Gaming the Congressional Budget Office
By the time the Obama Administration announced that it was giving up on its efforts to implement a relatively unknown but fiscally significant portion of the president's health-reform law, even the Affordable Care Act's strongest supporters acknowledged that the provision in question was indefensible. Mother Jones's Kevin Drum, for instance, noted that "[t]he budget forecasts for [the program] were always dodgy." Jonathan Cohn of the New Republic similarly confessed that those "who criticized [it] as unsustainable were right to raise alarms, while liberals like me were wrong to ignore them."
The jettisoned program, known as the Community Living Assistance Services and Supports (or CLASS) Act, was supposed to be a new public option for long-term-care insurance, but its viability was always in question. During the legislative drafting process in 2009 and 2010, CLASS's design problems spurred widespread, bipartisan allegations that the program amounted to what one Democratic senator called an unworkable "Ponzi scheme." The central problem, its critics alleged, was that the program was structured in a manner that would lead to a classic insurance "death spiral" of rising costs and declining enrollments. The administration ultimately agreed, and Health and Human Services secretary Kathleen Sebelius announced that her department had "not identified a way to make CLASS work." A congressional staffer involved in the debate over the program's design was less circumspect: "It is unfathomable that people could look at it and think it would work. It was never plausible."
If CLASS was indeed as bad as its detractors claimed and its supporters conceded, it is hardly a surprise that the Obama administration decided to drop the program. Rather, the surprise lies in how a program plagued by widely acknowledged design flaws managed to find its way into the Affordable Care Act in the first place.
It is especially confounding because, from all outward appearances, the American policymaking process has been revolutionized in the last half-century in a way that should have prevented something like CLASS from ever becoming law. In 1974, new safeguards were put in place to ensure fiscal accountability and prevent the kind of free-wheeling policymaking environment that had contributed to alarming budget deficits over the preceding decade. Among these "good government" reforms was the creation of the Congressional Budget Office, a new agency charged with producing credible financial data to better inform the policymaking process. These changes were widely hailed as ushering in a new era of accountability in Washington. Gone were the days when cagey political operatives could rush major legislation through Congress without any real consideration of the economic costs.
In reality, however, the supposedly improved policymaking process is every bit as prone to manipulation as the one it replaced. Obamacare offers an illuminating — though far from unique — case in point. The landmark law was actually helped through the legislative process by the incorporation of CLASS, a peripheral program purposely designed in an unworkable manner to game the CBO scoring process. Interest-group advocates representing the aging and disability communities managed to construct a superficially sound yet unfeasible policy that, had it been implemented without major modification, would ultimately have required a government bailout amounting to billions of dollars. Yet, paradoxically, because CLASS was carefully designed to comport with the arbitrary rules guiding budgetary projections, the program was officially "scored" by the CBO as offering billions in savings. And those illusory savings accounted for over half of the total savings credited to the Affordable Care Act. The very reforms designed to make Congress's policymaking process more economically credible and accountable created the institutional framework that encouraged the development of this defective policy and made it a politically essential add-on to the health-reform bill.
THE RISE OF BUDGET SCORING
President Lyndon Johnson's approach to passing Medicare in 1965 offers a classic example of why the old policymaking system needed reform. Other presidents — notably Harry Truman and John Kennedy — had tried and failed to overhaul American health care, and Johnson believed those setbacks were due to Congress's getting cold feet when confronted with cost projections for a new program. To avoid his predecessors' fates, Johnson took a two-pronged approach. First, he leaned on his congressional allies to rush Medicare through the lawmaking process with the goal of preempting objections. Second, he misrepresented Medicare's real costs by deliberately lowballing the program's long-term economic impact and disparaging the entire concept of cost estimates. Not surprisingly, Medicare ended up costing much more than Johnson said it would.
Medicare has since become a pillar of America's safety net, and as a result many would conclude that whatever obfuscation Johnson employed in pursuit of the program was worth it. Nonetheless, his calculated manipulations and casual dismissal of legitimate budgetary questions revealed a system that could be dangerously gamed by those in positions of power.
Under the next president, Congress passed a bill that would start to curb this kind of political exploitation. The 1974 Congressional Budget and Impoundment Control Act, known simply as the Budget Act, was enacted after a prolonged fight about the budget between the executive and legislative branches. President Nixon was unilaterally reducing federal expenditures by not spending money that Congress had appropriated, an action called "impoundment," and Congress saw this move as infringing on its Constitutional authority over spending. Thus, the Budget Act granted Congress more power over the budget process and created the Congressional Budget Office as a tool to help with decision-making.
The CBO is a nonpartisan institution that provides objective economic analysis of both the federal budget and federal legislation carrying budgetary implications. For many, the CBO represents one of the few straight shooters in Washington's swamp of partisan connivers. It is a strictly empirical, non-judgmental agency with no interest in normative debates over whether a particular bill ought to become law. The two houses of Congress jointly appoint the CBO's director who, according to the Budget Act, must be selected without regard to partisan affiliation.
When a bill is reported out of committee, the CBO is required to "score" it. This process involves analyzing changes that would occur to federal outlays and revenues if the bill were implemented as written. The score also includes an estimate of how much it would cost for state and local governments to comply with new federal legislation. In generating the score, the CBO projects ten years into the future and assumes that all current laws hold during that period. A ten-year window is long enough to get a sense for the long-term implications for proposed programs but not so long that one loses the ability to make reasonably informed projections. The CBO then compares the final projected cost to the "baseline" projections they make each year in order to decide if new legislation would increase or decrease deficits. Some bills require complicated economic modeling that some experts can contest, but the CBO score is generally viewed as the authoritative verdict on a bill's cost.
The CBO score affects legislation in two important ways. First, the score affects public opinion of the legislation. Although the CBO gives a detailed analysis of the bill in the report it produces, both lawmakers and the public tend to focus on the numerical projection that the CBO makes about the proposed legislation's cost. Second, the CBO score can trigger budgetary requirements in other laws. For example, according to the Office of Management and Budget, the Statutory Pay-As-You-Go Act of 2010 requires that all new laws with a fiscal impact cannot, when taken together, increase the projected budget deficit. If Congress does pass legislation that, in the CBO's judgment, will increase deficits, mandatory sequestration can automatically take effect. This and other legislative budget requirements make it extraordinarily difficult for Congress to pass new legislation that receives a high cost projection from the CBO.
The CBO was designed to counter the kind of misrepresentation used by Johnson and his allies in 1965. With the CBO watching, Congress has two options: Either pass only fiscally responsible legislation, or make laws appear as though they are revenue-neutral or, even better, cost-savers. Though there are great benefits that come from having reliable, nonpartisan estimates for the fiscal implications of legislative proposals, the CBO process for judging legislation can be manipulated, and the agency's crucial role in the legislative process makes such manipulation very appealing and rewarding. This manipulation of a policy's appearance can allow unworkable policies to become law, and there is no better example of the politics of policymaking than the history of long-term care legislation and the rise of the CLASS Act.
CREATING THE CLASS ACT
The Community Living Assistance Services and Supports program was touted as a new approach to the perennially intractable problem of long-term care. Today, 12 million elderly and disabled Americans require long-term care to complete basic daily activities like eating, bathing, and getting dressed, and almost 70% of those who reach the age of 65 will need some long-term care, with the average individual requiring three years of assistance. This care is extraordinarily expensive: A private room in a nursing home averages $87,600 annually, while home health aides average $20 an hour or $45,188 a year. Nationally, over $220 billion is spent annually on long-term care, amounting to more than 8% of total U.S. health expenditures — not counting the $450 billion worth of unpaid care informally administered by family members. And by 2050, the number of Americans needing long-term care is expected to rise to 27 million, more than double the current figure.
Private long-term-care insurance is available, but the plans are expensive and the market is dysfunctional. For the 90% of Americans over the age of 55 lacking this form of insurance, the means-tested Medicaid program offers a safety-net, though it requires seniors to burn through their savings in order to qualify. And even then, Medicaid's coverage is not a viable long-term solution, since the likely influx of more people onto states' Medicaid rolls would put a huge burden on states' already strained budgets.
The CLASS program was developed under the guidance of the late Massachusetts senator Ted Kennedy, but it was not the first attempt to address the problem of financing long-term care. The legislation that created Medicare and Medicaid, which was signed by President Johnson in 1965, at one point included a solution to the long-term-care problem, but it was ultimately dropped from the bill. Several subsequent attempts also failed. The Medicare Catastrophic Coverage Act of 1988 was designed to limit out-of-pocket expenses for seniors' catastrophic care. But the law quickly became a catastrophe in its own right because provisions for long-term care coverage — by far the most daunting and problematic of potential costs facing seniors of all income groups — had failed to make it into the law. The more modest coverage the law did provide merely duplicated coverage that many seniors already had. Moreover, it was financed by a progressive payroll tax that left many seniors paying for a program that offered coverage they did not need. Seniors revolted, and the law was quickly repealed.
Shortly thereafter, a bipartisan panel in Congress — "The Pepper Commission" — attempted to formulate a long-term-care plan along with a broader health-care reform proposal. The Commission voted to recommend a long-term-care social-insurance plan that was much less financially draining for individuals than Medicaid. However, when it came to funding its recommendations, the Commission was plagued by bitter infighting and was ultimately unable to reach a consensus. Prominent members of Congress — including Commission members — declared the report "dead on arrival," and the recommendations went nowhere.
The third prominent attempt was part of "Hillarycare." In 1993, a group of policy experts put together a long-term-care package that made it into several committee bills before the health-reform process collapsed. In the following years, some prominent liberals blamed the high cost of the long-term-care provision for dragging down the entire Clinton health-reform effort.
In light of this discouraging legislative track record, long-term-care advocates had concluded that they were stuck in a no-win situation. Effective policy solutions were politically impractical, while policies that were politically feasible would be woefully inadequate.
It was in this context that CLASS emerged promising a new approach. The government-run insurance scheme was developed by a coalition of disability and aging advocates. For several years, "The Friday Group," consisting of about 15 representatives from the various organizations, met weekly to develop their program in the office of Senator Kennedy, a longtime champion of the disability community. Eventually, the core groups stitched together a broader coalition of 275 organizations that publicly endorsed the program.
When CLASS was unveiled, it was pitched as an entirely voluntary, self-sustaining, government-run insurance program for long-term care. Any "working" adult — defined as someone earning $1,200 or more annually — would be eligible to enroll, and the program would not charge someone who would likely need long-term care more than it would charge others. The rates would vary considerably based on age, but they would be locked in upon signing up. For full-time students under 22 and those with incomes at or below the poverty line, monthly premiums would be $5. Individuals would have to pay into the system for five years before receiving any benefits, but once they became eligible, individuals with long-term-care needs would receive between $50 and $100 daily (totaling between $18,250 and $36,500 per year) for the rest of their lives to help fund the services they required. Compared to the costs facing seniors for long-term care and previous plans for a financing system, CLASS was comparatively modest in its benefits, but it would be an undeniable step in the right direction.
Unfortunately, even this scaled-back version of long-term-care reform was unworkable. Because CLASS relied on people voluntarily choosing to enroll, it presented a textbook case of adverse selection. Long-term-care insurance is not a popular product — people don't like thinking about long-term care, and they wrongly assume that Medicare covers it — and as a result people do not want to buy it. CLASS was therefore selling a largely unwanted product, and that meant the program would be most attractive to individuals who either knew they would qualify for benefits immediately or who were pretty certain that they would in the near future. Too few people would sign up from the healthy population whose premiums were needed to fund the benefits, leading to an insurance "death spiral" of rising rates and declining participation.
As a low-salience policy proposal, however, CLASS's fatal flaw managed to go unnoticed for years. Only upon transitioning from a marginalized, stand-alone piece of legislation to an Affordable Care Act add-on did questions start popping up about its financial underpinning, eventually leading North Dakota Democratic senator Kent Conrad to decry CLASS as a "Ponzi scheme of the first order." Nonetheless, the CLASS program remained in the Affordable Care Act and was signed into law by President Obama in March 2010.
FOLLOWING THE RULES
Many have wrongly assumed that the CLASS Act's dysfunctional design was tantamount to an embarrassing mistake. Indeed, some of the program's harshest critics bent over backwards to acknowledge the program's "good intentions."
But CLASS was, in reality, a remarkably clever response to the congressional policymaking system and to political reality. Advocates of the program recognized the historical conundrum they were facing: Policy viability was in conflict with political viability. And the most important lesson learned from past failures was that money matters. Though each of the thwarted attempts to create a national program contained its own unique idiosyncrasies, the common weakness was high cost. In the 12 years between the demise of the Clinton reform effort and the unveiling of the CLASS Act in 2005, not only was long-term care perceived to be a costly black hole on its own terms, but many prominent liberals supporting health-care reform saw it as a toxic policy area that threatened to drag down a comprehensive bill. The long-term-care advocates who designed CLASS were appropriately concerned that, whenever the next major attempt at overhauling American health care occurred, they would be pushed aside amidst charges that they were recklessly holding health reform hostage by insisting that long-term care be included. As a result, they knew that any long-term-care proposal would have to be self-financing; it could not require a penny of outside funding.
To that end, the advocates recognized that the score CLASS received from the CBO would be essential to achieving political viability. If the advocates could somehow find a way for CLASS to avoid the appearance of being a drain on the federal treasury, it would allow the program to evade the fate of previous attempts to address the problem. It would be even better if CLASS's score from the CBO showed savings. Indeed, if it were a money maker, CLASS would be appealing as an add-on for a larger bill because the "savings" could help pay for the larger package. If the larger package passed, CLASS would pass as well, even with its flaws. And, CLASS's supporters reasoned, once their program had navigated the hurdles of the legislative process and had been enacted, it could later be fixed.
The program's champions achieved this implausible goal through a tactically brilliant design choice: They created a five-year vesting period during which program enrollees would pay premiums but would not yet be eligible to receive benefits. While waiting periods prior to benefits kicking in are common in the private long-term-care insurance market, they are measured in days rather than years and rarely exceed 100 days. CLASS's five-year waiting period meant that when the CBO scored it, half of the ten-year scoring window would consist of the atypical period in which the program was taking in money but not paying out any benefits. Once benefit payments commenced in year six, a healthy fund would have accumulated over the first five years. These stockpiled funds would be quickly depleted once CLASS was fully operational with more money going out than coming in, but the well would not run dry until after the CBO's ten-year scoring window had closed.
In accordance with its standard operating procedures, the CBO dutifully reported that CLASS would generate billions of dollars in savings. Of course, those reported savings obscured the fact that once the program was completely up and running it would quickly be transformed into a money pit. Notably, the CBO wasn't fooled: This critical piece of information was highlighted in the agency's report. The CBO clearly stated that CLASS "would add to future federal budget deficits in a large and growing fashion beginning a few years beyond the 10-year budget window." But that kind of disclaimer does not attract much attention. The thing that matters is the single price tag produced by the CBO.
By cleverly structuring their program, the CLASS advocates had succeeded in creating a policy that would not only pass muster in the budget-scoring process but could be embedded in health-reform bill, offering the most coveted of gifts to the larger Obama initiative to which it was attached: money that would be counted as savings for the Affordable Care Act. And it was not a small infusion of cash. CLASS provided a windfall of $72 billion in CBO-certified savings, which accounted for over half of the Affordable Care Act's $132 billion in CBO-projected savings.
This demonstration of savings was critical for health reform's viability because the White House and congressional Democrats had made a commitment to deficit neutrality. In fact, the Affordable Care Act's savings was a key talking point for its supporters. A typical formulation in December 2009 found President Obama calling health reform "the largest deficit reduction plan in over a decade....[T]he CBO has said that this is a deficit reduction, not a deficit increase. So all the scare tactics out there, all the ads that are out there are simply inaccurate." To be sure, many cost-saving ideas were included in the Affordable Care Act, but CLASS was far and away the most important of these money savers according to CBO scoring.
Not everyone was fooled, however: Under intense pressure from several senators (led by New Hampshire Republican Judd Gregg), Congress at the last minute ended up requiring the program to be certified as actuarially sound for 75 years before the administration could implement it. This new requirement did not change the CBO score, but it created an enormous hurdle for getting the program up and running after it became law.
As expected by the program's critics, Secretary Sebelius announced some 19 months after the Affordable Care Act's triumphant White House signing ceremony that the Obama Administration would not be implementing CLASS. Sebelius lamented the failure, noting that since the law passed, "our department has worked steadily to find a financially sustainable model for CLASS....When it became clear that most basic benefit plans wouldn't work, we looked at other possibilities....[W]e cast as wide a net as possible in searching for a model that could succeed." The administration just couldn't make CLASS work, and it was officially repealed at the beginning of 2013.
Despite the dejected tone of Secretary Sebelius's statement, the White House appeared unfazed. Following the Sebelius announcement, one senior White House official told National Journal that CLASS "isn't even a hood ornament. It's like the windshield wiper on the back window of a car — but maybe not even that. The CLASS Act is not central in any way to the health care reform act." CLASS had served its ultimate purpose — not providing long-term-care insurance, but rather generating illusory savings to help "pay" for Obamacare.
For the program's committed supporters, however, Sebelius's announcement was a crushing defeat, one made worse by the White House's unexpected dismissiveness. In response to the administration official's comments, Connie Garner, a Kennedy staffer and the longtime point-person on CLASS, said, "That's tough....It was very important to them [i.e., the White House] when it was being debated....I don't know why it isn't important to them now."
THE POLITICS OF POLICYMAKING
While the CLASS saga offers a prime example of how the CBO can be manipulated, it is far from an anomaly. The tendency of budget rules to perversely shape policy is baked into the system. And though CLASS and the Affordable Care Act were Democratic proposals, Republicans know how to play the game, too.
In fact, two of the chief domestic accomplishments from the George W. Bush years were constructed around the CBO's scoring procedure. Consider the 2001 tax cuts. The White House and its allies made a political case for cutting taxes that rested on the existence of large budget surpluses. If the government had collected more money from the taxpayers than it required, the rationale went, those excess funds should be returned. As President Bush commonly put it, "The surplus isn't the government's money. The surplus is the people's money."
The CBO's rules helped make the administration's case by inflating the extent of the treasury's overflow. The CBO is required by law to operate on the assumption that previously passed taxing and spending dictates will be followed — even in instances where provisions are routinely changed or have little chance of being honored in the future. For example, the CBO had to take seriously the fantasy that popular tax credits and spending programs that were slated to expire would in fact be terminated, even though they were virtually certain to be extended. These faulty assumptions were calculated into the CBO's baseline, giving the illusion of extra money lying around ready to be shipped back to taxpayers. Money from the Medicare trust fund was also included in the reported surplus, even though members of Congress from both parties had pledged to leave those funds alone. The effect of these procedural moves was an inflated surplus as scored by the CBO.
Additionally, the tax cuts themselves were designed around CBO rules in a way that kept the price tag down. Phase-ins, for instance, made cuts for high-income earners take effect slowly, with the bulk of the rebate coming at the end of the ten-year scoring window. Further, sunset provisions stipulated that the tax cuts would abruptly end in 2010 and revert back to their 2001 levels. These provisions had the effect of reducing the cost of the tax cuts in the ten-year budget window while establishing a trajectory that would make it politically difficult to avoid extending the cuts when the 2010 reversal approached.
A second signature domestic accomplishment during the Bush administration was also tailored to CBO scoring. In his 2003 State of the Union address, the president called for a new prescription-drug benefit within Medicare and set a price ceiling for the new program at $400 billion. The result was the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which created Part D of Medicare to cover prescription drugs for senior citizens. The bill had been aggressively championed by the White House and was passed by the Republican congressional majority in the face of broad opposition from Democrats.
The CBO estimated the law's ten-year cost to be $395 billion, but that figure did not mean the new program's costs would be evenly divided over the coming decade. Instead, it represented a heavily back-loaded program design. The first two years combined would cost just over $10 billion before jumping to $28 billion for year three and then $40 billion in year four, when the legislation would be fully implemented. From there, costs would continue to climb steadily each year until they reached $65 billion in year ten. Beyond the ten-year window, it was expected that annual costs would quickly exceed $100 billion. In short, the program's design was ideal for generating a politically satisfactory CBO score. The agency's $395 billion cost estimate was profoundly unhelpful in gauging the true cost of the new prescription-drug benefit, but quite advantageous in making the Medicare expansion more politically palatable.
And the White House and Republican leaders needed all the help they could get. Even with the attractive cost estimate, the bill escaped the GOP-controlled House of Representatives by the slimmest of margins and only after a highly unusual extension of the voting period during which the leadership and the Bush administration pressured recalcitrant Republicans to switch their votes. Further evidence of the importance of the CBO's estimate came to light shortly after Bush signed the bill into law, when news broke that the administration had suppressed its own in-house cost estimate showing a much higher price tag. The president's Office of Management and Budget had determined, using a different set of assumptions than the CBO, that the bill would cost $534 billion — not $395 billion. Had the alternative cost projection been known, the bill would likely never have arrived on the president's desk.
Exploiting the CBO's ten-year window and its current-law assumption are just two ways that legislators can change the official scoring of their bills to make them look better than they actually are. An alternative tactic is an "advance appropriation," in which legislators appropriate money but dictate that it cannot actually be dispensed until the next fiscal year. The CBO scores bills based on when money actually leaves the treasury, not based on when it is appropriated. As a result, legislators can spend money on projects while also claiming to be fiscally responsible based on the CBO's score.
Another heavy-handed method is "directed scorekeeping," in which Congress dictates how the CBO should score a particular bill. Congress can, simply by writing instructions into the legislation, suppress the costs or exaggerate the benefits of a bill, and the CBO must comply. Dan Crippen, CBO director in the 1990s, noted in 1999 that the adjustments mandated by Congress shifted the CBO's projections for the 2000 budget by "$17 billion for the House and $16 billion for the Senate." Directed scorekeeping can have some benefits, in that it allows Congress to direct the CBO to account for certain factors that it otherwise would ignore. But the risk of abuse is high. Congress sought to stamp out the practice in 2000 by allowing members to raise a "point of order" objection, and directed scorekeeping has largely fallen out of use as a result.
THE FAILURE OF REFORM
Born of the 1974 good-government reforms, the Congressional Budget Office is supposed to offer accurate assessments of the fiscal implications of pending legislation and to alert Congress to potential problems. But the system is now routinely gamed. In fact, the policymaking process is structured in a manner that allows and even encourages the development of fundamentally flawed policies. And the implications of this new policymaking environment are every bit as disconcerting as those of the broken system it replaced.
Ultimately, the tragic rise and fall of the CLASS Act contains important insights for understanding today's policymaking process. The CLASS Act was most certainly a flawed policy, but it was one that sprang from, and was exceedingly effective at responding to, the institutional structure put in place by Congress's good-government reforms. The nation desperately needs to confront its long-term-care challenge and the implications it carries for all Americans, but the current policymaking process discourages such a discussion by pushing policymakers to craft policies that purportedly offer all of the gain with none of the pain.
There is no doubt that the rules of the policymaking game have changed in the 50 years since Lyndon Johnson was pushing his Great Society initiatives through Congress. But the possibilities and incentives for manipulating the rules — for good or ill — still exist. If he were alive today and placed in the middle of the Washington policy process, Johnson might even feel like he never left.