Health Reform's Coverage Costs Decline by $104 Billion

The budget estimates in the Congressional Budget Office's (CBO's) baseline released today may have looked largely the same as in February's report, but CBO actually made significant revisions to their cost projections of the coverage provisions in the Affordable Care Act.

Today's projections include a downward revision of $172 billion over ten years to estimates of the health exchange's premium subsidies and a $104 billion downward revision to the net cost of coverage provisions (coverage expansions net of closely related revenue sources like the individual and employer mandates).

Incorporating this year's data on premiums and plan structure in the exchanges on its estimates beyond 2014 for the first time, the revision to the exchange subsidies is almost 15 percent of the program's previously estimated spending and represents the only significant revision to ACA estimates since when CBO incorporated the effects of the Supreme Court decision. Similarly, CBO now projects that "the average premium for the benchmark silver plan in 2016 of about $4,400 is 15 percent below the comparable estimate of $5,200 published by CBO in November 2009."

Previously, CBO estimated that the federal government would spend $1.2 trillion over ten years on exchange plan subsidies; now, it expects spending to total $1.03 trillion over that same period. The agency arrived at this conclusion by fully incorporating lower than expected 2014 premiums into estimates going forward – in February, they only incorporated the effect in 2014 – and by further analyzing the characteristics of the plans offered in the health exchanges. CBO explains:

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.

CBO and JCT anticipate that, as enrollment in the exchanges rises, the differences between employment-based plans and exchange plans will narrow. Therefore, projected premiums during the next few years were revised downward more than were premiums for the later years of the coming decade.

Also contributing to the lower cost of the coverage provisions was a $12 billion increase in the projected revenue from the excise tax on high-cost insurance (the "Cadillac tax"). This increase came from an upward revision to CBO's projections of the number of active (non-retiree) employees receiving employment-based health insurance. 

Those downward revisions were partially offset by reductions in associated revenue. Individual and employer mandate penalties are now expected to be lower by about $20 billion combined due to a greater amount of people gaining coverage and due to the partial delay in the employer mandate for 2015. In addition, the greater prevalence of employment-based insurance projected means that more employees are getting tax-free health insurance through their employer rather than wages, which reduces income and payroll tax revenue by about $50 billion over ten years. Finally, the ACA's temporary risk corridor program is now expected to be budget-neutral rather than save $8 billion, as a result of an administrative rule change.

Net Cost of ACA Coverage Provisions
  2015-2024 Cost/Savings (-)
February 2014 Estimate $1,487
Exchange Subsidies -$172
Risk Corridors (Net) $8
Individual Mandate Penalty $6
Employer Mandate Penalty $12
"Cadillac" Tax -$12
Other Effects $54
Subtotal, Changes -$104
April 2014 Estimate $1,383

Source: CBO

Although there has been a lot of talk about ACA enrollment with the slow start to the exchanges and the surge in late March, CBO's estimates of coverage have remained largely unchanged. The agency now expects about 1 million fewer people to be uninsured annually, although it has revised downward slightly its estimates of employer coverage overall (due to fewer retirees staying on employer plans) and revised upward somewhat its estimate of enrollment in the exchanges. When the ACA has fully taken effect, the legislation is projected to reduce the number of uninsured people by 26 million per year.

Interestingly, given the recent RAND study estimating that employer coverage has increased by 8.2 million from September 2013 through March 2014, CBO still projects basically no change in total employer-based coverage from 2013 to 2014 (steady at 156 million).

As noted in the introduction, CBO's estimate of the coverage provisions had remained remarkably stable over time since the law's passage, the lone exception being the NFIB v. Sebelius Supreme Court decision reducing Medicaid spending by effectively making the expansion optional. Today's report is actually the first time that technical (rather than statutory) changes have made a significant change in the cost of the coverage expansion. The table below shows how those estimates have changed over time in the 2014-2019 period, the period of time that is common to all the projections.

Net Cost of ACA Coverage Provisions Over Time
  2014-2019 Cost (Billions) 2019 Cost (Billions) 2019 Reduction in Uninsured (Millions of People) 2019 Cost per Newly Insured
Original Score $759 $172 -32 $5,375
March 2011 Baseline $775 $158 -33 $4,800
July 2012 Estimate (post-SCOTUS decision) $702 $144 -29 $4,975
February 2013 Baseline $697 $149 -27 $5,525
May 2013 Baseline $710 $151 -25 $6,050
February 2014 Baseline $700 $151 -25 $6,050
April 2014 Baseline $659 $144 -26 $5,550

Source: CBO, CRFB calculations
Note: Relative sources of coverage for the newly insured are not necessarily the same in each estimate.
2019 cost per newly insured rounded to the nearest $25.

This table has been updated from the original posting to include 2019 data.