Contemplating Health Care Reform

Wednesday, August 12, 2009

How much will health care reform cost?

The Congressional Budget Office estimates proposed health care reforms will cost around $1 trillion over 10 years. Is this a credible cost estimate? One way to find out is to examine past cost estimates for related programs, particularly Medicare.

Leading up to passage and implementation in 2003, Medicare part D (prescription drug benefit) was estimated to cost $400 billion over a decade. Two months later, the estimate was $534 billion. The actual current cost estimate of the program is $900 billion.

The Senate Joint Economic Committee released the following results from a recent study of health care "improvement" cost estimates:

Medicare (entire program). In 1967, the House Ways and Means Committee predicted that the new Medicare program, launched the previous year, would cost about $12 billion in 1990. Actual Medicare spending in 1990 was $110 billion—off by nearly a factor of 10.

Medicare home care benefit. When Congress debated changes to Medicare’s home care benefit in 1988, the projected 1993 cost of the benefit was $4 billion. The actual 1993 cost was more than twice that amount, $10 billion.

Medicare catastrophic coverage benefit. In 1988, Congress added a catastrophic coverage benefit to Medicare, to take effect in 1990. In July 1989, the Congressional Budget Office (CBO) doubled its cost estimate for the program, for the four-year period 1990-1993, from $5.7 billion to $11.8 billion. CBO explained that it had received newer data showing it had significantly under-estimated prescription drug cost growth, and it warned Congress that even this revised estimate might be too low. This was a principal reason Congress repealed the program before it could take effect.

Source: Are Health Care Reform Cost Estimates Reliable?

(h/t Heritage)

Why is government so bad at estimating cost? A few reasons:

1. Government has a vested interest in underestimating and understating cost, but they do not have incentive to minimize cost, once programs are enacted. As we mentioned in a previous post, government is largely impervious to competitive forces, which result in greater efficiency and lower prices.

Further, the CBO estimate likely understates the actual cost, as it employs static scoring, which incorrectly assumes tax rate changes do not result in revenue changes and/or behavior changes.

2. Government employees, however well-intentioned they may be, are not in the business of maximizing consumer choice or lowering prices, as they have neither the incentive nor ability to do so. That can only be accomplished in a private consumer marketplace, not by a group of bureaucrats.

3. Independent modeling indicates a larger utilization of the public plan for larger companies, something the CBO does not emphasize. These data seem to suggest costs as high as $2.1 – $2.4 trillion for the current House proposal.

(reports available here, h/t City Journal)

So much for the plan adding "only" $1 Trillion to the deficit.

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