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CBO’s Estimate of Repealing Exchange Grants: The Importance of Being Effective

The Congressional Budget Office (CBO) recently released an analysis of a bill that would repeal grants to states under the health reform law to help them establish health insurance purchasing exchanges. Not surprisingly, CBO finds that the bill would reduce federal spending due to the fact that expected grants won’t be provided, to the tune of $1.9 billion over ten years.

But, that’s not the biggest effect on the federal budget. CBO also finds that state exchanges will “face greater challenges in becoming fully operational” and that “the federal government will be required to take responsibility for setting up exchanges in more states than is expected under current law.” According to CBO, this would “temporarily limit the desirability of exchanges as an alternative to other sources of coverage, reduce the capacity of some exchanges to process enrollment and ultimately lower enrollment by an estimated 5 percent to 10 percent below the levels expected under current law between 2014 and 2016.” CBO estimates that two million fewer people would be enrolled in exchanges in 2015 – meaning they wouldn’t have access to tax credits to make insurance more affordable – and about half a million more people would be uninsured. Taking all this into account, the budget office says the net effect on the federal budget would be savings of over $15 billion over ten years.

One thing this budget scoring exercise illustrates is how complex it is to forecast changes in health policy. A seemingly simple proposal to reduce grants to states has tentacles that extend widely, to state legislative actions, to individual decisions about whether to buy insurance, and to employer decisions about what benefits to offer to their workers. Preparing estimates like this is not a simple matter of adding and subtracting a bunch of numbers; it requires judgments about how political leaders and people will respond, and how those actions may in turn trigger further responses.

It also illustrates the somewhat intangible but important factor that effective implementation will play in how well the reform law works. States face decisions about whether or not to operate exchanges or leave that job to the federal government, and then further decisions about how those exchanges will operate. Some states may choose to create exchanges that are aggressive negotiators, while others may decide to implement exchanges that focus instead on facilitating a more open market for insurance.

No matter what direction states go, though, all exchanges – those operated by states and the backup version operated by the federal government – will face one big challenge: getting people enrolled. This is, of course, important to people, in particular those eligible for subsidies to help them purchase insurance or to enroll in Medicaid (since exchanges are required to direct people to Medicaid if they are eligible). It is also important to a well-functioning insurance market. Once insurance is made accessible regardless of pre-existing conditions in 2014, people who are sick will almost certainly take immediate advantage of the opportunity to get coverage. Whether the insurance risk pool is healthy or not will depend on whether exchanges also are effective at encouraging healthy people to enroll. An exchange with low enrollment is likely an exchange with a sicker than average population and high premiums.

Implementation of the Affordable Care Act will undoubtedly take many twists and turns between now and 2014, with legislative and regulatory decisions big and small at the federal level and in the states. The accumulation of these decisions will shape in a significant way how the law plays out and how real people and businesses will see and experience the health insurance system.

- Larry Levitt