The Corner

A Few More Thoughts on the CBO Report

This week’s new Budget and Economic Outlook document from the Congressional Budget Office has gotten a lot of attention, largely for its new projection of Obamacare’s effect on the labor market. But a couple of other, and in some respects related, points regarding what the CBO had to say about Obamacare and about the economy are worth a few more words. 

First, the agency’s overall projection of Obamacare’s coverage effects was largely unchanged from the last time its health analysts looked at the law. The kinds of methodological reconsiderations found in other parts of this document (and more on that below), and which suggest some significant changes in how CBO thinks about the economy, have not at this point been applied to the health law. CBO basically just re-ran its existing model without changing assumptions, altering just a few variables in response to the lower-than-anticipated exchange enrollment at this point. The agency’s health analysts say it will be a few months before enough is known for them to decide if they need to reconsider their basic expectations of the law. That approach is certainly in line with CBO’s usual caution (especially when it comes to getting in the middle of the most heated political controversies of the day).

One consequence of this is that, in analyzing the potential budgetary effects of Obamacare’s risk-corridor program, which CBO analyzed separately for the first time in this document, the health team assumed that the risk-corridor program in Obamacare would mirror the experience of the risk-corridor program in the Medicare prescription-drug benefit, despite enormous differences between the two programs. This led them to project that the risk-corridor program would actually net taxpayers $8 billion over the coming three years, since the Medicare Part D risk-corridor program has come in with a positive balance every year. 

CBO’s health team defends the decision to assess the Obamacare risk corridors this way on grounds of agency policy—that is, CBO tries to base its projections of new programs on the experience of similar existing programs where possible—rather than by actually asserting a near-analogy between the two systems in which these different risk-corridor provisions exist. One analyst also pointed out to me that the language of the Obamacare statute itself says of the risk corridors that “such program shall be based on the program for regional participating provider organizations under part D of title XVIII of the Social Security Act,” or in other words on the Medicare Part D risk-corridor program. 

But of course, basing the structure of the Obamacare risk corridors on those of the prescription-drug benefit doesn’t mean that the systems in which the two operate—on the one hand a regulated private market that needs to establish a balanced risk pool despite highly irrational economic incentives created by federal regulations and on the other a federal entitlement program that provides an additional benefit to a known very-high-risk population—are going to be similar. The nature of the risk faced by insurers in these two programs is quite different, as Peter Suderman suggests here

The very preliminary evidence we so far have from the exchanges gestures toward this difference. Just yesterday, for instance, the insurer Humana projected in an earnings statement that, nationally, it would need to tap Obamacare’s so-called “Three R’s”—reinsurance, risk-adjustment, and risk-corridors—for between $250 and $450 million in Obamacare’s first year. That amounts to an astonishing 25 percent of the company’s projected revenue in the exchanges. As Scott Gottlieb notes at Forbes, Humana attributes such enormous projected losses to the worse-than-expected risk profile of its exchange customers and to the administration’s late-year “fix” allowing some people to extend their 2013 coverage into this year. A recent regulatory filing by Wellpoint in California suggested problems of a similar scale in that state, despite recent comments by both Humana’s and Wellpoint’s CEOs that things were going better than they had anticipated. Insurers Cigna and Aetna have begun to send similar signals. It is too soon to know if other insurers are confronting similar problems, but we can certainly say that insurers in Medicare Part D never did. That doesn’t mean CBO was wrong to score this provision using this method. The agency has its reasons for sticking to methods like this as a matter of consistency and caution. But it should leave us with more than the usual uncertainty about the likelihood of its being right.  

In any case, the CBO’s score of the risk-corridor provision charts a pretty clear path for Republicans who want to protect the public from unlimited exposure to insurer losses in the exchanges. It points toward a bill that would require that outgoing risk-corridor payments not exceed incoming ones, and that they be reduced proportionally until they equal incoming payments if they would otherwise exceed them (an approach that Jim Capretta and I, among others, have proposed). If the Democrats share CBO’s optimistic expectations of the payments balance in the risk-corridor program, they should have no objection to such a bill since it wouldn’t change anything. If they don’t share those expectations then they expect taxpayers to bail out insurers suffering major losses, and they should be made to explain that to voters. 

The most striking and interesting feature of the CBO’s report, though, was not about health care per se but rather the agency’s overall take on the economy. For half a decade now, CBO’s outlook documents have had a kind of “just around the corner” feel. They have suggested that we have to wait a year or so and then the economy will bounce back in a big way and we will make up a lot of lost ground. This document largely abandons that optimism. It is a remarkably bleak assessment of America’s economic prospects, which downgrades its expectations for economic growth and therefore raises its deficit forecasts and its warnings about our medium-term fiscal outlook. The spending fights of the past few years have involved almost exclusively discretionary spending, and they have brought that spending down some, and therefore brought near-term deficits down too. But the deficit is about to start climbing again after next year, CBO warns, and with no end in sight, not because of discretionary spending but because of entitlements. As the report puts it:

In CBO’s baseline, spending is boosted by the aging of the population, the expansion of federal subsidies for health insurance, rising health care costs per beneficiary, and mounting interest costs on federal debt. By contrast, all federal spending apart from outlays for Social Security, major health care programs, and net interest payments is projected to drop to its lowest percentage of GDP since 1940 (the earliest year for which comparable data have been reported).

Of course, all of those factors have been known for some time. The reason CBO now sees them adding up to worse problems than it previously expected is its downgraded economic forecast. And the reason for that downgrade isn’t really anything that has happened in the economy in the months since CBO’s last forecast, but rather a systematic rethinking of the agency’s basic expectations of America’s economic potential—a rethinking that has yielded a pervasive pessimism that expresses itself in almost every element of the CBO’s forecasting. They’re not saying the economy has gotten worse lately, they’re saying they were wrong to think it wasn’t this bad before. 

And here we do get back, in a sense, to the projection that has gotten the most attention in this new report—the one about Obamacare and the labor market. CBO projected that the law would reduce the supply of labor to a degree that would in effect amount, as they put it, to “a decline in the number of full-time-equivalent workers of about 2.0 million in 2017, rising to about 2.5 million in 2024.” This has launched a debate about whether that’s all good or all bad or some of each. But the context in which this decline in the labor force is projected to occur matters a lot. 

In a hearing of the House Budget Committee yesterday, CBO director Douglas Elmendorf was asked by Rep. Diane Black what effect the diminished supply of labor would have on the economy. His answer suggested that the particular reduction in labor participation caused by Obamacare needed to be understood in the context of a larger decline in that measure that was at the heart of the CBO’s increasing pessimism about the economy. “It is the central factor in slowing economic growth,” Elmendorf told her. “After we get out of this current downturn, but later in this decade and beyond, the principal reason why we think the economic growth will be less than it was for most of my lifetime will be a slower rate of growth by the labor force.”

That slower rate of growth is not Obamacare’s doing. But it is made worse by Obamacare. Reforms of the health-care system, including any conservative reform implemented in place of Obamacare, must take account of the need to counteract rather than exacerbate this problem. 

Yuval Levin is the director of social, cultural, and constitutional studies at the American Enterprise Institute and the editor of National Affairs.


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