Trying to figure out the financial and other impacts of the federal reform law is about as easy as, well, signing up for the coverage on the federally-designed health insurance exchange. The Congressional Budget Office gives it another go-round. (CBO Report) The headlines are that CBO now expects a projected net cost (spending beyond revenues) of $1.38 trillion dollars over a ten-year period, with the added spending growing from $36 billion in 2014 to $156 billion in 2024. Recall please, that this reform was sold as not adding to the deficit. The law is expected to result in 84% of the non-elderly population being insured in 2014 and 89% by 2024, leaving a significant number still uninsured. While CBO says 6 million people will have exchange coverage in 2014 (this means actual coverage for some or all of the year and doesn’t include people who “enroll” but don’t pay) jumping to 13 million in 2015 and 24 million in 2016. The average cost of subsidizing an enrollee in the exchanges is expected to be $4410 in 2014. The reasons for the decline in net cost from the prior estimates in February are lower than expected premiums in the exchanges, which leads to a lower subsidy cost, offset to some extent by less revenue from employer penalty payments and increases in taxable compensation.
Certain assumptions made by CBO are questionable, in particular that exchange enrollment will grow rapidly 2015 and thereafter and that these enrollees will be healthier than the current pool. It is apparent that a large number of healthy, often younger, persons have decided they aren’t going to enroll and the lack of any effective enforcement mechanism on the individual mandate penalty will only encourage that behavior. If these levels of projected enrollment don’t occur, premiums will be going up more rapidly than even CBO projects. On the other hand, less money will be spent in subsidies. Several recent reports have indicated that health spending is beginning to rise more rapidly and that exchange enrollees are heavier users of services than average. CBO may have underestimated these factors. Premiums were artificially depressed in 2014 by about 10% by the federal reinsurance program according to CBO, but that program is being reduced next year and ending after 2016, so one would expect premiums to rise to compensate for this loss. As CBO also notes, narrow networks, low provider payments and strict utilization management allowed for lower exchange premiums, but HHS is already planning to limit use of these techniques, which will put further upward pressure on premiums. Note too that CBO has not included the cost of administering the reform law, which adds to the deficit. This is estimated to be at least $5 billion for the IRS alone and we know that HHS has spent many more billions on the exchanges, navigators, advertising, etc. CBO also makes the questionable assumption that employers who seek to avoid the tax on high-value insurance plans will increase employees wages as they reduce the value of the plans and that employees who no longer get health coverage at work will have higher taxable wages. The CBO always does yeoman’s work on its projections, and the uncertainty is great, but we still suspect this program will end up costing a lot more than currently estimated.