Function 550 - Health
Add a “Public Plan” to the Health Insurance Exchanges
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
|(Billions of dollars)||2014||2015||2016||2017||2018||2019||2020||2021||2022||2023||2014-2018||2014-2023|
|Change in Mandatory Outlays||0||0||1||-2||-4||-5||-6||-6||-7||-8||-5||-37|
|Change in Revenues||0||0||3||10||14||16||18||19||21||21||27||121|
|Net Effect on the Deficit||0||0||-3||-12||-17||-21||-23||-26||-27||-29||-32||-158|
Sources: Congressional Budget Office; staff of the Joint Committee on Taxation.
Note: This option would take effect in January 2016.
Under current law, individuals and families will be able to purchase private health insurance coverage for 2014 and later years through the newly established health insurance exchanges. Certain participants in the exchanges will be eligible for federal subsidies, in the form of tax credits to cover a portion of their premiums and additional subsidies to reduce cost-sharing amounts (out-of-pocket payments under their insurance policies). To qualify for the tax credits, people generally must have household income between 100 percent and 400 percent of the federal poverty guidelines and not have access to certain other sources of health insurance coverage (such as “affordable” coverage through an employer, as defined in the Affordable Care Act, or coverage from a government program, such as Medicaid or Medicare). The size of the tax credit (or premium subsidy) that someone will receive will be based in part on the premium of the second-lowest-cost “silver” plan—a plan that pays about 70 percent of the costs of covered benefits—offered through the exchange in the person’s area. To qualify for the cost-sharing subsidies, people must have household income below 250 percent of the federal poverty guidelines.
Small employers that provide health insurance have the option to let their workers buy that insurance through the exchanges; beginning in 2017, states may grant large employers that option as well. Such workers will still be considered to have employment-based health insurance and thus will not be eligible for exchange subsidies. However, their employers’ contributions for their insurance, and typically their own payments, will be excluded from income when calculating income and payroll taxes (as is the case for other employment-based health insurance).
Under this option, the Secretary of Health and Human Services would establish and administer a public health insurance plan that would be offered through the exchanges, alongside private plans, starting in 2016. The public plan would have to charge premiums that fully covered its costs, including administrative expenses. The plan’s payment rates for physicians and other individual practitioners would be set 5 percent higher than Medicare’s rates in 2013 and would rise in later years to reflect estimated increases in physicians’ costs; those payment rates would not be subject to the future reductions required by Medicare’s sustainable growth rate formula. The public plan would pay hospitals and other providers the same amounts that would be paid under Medicare, on average, and would set payment rates for prescription drugs through negotiations with drug manufacturers. Health care providers would not be required to participate in the public plan in order to participate in Medicare or Medicaid.
In the Congressional Budget Office’s estimation, premiums for the public plan would be between 7 percent and 8 percent lower, on average, during the 2016–2023 period than premiums for private plans offered in the exchanges—mainly because the public plan’s payment rates for providers would generally be lower than those of private plans. In addition, the public plan would be likely to have lower administrative costs than private plans. However, CBO expects that the public plan would be less inclined than private plans to use benefit management techniques (such as narrow provider networks, utilization review, and prior-approval requirements) to control spending. The public plan would also tend to cover people who were, on average, less healthy—and therefore more costly—than the average enrollee in a private plan. (The effects of that difference would be partly offset, however, by the risk-adjustment mechanism established by the Affordable Care Act, which will transfer funds from plans with healthier enrollees to plans with less healthy enrollees.) The extent to which premiums for the public plan differed from average premiums for private plans would vary across the country, largely because differences between the plans’ payment rates for providers would be likely to vary geographically.
Adding a public plan to the exchanges in the manner described in this option would reduce federal budget deficits by $158 billion through 2023, according to estimates by CBO and the staff of the Joint Committee on Taxation (JCT). That figure reflects a $37 billion reduction in outlays (mostly from a decrease in exchange subsidies) and a $121 billion increase in revenues (mainly from changes in employment-based health insurance coverage). Those estimates include the option’s effects on other spending and revenues related to health insurance coverage, such as outlays for Medicaid and penalty payments by large employers who do not offer “affordable” health insurance and by people who do not obtain insurance.
Exchange subsidies would be an estimated $39 billion lower between 2016 and 2023 under this option than under current law. Although the premium subsidies are structured as refundable tax credits, in most cases the amounts of those credits will exceed the total amount of federal income tax that recipients owe, and the amounts above the tax owed by recipients are classified as outlays. The cost-sharing subsidies for enrollees in exchange plans are also categorized as outlays. The $39 billion estimated reduction in subsidies consists of a $35 billion reduction in outlays and a $4 billion increase in revenues.
The decline in exchange subsidies would stem from several factors. CBO estimates that in many parts of the country, premiums for the public plan would be lower than the second-lowest premium among private “silver” plans, so introducing the public plan in those areas would reduce federal subsidies that are tied to that benchmark. In addition, the existence of a public plan with substantial enrollment would tend to increase the competitive pressure on insurers selling plans through the exchanges to lower their premiums, which would further reduce federal subsidies. Some of the savings from those two factors would be offset by an increase in subsidy payments caused by higher enrollment in exchange plans overall.
Revenues would be higher under this option than under current law mainly because two changes would cause a greater share of employees’ compensation to take the form of taxable wages and salaries rather than nontaxable health benefits, thereby boosting tax revenues. First, because the public plan would make the exchanges more attractive to individual purchasers, some employers would forgo offering coverage, thus reducing their spending on employment-based health insurance and increasing the share of compensation devoted to taxable wages and salaries. Second, the availability of a relatively inexpensive public plan would lead some other employers to buy lower-cost coverage for their workers through the exchanges, further increasing the percentage of total compensation paid as taxable wages and salaries. Revenues would also increase under this option because, as noted above, a portion of the savings on exchange subsidies would take the form of higher revenues rather than lower outlays. Further, because fewer employers would offer health insurance to their workers under this option, penalty payments by large employers that did not offer coverage would increase. Those effects would be slightly offset by a reduction in revenues from two factors: people newly enrolling in health insurance plans would no longer pay a penalty for not having insurance, and more small employers would take advantage of the tax credits available when buying coverage through the exchanges.
The number of people who would enroll in the public plan under this option would depend on several things, including the difference between the plan’s premiums and those of private plans and the number and types of providers who decided to participate in the public plan. Taking all of the relevant factors into account, CBO estimates that about 35 percent of the people who would get insurance through the exchanges—either individually or through an employer—would enroll in the public plan.
In all, about 2 million more people would obtain individually purchased coverage under this option than under current law, CBO estimates, and about 2 million fewer people would have employment-based coverage in each year. Small employers offering health insurance to their workers would be more likely to obtain it through the exchanges than they would under current law. The option would have minimal effects on the number of people with other sources of coverage and on the number of people who would be uninsured.
The current estimate of savings from this option is higher than the savings that CBO and JCT estimated for the same option in the previous version of this report (published in 2011). The change in the estimate primarily reflects two factors. First, CBO now estimates a larger reduction in the number of people receiving health insurance coverage through their employers under this option. As a result, CBO and JCT project that adding a public plan to the exchanges would lead to larger increases in tax revenues, as well as bigger increases in penalty payments by large employers that did not offer insurance, compared with the previous estimate. Second, since the 2011 estimate was published, preliminary tax data have shown that small businesses have been slower than expected to take advantage of the Affordable Care Act’s small-employer tax credits to reduce the cost of health insurance. Therefore, although CBO estimates that a similar number of people would newly obtain employment-based coverage through the exchanges, it expects a smaller share of employers to apply for the tax credits than previously estimated. Both factors increase savings compared with CBO and JCT’s 2011 estimate.
One rationale for adding a public plan to the exchanges is that it would help reduce premiums for some individuals, families, and employers who would buy insurance through the exchanges but would not qualify for subsidies. Premiums would be reduced both because the public plan would be one of the lowest-cost plans available in many areas and because adding a low-cost option would increase the competitive pressure on private plans, leading them to decrease their premiums.
A potential drawback of this option is that the public plan’s payment rates to providers might be much lower than the rates paid by private plans in many parts of the country, which could lead some providers who participated in the public plan to reduce the quality of the care they furnished. Although providers’ participation in the public plan would be voluntary, enrollment in the plan could be large enough that providers would face substantial pressure to participate.
Another possible drawback of this option is that if the public plan attracted high-cost enrollees and could not collect enough in premiums to cover its costs, the federal government would have to pay for the plan’s losses (although the plan would be required to build up a contingency fund). More generally, adding a public plan to the exchanges would imply a greater federal role in providing health insurance.