Health Reform Debate Highlights Budget Agency’s Critical Role

A congressional budget agency little known outside Washington has once again demonstrated the power of number-crunchers to drive policy.

CBO At a Glance

  • Created in 1974 by the Congressional Budget and Impoundment Control Act
  • Began operations in February 1975, with Alice Rivlin as the first director
  • Current director: Douglas Elmendorf
  • CBO’s fiscal 2009 budget: $44.1 million
  • Staff of about 235, with 63 analysts working on health legislation

-Kate Steadman

The economists who populate the Congressional Budget Office estimated this week that a Senate committee version of President Obama’s health overhaul plan would cost a cool $1 trillion but still leave millions of Americans uninsured. Although Democrats said the CBO analysis was preliminary, based on incomplete details of the legislation, the damage was done: Republicans pounced on the findings.

It might seem history is repeating itself, given that a critical CBO analysis dealt a huge setback in 1994 to President Clinton’s efforts overhaul the health care system. But Senate Democrats are scrambling to rework the health legislation and said yesterday they’ll get it right – with a more favorable CBO report — even if it pushes their timeline for completing a draft to early July.

Since the CBO was created by Congress in 1974 as the ultimate arbiter of the impact of spending on the budget and deficit, there has been an inherent tension between the agency and the White House and majority party in Congress over the cost and impact of huge new programs. Those disputes have ranged from the financial implications of the Bush administration’s Medicare prescription drug program to the cost of the wars in Iraq and Afghanistan to the star-crossed Clinton health care proposal.

“The Hill and interest groups and the administration want the program expansions to impose as little additional cost as possible, and the provisions that generate savings to produce as much as possible,” said Robert D. Reischauer, president of the Urban Institute and a former director of the CBO. “The members of Congress and the administration get lots of information from advocates arguing that CBO is being too parsimonious” in the way it “scores” or assesses a program’s costs or impact.

Reischauer ran afoul of the Clinton White House in 1994 when the CBO, in assessing a plan for creating new insurance markets or exchanges to provide government-sponsored coverage to Americans, ruled that the premiums flowing into the exchanges and the payments going out were governmental in nature and therefore had to be reflected in the overall cost of the program. This decision had the effect of adding billions to the long-term cost of the program, a finding that was eagerly seized upon by the many opponents of the health care plan.

“I characterized that as something of a rounding error,” Reischauer recalled yesterday. “But those who wanted to make hay did, just as you’re seeing now.”

Douglas W. Elmendorf, a veteran government economist and scholar with a Harvard Ph.D. who served in the Clinton Administration during the health care debate, became the eighth director of the CBO in late January. He took over from Peter Orszag, who had moved cross town to the White House to become Obama’s budget chief.

Before departing, Orszag, anticipating the big push by the new president for health care legislation, beefed up the agency’s staff with health care economists and ordered a new, high-speed computer to run a complex health insurance microsimulation model that analyzes health care proposals and their budget impact.

That model, which was revamped this year, analyzes a huge array of demographic data in order to predict how people are likely to respond to changes in the insurance market, including the availability of insurance, changes in premiums and government subsidies. The core data is taken from the Census Bureau’s Survey of Income and Program Participation, a survey of roughly 70,000 individuals interviewed at four-month intervals over a 40-month period.

Almost from the moment the two men assumed their new posts, Elmendorf and Orszag began sparring over health care reform: the effectiveness of Obama’s initiatives to drive down costs long term and not add to the budget deficit, while extending insurance to many of the approximately 46 million uninsured Americans.

In a May 29 Office of Management and Budget blog, Orszag acknowledged that expanding coverage would temporarily dominate and drive up spending, but that the cumulative effect over time would be “a reduction-and perhaps a dramatic one-in government spending.” But Elmendorf cautioned in a subsequent CBO blog that many of the administration’s hoped-for savings would “materialize slowly over time” and that some initiatives, such as prevention efforts or disease management, might actually drive up costs.

The CBO analysis driving debate on Capitol Hill arose from a legislative timetable the Democrats might now be regretting. As part of his strategy, Obama offered broad outlines of his program but left it to Congress to try to work out the details and draft the legislation, avoiding a repeat of the mistake President Clinton made in trying to dictate the bill.

House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., put the legislation on a fast track, with major committees with jurisdiction in both chambers responsible for drafting and reconciling a massive plan. In the Senate, both the Health, Education, Labor and Pensions and Finance committees have leading roles in drafting bills that will have to be merged at some point.

When the health committee decided to go first with its legislation, it was required to submit the proposal to the CBO for review. But the committee draft was missing important elements that could affect the budget agency’s conclusions.

The committee had assumed an expansion in Medicaid coverage, but it wasn’t in the bill because that’s under Finance jurisdiction. CBO assumed there would be a requirement for individuals to acquire health insurance, but the penalty in the draft for failing to buy insurance was weak – only $100. Health care analysts believe that a much tougher enforcement mechanism would have increased coverage. Also, the health committee exempted people under 150 percent of poverty from any penalty.

There also was no mention in the bill of the so called “pay-or-play” provision to pressure employers to either provide insurance or contribute to a pool, so that wasn’t reflected in the CBO estimate. Finally, there was no mention of Obama’s proposal for creating a public entity to provide reasonably priced insurance to the uninsured.

Elmendorf wrote that if the health committee bill were fully implemented, about 39 million people would obtain coverage through the new insurance exchanges. But the number of people with employer-sponsored coverage would decline by about 15 million, and “coverage from other sources would fall by about eight million,” resulting in a net decrease in the uninsured population of about 16 million.

White House officials said yesterday it was important to keep their focus on the bigger picture of enacting a deficit-neutral program for expanding health care coverage to millions of Americans and to drive down unsustainable health care costs.

“I think that most people who follow this closely understand that this was an analysis of a very incomplete draft from one committee, that there are a lot of different proposals that eventually will have to be put into one,” said Kenneth Baer, a spokesman for Orszag. “I wouldn’t say that we’re concerned.”

Some Republicans, including Sen. Mike Enzi, R-Wyo., a member of the Health and Finance committees, voiced outrage that the Democrats were pushing for a trillion-dollar plan that promised relatively little in return.

Sen. John Cornyn, R-Tex., a member of the Finance and Budget committees, said the CBO analysis highlights a larger problem with Obama’s health care policies. The White House, he said, is attempting to obscure the problem with health care “buzz words.”

“I think the [congressional] schedule is going to slide because of the shocking numbers coming out of the Congressional Budget Office,” Cornyn said.

John Sheils, senior vice president of the Lewin Group consulting firm, says it surprised him that the Health Committee miscalculated the way to best deal with CBO. “The way to use the expertise of the CBO is to bounce ideas off of them and see if you can get something together that works for all parties concerned,” he said.

Sheils commended the Finance Committee for waiting to fine-tune legislation in conjunction with the CBO before releasing the bill. “It’s a great way to put together something that isn’t dead on arrival,” he said.

Other experts – and Senate Democrats — downplayed the significance of the CBO assessment. Ken Thorpe, chairman of the Health Policy and Management department at Emory University and a former Clinton administration official, said it would be unwise to make too much of the initial $1 trillion price tag because “it’s just the first of many.”

Recalling the CBO clash with the Clinton administration over its health care plan, Thorpe said that the most recent CBO estimate won’t have that kind of effect because this time, the process is “different and better.”

With Congress writing the legislation rather than the administration, there can be a back and forth between the CBO and lawmakers. “It’s like a tennis match,” he said, in which the details of the bill go back and forth until the results are satisfactory to those involved.

KHN staff members Jenny Gold and Kate Steadman contributed to this article.