The Facts about the Government's Medicare Cost Projections

Separating economic myths from economic truths


Editor's Note: Reason columnist and Mercatus Center economist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.

Myth: The government's cost projections are reliable.

Fact: They are not. No matter what governmental body does the scoring, it is almost invariably unreliable.

In 1967 long-run forecasts estimated that Medicare would cost about $12 billion by 1990. In reality, it cost more than $98 billion that year. Today it costs $500 billion.

When it comes to the federal government, massive cost overruns are the rule, not the exception. The $800 billion cost of the war in Iraq dwarfs the $50-60 billion that Mitch Daniels, then director of the Office of Management and Budget, predicted at the outset. In light of these numbers it's interesting to remember that Larry Lindsey, President George W. Bush's economic advisor, was fired for projecting that the war could cost between 1 and 2 percent of GDP back in 2002 (roughly between $100 and $200 billion).

Strangely, lawmakers seem to never expect these extra costs even when the excesses take place under their own noses. The Capitol Hill Visitor Center, an ambitious three-floor underground facility, originally scheduled to open at the end of 2005, was delayed until 2008. The price tag exploded from an original estimate of $265 million in 2000 to a final cost of $621 million.

At the heart of the problem is the massive amount of budget gimmicks, the abuse of rosy scenarios, the emergency spending loopholes, and a lack of fiscal discipline by lawmakers who just can't stop spending the taxpayers' money.

This chart compares Congressional Budget Office long-term projections of the debt held by the public from 2010 with long-term projections calculated in 2007. In 2007, the CBO projected that the debt held by the public would surpass 60 percent in 2023. Note that this long-term projection incorporated policy changes that were deemed likely at the time. Using the same methodology last year, the CBO projected that the debt will exceed 60 percent of GDP by the end of 2010. In the three years between projections, the debt milestone has accelerated by 13 years. This unforeseen acceleration is worth careful consideration; as the government consumes more credit, less will be available to the private sector.

In other words, even even short-term economic projections are frequently unreliable—especially when the projections are done by the government.

The above chart shows what a more realistic path for Medicare spending may look like. It compares the long-term projections of Medicare costs under the current law (the 2011 Trustees Report) with the Centers for Medicare and Medicaid Services' Office of the Actuary's alternative projections (2011 Trustees Report Alternative). The latter projections were released as a "best estimate" of future Medicare expenditures to address the "likely understatement of current-law projections."

These projections primarily differ in their assumptions about the plausibility of drastic payment-rate cuts. If such cuts do not materialize, Medicare will cost tens of billions more each year than current law projects.

Furthermore, under the Patient Protection and Affordable Care Act, physician payments are tied to a sustainable growth rate mechanism (SGR), which adjusts repayment rates in order to cap physician-related spending. Since 2001, physicians have been scheduled to receive at least a 5 percent reimbursement cut each year under SGR; and this cut has been overridden by Congress every year except 2002.

In 2012, physician payments are scheduled to decrease by 29.4 percent—an update which is extremely unlikely to occur. So while the Board of Trustees is legally bound to incorporate these cost savings into its projections, the Office of the Actuary has formed a more realistic baseline which incorporates increasing physician repayments into the total cost of Medicare. 

Under the current-law baseline, Medicare spending is projected to grow from 3.99 percent of GDP in 2020 to 6.25 percent of GDP in 2080; under the alternative scenario, Medicare spending is projected to grow from 4.31 percent of GDP in 2020 to 10.36 percent of GDP in 2080. In nominal terms, this is a cost underestimation of $2.7 trillion dollars by the year 2080. 

Contributing Editor Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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  1. Why is that every time the divine Veronique comes on, there’s a little tingle in my leg?

    Love that haircut!

  2. That’s a big Twinkie.

  3. Where am i?

    1. Somewhere else, still not being funny.

      1. But if i’m not contained to one page i may leak into articles!

        1. leak in with my poor grammars!

  4. Missing the most important factor as usual. If we got rid of Medicare, there would still be healthcare costs. And they’d be more expensive for former Medicare recipients. The problem is healthcare costs.

    1. Actually Tony, the problem is that SOMEONE ELSE is paying those costs. Were they borne by the consumer, they’d be a LOT lower as normal market forces would apply. Sheese…..

      1. Yeah, Tony is assuming that every senior needs every healthcare service they currently recieve. He’s also assuming that they are entitled to getting those services on someone else’s dime.

        In Tony’s world it doesn’t matter where the money originates, so long as Government gets to spends it.

        1. The senior spent their adult lives paying into the system so that when they were old and decrepit their medical bills would be taken care of.

          Like it or not, America has a contract with anyone who has ever paid into the system.

      2. Except this assertion flies in the face of every bit of evidence in the healthcare market. It’s not a normal market. We have the freest healthcare market in the developed world and it’s the most expensive. Explain that. Without the empty-skulled fucking mindless nonsense platitudes. Do you people EVER FUCKING THINK?

        1. Here, Tony. Read through this – it’s a fairly comprehensive summary of the libertarian position on the U.S. health care system and a far better means of explication than would be provided by back and forth name-calling, etc. And yes, I sometimes fucking think.

    2. Tony,

      If you truly believe what you are saying, why not propose complete nationalization of every aspect of the economy?

      If in your own words:

      1. If we got rid of Medicare, there would still be healthcare costs.

      2. They’d be “””MORE EXPENSIVE””” for former Medicare recipients.

      Surely you MUST be in favor of nationalizing the entire US economy.

      Further, there would be scaling advantages to nationalizing the world economy under one government.

      1. A quote from Bastiat comes to mind:

        “Thankfully, bad ideas are never taken to completion, otherwise the human race would be sacrificed.”

      2. Yes surely I must be in favor of the 3 or 4 fallacies in that post. Healthcare is not like other markets. Demand is not a matter of consumer choice, but consumer necessity. It works best when it is single-payer and all the evidence in the world confirms this. Evidence trumps dogma, every time.

    3. The problem is that the resources devoted to political ends are not available to medical care.

  5., please fix the aspect ratio on clips from I have to assume Veronique does not appreciate being posted in stretchy-vision.

  6. In Tony’s world,
    Market forces are voodoo,
    Govt boondoggles are always ok. He is even cool with DoD ones, when the right team is in charge.

  7. Of course government projections are reliable. They reliably UNDERSTATE costs and reliably OVERSTATE benefits.

  8. I wonder if our next President is going to abolish Medicare, Medicaid, Social Security, 90% of departments and agencies of the federal government to start, tells the Eurofaggots to fuck off, and write his own speeches.

    What do you guys think?

    1. The Executive probably doesn’t have the ability to abolish Medicare, Medicaid, or Social Security unilaterally. Though dismantling agencies within the Executive branch, such as entire Cabinet departments, could be possible.

  9. Is anyone else annoyed by the way they present those charts? Hand-cam of a TV in the studio? Seriously? You can barely read the axes! Why bother to show them at all?

  10. Enough with the Daniels/OMB war cost canard, and particularly disappointed to see it here. Daniels/OMB was tasked to cost out a specific scenario: deploy, fight, six month stabilization, redeploy. They were NOT asked to predict the possible scenarios and cost each of them or even the most likely. I expect better of DeRugy and!

  11. It looks like ObamaCare is finally on its way to the Supreme Court, as the Obama Administration decided not to ask for a new hearing in the 11th Circuit Court of Appeals on Monday.
    You Health

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