www.cbo.gov

CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director

U.S. Congress

Washington, DC 20515

November 30, 2009

Honorable Evan Bayh

United States Senate

Washington, DC 20510

Dear Senator:

The attachment to this letter responds to your request—and the interest expressed 

by many other Members—for an analysis of how proposals being considered by 

the Congress to change the health care and health insurance systems would affect 

premiums paid for health insurance in various markets. Specifically, the 

Congressional Budget Office (CBO) and the staff of the Joint Committee on 

Taxation have analyzed how health insurance premiums might be affected by 

enactment of the Patient Protection and Affordable Care Act, as proposed by 

Senator Reid on November 18, 2009. 

I hope this information is helpful to you. If you have any further questions, please 

contact me or the CBO staff. The primary staff contact for this analysis is Philip 

Ellis.

Sincerely,

Douglas W. Elmendorf

Attachment

cc: Honorable Harry Reid

Majority Leader

Honorable Mitch McConnell

Republican Leader
Congressional Budget Office

An Analysis of Health Insurance Premiums Under the 

Patient Protection and Affordable Care Act

November 30, 2009

There is great interest in how proposals being considered by the Congress to 

change the health care and health insurance systems would affect premiums paid 

for health insurance in various markets. Consequently, the Congressional Budget 

Office (CBO) and the staff of the Joint Committee on Taxation (JCT) have 

analyzed how those premiums might be affected by the Patient Protection and 

Affordable Care Act, an amendment in the nature of a substitute to H.R. 3590, as 

proposed by Senator Reid on November 18, 2009. The analysis looks separately 

at the effects on premiums for coverage purchased individually, coverage 

purchased by small employers, and coverage provided by large employers.

Key Elements of the Proposed Legislation

The proposal includes many provisions that would affect insurance premiums:

• New policies purchased from insurers individually (in the “nongroup” 

market) or purchased by small employers would have to meet several new 

requirements starting in 2014. Policies would have to cover a specified set 

of services and to have an “actuarial value” of at least 60 percent (meaning 

that the plan would, on average, pay that share of the costs of providing 

covered services to a representative set of enrollees). In addition, insurers 

would have to accept all applicants during an annual open-enrollment 

period, and insurers could not limit coverage for preexisting medical 

conditions. Moreover, premiums could not vary to reflect differences in 

enrollees’ health or use of services and could vary on the basis of an 

enrollee’s age only to a limited degree.

• A less extensive set of changes would be implemented more quickly and 

would continue in effect after 2013. Among other changes, health 

insurance plans: could not impose lifetime limits on the total amount of 

services covered; could rescind coverage only for certain reasons; would 

have to cover certain preventive services with no cost sharing; and would 

have to allow unmarried dependents to be covered under their parents’ 

policies up to age 26. Those changes would also apply to new coverage 

provided by large employers, including firms that “self-insure”—meaning 

that the firm, rather than an insurer, bears the financial risk of providing 

coverage. 
2

However, current policies that had been purchased in any of those markets or that 

were offered by self-insured firms would be exempt from all of those changes if 

they were maintained continuously—that is, policies held since the date of 

enactment of the legislation would be “grandfathered.” 

In addition, the proposal would: establish a mandate for most legal residents of 

the United States to obtain health insurance; set up insurance “exchanges” 

through which certain individuals and families could receive federal subsidies to 

substantially reduce the amount they would pay to purchase that coverage; make a 

public insurance plan available through those exchanges in certain states; penalize 

certain individuals if they did not obtain insurance coverage and penalize certain 

employers if their workers received subsidies through the exchanges; provide tax 

credits to certain small employers that offer coverage to their workers; 

significantly expand eligibility for Medicaid; substantially reduce the growth of 

Medicare’s payment rates for most services (relative to the growth rates projected 

under current law); levy an excise tax on insurance plans with relatively high 

premiums; impose fees on insurers and on manufacturers and importers of certain 

drugs and medical devices; and make various other changes to the federal tax 

code and to Medicare, Medicaid, and other federal programs. Each of those 

components of the legislation has the potential to affect the premiums that are 

charged for insurance, directly or indirectly; some would increase premiums, and 

others would decrease them. 

Overview of the Analysis

In general, the premium for a health insurance policy equals the average amount 

that an insurer expects to pay for services covered under the plan plus a loading 

factor that reflects the insurer’s administrative expenses and overhead (including 

any taxes or fees paid to the government) and profits (for private plans). An 

insurer’s costs for covered services reflect the scope of benefits that are covered, 

the plan’s cost-sharing requirements, the enrollees’ health status and tendency to 

use medical services, the rates at which providers are paid, and the degree of 

benefit management the insurer uses to restrain spending. Although the factors 

affecting premiums are complex and interrelated—and thus can be difficult to 

disentangle—this analysis groups the effects of the proposal on premiums into 

three broad categories: 

• Differences in the amount of insurance coverage purchased, 

• Differences in the price of a given amount of insurance coverage for a 

given group of enrollees, and 

• Differences in the types of people who obtain coverage in each insurance 

market.

CBO and JCT estimated the effect of the legislation on premiums in three broad 

insurance markets—nongroup, small group, and large group—as well as the 
3

contributions to the changes in premiums from each of those three sources of 

change. Several aspects of the analysis bear emphasis:

• The analysis focuses on the effects of the legislation on the average 

premium per person—that is, per covered life, including dependents 

covered by family policies. That approach provides an integrated measure 

of the impact on premiums for single coverage and family coverage, and 

those effects are expressed as percentage changes in average premiums. 

The analysis also summarizes the effects of the proposal on the dollar cost 

of the average premium per policy (rather than per insured person) and 

presents those effects separately for individual and family policies in each 

market.1

• Many individuals and families would experience changes in premiums 

that differed from the changes in average premiums in their insurance 

market.2 As explained below, some provisions of the legislation would 

tend to decrease or increase the premiums paid by all insurance enrollees, 

while other provisions would tend to increase the premiums paid by 

healthier enrollees relative to those paid by less healthy enrollees or would 

tend to increase the premiums paid by younger enrollees relative to those 

paid by older enrollees. As a result, some individuals and families within 

each market would see changes in premiums that would be larger or 

smaller than, or be in the opposite direction of, the estimated average 

changes.

• The analysis examines the effects of the proposal in 2016 in order to 

indicate the impact that it would have once its provisions were fully

implemented. To focus on permanent elements of the legislation, however, 

the estimates exclude the effect of the reinsurance that would be provided 

for new nongroup plans between 2014 and 2016 only (which would be 

funded by an assessment on insurers).

• The analysis focuses on the effects of the legislation on total health 

insurance premiums that would be charged to individuals or employers 

before accounting for premium subsidies or the small business tax credit. 

The analysis also reports the effects of the legislation on the amounts the 

purchasers would ultimately have to pay, after accounting for those two 

forms of assistance. However, even when examining unsubsidized 

 1 In some cases, the translation from premiums per person to premiums per policy is complex. To 

the extent that proposals change the average number of enrollees in a family policy, the premium 

per person in family coverage could increase even as the premium per policy decreased (for 

example, if fewer children were covered); conversely, the average premium per person could 

decrease even as the premium per policy increased (for example, if more children were covered). 

2 Consistent with CBO and JCT’s earlier estimate of the coverage and budgetary effects of the 

insurance coverage provisions in this proposal, this analysis addresses coverage of the nonelderly 

resident population. 
4

premiums, the analysis incorporates the effects of those subsidies (as well 

as existing tax preferences) on the number and types of people who would 

obtain coverage in each market, because those effects would have an 

important impact on the total premiums charged. 

• The analysis does not incorporate potential effects of the proposal on the 

level or growth rate of spending for health care that might stem from 

increased demand for services brought about by the insurance expansion 

or from the development and dissemination of less costly ways to deliver 

care that would be encouraged by the proposal. The impact of such 

“spillover” effects on health care spending and health insurance premiums 

is difficult to quantify precisely, but the effect on premiums in 2016 would 

probably be small. 

This analysis contains several sections. The next section summarizes the findings. 

The following three sections describe the estimated effects of the legislation on 

total premiums paid to insurers through its effects on the amount of insurance 

coverage obtained, the price of a given amount of insurance coverage for a given 

group of enrollees, and the type of people who obtain coverage. A subsequent 

section analyzes the effect of the proposal on the net cost of obtaining insurance, 

taking into account both the subsidies that would be available to individuals for 

insurance purchased through the exchanges and the tax credits that would be 

provided to small businesses. The penultimate section discusses the effects of the 

excise tax on insurance policies with relatively high premiums (the effects of 

which are accounted for separately because they would apply only to a portion of 

the market for employment-based insurance in 2016). A final section briefly 

discusses some potential effects of the proposal that are not included in the 

quantitative analysis.

Summary of Findings

The effects of the proposal on premiums would differ across insurance markets 

(see Table 1). The largest effects would be seen in the nongroup market, which 

would grow in size under the proposal but would still account for only 17 percent 

of the overall insurance market in 2016. The effects on premiums would be much 

smaller in the small group and large group markets, which would make up 

13 percent and 70 percent of the total insurance market, respectively. 

Nongroup Policies

CBO and JCT estimate that the average premium per person covered (including 

dependents) for new nongroup policies would be about 10 percent to 13 percent 

higher in 2016 than the average premium for nongroup coverage in that same year 

under current law. About half of those enrollees would receive government 

subsidies that would reduce their costs well below the premiums that would be 

charged for such policies under current law.
Table 1.

Nongroupa Small Groupb Large Groupc

Distribution of Nonelderly Population Insured in These

 Markets Under Proposal 17 13 70

Differences in Average Premiums Relative to Current Law

 Due to:

 Difference in Amount of Insurance Coverage +27 to +30 0 to +3 Negligible

 Difference in Price of a Given Amount of Insurance

 Coverage for a Given Group of Enrollees -7 to -10 -1 to -4 Negligible

 Difference in Types of People with Insurance

 Coverage -7 to -10 -1 to +2 0 to -3

Total Difference Before Accounting for Subsidies +10 to +13 +1 to -2 0 to -3

Effect of Subsidies in Nongroup and Small Group Markets

Share of People Receiving Subsidiesd 57 12 n.a.

For People Receiving Subsidies, Difference in Average

 Premiums Paid After Accounting for Subsidies -56 to -59 -8 to -11 n.a.

Effect of Excise Tax on High-Premium Plans Sponsored

 by Employers

Share of People Who Would Have High-Premium Plans

 Under Current Law n.a. 19

For People Who Would Have High-Premium Plans Under

 Current Law, Difference in Average Premiums Paide n.a. -9 to -12

Memorandum

Number of People Covered Under Proposal (Millions) 32 25 134

Source: Congressional Budget Office and the staff of the Joint Committee on Taxation.

Notes:

a. 

 b.

c.

d.

 

e.

 

 

 5

The effect of the tax includes both the increase in premiums for policies with premiums remaining above the excise tax 

threshold and the reduction in premiums for those choosing plans with lower premiums.

The large group market includes people covered in plans sponsored by firms with more than 50 employees.

The small group market includes people covered in plans sponsored by firms with 50 or fewer employees.

n.a. = not applicable. 

Effect of Senate Proposal on Average Premiums for Health Insurance in 

2016

Percentage, by Market

The nongroup market includes people purchasing coverage individually either in the proposed insurance exchanges or in the 

individual insurance market outside the insurance exchanges.

Premium subsidies in the nongroup market are those available through the exchanges. Premium subsidies in the small group 

market are those stemming from the small business tax credit.
6

That difference in unsubsidized premiums is the net effect of three changes: 

• Average premiums would be 27 percent to 30 percent higher because a 

greater amount of coverage would be obtained. In particular, the average 

insurance policy in this market would cover a substantially larger share of 

enrollees’ costs for health care (on average) and a slightly wider range of 

benefits. Those expansions would reflect both the minimum level of 

coverage (and related requirements) specified in the proposal and people’s 

decisions to purchase more extensive coverage in response to the structure 

of subsidies. 

• Average premiums would be 7 percent to 10 percent lower because of a 

net reduction in costs that insurers incurred to deliver the same amount of 

insurance coverage to the same group of enrollees. Most of that net 

reduction would stem from the changes in the rules governing the 

nongroup market. 

• Average premiums would be 7 percent to 10 percent lower because of a 

shift in the types of people obtaining coverage. Most of that change would 

stem from an influx of enrollees with below-average spending for health 

care, who would purchase coverage because of the new subsidies to be 

provided and the individual mandate to be imposed.3

Average premiums per policy in the nongroup market in 2016 would be roughly 

$5,800 for single policies and $15,200 for family policies under the proposal, 

compared with roughly $5,500 for single policies and $13,100 for family policies 

under current law.4

Those figures indicate what enrollees would pay, on average, not accounting for 

the new federal subsidies. The majority of nongroup enrollees (about 57 percent)

would receive subsidies via the new insurance exchanges, and those subsidies, on 

average, would cover nearly two-thirds of the total premium, CBO and JCT 

The weighted average of the differences in those amounts 

equals the change of 10 percent to 13 percent in the average premium per person

summarized above, but the percentage increase in the average premium per policy

for family policies is larger and that for single policies is smaller because the 

average number of people covered per family policy is estimated to increase 

under the proposal. The effects on the premiums paid by some individuals and 

families could vary significantly from the average effects on premiums.

 3 Although the effects of each factor should be multiplied rather than added in order to generate 

the total effect on premiums, there are also interactions among the three factors that make the sum 

of the individual effects roughly equal to the total effect. The ranges shown for the likely effects of 

each factor and for the likely overall effect on premiums were chosen to reflect the uncertainties 

involved in the estimates; however, the actual effects could fall outside of those ranges. 

4 Because of an error, the figures for average nongroup premiums in 2016 under current law that 

were reported in CBO’s September 22, 2009, letter to Senator Baucus on this subject (which had 

been reported as being about $6,000 for single coverage and about $11,000 for family coverage) 

were not correct. 
7

estimate. Thus, the amount that subsidized enrollees would pay for nongroup

coverage would be roughly 56 percent to 59 percent lower, on average, than the 

nongroup premiums charged under current law. Among nongroup enrollees who 

would not receive new subsidies, average premiums would increase by somewhat 

less than the 10 percent to 13 percent difference for the nongroup market as a 

whole because some factors discussed below would have different effects for 

those enrollees than for those receiving subsidies.

The amount of subsidy received would depend on the enrollee’s income relative 

to the federal poverty level (FPL) according to a specified schedule (see Table 2,

appended).5

The legislation would have much smaller effects on premiums for employmentbased coverage, which would account for about five-sixths of the total health 

insurance market. In the small group market, which is defined in this analysis as 

consisting of employers with 50 or fewer workers, CBO and JCT estimate that the 

change in the average premium per person resulting from the legislation could 

range from an increase of 1 percent to a reduction of 2 percent in 2016 (relative to 

current law).

Under the proposal, the subsidy levels in each market would be tied 

to the premium of the second cheapest plan providing the “silver” level of 

coverage (that is, paying 70 percent of enrollees’ covered health care costs, on 

average). CBO and JCT have estimated that, in 2016, the average premium 

nationwide for those “reference plans” would be about $5,200 for single coverage 

and about $14,100 for family coverage. The difference between those figures and 

the average nongroup premiums under the proposal that are cited above ($5,800 

and $15,200, respectively) reflects the expectation that many people would opt for 

a plan that was more expensive than the reference plan, to obtain either a higher 

amount of coverage or other valued features (such as a broader network of 

providers or less tightly managed benefits). 

Employment-Based Coverage

6 In the large group market, which is defined here as consisting of 

employers with more than 50 workers, the legislation would yield an average 

premium per person that is zero to 3 percent lower in 2016 (relative to current 

law). Those overall effects reflect the net impact of many relatively small 

changes, some of which would tend to increase premiums and some of which 

would tend to reduce them (as shown in Table 1).7

 5 Table 2 reproduces the table included in Congressional Budget Office, letter to the Honorable 

Harry Reid providing an analysis of subsidies and payments at different income levels under the 

Patient Protection and Affordable Care Act (November 20, 2009). 

6 Under the proposal, the small group market in 2016 would be defined to include firms with 100 

or fewer employees, but the threshold for the exemption from the penalties imposed on employers 

would be set at 50 full-time employees. Because the proposal would have similar effects on 

premiums for large and small employers, reclassifying firms with 51 to 100 workers as small 

employers for purposes of this analysis would probably have little effect on the overall results, 

though the factors affecting premiums for those firms would be somewhat different. 

7 Because the aggregate amount of premiums for employment-based plans is large, even small 

percentage changes can have noticeable effects on the federal budget through their effects on the 

amount of compensation excluded from taxation because of the tax preference that applies to those 

premiums.
8

By CBO and JCT’s estimate, the average premium per policy in the small group 

market would be in the vicinity of $7,800 for single policies and $19,200 for 

family policies under the proposal, compared with about $7,800 and $19,300 

under current law. In the large group market, average premiums would be roughly 

$7,300 for single policies and $20,100 for family policies under the proposal, 

compared with about $7,400 and $20,300 under current law.8

The reductions in premiums described above also exclude the effects of the excise 

tax on high-premium insurance policies offered through employers, which would 

have a significant impact on premiums for the affected workers but which would 

affect only a portion of the market in 2016.

As in the nongroup 

market, the effects on the premiums paid by some people for coverage provided 

through their employer could vary significantly from the average effects on 

premiums, particularly in the small group market. 

Those figures do not include the effects of the small business tax credit on the 

cost of purchasing insurance. A relatively small share (about 12 percent) of 

people with coverage in the small group market would benefit from that credit in 

2016. For those people, the cost of insurance under the proposal would be about 

8 percent to 11 percent lower, on average, compared with that cost under current 

law. 

9 Specifically, an estimated 19 percent 

of workers with employment-based coverage would be affected by the excise tax 

in that year. Those individuals who kept their high-premium policies would pay a 

higher premium than under current law, with the difference in premiums roughly 

equal to the amount of the tax. However, CBO and JCT estimate that most people 

would avoid the cost of the excise tax by enrolling in plans that had lower 

premiums; those reductions would result from choosing plans that either pay a 

smaller share of covered health care costs (which would reduce premiums directly 

as well as indirectly by leading to less use of covered medical services), manage

benefits more tightly, or cover fewer services.10

 8 Those calculations also reflect an expectation that a large share of enrollees in employmentbased plans would be in grandfathered plans throughout the 2010–2019 period.

9 Beginning in 2013, insurance policies with relatively high premiums would be subject to a

40 percent excise tax on the amount by which the premiums exceeded a specified threshold. That

threshold would be set initially at $8,500 for single policies and $23,000 for family policies (with 

certain exceptions); after 2013, those amounts would be indexed to overall inflation plus 

1 percentage point.

10 CBO and JCT assume that, if employers reduce the amount of compensation they provide in the 

form of health insurance (relative to current-law projections), offsetting changes will occur in 

other forms of compensation, which are generally taxable.

On balance, the average premium 

among the affected workers would be about 9 percent to 12 percent less than 

under current law. Those figures incorporate the other effects on premiums for 

employment-based plans that were summarized above. 
9

Uncertainty Surrounding These Estimates

The analysis presented here reflects the cost estimate for the legislation that CBO 

and JCT provided on November 18. The same substantial degree of uncertainty 

that surrounds CBO and JCT’s estimates of the impact that the proposal would 

have on insurance coverage rates and the federal budget also accompanies this 

analysis of the proposal’s effects on premiums. Some components of those effects 

are relatively straightforward to estimate, such as the effect of imposing specific 

fees or the effect of a change in the amount of coverage purchased because of 

requirements for minimum coverage; however, estimating effects that depend 

heavily on how enrollees, insurers, employers, or other key actors would 

respond—to such things as the changes in the market rules for nongroup policies 

or the excise tax on high-premium policies—involve greater uncertainty. The 

projections of average premiums in each market under current law are also 

uncertain. 

Differences in the Amount of Coverage Purchased

One key factor contributing to the differences in average insurance premiums 

under the proposal is differences in the average amount of coverage purchased. 

Those differences reflect differences in both the scope of insurance coverage—the 

benefits or services that are included—and in the share of costs for covered 

services paid by the insurer—known as the actuarial value. With other factors 

held equal, insurance policies that cover more benefits or services or have a 

higher actuarial value (by requiring smaller copayments or deductibles) have 

higher premiums, while policies that cover fewer benefits or services or specify 

larger copayments or deductibles have lower premiums. 

The main elements of the legislation that would affect the amount of coverage 

purchased are the requirement that all new policies in the nongroup and small 

group markets cover at least a minimum specified set of benefits; the requirement 

that such policies have a certain minimum actuarial value; and the design of the 

federal subsidies, which would encourage many enrollees in the exchanges to join 

plans with an actuarial value above the required minimum. (The excise tax on 

high-premium plans would also affect the amount of coverage purchased; the 

impact of that tax is discussed in a separate section of this analysis.) Those 

provisions would have a much greater effect on premiums in the nongroup market 

than in the small group market, and they would have no measurable effect on 

premiums in the large group market. 

Specifically, because of the greater actuarial value and broader scope of benefits 

that would be covered by new nongroup policies sold under the legislation, the 

average premium per person for those policies would be an estimated 27 percent 

to 30 percent higher than the average premium for nongroup policies under 

current law (with other factors held constant). The increase in actuarial value 

would push the average premium per person about 18 percent to 21 percent above 

its level under current law, before the increase in enrollees’ use of medical care 

resulting from lower cost sharing is considered; that induced increase, along with 
10

the greater scope of benefits, would account for the remainder of the overall 

difference. 

In the small group market, the greater actuarial value and broader scope of 

benefits provided for in the legislation would increase the average premium per 

person by about zero to 3 percent (leaving aside the effect of the excise tax on 

high premium plans, which is discussed separately, and holding other factors 

constant). Those requirements would have no noticeable effect on premiums in 

the large group market (again, excluding the effect of the high-premium excise 

tax). 

A Broader Scope of Benefits Would Increase Nongroup Premiums

Under the legislation, new nongroup policies would cover a broader scope of 

benefits than are projected to be covered by such policies, on average, under 

current law. In particular, the legislation would require all new nongroup policies 

to cover a specified set of “essential health benefits,” which would be further 

delineated by the Secretary of Health and Human Services (HHS) and would be 

required to match the scope of benefits provided by typical employment-based 

plans. As a result, new nongroup policies would cover certain services that are 

often not covered by nongroup policies under current law, such as maternity care, 

prescription drugs, and mental health and substance abuse treatment. Moreover, 

nongroup insurers would be prohibited from denying coverage for preexisting 

conditions, so premiums would have to increase to cover the resulting costs. 

An additional consideration relates to state-mandated benefits. Under the 

proposal, states that mandated coverage of benefits beyond those required by the 

new federal rules would have to pay any costs of subsidizing those additional 

benefits. CBO and JCT assumed that, to the extent that states continued to 

mandate such benefits, they would make the resulting payments directly to 

insurers—so those costs would not be reflected in the premiums that enrollees 

observed when shopping for insurance in the exchanges. The reduction in 

premiums (relative to those under current law) resulting from this provision

would be relatively small because many benefits that states mandate are already 

provided by typical employment-based plans and thus would be included in the 

“essential health benefits” that the proposal would require nongroup policies to 

cover.

11

 11 For an additional discussion of the average incremental cost of state-mandated benefits, see 

Congressional Budget Office, 

The legislation would further require that policies sold in the small group market 

cover the same minimum set of benefits as those sold in the nongroup market. 

That requirement would have relatively little effect on premiums in the small 

group market, however, because most policies sold in that market already cover 

those services and would continue to cover them under current law. Further, small 

group policies that are maintained continuously would be grandfathered under the 

proposal. 

Key Issues in Analyzing Major Health Insurance Proposals

(December 2008), p. 61. 
11

A Greater Actuarial Value Would Increase Nongroup Premiums

Under the legislation, new nongroup policies purchased after 2013 would have a 

substantially greater actuarial value, on average, than nongroup policies 

purchased under current law. Policies sold in the nongroup market are expected to 

have an average actuarial value of about 60 percent under current law, and new 

nongroup policies would be required to have an actuarial value of at least 

60 percent (the level specified for the “bronze” plan) under the proposal. 

However, federal premium subsidies would be tied to a “reference premium” 

equal to the premium of the second lowest cost “silver” plan, which would have 

an actuarial value of 70 percent, and plans would also be available with actuarial 

values of 80 percent (“gold” plan) and 90 percent (“platinum” plan).12

People who received premium subsidies would be able to buy a plan whose 

premium exceeded the reference premium, although they would have to pay the 

entire additional cost of that more expensive plan. With the expected enrollment 

choices of people with subsidies and people without subsidies taken into account, 

the average actuarial value of nongroup policies purchased is estimated to be 

roughly 72 percent. The increases in actuarial value relative to that under current 

law would increase the premiums for those policies, because the policies would 

cover a greater proportion of their enrollees’ spending on medical care. Of course, 

the increases in actuarial value would also reduce enrollees’ expected out-ofpocket spending on copayments and deductibles, particularly for enrollees who 

used more medical services than average. The reduced cost sharing would lead to 

greater use of medical services, which would tend to push premiums up further.13

Among nongroup enrollees who would not receive new subsidies, the average 

actuarial value of their coverage would not differ as sharply from the average for 

the nongroup market under current law. Some would choose to enroll in a “young 

invincibles” plan to be offered under the proposal; that plan would have relatively 

high deductibles and a relatively low actuarial value (estimated to be less than 

50 percent), and the premium would be correspondingly low. (That plan would 

generally not be attractive to individuals who could receive premium subsidies for 

more extensive coverage.) Moreover, if they wanted to, current policyholders in 

the nongroup market would be allowed to keep their policy with no changes, and 

the premiums for those policies would probably not differ substantially from 

current-law levels. But because of relatively high turnover in that market (as well 

as the incentives for many enrollees to purchase a new policy in order to obtain 

 

 12 Enrollees with income below 200 percent of the FPL would receive subsidies for cost sharing to 

increase the overall actuarial value of their coverage to either 80 percent or 90 percent. However, 

the plan in which they enrolled would have a premium that reflects an actuarial value of 

70 percent, and that premium was used in the calculation of the average premium under the 

proposal.

13 The increase in spending for health care that would arise when uninsured people gained 

coverage is accounted for separately; see the discussion below. For a discussion of the impact that 

cost sharing has on spending for health care and related considerations, see Congressional Budget 

Office, Key Issues, pp. 61–62, 71–76, and 110–112. 
12

subsidies), CBO and JCT estimate that relatively few nongroup policies would 

remain grandfathered by 2016. 

Effects on Premiums for Employment-Based Plans Would be Much Smaller

The legislation would impose the same minimum actuarial value for new policies 

in the small group market as in the nongroup market. That requirement would 

have a much smaller effect on premiums in the small group market, however, 

because the great majority of policies sold in that market under current law have 

an actuarial value of more than 60 percent. Essentially all large group plans have 

an actuarial value above 60 percent, so the effect on premiums in that market 

would be negligible. In sum, the greater actuarial value and broader scope of 

benefits in the legislation would increase the average premium per person in the 

small group market by about zero to 3 percent (with other factors held constant). 

Those requirements would have no significant effect on premiums in the large 

group market. 

Differences in the Price of a Given Amount of Coverage 

for a Given Population

A second broad category of differences in premiums encompasses factors that 

reflect an “apples-to-apples” comparison of the average price of providing 

equivalent insurance coverage for an equivalent population under the legislation 

and under current law.14 The main provisions of the legislation that fall into this 

category are the new rules for the insurance market, including the establishment 

of exchanges and availability of a public plan through those exchanges, which 

would reduce insurers’ administrative costs and increase slightly the degree of 

competition among insurers, and several new fees that would be imposed on the 

health sector, which would tend to raise insurance premiums.15

Some observers have argued that private insurance premiums would also be 

affected by changes in the extent of “cost shifting”—a process in which lower 

rates paid to providers for some patients (such as uninsured people or enrollees in 

government insurance programs) lead to higher payments for others (such as 

privately insured individuals). However, the effect of the proposal on premiums 

through changes in cost shifting seems likely to be quite small because the 

proposal has opposing effects on different potential sources of cost shifting, and 

 14 In this description, “equivalent coverage” means policies that have the same scope of benefits 

and cost-sharing requirements. The benefits received by enrollees in plans with equivalent 

coverage also depend on factors such as the benefit management being used and the size and 

composition of the provider network.

15 The effect of the excise tax on health insurance plans with relatively high premiums is discussed 

separately, below. Also, to focus on permanent elements of the legislation, this analysis does not 

include the effect of the reinsurance that would be provided for new nongroup plans between 2014 

and 2016 only. Those payments would be financed by a fee levied on all private insurers, so the 

effects would differ by market but the overall impact on premiums would be modest. 
13

the total amount of cost shifting in the current health care system appears to be 

modest relative to the overall cost of health insurance.

CBO and JCT estimate that the elements of the legislation that would change the 

price of providing a given amount of coverage for a given population would, on 

net, reduce the average premium per person for nongroup coverage in 2016 by 

about 7 percent to 10 percent relative to the amount under current law. Those 

elements of the legislation would reduce the average premium per person in the 

small group market by about 1 percent to 4 percent and would not have a 

measurable impact on premiums in the large group market. 

New Market Rules Would Reduce Administrative Costs

Compared with plans that would be available in the nongroup market under 

current law, nongroup policies under the proposal would have lower 

administrative costs, largely because of the new market rules:16

• The influx of new enrollees in response to the individual mandate and new 

subsidies—combined with the creation of new insurance exchanges—

would create larger purchasing pools that would achieve some economies 

of scale. 

• Administrative costs would be reduced by provisions that require some 

standardization of benefits—for example, by limiting variation in the 

types of policies that could be offered and prohibiting “riders” to 

insurance policies (which are amendments to a policy’s terms, such as 

coverage exclusions for preexisting conditions); insurers incur 

administrative costs to implement those exclusions.

• Administrative costs would be reduced slightly by the general prohibition 

on medical underwriting, which is the practice of varying premiums or 

coverage terms to reflect the applicant’s health status; nongroup insurers 

incur some administrative costs to implement underwriting. 

• Partly offsetting those reductions in administrative costs would be a 

surcharge that exchange plans would have to pay under the proposal to 

cover the operating costs of the exchanges.

In the small group market, some employers would purchase coverage for their 

workers through the exchanges.17

 16 Those market rules would also affect premiums by changing the scope of coverage provided and 

the types of people who obtain coverage, as discussed in other sections.

17 In 2016, states would have to give all employers with 100 or fewer employees the option to 

purchase coverage through the exchanges. States could give larger employers that option starting 

in 2017. However, CBO and JCT expect that few large firms would take that option if offered 

because their administrative costs would generally be lower than those of nongroup policies that 

would be available in the exchanges. 

Such policies would have lower administrative 

costs, on average, than the policies those firms would buy under current law, 
14

particularly for very small firms.18

One other feature of the proposal would also put a modicum of downward 

pressure on average premiums in the exchanges—namely, the provisions allowing 

exchange administrators to act as “prudent purchasers” when reviewing and 

approving the proposed premiums of potential insurers.

The primary sources of administrative cost 

savings for small employers would be the economies of scale and relative

standardization of benefits in the exchanges noted above; currently, the use of 

exclusions for preexisting conditions is rare in the small group market, so the 

rules affecting coverage of those conditions would have only a small effect on 

administrative costs in that market. 

In addition, the administrative simplification provisions of the legislation would 

require the Secretary of HHS to adopt and regularly update standards for 

electronic administrative transactions such as electronic funds transfers, claims 

management processes, and eligibility verification. In CBO and JCT’s estimation, 

those provisions would reduce administrative costs for insurers and providers, 

which would result in a modest reduction in premiums in all three broad insurance 

markets.

Increased Competition Would Slightly Reduce Premiums in the Nongroup 

Market 

The exchanges would enhance competition among insurers in the nongroup 

market by providing a centralized marketplace in which consumers could 

compare the premiums of relatively standardized insurance products. The 

additional competition would slightly reduce average premiums in the exchanges 

by encouraging consumers to enroll in lower-cost plans and by encouraging plans 

to keep their premiums low in order to attract enrollees. In particular, insurers 

probably would adopt slightly stronger benefit management procedures to restrain 

spending or would slightly reduce the rates they pay providers. Those small 

employers that purchased coverage through the exchanges would see similar 

reductions in premiums because of the increased competition among plans.

19

CBO and JCT’s analysis of exchange premiums has also taken into account the 

availability of a public plan through those exchanges in some states. Premiums for 

the public plan as structured under the proposal would typically be somewhat 

Although the 

administrators’ authority would be limited, evidence from the implementation of 

an exchange system in Massachusetts suggests that the existence of such authority 

would tend to reduce premiums slightly. 

 18 Among small employers, administrative costs decline as a share of premiums as the size of the 

firm increases. Thus, the smallest employers would be most likely to see lower administrative 

costs for policies in the exchanges than what they would be charged under current law.

19 Specifically, the legislation would require insurers seeking to participate in the exchanges to 

submit a justification for any premium increase prior to implementing it; the legislation also would 

give exchanges the authority to take that information into consideration when determining whether 

to make a plan available through the exchanges.
15

higher than the average premiums of private plans offered in the exchanges.20

• A public plan as structured in the proposal would probably attract a 

substantial number of enrollees, in part because it would include a broad 

network of providers and would be likely to engage in only limited 

management of its health care benefits. (CBO and JCT estimate that total 

enrollment in the public plan would be about 3 million to 4 million in 

2016.) As a result, it would add some competitive pressure in the 

exchanges in areas that are currently served by a limited number of private 

insurers, thereby lowering private premiums to a small degree. 

By 

itself, that development would tend to increase average premiums in the 

exchanges—but a public plan would probably tend to reduce slightly the

premiums of the private plans against which it is competing, for two reasons: 

• A public plan is also apt to attract enrollees who are less healthy than 

average (again, because it would include a broad network of providers and 

would probably engage in limited management of benefits). Although the 

payments that all plans in the exchanges receive would be adjusted to 

account for differences in the health of their enrollees, the methods used to 

make such adjustments are imperfect. As a result, the higher costs of those 

less healthy enrollees in the public plan would probably be offset partially 

but not entirely; the rest of the added costs would have to be reflected in 

the public plan’s premiums. Correspondingly, the costs and premiums of 

competing private plans would, on average, be slightly lower than if no 

public plan was available. 

Those factors would reduce the premiums of private plans in the exchanges to a 

small degree, but the effect on the average premium in the exchanges would be 

offset by the higher premium of the public plan itself. On balance, therefore, the 

provisions regarding a public plan would not have a substantial effect on the 

average premiums paid in the exchanges.21

The legislation would impose several new fees on firms in the health sector. New 

fees would be imposed on providers of health insurance and on manufacturers and 

importers of medical devices. Both of those fees would be largely passed through 

New Fees Would Increase Premiums Slightly

 20 Under the proposal, the public plan would negotiate payment rates with providers. CBO and 

JCT anticipate that those rates would be similar to the rates paid by private insurers participating 

in the exchanges. The public plan would have lower administrative costs than private plans, on 

average, but would probably engage in less benefit management and attract a less healthy pool of 

enrollees (the effects of which would be offset only partially by the risk adjustment procedures 

that would apply to all plans operating in the exchanges). On net, those factors would result in the 

public plan’s premiums being somewhat higher than the average premiums of private plans in the 

exchanges.

21 The presence of the public plan would have a more noticeable effect on federal subsidies 

because it would exert some downward pressure on the premiums of the lower-cost plans to which 

those subsidies are tied.
16

to consumers in the form of higher premiums for private coverage. Self-insured 

plans would be mostly exempt from the fee on health insurance providers, and 

since large firms are more likely to self-insure, that fee would result in smaller 

percentage increases in average premiums for large firms than it would for small 

firms and for nongroup coverage.22

• On the one hand, the legislation would reduce payments to hospitals and 

certain other providers under Medicare.

The legislation also would impose a fee on manufacturers and importers of brandname prescription drugs, which would be allocated among firms on the basis of 

drug sales to government programs. Because that fee would not impose an 

additional cost for drugs sold in the private market, CBO and JCT estimate that it 

would not result in measurably higher premiums for private coverage. (The 

legislation would also impose an excise tax on high-premium insurance policies 

provided by employers; that tax is discussed separately below because it would 

affect only a portion of the insurance market.) 

Effects Related to Cost Shifting Would Be Minimal

Some observers have predicted that the proposal (and similar initiatives) would 

affect premiums for private insurance plans by changing the extent of cost 

shifting. The legislation would have opposing effects on the pressures for cost 

shifting: 

23 In addition, it would 

significantly increase enrollment in Medicaid, which pays providers 

appreciably lower rates than private insurers do. Those changes could 

cause premiums for private coverage to increase. 

• On the other hand, the legislation would ultimately reduce the uninsured 

population by more than half, which would sharply reduce the amount of 

uncompensated or undercompensated care provided to people who lack 

health insurance. One recent estimate indicates that hospitals provided 

about $35 billion in such care in 2008—an amount that would grow under 

current law but would be expected to decline considerably under the 

legislation.24

 22 The fee would be levied on third-party administrators of self-insured plans in proportion to 

twice their administrative spending, which is substantially less than the total premiums that would 

be the base for the levy on plans purchased from insurers. Government health insurance plans such 

as Medicare and Medicaid would be exempt from that fee, but any public plan offered in the 

exchanges would be subject to it. 

23 The legislation would reduce Medicare payment updates for most services in the fee-for-service 

sector (other than physicians’ services) and reduce Medicare and Medicaid payments to hospitals 

that serve large numbers of low-income patients, known as “disproportionate share” (DSH) 

hospitals. 

That change could cause premiums for private coverage to 

decrease.

24 Recent evidence indicates that physicians collectively provide much smaller amounts of 

uncompensated or undercompensated care than hospitals. See Jonathan Gruber and David 

Rodriguez, “How Much Uncompensated care Do Doctors Provide?” Journal of Health 

Economics, vol. 26 (2007), pp. 1151–1169.
17

The net effect of those opposing pressures would depend on their relative 

magnitude and also on the degree to which costs are shifted. CBO expects that the 

magnitude of those opposing pressures would be about the same. Moreover, 

CBO’s assessment of the evidence is that a small amount of cost shifting occurs 

but that it is not as widespread or extensive as is commonly assumed. The fact 

that private insurers pay providers higher rates, on average, than Medicare and 

Medicaid is not evidence that cost shifting occurs. For cost shifting to occur, a 

decline in the rates paid by some payers would have to lead to an increase in the 

rates paid by others; thus, for cost shifting from reductions in rates paid by 

Medicare to occur, providers would have to have initially been charging private 

insurers lower rates than they could have. Well-designed studies have found that a 

relatively small share of the changes in payment rates for government programs is 

passed on to private payment rates, and the impact of changes in uncompensated 

care is likely to be similar.25

 25 For a more extensive discussion of cost shifting, see Congressional Budget Office,

Overall, therefore, CBO’s assessment is that the 

legislation would have minimal effects on private-sector premiums via cost 

shifting. 

Differences in the Types of People Who Obtain Coverage 

in Different Insurance Markets

The third broad factor that would affect average insurance premiums is 

differences in the types of people who obtain coverage in different insurance 

markets. If more people who are relatively healthy or relatively disinclined to use 

medical care participate in a given insurance market, then the average spending 

on medical services provided in that market will be lower, and the average 

premium in that market will be lower, with other factors held equal; conversely, if 

more people who are relatively unhealthy or are relatively inclined to use medical 

care participate in a given insurance market, the average spending on medical 

services and the average premium for that market will be higher, all else equal. 

Thus, a shift of less healthy people from one insurance market to another will tend 

to lower premiums in the “source” market and raise them in the “destination” 

market. Likewise, the number and types of people who would be uninsured under 

current law but would become insured under the proposal—and the effects of 

gaining coverage on their use of health care—would affect the average premiums 

charged in the markets in which they buy insurance. 

Overall, CBO and JCT estimate that an influx of new enrollees into the nongroup 

market would yield an average premium per person in that market that is 

7 percent to 10 percent lower than the average premium projected under current 

law. Changes in the types of people covered in the small group and large group 

markets would have much smaller effects on premiums, yielding a change in the 

small group market that could range from a decrease of 1 percent to an increase of 

2 percent, and a decrease in the large group market of zero to 3 percent. 

Key Issues,

pp. 112–116. 
18

Key Characteristics of the Insured and Uninsured Under Current Law

To assess the likely medical spending of prospective new enrollees in different 

insurance markets, it is useful to review some key characteristics of the insured 

and uninsured populations under current law. CBO and JCT’s assessment of those 

characteristics is based on data from representative surveys of the U.S. population 

that examine people’s health insurance coverage, health status, and use of health 

care.26

One other factor that would not be the same—and that would tend to accentuate 

this projected difference in utilization—is how much medical care the uninsured 

would use once they did gain coverage: They would tend to consume less medical 

care than current nongroup enrollees, even after adjusting for their age and health. 

CBO’s review of relevant studies concluded that insuring the currently uninsured 

under a typical employment-based plan would generate an increase of 25 percent 

to 60 percent in their average utilization of care. (That average increase in 

utilization and spending would arise even though some newly insured people

This discussion addresses the projected distribution of the population in 

2016, using as a reference point the 162 million people expected to be covered by 

employment-based insurance in that year under current law. 

About 14 million people are expected to be covered by nongroup policies in 2016 

under current law. Enrollees in nongroup coverage would be about 3 years older, 

on average, than enrollees in employment-based insurance—which would tend to 

raise their use of medical care—but would be slightly healthier, on average, at any 

given age—which would tend to lower their use of care. On balance, the average 

spending on medical care of nongroup enrollees would be somewhat greater than 

that of enrollees in employment-based insurance if they were enrolled in 

insurance plans with the same amount and structure of coverage. 

By contrast, the 52 million people who are expected to be uninsured under current 

law in 2016 would be about 2 years younger, on average, than the population 

covered by employment-based plans and thus would be about 5 years younger 

than nongroup enrollees, on average. At any given age, the average health of the 

uninsured population would be somewhat worse than the average health of people 

with nongroup insurance. A large share of the uninsured population, however, 

would not be eligible to obtain subsidized coverage via the exchanges; instead, 

those with income below 133 percent of the FPL would generally be eligible for 

free coverage through Medicaid. That low-income group is relatively unhealthy, 

and once they are removed from the comparison, the disparity in health between 

the remaining uninsured population and current-law enrollees in the nongroup 

market essentially disappears. Therefore, considering only their age and their 

health status and holding other factors constant, the expected use of medical care 

by uninsured people who would be eligible for subsidized coverage in the 

exchanges would be less than that of current nongroup enrollees.

 26 For additional information on the data sources used and the methodology involved, see

Congressional Budget Office, CBO’s Health Insurance Simulation Model: A Technical 

Description, Background Paper (October 2007). 
19

would avoid expensive treatments by getting care sooner, before their illness 

progressed, or would receive services in a less expensive setting.) Despite that

substantial increase in utilization, their use of care would still be below that of 

people with similar characteristics who are currently insured.

27

• The legislation would establish an annual open enrollment period for new 

nongroup policies similar to that typically used by employers, which 

would limit opportunities for people who are healthy to wait until an 

illness or other health problem arose before enrolling. 

That remaining

difference in average utilization probably reflects various differences between the 

insured and uninsured aside from differences in their age and health status, and 

the effect of obtaining insurance could be much larger for some people and much 

smaller for others. 

A Limited Amount of Adverse Selection Would Occur in New Nongroup 

Plans

The preceding discussion examined the types of people who would receive 

coverage in different markets under current law or would be eligible to receive 

coverage in different markets under the proposal. However, the effects of the 

proposal on the types of enrollees in each market would depend ultimately on 

who chose to receive coverage in those markets—with the most significant 

changes coming in the nongroup market.

Under current laws governing the nongroup market, insurers in most states do not 

have to accept all applicants, may vary premiums widely to reflect differences in 

enrollees’ health status and age, and may exclude coverage of preexisting medical 

conditions. By themselves, the proposal’s provisions changing those rules would 

make nongroup coverage more attractive to people who are older and who expect 

to be heavier users of medical care and less attractive to people who are younger 

and expect to use less medical care. Therefore, in the absence of other changes to 

the insurance market, people who are older and more likely to use medical care 

would be more likely to enroll in nongroup plans—a phenomenon known as 

adverse selection. Such selection would tend to increase premiums in the 

exchanges relative to nongroup premiums under current law. 

However, several other provisions of the proposal would tend to mitigate that 

adverse selection: 

• The substantial premium subsidies available in the exchanges would 

encourage the enrollment of a broad range of people. For people whose 

 27 CBO estimates that the uninsured currently use about 60 percent as much medical care as 

insured people, taking into account differences between the groups in their average age and health 

status. Providing all of the uninsured with health insurance coverage equivalent to a typical 

employment-based plan would thus be estimated to increase their demand for medical services to a 

level that is between 75 percent and 95 percent of the level of similar people who are currently 

insured (corresponding to an increase of 25 percent and 60 percent, respectively). For additional 

discussion of these estimates, see Congressional Budget Office, Key Issues, pp. 71–76.
20

income was below 200 percent of the FPL, those subsidies would average 

around 80 percent. 

• The requirement that people have insurance would also encourage a broad 

range of people to take up coverage in the exchanges. CBO and JCT 

expect that some people would obtain coverage because of the penalties 

that would be levied for not complying with the mandate (which would be 

$750 per adult and $375 per child in 2016) and that others would obtain 

coverage simply because of the existence of a mandate; those expectations 

are based in part on people’s compliance with other types of mandates.28

• The premiums that most nongroup enrollees pay would be determined on 

the basis of their income, so higher premiums resulting from adverse 

selection would not translate into higher amounts paid by those enrollees 

(though federal subsidy payments would have to rise to make up the 

difference). That arrangement would dampen the chances that a cycle of 

rising premiums and declining enrollment would ensue.

• During the 2014–2016 period, as the mandate penalties were being phased 

in and other provisions were in the initial stages of implementation, the

legislation would provide reinsurance payments to insurers that ended up 

with particularly high-cost enrollees. That reinsurance system (funded by 

an assessment on all insurers) would also limit the impact of adverse 

selection on insurance premiums. 

On balance, CBO and JCT expect that some adverse selection into nongroup 

plans would arise, especially among people who received relatively small 

subsidies. However, the extent of such adverse selection is likely to be limited, 

and many nongroup enrollees would be in fairly good health.

The Characteristics of Enrollees in Nongroup Plans Would Be Substantially 

Different Than Those Under Current Law

CBO and JCT estimate that about 32 million people would obtain coverage in the 

nongroup market in 2016 under the proposal, consisting of about 23 million who 

would obtain coverage through the insurance exchanges and about 9 million who 

would obtain coverage outside the exchanges. Relative to the situation under 

current law, with about 14 million people buying nongroup coverage, the different 

mix of enrollees would yield average premiums per person in that market that are 

about 7 percent to 10 percent lower. Some people who would enroll in nongroup 

coverage under the proposal would be uninsured under current law, some would 

have employment-based coverage, and some would have nongroup coverage 

under current law as well. To estimate how the different mix of enrollees in the 

nongroup market would affect premiums, it is useful to examine enrollment 

patterns and expected medical costs for each of those three groups. 

 28 For a discussion of compliance with mandates, see Congressional Budget Office, Key Issues,

pp. 48–54.
21

First, CBO and JCT estimate that about a third of the nongroup enrollees 

estimated under the proposal in 2016 would be uninsured under current law. As 

discussed above, the pool of people who would be eligible for the exchanges and 

would otherwise be uninsured would be—relative to those who have nongroup 

coverage under current law—younger, roughly as healthy at any given age, and 

likely to use less medical care (given their age and health status). At the same 

time, the adverse selection discussed above means that the members of that pool 

who would choose to purchase coverage would be less healthy, on average, than 

all of the members of the pool together, particularly among those who would 

receive limited subsidies. On balance, CBO and JCT estimate that the enrollees 

who would be uninsured under current law would use significantly less medical 

care, on average, than individuals enrolled in nongroup coverage under current 

law (with other factors held constant).29

 29 People who report that they are in either fair or poor health tend to use much more health care 

than the average person, and otherwise uninsured people in fair or poor health would be more 

likely to enroll in nongroup coverage. Even so, they would constitute less than 10 percent of the 

otherwise uninsured group enrolling in nongroup coverage. 

Second, CBO and JCT estimate that about a fifth of nongroup enrollees under the 

proposal in 2016 would have employment-based coverage under current law. 

Most of those people would not have an offer of employment-based coverage 

under the proposal; others would have such an offer but it would be deemed 

unaffordable, so they would be eligible to obtain subsidies through the exchanges. 

On average, those enrollees would be older and in poorer health than nongroup 

enrollees under current law, because the proposal’s changes in the nongroup 

market would make that market more appealing to those types of people. The 

inflow of those people into the nongroup market would thus tend to increase 

average medical spending and average premiums per person in that market to 

some degree. 

Third, CBO and JCT estimate that nearly half of the people enrolling in nongroup 

coverage under the proposal would have nongroup coverage under current law as 

well. Holding other factors constant, those enrollees would obviously not change 

average medical spending or premiums in the nongroup market relative to the 

levels under current law. 

In the comparison of nongroup premiums under the proposal with those under 

current law, the differences discussed in this section would vary considerably

among people. In general, the proposal would tend to increase premiums for 

people who are young and relatively healthy and decrease premiums for those 

who are older and relatively unhealthy. However, to fully evaluate the 

implications of the proposal for different types of people, it is necessary to include 

the effects of the subsidies that are discussed below. 
22

The Characteristics of Enrollees in Employment-Based Plans Would Be 

Slightly Different Under the Proposal

CBO and JCT estimate that changes in the characteristics of people with 

insurance in the small group market would yield a change in the average 

premiums per person in that market that could range from a decrease of 1 percent 

to an increase of 2 percent. That difference would be the net effect of three 

principal factors:

• Under the legislation, new insurance policies sold in the small group 

market would be subject to the same rating rules as policies sold in the 

nongroup market. In particular, insurers in the small group market could 

not vary premiums to reflect the health of firms’ workers. That change 

would reduce premiums for small firms whose employees are in relatively 

poor health—leading some of those firms that would not offer insurance 

under current law to do so under the proposal—and increase premiums for 

small firms whose employees are in relatively good health—leading some 

of those firms who would offer coverage under current law not to do so 

under the proposal. Consequently, the people covered in the small group 

market would be in somewhat worse health, on average, under the 

proposal than under current law, which would tend to increase average 

premiums in that market.30

• The individual mandate included in the proposal would induce some 

uninsured workers who would decline the coverage offered by their 

employers under current law to purchase such coverage. That change 

would reduce average premiums by a modest amount, because the people 

who would become insured would be in better health, on average, than 

their coworkers who would purchase insurance under current law.

• The individual mandate (and the small business tax credit) would also 

increase slightly the percentage of small firms that offer coverage. Those 

firms are likely to have healthier workers, on average, than small firms 

that would offer coverage under current law, largely reflecting the relative 

youth of workers at firms that would not offer coverage under current law 

compared with workers at firms that would. Consequently, their inclusion 

in the small group market would reduce average premiums in that market 

by a small amount. 

 30 That effect would be muted by the proposal’s grandfathering provisions, which would allow 

insurers to continue to set premiums according to current rules as long as an employer’s policy 

was continuously maintained; however, that option would also be most attractive to employers 

with relatively healthy workers and least attractive to employers with relatively unhealthy 

workers. The increased attractiveness of the nongroup market for older and less healthy workers 

would also temper the effect of the new rating rules on average premiums in the small group 

market, because some of those workers would shift from employment-based to nongroup 

coverage.
23

In contrast, CBO and JCT estimate that changes in the characteristics of people 

with insurance in the large group market would reduce average premiums per 

person in that market by about zero to 3 percent. One factor that would contribute 

to that difference is the shift of some less healthy workers to the nongroup market, 

as noted above. Another factor is the individual mandate, which would encourage 

younger and relatively healthy workers who might otherwise not enroll in their 

employers’ plans to do so. Other factors that would slightly increase coverage of 

relatively healthy individuals under large group plans are the provisions of the 

legislation that would require large employers to automatically enroll new 

employees in an insurance plan and to offer coverage for unmarried dependents 

up to age 26. The proposal’s restrictions on variation in premiums would have 

minimal effect on premiums in the large group market; many large firms selfinsure and thus would not be affected by those changes, and firms that might be 

adversely affected could be grandfathered and thus avoid the restrictions. 

Effects of the Proposed Exchange Subsidies and Small 

Business Tax Credit 

Under the proposal, the government would subsidize the purchase of nongroup 

insurance through the exchanges for individuals and families with income 

between 133 percent and 400 percent of the FPL, and it would provide tax credits 

to certain small businesses that obtained health insurance for their employees. 

Although the preceding analysis accounted for the effects of those subsidies on 

the number and types of people who would obtain coverage and on the amount of 

coverage that enrollees would obtain, the direct effect of the subsidies on 

enrollees’ payments for coverage were not included in the figures presented above 

because the objective there was to assess the impact of the legislation on the 

average premiums paid to insurers. This section builds on the earlier calculations 

by quantifying how the exchange subsidies and tax credits would directly affect 

the average premiums paid by individuals and families who would receive that 

government assistance.

Premium subsidies in the exchanges would be tied to the premium of the second 

cheapest silver plan (which would have an actuarial value of 70 percent). The 

national average premium for that reference plan in 2016 is estimated to be about 

$5,200 for single coverage and about $14,100 for family coverage (see Table 2). 

The national average premium for all nongroup plans would be higher—about 

$5,800 for single coverage and about $15,200 for family coverage—because 

many people would buy more expensive plans. 

Under the proposal, the maximum share of income that enrollees would have to 

pay for the reference plan would vary depending on their income relative to the 

FPL, as follows: 

• For enrollees with income below 133 percent of the FPL, the maximum 

share of income paid for that plan would be 2.0 percent in 2014; for 

enrollees with income between 133 percent and 300 percent of the FPL, 
24

that maximum share of income would vary linearly from about 4 percent 

of income to 9.8 percent of income in 2014; and for enrollees with income 

between 300 percent and 400 percent of the FPL, that maximum share of 

income would equal 9.8 percent. 

• After 2014, those income-based caps would all be indexed so that the 

share of the premiums that enrollees (in each income band) paid would be 

maintained over time. As a result, the income-based caps would gradually 

become higher over time; for 2016, they are estimated to range from about 

2.1 percent to about 10.2 percent. 

• Enrollees with income below 200 percent of the FPL would also be given 

cost-sharing subsidies to raise the actuarial value of their coverage to 

specified levels: 90 percent for those with income below 150 percent of 

the FPL, and 80 percent for those with income between 150 percent and 

200 percent of the FPL. 

• Enrollees with income above 400 percent of the FPL would not be eligible 

for exchange subsidies, and enrollees with income below that level whose 

premiums for the reference plan turned out to be less than their incomebased cap also would not receive subsidies.

CBO and JCT estimated that roughly 23 million people would purchase their own 

coverage through the exchanges in 2016 and that roughly 5 million of those 

people would not receive exchange subsidies.31

The government would also provide some subsidies for the purchase of health 

insurance in the form of tax credits to small firms. Under certain circumstances, 

firms with relatively few employees and relatively low average wages would be 

eligible for tax credits to cover up to half of their contributions toward insurance 

premiums. Of the people who would receive small group coverage in 2016 under 

the proposal, roughly 12 percent would benefit from those credits, CBO and JCT 

estimate. For the people who would benefit from those credits, the credits would 

Therefore, of the 32 million 

people who would have nongroup coverage in 2016 under the proposal (including 

those purchased inside and outside the exchanges), about 18 million, or 

57 percent, would receive exchange subsidies. For the people who received 

subsidies, those subsidies would, on average, cover nearly two-thirds of the 

premiums for their policies in 2016. Putting together the subsidies and the higher 

level of premiums paid to insurers yields a net reduction in average premiums 

paid by individuals and families in the nongroup market—for those receiving 

subsidies—of 56 percent to 59 percent relative to the amounts paid under current 

law. People in lower income ranges would generally experience greater 

reductions in premiums paid, and people in higher income ranges who receive 

subsidies would experience smaller reductions or net increases in premiums paid. 

 31 See Congressional Budget Office, cost estimate for the amendment in the nature of a substitute 

to H.R. 3590, the Patient Protection and Affordable Care Act (November 18, 2009), Table 3. 
25

tend to reduce the net cost of insurance to workers relative to the premiums paid 

to insurers by a little less than 10 percent, on average, in 2016. In the small group 

market, the other factors that were the focus of earlier sections of this analysis 

would cause premiums paid to insurers to change by an amount that could range 

from an increase of 1 percent to a reduction of 2 percent (compared to current 

law). Putting together the tax credits and the change in premiums paid to insurers 

yields a net reduction in the cost of insurance to workers in the small group 

market—for those benefiting from tax credits—of 8 percent to 11 percent relative 

to that under current law. 

Effects of the Excise Tax on High-Premium Insurance 

Plans

The legislation would impose an excise tax on employment-based policies whose 

total premium (including the amounts paid by both the employer and the 

employee) exceeded a specified threshold. The tax on such policies would be 

40 percent of the amount by which the premium exceeded the threshold. In 

general, that threshold would be set at $8,500 for single policies and $23,000 for 

family policies in 2013 (the first year in which the tax would be levied), although 

a number of temporary and permanent exceptions would apply. After 2013, those 

dollar amounts would be indexed to overall inflation plus 1 percentage point. 

CBO and JCT estimate that, under current law, about 19 percent of employmentbased policies would have premiums that exceeded the threshold in 2016. 

(Because health insurance premiums under current law are projected to increase 

more rapidly than the threshold, the percentage of policies with premiums under 

current law that would exceed the threshold would increase over time.) For 

policies whose premiums remained above the threshold, the tax would probably 

be passed through as a roughly corresponding increase in premiums. However, 

most employers would probably respond to the tax by offering policies with 

premiums at or below the threshold; CBO and JCT expect that the majority of the 

affected workers would enroll in one of those plans with lower premiums. Plans 

could achieve lower premiums through some combination of greater cost sharing 

(which would lower premiums directly and also lower them indirectly by leading 

to less use of medical services), more stringent benefit management, or coverage 

of fewer services.

Thus, people who remained in high-premium plans would pay higher premiums 

under the excise tax than under current law, and people who shifted to lowerpremium plans would pay lower premiums under the excise tax than under current 

law—with other factors held constant. On net, CBO and JCT estimate that the 

excise tax and the resulting behavioral changes, incorporating the changes in 

premiums for employer-sponsored insurance that were discussed earlier in this 

analysis, would reduce average premiums among the 19 percent of policies 

affected by the tax by about 9 percent to 12 percent in 2016. 
26

Other Potential Effects on Premiums

The proposal could have some broader or longer-term effects on the level or 

growth rate of health care spending and health insurance premiums. Such effects 

could arise from several sources, some of which would tend to raise premiums 

relative to the figures cited above, and others of which would tend to lower them. 

The uncertainties involved in assessing the magnitude of those effects are 

especially great. However, in CBO and JCT’s judgment, those effects are unlikely 

to be large—especially by 2016, which is the focus of this analysis. 

On the one hand, research by Amy Finkelstein suggests that expanded insurance 

coverage could have broader effects on the use of health care services than are 

captured by focusing on changes for the previously uninsured.32

On the other hand, the proposal includes numerous provisions that would 

encourage the development and dissemination of less costly ways to deliver 

appropriate medical services, either directly or indirectly. Examples of those 

provisions include the excise tax on high-premium insurance plans; the creation 

of a new Medicare advisory board that might limit the growth rate of Medicare 

Examining trends 

in hospital spending, she found that the substantial increase in demand for 

medical services generated by the introduction of Medicare in 1965 accelerated 

the dissemination of new medical procedures more broadly and could account for 

about half of the overall increase in hospital spending for the population as a 

whole that occurred in subsequent years. 

By that logic, the expansion of insurance coverage to millions of nonelderly 

people under this proposal could generate a larger increase in health care 

spending—and thereby health insurance premiums—than estimated here. 

However, several factors temper that conclusion. For one, the quantitative effect 

would presumably be smaller than that caused by Medicare because nonelderly 

people use less health care, on average, than elderly people. Moreover, Medicare 

initially paid hospitals on the basis of their incurred costs—an approach that gave 

hospitals little incentive to control those costs. The increase in hospital spending 

that resulted from Medicare’s creation could well have been smaller under a less 

generous payment system or in an era of more tightly managed care. In particular, 

roughly half of the increase in insurance coverage generated by this proposal 

would come from expanded enrollment in Medicaid, which pays relatively low 

rates to providers. Incentives for cost control would also be greater in the 

proposed exchanges, because exchange enrollees would have to pay the full 

additional cost of joining a more expensive insurance plan. Regardless, any

effects of expanded insurance coverage on the dissemination of new medical 

procedures would unfold slowly and would have little effect on health care and 

health insurance premiums by 2016.

 32 See Amy Finkelstein, "The Aggregate Effects of Health Insurance: Evidence from the 

Introduction of Medicare," Quarterly Journal of Economics, vol. 122, no. 1 (February 2007), 

pp. 1–37. For additional discussion of this study, see Congressional Budget Office, Key Issues,

p. 111. 
27

spending; and certain changes in Medicare’s payment methods as well as new 

pilot and demonstration projects regarding other changes in payment methods

(such as penalties for hospital readmissions that are deemed avoidable and 

incentives to coordinate patients’ care). The changes in Medicare’s payment 

methods could “spill over” to the private sector and decrease spending for health 

care relative to currently projected levels. However, the effects of those initiatives 

on Medicare’s spending are uncertain and would probably be small in 2016 

relative to the program’s total spending, so any spillover to private insurance at 

that point would probably be small as well. In addition, the excise tax on highpremium plans would apply to a small share of plans in 2016, so its effects on the 

cost and efficiency of health care would also probably be small at that point.

All of those considerations serve to emphasize the considerable uncertainty that 

surrounds any estimate of the impact of any proposal that would make substantial 

changes in the health insurance or health care sectors, given the size and the 

complexity of those sectors. That uncertainty applies to the estimated effects of 

proposals on the federal budget and insurance coverage rates, as well as to their 

impact on premiums.
TABLE 2. Analysis of Exchange Subsidies and Enrollee Payments in 2016 11/20/2009

Under the Patient Protection and Affordable Care Act

Estimate for "Reference Plan" in 2016 -- 2nd Lowest-Cost "Silver" Plan

Actuarial Value Average Premium Avg. Cost Sharing

Single Policy 70% $5,200 $1,900

Family Policy 70% $14,100 $5,000

Dollars

Percent of 

Income

100-150% /d 2.1% - 4.7% $ 14,700 $ 300 94% $ 1,100 $ 800 $ 1,100 7%

150-200% 4.7% - 6.5% $ 20,600 $ 1,200 77% $ 600 $ 1,300 $ 2,500 12%

200-250% 6.5% - 8.4% $ 26,500 $ 2,000 62% $ - $ 1,900 $ 3,900 15%

250-300% 8.4% - 10.2% $ 32,400 $ 3,000 42% $ - $ 1,900 $ 4,900 15%

300-350% 10.2% $ 38,300 $ 3,900 25% $ - $ 1,900 $ 5,800 15%

350-400% 10.2% $ 44,200 $ 4,500 13% $ - $ 1,900 $ 6,400 14%

400-450% n.a. $ 50,100 $ 5,200 0% $ - $ 1,900 $ 7,100 14%

Dollars

Percent of 

Income

100-150% /d 2.1% - 4.7% $ 30,000 $ 600 96% $ 3,300 $ 1,700 $ 2,300 8%

150-200% 4.7% - 6.5% $ 42,000 $ 2,400 83% $ 1,800 $ 3,200 $ 5,600 13%

200-250% 6.5% - 8.4% $ 54,000 $ 4,000 72% $ - $ 5,000 $ 9,000 17%

250-300% 8.4% - 10.2% $ 66,000 $ 6,100 57% $ - $ 5,000 $ 11,100 17%

300-350% 10.2% $ 78,000 $ 7,900 44% $ - $ 5,000 $ 12,900 17%

350-400% 10.2% $ 90,100 $ 9,200 35% $ - $ 5,000 $ 14,200 16%

400-450% n.a. $ 102,100 $ 14,100 0% $ - $ 5,000 $ 19,100 19%

Source: Congressional Budget Office and the Staff of the Joint Committee on Taxation.

Notes: All dollars figures have been rounded to the nearest $100; n.a. = not applicable; FPL = federal poverty level. 

b) In 2016, the FPL is projected to equal about $11,800 for a single person and about $24,000 for a family of four. 

c) Subsidies would be based on enrollees' household income, as defined in the bill. 

d) Under the bill, people with income below 133% of the FPL would generally be eligible for Medicaid and thus ineligible for exchange subsidies; 

the premium cap in 2014 for those with income below 133% of the FPL would be 2% of income. 

Single Person

Income 

Relative to 

the FPL

Premium Cap 

as a Share of 

Income /a

Middle of 

Income 

Range /b,c

Enrollee 

Premium for 

Low-Cost 

"Silver" Plan

Premium 

Subsidy 

(share of 

premium)

Average 

CostSharing 

Subsidy

Average 

Net Cost 

Sharing

Enrollee Premium + 

Avg. Cost Sharing

Family of Four

Income 

Relative to 

the FPL

Premium Cap 

as a Share of 

Income /a

Middle of 

Income 

Range /b,c

Enrollee 

Premium for 

Low-Cost 

"Silver" Plan

Premium 

Subsidy 

(share of 

premium)

Average 

CostSharing 

Subsidy

Average 

Net Cost 

Sharing

Enrollee Premium + 

Avg. Cost Sharing

a) In 2014, the income-based caps would range from about 4% at 133% of the FPL to 9.8% at 300% of the FPL, and that 9.8% cap would extend to 

400% of the FPL; in subsequent years, those caps would be indexed.