Bethesda, Md.

FOR competence and integrity, few organizations command more respect in Washington than the nonpartisan Congressional Budget Office. As health care reform makes its way through Congress, the budget office’s assessment of how much various elements might cost may determine the details of legislation, and whether it ultimately passes. But when it comes to forecasting the costs of reform, the budget office’s record is suspect. In each of the past three decades, when assessing major changes in Medicare, it has substantially underestimated the savings the changes would bring.

In the early 1980s, Congress changed the way Medicare paid hospitals so that payments would no longer be based on costs incurred. Instead, hospitals would receive a predetermined amount per admission, based on the patient’s primary medical problem. This encouraged shorter stays, led to fewer diagnostic services and reduced administrative costs. The Congressional Budget Office predicted that, from 1983 to 1986, this change would slow Medicare hospital spending (which had been rising much faster than the rate of inflation) by $10 billion, and that by 1986 total spending would be $60 billion. Actual spending in 1986 was $49 billion. The savings in 1986 alone were as much as three years of estimated savings.

Why was the budget office so far off? It had projected that the new payment strategy would increase hospital admissions, because hospitals would maximize their payments by admitting patients who were less severely ill and discharging them quickly. In short, they would make up money with faster turnover. But in the first year of the new payment system, admissions, which had been increasing, actually declined by 3.5 percent. By the third year, they had declined by 15.9 percent. It may be that the declining admissions resulted from a new and stronger program for reviewing admissions.

But the Congressional Budget Office was correct in assuming that hospital stays would grow shorter. In the first three years of the payment system, the length of Medicare patients’ hospital stays, which had been decreasing by 1 percent to 2 percent a year, fell by 17 percent. The new system also led hospitals, for the first time in decades, to cut their work forces  by 2.3 percent in the first year alone.