Many people were aware ahead of time as to what the Congressional Business Office (CBO) report issued on Monday was going to portray regarding the Senate Republican leadership’s proposed healthcare legislation. Unfortunately, for the CBO they have earned a reputation that is not so flattering when it comes to objective and accurate analysis of projections. Over the past couple of decades, the CBO continually misses the mark, and receives much criticism mainly due to breaking their own rules regarding objectivity and transparency. Is it possible the CBO is a byproduct of The Swamp? Not surprising when a dysfunctional Congress is the body to which they report and who holds them accountable. In a way, it is like putting the fox in charge of the hen house.
A quick trip out to the CBO website should instantly set one’s mind at ease. (Sarcasm alert!)
CBO is strictly nonpartisan; conducts objective, impartial analysis; and hires its employees solely on the basis of professional competence without regard to political affiliation. CBO does not make policy recommendations, and each report and cost estimate summarizes the methodology underlying the analysis.
The website also reports that the CBO consults with numerous outside experts who represent a variety of perspectives. The experts include professors, analysts at think tanks, representatives of industry groups, other private-sector experts, and people working for federal agencies and for state and local governments. I don’t know about you, but these words do not give me a warm and fuzzy feeling. Maybe because we are in Washington, D.C. where it is extremely difficult to find anything that is not partisan, or maybe it is due to my years of working with the financial budget building process and doing analysis of budgets, that turns my critical eye, especially when it appears there is no accountability for significant misses in the past projections.
There is substantial uncertainty around projecting the economic impact of major pieces of legislation. It is a difficult task and errors are unavoidable. However, when they are perpetual and large-scale as those we have seen with the CBO over the past two decades, it might be worthy of a pause, to assess and correct. My point is not to over simplify or criticize the work done by the CBO. Healthcare is extremely complex with a plethora of moving parts which each impact one another. However, if our law makers are going to base whether they present a bill for a vote or use the information to determine their vote, then shouldn’t we all want the findings in the report to be as accurate and understandable as possible?
After reading the CBO’s forty-nine-page report issued Monday, it is concerning as a person with many years of experience in healthcare finance and budgeting, that I am left perplexed or maybe the word to use is befuddled. Budget basics are a black and white process. Start with high-level assumptions, in this case the proposed legislation. Define a methodology and key risk factors that might impact findings. For each risk factor assess sensitivity level as to the likelihood of them happening and the financial result. Finally, a continual retooling as time goes by so that the errors in previous budgets do not become a baseline or part of the next year’s forecast. Here is the excerpt from the CBO report as to the basis of the estimations used.
The agencies have provided an overall estimate of the budgetary effects of the coverage provisions in this legislation, and not separate estimates for each provision, for three related reasons. First, the agencies’ modeling is done in an integrated way. Second, there are important interactions among the provisions, so the sum of the parts (when considered separately) does not equal the whole. Third, the order in which the provisions are considered would matter. For the noncoverage spending provisions, the agencies have done separate estimates
Clear as mud? An example of how important estimations and underlying assumptions are to projections made by CBO can be found by reviewing the key past errors used in projecting effects of the Affordable Care Act. The CBO hung its hat on two projections but did not look at additional risk factors. The underlying assumptions of these projections did not come to fruition as expected and are key to the failure of the program. Allow me to enumerate:
- CBO projected that by now the market would be stable and there would be twice as many enrollees in the exchange.
- They failed to identify the risk of lost profitability to the insurance companies and how they would respond if only 10.4 million enrolled instead of the projected 21 million. The lost profitability is what caused insurers to increase premiums and in extreme cases pull out of the market in many states.
- CBO projected that the ACA Medicaid expansion would be much smaller and less expensive than has been experienced. Here the risk they failed to anticipate was to what degree that states would respond to the federal government’s elevated reimbursement rate for the Medicaid expansion. By maximizing enrollment and paying insurance companies extremely high payment rates for this population, Medicaid enrollment became the high cost band wagon which resulted under estimating cost of the program by approximately $26 billon.
CBO has not yet explained if or how it has corrected its models for these past mistakes, and they should have made those corrections to the model before moving forward. These estimates, or lack thereof, impacted the analysis of Monday’s report and will continue to have a prominent role as Congress endeavors to repeal and replace Obamacare. It is important to appreciate the large degree of uncertainty and to understand CBO’s key mistakes estimating the ACA. If they use a defective model and do not appropriately assess risk, then it is possible that the analysis in their next report on this bill could prove as inaccurate and worthless as the first.
One last point and this is vital because it could cause the projections to have overestimated the costs and the projected numbers of people without insurance in the future. The CBO’s model is based on the economic performance of the past several years, and not taking into effect the positive upturn in the economy we are currently experiencing. It is worth having the entire picture from worst case to best case in order to understand and make projections for the future. This is especially important in an environment where politicians use the CBO report as gospel if it benefits their cause and where the American people must live with the results.