CBO: Thanks to Lower Premiums, Obamacare Won’t Blow Up the Deficit

Source: Thinkstock

Source: Thinkstock

An updated estimate of the effects that the insurance coverage provisions of the Affordable Care Act will have on the United States budget provided by the Congressional Budget Office may not have declared the health care reform a success, but it shows that the law is not the fiscal disaster some opponents believed it would be.

In the months that the Affordable Care Act was debated in Congress before President Barack Obama signed his signature piece of legislation into law in March 2010 and in the the years the Affordable Care Act was debated across the country before the cornerstone provision of the health care reform was implemented in October 2013, the overarching concerned voiced by critics was its cost. In a document entitled “The Case Against Obamacare,” posted to the GOP website in 2011, claimed that the health care reform and its so-called “unconstitutional” individual insurance mandate would drive up health care costs, increase insurance premiums, hurt the quality of health care, raise taxes, and swell the deficit.

The cornerstone provision of the Affordable Care Act — the individual insurance exchanges set up in all fifty states and Washington D.C. — launched on October 1, and despite the design flaws and software errors that marked the rollout and kept sign-ups low initially, more than 7 million Americans had enrolled by the March 31 deadline, meeting the high-end of the Obama administration’s target. The exchanges system may be in operation and the 7 million enrollment hit, a sign that the exchanges are viable, but it is far too soon for health industry experts to conduct a full analysis of how Obamacare has altered the American health care system. However, evidence is emerging that can provide clues on how health care costs, insurance premiums, taxes, and the deficit have been affected.

A Monday report from the nonpartisan Congressional Budget Office contained an updated estimate on how the Affordable Care Act will impacted the United States budget and the health insurance industry. The exchange program intended to expand insurance coverage will cost the government $104 billion less over the next decade than originally projected, and in 2014 alone, the coverage provisions will cost $5 billion less than the $41 billion calculated earlier in the year. The federal government will spend a total of $1,839 billion on subsidies for insurance obtained through the exchanges, on Medicaid payments, on the Children’s Health Insurance Program known as CHIP, and on tax credits for small employers. That figure will be partially offset by penalties collected from those Americans who choose to violate the individual insurance mandate. Plus, the CBO estimated that Medicare outlays will decrease by $98 million over ten years, compared with the February estimate, thanks to lower prescription drug and hospital insurance expenditures, while Medicaid spending would decrease by $29 billion.

Most importantly, the agency’s findings — which were prepared with the help of the staff of the Joint Committee on Taxation — showed that the subsidies, which the federal government will distribute to eligible Americans to make exchange insurance more affordable, will cost the federal government slight less than previously calculated. That discovery allowed the CBO to decrease its estimate for U.S. deficit growth over the next decade. In the revisions to its annual budget estimates, the agency explained that lower-than-expected subsidy costs reflect the lower insurance premiums insurers are charging in the online marketplaces operated by a select number of states and the federal government. Over the next ten years, the CBO now expects the federal government to spend approximately $164 billion less on insurance subsidies for policies purchased through the Obamacare exchanges.

“This report demonstrates the Affordable Care Act is working,” White House Press Secretary Jay Carney said at a news briefing. “It shows that marketplace healthcare costs have gone down because premium estimates have gone down.” It also is piece of a good Obamacare news for the an administration downplaying the recent resignation of Department of Health and Human Services Secretary Kathleen Sebelius, whose departure reignited criticism of the insurance marketplaces’ glitch-riddled launch last October.

Earlier in the history of the Affordable Care Act, the CBO theorized Obamacare’s exchange plans would look more like employer-based coverage, but that has not been the case, which is why premiums are cheaper than the agency had anticipated. “The plans being offered through the exchanges this year appear to have, in general, lower payment rates for providers, narrower networks of providers, and tighter management of their subscribers’ use of health care than employment-based plans,” the report noted. The fact that insurance premiums were lower than expected was a “crucial” factor in the CBO’s downward revision of the government’s subsidy costs. For 2014, the average expected subsidy amount is approximately $300, or 6 percent, cheaper than the CBO’s February projections, while the expected 2024 subsidy is $2,100, or 14 percent, less than the earlier estimate.

Plus, the two-year extension implemented by the Obama administration, which allowed the millions of policyholders with previously canceled non-Obamacare-compliant health plans to renew their coverage, also helped decrease overall costs. Those policyholders who retain non-compliant plans remain outside the marketplaces and therefore do not qualify for subsidies.

This update to baseline estimates of the budgetary effects of the ACA’s insurance coverage provisions has changed many times since the legislation was enacted in March 2010. And, while the period of time covered by the CBO’s calculations has shifted, year-over-year comparisons of the agency’s estimates of the health care reform’s budgetary impact shows that the negative effect of its coverage provisions have decreased over the past four years. “That net downward revision is attributable to many factors, including changes in law, revisions to CBO’s economic projections, judicial decisions, administrative actions, new data, numerous improvements in CBO and JCT’s modeling, and lower projected health care costs for both the federal government and the private sector,” noted the report.

The question is whether lower-than-expected insurance premiums will last. The main problem is that the creators of the Affordable Care Act decided to use what are called “narrow networks” to control costs. Because the provisions of the health care reform prevent insurers from competing in traditional avenues, like in the coverage of healthy clients or lowering benefits while increasing deductibles, networks are one of the few areas left for insurers to best their rivals. Health experts argue that narrow networks — which limit the doctors and hospitals available to subscribers — are the key to some of the United States’ most successful health plans, but it is solution that is very unappealing to insurance consumers and runs contrary to the campaign promise made by Obama in 2008, when he noted that if you like your doctor you can keep your doctor. Of course, Obamacare did not invent this trend, but it did accelerate a trend already in existence.

“Narrow networks are not some cruel attempt to limit patient choice foisted upon us by the insurance industry,” David Dranove and Craig Garthwaite, two professors at Northwestern University’s Kellogg School of Business, wrote last October. “Instead, these plans may provide our best opportunity for harnessing market forces to lower prices. Even high priced providers know they stand a good chance of being in broad networks. But insurers offering narrow networks can be picky about which providers they select.” Even though narrow networks are not necessarily bad for insurance customers, the American public has expressed outrage at the policy, and that displeasure likely means insurance policies and doctor and provider networks will evolve over the next ten years.

According to the report, the CBO expects 2015 premiums will increase slightly. CBO calculations show that premiums for the exchange’s silver-level plans — which are the benchmark used to determine premium subsidies —  are expected to jump modestly from $3,800 in 2014 to $3,900 in 2015. In the years after 2015, premiums are projected to increase by greater leaps. But still, the CBO said the premiums expected in 2016 are 15 percent below projections made four years ago.

Significantly, the agency based its 2014 calculations on 6 million enrollments, even though the administration has announced that 7.5 million Americans signed up for insurance policies through the exchanges. The CBO explained this decision by noting that the White House’s figure counts enrollments differently. The CBO budget analysis count of 6 million is based on the agency’s expectation for the average number of Americans who are covered in 2014, rather than the number of Americans who have enrolled as of March 31. Actual enrollments could be quite different at the end of the year than the White House’s number.

The CBO’s downward revised estimate of the cost of the Affordable Care Act’s coverage provision impacted the United States deficit; compared with the February estimate, the report notes that he agency’s cumulative deficit forecast for fiscal years from 2015 through 2024 will decrease by $286 billion to $7.62 trillion, with reduced health cost estimates comprising a majority of that decrease.

But despite the veneer of good Obamacare news that covered the CBO report, the fact remains that U.S. budget deficits will still increase after 2015, even if budgetary shortfalls will decrease by smaller percentages that shown in earlier projections. “If current laws do not change, the period of shrinking deficits will soon come to an end,” the CBO said in the report. According to the agency, the aging baby boomer generation is at fault. As those born between the late 1940s and mid-1960s — retire in greater numbers, more individuals will be drawing federal benefits. Consequently, the CBO expects mandatory spending programs — like Medicare, Social Security, and Medicaid — will soar, accounting for 11.5 percent of gross domestic product in 2024, up from 2013’s 9.5 percent. By 2024, spending on those programs will cost the government $3.1 trillion and represent more than half of all federal spending.

While the federal deficit will reach a low of $469 billion, or 2.6 percent of U.S. gross domestic product, it will then begin to climb. The CBO expects it will surpass $1 trillion once again in 2023 and 2024 — a level representing around 4 percent of GDP.

More From Wall St. Cheat Sheet:

Follow Meghan on Twitter @MFoley_WSCS