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Critically-Important CBO Cost Estimates for President Obama’s Health Care Changes Were Materially Wrong

     By Fulcrum Inquiry Damages, Appraisal, Accounting & Economics Expert Witnesses

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Last week the Congressional Budget Office issued “updated and expanded” cost estimates that show their prior “final” estimates were entirely incomplete and misleading. We explain what happened, and what should have happened.
The Patient Protection and Affordable Care Act (PPACA) was signed into law by President Obama on March 23, 2010. The related Health Care and Education Reconciliation Act of 2010 was signed into law on March 30, 2010. The votes in the House of Representatives for these two bills were quite close.

The PPACA passed only after the Congressional Budget Office (CBO) issued a March 20, 2009 report that estimated the PPACA's net cost (calculated after consideration of a significant tax increase) would reduce the federal deficit by $143 billion over the first decade. At the time, the CBO indicated that they had “completed” their work, and the report was a “final cost estimate”.

Several Congressmen indicated that the CBO estimates showed a deficit reduction that allowed them to vote for the legislation, in a situation where they would have otherwise withheld their support. As an example only, when announcing his previously-withheld support of the PPACA, Bart Gordon (D-Tenn.) stated:

“I have consistently said I would not support any version of healthcare reform unless it brings down rising healthcare costs, improves access to affordable care and does it all without adding one nickel to the national deficit. I’ve now been presented with a bill that does all three.”

In describing the CBO report, House Democratic Whip James Clyburn stated:

"We are absolutely giddy over the great news that we've gotten from the CBO."

Later that day, when speaking with Charlie Rose on PBS, Clyburn was asked if the CBO report will "close the deal" for Democrats. Clyburn said:

"I think so," I really...believe that the people who were very leery about what this would do to the country's debt and deficit are very pleased with this. … It’s exactly what we had hoped for, but I tell you, very few of us thought it would be this good."

The CBO report did not include all costs

The reason that the CBO numbers were better than anyone expected is that the CBO numbers were wrong. On May 11, 2010, the CBO announced that it identified at least $115 to $125 billion of additional costs from 2010 to 2019. These additional costs:

1. Increase the total cost of the health care plan to more than $1 trillion, thereby exceeding President Obama’s unofficial limit to the cost of this health care reform, and

2. Reduce the previously-announced deficit reduction by more than 80%, thereby causing the deficit reduction (after the tax increase) to well under the $100 billion reduction goal sought by Speaker Pelosi and others in defense of this legislation.

The CBO’s May 11, 2010 report explains the change as follows:

“The following analysis updates and expands upon the analysis of potential discretionary spending under PPACA that CBO provided on March 13, 2010. In particular, it provides an update of the earlier tally of specified authorization amounts, as well as a list of programs or activities for which no specific funding levels are identified in the legislation but for which the act authorizes the appropriation of “such sums as may be necessary.’”

The CBO further explains that Congress provided “explicit authorizations for a variety of grant and other program spending for which no specific funding levels are identified in the legislation”. For these areas, the PPACA requires spending “such sums as may be necessary”, but the amount of what “may be necessary” can be changed. After placing a “discretionary” label on such programs (vs. a label of “direct” spending for items that were estimated), the CBO’s March 20, 2010 report ignored all discretionary spending for purposes of their cost tally.

Perhaps more importantly, the additional $115 million reported on May 11, 2010 is still not a complete list of the previously-undisclosed additional spending. The May 11, 2010 update includes a new Table 2 that lists 52 programs for which cost estimates still have not been made. The CBO explains this list of items as follows:

“Table 2 presents a list of new activities for which PPACA includes only a broad authorization for the appropriation of “such sums as may be necessary.” For those activities, the lack of guidance in the legislation about how new activities should be conducted means that, in many cases, CBO does not have a sufficient basis for estimating what the “necessary” amounts might be over the 2010-2020 period. … CBO does not have a comprehensive estimate of all of the potential discretionary costs associated with PPACA.”

The above is an incredible explanation. The CBO’s explanation is comparable to a company raising investment money by issuing projections that show a proposed business venture will be wildly successful. After moneys are raised from investors, the company then announces that there will not really be profits, but massive losses instead. The difference between the initially-projected profits and the real losses occurs because a large number of expenses were left out of the projections used to entice the investors. The additional expenses were not estimated because the amounts were difficult to estimate. The company’s management will make decisions regarding these missing expenses later. Although all such subsequently-determined expenses are “discretionary”, the “discretionary” costs are required and will cause the previously-reported profits to disappear. No one listening to such a tale would claim that such misreporting to investors is OK. Similarly, all those listening to the CBO’s explanation should be outraged.

How the CBO should have altered its reporting

The point of this article is not that the PPACA is a poor idea. The focus of this article is limited to the means by which the CBO reported its PPACA conclusions. As CPAs, economists, and financial analysts, we are often asked by clients to prepare reports under severe time constraints. A proper response consists of some mix of the following alternatives:

1. A status report which provides the client with the best information that is currently available - With a status report, the interim information must be clearly and plainly identified as not being final. Meaningful details must be provided regarding work yet to be done.

2. A status report would be so incomplete as to be irresponsible - In such event, no report is issued because the available information, however technically correct, is sufficiently incomplete as to be inherently misleading. CBO should have known that piecemeal delivery of information would be rife with potential for misuse, mischaracterization, or misunderstanding. If additional time was required to perform a complete analysis (as was the case here), CBO should have waited to release its findings.

The CBO elected to issue a status report, but failed to clearly identify that its March 20, 2010 report was incomplete. The 36-page letter to Speaker Pelosi is detailed and difficult to read. It notes the exclusion of discretionary spending only in the following limited statements:

1. One sentence at the end of a 12-line paragraph that reads, “CBO has not completed an estimate of the potential impact of the legislation on discretionary spending, which would be subject to future appropriation action.”

2. A sentence that discretionary spending associated with certain administrative costs are not included in these estimates, and that such costs are around $5 billion. Notably, no mention is made of the more expensive discretionary program costs that vastly exceed the $5 billion estimate.

3. After a lengthy discussion of the $5 billion of administrative costs described in item 2 immediately above, the following comment is provided with no additional explanation:

“A third category of discretionary spending is explicit authorizations for a variety of grant and other programs for which no funding levels are specified in the legislation. CBO has not yet completed estimates of the amounts of such authorizations.”

4. A footnote to a lengthy table. The footnote reads, “Does not include effects on spending subject to future appropriations.”

Instead of either delaying any report until useful information was available, or stating that the report that was being issued was only a status report, the CBO released its “final cost estimate”. Predictably, their client (Congress) took this “final cost estimate” and passed legislation by a slim margin of only 3 votes more than the required 216.

Despite its constant claims to the contrary, the CBO’s structure prevents it from being a nonpartisan agency

The CBO was created as an independent nonpartisan agency by the Congressional Budget and Impoundment Control Act of 1974. The CBO’s website describes its mission as:

“CBO's mandate is to provide the Congress with:

• Objective, nonpartisan, and timely analyses to aid in economic and budgetary decisions on the wide array of programs covered by the federal budget and

• The information and estimates required for the Congressional budget process.”

However the CBO’s reporting structure prevents it from accomplishing this mandate and from being nonpartisan. The Speaker of the House of Representatives and the President pro tempore of the Senate jointly appoint the CBO Director. Although the Director’s term of office is four years, either House of Congress may remove the CBO Director at any time by resolution.

Douglas W. Elmendorf is the current CBO Director, and the one responsible for the PPACA reports discussed in this article. He rejoined the CBO in late December 2008 after the Democratic electoral landslide that had just occurred, and became its director on January 22, 2009, two days after President Obama’s inauguration. Elmendorf is an economist who has been in various government positions since 1993, including a prior stint at the CBO, but including other positions for the Federal Reserve Board, Council of Economic Advisers, and the Treasury Department. Elmendorf worked at the Brookings Institution from 2007 to 2009.

The CBO Director should be fired or resign

In light of the political pressure brought to bear at the time the PPACA was passed, it is not hard to imagine the difficult position in which Mr. Elmendorf was being placed. He serves at the whim of Congress. But this type of pressure is well known to accountants, auditors, financial analysts and other others who are charged with producing accurate financial information. The fact that a client or boss (i) wants the accountant, auditor or analyst to lie and (ii) holds great power over one’s employment is not a justification for bowing to such pressure.

As a firm, we regularly rely on the CBO for its sound analysis and summaries. We and others in the financial community have come to expect CBO excellence, and we usually get it. The CBO (as well as all others in a financial reporting position) must have the confidence of the users of their reports. Without this confidence, CBO’s reports are useless.

By issuing a materially false March 2010 report regarding the PPACA, Mr. Elmendorf’s integrity as CBO Director is in question, and will appropriately remain in question. The CBO was not an independent nonpartisan agency with respect to the PPACA report that Congress and the President used before the PPACA’s passage. Mr. Elmendorf was probably trying to keep his job by issuing an incomplete report regarding the PPACA, but he should lose his job for the same reason. Mr. Elmendorf should be fired, or should resign.

In case anyone doubts the correctness of this call for resignation, consider what would happen to an auditor of a large public company who fails to report properly that his client is issuing false or misleading financial statements. Putting aside the period in which the failed auditor may be retained to help defend the inevitable malpractice suits, the failed auditor will never have the confidence of his partners, and will inevitably leave the firm. Similarly, a chief financial officer overseeing financial statements that must be restated, a financial analyst who fails to disclose a material conflict, or an appraiser who materially misestimates a value because a client is looking for a particular result all face similar fates. Whether by design or incompetence, the CBO and Mr. Elmendorf misled the nation. He should not be allowed to remain as CBO Director.

The CBO failed to meet its mission on this exceptionally important and controversial legislation. We are not naïve enough to expect the current Speaker of the House of Representatives or the President pro tempore of the Senate to act on Mr. Elmendorf’s dismissal, but that would be the proper thing to occur.

Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials: CPA, MBA, CMA and ASA.

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