Uncertainty, the CBO, and health coverage

September 18, 2009 at 5:18 pm

| Gabriel |

[update. #1. i’ve been thinking about these ideas for awhile in the context of the original Orszag v. CBO thing, but was spurred to write and post it by these thoughts by McArdle. #2. MR has an interesting post on risk vs uncertainty in the context of securities markets]

Over at OT, Katherine Chen mentions that IRB seems to be a means for universities to try to tame uncertainty. The risk/uncertainty dichotomy is generally a very interesting issue. It played a huge part in the financial crash in that most of the models and instruments based on them were much better at dealing with (routine) risk than with uncertainty (aka, “systemic risk”). Everyone was aware of the uncertainty but the really sophisticated technologies for risk provided enough comfort to help us ignore that so much was unknowable.

Currently one of the main ways we’re seeing uncertainty in action is with the CBO’s role in health finance reform. The CBO’s cost estimates are especially salient given the poor economy and Orszag/Obama’s framing of the issue as about cost. The CBO’s practice is to score bills based on a) the quantifiable parts of a bill and b) the assumption that the bill will be implemented as written. Of course qualitative parts of a bill and the possibility of time inconsistency are huge elements of uncertainty on the likely fiscal impact of any legislation. The fun thing is that this is a bipartisan frustration.

When the CBO scored an old version of the bill it said it would be a budget buster, which made Obama’s cost framing look ridiculous and scared the hell out of the blue dogs. This infuriated the pro-reform people who (correctly) noted that the CBO had not included in its estimates that IMAC would “bend the cost curve,” and thus decrease the long-term growth in health expenditures by some unknowable but presumably large amount. That is to say, the CBO balked at the uncertainty inherent in evaluating a qualitative change and so ignored the issue, thereby giving a cost estimate that was biased upwards.

More recently the CBO scored another version of the bill as being reasonably cheap, which goes a long way to repairing the political damage of its earlier estimate. This infuriates anti-reform people who note (correctly) that the bill includes automatic spending cuts and historically Congress has been loath to let automatic spending cuts in entitlements (or for that matter, scheduled tax hikes) go into effect. That is to say, the CBO balked at the uncertainty inherent in considering whether Congress suffers time inconsistency and so ignored the issue, thereby giving a cost estimate that was biased downwards.

That is to say, what looks like a straight forward accounting exercise is only partly knowable and the really interesting questions are inherently qualitative ones like do we trust IMAC to cut costs and do we trust Congress to stick to a diet. And that’s not even getting into real noodle-scratchers like pricing in the possibility that an initially cost-neutral plan chartered as a GSE would eventually get general fund subsidies or what will happen to the tax base when you factor in that making coverage less tightly coupled to employment should yield improvements in labor productivity.

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