Congressional Budget Office
Douglas W. Elmendorf
Director’s Blog

Later this week, CBO will be releasing its new Long-Term Budget Outlook. Perhaps the single most important variable affecting the nation’s long-term fiscal outlook is the rate at which health care costs will grow in the future. Over the past 30 years, total national spending on health care has more than doubled as a share of GDP. According to the projections we released last month in our Long-Term Outlook for Health Care Spending, that share will double again by 2035, claiming more than 30 percent of GDP. Federal spending on Medicare and Medicaid, which accounts for 4 percent of GDP today, is projected to triple as a share of GDP (to 12 percent) by 2050 under current law.

Although the aging of the population is frequently cited as the major factor contributing to the large projected increase in federal spending on Medicare and Medicaid, by itself it accounts for only a small fraction of the growth that CBO projects. A more important factor is excess cost growth: the extent to which the increase in health care spending for an average individual exceeds the growth of per capita GDP. The gains from higher spending are not always clear, however. Substantial evidence exists that more expensive care does not always mean higher-quality care. Medicare costs per beneficiary, for example, vary substantially across the United States for reasons that cannot be fully explained by the characteristics of the patients or other factors — and the higher-spending regions don’t generate better health outcomes, on average, than the lower-spending ones. These types of research findings suggest that embedded in the country’s central long-term fiscal challenge are opportunities to reduce health costs without impairing health outcomes overall.

Since rising health care costs and their consequences for Medicare and Medicaid constitute the nation’s most fundamental long-term fiscal challenge, one of my highest priorities as CBO director is to augment our work on health care — while still continuing our outstanding and crucial work in other areas as well.

CBO’s health work spans all the analytical divisions of the agency and is divided into two broad categories: (1) estimating the budgetary impact of federal health programs and proposed legislation, and (2) preparing studies on health policy issues.

• The Health Cost Estimates Unit in the Budget Analysis Division estimates the cost of proposed health legislation and prepares spending projections for federal health programs.
• The Health and Human Resources Division conducts studies of health issues, including Medicare, Medicaid, pharmaceuticals, public health, and private health markets; it also develops models that underlie cost estimates.
• The National Security Division conducts studies of the health care provided by the Departments of Defense and Veterans Affairs.
• The Tax Analysis Division examines aspects of the tax system and its interactions with health care.
• The Microeconomic Studies Division also analyzes health issues, especially those related to competition or market structure, including most recently prescription drug pricing and research and development in the pharmaceutical industry.
• The Macroeconomic Analysis Division also does work on the economic effects of health care and insurance programs.

In addition to dedicating more staff to work on health care, we’ve also appointed a panel of health advisers to complement our panel of economic advisers, and I have been spending a significant share of my own time on the topic. The goal is to provide policymakers and others with more analyses of health care issues and options for reducing health care costs over the long term — and you should expect to see a significant number of publications on the topic from CBO in the coming months and years.

For easy reference, we also have a new Web page that collects many of the agency’s activities in the area.

CBO released its Monthly Budget Review today. During the first two months of fiscal year 2008, the budget deficit was $157 billion, according to our estimates — $35 billion higher than the same period last year. Timing shifts and a difference in the number of business days account for roughly half of the increase in the deficit relative to last year. After adjusting for those differences, we estimate that the increase in the deficit amounts to about $16 billion.

Trends in corporate revenue may be of particular interest because much of the improvement in the budget deficit over the past several years can be attributed to a substantial rise in corporate income tax revenue. The report notes that although the amounts collected thus far are small and may not provide much insight into the receipts to be collected during the full fiscal year, net corporate income tax receipts declined by 35 percent ($5 billion) during the first two months of this fiscal year, compared with receipts in the same months last year. Corporate receipts have fallen in each of the past five months compared with the same months in fiscal year 2006. The first substantial payment of corporate taxes for this fiscal year is due to the IRS by December 17, and more information about trends in corporate income tax revenue will be available shortly thereafter.

The Monthly Budget Review was prepared by Mark Booth and Barbara Edwards of our Tax Analysis Division and Chad Chirico and Kathy Gramp of our Budget Analysis Division.

CBO released a new report this morning on the impact of unauthorized immigrants on state and local government budgets. Most analyses have found that the fiscal impact of immigrants as a whole (both legal and unauthorized, and including all levels of government) is slightly positive — the tax revenues generated by immigrants exceed the cost of the government services they use. This study examines the literature on a more narrow question: the fiscal impact of unauthorized (as opposed to all) immigrants at the state and local government level (excluding the federal government).

Many state and local governments incur costs for services associated with unauthorized immigrants, particularly in the areas of education, health care, and law enforcement. Some of those costs are incurred because of rules governing federal programs, court decisions, and state-level statutory or constitutional requirements. CBO’s review of the literature finds that the amount of spending involved is a small share of total state and local spending on these services, but the tax revenue collected from unauthorized immigrants at the state and local level does not offset the costs involved. The result is probably a modest negative net impact on state and local budgets.

The paper was written by Melissa Merrell in our Budget Analysis Division, which is the part of CBO responsible for preparing cost estimates of legislation. Melissa covers topics including immigration, administration of justice, emergency management, and regional planning in the State and Local Government Cost Estimates Unit. Prior to joining CBO, she worked for the Association of Metropolitan Planning Organizations and the League of Women Voters. She holds a master’s degree in public policy from George Washington University and a bachelor’s degree in political science and sociology from St. John Fisher College in Rochester, NY.

I am testifying before the House Budget Committee this morning on economic conditions and the budget. CBO will not be releasing an updated macroeconomic forecast until January, when we release our next Economic and Budget Outlook, so the testimony doesn’t have any specific projections for the macroeconomic outlook. Nonetheless, the testimony does discuss many of the cross-cutting factors affecting the macroeconomy — including difficulties in the housing market, the stabilization of the current account, turbulence in financial markets, oil price trends, and consumer confidence.

Marty Feldstein and Fred Bergsten are also on this morning’s panel. You can view the hearing through the House Budget Committee website.

CBO’s testimony was put together by our Macroeconomic Analysis Division, which is responsible for economic forecasting, policy analysis, and financial analysis of federal programs and is directed by Bob Dennis (who has been with CBO since 1979).

On the topic of macroeconomic forecasts, we have long evaluated our own forecasting accuracy with the thought that publishing such analysis of our own projections is an important form of transparency. And I was interested to learn from a paper released by two Federal Reserve economists on November 19 that CBO’s record on macroeconomic forecasting looks quite good, even compared to the Federal Reserve’s own outstanding (and larger) staff.  So kudos to our macro division!

Welcome to the CBO Director’s Blog!

As technology evolves, the Congressional Budget Office is working hard to improve the ways in which we communicate with the Congress and the public. Our analysis has always been of the highest quality, and we’d like to make sure we meet the same high standards in our electronic communications.

We’ve already added new functions to our website to improve our list server and to provide the Congress and citizens with audio files of speeches and presentations along with the materials that go with them. This blog is the latest addition to our communications modernization effort.

What are you likely to read on this blog? First, you will learn more about CBO — the types of work we do, how we do it, and more about the outstanding analysts we have. For example, when we come out with a new report or important cost estimate, I may write a bit about the analytical substance and also introduce you to the key staff who took the lead in the analysis. Second, CBO’s research and cost estimates are often discussed extensively in the media and elsewhere — and not surprisingly, from time to time misunderstandings or misinterpretations arise about some analysis we have done. In those kinds of situations, I will use the blog to further explain our work and address possible or potential misunderstanding. Finally, when it seems appropriate, I will use the blog to link our work to relevant outside research from academic or other institutions that may shed additional light on the challenging issues the Congress is working to address.

I will write several times each week while Congress is in session — perhaps less often when it is not. Since this is CBO’s first attempt to dip its toes into blogging waters, I will begin slowly. For that reason, at least for now I have decided not to post responses on the blog. I would, though, be delighted to hear from anyone who would like to comment upon something I have written — and may ask to post a particularly interesting comment if it adds substantively to the discussion on a particular subject. If you wish to write in, please address your comments to: blog@cbo.gov.

I look forward to hearing from you and for any feedback you may have for me on the blog. Here we go!