« Democrat Congressman Rants At Concerned Constituent For Asking About Health Care | Main | Absolutely the world's worst TV interview »

August 8, 2009

CBO underestimated ObamaCare cost by at least $1 trillion?

Topics: Political News and commentaries

According to Dr. Stephen Parente of Minnesota's Carlson School of Management, the CBO used outdated models to determine short- and long-term costs of Barack Obama's health care reform package. Newer and more applicable models that the CBO declined to use show that the actual cost will be more than double the CBO estimates (via Hot Air):

The CBO is actually being kind to the would-be reformers. Its analysis likely understates--by at least $1 trillion--the true costs of expanding health coverage as current Democratic legislation contemplates. Over the last few months, my colleagues and I at the consulting firm Health Systems Innovations have provided cost estimates of health-care reform to both Republican and Democratic members of Congress, and we've posted these estimates on our website as well. We believe that the Democratic bills currently under consideration in the House and Senate would cost $2.1 trillion and $2.4 trillion, respectively--much higher than CBO's figures.

The discrepancies between our estimates and CBO's stem from our different assumptions about a key issue. The Democratic plans envision a government-run insurance program, modeled after Medicare, that will compete with private insurers. How many people would opt for coverage under this public insurance? We believe that both large and small employers would have powerful incentives to shift their employees out of private coverage and into the public plan. Like the Urban Institute, we estimate that roughly 40 million people would make the shift. CBO seems to assume, however, that large employers would use the public plan only sparingly and that only 11 million people would move from private to public insurance--which would, of course, result in lower costs.

Why the difference in these estimates? We believe that we have better data on this issue than the CBO, which uses simulation models of health-insurance plans based on much older health-plan data--typically from 2001 or even 2000. Our estimates are grounded in 2006 commercial-insurance data to which the CBO doesn't have access (the data are not publicly available and the CBO didn't make provisions to purchase them). These data reflect the advent of much cheaper, high-deductible health plans and limited-provider network plans. If the government modeled its public option on these inexpensive plans, the result would be cheap enough to lure far more people away from private health insurance than the CBO estimates.

Our model has a good track record. The last time government introduced a major health-insurance innovation was 2004, which saw the introduction of Health Savings Accounts. We used the same model to predict that 3 million people would adopt these HSAs by the beginning of 2006. Our estimate, which we published in the peer-reviewed journal Health Affairs, was spot-on, predicting the market response more accurately than most other models, which produced adoption-rate estimates at least one-third lower.

As Ed Morrissey points out, the higher rate of employers shifting their employees out of private coverage and into the public plan will mean higher payouts from the government as people move from their private insurance to the public plan, especially in the case of employers wanting to rid themselves of the direct costs of providing health insurance. The net effect is a much higher burden on the government, not reflected in the CBO estimates, which amplifies the effect on the deficit and the need for increased taxation. Notably, the tax income in the CBO chart below isn't indexed to enrollment, and the revenue remains fairly constant regardless of how many people wind up in the plan:

And in a related must-watch video, HSI Networks' Steve Parente discusses the results of an independent study that show that health-care reform will cost more than $4 trillion to cover all of the 47.7 million uninsured under the proposed public plan.

Given that the strong possibility exists that the estimates from the more current models used by Minnesota's Carlson School of Management are right, and the CBO is wrong, shouldn't the CBO purchase the latest models before taxpayers are called upon to gamble on a potential increased cost of at least in excess of a trillion dollars?

Posted by Richard at August 8, 2009 11:24 AM

Articles Related to Political News and commentaries:

• CBO underestimated ObamaCare cost by at least $1 trillion? - Aug 08, 2009