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Shooting the Messenger: CBO in the Crosshairs

Thursday, June 4, 2009

The official scorekeeper for health reform legislation in Congress has stated that the overhaul proposed by the administration could increase costs. What to do? Shoot the messenger.

The Obama administration has staked its healthcare package on its ability to cut health costs, which the administration has termed “the real deficit threat.” The Congressional Budget Office (CBO) has put a kink in the works, however, by stating that the administration’s main overhaul ideas would do little to reduce costs and might even increase them. Rather than take on the real reason U.S. health costs are so high—our system’s strong incentives to overspend—the new theme on the left is simply to bash the CBO and hope they’ll give in.

The administration proposes three main reforms to reduce healthcare costs: First, increased use of information technology, particularly electronic medical records; second, disease management, the intensive treatment and follow-up on chronic diseases such as diabetes; and third, comparative effectiveness research, which is cost-benefit analysis to find the best treatment for each dollar of cost.  

But here’s the problem: the CBO, the official scorekeeper for any health reform proposed in Congress, has stated none of the reforms proposed by the administration is likely to significantly cut healthcare costs. In fact, according to CBO, these reforms could even increase costs.

CBO’s skepticism arises for two reasons. First, these reforms would be applied to all patients but would reduce costs for only some of them. While some patients may see better care due to disease management, for instance, it is not clear that costs for these patients will be reduced, and even less so that they will be reduced sufficiently to cover the costs of treatment for the majority of patients who are unlikely to see large benefits.

Second, unless new incentives encourage doctors and patients to seek out cost-effective care, potential savings are likely to be ignored. For instance, comparative effectiveness research might determine that one drug is more cost-effective than another, but until the healthcare system makes cost a factor it cannot be expected that this research will alter treatment decisions.

So, in CBO director Doug Elmendorf’s March testimony before Congress, he says, for instance:

The adoption of more health IT is generally not sufficient to produce substantial savings because the incentives for many providers to use that technology in ways that control costs are not strong . . .

. . . Generating additional information [through comparative effectiveness research] is likely to have a very limited effect on spending for healthcare.”

In an earlier analysis of the academic literature on disease management, CBO said:

There is insufficient evidence to conclude that disease management programs can generally reduce overall health spending.

The key to lowering costs, Elmendorf stressed, is changing incentives. His testimony used the word “incentives” 33 times, by my count. Both the income and payroll tax exclusion for employer-sponsored healthcare and the third-party payer structure of most health coverage encourage patients to demand services and doctors to provide them even if the value of those services does not exceed their cost. The result: high costs and wasteful treatment.

Unless new incentives encourage doctors and patients to seek out cost-effective care, potential savings are likely to be ignored.

The rational response to CBO’s arguments would be to focus more on improving incentives. The actual response? Bash CBO. A spreading meme on the political left is to focus on CBO’s role as the scrooge in the healthcare play, and on how CBO’s lack of vision and insight threatens to spoil a good time for everybody.

The Washington Post’s Steve Pearlstein takes on the “budget scolds” at CBO, saying the agency’s refusal to play along “will leave Congress with no choice but to try to finance its health-reform efforts by raising taxes or limiting payments to doctors and hospitals, possibly jeopardizing the entire project.” But unless the administration is willing to either radically change incentives in a free market direction, or use heavy-handed cost containments that would surely doom the proposal politically, those are the choices it faces.

Likewise, The New Republic’s Jonathan Cohn bemoans “the bean counters who could kill healthcare reform,” saying that despite prodding from former CBO Director Peter Orszag, now Obama’s budget chief, CBO analysts are not projecting the kinds of savings the left would like to see.

The problem here is that CBO’s take is more consistent with outside research. For instance, a new report compiled by the Fiscal Seminar, a group of think tank experts spanning the ideological spectrum says:

While some general consensus is emerging on the need to improve healthcare delivery through such means as health information technology and comparative effectiveness research, less progress has been made in understanding how healthcare cost growth might be reined in through these approaches. Indeed, most analysts believe such measures will have modest effects at best unless they are combined with real limits on healthcare expenditures.

In the end, it is unlikely CBO will be cowed and will realistically score any health reform bill before Congress passes it. This is why, despite holding large congressional majorities, the prospects of the administration’s proposed healthcare overhaul remain uncertain.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute.

FURTHER READING: In “Obama’s Truly Exceptional Budget and Tax Plans,” Biggs writes that despite predicting almost implausibly strong economic growth over the next ten years, the administration is projecting enormous budget deficits. In “Full Faith and Overextended Credit,” Biggs warns that the federal government’s long-term budget could bring about a financial crisis that surpasses the current one. And in “The Straw Men of Social Security,” the author argues Social Security is badly in need of reform.

Image by Darren Wamboldt/Bergman Group.

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