist who is against health care reform.
The people against healthcare reform generally know very little about the economics of health care.
That’s why they dont’ realize that we’re heading for a brick wall if we don’t have real reform very, very soon.
(These are the same folks who didn’t realize that Fannie and Freddie were heading for disaster.)
Dr. Calm, you said “[h]ow sad it is that we willingly rubber stamp trillions for discretionary wars yet are unwilling to bear the cost of caring.” First, “willingly rubber stamp?” I seem to recall a lot of protests for the last war we entered into. Were those willing rubber-stampers? Second, it may be “sad” but, unfortunately for you, Congress, and the President, one of those two options (war) is addressed in the Constitution; the other (a “right” to health care) is not. What’s next – a right to housing, food, and cars? “Yes,” says the socialist!