How Do We Know It Will Cut the Deficit by $130 Billion?

How the Congressional Budget Office figures out the cost of the health care reform bill.

According to preliminary cost estimates, the Congressional Budget Office puts the Democrats’ final health care package at $940 billion over 10 years. The CBO report also estimates that the final plan will cut the federal deficit by $130 billion in its first 10 years and by $1.2 trillion in its second 10 years. Last July, Brian Palmer examined how the CBO calculates the cost of legislation. The original article is reprinted below.

A deal struck among House Democrats on Wednesday will cut the 10-year cost of health care reform from the Congressional Budget Office’s original $1 trillion estimate to $900 billion. How does the CBO calculate the costs of legislation?

By studying the best historical analogue. When the office receives a piece of legislation, it first determines how the bill would change the status quo and whether similar changes have occurred in the past. The CBO can reliably predict the budgetary impact of changes in marginal tax rates, for example, because the effects of past tax-rate adjustments are so well-documented. For many bills, however, the proposed changes would be unprecedented or so complex that forecasters have to flex their imaginations to find serviceable analogues.

The congressional accountants are required to calculate the budget impact of any bill approved by committee in a process known as scoring. (For some important bills, such as the health care legislation, the office acts earlier in the process.) Even if the forecast is speculative, the CBO must come up with a hard number so that Congress can offset the costs with spending cuts or increased revenue.

The forecast for the health care bill is more speculative than most. To get a sense of what these changes might cost, accountants have to guess how employers might respond to the “pay or play” provisions: How many would subsidize employee health insurance, and how many would rather pay the government penalty? To make things more difficult, the reform bill would offer a public health insurance plan but does not give any details on what benefits would be included. Then there are political factors that are nearly impossible to predict: Proponents of the bill claim that by implementing the recommendations of a Medicare advisory committee, the government can save substantial sums. But no one really knows who will be on the committee or what their recommendations might be—and the CBO has to speculate about the possible influence of lobbyists.

The behavior of private individuals is more difficult to predict. You might assume that everyone will just buy into the health options that give them the most coverage for the least amount of money. But that’s not necessarily the case. If information is hard to come by, or if some choices involve new bureaucratic hurdles, then people might not always pursue their economic interest. That’s what happened when the government introduced food stamps, Supplemental Security Income, and Temporary Assistance for Needy Families, among other benefit programs. To figure out how Americans might respond to public health insurance or federal subsidies for private plans, CBO looked at the response to these near analogues.

There are also many basic questions about the efficacy of certain programs on which the data are unsettled. For example, does offering long-term homes for the chronically ill save money? What about electronic health records or comparative effectiveness research? On these unresolved issues, the CBO consults with a panel of independent advisers, makes its best guess, and flags the issue in its estimates. Advocates of reform complain that the office chronically underestimates the savings from these more speculative programs.

Certain issues are not included in a bill’s score. The accountants do not estimate what impact a bill might have on the macroeconomic climate. The availability of a public health care plan, for example, could shrink the labor force by increasing retirement among nonseniors. Inversely, greater access to health care might decrease morbidity and mortality, thus expanding the labor force. Neither possibility is considered. Also, the CBO sometimes neglects to consider certain costs—either because of time constraints or uncertainty—and makes note of the omission in their estimates. The recent health care forecasts do not consider the administrative cost of implementation.

So how good is the CBO? Not so great on past health care legislation. According to critics, CBO overestimated the five-year cost of the Medicare prescription-drug benefit by 35 percent. And after the 1997 Balanced Budget Act, Medicare spending dropped twice as fast over three years as CBO predicted. By all accounts, these two bills were easier to model than the current bill.

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