CBO vs. The Bush Administration on Medicare -- A Difference of Opinion, Not a "Raised" Estimate 
Jeff Lemieux
March 23, 2004

The Administration's long-suppressed cost estimate of the Medicare drug bill is higher than the original Congressional estimate.  The delay has caused people to assume that the estimates have been revised upward.  However, that is not true.  What happened is that the Congressional Budget Office (CBO) and Medicare's Office of the Actuary simply disagreed about estimating assumptions.  CBO said the drug benefit would cost less; the actuaries said it would cost more.  Unfortunately, the White House delayed the release of the actuaries' estimates until this year, which created the uproar and confusion.

Outline:
Lessons from the Medicare Cost Controversy
The Drug Benefit Should Be Fixed, Not Discarded

Lessons from the Medicare Cost Controversy:  There are several "take home" points about the controversy over CBO vs. Bush Administration estimates of last year's big Medicare drug law.

The drug estimates have not been "revised upward."  Instead, CBO and the Administration simply disagreed on the cost.  Table 1 shows a simple comparison of the cost estimates.

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Table 1.  Comparison of Drug Cost Estimates (in billions) 

Bush Administration
											2004-
	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2013
Drugs	2	3	35	50	55	60	65	71	79	89	510
Health Plans	2	2	4	5	6	5	5	5	6	6	46
Other	4	8	5	1	-4	-5	-6	-7	-9	-9	-22
Total	8	13	44	56	57	60	64	69	76	86	534
Congressional Budget Office
											2004-
	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2013
Drugs	0	1	26	39	45	49	54	59	65	73	410
Health Plans	1	1	0	2	2	2	2	2	2	2	14
Other	3	4	2	-1	-3	-4	-6	-8	-8	-9	-29
Total	4	6	28	40	44	47	50	53	59	66	395

Source:  Centrists.Org
Note:  Numbers may not sum to totals because of rounding.

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The Administration shouldn't have suppressed its own estimates.  Sure, CBO is the official arbiter of the cost of legislation in Congress.  But the Medicare actuaries' numbers are interesting and worth noting. 

Members of Congress should have had a chance to look over the Administration's numbers up front.  Besides, they might very well have decided CBO's numbers were more realistic. 

Instead, this controversy over suppressed estimates may have given the alternative figures from the Medicare actuaries too much credibility.

In reality, we don't know whose assumptions are correct.  The controversy makes it seem like CBO's numbers were wrong, which may not be the case.

All estimates should be explained in words, before the final votes.  No bill making far-reaching changes in entitlement programs (or taxes for that matter) should go to final votes on the floor of the House and Senate without a thorough, well-explained cost estimate.  Moreover, the official estimators at CBO and in the Administration should discuss practical and workability matters in their reports. 

Last year, CBO didn't release its written estimates of the House- and Senate-passed Medicare bills until a month after the floor votes.  There is still no written analysis of the final conference agreement that was enacted into law, although CBO has released several helpful tables.  CBO has never done an analysis of implementation or workability aspects of the legislation, or any "sensitivity tests" showing the cost under differing scenarios of how law might work out in practice.  Legislation of this magnitude should be analyzed before members of Congress make their final votes, not after.

This is just Fundamental Budgeting 101.  If a bill has to be rushed through before the estimates can be prepared, the bill probably needs more work.

Blaming the higher cost of the Administration's estimates on private health plans won't wash.  The Medicare actuaries assume that enrollment in Medicare HMOs and other private comprehensive health plans will be much higher than CBO believes.  The Administration believes that 32 percent of Medicare beneficiaries will enroll in HMOs and Preferred Provider Organizations (PPOs).  By contrast, CBO assumes the figure will be less than a third as much, only 9 percent.  As a result, the Medicare actuaries calculate that payments to private health plans will be considerably higher than CBO estimates.

Liberals have always been irked by the private health plans that offer Medicare benefits.  But in the long run, keeping vibrant private sector options in Medicare can be a formidable check against uncontrolled growth in the program's spending.  This doesn't affect cost estimates of individual bills, but competition and rivalry between Medicare's traditional plan and alternative private plans will give future Congresses more leeway to control costs.

Bipartisanship matters.  If the Medicare bill had been a bipartisan effort, both sides would be "bought in" to its success.  As it stands now, the crude political attempts by Republicans to capitalize on the drug benefit as a partisan achievement have created a dangerous situation where opponents of the bill -- many Democrats and a handful of conservative or renegade Republicans -- are not invested in making sure the bill succeeds.

The poisonous partisan atmosphere makes it more likely that a budgetary crisis could cause legislators to allow the drug benefit to lapse, rather than fixing it to make sure it works at a reasonable cost.  A lapsed or failed drug benefit would help nobody.

The cost estimates aren't wrong, but future Congresses may add more to the cost.  Think tanks believe the ultimate cost of the Medicare bill will be higher than the official estimates, not because the estimates are wrong, but because Congress promised more than the law delivered.  One reason the drug benefit isn't as popular as Congressional leaders and White House officials had hoped is that seniors can sense the exaggerated claims made by its proponents.  The cost dispute feeds this perception.

Several press reports have indicated that health policy scholars believe the official estimates are too low.  That is not because we believe the estimators did a bad job, or that there are technical flaws in their work.  Instead, it is because Congress promised seniors a full drug benefit, but the law only delivered a partial benefit.  It makes sense to assume that future legislators will spend more to smooth over the bill's rough spots, and thereby improve the drug benefit's workability and popularity.

The Drug Benefit Should Be Fixed, Not Discarded:  In the coming weeks, several conservative think tanks and commentators will suggest that the drug "discount card" program being readied for introduction this summer as an interim benefit should be extended into 2006 and beyond.  (Under current law, the discount card program is scheduled to end when the main drug benefit begins in 2006.)

The discount card program was a good idea all along, and that part of the Medicare bill generated a modicum of bipartisan goodwill.  It was clear from the beginning that many companies would step forward to offer the cards.  Now, there are encouraging signs that the cards will also contain substantial discounts, which was questionable when the bill was enacted.

With expectations for the 2006 drug benefit running low, the discount cards are likely to be quite popular with seniors.  The cards are essentially free (card offerers can charge an annual fee of up to $30) and they include special "cash" benefits for low-income seniors. 

However, extending the cards is not enough, at least if that means discarding hope for a fuller drug benefit.  Congress would be wiser to fix the drug benefit's flaws.

Here is a set of proposals legislators should consider:

1.  Extend the discount cards, but establish a catastrophic drug benefit as well.  Like the discount cards, seniors should not have to pay more than a nominal amount for the added catastrophic coverage.  However, the catastrophic benefit need not provide 100 percent coverage.  For example, the catastrophic coverage could include coinsurance or copayments to ensure that seniors didn't lose all financial constraints on drug purchases, even after their catastrophic coverage kicked in.

2.  Trigger the catastrophic coverage in two ways.  First, start the catastrophic coverage when an enrollee hits $3,600 in out-of-pocket drug spending (as the current 2006 drug benefit specifies).  Second, establish a new trigger for the catastrophic coverage at $5,100 in total drug spending (which is the equivalent for people with a reasonable amount of supplemental or "up-front" drug coverage).  The new trigger for catastrophic coverage would eliminate disincentives for people to acquire supplemental coverage, and it would give employers a stronger incentive to maintain their retiree drug coverage.

3.  Allow all types of drug plans to offer the catastrophic coverage.  Discount card plans, employers with retiree drug coverage, Medigap plans, HMOs and new Preferred Provider Organizations (PPOs) offering Medicare coverage should be allowed to offer the catastrophic coverage, and be reimbursed for the costs of that coverage by Medicare.

4.  Eliminate the "assets test" for eligibility for the low-income benefits.  Asset tests are abhorrent to economists, because they create incentives for people either not to save in the first place, or to needlessly divest themselves of assets in order to qualify for benefits.  According to a preliminary estimate from the CBO, it would cost about $16 billion over the 10 year budget period between 2005 and 2014 to repeal the assets test in the Medicare drug law.

This alternative proposal would not necessarily prevent Medicare from offering the 2006 drug benefits as currently scheduled in the law.  On the one hand, the 2006 benefit could be repealed and replaced with this "discount card plus catastrophic" proposal.  That would probably cost taxpayers less than the current bill.

However, Congress could also allow the discount/catastrophic option to be another option for Medicare beneficiaries.  Seniors could choose the discount-catastrophic option, or pay a higher premium to get richer coverage.  That could cost more, but it's hard to know for sure.  If it did, it would be justifiable as a necessary step to make the drug benefit work.

There is no question that a new discount-catastrophic option could add to the complexity of an already complicated drug law.  Many details would have to be worked out, especially regarding coordination with employment-based retiree drug coverage.

However, the discount-catastrophic option is by its nature easier to explain than the 2006 drug benefit:  Medicare would cover most of the cost for seniors with very high drug spending, regardless of how they choose to obtain coverage.  That is a reasonable approach for an entitlement program in difficult budgetary times.  It would make more sense to many seniors than promising a full drug benefit, but only delivering half.

Links:
Congressional Budget Office Preliminary estimate of the cost of eliminating the "assets test" for low-income drug benefits (March 19, 2004)

Centrist Policy Network The Administration Finally Releases Some Medicare Drug Estimates
(March 22, 2004)

Centrists.Org The Curious, Counter-Intuitive Relationship Between Medicare Costs and HMO Enrollment (February 8, 2004)

Centrist Policy Network Medicare Follow Up? (January 4, 2004)

Centrist Policy Network Legislative Text and CBO Estimates of the Medicare Conference Agreement (November 20, 2003)

Centrist Policy Network Medicare and Rx Drug Resource Page