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Sticker Shock Over ObamaCare: Part 2

Shikha Dalmia
August 6, 2009, 11:16pm

Talking about  sticker shock over the Congressional Budget Office's estimate that ObamaCare will end up costing more than $1 trillion over 10 years, as it turns out even this figure is almost certainly too low. The Wall Street Journal reminds us this morning that Congressional actuaries have a history of under-estimating the ultimate cost of such programs.

"[They] expected Medicare to cost $3.1 billion in 1970. In 1969, that estimate was pushed to $5 billion, and it really came in at $6.8 billion. House Ways and Means analysts estimated in 1967 that Medicare would cost $12 billion in 1990. They were off by a factor of 10-actual spending was $110 billion-even as its benefits coverage failed to keep pace with standards in the private market. Medicare spending in the first nine months of this fiscal year is $314 billion and growing by 10%," the WSJ notes.

Nor is the CBO likely to break its streak of low-ball predictions this time. In fact, according to Stephen T. Parente in the City Journal, the CBO estimate is off by - hold on to your wallets - about one trillion dollars! That means that ObamaCare might cost twice as much as the CBO claims -- or two trillion dollars.

Parente was John McCain's health care advisor so ObamaCare supporters are likely to dismiss his claims. But Parente is a principal of Health Systems Innovations that routinely provides health care estimates to both Republican and Democratic members of Congress. He is also director of the Medical Industry Leadership Institute and an associate professor in the finance department at the Carlson School of Management at the University of Minnesota so there is reason to think that he knows what he is talking about.

His contention is that the CBO under-estimates the final price tag of both the House and Senate versions of ObamaCare because it under-estimates the number of people who will switch from a private to a public option. Like the Urban Institute - no bastion of right-wing misinformation on the issue -- Parente estimates that large and small employers would collectively dump roughly 40 million people on to the subsidized public option. But the CBO assumes that large employers would use the public plan only sparingly and that only 11 million people would move from private to public insurance.

Why the difference in these estimates? Parente believes that this is because the CBO uses simulation models of health-insurance plans based on much older health-plan data-typically from 2001 or even 2000. His estimates are grounded in 2006 commercial-insurance data to which the CBO doesn't have access (the data are not publicly available and the CBO didn't make provisions to purchase them). "These data reflect the advent of much cheaper, high-deductible health plans and limited-provider network plans. If the government modeled its public option on these inexpensive plans, the result would be cheap enough to lure far more people away from private health insurance than the CBO estimates," he notes.

He could be wrong, but he claims that his model has a good track record. "The last time government introduced a major health-insurance innovation was 2004, which saw the introduction of Health Savings Accounts. We [HSI] used the same model to predict that 3 million people would adopt these HSAs by the beginning of 2006. Our estimate, which we published in the peer-reviewed journal Health Affairs, was spot-on, predicting the market response more accurately than most other models, which produced adoption-rate estimates at least one-third lower," he notes.

I think I am getting heart burn in addition to sticker shock. Will someone please stop Parente by reporting him to the before I have to pop another Malox. When it comes to ObamaCare, all unfavorable predictions are by definition lies!

Shikha Dalmia is Senior Analyst

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