On May 24, the Congressional Budget Office (CBO) released its assessment of the American Health Care Act (AHCA). The estimate reflects the impact of two amendments that were key to the US House of Representatives’ passage of the bill three weeks earlier. The MacArthur amendment allows states to apply for waivers from key Affordable Care Act (ACA) regulatory requirements. The Upton amendment creates an $8 billion fund to help make insurance more affordable to high-cost individuals in states that change ACA insurance rules. Much of the discussion in the updated cost estimate explains the CBO’s rationale for determining how many people could be affected by the waivers and their potential impact on premiums, insurance enrollment, and the federal budget.

The MacArthur amendment raised concerns that the AHCA would undermine protections for people with preexisting conditions. States would be able to modify the ACA’s essential benefits requirement and permit insurers to charge premiums according to a person’s health status. Eliminating benefits such as maternity coverage or mental health benefits and setting premiums on the basis of one’s health status would lower costs for healthier people but increase costs for those needing more health services.

Although the MacArthur amendment represents a major policy shift from earlier versions of the AHCA, it did not alter the CBO’s basic view of the legislation. The current analysis is consistent with CBO estimates from March 13 and March 23 of earlier versions of the AHCA.

The CBO expects the legislation to substantially increase the number of people going without health coverage. That is the result of large reductions in federal subsidies for Medicaid and the shift to age-related premium subsidies, which would substantially reduce the refundable tax credits for lower-income households. The CBO also assumes that eliminating the tax penalties associated with the individual mandate would reduce enrollment in Medicaid and private insurance. Those changes would result in a small reduction in the federal budget deficit, according to the CBO.

Below, we outline the CBO’s main findings, then highlight three areas where the CBO likely, in our view, got it wrong. However, the primary issue is not the CBO, but the AHCA. The overall thrust of the CBO’s report is surely correct, and the task of the US Senate now is to improve the bill.

CBO’s Main Findings

The CBO’s updated assessment of the AHCA includes the following:

Large Spending and Tax Cuts

The CBO estimates that the AHCA would reduce federal spending by $1.1 trillion over 10 years, driven by $834 billion in savings in the Medicaid program. The bill would immediately repeal most of the ACA’s taxes (as was the case with the March version), with two important exceptions. The increased Medicare payroll tax on upper-income households would not be repealed until 2023. The bill also delays repeal of the excise tax on high-cost insurance plans (the so-called “Cadillac tax”) until 2026. Overall, the bill cuts taxes by $992 billion over 10 years.

A Small Amount of Deficit Reduction

The net deficit reduction of the legislation would be $119 billion over the period 2017–26—somewhat less than the $150 billion reduction estimated by the CBO in March. The House-passed bill added new funds for states to address high-cost cases in the insurance market and to provide more support for maternity care and mental health.

Reduced Insurance Enrollment

The CBO estimates that the number of people going without insurance would rise by 23 million in 2026 under the AHCA. That is about one million more people remaining enrolled in coverage than under the March version of the legislation. The CBO expects that fewer people would purchase nongroup coverage, but more people would enroll in employer plans, compared with the earlier estimate. Medicaid enrollment is expected to decline by 14 million in 2026, which is largely consistent with past estimates. That reduction is a result of rolling back enhanced federal matching funds for the ACA’s Medicaid expansion and eliminating the tax penalties for going uninsured.

Impact Of State Waivers

If the AHCA became law, its impact on the insurance market would depend crucially on how many states obtain a MacArthur waiver and the specific changes in health insurance rules adopted by those states. The CBO’s assumptions about state actions were based on the track record of the states in their regulatory approaches to health insurance prior to the ACA. The CBO also believes that states with limited insurer participation in the ACA’s exchanges, and with rapidly escalating premiums in the nongroup market, would be more likely to seek these regulatory waivers.

Without naming specific states, the CBO assumed that half of the country’s population lives in states that would not request waivers and would continue to enforce the ACA’s rules on essential health benefits and community rating. About one-third of the population lives in states assumed by the CBO to pursue moderate adjustments in their insurance regulations through the waiver option. According to the CBO, such adjustments could include reductions in the essential health benefits package and limited changes in community rating. The remaining one-sixth of the population is assumed to be in states that would adopt more dramatic changes in the ACA’s requirements, including large changes in essential health benefits and much higher premiums charged to less-healthy people.

In 2018 and 2019, the CBO projects that premiums would rise (relative to current law) in all states as the repeal of the individual mandate’s penalty encourages younger and healthier people to exit the market. The higher average cost of a less-healthy risk pool would drive up premiums.

Beginning in 2020, when the waiver option would allow states to begin implementing alternative regulatory approaches, premium changes would depend on what a state decided to do.

In states that do not pursue any changes to the ACA’s approach, the CBO expects premiums to drop by 4 percent by 2026, compared to current law. Two policy changes are responsible for that result. First, the AHCA relaxes the rule requiring insurers to charge older enrollees no more than three times what they charge younger enrollees, resulting in lower premiums for them. Second, the AHCA adopts age-based tax credits that do not vary with the cost of coverage. As a result, many older people will face higher insurance premiums net of the subsidy under the AHCA, shifting the enrolled population toward younger and healthier consumers. The CBO believes the insurance markets would be relatively stable in these states.

In states that adopt moderate changes in market regulations, the CBO expects premiums to fall in 2026 by about 20 percent on average, although there would be great variation among the states. The CBO assumes that most of this reduction would be the result of insurance policies offering fewer benefits. That would mean consumers needing these services would face higher out-of-pocket costs. The CBO also expects the insurance markets in these states to be relatively stable.

In the small number of states that make major adjustments to the ACA’s regulatory structure, the CBO expects premiums in the nongroup market to closely track the health status of the enrollee. Younger and healthier consumers would be able to get policies with much lower premiums compared to current law, and higher-cost enrollees would face much higher premiums. The CBO argues that even accounting for the $138 billion available to the states through the Patient Safety and Stability Fund, the premium shift would be so substantial that many high-cost enrollees would no longer be able to buy coverage at affordable rates. Consequently, the insurance markets in these states would be much less stable than they are under current law.

The CBO also expects the state waiver option to make room for insurance plans that do not provide protection against major medical expenses. For example, such plans might provide up-front reimbursement for some medical expenses but only up to a specified dollar limit. Other plans might cover a narrow range of services that might not include all services necessary to treat a costly injury or illness. Under certain circumstances, the refundable tax credits available under the AHCA could be used to subsidize enrollment in these plans. Overall, the CBO expects a few million people to purchase plans such as these, but the agency does not consider them insured because they remain exposed to major medical expenses.

Is CBO’s Estimate Accurate?

The CBO is frequently criticized for producing inaccurate cost estimates, particularly for legislation that is politically controversial. After the CBO released its latest estimate of the AHCA, the Trump administration immediately pushed back, and others argued that the CBO had seriously misjudged the bill. Not surprisingly, opponents of the Republican reform embraced the most unfavorable parts of the CBO estimate as proof that the bill should be scrapped.

Both the criticism and the praise are misplaced. The CBO’s track record on estimating the impact of health reform is unavoidably mixed. Reform legislation is complex, and the estimates depend on assumptions about responses of consumers, insurers, and providers to a proposal that has not yet been enacted. The agency overstated the number of people who would enroll in ACA exchange plans, but its estimates of overall increases in insurance coverage were close to accurate. It was also fairly accurate on the increase in Medicaid enrollment, although it severely underestimated the cost of that expansion.

We highlight three major concerns about the accuracy of the latest CBO assessment of the AHCA.

An Outdated Baseline

The CBO used its March 2016 baseline to assess the effects of the AHCA. That baseline is out of date. First, it assumes enrollment in the ACA exchanges will rise to 18 million in 2018. That’s not going to happen, given that exchange enrollment was 12.7 million in 2016 but dropped to 12.2 million this year.

Second, the baseline assumes much higher enrollment in future years under Medicaid based on many more states opting into the ACA’s program expansion. In the CBO’s assessment of the AHCA, the agency forecasts there will be some five million people enrolled in Medicaid in 2026 who are not eligible for the program today but who will gain eligibility in the future when states agree to expand their programs. That assumption is questionable at best in the current political environment, with an administration and Congress actively working to stop the flow of federal funds for the expansion population.

The Senate should insist that the CBO update its baseline with more realistic assumptions before assessing any bill under consideration in that chamber.

The Waiver States

There is no right or wrong approach to projecting how many states might pursue waivers under the MacArthur amendment. The CBO’s method combines analysis of past state practices with judgment about what that means for the future. The assumption that half of the states will pursue adjustments to their insurance regulations strikes us as unlikely to be correct.

The political debates in those states will mirror the one occurring at the national level. It is instructive that the House did not directly undo the ACA’s essential health benefits rules and the community rating requirement. Given the strong public support for protecting people with preexisting conditions, the House probably could not have obtained a majority to vote for a version of the AHCA that included direct repeal of those provisions. Instead, the bill kicks the decision to the states, with legislators facing the same political constraints as members of Congress. We expect far fewer states to actually pursue waivers that clearly would require those with elevated health risks to pay more for their coverage.

What Counts As Insurance

Republican health reform intends to shift regulatory control over the insurance market from the federal government back to the states and to give individuals a wider range of choices in health plans. The CBO’s standard for what constitutes coverage that can be counted as health insurance reflects what most people would think should be covered in the case of a major medical event. ACA plans that include high deductibles and tight provider networks satisfy the essential health benefits regulation, but millions of people who could buy such plans choose not to do so. Some already buy more narrowly defined coverage that is more affordable, and that number might grow under the AHCA. It would be preferable if the CBO identified those individuals in their estimate (separately from those considered fully insured). It would be better policy if the AHCA were modified so that everyone had access to affordable catastrophic coverage.

The Problem Is The AHCA, Not The CBO

The Senate is now tasked with producing an alternative to the House-passed AHCA that could gain 50 votes. Senators would be well advised to focus on that difficult job and not be distracted by criticisms of the CBO modeling. The problem with the House bill is not the CBO cost estimate, it is the bill itself. Although specific estimates could vary, there is no reasonable set of assumptions that would lead to a completely different forecast than the one presented in the CBO’s latest estimate.

The House bill has many structural features that are commendable, including the effort to bring fiscal discipline to Medicaid. But failure to provide adequate support would leave too many low-income families unable to buy insurance. That can be fixed with a better approach. Instead of attacking or ignoring the CBO, the Senate should work with the agency to produce a bill that can attract broader public support and that can serve as the basis for future reforms.