Planet Money - CBOhhhh, that's what they do

Episode Date: March 1, 2023

If you are a congressperson or a senator and you have an idea for a new piece of legislation, at some point someone will have to tell you how much it costs. But, how do you put a price on something that doesn't exist yet?Since 1974, that has been the job of the Congressional Budget Office, or the CBO. The agency plays a critical role in the legislative process: bills can live and die by the cost estimates the CBO produces.The economists and budget experts at the CBO, though, are far more than just a bunch of number crunchers. Sometimes, when the job is really at its most fun, they are basically tasked with predicting the future. The CBO has to estimate the cost of unreleased products and imagine markets that don't yet exist — and someone always hates the number they come up with.On today's episode, we go inside the CBO to tell the twisting tale behind the pricing of a single piece of massive legislation — when the U.S. decided to finally cover prescription drug insurance for seniors. At the time, some of the drugs the CBO was trying to price didn't even exist yet. But the CBO still had to tell Congress how much the bill would cost — even though the agency knew better than anyone that its math would almost definitely be wrong.We want to hear your thoughts on the show! We have a short, anonymous survey we'd love for you to fill out: n.pr/pmsurvey Help support Planet Money and get bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

Hey, everyone. A quick announcement before the show. We want to check in with you to see what we at Planet Money are doing well and what we could improve. So we've set up a short anonymous survey at n.pr.pm survey. It takes less than 10 minutes and you'd be doing all of us at Planet Money a huge favor by filling it out. That's n.pr.pm survey. Thanks. This is Planet Money from NPR. If you are a senator or a member of Congress and you have some like great idea about a new piece of legislation, at some point someone will have to say, okay, this is how much your amazing piece of legislation would cost. And back in the day, it used to be that the White House gave you that cost estimate. But in the 1970s, there were some members of Congress who started to say, how do we know we can trust the White House Office of Management and Budget? This was when Richard Nixon was in the White House.

This is pre-Watergate, but already trust was not exactly at an all-time high between the legislative and executive branches. Congress wanted its own nonpartisan agency independent create that. And so in the summer of 1974, they did. They created the Congressional Budget Office, the CBO. Today, nearly every bill that passes a full committee, so any bill that has a chance of getting voted on, has to get priced by the CBO. Congress generally does not vote on a bill until the CBO says this is how much it would cost. And it's easy to assume the CBO is just a bunch of economists and people who are really good at math, who crunch numbers and move things around on spreadsheets all day. And it's not not that. But in its finest moments, the CBO is so much more than that. It is an entire agency devoted to predicting the future. Its job at its core is to imagine things that don't even exist yet so they can tell us how much it would cost if they did exist. Congressional budget office, you say? More like crystal ball office.

Oh, Kenny. Hello and welcome to Planet Money. I'm Sarah Gonzalez. And I'm Kenny Malone. Today on the show, we bring you the story of the CBO as they attempted to price one giant specific piece of legislation to understand just how incredibly tricky and complicated this job can be. It was a bill so complex it would take the CBO a year and a half to come up with a

cost estimate. And that whole process, it really reveals the sometimes very weird relationship the CBO has with the very Congress that created the CBO. This story involves a donut hole. A death spiral. And secret drugs from the future. Okay, the CBO does two main things. One, it does economic analysis. They're like a think tank.

They study all these things Congress is interested in, like what would happen to the economy if we increase the federal minimum wage? And they go like, well, it will be good in these ways. It will be bad in these ways. Boom. And then two, the CBO estimates the cost of nearly every bill that gets a full floor vote. Now, most of those bills that the CBO is pricing are not exactly earth shattering pieces of legislation. Most of the time, the CBO is grinding away, running the prices of pretty simple stuff. Like you're renaming a post office. There is no federal cost. If you're renaming a post office? Yeah, it's a de minimis cost. It does not cost much to rename post offices.

It does not cost much to rename post offices. Doug Holt Aiken used to be the director of the CBO, the head. And apparently, Congress renames post offices a lot. When Doug was there, almost 20 percent of enacted legislation was post office renamings. You know, the Gerald Putnam post office and things like that. It must be in really small letters on the building because I've never noticed it. Okay. Okay. Okay.

It's like a little plaque. And yet basically every time that some member wants to rename a post office with this little plaque, the CBO has to weigh in. They say, okay, it will cost this much. Boring. Can be very boring. Yeah. Can be very boring. You do not become the director of the CBO because you love pricing post office plaques. No. You take this job because maybe two or three times a year, Doug says, the CBO will get to do something really hard, complicated, something very fun. Where you have to put a price tag on something that has never been priced before. Doug says this is where the CBO shines. That's when I think it's at its best.

You've been asked to answer, what is the cost of doing this thing that has never before been done and does not exist in nature, but you can go into your fantasy land and figure it out. This is the best place to be at the CBO, in fantasy land. Yes, absolutely.

Yes. It is so much better than real-life land. Way better. Now, Doug's favorite example of this special twice-in-a-year Fantasyland project, it landed in his lap a couple of decades ago. It's the early 2000s. Senior citizens are spending an unbelievable amount of money on prescription drugs. are spending an unbelievable amount of money on prescription drugs.

Like, yes, they had Medicare. But at this time, Medicare did not cover prescription drugs. Not really, at least. Medicare at this time only covered hospital stays and certain doctor's visits. And like, yes, if you were given drugs while you were hospitalized, it covered that. But if you needed some heart medicine once you were out of the hospital in the real world, no, no drug coverage. Which you might assume would leave senior citizens looking for drug coverage from private insurance companies. There was a little of that, but there was no real robust market of private companies offering

prescription drug coverage, not for seniors, because it is a remarkably risky insurance to offer. So you just always paid out of pocket for your drugs? Out of pocket, yes. For seniors here? Seniors, for seniors. Yeah. And so in 2003, Republicans in Congress and President George W. Bush, who was running for reelection, propose throwing a bunch of money at this problem. They're thinking if the government subsidizes prescription drug insurance, maybe, maybe that will make private insurance companies say, OK, yeah, maybe now senior drug insurance is a good business to be in because, you know, we'll sell insurance to seniors. The government will help pay for it. So we make money.

Yeah. And to be clear, the intent was not for Medicare or the government will help pay for it so we make money. Yeah. And to be clear, the intent was not for Medicare or the government to fully cover drugs. The goal was to subsidize drug insurance enough to encourage a private sector to pop up and finally offer these drug plans. And Republicans were like, hey, this new untested giant policy, $400 billion. That seems like a good number for us to spend on this $400 billion. Bees. Billion.

Billion. Billion. Yes. Doug says a big number like this looks pretty good to the president's campaign people. Oh, like they wanted to be able to say, look how much he is devoting to seniors. This president has done for you.

Yes. Billions means love. Billions means love. Billions means love. Billions means love? That's how that works. Okay. The $400 billion, to be clear, would actually also go to improve a few other things in the Medicare system. But the overwhelming majority of that money was to try and create prescription drug coverage. This is where the CBO comes in.

The CBO's job here is to kind of tether Congress to reality a little bit. CBO economists are the ones who say, we'll tell you if $400 billion will actually achieve the thing you want to achieve. This is what Doug loves. Because now, to figure all this out, This is what Doug loves. Because now, to figure all this out, the CBO is going to have to construct this prescription drug insurance fantasy land. Yeah, a little imaginary world with imaginary seniors, imaginary drug insurers, imaginary drug companies, where the CBO can kind of like move all the little pieces around and see how everyone would behave in this fake future world. Yeah, I like to imagine it as one of those little miniature toy villages.

Remember Mr. Rogers' neighborhood of make-believe? You got your little miniature senior citizens are in there moving around. Yeah, your little mini drug stores in the town square. Yeah, like ice cream par- no, nothing like- it's in computers. But the CBO does have to build all of this from scratch. And so one of the first things the CBO is going to need to model

and predict is how will senior citizens behave in this fantasy land where the government is subsidizing drug insurance? I know you're having to look at how many seniors are there, how many have prescription drugs?

How much do they cost? What else is going into this, like, we're creating a world that doesn't exist? We need to know some things about seniors and their habits in buying insurance. How sensitive are they to premiums? If premiums go up and down, how many people are going to drop out because it's too expensive? Yeah. Unlike some parts of Medicare, seniors would have to sign up and pay some money for this kind of insurance. And the CBO has to predict, you know, will seniors actually do this? Will they sign up? Yeah, so the CBO pulls some of the government's Medicare data about seniors and their drug buying behavior, which then lets the CBO kind of like, you know, populate this fictional world with these different imaginary characters.

Yeah, like they actually have, you know, statistical senior Susie over here. And they're like, OK, we know how much Susie spends on drugs a lot. And if the government starts paying a big chunk of Susie's drug costs, she will probably spend even more. And then they have like statistical senior Ben over there who they know spends nothing on drugs. But if the government starts throwing money at him, they're like, Ben will probably be like, oh, OK, maybe I will get this heart medicine I've been needing then. And then how do Ben and Susie act when the subsidy is more or less? Doug's playing around with the dials in this new world. But the senior citizens, they is what they're going to be. How do they make money? What do they like to do in the way of pricing?

There are all sorts of games insurers like to play because they make the most money if they can get people to buy their insurance who then don't need drugs. That's ideal. Yeah. Insurers want as many people as possible to sign up. And the insurers were kind of the big question mark about whether this fantasy land would work or not. Because remember, in the real world, insurance companies were basically not willing to offer prescription drug insurance to seniors at the time because they were scared of one really big thing, that too many seniors who are sick would sign up and then not enough healthy seniors

would sign up. Yeah, that would not be a sustainable market. You do not want just sick people who need prescription drugs signing up. That leads to what is called an insurance death spiral. Only the sick people sign up, so their premiums are too high and they eventually just drop out and the whole thing implodes on itself. It's a debt spiral. What you want is seniors who don't need drugs to sign up because it is just like such a good deal that they sign up just in case they might need drugs later on. So the CBO is like, OK, what will cause that to happen? That is what the CBO has to test in their fantasy land. And really, that boils down to how much does the government have to subsidize insurance in order to convince enough healthy seniors to sign up,

which would then convince insurance companies that a death spiral will not happen. But they can't feel really, really confident about what that number is, what the subsidy is, without first figuring out how these other characters in drug fantasy land are going to act, the drug companies. What are these drug companies going to be making? What are they going to be selling?

There's now all these new customers of potential out there. What are they going to do? And this, this is where the CBO really gets to be the crystal ball office, because to build this fantasy land, Doug and his colleagues have to predict the price of prescription drugs, not just over the next year or two, but 10 years from now.

Yeah, the CBO's cost estimates are generally for like 10 years out. And this is kind of impossible to do, right? Because like they don't even know what drugs will exist in 10 years, what scientific breakthroughs would happen. So like how do you price imaginary drugs? We signed non-disclosure agreements with the major pharmaceutical companies and asked them

what they were developing. And they tell you? They showed us everything. What motivation do they have that the government's going to start subsidizing the things that they make? Look, they're about to throw $400 billion on the table. Like, you know, they wanted this to happen. I promise you. Yeah, right, right, right. The CBO gets all the goods from the big drug makers. Like, okay, we're going to have this new heart medicine in five years. We've got a patent on this other one.

And the CBO just promised them that no one else would see these documents. Promise. We have safes and we had secure networks that were air-gapped and no one could get in. And, you know, so you do a lot of security precautions. And at some point, some members of Congress are like, wait, can you, like, can you share this future drug info with us? And technically, Doug says, Congress is the CBO's boss. They could have just taken the drug data from him. Like, I really couldn't have stopped them. So my only defense was, if you ever ask me to disclose this stuff, I promise not to disclose.

CBO will never get any data from anybody ever again. And you will get terrible cost estimates and not know what's going on with your legislation. And they understood that. We never had any trouble. All the secrets were safe. And after a year and a half of playing out every scenario they can think of, they've moved all the little pieces around the Fantasyland village a zillion times and they arrive at an answer. Yes, Congress, this can work the way that you want it to work.

We have enough money to incentivize enough seniors to sign up that private insurers would be willing to enter the market. And the good news is that according to the CBO's calculations, it won't even take $400 billion to do this. It would only cost taxpayers $340 billion. Doug's done. He's feeling pretty good. And that's when the phone rings.

It's a member of Congress. And he does not like Doug's number. That's after the break. So the CBO has arrived at a cost estimate they feel good about. This new Medicare drug insurance, plus some other little tweaks to Medicare, will cost $340 billion. That's what Doug says. Now it could go to a vote. Now Congress can decide if they want this to become a law. That's when Doug gets the call.

The weekend before the final vote, Ways and Means Chairman Bill Thomas, who was the lead on this, called me at my home and he goes, we've got a problem. So what do you mean? He goes, the last iteration only cost $340 billion. That's too little. My guys are going to be upset. We've got to spend more. Oh, because they were like, we want the $400 billion. Billions is love.

Billions is love. We were $55 billion short on love. Wait, so he actually said like, this is too, like we need to spend. It's too cheap. He's like, how can we spend another $45, $50 billion?

Do you remember this? Well, yes. This is the congressman who called Doug. This is Bill. Hey, I'm Bill Thomas. All right. Hey, Bill Thomas. Bill says, yeah, he told Doug to go back to the report and get the math closer to $400 billion.

But because we didn't do enough. Bill's saying less money means less help for seniors. Not good. And the White House and Congress have said they'd be willing to devote $400 billion to this. So Bill Thomas wanted to spend $400 billion. He actually thought that he wouldn't have the votes if he didn't spend everything he could.

Why would I spend all that time and energy to create something that wouldn't pass? And Bill and Doug and some other ex-CBOers we spoke to said, there's nothing like super shady about this, right? Congress had $400 billion to spend, so they wanted to spend that amount. And so the CBO is like, all right, well, if this program was already going to work at 340, it'll work at $400. It can just pay for more stuff for seniors. And it wasn't

even that hard to figure out how to spend more, Doug says. At this point, we know every lever in the program, does it raise or lower costs and by how much? And so I literally don't know what they changed, but the staff was like, we got this. They're tweaking those knobs, like a little more here, a little more there. Okay, what if we do this, this, and this? Oh, that's $410 billion. Okay, how about $395? Oh, that's too much.

No, keep it down. $395, done. Doug honestly doesn't remember exactly how they got to $395 billion, but he says they probably just increased the subsidy a little bit. Here's what the subsidy ended up being. The government basically said, all right, insurance companies, whatever you think your costs are going to be to offer this, your administrative costs, how much you'll spend on drugs, some profit for yourself, whatever your costs are, we're going to pay 75% of it. And then seniors will pay the remaining 25%.

There was a formal process but it was basically that so that is like a huge amount of guaranteed money from the government of course insurers were going to enter this market and all the cbo had to do to get this to cost 395 billion dollars was tweak those knobs like just a little bit. For people who might hear that and think like, how can we trust anything? What would you say to those people? We, I mean, in both cases, we gave him an accurate estimate. We gave him an accurate estimate with low subsidies and with higher subsidies. One was $340, one was $395. They get to decide how big they want the subsidies to be. That's their call. And now here's the thing. Yes, that's either weird or highly political or whatever you want to think of it, but it also has nothing to do with science because we had no idea if it was really going to be

$395 billion. This is super uncertain. As I pointed out, this product did not exist in nature, right? So we're tweaking down to the decimal point something that doesn't exist as if we really know what's going to happen. Now, some people might argue the best version of this whole process we've walked through would be that Congress comes up with a policy idea, then CBO estimates cost, and then Congress writes a check for that amount. And sometimes it happens like that, but a lot of the time it happens like how it happened with this prescription drug thing.

Congress had an idea. They said, this is how much we want to spend on this. And then they handed it to the CBO to figure out the math. And then the CBO has to go like back and forth, back and forth with Congress. And the reality is that when you do it this way, you end up sometimes with a policy that technically works, but it is maybe a little funky, which is how the senior prescription policy wound up with a very strange hole in the drug coverage. Yeah, to make this policy work for anything close to $400 billion, this is what the policy had to be. Yes, seniors get this, honestly, pretty great deal on insurance, but only for the first $2,250 worth of drugs each year. Then they fall in a hole and start paying the full cost of drugs until they rack up so much in out-of-pocket costs that they get to crawl out of the hole for insurance to once again kick in. So there was a hole in the coverage. You had to leave that donut hole

because you didn't have enough money to fill it. And that's because we only had $400 billion to work with. Wait, is the donut hole, are those real terms? The donut hole is what we called it, yes. We called it the donut hole because the insurance policy looked like a donut, a big hole in the middle. And that's a weird insurance policy.

But that is the insurance policy that $400 billion could build. Or at least that was the CBO's best guess in 2003. Now it could get voted on. Let me begin by saying that... That is Bill Thomas, happy, of course, to present the full $400 billion-ish dollar version of this plan to the world. Seniors and taxpayers have been waiting a long time for this day. The prescription drug bill passes the House and the Senate in 2003. And George W. Bush

signs the very nearly $400 billion Medicare Modernization Act into law. Now, just a couple miles away, the White House Office of Management and Budget was actually running their own numbers on this thing. And they thought that this whole plan would cost way more than what the CBO estimated. The White House was saying it would cost $534 billion. And today we know what the real number was, the answer to what actually happened when this program lived in the real world. It turned out both the OMB and the CBO's estimates were pretty off. Subsidizing insurance for seniors was actually way cheaper than anyone had predicted. It came in about 25% below what we thought. It's $100 billion.

$100 billion? It's $100 billion. Yeah, it's a lot cheaper. And it was because generics became more plentiful and cheaper than we anticipated, by and large. Yes, generic drugs. Of course, that was a huge part of this. The CBO had tried to factor in the effect of people switching from brand name drugs to generic drugs, which brings prices down, but they simply hadn't predicted how popular generic drugs would become.

Does it often work this way that you guys, the math is like a little, I mean, I imagine the math is always off because how do you get- It is always off. It is always off? No one can tell the future. So yes, it's always off. It comes with the turf. You can't forecast the future.

Everything about the future is different. The economy is different. The Congress is different. They change the laws on you. And, you know, so it never Everything about the future is different. The economy is different. The Congress is different. They changed the laws on you. And, you know, so it never works out the way you thought. So you just have to give it your best effort and then move on. Before we go, a quick reminder that we want to hear from you about what we are doing well at Planet Money, what we could improve.

We've got a short anonymous survey at n.pr slash pm survey. It takes less than 10 minutes and it'd be really big help to us if you filled it out. That is n.pr slash pm survey. Thanks. slash pm survey. Thanks. Today's show was produced by Willow Rubin and Dave Blanchard with engineering help from Josh Newell. It was edited by Keith Romer and fact-checked by Sierra Juarez.

Jess Jang is Planet Money's acting executive producer. We want to give a super special thank you to Phil Ellis for helping us understand this very, very complicated health policy. And thanks also to Wendy Edelberg. I'm Sarah Gonzalez. And I'm Kenny Malone. This is NPR. Thanks for listening.

And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.