Republicans and their allies keep saying the Affordable Care Act will bankrupt the taxpaying public.
Now there’s one more reason to think they are wrong.
It comes from the Washington’s official accountant, the Congressional Budget Office, which on Monday released a newly updated projection on how the Affordable Care Act will affect the deficit and insurance coverage. In February, the last time CBO addressed these issues comprehensively, it predicted that the net cost of the law’s coverage provisions would be about $1.4 trillion over ten years. Now, CBO says, it’s likely to be about $1.3 trillion, or $100 billion less.
It's actually the latest in a series of revisions, each one suggesting the law would cost less money than the previous projection had suggested. (See graph above.) And why this latest change? It doesn't appear to be because the law will reach fewer people. CBO now expects slightly more people to end up with health insurance, at least over the long run. The CBO's primary explanation for lower costs is that health insurance premiums on the new exchanges—what the administration calls “marketplaces”—are lower than CBO had originally expected they would be.
That may sound hard to believe, given all the stories in the last few months about people who lost their old coverage and now must pay more for it. But there’s no inconsistency here. In the transition from the old system, in which insurers could charge higher prices to the sick or avoid them altogether, to a new system, in which everybody pays the same price regardless of pre-existing condition, some young and healthy people must now pay more for their individual policies. In addition, the law requires that all new plans include a set of essential benefits—including things like maternity coverage and mental health that the old policies frequently excluded. That, too, tends to make insurance more expensive than it was last year.
But the federal government is simultaneously providing generous tax subsidies, designed to offset those price increases and, more generally, make health care more affordable for people who couldn’t pay for it previously. Those subsidies, along with the law’s expansion of Medicaid, are the most expensive part of the law—together they account for the vast majority of its spending. The cost of those subsidies depends on the raw, unsubsidized prices that insurers are charging upfront. The higher the premiums, the more expensive the subsidies. And that’s where the law has, so far, outperformed expectations. Insurers are offering plans with lower premiums than CBO and other experts had predicted. As a result, the federal government is on the hook for less financial assistance.
Better still, the CBO says that it doesn’t expect across-the-board premium spikes next year, as the law’s critics and even some insurance company officials have speculated would happen. Of course, the CBO could be totally wrong about that. And even if it’s not wrong about what’s likely to happen to premiums overall, it’s possible—I’d say likely—that prices in some parts of the country will go up significantly next year. But CBO's new projections would put such rate increases into better, more favorable perspective. Premiums are already lower than expected. The law is already reducing the deficit by more than expected. So even if premiums rise next year or beyond, the law could still end up calling for lower spending—and more deficit reduction—than the original projections suggested.
"It is good news that premiums have come in lower than expected, meaning lower costs for the federal government and for families as well," says Larry Levitt, senior vice president at the Kaiser Family Foundation. "It’s a sign that the ACA may be working to hold premiums down by forcing insurers to compete over price rather than by cherry-picking healthy people. Sustaining this, as CBO anticipates, will be key to the law succeeding."
Perhaps the most interesting part of the report was CBO’s explanation for why premiums are lower than expected:
A crucial factor in the current revision was an analysis of the characteristics of plans offered through the exchanges in 2014. Previously, CBO and JCT had expected that those plans’ characteristics would closely resemble the characteristics of employment-based plans throughout the projection period. However, 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 do.
To translate that, the plans on the marketplaces are cheaper because they limit beneficiaries to fewer doctors and hospitals, while controlling their access to treatments and medications. Insurers have used the techniques for a long time, going back at least to the 1980s. That’s “managed care.” But insurers appear to be using them much more aggressively in the new marketplace plans, on the theory that most people will pick policies based on price rather than access. The change has not gone over well with many people, particularly those whose old policies lacked such restrictions. And in at least a few cases, these restrictions are bound to create real hardship for people with serious medical problems who need access to particular medications or specialists.
On the other hand, there’s ample evidence that doctors and hospitals routinely overcharge—and, absent price controls, these are the most effective techniques that insurers have for bargaining down prices. In the best of all worlds, insurers would manage care the way innovative group practice organizations, like Intermountain in Utah and the Cleveland Clinic, do. The key, as always, is finding a balance. The Administration recently announced it’d be scrutinizing insurers to make sure their networks of providers are adequate, as the law dictates. It’s also possible that, over time, insurers themselves will loosen controls in order to please customers who want it. CBO, in its report, says it expects that to happen—that, one way or another, insurers will expand networks and relax their management—but not so much that it will cause the law’s cost to skyrocket.
"We have to remember," says Levitt, "that as sophisticated as CBO’s projections are, they are ultimately still relying on a crystal ball and the future is always uncertain." That's good advice. This latest report from CBO is a hint that the law is working out pretty well, but it's still only a hint.