Sunday, September 13, 2009

What is the Congressional Budget Office and What is Its Role in Healthcare Reform?

The Congressional Budget Office has come up frequently in the current debate over healthcare reform. Here is a look at the Congressional Budget Office (CBO) and the role it is playing in the reform process.

A Reputation for "Competence and Integrity"

The CBO is a non-partisan agency that provides Congress with “objective, nonpartisan, and timely analyses to aid in economic and budgetary decisions." One of the CBO's most important functions is to estimate the costs and revenues of proposed legislation. According to former CBO director Rudolph Penner, the CBO's "cost estimates guard against the Congress unwittingly adopting programs whose costs are very different in the long run than in the immediate future; and its policy analysis helps the Congress decide what works and what doesn't work."

The nonpartisan nature of the CBO is essential to its credibility. Penner says, "it lends more stability as political power shifts and that allows the development of specialized skills in different areas of public policy. A nonpartisan staff often has more credibility with outsiders, and although there are exceptions, those analysts who try to combine rigorous policy analysis with political judgments typically do not do well with either. It is better to let analysts be analysts and to let elected politicians decide which of the analytic results can be sold to the voters."

As pointed out in a recent New York Times Op-ed piece, "for competence and integrity, few organizations command more respect in Washington than the nonpartisan Congressional Budget Office." Any CBO estimate of the cost of legislation will carry significant weight in a debate over whether a proposed bill is financially feasible. Once a CBO estimate is issued, it is taken seriously (Even if it is incorrect, but we'll get to the question of accuracy in a bit). Legislators aren't about to start arguing the nuts and bolts of budget analysis. "Trying to dispute technical details from CBO can quickly make voters’ eyes glaze over.

An Expensive Endeavor

When some legislators were worried about the cost of trying to provide medical coverage for the roughly 30 million Americans who don't have health insurance and the CBO released preliminary estimates in June suggesting the price tag of proposed plans would be over $1 trillion, there was legitimate concern that the endeavor would be too expensive. Politico correctly predicted that "as CBO estimates about the high cost of the health care proposal emerge in coming months, Republicans will continue to pound Democrats about the impact on the deficit."

In July when Congress was scurrying to meet President Obama's deadline to pass a bill before the August recess, CBO director Douglas Elemendorf testified before the Senate Budget Committee with a bleak assessment of the cost of proposed healthcare legislation. The Washington Post reported that Elmendorf's "
remarks suggested that rather than averting a looming fiscal crisis, the measures could make the nation's bleak budget outlook even worse." Elemendorf stated that while reforming the healthcare system could be a source of savings, the proposed "changes that we have looked at so far do not represent the sort of fundamental change, the order of magnitude that would be necessary, to offset the direct increase in federal health costs that would result from the insurance coverage proposals."

The estimates from the CBO along with Elmendorf's testimony provided some valuable ammunition for opponents arguing that proposed plans were not financially prudent. It became apparent that a positive assessment from the CBO was a hurdle healthcare reform would have to clear. Legislators would have to come up with ways to counteract the large expenses of expanding Medicaid and Medicare and providing subsidies for people who cannot afford to purchase insurance on their own.

(One method of paying for the expanded coverage proposed by House Democrats was a surtax on the wealthiest 1 percent of Americans. This proposal, however, seemed to lose steam almost immediately after it was proposed when it became apparent that a bill with such a provision would probably not make it through the Senate. Democrats would have to find something more palatable to the conservative members of their own party.)

Clearing the CBO Hurdle

In early September when Barack Obama addressed Congress in a joint session, he vowed not to sign any bill that adds "one dime" to the budget deficit. He argued that the savings that come from reforming the current healthcare system would cover the added expenses of expanding insurance coverage. He then added a new proposal: automatic spending cuts. A healthcare bill should include a trigger mechanism so that if the savings promised by proponents of reform do not materialize, spending cuts should be imposed.

The President did not offer specifics about where these cuts should come from, but as explained by Jackie Calmes of the New York Times, he may not have to. He can let Congress argue over the details. With such a trigger mechanism in place,
"precedents suggest that the nonpartisan Congressional Budget Office would be likely to conclude that the bill would not add to annual deficits [. . .] and a finding of deficit neutrality from the budget office, which 'scores' costs and savings over a 10-year period, is crucial to passing a health care bill."

Just days after the administration proposed automatic spending cuts, the CBO released a new estimate putting the price tag of healthcare legislation at $880 billion, a significant decrease.

Trigger Happy

While automatic spending cuts appear to be an effective means of getting a favorable CBO assessment, how effective will they be in practice? As Megan McArdle explains in the New York Times Room for Debate Blog, "we have already tried, and failed, to rein in Medicare costs with automatic spending cuts. In 1997, Congress enacted a rule that was supposed to control costs by triggering automatic cuts in doctor fees if they grew faster than the economy as a whole. Every year, Congress ritually votes to delay the cuts for another budget cycle. At this point, the next scheduled 'automatic' cut will slice doctor payments by more than 20 percent. The larger these disparities grow, the less likely they are to ever happen."

“We’ve been burned on triggers before: they get ignored, waived, and sometimes eliminated altogether,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, which is supported by business, to the New York Times. “We need to develop a serious and reliable trigger that politicians are actually willing to abide by.”

Questions of Accuracy and Reliability

I'm sure CBO analysts know what they're doing, but I can't help but question accepting the validity of automatic spending cuts when they have such a poor track record. What happens if the savings don't materialize and Congress chooses to ignore or postpone spending cuts? Similarly, it seems strange not to factor savings from proposed reforms into budget estimates. Apparently, "such savings cannot be scored by the Congressional Budget Office." And this leads us to questions of accuracy and reliability.

In a statment before Congress, Former CBO director Rudolph Penner, admitted, "it is inevitable that some of CBO's output will be wrong and some of it will be annoying to one political party or the other, either because mistakes were made or good analysis was badly timed." He went on to explain that, "no one forecasts anything very well." In the case of budget forecasting, "relatively small percentage errors in forecasting revenues and outlays [. . .] imply very much larger percentage errors in forecasting surpluses or deficits."

In a recent New York Times op-ed piece, Jon Gabel, a senior fellow at the National Opinion Research Center of the University of Chicago, argues that "the budget office’s record is suspect. In each of the past three decades, when assessing major changes in Medicare, it has substantially underestimated the savings the changes would bring." He goes on to assess the accuracy of CBO estimates regarding the last three instances of major healthcare legislation finding large discrepancies in each case. Gabel concludes that the CBO "has substantially overestimated the cost of health care reform three times out of three. As Congress now works on its greatest push for reform in generations, the budget office needs to revise the methods it uses to make predictions about costs."

Three Points

1) A favorable estimate from the CBO is essential for a healthcare bill to pass.
2) The CBO has overestimated the cost of the last three major pieces of healthcare legislation.
3) To get a favorable CBO estimate, the Obama administration has proposed automatic spending cuts which Congress has a history of ignoring when the cuts are supposed to be triggered.

What we can hopefully conclude from these three points is that a healthcare bill will pass, the savings will exceed expectations, and the automatic spending cuts will never need to be triggered. But as Rudolph Penner acknowledged, "nobody forecasts anything very well." Lets hope small miscalculations today don't lead to bigger problems down the road.

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