The CBO's Sleight of Hand On Health Care

At the beginning of the week, the Congressional Budget Office gave House Speaker Nancy Pelosi their estimates of the how much the health care reconciliation bill will cost. But Pelosi decided to wait days to release those numbers. For Democrats anxious to pass the bill, the delay has been extremely frustrating as Congress must wait 72-hours after the release of the CBO estimates before voting. They desperately wanted to vote before Sunday morning, when Obama leaves on his trip for Indonesia, Australia, and Guam. Naturally, Democrats want President Obama around to do any last-minute arm-twisting that might be necessary. Thus, the House would have had to release the CBO estimates by Wednesday night. They missed that deadline.

But, despite delaying the vote until after Obama leaves on his trip, Pelosi had good reasons for waiting to release the numbers. The CBO probably estimated the costs for the health care bill to be too high, probably over the magic one trillion dollar price tag, which she thinks means even more congressmen opposing the bill.

What is going on behind the scenes during this delay? Probably a lot of number crunching. Congressional Democrats have the CBO equations used to calculate expenditures and taxes and have spent the last few days changing different numbers in the bill to jimmy the total costs below a trillion dollars. Yet, no one really believes that the CBO equations accurately measure the costs of the health care bill to the government or to anyone else. Once one knows what costs the CBO counts and which ones are ignored, gaming these numbers can allow Democrats to hide huge parts of the bill’s costs.

Take the huge $500 billion cuts in Medicare. There is a big difference between the government's costs and the costs for the system as a whole. Medicare and Medicaid already reimburse hospitals and doctors at rates that don’t cover their costs. Even lower reimbursement rates mean private insurers will have to offset those losses or hospitals and doctors will start losing money, with many going out of business. Cuts in Medicare pass the buck to private insurance companies, which pass the costs to private customers who pay higher premiums to cover the Medicare shortfall. And as costs rise, more and more of the insured will opt out of buying insurance. But the CBO estimates disregard this effect.

Even if the general public has not yet come to understand this cost shifting effect, doctors do. As private insurance will not pick up all the higher costs from government Medicare cuts, it means less money for doctors and hospitals as well. Basically everyone is going to suffer a little from the lowered Medicare reimbursements. This week, The New England Journal of Medicine released a survey of doctors, showing that 46.3 percent of "primary care physicians (family medicine and internal medicine) feel that the passing of health reform will either force them out of medicine or make them want to leave medicine." Not only will doctors leave medicine, but "27% [of physicians] would recommend medicine as a career but not if health reform passes."

The health care debate has focused on reducing health care costs by reducing demand. In contrast, the supply side has largely been ignored. But health care is like other goods and services. Just as less gasoline means higher gas prices, fewer doctors and fewer hospitals means higher health care prices. But even if the reduction in the number of doctors is a fraction of 46.3 percent mentioned, say 5% or 10%, there will still significant increases in medical costs. Again, despite all the promises about how the health care bill will control medical costs, the CBO estimates completely ignore this impact of the health care bill on everyone’s costs.

The CBO also doesn't deal with the ban on insurance companies charging different premiums based on pre-existing health conditions. This will raise the premiums for private insurance, too. Imagine what would happen if you could buy auto insurance right after you have had an accident and then be allowed to immediately drop coverage again once the car was fixed? People would wait until they got in an accident before they bought insurance, and insurance premiums would skyrocket. The "insurance" fee would be the price of what it costs to get the car fixed plus the administrative costs of handling the "insurance."

The health care bill tries to fix this by fining people who don't buy insurance. The fine will gradually rise so that by 2016 the annual fine will reach $750 per person without insurance. But this fine is way too small to make most people buy health insurance. In 2008, the average price of an individual insurance policy was $4,704 and it was $12,682 for a family of four, and it will be much higher in 2016. Thus most people will want to pay the $750 and then just sign up when they "need" insurance.

Despite repeated requests by Senator Tom Coburn and other Republicans, the CBO has not analyzed the effects of banning insurance companies from considering pre-existing conditions. There is a good reason Democrats do not want the effect to be known: the ban in the Senate bill will raise the cost of insurance and reduce the number of insured.

On Wednesday, in an interview with Fox News' Bret Baier, President Obama explained why he thought that his health care bill is necessary: "Well, if [the health care bill] doesn't pass, I'm more concerned about what it does to families out there who right now are getting crushed by rising health care costs and small businesses who were having to make a decision, 'Do I hire or do I fix health care?' That's the reason I make these decisions."

Two things are certain. First, the health care bill is going to dramatically increase medical costs. Second, the CBO cost estimates, even if large, will not reflect the true total cost of the health care bill. The current political dance on gaming the CBO numbers so that Democrats can claim that the government health care takeover will cost less than a trillion dollars is a useless waste of time.

*John Lott is the author of Freedomnomics.