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U.S. health plans have history of cost overruns

- The Washington Times - Wednesday, November 18, 2009

As President Obama and Congress craft the largest national health insurance program since the creation of Medicare and Medicaid in 1965, they insist that the final product will add "not one dime" to the federal deficit.

But cost projections are notoriously unreliable, and history is filled with examples of federal programs - especially in health care - that cost far more than originally predicted.

In 1965, the House Ways and Means Committee estimated that the hospital insurance program of Medicare - the federal health care program for the elderly and disabled - would cost $9 billion by 1990. The actual cost that year was $67 billion.

In 1967, the House Ways and Means Committee said the entire Medicare program would cost $12 billion in 1990. The actual cost in 1990 was $98 billion.

In 1987, Congress projected that Medicaid - the joint federal-state health care program for the poor - would make special relief payments to hospitals of less than $1 billion in 1992. Actual cost: $17 billion.

The list goes on. The 1993 cost of Medicare's home care benefit was projected in 1988 to be $4 billion, but ended up at $10 billion. The State Children's Health Insurance Program (SCHIP), which was created in 1997 and projected to cost $5 billion per year, has had to be supplemented with hundreds of millions of dollars annually by Congress.

Barely two weeks in office, Mr. Obama signed a $33 billion bill that will add 4 million mostly low-income children to the SCHIP program over the next 4 1/2 years.

All of these numbers were assembled and published in July by the Senate Joint Economic Committee.

The White House and Democratic leaders insist that the proposed health care reform being debated on Capitol Hill will be different. They also note that the costs of some federal health care programs, including the Medicare prescription-drug program, have come in below projections.

But the official arbiter of costs in Congress, the Congressional Budget Office, hints that comprehensive health care reform could go the way of most other health care initiatives from Washington.

The CBO projected earlier this month that the health care bill passed by the House will reduce cumulative budget deficits by $109 billion over a decade. But it also warns that its estimates are "subject to substantial uncertainty."

When Medicare and Medicaid were created, policymakers were making changes in health care that went well beyond historical experience, said Henry Aaron of the Brookings Institution.

"Models were not adequate to capture the complex interrelationships" among patients, doctors, hospitals, pharmaceutical firms, medical-device manufacturers and other major players in the health care system, he said.

The major actors - including patients, doctors and hospitals - quickly learned how to use Medicare to their best advantage, which caused costs to outdistance projections, said Joseph Antos, a health care policy analyst at the American Enterprise Institute.

Financial incentives affecting these actors played a major role.

"The most dangerous words you can utter in a doctor's office are, 'It might help, and it won't cost you a dime,' " Mr. Antos said.

Timing also contributed to the soaring costs of Medicare and Medicaid.

"Modern medicine was just coming into acceptance in the 1950s and 1960s," said Josh Gordon, a health care specialist at the nonpartisan Concord Coalition, which advocates balanced federal budgets. The future advances of medical sciences, and their inevitably high costs, were not fully appreciated in 1965, he said.

The mere existence of Medicare helped to raise its long-term costs beyond projections, Mr. Gordon said. "Medicare led to increasing life expectancy, which obviously impacted Medicare's costs" as older and older seniors used more and more of its services over longer and longer periods of time.

Even in cases where the government has strived to use resources more efficiently, it has increased costs elsewhere, Mr. Antos said.

Through the early 1980s, Medicare was essentially paying a piece rate to the hospitals. That changed in 1983 when the government adopted its diagnosis-related group (DRG) policy. Hospitals are paid the average cost of treating patients who are placed into the same DRG.

The policy change resulted in earlier discharge of patients. As a consequence, spending for skilled nursing facilities increased by 38 percent per year from 1988 to 1997, said Jon R. Gabel at the National Opinion Research Center of the University of Chicago.

Once policymakers create a federal health care program, they tend to expand it. That accounts for a significant part of a program's growth beyond original projections, said Thomas Schatz, president of Citizens Against Government Waste. "Odds are good that it will grow larger, cover more people and be more expensive," he said.

Also, the government has consistently underestimated the rate of increase in the Medicaid rolls, further pushing outlays beyond projections, said Dennis Smith, a health care specialist at the Heritage Foundation.

In 2000, Health Care Financing Administration director Nancy-Ann DeParle, who now serves as the White House health "czar," estimated that the number of children enrolled in Medicaid would increase by 1 percent a year, rising from 22.6 million in 2000 to 23.8 million in 2005. In reality, 29.9 million children, or about 26 percent more than projected, were enrolled in Medicaid in 2005, Mr. Smith said.

Overestimations have occurred as well. DRG-related Medicare payments to hospitals totaled $49 billion in 1986, nearly 20 percent below CBO's 1983 projection of $60 billion.

The most famous example of a federal health program coming in below estimates is Medicare's Part D prescription-drug program, which Congress enacted in 2003. Part D's actual costs have been lower than CBO's estimates.

A major reason for this trend "is likely a reflection of the competition that's occurring in the private market," said CBO Director Peter Orszag, who is now the White House budget director.

The Medicare drug program "represents the one time Congress almost entirely relied on private competition to hold down costs," said James Capretta, a fellow at the Ethics and Public Policy Center who was the lead official at the White House Office of Management and Budget when Medicare's drug program was created.

The heart of the health care reform envisioned by Democratic House leaders would be a government-run insurance option.

Supporters argue that the "public" insurance option would provide needed competition for private insurers and help expand coverage and drive down costs. Opponents say the taxpayer-backed public option threatens to undermine the market, set the stage for a government takeover of health care, and eventually lead to fewer choices and even higher costs.