On Monday, after the Congressional Budget Office (CBO) released its score of the American Health Care Act (AHCA), which would partially repeal Obamacare and replace it with a new system of insurance subsidies, Speaker of the House Paul Ryan said that the CBO report “confirms that the American Health Care Act will lower premiums” and tweeted a graphic indicating that the bill would lower premiums by 10 percent.
The problem with Ryan’s claim is that it doesn’t tell the whole story. Instead, it relies on downplaying or overlooking key aspects of the CBO’s premium estimates. Indeed, the CBO provides reason to believe that the most immediate and significant effect of the AHCA will be to raise insurance premiums.
When Ryan says that the CBO report confirms that the House bill will lower premiums, he’s not talking about what would happen right away. He’s referring to the budget office’s projections for what happens after 2020. Starting in the next decade, the agency says that increased premiums would be offset by several factors, and by 2026 would result in individual premiums that are, on average, 10 percent lower than under the current law trajectory.
So Ryan’s argument is that CBO’s estimates confirm that the AHCA would lower premiums in the long run. But even that doesn’t tell the whole story, and there are a number of caveats and qualifications needed to understand the CBO’s numbers.
The first is that the 10 percent lower figure is a relative estimate, judged against the current law baseline extended out into the future. CBO is saying that premiums would be 10 percent lower than they would otherwise be a decade from now, with a decade’s worth of price hikes built in—which is not at all the same as 10 percent lower than premiums are today.
The second is that a big part of why premiums would be lower is that the federal government would be picking up part of the tab. One of the reasons why CBO predicts that premiums would fall for consumers is that it expects that states would use a $100 billion pot of new federal funding called the Patient and State Stability Fund to help cover extremely high cost enrollees, basically removing them from the rest of the insurance pool. The effect, as Cato Institute Health Policy Director Michael Cannon wrote this week, would be to “hide a portion of the full premium by shifting it to taxpayers.” It’s effectively a second layer of subsidies in addition to the refundable tax credit the AHCA would already provide to people buying coverage on the individual market.
Another thing to remember is that the 10 percent relative decrease is an average. It’s not an across the board reduction. And the benefit would go almost entirely to younger and healthier people—while older people would actually be charged quite a bit more.
To understand why, recall that Obamacare includes what’s known as an age rating provision, which limits insurers from charging an older person more than three times what a younger person is charged. The result is to compress rates, meaning that younger and healthier people pay more and older and sicker people pay less. The Republican plan would keep the age rating rule in place but expand it to allow insurers to charge older people up to five times what they charge young adults. So younger people would pay less, and older people would pay more. According to CBO, “premiums in the nongroup market would be 20 percent to 25 percent lower for a 21-year-old and 8 percent to 10 percent lower for a 40-year-old—but 20 percent to 25 percent higher for a 64-year-old.” The point is that the 10 percent overall decrease wouldn’t be a decrease for everyone.
So when Paul Ryan says that the CBO confirms that the AHCA would lower premiums, what he’s actually referring to is the CBO’s projection that the law would lower premiums for younger people, in part by funding a new federal backstop for the insurance market, on a relative basis, a decade from now.
Just as important is what Ryan doesn’t say, which is that in the meantime, the CBO report projects that premiums would rise as a result of the AHCA.
In 2018 and 2019, premiums in the individual market would be 15 to 20 percent higher than under the current trajectory. Most of the increase would come as a result of the law’s elimination of the penalties associated with the individual mandate. Without those penalties in place, the CBO expects that younger and healthier people will decline to purchase insurance, leaving a smaller, sicker insurance pool—and making premiums more expensive. The CBO, in other words, is projecting a significant premium increase in the years before the reductions kick in.
All of the CBO’s estimates should, of course, be regarded with some skepticism. The budget office has a history of missing the mark on projections related to health care legislation. But the short-term premium hikes the CBO expects should be regarded as more likely than the longer-term decreases, because projections tend to become less accurate and reliable the further they extend out into the future.
In any case, if Ryan is going to declare that CBO’s projections confirm the merits of the legislation he’s trying to pass, then it’s worth understanding what the CBO is really saying about the AHCA’s likely effect on health insurance premiums, which is that premiums would go up for several years before falling, maybe, for some people.
Tellingly, other Republicans seem to have taken a rather different message from CBO’s report.
Asked about the bill yesterday, Texas Senator Ted Cruz worried that the “most troubling aspect” was the CBO’s projection of higher health insurance premiums. “This is not the mandate that we were elected to fulfill,” he said, according to the Dallas Morning News. “The test of success will be a year from now, two years from now, three years from now: Is health care more affordable?” Under the House Republican plan, the CBO states quite clearly that it won’t be.