Healthcare Reform Costs Are Always Underestimated

Image source: Senate Joint Economic Comm.

Government-run healthcare: What will it cost?

The ironic part about the current discussions of healthcare reform costs is that proponents of the plan initially said — and some are continuing to say — that healthcare reform would save money. Unfortunately for them, the Congressional Budget Office (CBO) pointed out that the legislation before the House of Representatives (H.R. 3200) would actually add significantly to the deficit by as much as $1 trillion over the next 10 years.

That news caused many in Congress to gulp hard, yet the CBO estimate is almost certainly low if history is a guide. I thought it would be useful to look at how far off previous estimates from Congress on Medicare costs have been in the past.

When Medicare was passed, various future estimates of costs were made by Congress. Those estimates were wildly off base, so much so that it is doubtful that Medicare would have passed, had there been an accurate cost estimate. The chart above shows the estimate for the year 1990 of $12 billion versus actual spending of $110 billion. The $12 bill estimate was adjusted for inflation. So, the actual costs were nine times higher than estimated.

This report from the Senate’s Joint Economic Committee gives some historical detail for Medicare and other programs:

Are Health Care Reform Cost Estimates Reliable (Joint Economic Committee, July 31, 2009, Senator Sam Brownback (R-KS)

Since the end of World War II, major health care reform proposals have generally always cost more-sometimes significantly more-than the highest cost estimates published while the legislation was pending…

…Medicare (entire program). In 1967, the House Ways and Means Committee predicted that the new Medicare program, launched the previous year, would cost about $12 billion in 1990. viii Actual Medicare spending in 1990 was $110 billion-off by nearly a factor of 10.

A certain level of error in cost projections is to be expected, especially regarding sectors as complicated as health care. But as Table 1 shows, the foregoing examples represent extreme under-estimates, with error ratios ranging from 1.2:1 to 17:1. What explains this phenomenon? For reasons that may never be entirely understood, health care appears to be an area with great room for overly optimistic assumptions regarding changes in the behavior of patients and providers, technological innovation, the practice of medicine, program take-up rates, future health cost inflation, and the likely success of proposed cost-control mechanisms.

…Whatever the causes, it seems there is a kind of Murphy’s Law of health care legislation: “If it can cost more than the highest available official estimate, it probably will.” The House and Senate are currently considering health care reform bills that would cost in the vicinity of $1 trillion over the first 10 years and $2.4 trillion over the first 10 years of full implementation…

Here is the table referenced above:

Source: Senate Joint Economic Comm.

As you can see from the table, this is not just a problem for Medicare nor is it a problem limited to the U.S. For a variety of reasons, estimating costs of government-run healthcare seems to be quite difficult. So, I would not take current estimates as being cast in stone. In fact, I would assume they are very low as Congressional estimates have been in the past.

Comments

[casey00001:]

The current administration doesn't care what anything costs. They were elected, they are in charge and they are going to do whatever they want. People need to face that reality. Nothing will ever be cost justified over the next three years.

Aug 30 12:29 PM

[JCC:]

With the rate of healthcare inflation, costs in the US double every 8 years. Currently in the US the government pays 50% of healthcare costs.

While you have a point on the underestimation of true costs, the overall underestimation is far worse in the USA than in the other countries that you mentioned. Idiotic regulations, and poorly contrived laws, like the one that prevents the government from negotiating costs for pharmaceuticals cause this.

So our choice is to get rid of all of the regulation and the FDA, to form a free market, or to craft a plan as is being done today. The first choice of getting rid of regulation and the FDA will never happen in the USA.

The second choice has a chance, and we cannot afford to continue with the current system.

Aug 30 07:21 PM

[milkchaser:]

One could argue that the problem is not optimism that costs will be contained, but lack of optimism and foresight about how new and more expensive medical technologies will be adopted and become the standard of care (e.g. replacement of knees, hip joints, eye lenses; arterial stents; blood pressure medicine, etc). The alternative is to let grandma and grandpa die or live in pain, which we choose through our representatives not to do.

Other significant costs contribute, of course. The cost of litigation and defensive medicine come to mind. Wise legislators could foresee this, but who ever said we have wise legislators?

To JCC: The FDA and medical regulation in general, while contributing to the cost, also contribute mightily to the safety of American medicine. On balance, they do more good than harm.

Aug 31 12:14 PM

[JCC:]

Milkchaser - I appreciate your comments and civility. On the FDA, I wonder if the rules and regulations have prevented new development and in addition made development a lot more expensive. So while I agree that they have added protection, I wonder if the combination of costs and develoment slowdown exceeds the benefit that they provide..

On Aug 31 12:14 PM milkchaser wrote:
> To JCC: The FDA and medical regulation in general, while contributing > to the cost, also contribute mightily to the safety of American medicine. On balance, they do more good than harm. >

Sep 02 06:54 PM