Legislative Bulletin: CBO Estimate of American Health Care Act as Passed by the House

On May 24, the Congressional Budget Office (CBO) released its score of the American Health Care Act, as passed by the House on May 4. CBO found that the bill would:

  • Reduce deficits by about $119 billion over ten years—$133 billion in on-budget savings, offset by $14 billion in off-budget (i.e., Social Security) costs.
  • Increase the number of uninsured by 14 million in 2018, rising to a total of 23 million by 2026—a slight reduction from its earlier estimates.
  • Generally reduce individual market insurance premiums, “in part because the insurance, on average, would pay for a smaller proportion of health care costs.” However, those reductions would vary widely, as detailed further below.

Most of the CBO analysis focused on changes to the legislation made since the bill was originally introduced—and specifically the effects on insurance markets. The current CBO report therefore should be read in conjunction with the prior report (found online here, and my summary of same here).

Waivers:         With respect to the state waivers for insurance regulations—specifically, essential health benefits and community rating requirements—CBO categorized states as adopting one of three general approaches, based in part on the way states regulated their insurance markets prior to Obamacare. CBO did not attempt to determine which states would make which decisions, but used three categories to describe their attitude toward the waivers:

  • About half of the population would live in states that would not adopt the waivers;
  • About one-third of the population would live in states adopting “moderate” waivers; and
  • About one-sixth of the population would live in states adopting “substantial” waivers.

No Waiver States:       CBO estimated that in these states, premiums would fall by an average of 4 percent by 2026, due largely to a younger and healthier population purchasing insurance. Specifically, the greater variation in age rating that the bill permits for insurers, beginning in 2019, would raise premiums for older people while “substantially” lowering them for younger individuals.

Moderate Waiver States:        CBO estimated that in these states, premiums would fall by an average of 20 percent, with significant variations. “The estimated reductions in average premiums range from 10 percent to 30 percent in different areas of the country,” and reductions for younger people would be greater than those for older individuals. The premium reductions would come because “on average, insurance policies would provide fewer benefits;” however, plans “would still offer financial protection from most major health risks.”

CBO noted that states making moderate changes might eliminate such requirements as maternity care, mental health, substance abuse, rehabilitative and habilitative care, and pediatric dental care. In general, insurers “would not want to sell policies that included benefits that were not mandated by state law.” Carriers could sell supplemental riders for such coverage, but CBO concluded most individuals purchasing those riders would utilize them, potentially resulting in “substantially higher out-of-pocket costs” for said individuals.

In the case of states making moderate changes via waivers, CBO estimated that while premiums would be lower for individual insurance, employers would be more likely to continue offering group coverage, and therefore fewer employees would switch from employer to individual market policies. CBO estimated that, compared to the previous estimate, “slightly more people would have insurance in those states, but fewer of them would be enrolled through the non-group market.”

Substantial Waiver States:    In these states, CBO estimated that, while waivers would result in “significantly lower premiums” for those with low expected health costs, the changes could destabilize markets over time, such that less healthy individuals might be “unable to purchase comprehensive coverage with premiums close to those under current law and might not be able to purchase coverage at all.”

Essentially, CBO believes that waiving the community rating provision will create an arbitrage opportunity, whereby healthy individuals will want to undergo medical underwriting to lower premiums, while sick individuals will be unable to do so. CBO wrote that some healthy individuals will actually attempt to hide proof of continuous health insurance coverage, because they could achieve lower premiums by doing so:

CBO and JCT anticipate that, in states making substantial changes to market regulations, most healthy people applying for insurance in the nongroup market would be able to choose between underwritten premiums and community-rated premiums. If underwritten premiums were to their advantage, healthy applicants could fail to provide proof of continuous coverage when first applying for nongroup insurance—or allow their coverage to lapse for more than 63 days before applying. Moreover, insurers and states might have difficulty verifying that an applicant did not have continuous coverage. As a result, such a waiver would potentially allow the spread of medical underwriting to the entire nongroup market in a state rather than limiting it to those who did not have continuous coverage.

Essentially, CBO believes that this arbitrage opportunity could lead to a “death spiral” when it comes to coverage for individuals with high health needs—they may be unable to purchase coverage at any price. As a result, CBO concluded that in substantial waiver states, “employers would be even more likely to continue offering coverage than in states making moderate changes,” which would tend to keep individuals enrolled in group coverage, and decrease coverage in the individual insurance market overall.

CBO also noted that a “few million” (number not more specifically defined) individuals might purchase coverage that “would not cover major medical risks.” It noted the possibility that a secondary market would develop to sell insurance policies priced to match the amount of the bill’s tax credits: “Although such plans would provide some benefits, the policies would not provide enough financial protection in the event of a serious and costly illness to be considered insurance.”

Patient and State Stability Fund:            The estimate included additional details surrounding the Stability Fund, most of which CBO assumed “would be used by states to reduce premiums or increase benefits in the non-group market:”

  • The original $100 billion allocated to the fund would “exert substantial downward pressure on premiums in the non-group market and would help encourage insurers’ participation in the market.”
  • The $15 billion in invisible risk sharing funds, which “would be directed to insurers to reduce their risk of having high-cost enrollees…would have a small effect on premiums in 2018 and a larger effect on premiums in 2019.”
  • The $8 billion in funds for waiver states “would increase the number of states choosing such a waiver,” but CBO did not attempt to predict the precise way in which states would utilize those funds. While one section of the estimate alleges that “the funding would not be sufficient to substantially reduce the large increases in premiums for high-cost enrollees,” another section notes that only $6 billion of the funding would be spent over the decade—providing contradictory and unclear messages about whether the funding would be sufficient, and if it would not, why CBO thinks some of that supposedly insufficient funding would not be spent within a decade.
  • The $15 billion to cover maternity and mental health care would likely go to “health care providers rather than to insurers;” $14 billion would be spent over the decade.

Changes in Insurance Coverage:               CBO estimated that under the bill, the number of uninsured would rise by 14 million in 2018, 19 million in 2020, and 23 million in 2026. With respect to Medicaid, 14 million fewer people would have coverage than under current law; however, CBO noted that some of those individuals “would be among people who CBO projects would, under current law, become eligible in the future as additional states adopted” Medicaid expansion.

CBO estimated that the individual insurance market would decline by 8 million in 2018, 10 million in 2020, and 6 million in 2026. The estimate noted CBO’s belief that the individual market will shrink in 2020, only to expand in later years, because of implementation difficulties, particularly for states that apply for waivers and are therefore charged with certifying plans. “CBO and JCT expect that such implementation difficulties would result in some reduction in coverage and some occasions when individuals purchasing coverage would fail to get the credits. Those difficulties would probably decline over time in most markets.”

When compared to its original estimate of the bill, CBO concluded that:

  • Enrollment in the individual market would be 1 million lower in 2018 and 3 million lower in 2026, due to more employers continuing to offer coverage, while some otherwise uninsured individuals would choose to enroll in individual coverage due to lower premiums.
  • Employer based coverage would increase by 1 million in 2018 and 4 million in 2026, primarily because employers would be more likely to offer—and employees more likely to accept—group health coverage in states with insurance waivers.
  • The uninsured would decrease by 2 million in 2020 and 1 million in 2026, “primarily attributable to lower premiums for non-group coverage.” CBO concluded that, while coverage would be less robust under the waivers, “more people would choose to enroll rather than be uninsured.”

Administrative Complexity:          CBO included several passages noting the complexity and potential administrative/implementation challenges associated with the bill. It assumed that the state insurance waivers would not actually go into effect until 2020, as states would need time to prepare for same. For instance, CBO noted that Obamacare subsidies—which would remain in effect in 2018 and 2019 under the bill—are linked to the second-lowest cost silver plan. Determining the second-lowest cost silver plan in a state waiving some or all Obamacare regulations—where insurers could practice medical underwriting for individuals without continuous coverage—would require “substantial additional regulations or guidance.”

Further, because states accepting waivers would have to define qualified health plans beginning in 2020, those states would have to administer the tax credit program. The uncertainties surrounding whether and how states could administer the new programs led CBO to conclude that in waiver states “eligible people would initially be slower to take up the offer of tax credits, more claims would be made by people who are ineligible, and payments would be made for policies that do not qualify as insurance.”