A Billion Here, a Billion There

Fuzzy math on the Medicare prescription drug benefit

When the Bush administration released its proposed budget for 2006, The Washington Post ran a front-page story claiming that the most recent projections for the cost of the new Medicare prescription drug benefit are much higher than last year's. The Bush administration denounced the claim as "flat wrong" and took the unusual step of issuing a statement seeking a correction from the Post.

Who's right? The truth is, neither party is wearing the white hat. And all the shouting has left unanswered important questions about the cost of the drug benefit that taxpayers will begin funding next year.

The administration's last official ten-year cost projection—that the new Medicare law would cost $534 billion over ten years—was deservedly controversial. The administration hid the estimate while publicly touting a much lower estimate ($400 billion). Thus most observers were suspicious when the president's budget was released last week.

The latest estimate, which projected the cost of just the drug benefit, was much higher: $1.2 trillion over 10 years. This is not directly comparable to the previous projection, for a number of reasons. First, it is a gross figure that does not include offsets that will accrue to the Treasury. Accounting for these brings the 10-year cost projection for the drug benefit to a net $725 billion.

But even this estimate does not provide an apples-to-apples comparison with the previous estimate. The $534 billion figure was the projected cost of the entire Medicare Modernization Act, not just the drug benefit. The projected "10-year" cost of the drug benefit itself was $511 billion.

Getting closer now, but still not there. The discrepancy between $511 billion and $725 billion comes from the fact that the earlier "10-year" projection looked only at the first eight years that the drug benefit will be operative. The new cost projection looks at the first 10 years. An apples-to-apples comparison shows the projected cost for the first eight years increased from $511 billion under the previous estimate to $518 billion under this year's estimate—an increase of 1.5 percent, or nearly $1 billion per year.

This is hardly a doubling of the projected cost, as The Washington Post's front-page headline suggested. But neither does an extra $1 billion per year leave the cost projections "virtually unchanged" as the Bush administration claims. Only in Washington is $1 billion per year considered a rounding error.

Perhaps there's room for a deal: The Post could admit that its article overstated the increase in the administration's cost projections if the president admits it was wrong to withhold its original cost projections from the public.

The flap over the net difference between past and current projections distracts from important questions about changes in the projections for the component parts. For example, projected outlays under the drug benefit increased by $28 billion over the 2004–2013 period. This gross increase is four times the size of the net increase. The remainder was erased by a projected increase in offsetting savings of $21 billion.

Within those categories, even larger swings were seen. Spending projections for individual line items increased by as much as $32 billion while another decreased by $22 billion. These figures suggest more volatility in the projections than a mere 1.5 percent increase. The Bush administration has yet to explain these differences from previous estimates and lay bare all the relevant information.

It would be advisable for the administration to do so. Many Republicans have expressed skepticism over the Medicare actuary's economic assumptions. And people of all political stripes may still wonder whether the administration is being fully forthcoming. For its part, the administration has yet even to hint that it was it was wrong to withhold cost estimates from the public.

We won't know the actual cost of the Medicare prescription drug benefit until well after the program begins to take effect in January. But the public can get a better idea if we have access to more information now.