UNDERSTANDING CBO'S HEALTH-CARE ESTIMATES.

This is a really important point about the Congressional Budget Office, which has been worrying reformers lately with harsh cost estimates on various health-care overhaul plans:

Put most simply, the CBO’s track record in predicting the effects of health legislation is abysmal. Over the last two decades, the CBO has routinely overestimated the costs of expanded government health care benefits and underestimated the savings from program changes designed to reduce expenditures. Most recently, it overestimated the five-year cost of Medicare Part D — the prescription drug benefit -— by more than 35%. Even more dramatically, the CBO’s estimates of the Medicare savings from the Balanced Budget Act of 1997 underestimated the impact, on average, by a full 100%. That’s right: In the BBA’s first three years, Medicare spending fell fully twice as fast as the CBO had projected.

It comes from this Roll Call column that explains why the CBO's task is so difficult and inherently results in errors; essentially, the assumptions that CBO makes about the world and the requirement that it look 10 years into the future make forecasting difficult. The only appropriate way to go about it is to be exceedingly conservative (risk-wise). But that doesn't mean analysts and politicians should forget these caveats -- as Bruce Vladek, the column's author, says, "Instead of treating CBO estimates like the Ten Commandments, we should treat them like the informed wild guesses they actually are."

Before conservatives come out with this "you like the CBO when it favors your plans and criticize it when it doesn't" business -- pot kettle black, incidentally -- I'd note that this is my favorite CBO graph, which I highlighted in this very CBOcentric post.

Meanwhile, Stan Collender, a top budget analyst and a sober-minded man, thinks the conflict between CBO and OMB is "as close as you get to a knife fight among federal budgeteers." I wouldn't necessarily go that far, but there is certainly interest on the reformers' side in pushing the CBO to focus on the fundamentals and avoid speculation.

-- Tim Fernholz