Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Defining “Budget Arbitrage”

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Budget Arbitrage — n. the act of “paying for” relatively certain short-term spending proposals by “reducing” highly uncertain longer-term spending.  Budget arbitrage takes advantage of the fact that CBO scoring does not risk-adjust scored spending based upon the likelihood that the underlying assumptions are accurate.

Budget arbitrage is the natural result of a political process that attempts to find the politically least costly method of “paying for” current spending.  The more uncertain the estimate of the future, the less likely there will be political opposition to the future cut.  In contrast, the more certain the short-term spending is, the more certain is the short-term political gain.

One classic example was HR6331, where an increase in physician payments beginning immediately (July 1, 2008) were “paid for”, in part, by asserting a network requirement on Medicare Advantage providers.  This network requirement was estimated to reduce the attractiveness of Medicare Advantage and, therefore, reduce enrollment and corresponding costs to CMS.  This requirement is to become effective on January 1, 2011, 43 months after the increased expenditures were to begin.  This was estimated to save substantial sums of money despite the possibility that many Medicare Advantage providers might move their membership from FFS plans, regardless.  If that would have happened the deficit would have been lower and Congress would have had to find alternative means to fund the short-term and immediate spending increases.

The net effect of “paying for” the physician fee increase was to increase the short-term deficit and potentially increase the long-term deficit, as well.

Notably, the Medicare Advantage “cuts” in the bill were estimated to more than pay for the short-term physician fee increases.  Rather than “apply” the estimated excess to future deficit reduction, the difference was “spent” in a “Medicare Improvement Fund” that would accumulate significant funds.  In that manner a highly uncertain savings estimate for the years 2014-2017 was transformed into a guaranteed source of future revenues in case additional spending is desired in future Congresses.  This is true regardless of whether or not 2011 Medicare Advantage enrollment validates or invalidates the estimates used by the CBO in 2008.

A summary of HR6331 is here.


Written by Victor

June 3, 2009 at 11:01 pm

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  1. […] Original post by Victor […]

  2. […] is highly uncertain and therefore an example of budget arbitrage, although it comes from within the CBO […]

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