Monday, February 8, 2010

Why did the budget not use Trustees projections for health cost growth?

Over at AEI's The American, I write about an arcane but (I think) important issue in the Obama administration's FY 2011 budget: for the first time, I argue, the administration has rejected the projections of its own Trustees for health care cost growth, substituting a rate twice as high as projected by the Trustees (and around one-third higher than projected by CBO). The result, I argue, is that the budget seems to confirm the administration's argument that health care cost growth is by far the biggest driver of future entitlement costs. Population aging, I've argued, is an equal cost driver over the long-term and the biggest source of costs over the next several decades.

A knowledgeable friend counters my argument on several fronts:

First, the FY 2011 budget isn't the first to reject the Trustees assumptions. The FY 2008 and FY 2009 Bush budgets also did not use the Trustees projections for health care cost growth. This is true, but the final two Bush budgets were explicitly modeling the effects of policy changes – principally, capping the tax exclusion for employer provided health care – that were designed to reduce the rate of health cost growth. These budgets made clear that the current law baseline projection was that of the Medicare Trustees. The FY 2011 Obama budget, by contrast, uses different assumptions for current law than do the Medicare Trustees, with the effect that Medicare spending is projected to rise to 22 percent of GDP by 2085, versus less than 9.5 percent under Trustees assumptions.

Second, the historical rate of health care cost growth is a good guess for how costs will grow in the future. This is certainly a defensible argument, though both the Medicare Trustees, an expert group that advised them, and the CBO think that costs will slow over time. What I think is missing, though, is some explanation in the budget that a higher rate of cost growth actually makes sense. The budget itself is a bit cagey on this; it doesn't explicitly state that its baseline projections are its best guess for the future. Rather, it merely states that if historical costs rates continue then this is what we'll see in terms of overall costs.

My skepticism on the administration's health cost assumptions comes down to this: they've often argued that rising per capita health care costs, not population aging, are the biggest driver of entitlement spending. By this argument, reforms to reduce cost growth in the private sector would leak over into Medicare and Medicaid, painlessly reducing entitlement costs – "Healthcare reform is entitlement reform," the President likes to say. This conclusion is not true under Trustees or CBO assumptions, but is true under the new assumptions in the budget. Perhaps I'm just being too cynical, but given some of the other arguments the administration has used over the course of the health care debate that turned out to be underwhelming I was suspicious over how this change came about and what drove it.


Bruce Webb said...

Well I would ask whether the 2009 Reports were in any sense those of Obama's Trustees. Given the delays in confirmation of Solis and Sebellius and the crushing work burden dropped on Geightner from day one and before in dealing with TARP and the stimulus it is not clear that any of Obama's cabinet members really had the time to oversee the Report of an Independent Agency not really under their direct controll. Given the vacancies of the two Public Trustee positions the 2009 Report was really under the oversight of Michael Astrue, Steve Goss and whoever was heading up CMS.

Plus anyone who has even dipped a toe into these issues understands that differences between SSA, OMB and CBO treatments of SS and Medicare numbers can be dramatically different.

Andrew G. Biggs said...

That's a valid point. I would just be very surprised if this year the Medicare Trustees pushed for GDP+2 after so many experts -- including Peter Orszag -- have said it's not very credible.