Executive Summary: Understanding CBO Health Cost Estimates

With so much happening in the health care reform arena, everyone is paying close attention to the budget analyses of the Congressional Budget Office (CBO). The CBO often uses sophisticated economic modeling and usually frames information in ways that match the specific requirements of the congressional budget process. This can make it a challenge at times to understand what the scores mean and don't mean.

What the CBO Does

The CBO is a key part of the budget process. The CBO provides six basic services in the ongoing health reform debate.

1. The CBO prepares cost estimates for proposed legislation. These are often made public, but the CBO also prepares confidential, behind-the-scenes estimates for staff and Members while they are in the process of developing legislation.
2. The CBO provides estimates of policy impacts that are budget-related. For example, when looking at recent health insurance proposals, the CBO included estimates of how the proposals would affect Americans' coverage.
3. The CBO decides if proposed policies should be treated as part of the government, and thus recorded on the budget for congressional purposes. This was a big issue during the Clinton health debate. At that time, the CBO said the federal requirements on the private sector were so tight that much of the health care system should be included in the federal budget.
4. The CBO decides if a drafted bill would impose mandates on state and local governments or the private sector and, if so, how large those mandates are. Mandates are sometimes used to challenge proposed legislation.
5. Upon request, the CBO provides more information that goes beyond the scope of basic cost estimates. This can be useful in really understanding budget scores.
6. The CBO devotes substantial resources to studies related to health policy and the budget.

What the CBO Doesn't Do

The CBO does not make policy recommendations. It is not the job of the CBO to encourage or discourage particular policy actions. The agency's role is limited to ensuring that Congress has the best possible budget information.

The Basics of Budget Scoring

• Scoring focuses on revenues and mandatory spending: Revenues are the money that the government raises through taxes, most importantly those on payrolls, individual incomes, and corporate profits. Mandatory spending is any spending that occurs outside the annual appropriations process.
• Scores may also mention discretionary spending, but they ignore interest: There are two other types of spending: discretionary spending and interest on the national debt. Discretionary spending is handled through the annual appropriations process. Interest on the national debt is technically a form of mandatory spending, but the congressional budget process does not consider it when evaluating legislation.
• Legislation can affect revenues and mandatory spending in various ways: When evaluating proposed legislation, budget analysts try to track all the ways, both direct and indirect, that it might change revenues and mandatory spending.
• Policy proposals are evaluated relative to a baseline: To estimate the budget effects of a bill, the CBO compares it with a baseline estimate of what would happen without the legislation.

Key Issues in Scoring Health Proposals

Behavioral responses are important. When the CBO makes projections, it tries to predict how everyone (consumers, workers, providers, employers, state governments, insurers, etc.) would respond to a new policy change.

Changing health habits and medical practices doesn't necessarily reduce costs. In recent years, lawmakers have often considered policies that would change health habits or the practice of medicine. These proposals come in many flavors but share common goals of improving care and reducing costs. However, these policies may not reduce federal spending as much as proponents expect, if at all.

Policy impacts depend on payment rules. Health spending is often controlled by formulas that determine health care provider payments and beneficiary premiums. These formulas can offset or eliminate any federal savings that might result from changes in medical practices.

Budget scoring rules prohibit certain health care changes from being scored. The CBO must follow certain rules in evaluating health reform proposals. Among these, the CBO cannot give credit for certain types of proposed savings.

Scores usually look at only the first 10 years. But spending on health programs often accelerates over time, meaning the second 10-year period and subsequent periods can be far higher.

Commentators often summarize the CBO's cost estimates in terms of the net budget impact over 10 years. That shorthand is useful and important, but a single figure can conceal more than it reveals. To truly understand scores, it is often necessary to look at the scores for individual programs and individual years.

Donald B. Marron served as deputy director of the Congressional Budget Office from October 2005 to August 2007, including more than a year as acting director, and later served as a member of the Council of Economic Advisers. He now consults on economic, financial, and budget matters and writes the blog dmarron.com.