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Source: US Congressional Budget Office

The Medicare-Eligible Retiree Health Care Fund (MERHCF) was created by the Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001 (Public Law 106-398). That fund pays for health care programs that supplement Medicare for senior beneficiaries of the Military Health System.

In a cost estimate prepared for the Congress in October 2000, the Congressional Budget Office estimated that spending from the MERHCF would total about $57 billion over the 2003–2010 period; actual costs over that period were 3 percent less—about $55 billion. This report provides details about why that estimate differed from actual expenditures and discusses how CBO will use that information to assess and improve the accuracy of future cost estimates and reports.

CBO concluded the following:

  • Although the $2 billion difference between the cost estimate and actual expenditures from the MERHCF was relatively small, there were significant differences between the various components of the estimate and actual spending. Specifically, costs for the TRICARE for Life Medicare wraparound benefit and reimbursements to military treatment facilities were lower than CBO estimated. Those differences were largely offset by the costs of the Senior Pharmacy benefit, which were higher than CBO estimated.
  • The differences between the agency’s estimates and actual spending were attributable to a combination of factors: Specifically, behavioral responses among the affected beneficiaries were different from what CBO anticipated, administrative decisions by the Department of Defense and subsequent legislation affected the amounts paid by the MERHCF for the Senior Pharmacy benefit, and various other factors resulted in outcomes that differed from CBO’s estimates.

Analysis of the cost estimate has generated valuable insights that CBO is using to improve its baseline projections of spending for the MERHCF and also to improve cost estimates for other proposals. For instance, on the basis of its experience preparing the MERHCF cost estimate, and experience derived from projecting the costs of other federal programs, the agency has taken a more cautious approach when estimating the rate at which people begin using new government benefits. CBO has also gained insight into how to better interpret and use data and to highlight the presence of uncertainty when preparing cost estimates.