In a recent update to its projections for Obamacare's cost, the Congressional Budget Office estimated that the net cost of the law has fallen by about $109 billion through 2024. Amidst a multitude of factors, one stands out: a significant reduction in projected exchange subsidies of about $164 billion over 10 years. Indeed, one point that has received quite a bit of attention is the estimate that premiums will increase only 3 percent in 2015.
Why has the cost of subsidies on the exchanges fallen? The CBO doesn’t keep us guessing. Three factors are responsible for the cost-savings, according to the nonpartisan agency.
For one, they now project a healthier than average risk pool – simply put, more healthy people will sign up for coverage. While it is true that as the individual penalty becomes more severe in later years (reaching as high as 2.5 percent of income), more healthy people will sign up (thus keeping premiums down), this is likely to be a salient factor in later years – not now. When pricing their 2015 plans, insurers will not know much about the health status of enrollees – so any effect from a better-than-expected risk pool won’t be visible until later down the road.
The second factor the CBO addresses is the role of another federal backstop program known as transitional reinsurance. Under this program, the federal government effectively transfers money from insurance plans used by large companies to the plans being sold on the federal exchanges. Plans are then paid out from this pool of money if they have high-cost enrollees. In 2014, transitional reinsurance is projected to have reduced premiums by about 10 percent according to the CBO. However, this program will phase out after 2016 – and costs will likely rise.
The third and final element here is perhaps one of the most relevant – plan designs. One way that insurers have managed to keep down premiums (about 15 percent less than CBO projected originally) is by limiting networks, having tighter plan management features, and paying providers lower rates. While CBO projects that these plan designs will be difficult to sustain going forward, if they do survive, they will put significant downward pressure on premiums.
And it’s the last point that conservatives should see as a silver lining in the Obamacare cloud. Higher-deductible plans with narrow networks are typically at the core of much of conservative health care reform. After all, it’s these kinds of plans that help impose the increased transparency and competition into health care markets that free-market advocates want to see.
But that doesn't make Obamacare a free-market success story. Relatively expansive (and expensive) benefit mandates and tight age bands in the law put upward pressure on premiums. Higher prices will lead many healthier uninsured to stay out of the market. As I and my fellow Manhattan Institute colleagues have written before, this effect, along with the high deductible plans available on the exchanges, creates opportunities for conservatives to champion real consumer choice. Reducing some of these mandates, for instance, would allow a greater variety of plan choices, with consumers being able to make more tradeoffs between benefits, deductibles, network size and premiums. While such changes will have to wait until after the midterm elections, these reforms would help move Obamacare more in the direction of patient- and consumer-directed health care -- a win for free-market advocates.Yevgeniy Feyman is a fellow at the Manhattan Institute's Center for Medical Progress.