Congressional Budget Office
Director’s Blog

Today I am speaking at the Prepare For Launch Health Reform Summit of the Senate Finance Committee. My statement is available here. To view the session, Approaches to “Bending the Growth Curve” of Health Care Spending, I participated in, click here.

Key points from my statement are below:

• The single most important factor influencing the federal government’s long-term fiscal balance is the rate of growth in health care costs, caused largely by rising health care costs per beneficiary.
• The significant geographic variation in per capita health care spending across the United States suggests substantial inefficiencies in health care today and an opportunity for reducing health costs without adversely affecting health outcomes.
• These inefficiencies are perpetuated, in part, by a lack of clarity as to what insurance costs and who ultimately pays those costs– especially with regard to employer-provided health insurance.
• Providing more information on the “comparative effectiveness” of alternative medical treatments, and changing financial incentives that encourage providers to engage in expensive treatments and procedures may help shift professional norms to improve efficiency and restrain cost growth.
• Increased transparency with regard to specific medical services may not lead to reduced health care expenditures, however, because consumers generally don’t make independent decisions about what services to purchase from whom, particularly in an emergency. In addition, many health care markets are relatively concentrated, and in those settings, increased price transparency may lead to higher, rather than lower, prices for specific services by facilitating collusion among providers.

CBO has issued a cost estimate for the Federal Housing Finance Regulatory Reform Act of 2008, as ordered reported by the Senate Committee on Banking, Housing, and Urban Affairs on May 20. CBO estimates that enacting the legislation would increase revenues by about $8.0 billion over the 2009-2018 period, net of income and payroll tax offsets. Over that period, we estimate that direct spending from those proceeds would total about $7.2 billion. The additional revenues would thus exceed direct spending by an estimated $800 million, decreasing future deficits (or increasing surpluses) by that amount over the next 10 years. In addition, implementing this bill would reduce net discretionary spending over the next 10 years by $31 million, assuming appropriation actions consistent with the bill.

This legislation would make a number of changes in federal housing policy. It would:

• Establish a single regulator—the Federal Housing Finance Agency (FHFA)—for government-sponsored enterprises (GSEs) involved in the home mortgage market. GSEs are privately owned, Congressionally chartered financial institutions created to enhance the availability of mortgage credit. The GSEs that would be regulated by FHFA include the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Banks (FHLBs).

• Require Fannie Mae and Freddie Mac to annually pay amounts equal to 4.2 basis points on each dollar of unpaid principal balance of each enterprise’s total new business purchases (that is, 4.2 cents per $100 of the value of the new mortgages purchased or securitized in that year). These assessments would begin during fiscal year 2009 and would be deposited into new federal funds.

• Authorize—from October 1, 2008, through September 30, 2011—a new mortgage guarantee program under the Federal Housing Administration (FHA) that would allow certain at-risk borrowers to refinance their mortgages after the mortgage holder (lender or servicer) agrees to a write-down of the existing loan (that is, a reduction in the amount of loan principal). A portion of the GSEs’ assessments would be used to pay the cost of this new program.

• Require loan originators to participate in a Nationwide Mortgage Licensing System and Registry that would be administered by either a nonfederal entity or the Department of Housing and Urban Development  in coordination with the federal banking regulatory agencies.

• Authorize the appropriation of such sums as are necessary for the Treasury Department’s Office of Financial Education to provide grants to state and local governments, Indian tribes, and other entities to support financial education and counseling services.

Every year in response to a Congressional directive, the Department of the Navy issues reports that describe its plans for ship construction over a 30-year period. In the report released in February 2006, the Navy presented its fiscal year 2007 plan, which called for expanding its fleet from 285 battle force ships in 2006 to 313 by 2020 and beyond. In May 2006, the Congressional Budget Office (CBO) issued a study analyzing that plan and estimating its potential costs. Today CBO released an analysis of the resource implications of the Navy’s fiscal year 2009 shipbuilding plan.

Since May 2006, the Navy has provided two updates to its 313-ship plan, one for fiscal year 2008 and one for fiscal year 2009. The plans differ in several ways. For instance, although the 2007 and 2008 plans both assumed annual costs of $16.1 billion for new construction, the 2008 plan increased the total number of ships scheduled for purchase over the 30-year period to 293, compared with 280 under the 2007 plan. The 2009 plan envisions purchasing three more ships than indicated in the 2008 plan—296—and increases the Navy’s estimate of the costs to implement the plan by about 30 percent. Although the overall number of ships slated for purchase under the 2008 and 2009 plans differs only slightly, the Navy made significant changes in the types of ships it would purchase under the two plans. CBO’s analysis found the following:

• Executing the Navy’s most recent 30-year shipbuilding plan would cost an average of about $27 billion per year (in 2009 dollars), or more than double the $12.6 billion a year that the Navy has spent, on average, since 2003.
• The Navy’s 2009 budget request appears to depart from all of the budgetary assumptions used to develop the service’s 2007 and 2008 shipbuilding plans.
• CBO’s estimates of the Navy’s shipbuilding program through the period covered by the 2009-2013 Future Years Defense Program are about 30 percent higher than the Navy’s estimates.
• For the 2009-2020 “near term” period, CBO estimates that the new-ship construction alone would cost about 13% more than the Navy estimates
• For the “far term” period beyond 2020, CBO estimates that costs would be about 8% greater than the Navy projects.

These estimates are based on a number of assumptions that CBO made about the size and characteristics of various types of ships that the Navy would buy and about the timing of those purchases. Different assumptions could produce different estimates. The analysis was performed by Eric J. Labs of our National Security Division and Raymond Hall of our Budget Analysis Division.

CBO released a new Monthly Budget Review today. During the first eight months of fiscal year 2008, CBO estimates that the federal government incurred a deficit of $317 billion, $168 billion more than the shortfall recorded through May of last year. About $50 billion of that change is due to the distribution of the tax rebates enacted in the Economic Stimulus Act of 2008. That amount is just under half of the total rebates expected for this year–most of the remainder will be disbursed during the next two months.

Federal taxes withheld from paychecks are up by about 4 percent so far this year, though the increases have been smaller in recent months, reflecting slowing growth in wages and salaries. In May, receipts of corporate income taxes declined, relative to those in the same month last year, for the 11th consecutive month. For the first eight months of the fiscal year, corporate receipts have declined by about 16 percent ($33 billion).

Net of refunds, federal receipts this year are about the same as they were at the same point last year. In contrast, spending so far this year is up by about 8 percent (after adjusting for shifts in the timing of certain payments).

RAND researchers recently sent me a letter and an attachment , which they have circulated to others, commenting on CBO’s analysis of a recent RAND health IT study. Our analysis is summarized here and the full analysis is here . As I have noted previously, I will occasionally use this blog to respond to critiques of our work, and that is the purpose of this entry.

The RAND study estimated potential savings of approximately $80 billion per year from health IT if it were widely adopted. As CBO concluded in its recent report, however, that $80 billion figure is not an appropriate guide to the effects of legislative proposals aimed at increasing the use of health IT for several reasons. For example, the RAND study attempted to measure the potential impact of the widespread adoption of health IT — assuming the occurrence of “appropriate changes in health care” — rather than the likely impact, which would take account of factors that might impede its effective use. In addition, the RAND study was based solely on empirical studies from the literature that found positive effects for the implementation of health IT systems; it excluded studies of health IT that failed to find favorable results.

Nothing in the RAND letter would cause us to modify our previous conclusions. The letter emphasizes that the RAND study was published in a peer-reviewed journal (Health Affairs ), was implemented with the advice and review of a steering group of experienced and respected professionals, and was carried out with transparency with respect to its methods and assumptions. CBO did not, though, criticize the report for failing to be peer-reviewed, having inappropriate leadership, or lacking transparency. Our concerns are instead based on the substance of the study itself — especially the questions it was designed to answer — and perhaps more importantly how it has been used in the policy debate. (Similarly, CBO did not criticize the RAND study for being funded "by companies interested in health information technology." The issue we addressed is instead the analysis itself and how that analysis has been presented in policy circles.)

The letter also argues that CBO did not take account of other possible benefits of adopting health IT beyond those considered in the RAND report (such as improvements in health and safety), and that those benefits imply that RAND’s estimate of savings is conservative. In our paper we specifically identified the sources of savings considered in the RAND study and also described some other possible areas of savings. For example, our paper stated that “One significant potential benefit of health IT that has thus far gone relatively unexamined involves its role in research on the comparative effectiveness of medical treatments and practices.” However, we also recognized that obtaining those benefits would require a number of steps beyond merely a greater diffusion of health IT. For example, it would require creating databases, commissioning studies, and then most importantly using the results of those studies to alter the practice of medicine. In other words, much more would have to change to obtain these benefits than just the adoption level of IT.

Another area of confusion appears to be the question of the appropriate counterfactual: that is, what are the scenarios one is trying to compare when evaluating the impact of health IT? For our work at CBO, we compare what would happen under a proposed piece of legislation with what would happen if current laws remained in place. RAND’s $80 billion savings estimate, by contrast, is generated by comparing the level of adoption in 2004 with the level of adoption attained in a future year if IT were to follow a diffusion pattern that has been observed in other industries. Even if we agreed with other assumptions and calculations that led RAND to the $80 billion estimate (which we do not), we believe that health IT will continue to diffuse under current law, so that the appropriate calculation for our purposes is to compare savings under a new law with savings under the current-law pattern of diffusion. The point matters because health IT in the future will almost certainly have attained greater adoption rates than had occurred in 2004. Indeed, in a different RAND study, the authors compared savings under a baseline of continued adoption with a subsidy program that would speed adoption by 50 percent. That study’s estimate of the impact of the subsidy program follows more closely the approach that CBO would take.

Our published analysis covers, in more detail, the other technical reasons why we believe that the RAND study’s estimates overstate the cost savings from policy interventions to increase the adoption of health IT.

Finally, we very much appreciate and value the input that outside reviewers provide as we prepare our reports. As I have noted in a previous post , the fact that someone is listed as a reviewer of our paper in no way implies that the reviewer agrees with the analysis in the paper.

CBO has a team of runners in Saturday’s National Race for the Cure.  Here’s the CBO team photo from today:

I just returned from a brief trip to the United Kingdom, where among other activities I gave a talk at the Prime Minister’s Strategy Unit.

I am increasingly convinced that we need to incorporate more behavioral economics into public policy (for example, see here). The Prime Minister’s Strategy Unit has been doing impressive work on the topic. See a fascinating paper it published earlier this year on cultural change and public policy, and a related paper on personal responsibility and behavioral change issued in 2004.

The rising cost of health care represents the nation’s single most important long-term fiscal challenge.  CBO issued a new brief today on whether increased transparency about prices for specific health care services and pharmaceuticals would help to temper the rapid growth in costs.

One form of transparency — regarding the incidence of overall health care costs — may help to improve efficiency in the health sector. In particular, workers pay for employment-based health insurance through reduced take-home pay, but those costs may not be evident to many of them. A greater awareness of the total costs of health care and who ultimately bears them might generate increased demand for efficiency in that sector. This brief does not address this broader concept of transparency.

The brief focuses on another aspect of price transparency: the possibility that if individuals know the prices of health care services, they would be more likely to seek out less expensive providers or treatments and to question how effective the care they are purchasing is likely to be. It notes that several factors may limit the effectiveness of this type of transparency in cutting health care expenditures:

• On the consumer side, more than 80 percent of the population is covered by some form of health insurance, which insulates people from the full price of the health care they consume, limiting their incentive to compare prices. Doctors and other health professionals often direct decisions about what services to buy from whom, as individuals may have little information on the care they need or the quality or value of that care. Moreover, for insured and uninsured people alike, awareness of prices would make little difference in emergency situations or in the relatively small number of cases that account for a disproportionate share of overall health care spending.

• On the provider side, more transparency would make information about the prices that hospitals,physicians, and drug companies charge insurers more visible, but whether such disclosure would lead to higher or lower prices for consumers on average is unclear and depends on the nature of competition in the relevant market. The markets for some health care services are highly concentrated, so increasing transparency in such markets could lead to higher, rather than lower, prices because higher prices are easier to maintain when the prices charged by each provider involved can be observed by all of the others. Whatever the effect on average prices, more transparent prices would probably reduce the range of prices.

The brief was written by Sheila Campbell of our Microeconomic Studies Division.

Today CBO issued a cost estimate for an amended version of the Lieberman-Warner Climate Security Act of 2008.  The substitute amendment for S. 3036 (formerly S. 2191) would set an annual limit or cap on the volume of certain greenhouse gases (GHGs) emitted from electricity-generating facilities and from other activities involving industrial production and transportation.  Under this legislation, the Environmental Protection Agency (EPA) would establish three separate regulatory initiatives known as cap-and-trade programs— one covering most types of GHGs, one covering hydrofluorocarbons (HFCs), and a third program to cover the carbon emissions embodied in imported goods.

EPA would establish a quantity of allowances for each of calendar years 2012 through 2050 and would auction some of those allowances.  The proceeds would be used to finance various initiatives, such as developing renewable technologies, assisting in the education and training of workers, and providing energy assistance for low-income households.  EPA would distribute the remaining allowances at no charge, to states and other recipients, which could then sell, retire, or use them, or give them away.  Over the 40 years that the proposed cap-and-trade programs would be in effect, the number of allowances and emissions of the relevant gases would be reduced each year.

CBO estimates that enacting the legislation would increase revenues by about $902 billion over the 2009-2018 period, net of income and payroll tax offsets.  Over the next 10 years, we estimate that direct spending would total about $836 billion.  The additional revenues from enacting this legislation would exceed the new direct spending by an estimated $66 billion, thus decreasing future deficits (or increasing surpluses) by that amount over the next 10 years. Other spending could result from enactment of the bill, but it would be subject to future appropriation action. This estimate does not address such spending. In years after 2018, net revenues attributable to the legislation would exceed annual direct spending through 2050.

A detailed discussion of  the methodology that CBO uses for analyzing this type of legislation, including the budgetary treatment of the cap-and-trade program and a discussion of how tax offsets are applied to the revenues generated by allowances auctioned and given away are included in CBO’s April 10 cost estimate for S. 2191, the America’s Climate Security Act of 2007, as ordered reported by the Senate Committee on Environment and Public Works in December 2007.