July 24, 2012

July 24, 2012 | Commentary on Obamacare

The New ACA Score And The Perils Of Letting Cost Estimates Drive Policymaking

If you were expecting the Congressional Budget Office (CBO) recalculation of the Affordable Care Act (ACA) to rival the drama of the Supreme Court decision, you will have been disappointed.  But the new CBO re-estimate underscores the dangers of basing major policy changes on such forecasts.

While the Court caused political shockwaves by declaring the ACA’s “penalty” to be a “tax”, that in itself did not have major implications for the new score.  CBO projects a net reduction in total federal outlays of $84 billion over 10 years (the new total is $1,168 billion) and an increase in the uninsured of about 3 million, when compared with its earlier estimates.  Significant numbers, but not earth-shattering.  The Joint Committee on Taxation provided revenue estimates for the CBO forecast.

But CBO faced enormous challenges in estimating the impact of the ruling, and its seemingly precise estimate clouds the significant guesses it had to make.

The Challenge Facing CBO

Rather than the tax-not-penalty decision, the part of the Court’s ruling with the greatest budgetary implications concerned Medicaid.  It also gave CBO its biggest headache.  The Court struck down the provision requiring states to expand Medicaid coverage to households up to 133 percent of the poverty level.  So CBO had to figure how many states – indeed which states, given different Medicaid coverage pattern today in the states – would decline short-term federal funding for the expansion (what the Wall Street Journal called the “teaser rate”), knowing they would have to pay a portion of the cost in future years.  The governors of several states, including Texas, Florida and South Carolina, have already declared they would refuse the money.

So what could CBO do?  Take such declarations at face value?  Factor in a bit of politics, consult a political crystal ball, and predict what might actually happen in state houses next year? Give a range to show, say, the different effects of all states declining or all agreeing to expand Medicaid?

To compound the scoring challenge, CBO had to project what would happen to newly eligible Medicaid households in states that decline federal money to expand Medicaid.  Some, but not all, would be eligible for subsidies in the new ACA exchanges, depending on household income.  But how many would sign up (adding to subsidy costs, even though they would not have added to federal Medicaid costs)?

According to former CBO Director Douglas Holtz-Eakin, depending on your guess the potential range of budgetary effects would be large.  If the six states currently saying they will not expand Medicaid follow through with that threat, Holz-Eakin estimates the net budget impact would be $22-80 billion between 2014 (when the expansion occurs) and 2021.  But if all states decide the expansion is an offer they must refuse because of the long-term state cost, the impact could be as high $627 billion.

A False Sense Of Certainty

Faced with the uncertainty about state action, CBO declined to give a range (a bad thing).  Instead it avoided second-guessing states (arguably a good thing for people who wear green eyeshades rather than appear on political talk shows) and projected a number based on “the middle of the distribution of possible outcomes.” That’s defensible, in the same sense as a weather forecaster splitting the difference on the chances of thunderstorms next Friday, but it results in a seemingly precise number that is almost certainly wrong and yet gives a false sense of certainty to policymakers.

This case of CBO scoring highlights once again why it is so important for policy to be driven a bit less by budget estimators generating apparently precise numbers.  That leads to policies based on guesses needed for a computer algorithm rather than on judgment and public discourse about the nature and purpose of government.  But alas, Congress insists that CBO come up with one number for its deliberations, not a range or a zone of probability.  And so even though CBO wisely warns that its number “should not be viewed as representing a single definitive interpretation of how the ACA should or will be implemented in light of the Court’s decision,” regrettably it will be.

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First apperead in Health Affairs Blog