U.S. health spending grew by 4% in 2008. This increase was the smallest in 50 years, influenced in part by the recession. There also is a tendency for several years of rapid spending growth to be followed by several years of slower growth as employers, patients, and government take steps to control costs.

Federal government health spending increased 10.4%; private business spending increased 1.2%.

See the Health Affairs article, Health Care Spending at a Historic Low in 2008, for details.

The Congressional Budget Office released its score of the secret Senate health-care bill on December 19. It projected that the bill would reduce federal deficits over the next 10 years by $132 billion, $2 billion more than its $130 billion score for the previous, public version.

Based on what the CBO described as a “rough outlook for the decade following the 10-year budget window,” President Obama and Senate Democrats pronounced that the bill would reduce federal deficits by up to $1.3 trillion during 2020-2029. According to the President, this figure proves wrong “those who are continually carping about how this is somehow a big spending government bill.”

The $1.3 trillion figure apparently comes from Democratic staffers’ translation of a statement in CBO Director Elmendorf’s December 19th transmittal letter to Senator Reid, which indicated that the CBO expects that the legislation would reduce deficits in the decade after 2019 by an amount “in a broad range around one-half percent of GDP.” Among other assumptions, the one-half percent of GDP figure assumed that projected savings in Medicare spending and other savings as of 2019 would grow by 15 percent annually during 2020-2029. That’s a lot, especially as Director Elmendorf concluded : “It is unclear whether such a reduction in the growth rate [in Medicare spending] could be achieved, and if so, whether it would be accomplished through greater efficiencies in the delivery of health care or would reduce access to care or diminish the quality of care.”

On December 20, the CBO issued a correction of its “rough outlook” for the bill’s longer-term effects, due to its misinterpretation of provisions regarding when a new Independent Advisory Board would have to recommend changes in Medicare to cut spending, which would automatically take effect unless blocked by specific legislation. The Senate bill would require the Independent Advisory Board to recommend changes to limit spending after 2019 if spending growth exceeded GDP growth plus one percent. The CBO had mistakenly assumed that a lower inflation-based threshold to be used during 2015-2019 would continue after 2009.

The CBO’s revised projection is that savings in Medicare spending would increase 10 to 15 percent per year during 2020-2029, rather than 15 percent, and that federal deficits would be reduced “in a broad range between one-quarter and one-half percent of GDP,” rather than one-half percent. Director Elmendorf’s December 20th letter reiterates the uncertainty concerning these projections, whether such reductions in Medicare spending could be achieved, and, if so, the extent to which access to care or quality of care would be affected.

In the shorter term, and as was true for its score of the bill’s prior version, the CBO projects that the creation of a new federal long-term care insurance program, the Class Act, would reduce the 10-year deficit by $72 billion. During the program’s early years, premiums would be collected without paying out much in benefits. The CBO notes that the program would likely reduce deficits by a smaller amount during 2020-2029.

In his November 25th letter on the Class Act, Director Elmendorf indicated that the proposal (and a similar proposal in the House bill) “would add to budget deficits in the third decade – and in succeeding decades – by amounts on the order of tens of billions of dollars for each 10-year period.” His December 19th letter states that “the magnitude of the increase would be fairly small compared with the effects of the bill’s other provisions, so the [Class] program does not substantially alter CBO’s assessment of the longer-term effects of the legislation.”

The President’s statements about the Senate bill’s cost notwithstanding, CBO projections of the effects of health-care legislation on federal deficits are highly uncertain and prone to error, especially after the first 10 years, even if not affected by political considerations. The CBO’s corrected “rough outlook” of federal deficit reductions from the Senate bill of roughly one-quarter to one-half percent of GDP during 2020-2029 assumes substantial year-to-year percentage reductions in Medicare spending compared with current law. The CBO admits that it does not know whether projected cuts in spending can be achieved, and, if so, how they would be achieved and whether they would affect care. Of the projected $132 billion in deficit reduction during 2010-2019, over half reflects startup of the proposed Class Act, another new federal entitlement, which the CBO projects would eventually add tens of billions of dollars to deficits.

Given the uncertainties surrounding the CBO’s projections, it would be better if the organization could provide a reasonable range of estimates for the 10-year budget window, rather than a single estimate. It would also be better for the CBO to provide a range of guesses if it engages in rough speculation about the longer-term effects of proposed legislation as a proportion of GDP, and it should assume that politicians will translate those guesses into dollar amounts, however meaningless.

Here’s a link to my Dec. 24 post on the National Review health care blog, NRO Online Critical Condition.