Will it Lower the Federal Deficit?

This is one of the most heated questions when it comes to the health care debate. A lot of people were caught of guard by the Congressional Budget Office (CBO) estimates. There have been accusations on both sides about the accuracy of the estimate. I have read several articles that state that CBO estimates are historically too optimistic. On the Today Show this morning, President Obama said that they are historically pessimistic. Both of these groups are wrong, and the CBO says so, here under "How accurate are CBO budget projections?" They clearly state that their estimates are not intended to be used to predict future budgetary outcomes. The accuracy of their estimates is dependent on a lot of factors that they legally can't take into account.

The CBO estimates that this legislation will reduce the federal deficit by $124 billion over 10 years. If the deficit isn't $124 billion lower in 10 years, it doesn't mean that the CBO was wrong. The CBO makes several assumptions when they produce a cost estimate. I'm going to analyze several of them here. As you read over these, remember that a lot of very smart people put a lot of effort into these estimates. They may not be completely accurate, but they are the best that we can do.

The 10 year estimate

The CBO can only consider the effects of legislation under current law. That means that if Congress makes a change to the health care legislation in five years, the estimate is no longer valid. So the real question is, how likely is Congress to change this legislation. In the CBO's estimates for the Reconciliation Bill ( pages 13-14), they state that this is not often the case with major legislation. They give several examples related to health care, in which Congress has taken actions that have increased costs.

It also says that this legislation "put[s] into effect a number of policies that might be difficult to sustain over a long period of time." This includes significant reductions to reimbursement rates to doctors for Medicare services. If Congress reduces or eliminates these reductions next year, then the cost of this bill will change significantly.

A panel known as the Independent Payment Advisory Board (IPAB) will be formed with a responsibility to find ways of reducing the cost of health care. On page 14, the CBO states the assumption that the IPAB will be fairly effective at reducing costs. If they are less effective than expected, then the legislation will cost more. If they are more effective, it will cost less.

The 20 year estimate

The CBO estimate does not contain the $1.2 trillion dollar figure. What they do say is on pages 11-12. Many times, they mention the imprecision of estimates so far into the future. It estimates the savings to be in a "broad range" about .5% of the Gross Domestic Product (GDP) in 20 years. The $1.2 trillion dollar figure is estimated to be .5% of GDP in 20 years. The broad range means that it very well could cost $1 trillion dollars or save $2 trillion dollars. They just don't know. It is, yet again, important to note that any changes to this legislation in the next 20 years will change the cost estimates.

The Conclusion

Are the CBO estimates accurate? No. They were never intended to be so. The CBO is required to provide estimates using only current law. Invariably, things will come up. Congress will pass laws regarding health care. The CBO can't predict what actions Congress will take and those actions could have great sway on the final costs of this legislation.

Will this legislation lower the deficit? We don't know. Lots of changes may come up over the next ten years.

I only covered a few of the assumptions here, but if you want more information, read the CBO report.