New CBO Projections Raise Scare on Medicare Spending – And Raise Eyebrows

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New CBO Projections Raise Scare on Medicare Spending – And Raise Eyebrows
By: Jon Walker Thursday July 1, 2010 2:24 pm	Tweet9

I hope everyone looking at the CBO’s long-term budget projections (PDF) understands how completely arbitrary they are. Take, for example, this passage showing how the CBO calculated the long-term cost of Medicare. The CBO claims the cost of private health insurance will eventually grow at the same rate as GDP, yet the cost of Medicare will continue to grow much faster than private health insurance for decades.

The private sector and state governments will probably respond to rising costs for health care by instituting various changes. Employers can intensify their efforts to reduce the costs of the insurance plans they sponsor—for example, by working with insurers to make the delivery of health care more efficient or by reducing the extent of the insurance coverage they offer. To avoid higher premiums, employees can shift to plans with more tightly managed benefits or higher cost-sharing requirements. State governments can respond to growing costs for Medicaid by limiting the services they choose to cover or by tightening eligibility to reduce the number of beneficiaries. Because the federal government’s spending for Medicaid depends on what the states spend, actions by the states that reduce the growth of their Medicaid spending will also slow the growth of federal spending for the program.
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In the absence of changes in federal law, state governments and the private sector have more flexibility to respond to the pressures of rising health care spending than does the federal government. Consequently, CBO projects that excess cost growth in Medicaid’s spending and in other (non-Medicaid, non-Medicare) spending would slow to a greater degree than would Medicare’s spending. Specifically, CBO assumed that the rate of excess cost growth for both Medicaid and other health care spending in 2084 (the last year of the current 75-year projection period) would be zero, whereas the rate of excess cost growth for Medicare at the end of the period would be 1.0 percentage point.(emphasis added)

This entirely defies logic and history. The idea that the growth rates in Medicare would outstrip private health insurance for several decades, as the CBO claims, is absurd and makes any projections based on that assumption dubious.

It is important when you see graphs like this from the CBO that you realize they completely depend on assumptions with little logic. The CBO knows health-care-cost growth rates can’t continue forever. “Such a rate of growth cannot continue indefinitely, however, because if they did, total spending on health care would eventually account for all of the country’s economic output—an implausible outcome.” Yet it allows its projections to assume health care will still take up 41 percent of our GDP by 2080, a number that I believe is impossible for an economy to support.

The only reason its projections are not much higher is because the CBO assumes the rate of growth will hit some kind of wall and start to slow down slightly, beginning in 2022. There is no justifiable reason to choose 2022 over say 2017, 2020 or 2031. There is also no real justification for choosing how slowly the rate of increase of health-care costs reduces. Changing these assumed numbers even slightly would radically change the long- term outlook.

I’m not pretending I could do a better job of projecting something as complicated as the cost of health care decades from now. I’m only pointing out that it is an impossible task for anyone. The CBO’s assumptions are really nothing more than that. These long-term projections are largely meaningless.