Fed Economists Debunk CBO Runaway Medicare Cost Scare

by Randy Shannon

The heart of the argument to cut Medicare is that runaway medical costs will outpace gross domestic product and bankrupt the USA. This argument is based on budget predictions by the Congressional Budget Office (CBO). We heard echoes of this argument in the recent primary and general election: “We will have to do something about Medicare costs.”

These predictions are so bogus that two Federal Reserve economists have debunked the CBO methodology and conclusions as economic malpractice. This is a very significant blow to the “out of control deficit” argument and should be widely discussed and disseminated. Below is commentary on the Fed economists’ paper by economic blogger Yves Smith.

Graph of Healthcare Share of Federal Budget (yellow line) Based on Bogus Congressional Budget Office Predictions

Fed Budgetary Experts Demolish CBO Health Cost Model, the Lynchpin of Budget Hysteria

A remarkably important and persuasive paper that calls into question the need for “reforming” Medicare has not gotten the attention it warrants.An Examination of Health-Spending Growth In The United States: Past Trends And Future Prospects” by Glenn Follette and Louise Sheiner looks at the model used by the Congressional Budgetary Office to estimate long term health care cost increases. Bear in mind that this model is THE driver of virtually all forecasts of future budget deficits.

This paper, although written in typically anodyne economese, is devastating in the range and nature of its criticisms. And the reason this assessment should be taken seriously, independent of the importance of the issues it raises, is that the authors are uniquely qualified to make this critique. Follette is chief of the Fed’s fiscal analysis section. Sheiner, a fellow member of that group, has worked for both the Treasury and the Council of Economic Advisers previously. In other words, the sort of analysis they have made here is the core of what they do on a daily basis.

The argument made by the opponents of the plans to cut Social Security and Medicare generally take this form: concerns about Social Security are greatly exaggerated. They are based on long-term forecasts, which are notoriously inaccurate in outlying years. The most commonly cited, by the Trustees of the Social Security system, projects the exahustion of the famous trust fund in 2033. As several analysts have observed, if Social Security really has a problem, we’ll know it in plenty of time; there’s no need to do anything immediately.

By contrast, conventional wisdom is that Medicare does have a long term cost predicament, but the problem is not demographic, but that of the steep rise of health care costs in general.

The fundamental beef of Follette and Sheiner with the CBO model is that it naively assumes past growth in health care spending as the basis for its long-term projections. The result is that it shows that trees will grow to the sky. One of the things anyone who has build forecasting models will tell you is you come up with assumptions that look reasonable and then sanity check the output. The Fed economists point out numerous ways that the model output flies in the face of what amounts to common sense in the world of long term budget forecasting.

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