Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Playing “What If” with the CBO numbers

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What if the CBO was more than $90 billion off its cost estimate for HR3962 (blog entry here)?  I think it may be, and it is easy to explain why.

Yesterday, I pointed out that the projected non-group enrollments outside of the Exchange were highly implausible.  Specifically, since individual new-sales outside of the Exchange would be made illegal, it seems illogical to project a static or increasing population of individual policy holders outside of the Exchange.

In today’s marketplace, people tend to cycle through individual coverage; as many as 35%-40% of policies terminate before they reach their first anniversary.  We could take all of the CBO assumptions, but simply assume that only 25% of individual policies lapse annually.  The result would be more than $90b in additional costs between 2015-2019, as illustrated in the table below.

The first three lines in the following table are straight from the various CBO reports.  The fourth line simply assumes that 25% of the policies that existed in 2015 lapse in 2016, and so forth through 2019.  I then assumed that those who lapse join the exchange at an average cost equivalent to those already on the Exchange.  The result is a whopping $91 billion difference.

This illustrates two things.  First, we have very little idea what is really going on inside the CBO models, and results this bizarre suggest that more peer review is warranted.  Second, even if the initial CBO model is perfectly fine, tiny tweaks in assumptions can result in massive swings in cost for this sort of program.  I would argue that this program design is inherently risky; the only way to keep the costs even remotely under control is to build a series of firewalls between employer-based coverage and individual coverage (less than 20% of people are even eligible for the Exchanges let alone the subsidies).  If any of these firewalls leak or if any of these assumptions are slightly wrong, we could be in serious fiscal difficulty.

2015 2016 2017 2018 2019 TOTAL
Cost of Subsidy ($b) 82 96 103 111 120 512
Baseline Non-Group Enrollment (m) 14 14 14 14 15 71
CBO Non-Group/Other Enrollment (m) 8 8 8 8 9 41
Reform Mkt w/ 75% Retention (m) 8 6 5 3 3 24
Add’t’l Subsidy Cost ($b) $0 $10 $18 $26 $38 $91
Avg. Subsidy/Subsidized Enrollee 5500 5800 6100 6500 6800
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Written by Victor

October 31, 2009 at 2:35 am

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