07.26.12

Congressional Budget Office Report Estimates Cost of Health-Care Law

The CBO’s new report on the cost of the Affordable Care Act raises as many questions as it answers, reports Alex Klein.

The Congressional Budget Office on Tuesday issued its first analysis of the Affordable Care Act since the Supreme Court’s ruling last month, which largely upheld the law. Amid the sound and fury of the individual mandate’s survival, many saw the court’s less-publicized decision—limiting the bill’s Medicaid expansion—as little more than a hiccup. But the report confirms that the call is going to have a big effect on cost and coverage.

The CBO now estimates that the altered bill will leave 3 million fewer people insured than before; that the decreased coverage will save the federal government $84 billion by 2022; and that repealing the ACA—which the House has voted to do in whole or in part time—would increase the deficit by $109 billion.

But behind these headline numbers, the CBO’s updated report is filled with uncertainty. Scholars differ on how much money, if any, the limit on Medicaid expansion will save—and even on the right methodology to figure it out. With the political climate surrounding state opt-outs shaky at best, the CBO’s projections are based on a lot of guesswork. Before quoting the numbers as gospel, it’s worth looking at several, potentially shaky assumptions at the report’s core.

In order to come up with its final figures, the CBO assumes that by 2022, one third of Americans who are newly eligible for Medicaid will live in states that actually approve the health-care law’s Medicaid expansion. It also assumes that one half will live in states that partially extend Medicaid coverage, and one sixth will live in states that turn it down.

First, budget experts say that the “one third by 2022” assumption is “overly pessimistic,” as John Holahan, director of the Urban Institute’s Health Policy center put it.

States may take a few years to come around to the Medicaid expansion, as they did to the program itself when it was first introduced in 1965. But within a decade, Holahan said, “it’s hard to see that they will be willing to live with growing uninsured populations when there’s so much federal money available to help them pay for it.”

Even today, less than one month after the Supreme Court’s decision, ten states have said they will opt into the Medicaid expansion in full: California, Connecticut, New York, Massachusetts, Minnesota, Hawaii, Illinois, Maryland, Vermont, and Washington. Running 2009 Kaiser Foundation numbers, the combined current Medicaid enrollment of the pro-expansion states comes to just under 24.3 million people: that is, more than a third of the 62.5 million people who are enrolled in Medicaid overall.

“Given how desperate the financial situation is in most states—it seems irrational for a governor who has to deal with sick, uninsured people to leave all this on the table.”

Before the Supreme Court’s ruling, 13 governors had indicated that they would support expanding Medicaid under the ACA, according to a 2010 Booz & Co. analysis; that study predicted that those states would expand their enrollment by 4.3 million, or 28 percent of the newly eligible.

Given how many states are opting in already, the CBO’s  “one-third” figure seems too gloomy, said Holahan. In other words, if about a third of current Medicaid beneficiaries already live in states that plan to approve the full expansion, why assume that, 10 years from now, still only a third of the newly eligible will live in states that have adopted it?

“It seems low to me,” said Richard Frank, Harvard professor of health economics and President Obama’s former director of disability, aging, and long-term-care policy. “My take is that—given how desperate the financial situation is in most states—it seems irrational for a governor who has to deal with sick, uninsured people to leave all this on the table.”

The lowball estimate on state opt-ins “overstates the budget savings,” Holahan said, while also overstating the number of people who will end up uninsured under the new ACA.

The CBO’s second shaky assumption is that about half of the newly eligible will live in states that “partially extend Medicaid coverage” by 2022. But that “partial” policy window might not even be open. Fully adopting the Medicaid expansion means expanding coverage to individuals with an income as high as 138 percent of the federal poverty level (in 2012, the level is $11,170 for a single person). The CBO hypothesizes that many states won’t go that far, but will partially expand their coverage—say, to 120 percent—using federal funds.

But the contours of such a scheme, and the minimum coverage level—if any—have yet to be worked out, and the CBO doesn’t describe what a partial adoption program would look like. “I couldn’t tell what ‘partial’ really meant,” Frank said. “I started guessing.”

The department of Health and Human Services has not yet responded to a request from 21 Republican governors to detail how Medicaid might be partially expanded. And of course, the federal government would have an incentive to withhold Medicaid expansion funds until states agree to the ACA’s “138-percent” provision.

As Holahan said, “It’s not clear that partial expansion is even an option.” Frank isn’t sure if the HHS secretary even has the authority to use subsidy dollars below a certain coverage threshold. “The question is how far down can you go,” he said. “What authority does the HHS secretary have to adjust policy among the local exchanges?”

Of course, the CBO’s two main assumptions are not entirely unreasonable. States could indeed stonewall adoption of the Medicaid expansion for several years; and the federal government might agree to a workable partial-expansion plan to cover half of the newly eligible by 2022. But, in the current climate, numbers based on these assumptions are squishy. Frank said that although the CBO “had to” issue an updated projection, it’s one of the diciest ACA reports he’s seen, due to uncertainty. Starting with slightly different assumptions would render wildly varying pricetags.

A spokesperson for the CBO declined to comment directly on the report, but referred to several paragraphs that acknowledged the fundamental uncertainty of the assessment: “CBO and JCT have not relied on state-by-state predictions about Medicaid expansions,” the report said. “States' decisions will probably span a very wide range … [these] assessments should not be viewed as representing a single definitive interpretation of those possible outcomes."

On Tuesday, the American Action Forum, a center-right think tank run by former CBO director Doug Holtz-Eakin, released new modeling of the ACA’s state Medicaid expansion and came up with far different figures than the CBO’s. While the government office analyzed the expansion in aggregate, the Forum built a model with 50 individual states, minus the six that plan to opt out: Florida, Louisiana, Mississippi, Nebraska, South Carolina, and Texas. In that analysis, the cost of the ACA would actually rise by as much as $80 billion by 2021.

Michael Ramlet, one of Forum report’s main authors, said the additional costs will come from those who don’t enroll in Medicaid and are forced to shift their weight to subsidized state exchanges, which are locally administered but federally subsidized. If those six states opt out, he said, that means 4.4 million fewer people on Medicaid, and billions more boosting federal deficits by joining exchanges.

By contrast, the CBO assumes that 6 million people will miss out on Medicaid, and only about half of them will end up in the exchanges. Per capita, these people will be more expensive to the government, but there will be far fewer of them. The remaining three million will go without any insurance. Thus, the report argues, seeing states opt out of the ACA Medicaid expansion saves the federal government money.

Essentially, if you think Obamacare will reduce the deficit in the next 10 years—as the CBO and the administration do—then seeing states drop out saves money, but also reduces coverage. But if you think that Obamacare will increase the deficit—like the AAF and the Republicans do—then state opt-outs make it even worse by shifting the cost burden of states and individuals to the federal government.

Though Holtz-Eakin, Holahan, and Frank may differ on the final figures, they’re all in agreement on one thing: as Holtz-Eakin said, “the CBO doesn’t yet have all the information needed to resolve the uncertainty.”

In 2002, when trying to evaluate Medicare Part D’s new prescription drug program, the former CBO chief called it “a major departure from what currently exists” with “a great deal of uncertainty as to its budgetary impact.” But the Medicaid expansion is far larger than the prescription drug program. “That’s kids’ stuff compared to this,” Frank said.