On Medicare and Budget Numbers, CBO Is Failing

Posted July 3, 2003 at 1:30pm

Congress is poised to enact a Medicare drug benefit based on bad information. The Congressional Budget Office has failed its duty to provide lawmakers with a thorough and balanced analysis.

This is very bad news. During the past two decades, legislators relied on the CBO’s nonpartisan economic and budget estimates. In the early 1990s, the CBO produced detailed reports on every major health proposal offered in Congress. Lately, however, the CBO has been falling down on the job, and not just on health care.

The CBO’s most basic product, its 10-year budget “baseline,” contains two glaringly unrealistic assumptions: first, that tax cuts will expire on their scheduled “sunset” dates, and second, that defense and domestic spending will suddenly slow to a growth rate of about 2.5 percent. As a result, the CBO projects that this year’s $400 billion-plus deficit will swing back to surplus over the next several years. CBO’s official budget projections state that by 2012, the federal budget will have a $400 billion surplus.

That conclusion is ridiculous because those assumptions are wrong. Hundreds of billions of dollars in tax cuts will not be allowed to suddenly expire — the impact on the economy would be far too disruptive. And defense and domestic spending is growing two to three times faster than inflation (even before considering the one-time cost of wars in Afghanistan and Iraq). There is no indication that the pace of spending will slow.

The CBO’s recent health care work is just inadequate. Congress is poised to enact a $400 billion drug benefit in Medicare. Or so it thinks. No think tank in Washington (and few economists or actuaries outside the Beltway) believe the Medicare bills will work as intended. The basic structure — a stand-alone, high-premium, limited-coverage, drug-only benefit delivered by private risk-bearing health plans — is “not found in nature,” according to Medicare’s top administrator. As a result, the new benefit will likely require hundreds of billions in extra federal funding to correct workability problems and smooth over inevitable political emergencies.

Why does the CBO not explain this? The overarching problem at the CBO is a creeping bureaucratic mind-set.

The CBO has become a routine- and rules-dominated agency, in which nonperformance has few penalties. The organization acts like a slave to estimating requirements forced on it by a manipulative and deceitful Congress. It sees little need to fight back and warn Congress of its folly. Instead it tries to play within the rules and avoid controversy.

A senior CBO staffer told me a couple of months ago that it wasn’t his problem if the Medicare proposal didn’t work. The CBO would “score” it as if it did, and if Congress had to pour more money in later, the CBO would score that too.

That mentality is a far cry from what Congress wanted when it formed the CBO: a strong, independent group of economists charged with explaining policy proposals and forcing legislators to recognize budgetary reality.

If the current Congress rejects realistic assumptions, the CBO should just put the Congressionally directed estimates in an appendix. But it must tell the truth up front to the media, the public and (whether they like it or not) the legislature.

At a recent legislative meeting in the Senate Finance Committee, Majority Leader Bill Frist (R-Tenn.) — a health policy expert — seemed genuinely shocked when new CBO Director Douglas Holtz-Eakin explained that under the Medicare proposal, 37 percent of seniors with employment-based retiree drug coverage would be dropped from those plans.

The CBO should have explained the proposal’s impact on retiree coverage long before. After all, Congress has been considering similar bills for several years. In fact, the main (heretofore silent) critique of the CBO among Medicare reform advocates in the past several years is that proposals like the Senate bill are the only market-based ideas the CBO has even considered. Other ideas, including the Breaux-Frist competitive proposal, proposals to meld drug benefits with supplemental “Medigap” coverage, and the more recent “low-income, catastrophic and discount card” plans, have gotten virtually no attention.

It isn’t easy (or politically correct) to bash the CBO. Cost estimators are often scorned by irresponsible legislators and political partisans.

But the nation desperately needs an aggressive, determined and vocal CBO. The short-lived era of easy budget choices is almost over. Under realistic assumptions, the United States faces deficits of 3 percent to 4 percent of gross domestic product throughout the decade. After 2010, as the baby boom generation retires and demands entitlement benefits, our children will grapple with truly massive and economically untenable deficits.

If the CBO regains its footing soon, legislators will have a chance to address those problems before they become crises. We must face reality.

The CBO can’t allow our leaders to pretend that huge tax cuts just go away automatically, or that giant Medicare expansions can be rushed through Congress without a thorough evaluation.

Jeff Lemieux is executive director of Centrists.Org and an economist with the Progressive Policy Institute. He was staff economist and cost estimator for the bipartisan Breaux-Thomas Medicare Commission in the late 1990s and is a former Congressional Budget Office health economist.