CBO score of House GOP healthcare bill wrong on the impact of state waivers

The Congressional Budget Office (CBO) released their much-anticipated fiscal analysis of the House bill to repeal and replace Obamacare yesterday.  The two headline data points show that the bill would leave 23 million more Americans without health insurance and reduce the budget deficit by $119 billion over ten years.

Predictably, supporters of the bill received the CBO analysis with a mountain of skepticism.   CBO projections on insurance exchange enrollment have been wildly off target, at one point projecting 25 million people would be covered by Obamacare exchanges in 2017 compared to the 12.2 million people that actually enrolled.

A critique you likely won’t see in the mainstream press is over how the CBO appears to have relied on a couple articles posted on the Brookings Institute website to analyze the impact of allowing states to waive certain Obamacare regulations.  The articles were written by Matt Fiedler, former Chief Economist of the Council of Economic Advisers in the Obama Whitehouse.   One article focused on how waiving the essential health benefit (EHB) requirement could impact protections against catastrophic losses for people enrolled in large employer plans.  The other article assessed how waiving community rating regulations—the regs that restrict insurers from pricing premiums based on health status—for people who failed to maintain continuous coverage would impact individual insurance markets.

The Brookings analysis on the EHB waiver is flat out wrong and his analysis on waiving community rating, to say the least, exaggerates the possibilities.  Nonetheless, the CBO touts the same two positions without any qualification.

Here’s what the CBO says about how a state waiving EHBs could lower protections against catastrophic losses:

For the large-group market, which generally consists of employers with more than 50 employees, current regulations allow employers to choose the EHB benchmark plan of any state in which they operate. Because of those regulations, a large employer operating in multiple states, including one that elected an EHB waiver, could base all of the plans it offers on the EHB requirements in a state with the waiver. That decision could allow annual and lifetime limits on benefits not included in the state’s EHBs.

Wrong.  If a state chose to specify their own EHBs under a waiver, that choice would not be available to a large employer under current regulations.  Presently, a state may choose an EHB from among a set of benchmark plans.  While this gives states a choice, it also sets a minimum standard for the federal EHB across the country.  Also under current regulations, for the purposes of the annual and lifetime dollar limit restrictions, a large employer may choose from among “one of the base-benchmark plans selected by a State.”  Nothing in the regulations suggests an employer could choose from anything but a benchmark plan.  Thus, an employer could not choose from an EHB specified by a state under a waiver.  It would not be a benchmark plan.

While the CBO got this wrong, they thought the impact would be slight considering “large employers already have significant flexibility.”  The CBO makes a bigger deal about what waiving community rating regulations might mean.

The CBO estimates “that about one-sixth of the population resides in areas in which the nongroup market would start to become unstable beginning in 2020” due to a state’s decision to waive EHBs and, in particular, community rating.  The waiver from community rating would allow insurers to price premiums based on health status for people who don’t maintain continuous coverage.  Here’s how the CBO predicts that such a waiver would impact the market:

CBO and JCT anticipate that most healthy people applying for insurance in the nongroup market in those states would be able to choose between premiums based on their own expected health care costs (medically underwritten premiums) and premiums based on the average health care costs for people who share the same age and smoking status and who reside in the same geographic area (community-rated premiums). By choosing the former, people who are healthier than average would be able to purchase nongroup insurance with relatively low premiums.

CBO and JCT expect that, as a consequence, the waivers in those states would have another effect: Community-rated premiums would rise over time, and people who are less healthy (including those with preexisting or newly acquired medical conditions) would ultimately be unable to purchase comprehensive nongroup health insurance at premiums comparable to those under current law, if they could purchase it at all—despite the additional funding that would be available under H.R. 1628 to help reduce premiums. As a result, the nongroup markets in those states would become unstable for people with higher-than-average expected health care costs. That instability would cause some people who would have been insured in the nongroup market under current law to be uninsured.

This scenario the CBO imagines for one-sixth of the population is, well, preposterous.   At its core, they believe a state waiving community rating will allow healthy people to choose from one of two insurance pools, the community rated pool and the underwritten pool.  Given the freedom, a healthy person will always choose to base their premium on their health underwriting and, thus, leave less healthy people behind in the community-rated pool.

Why is this scenario preposterous?  If a state went the direction the CBO imagines, it would be the state’s choice.  The waiver gives states the freedom to choose several different directions.  Why would the CBO assume a state would choose this direction when a state never chose this type of regulatory structure before Obamacare?  Why choose this direction when, as the CBO points out, there are such obvious pitfalls?

Moreover, while the language of the bill could be much more clear, it’s also reasonable to read the House bill to limit the application of underwriting to only high-risk people, which would stop healthy people from choosing the underwritten pool and messing up the community-rated pool.  This reading makes much more sense in the context of allowing states to establish different ways to cover people with pre-existing conditions that don’t burden the rest of the nongroup market with their high costs. That certainly appeared to be the intent of the waiver.

Admittedly, this is all very complicated stuff, but it’s surprising that the CBO would just run with these assumptions without any qualification.  Hopefully, they take a more discerning look at the Senate bill when it comes around, assuming a Senate bill ever turns even a corner of the way to the finish line.