Study: CBO Underestimates Cost Savings from Health Reform

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When faced with the challenge of projecting the economic impact of health reform measures, the Congressional Budget Office (CBO) has historically underestimated savings and overestimated costs, a new <a href="/publications/issue-briefs/2010/jan/does-congressional-budget-office-underestimate-savings-reform">Commonwealth Fund–supported study</a> finds. The problem, according to the study, lies with the agency's "cautious methods." <br /><br />Jon Gabel, a senior researcher at the National Opinion Research Center in Washington, D.C., argues that CBO's reliance on historical precedent in estimating the costs of substantial legislative reforms—such as those involving a dramatic shift in financial incentives for health care providers—often leaves it with little basis for estimating savings. "Too often, a lack of information is taken to mean zero savings, but zero is not a logical estimate," Gabel says. <br /><br />The study examined three major changes made to health care financing in recent decades to see how CBO scored the expected changes in spending and what the actual outcomes of the new policies were. The reforms included: the change made in 1983 to the way Medicare pays hospitals under the prospective payment system and diagnosis-related groups; changes in the payment of hospitals, skilled nursing facilities, and home health care under the Balanced Budget Act of 1997; and the Medicare Modernization Act of 2003, which, among other things, made prescription drug coverage available to Medicare beneficiaries. <br /><br />In each case, CBO substantially underestimated savings and thereby overestimated the cost of Medicare to the federal budget. For example, actual federal spending on Medicare Part D drug benefits has been 40 percent lower than CBO's projection. <br /><br />CBO has had particular difficulty assessing the impact of multiple, simultaneous changes designed to produce a synergistic effect—such as the comprehensive package of health care delivery, payment, and financing reforms now making its way through Congress, the study finds. Gabel says that increased fraud and abuse oversight should further control health spending. <br /><br />"If history is our guide," Gabel concludes, "the combined effects of these shifts will be far greater than the sum of the independent effect of each change."<br />