2009 August 09 Sunday
Congressional Health Plan Cost Estimates $1 Tril Too Low

Stephen T. Parente, a biz prof at U Minn and a member of a consulting firm that works with large medical cost databases, says Congressional estimates for costs of current health care legislation are low by over $1 trillion dollars.

The CBO is actually being kind to the would-be reformers. Its analysis likely understates—by at least $1 trillion—the true costs of expanding health coverage as current Democratic legislation contemplates. Over the last few months, my colleagues and I at the consulting firm Health Systems Innovations have provided cost estimates of health-care reform to both Republican and Democratic members of Congress, and we’ve posted these estimates on our website as well. We believe that the Democratic bills currently under consideration in the House and Senate would cost $2.1 trillion and $2.4 trillion, respectively—much higher than CBO’s figures.

The discrepancies between our estimates and CBO’s stem from our different assumptions about a key issue. The Democratic plans envision a government-run insurance program, modeled after Medicare, that will compete with private insurers. How many people would opt for coverage under this public insurance? We believe that both large and small employers would have powerful incentives to shift their employees out of private coverage and into the public plan. Like the Urban Institute, we estimate that roughly 40 million people would make the shift. CBO seems to assume, however, that large employers would use the public plan only sparingly and that only 11 million people would move from private to public insurance—which would, of course, result in lower costs.

To the extent that the US government subsidizes its own health insurance plan it will be able to offer premiums at below market rates. So it seems inevitable that it will take away market share from private plans. How can one expect otherwise?

Parente says he has a bigger dataset of commercial insurance data to work with that the Congressional Budget Office does not have.

Why the difference in these estimates? We believe that we have better data on this issue than the CBO, which uses simulation models of health-insurance plans based on much older health-plan data—typically from 2001 or even 2000. Our estimates are grounded in 2006 commercial-insurance data to which the CBO doesn’t have access (the data are not publicly available and the CBO didn’t make provisions to purchase them). These data reflect the advent of much cheaper, high-deductible health plans and limited-provider network plans. If the government modeled its public option on these inexpensive plans, the result would be cheap enough to lure far more people away from private health insurance than the CBO estimates.

We already have government entitlements programs that we can not afford. The aging population is going to cause the costs of those programs to skyrocket in the 2010s and 2020s. On top of that Peak Oil is rapidly approaching and will cause an extended economic contraction. Existing entitlements programs will have to shrink and suffer big benefits cuts as the economy contracts.

Share |      By Randall Parker at 2009 August 09 02:09 PM  Economics Health

Mthson said at August 10, 2009 1:45 AM:

Canada appears to spend a smaller portion of its GDP on healthcare than the US does (10.1% vs. 16%),1 so maybe healthcare reform can have a boost on US GDP?

Canada appears to be getting an even better deal when we take into account that their average per capita GDP (38.3k USD) is 81% of that in the US (47.2k USD).2 (According to an averaging of the World Bank, IMF, and CIA factbook estimates of GDP per capita.)

Ned said at August 10, 2009 1:08 PM:

Canada does indeed spend a lower percentage of GDP on health care than the US, and yet the average Canadian life span is longer. Here's why:


Ned said at August 10, 2009 1:09 PM:

Canada does indeed spend a lower percentage of GDP on health care than the US, and yet the average Canadian life span is longer. Here's why:


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