On June 26, 2017, the Congressional Budget Office and Joint Committee on Taxation (referred here collectively as CBO) released a cost estimate on the Senate’s Better Care Reconciliation Act (BCRA) of 2017. The JCT separately released an analysis of the revenue effects of the legislation.

The headlines are that the BCRA would reduce spending over the period of 2017-2026 by $321 billion, $202 billion more than the reduction that would result from House American Health Care Act (AHCA). It would also, however, reduce coverage by about 22 million people by 2026, an only slightly smaller coverage loss than under the AHCA, leaving about 49 million people uninsured in that year.

The CBO projects that the BCRA would reduce premiums in the individual market as compared to current law but would dramatically increase out-of-pocket spending for cost-sharing. Indeed, the CBO believes that many lower-income people would not consider the BCRA insurance worth buying despite the bill’s continuation of income-based tax credits. The BCRA would raise the cost of coverage significantly for older people as it reduced it for younger people.

The CBO believes that the six-month waiting period for coverage in the individual market for individuals with gaps in coverage would only slightly increase the number of people covered. The waiting period would have far less effect on coverage than the individual mandate would have if not repealed.

Unpacking The BCRA’s Spending And Revenue Effects

The CBO projects that the BCRA would reduce direct spending by $1.022 trillion over the 2017-2026 period while reducing revenues by $701 billion. (These reductions, and the reduction in coverage, are measured relative to the CBO’s March 2016 baseline, as the CBO has not had time yet to conduct analysis of the BCRA under its January 2017 baseline. The CBO believes that the effects of the BCRA on cost and coverage would be similar using a 2017 baseline).

Medicaid spending would be cut by $772 billion over ten years, and would be $160 billion—26 percent—less in 2026 than under current law. The BCRA would cut spending on tax credits and related coverage provisions by $408 billion. The CBO estimates that the short-term and long-term state stability funds in the BCRA would cost $107 billion.

The federal government would lose $210 billion in individual and employer mandate penalties, while the bill’s tax cuts and changes in tax preferences would cost $541 billion. The JCT estimates that elimination of the additional Medicare payroll tax that the ACA imposed on people with income exceeding $200,000 per year ($250,000 for joint filers) would cost $59 billion; eliminating the Medicare tax the ACA imposed on unearned income for the same wealthy taxpayers would cost $172 billion; and repealing the health insurance provider tax would cost $145 billion.

The CBO predicts that the BCRA would not cause federal budget deficits to increase in any four consecutive 10-year periods beginning in 2027. This is primarily because federal Medicaid expenditures would continue to grow more slowly as tighter growth in per-capita caps was imposed after 2025.

The CBO concluded that the Association Health Plan provisions of the BCRA would limit the application of state insurance regulations, but would not impose additional spending or loss of revenues on the states.  The CBO offers no information as to how these provisions would affect federal revenues or outlays, raising a serious question as to whether they are extraneous, and thus should be stricken, under the Byrd rule.

Unpacking The BCRA’s Coverage Effects

The CBO estimates that in 2018, 15 million more people would be uninsured under the BCRA than under current law, with the number reaching 19 million in 2020 and 22 million in 2026. The decline in enrollment would be disproportionately among people between 50 and 64 years of age and with income less than 200 percent of the federal poverty level. The CBO estimates that enrollment in Medicaid would decrease by 15 million in 2026, about 4 million of whom would be new enrollees who would have been enrolled by states that would have expanded Medicaid had the current law remained in effect. The CBO believes that the repeal of the individual mandate would reduce Medicaid enrollment because people would be less likely to seek out coverage or recertify eligibility (not because they would drop coverage).

The CBO estimates that 7 million fewer people would enroll in individual coverage in 2018, 9 million fewer in 2020, and 7 million fewer in 2026. The decline would be attributable to the end of the individual mandate and to the substantial decrease in the average subsidy for lower-income enrollees, as well as to the fact that some people would lose subsidy assistance altogether. The CBO believes that employer coverage would drop initially because of the mandate repeals, but would return to the coverage levels that would be expected under current law as employers and employees realized that the low-value individual coverage offered under the BCRA was no substitute for employer coverage.

The CBO projects that average premiums would increase 20 percent for 2018 over current law, largely because of the individual mandate penalty repeal, but that they would be only 10 percent higher for 2019 as the stabilization funding kicked in. By 2020, average premiums would be 30 percent lower than under current law because the coverage would be of much lower value. The average actuarial value of coverage under benchmark plans which are used for setting tax credits would drop from 70 percent under current law to 58 percent under the BCRA. Deductibles would be very high under the BCRA, with few if any services offered before the deductible. By 2026, average premiums would be 20 percent lower than under current law as federal subsidies for market stabilization came to an end.

The CBO predicts that net premiums paid by lower-income people after the application of tax credits would be about the same under the BCRA as under current law, but that cost-sharing would be much higher. A 40- year old with an income at 175 percent of the federal poverty level would have paid about $1,700 in 2026 for a silver plan under current law, but would pay $1,600 under the BCRA. Because of the elimination of cost-sharing reductions, however, the actuarial value of the coverage would fall from 87 percent to 58 percent.

Because deductibles would be so high, few low-income people would purchase any plan. In particular, even though the BCRA provides tax credit eligibility for people with incomes below 100 percent of the poverty level, who are now ineligible for any coverage in states that have not expanded Medicaid, these people would face a deductible of about half their yearly income before they could use their coverage. Few would find this coverage worth buying.

Under current law, net premiums for people who qualify for tax credits are the same regardless of age. Under the BCRA, net premiums would in general be higher for older people and lower for younger people. Premiums for individuals without tax credits would cost much more for older people under the BCRA then under the current law because of the BCRA’s 5-to-1 permissible age rating ratio; current law allows only a 3-to-1 age ratio. The CBO estimates that in 2026, a 21-year old earning $68,200 would pay $4,100 for coverage under the BCRA; a 64 year- old, $20,500.

Market Stability Under The BCRA

The CBO believes that the individual market would remain stable under the current ACA as premiums increase because increases are covered for low- and moderate-income enrollees by increased premium tax credits. It recognizes that markets may be unstable under the ACA in some areas of the country, in part because of continuing uncertainty about both the funding of cost-sharing reduction payments and the enforcement of the individual mandate, but this would be the exception.

The CBO also believes that markets would be stable in most states under the BCRA. The CBO believes that the continuation of income-based tax credits, the funding of the cost-sharing reduction payments through 2019, and the BCRA’s stability fund payments to insurers and states would contribute to market stability before 2020. The CBO predicts that markets would remain stable in most states following 2020 because of the continued availability of stabilization funds and premium tax credits.

The CBO predicts, however, that insurers might withdraw from some markets that are sparsely populated as the skimpier tax credits and coverage under the BCRA would draw too few enrollees to support a market. Moreover, the smaller tax credits under the BCRA would draw fewer healthier people into the individual market, causing upward pressure on premiums.

How States Would Likely Use 1332 Waivers Under The BCRA

The CBO projects that as premiums increase, states might obtain 1332 waivers to reduce regulatory requirements (in particular, benefit mandates) or use 1332 waiver funds or their own funds to reduce premiums, restoring market stability. The CBO projects that about half of the population of the US would live in states that pursue 1332 waivers under the BCRA.

The CBO believes that few states would seek changes in the tax credit structure, because the states would not want to take over from the IRS the task of administering the credits. States would seek waivers that increase pass-through funding. Even though waivers are supposed not supposed to increase the deficit, the CBO believes that states would be “optimistic in their estimates of savings,” increasing federal expenditures and the federal deficit.

The CBO projects, however, that waivers would have little effect on the number of people with health insurance coverage. Waivers that allow states to narrow essential health benefits would have the effect of lowering premiums and thus increasing the number of unsubsidized people covered. States might also use pass-through funding to lower premiums further. But employers might reduce coverage in response to lower-premium individual market coverage, and fewer subsidized persons might purchase coverage with fewer benefits.

Waivers might help stabilize markets in some states that used funds to assist people who could not otherwise afford coverage, but could destabilize markets in states that used the funds to help people who could otherwise afford coverage or for other purposes. Moreover, if waivers were used to drop coverage for high-cost items—such as maternity, mental health, and substance use disorder care, or certain prescription drugs—these items could become extremely expensive for those who need them.

How States Would Use The BRCA’s Stabilization Funds

The CBO estimates that virtually all the BCRA short-term stabilization funds would be used to reduce premiums for nongroup market plans, increasing enrollment by those who are not eligible for premium subsidies. It estimates that three quarters of the long-term stabilization funds would be used for the same purpose.

The Effects Of The BCRA’s Waiting Period

The CBO believes that the six-month waiting period that would be imposed by the BCRA on people without continuous coverage would only slightly increase the number of people with coverage. Some individuals would purchase or retain coverage, when they otherwise might not have done so, to avoid a coverage gap and consequent waiting period. Some people might also take up coverage for six months each year and concentrate their medical spending during that period.

On the other hand, some people who would otherwise have had coverage would be unable to get it for six additional months, causing insurers to lose premiums during the waiting period. The CBO predicts that initially the provision would cost insurers more in administrative costs and lost premiums than it would gain them in additional enrollees, but after 2019 increased enrollment would make up for the cost.

What States Would Do Under The BCRA Regarding MLR Requirements

The CBO predicts that about half the population would live in states that would eliminate federal regulation of medical loss ratios, but that some states would allow lower ratios, leading to increased administrative costs and higher federal spending for premium tax credits in states where lack of competition allowed insurers to raise rates. The repeal of the federal MLR would likely have little effect on coverage.

The BCRA’s Effect On Medicaid

The CBO report contains an extensive section on the effects of the BCRA changes in Medicaid which will not be covered in detail here. The CBO projects that the per-capita cap would have a greater effect on some eligibility groups than on others. However, beginning in 2025, when the inflation adjustment for the caps will change to the CPI-U—general inflation, rather than medical inflation—federal expenditure increases would fall behind state cost growth for all categories. The CBO believes that few states would find the BCRA Medicaid block grant option attractive, as it would provide less funding for most than the per-capita cap.

States would react to federal spending cuts by cutting provider rates, dropping optional services, and finding more efficient ways of delivering services, but ultimately they would have to cut enrollment. Ending the enhanced federal match for Medicaid expanded coverage would also likely reduce Medicaid enrollment. Various other Medicaid cuts or program changes discussed by the CBO would affect Medicaid spending to a lesser extent.

Eliminating Planned Parenthood funding for a year would reduce direct spending by $225 million but would substantially reduce access to care in some areas and increase Medicaid direct spending for several thousand additional births by $79 million, for a net savings of $146 million.

The CBO report is surely not good news for Senate Majority Leader Mitch McConnell (R-KY), who has expressed a desire to vote on the BCRA by June 30. On the other hand, it does give him $200 billion to persuade republican senators who are reluctant to vote for the bill, since the Senate merely has to meet the house in deficit reduction. We will see over the next couple of days how McConnell and other senators will respond and whether the Senate will decide to hold off on a vote until July.