Supplemental Information on Potential Effects of the Affordable Health Choices Act

September 10, 2009

Today CBO released a letter responding to a number of questions from the Ranking Memberof the Senate Committee on Health, Education, Labor, and Pensions (HELP) about the effects of health insurance legislation considered by the Committee this summer. CBO and the staff of the Joint Committee on Taxation (JCT) issued a preliminary and partial analysis of that legislation as it was introduced on July 1, 2009. We have not completed an assessment of the legislation as it was ultimately approved by the committee.

Expanding Medicaid Coverage. One question concerned the cost of combining the legislation with an expansion of eligibility for Medicaid for all legal residents with income below 150 percent of the federal poverty level (FPL). As CBO indicated in its letter to Senator Gregg on July 6, 2009, an expansion of Medicaid coverage of this sort would increase the federal cost of the legislation considerablyby an amount that is probably on the order of $500 billion over 10 years. Our preliminary assessment was that the provisions of the legislation pertaining to insurance coverage would increase federal deficits by $645 billion over the 20102019 periodso such a Medicaid expansion would probably bring the total federal cost to more than $1 trillion. Adding a Medicaid expansion to the legislation would also yield a substantially larger reduction in the number of people who are uninsured, because about half of the people projected to be uninsured under current law would have income below 150 percent of the FPL.

Effect on Workers Wages. Another question asked whether the costs borne by employers as a result of the proposal would be passed on to workers. Under the legislation as introduced, firms with more than 25 workers would have to offer health insurance (and contribute a specified share of the premiums) or pay a penalty. CBO believes that firms that pay the penalty would generally pass that cost on to their workers, primarily in the form of lower wagesjust as firms that contribute toward health insurance today pay lower wages than they otherwise would, keeping their total compensation costs about the same. One exception would be workers earning close to the minimum wage, because their wages might not be able to adjust downward to offset the cost of the penalty; as a result, employment of those workers might be adversely affected, though that impact is likely to be small. (For more discussion, seeEffects of Changes to the Health Insurance System on Labor Markets.)

Effect on Health Insurance Provided by Employers. A further question dealt with the effects of the legislation on employment-based health insurance. CBO and JCT estimated that the version that was introduced on July 1 would not have a major effect on the number of people obtaining coverage through an employer. This outcome is the net effect of changes going in both directions: Some people would gain employment-based coverage, because the mandate to obtain health insurance would induce some employers to make an offer of such coverage that would not have been made otherwise or would induce some individuals to take advantage of an existing offer that they would not have accepted otherwise. At the same time, we estimated that some people who would have employment-based coverage under current law would not have such coverage under the proposal.

Impact of a Public Plan. Another question was whether the federally administered "public plan" that would be offered under the legislation as introduced would have a substantial effect on federal spending for health care. In the legislation, the public plan would be managed by the Department of Health and Human Services, would pay negotiated rates to providers of health care, and would have to be financially self-sufficient (albeit with the government bearing some risk, as discussed below). Given those provisions, CBOs assessment is that premiums for the public plan would typically be comparable to the average premiums of private plans offered in the insurance exchangesand thus the existence of such a plan would not directly affect the amount of federal subsidies for health insurance under the legislation.

Nevertheless, including a public plan would probably have two small effects on private premiums, both of which would tend to lower federal subsidy payments through the exchanges to some degree. First, a public plan as structured in the introduced bill would probably attract a substantial minority of enrollees (in part because it would include a broad network of providers and would be likely to engage in only limited management of its health care benefits). As a result, it would add a small amount of competitive pressure in many insurance markets that are currently served by a limited number of private insurers. Second, a public plan is also apt to attract enrollees who, overall, are less healthy than average (for the same reasons it would attract a substantial number of enrollees). Although the payments received by all plans in the exchanges would be adjusted to account for differences in the health of their enrollees, the methods used to make such adjustments are imperfect. As a result, the higher costs of those less healthy enrollees in the public plan would probably be offset partially but not entirely; the rest of the added costs would be reflected in the public plans premiums. Correspondingly, the costs and premiums of competing private plans would, on average, be slightly lower than if no public plan was available.

Effects on National Spending for Health Care. The introduced legislation would also affect national spending on health care. By itself, a substantial expansion of insurance coverage could cause national spending on health care to increase by between 2 percent and 5 percent, largely because insured people generally receive somewhat more medical care than do uninsured peoplenotwithstanding the fact that some newly insured people would avoid expensive treatments by getting care sooner, before their illness progressed. (For more discussion, see Key Issues in Analyzing Health Care Proposals.) However, the rise in national spending on health care would be less than the increase for the federal government because some costs that are now paid by others would be shifted to the government (via the subsidies provided by the bill).

The bill would encourage private insurers to adopt measures to improve the coordination of the care they provide, but private insurers would be inclined to adopt cost-reducing strategies even in the absence of new legislation, so the effect of those provisions on costs is not clear. The insurance market reforms included in the bill would reduce administrative costs for individually purchased policies, but the resulting savings would probably be small relative to the increase in spending brought about by the insurance expansion. On balance, the bill would probably increase national spending on health care modestly.