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Obama Budget Rigs Healthcare Numbers

Friday, February 5, 2010

For the first time by any administration in memory, the Obama budget forecast rejects the Medicare Trustees’ projections for long-run healthcare cost growth. Why would the White House do this?

The Obama administration’s fiscal year 2011 budget continues a pattern of ignoring independent analysis and rigging economic assumptions to meet political goals. For the first time by any administration in memory, the Obama budget forecast rejects the Medicare Trustees’ projections for long-run healthcare cost growth. The reason: the Trustees’ projections undercut the administration’s narrative that increased federal control over private sector healthcare could painlessly reduce Medicare and Medicaid costs. The Obama budget instead assumes long-term health cost growth at twice the rate projected by the Trustees.

The White House’s assumptions are factually implausible. Worse, they threaten to politicize the Social Security and Medicare Trustees, whose process for estimating entitlement costs has until now stood out for its lack of political influence.

Ignoring independent analysis is a pattern for the Obama administration.

The budget’s long-term analysis projects Social Security, Medicare, and Medicaid spending over 75 years. While past administrations have sometimes used their own productivity and interest rate assumptions, these changes generally have only minor effects. But all past administrations, and even the Obama administration in its fiscal year 2010 budget, adopted the Social Security and Medicare Trustees’ baseline program-specific assumptions, including the rate of healthcare cost growth.

These Trustees’ assumptions are generated in a process deliberately insulated from politics. While cabinet members make up four of the six Medicare and Social Security Trustees, White House staff do not attend meetings of the Trustees working group and have no say regarding economic or demographic variables. During my time at the Social Security Administration I never saw politics influence how assumptions were chosen.

The rate of health cost growth per beneficiary combines with population aging, which swells the number of beneficiaries, to raise overall Social Security, Medicare, and Medicaid spending. The Medicare Trustees have for years projected that per capita health costs will grow around 1 percent faster than gross domestic product. In health experts’ lexicon, “excess cost growth” will equal “GDP plus 1 percent.”

In the context of backing their political claims, these assumptions allow the White House to produce charts seemingly backing the budget’s claim that excess cost growth is ‘the most important single factor driving the long-run budget outlook.’

The 2011 Obama budget, by contrast, assumes per capita health costs will grow at GDP plus 2 percent, double the Trustees’ rate. The effects of this change are staggering: the administration’s 2010 budget, which followed the Trustees assumptions, projected Medicare costs of 9.6 percent of GDP by 2080. The 2011 budget, which uses White House assumptions, projects Medicare will consume 22 percent of GDP by 2085.

To what possible purpose could these changes have been made? The answer lies in the administration’s case for increased federal control over private-sector healthcare.

Since coming into office, the administration has argued that “the deficit impact of every other fiscal policy variable is swamped by the impact of health-care costs,” as Obama budget director Peter Orszag wrote in the Wall Street Journal last year. Excess cost growth, Orszag argued, is the real deficit threat. The administration similarly downplays the role of population aging.

But this debate isn’t merely academic. The administration claims that rising costs for Medicare and Medicaid originate in the private health sector. The best way to reform Medicare and Medicaid, Health and Human Services Secretary Kathleen Sebelius has said, is to “fix what’s broken” in the rest of the healthcare system. The president flatly states, “healthcare reform is entitlement reform.”

Biggs 2.4.10 A

They’re wrong. As I and other critics have shown, population aging is by far the biggest contributor to entitlement spending over the next several decades and will be the principal cost driver through the mid-2050s. Partly as a result of these analyses, Orszag’s successor at the Congressional Budget Office, Douglas Elmendorf, altered the agency’s presentations to more accurately reflect aging’s role.

In other words, even if healthcare overhaul managed to “bend the cost curve” and reduce per-capita health spending, the surge of retirees collecting Medicare, Medicaid, and Social Security benefits would still push government spending ever upwards. Thus, the facts undermine the administration’s argument for greater regulation over private-sector healthcare.

Seen in isolation, assuming health cost growth of GDP plus 2 percent seems bizarre. An expert panel assembled by Medicare declared that 2 percent excess cost growth was “implausibly large,” as it implied total private and public health expenditures swallowing the vast majority of GDP. Orszag himself testified before Congress that simple extrapolations of historical cost trends have “significant shortcomings” and that “even in the absence of changes in federal law, spending growth would probably slow eventually.” A number of economic studies that modeled demand for healthcare concluded that long-term costs could grow even more slowly than Medicare currently projects. The White House clearly seems on the wrong side of expert opinion.

Biggs 2.4.10 B

But in the context of backing their political claims, these assumptions allow the White House to produce charts seemingly backing the budget’s claim that excess cost growth is “the most important single factor driving the long-run budget outlook.” In short, it is an assumption of political convenience.

Ignoring independent analysis is a pattern for the Obama administration. During the healthcare debate, Medicare’s actuaries produced an analysis showing that congressional health plans would increase rather than decrease national health expenditures. The White House rejected the actuaries’ study and had the White House Council of Economic Advisors issue its own memo claiming that reform would “bend the cost curve.” Likewise, bright minds within the Office of Management and Budget surely thought that if the Medicare Trustees’ projections didn’t suit their needs they would simply generate their own.

Policy initiatives come and go, and the Obama administration’s healthcare overhaul may already have petered out. But as the Medicare Trustees work on the next report, there will be implicit pressure to produce assumptions that mirror those generated within the White House. Without such a change, the new White House baseline stands out like a sore thumb. But a process once corrupted isn’t easily purified.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute. From 2008–2009 he served as principal deputy commissioner of the Social Security Administration and as secretary of the Social Security Board of Trustees.

FURTHER READING: Biggs wrote about similar attempts in “Shooting the Messenger: CBO In the Crosshairs” and “Senate Obamacare Bill Depends on Enron Accounting for ‘Savings.’” He also answers the question, “Why Is There So Much Waste in U.S. Healthcare?” Veronique de Rugy explains “The High Cost of No Price” for healthcare spending, while Dustin Chambers details “What Is Driving Rising Healthcare Costs?”

Image by Darren Wamboldt/Bergman Group.

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