Yesterday, in its budget and economic outlook for the next decade, the Congressional Budget Office (CBO) substantially changed its short-term Affordable Care Act (ACA) estimates in ways that show the law is performing far worse than expected. CBO’s new projection of 13 million exchange enrollees in 2016 is nearly 40% below previous expectations. CBO’s also projects that the average subsidy per enrollee in 2016 will increase by about 18% relative to its March 2015 ACA estimate—an indication that enrollees are both less healthy and poorer than the agency originally projected.

Additionally, the ACA’s Medicaid expansion is costing far more than projected because of higher enrollment and higher spending per enrollee. The costs of Medicaid expansion almost certainly exceed corresponding benefits given the findings of a recent study by MIT, Harvard, and Dartmouth economists that Medicaid expansion enrollees only receive about 20 to 40 cents of benefit for each dollar of program spending. Overall, CBO’s revision demonstrates that the ACA’s coverage expansion is primarily benefiting people earning less than 200% of the federal poverty level (FPL)—an income equal to $23,540 for a single person—while its costs, largely in the form of higher premiums and taxes and fewer health insurance choices, are widespread.

Lower Than Projected Enrollment, Particularly of Middle Class People

In a column on November 19—the same date the Mercatus Center published my study on how the ACA was underperforming initial expectations—I wrote that CBO would likely need to significantly downgrade the law’s baseline. Like every other organization that modeled the effect of the law, CBO projected far more people would enroll in exchanges than have thus far. These organizations also expected enrollees would be younger, healthier, and earn higher income than has turned out to be the case.

For example, in January 2015, the Urban Institute projected that 36% of 2016 enrollees would have income below 200% of the FPL and 25% of enrollees would have income above 400% of the FPL. Based on the most recent data released by the Department of Health and Human Services, about 64% of 2016 enrollees have income below 200% of the FPL and only 3% earn income above 400% of the FPL.

In its March 2015 estimates, CBO projected 21 million exchange enrollees in 2016 with 15 million of them receiving tax credits to reduce net premiums and 6 million of them earning income too high to qualify for tax credits. In the estimates released yesterday, CBO decreased those projections to just 13 million enrollees—11 million with tax credits and just 2 million without the credits. Therefore, in the last 10 months, CBO has downgraded its overall enrollment expectation by 38%, its expectation of subsidized enrollment by 27%, and its expectation of unsubsidized enrollment by 67%.

I have written extensively about why this has likely happened; the short story is that ACA plans are proving to be unattractive to relatively healthy people with income above 200% of the FPL. These plans generally have far higher premiums and deductibles than pre-ACA individual market plans. While people with income below 200% of the FPL can qualify for subsidies to reduce high ACA plan deductibles and other cost-sharing amounts, people with income above that level generally confront the entire cost.

Even though people with income between 200% and 400% of the FPL generally qualify for tax credits to reduce their premiums and face the prospect of a tax penalty under the individual mandate, the vast majority of the previously uninsured earning income above 200% of the FPL are foregoing exchange plans. In a footnote in yesterday’s report, CBO assumes that most of these people will purchase plans directly from an insurer. However, the ACA outlawed many plans that would otherwise have appealed to this population. Moreover, since people who purchase plans directly from an insurer cannot receive tax credits, purchasing a plan directly from an insurer does not make economic sense for people earning between 200% and 400% of the FPL.

Average Subsidy Cost Increasing

Because of how far enrollment was below initial projections, I wrote the following on November 19: “While the aggregate subsidy amount will go down, the average subsidy amount will likely increase because of higher than expected premiums and a higher percentage of the subsidized enrollees having lower income and thus qualifying for larger subsidies than CBO anticipated.” According to CBO, this will likely be the case in 2016.

CBO has not released exchange enrollment projections beyond 2016, and its projected subsidy cost is partly a function of exchange enrollment. We can, however, compare CBO’s current projection for the cost of subsidies in 2016, to the one it made in March 2015.

In March 2015, CBO projected an aggregate subsidy cost of $53 billion in 2016—which equates to an average subsidy of $3,533 for the 15 million projected subsidized enrollees. (This is not a perfect estimate because CBO uses the fiscal year for spending and the calendar year for enrollment). Yesterday’s report indicates that the agency expects the subsidies will cost $7 billion less because of lower enrollment. This equates to a $46 billion subsidy cost in 2016 for 11 million subsidized enrollees, equating to an average subsidy of $4,181.

This updated average subsidy amount is 18% higher than the average subsidy projected by CBO only ten months ago. The higher average subsidy is likely a reflection of larger overall premiums and that subsidized enrollees have lower average income than CBO previously projected (subsidies increase as income decreases all else equal).

Medicaid Significantly Increasing

In yesterday’s report, CBO estimates that total federal Medicaid spending equaled $350 billion in 2015, $48 billion more than federal Medicaid spending in 2014 and $84 billion more than federal Medicaid spending in 2013. According to CBO, spending is significantly higher than projected because of “higher-than-expected spending and enrollment for newly eligible beneficiaries under the Affordable Care Act.” CBO estimates that average monthly enrollment of newly eligible Medicaid beneficiaries—mostly non-disabled, childless adults—“was 55 percent higher in 2015 than in the previous year—a total of 9.6 million compared with 6.1 million in 2014.”

CBO expects that federal Medicaid spending will increase by $31 billion this year. Moreover, CBO now projects $187 billion in higher federal spending on Medicaid over the next decade relative to last year’s projection.

Takeaway

Relative to its 2015 ACA projections, CBO now expects several million fewer enrollees, even including the fact that Medicaid enrollment is above previous projections. CBO also expects higher federal spending, largely because the ACA Medicaid expansion appears much more costly than CBO expected. The combination of lower enrollment and higher federal spending than expected provides additional evidence that the ACA’s benefits were not worth the corresponding costs.

Correction

A very wise reader pointed out that the original version of this piece compared CBO’s January 2016 projection of mandatory outlays for exchange subsidies (which include risk adjustment and reinsurance payments) with CBO’s March 2015 projection of the deficit impact of the exchange subsidies. Therefore, the previous draft had an erroneously high projected cost of the subsidies and a high average subsidy cost. The numbers now reflect CBO’s statement in its January 2016 economic and budgetary outlook that the federal subsidy cost will decline by an estimated $7 billion over 10 years from previous projections. Since CBO only appears to have updated its ACA baseline for 2016, I attribute the entire $7 billion to 2016 for my calculations above.