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Why Reform Will Cost Taxpayers More, Much More

Saturday, December 26, 2009

Let’s look at some of our recent cost overruns in government-driven medical spending.

Congress is telling us that the different healthcare bills it is considering will cost roughly $900 billion over ten years and will somehow end up saving taxpayers’ money in the long run. If history is our guide, this claim will not be correct as massive cost overruns are common in government.

Take Medicare, for instance. In 1967, long-run forecasts estimated that Medicare would cost about $12 billion by 1990. In reality, it cost $110 billion that year. Today, it costs $500 billion.

Moreover, based on Congressional Budget Office data, this chart below illustrates how long-term projections of Medicare spending have steadily increased, even in recent years and over short periods of time. In 2005 for example, CBO projected that Medicare would cost $1.5 trillion in 2050. Two years later, in 2007, the same CBO projected that this cost would reach $2.8 trillion. And in 2009, it projected that the cost would be $3 trillion instead. In other words, this projected cost doubled in four years.

deRugy chart 12.23.09

This upward revision of projected costs comes despite CBO’s allowances for “excess cost growth,” meaning that CBO is aware that it tends to underestimate the long-term cost of programs, so it allows for some excess spending in its projections.

Furthermore, the actual expenditures exceed projections—in 2008, federal outlays for Medicare exceeded most recent projections by $63 billion; in 2009, federal outlays for Medicare exceeded projections by more than $148 billion.

Scoring agencies, such as CBO or the Office of Management and Budget (OMB), are renowned for their inability (intentional or not) to project program costs accurately. The bad news is that once a program is in place, there isn’t much hope for taxpayers, who will be left with a hefty and inflated bill. According to the Wall Street Journal, since 1965, "U.S. health spending has risen about 2.7% faster than the economy and on current trend would hit 20% of GDP within a decade. Every public or private attempt to arrest this climb has failed: wage and price controls in the 1970s, the insurance industry’s ‘voluntary effort’ in the ’80s, managed care in the ’90s.”

This should be a lesson for those who truly believe that the current healthcare overhaul considered by Congress today will reduce cost in the long run. Even Doug Elmendorf, the director of the CBO, acknowledged on December 7 the limitations and possible underestimation of its own “$900 billion” healthcare Senate plan scoring. Of course, this won’t be the first time CBO underestimates a healthcare program’s long-term costs—and it won’t be the last.

Veronique de Rugy is a senior research fellow at The Mercatus Center at George Mason University.

FURTHER READING: de Rugy regularly inspects government spending for THE AMERICAN. She explains the “State of the Stimulus,” how “The Jobs Picture Crashes Into Debt Realities,” and offers “A Peek Inside the Deficit.”

Image by Dianna Ingram/Bergman Group.

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