The Medicare Flap: What's $140 Billion?

CBO Director Douglas Holtz-Eakin says the estimated budget gap in the new reform law doesn't mean much, at least in the big picture

By Peter Coy

The director of the Congressional Budget Office insists that the political furor in Washington over disputed cost projections of the new Medicare reform law is much ado about nothing. Although two estimates differ by $140 billion over a decade, that's "not a big difference in any deep scientific sense," CBO Director Douglas Holtz-Eakin told a group of BusinessWeek editors on Mar. 26.

Huh? Surprisingly, he may be right. But to put this comment in context, consider some background for those who haven't been following one of the latest mini-scandals Inside the Beltway:

Since January, the Bush Administration has been catching flak from both Democrats and some conservative Republicans over the cost of adding prescription-drug coverage to Medicare. The issue is whether the Bush team might have low-balled the bill's expense to get the measure through Congress.


  Last November, when Congress narrowly passed the bill, it relied on an estimate from the nonpartisan CBO that the Medicare modernization bill –- including the drug benefit -- would cost about $395 billion over its first 10 years. But two months ago, the White House announced that according to its own estimates, the bill will cost more like $534 billion over that period. The White House says both numbers are plausible and reflect honest differences of opinion. In any case, it adds, Congress was obligated by law to rely on the CBO's projections when it voted last year.

The Administration's announcement ticked off budget hawks, who argue that Congress was misled into passing a bill that was simply too expensive. The criticism intensified when Medicare's Chief Actuary, Richard Foster, claimed that he believed all along that the CBO's $395 billion figure was too low -- but was threatened with firing if he gave Congress his analysis. Thomas Scully, who was Foster's boss, claims he was only joking about the firing threat. The inspector general is investigating Foster's allegation.

The dispute has deepened the mistrust between the White House and its legislative adversaries, Hill-watchers say. Congress held a hearing on Mar. 24, at which Holtz-Eakin testified.


  Holtz-Eakin is trying to cool down the debate with a surprising claim: The $140 billion difference in estimates is actually no big deal. And what's even more shocking is that he's probably right.

As the top numbers guy advising Congress, Holtz-Eakin is used to dealing with large figures. He notes that this $140 billion difference doesn't look like such a big sum compared to the approximately $7 trillion that Medicare will spend over the next decade. In fact, it's about 2%. Also, Holtz-Eakin says, $140 billion is small in comparison to the high degree of uncertainty in the 10-year forecast.

Last week, the Medicare trustees released a report showing that their low-end estimate of the cost of the drug benefit was about $270 billion lower than their intermediate cost estimate -- an illustration of how rough these numbers are. The bottom line: "This is not a big difference in any deep scientific sense," Holtz-Eakin says.


  As for explaining the differences between the two estimates, Holtz-Eakin says much of the gap comes down to different forecasts of how many people will start to take advantage of the new Medicare drug benefit, and how quickly they'll do so. Another big discrepancy is over the cost of low-income subsidies. "It's not very exotic stuff," the CBO director says. "It's a bunch of genuinely technical differences."

Of course, Holtz-Eakin's explanation doesn't bear on the question of whether Foster, the Medicare actuary, was muzzled for political reasons. But it does make it seem as though the discrepancy in numbers isn't as huge as some people have been making out. That may be a hard sell in Washington right now, since partisan bickering seems to have reached a new low in recent days. But for the number-crunchers, it looks as though the Medicare debate might just be a tad overblown.

Coy is economics editor for BusinessWeek in New York

Edited by Beth Belton