Offsetting savings in health care: an example

February 7, 2008

Among some parts of the health policy community, CBO appears to have acquired an undeserved (and unfortunate!) reputation for failing to incorporate offsetting savings into our cost estimates. Since I hear about this issue so frequently, I thought it would be worthwhile to do a brief post about it.

To begin, let me be very clear: We are firmly committed to reflecting savings in our cost estimates, whether in health care or any other area, when (a) there is relevant evidence suggesting such savings, (b) the savings accrue to the federal government rather than to other parts of the economy, and (c) the savings occur within the relevant budget windows. Unfortunately, many examples that advocates cite as offering potential savings don't meet at least one of those three necessary conditions.

As a specific example of offsetting savings that do meet these conditions, consider the tobacco legislation (S. 625) that has been reported out of the Senate Committee on Health, Education, Labor and Pensions. Our score of that legislation includes savings to Medicaid from a reduction in low-birth weight babies triggered by reduced smoking among pregnant women. As the score notes:

"CBO anticipates that the decline in smoking due to FDAs regulation of tobacco products also would reduce the number of women on Medicaid who smoke during pregnancy. This reduction would lead to lower spending by the Medicaid program - which covers about 40 percent of all pregnancies in the United States - because women who do not smoke are less likely to have miscarriages, experience complications during pregnancy, and give birth to children with low birth weights. A variety of research indicates that children with low birth weights have higher medical costs, particularly at birth, but also later in life. Savings of some such costs would be partly offset by higher costs for additional live births because of the decline in miscarriages. On net, CBO estimates that FDAs regulation of tobacco products would reduce federal Medicaid spending by $78 million over the 2009-2018 period."

Admittedly, the net offsetting savings are modest relative to Medicaid's total outlays -- but that is partly because of the 10-year budget window and also partly because, as the document notes, fewer miscarriages means more births and more kids, which can raise costs for Medicaid.

That raises an important point: improved health outcomes, even if they are desirable, do not always mean reduced costs for the federal government. Indeed, many health benefits would be associated with reduced smoking -- but the impact on health care costs in other federal health programs beyond Medicaid is less clear, especially over a 10-year window. CBO therefore concluded, "Reduced smoking levels may have additional effects on other federal health care programs. However, CBO did not estimate any additional effects, because the magnitude and direction of those effects is less certain than the impact of reduced smoking levels on pregnancies covered by Medicaid."

As CBO continues to expand its work on health care, we will continue to assess and explore possible sources of offsetting savings. We draw upon our panel of health advisers to help us identify new academic studies that may be relevant in this effort, and I would welcome additional suggestions from the policy community to make sure that we continue to produce the best possible cost estimates. And we all need to remember that although opportunities exist to improve health outcomes and reduce overall health care costs, many steps that would lead to better health outcomes don't necessarily reduce federal budget costs -- which is the focus of the scoring process -- given the institutional structure of the federal health programs.