CBO’s Prophecies, Demystified
The budget gnomes tend to underestimate market incentives, especially in health care.
PHOTO: EUROPEAN PRESSPHOTO AGENCY
The white smoke rose Monday afternoon from the Congressional Budget Office as the fiscal forecasters published their cost-and-coverage estimates of the GOP health-care reform bill. Awaiting such predictions—and then investing them with supposed clairvoyance—are Beltway rituals. The coverage numbers weren’t great for Republicans, but they shouldn’t allow an outfit that historically underestimates the benefits of market forces to drive policy.
The good news is that CBO estimates that the American Health Care Act would cut the budget deficit by $337 billion over 10 years as the bill replaces ObamaCare’s subsidies with tax credits, rationalizes its Medicaid expansion and repeals its tax increases. The bill would cut taxes by nearly $900 billion while cutting spending by $1.2 trillion.
The bad news is that CBO thinks 14 million people on net would be uninsured in 2018 relative to the ObamaCare status quo. How many people may “lose coverage” is the debate progressives want to have, as if that’s the only relevant question in U.S. health care.
The CBO attributes “most” of this initial coverage plunge to “repealing the penalties associated with the individual mandate.” If people aren’t subject to government coercion to buy insurance or else pay a fine, some “would choose not to have insurance because they chose to be covered by insurance under current law only to avoid paying the penalties, and some people would forgo insurance in response to higher premiums.”
What this finding says about the value Americans attach to ObamaCare-compliant health insurance is damning. If CBO is right, some 14 million people would rather spend their money on something else, despite the subsidies.
But CBO also has too much faith in the mandate as an effective policy tool. In ObamaCare practice, the mandate isn’t pulling “free riders” into the insurance markets. The IRS reports that in 2015 some 12.7 million taxpayers claimed one or more exemptions from the mandate, such as “hardship,” while merely 6.5 million paid the fine.
The GOP wager is that the stability of the individual insurance market would improve with better incentives and if people want to participate. Deregulation would free up insurers to offer more options at many price points that meet different needs. Instead of brute force, Republicans think more people would join the market because if it offers alternatives worth the cost.
CBO’s budget gnomes don’t share these assumptions and they don’t get built into their models. CBO models are not a writ carved in stone by a finger of light, but merely an educated economic guess about how consumers and businesses will behave differently in response to new health-care policies.
Thus this cost estimate should be part of the larger debate, not taken as gospel. Last year the more market-friendly Center for Health and Economy scored the House GOP’s “Better Way” health plan, which this bill closely resembles. The center model was designed by the University of Minnesota’s Stephen Parente, the leading expert in modeling premium support-style health reforms.
The center estimated that the individual market would grow by about a million on net compared to current law in 2018 and by 13 million in 2026. Tax credits and deregulation may well be more powerful than mandates in practice.
The center did find that per-capita Medicaid block grants would cause about four million fewer insured individuals in total by 2026, which is more modest than CBO. Over time, according to CBO, coverage losses would rise to 21 million in 2020 and then to 24 million in 2026 as states rolled back ObamaCare’s Medicaid expansion.
But there are more than a few reasons to doubt CBO’s fortune-telling, especially in health care. Precisely because its models give too much weight to government coercion and too little to free markets, its projections have often missed the mark.
In February 2013, CBO predicted that ObamaCare enrollment in the individual market would be 13 million in 2015, 24 million in 2016 and 26 million in 2017. The actual enrollment for those years were, respectively, 11 million, 12 million and 10 million. As recently as March 2016, CBO was projecting an enrollment boom of 15 million for this year.
CBO also failed to predict how many people would game ObamaCare’s insurance rules and mandates, signing up for coverage just before they need expensive procedures like knee replacements then dropping coverage. On paper they shouldn’t behave that way, but the real world works differently than CBO’s models.
CBO was also badly wrong about the 2003 Medicare prescription drug benefit, which unlike ObamaCare used incentives, markets and private competition to control public costs. The drug benefit cost about 40% less over its first decade than CBO projected.
Democrats in 2009-2010 wasted months gaming the CBO scoring process to hide the enormous true costs of ObamaCare with budget gimmicks, which is a spectacle the GOP ought to avoid. Opponents in Congress weren’t any more convinced than the public, and the delays crowded out other priorities. If Republicans try to juke the coverage estimates, they’ll be making the same mistake.
The smarter approach is to take CBO as merely one opinion about the future and point to others that are equally credible, and explain why. Above all, the GOP shouldn’t let budget scorekeepers dictate political judgments. They should thank the CBO for its opinions, have confidence that their ideas will work, and march ahead to fulfill their campaign promise to repeal and replace the failing Affordable Care Act.
