Why CBO’s Estimate of GOP Obamacare Replacement May Overstate Negative Effects

The Congressional Budget Office (CBO) cost estimate of the American Health Care Act (AHCA) is out. On its face, CBO’s report is not all that helpful to supporters of the House GOP’s Obamacare replacement. So, comments from the White House and Congressional Republicans downplaying the report prior to its release are not surprising. Still, their arguments may not be entirely without merit.

Here’s what the CBO estimate found:
  • AHCA will cause premiums to fall after 2020, but rise until then by about 15-20%.
  • In 2018, 14 million fewer people will be covered under AHCA relative to Obamacare, largely a result of people choosing to forgo coverage if the individual mandate is removed. Through 2026 24 million fewer Americans will be covered by health insurance.
  • The GOP plan will reduce the deficit by $337 billion over ten years.
CBO’s estimate is confined to the bill now making its way through Congress, which is one part of a planned three stage repeal. It does not consider other elements still on the drawing board, including regulatory tweaks and a planned second bill relaxing prohibitions on selling insurance across state lines and allowing the government to use its buying power more aggressively to negotiate for lower prescription drug prices. To be fair, it is impossible to know at this point what effect these measures will have. Still, because it doesn’t consider them, CBO’s estimate arguably provides an incomplete picture of what the post-Obamacare healthcare market will look like if the repeal plan is fully implemented.

There are considerable uncertainties in estimating the effects of complex policy changes. To do so requires making assumptions about how human beings will respond in the real world. People are fickle and don’t always behave exactly as you’d expect on paper. This makes cost estimates a tricky business.

Because the AHCA repeals Obamacare’s individual mandate, CBO reckons that in the short term more people will opt out of coverage since there would no longer be a penalty for doing so. The extent to which this assumption is borne out will have a substantial impact on how much insurance plans will cost and the number of people covered.

There’s reason to suppose that the effect of removing the individual mandate might not be as pronounced as CBO assumes. Josh Blackman makes a credible case that the individual mandate has not been nearly as consequential in compelling people to get coverage as thought. It follows that repealing it may not turn out to be as significant either.

The individual mandate’s penalty is simply too low, Blackman argues, to substantially compel coverage. Flawed assumptions about the extent to which people in the individual market would enroll in plans in response to the individual mandate led the CBO to overestimate the number of people who would gain coverage under Obamacare. These same assumptions may cause it to overestimate the number of people who will no longer be covered as a result of repealing it.

This is especially true when it comes to the number of people covered under Medicaid. CBO estimate that 5 million of the 14 million people expected to drop coverage in 2018 are Medicaid recipients. Imagining that the repeal of the individual mandate would result in such large numbers of eligible beneficiaries rejecting coverage that comes at no cost to them is dubious.

Repealing the individual mandate will have some impact on the number of people covered, but it is hard to tell exactly how large the effect will be. One consequence of giving people a choice is that some people will chose not buy health insurance. Still, it is a reasonable proposition that the actual number of people who chose to opt out of coverage may be less than CBO suggests. Further, if a higher proportion of healthy people than expected choose to keep coverage, premiums would be lower as well.

Views of CBO as hero or villain oscillates between the parties depending on how favorable its analysis is towards partisan priorities. That’s a pretty good indication that it is more or less fair in how it goes about its work. While there can be reasonable disagreement about CBO’s assumptions, it is wrong to suggest that it has deliberately cooked these numbers. It is militantly non-partisan and populated by economists and analysts that are fairly apolitical by nature. It can be true that CBO’s cost estimate was made in good faith, yet might turn out to be wrong nonetheless.

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