The hot news here at CCF today is the new CBO score for the bipartisan, bicameral 5-year CHIP deal – the KIDS Act – it now costs $800 million instead of $8.2 billion. And no, that is not a typo. This leaves a lot of people asking – what changed?

Before getting into why the scores are different, here’s a refresher on how CBO scoring works. When CBO “scores” – provides a cost estimate for – a bill, they analyze how the bill would change federal spending relative to current law. Current law is captured in the CBO baseline, which is updated at different points throughout the year to reflect changes in law and changes in the economy.

For example, the CHIP baseline shows how much the federal government will spend on CHIP in the next 10 years (CBO always looks at spending implications over a 10-year window per congressional budgeting rules). Check out the most recent CHIP baseline here. If you look at the figures for 2016, you’ll see that the federal government spent about $14.3 billion to cover 8.9 million children that year. This is what CHIP costs.

But what CHIP costs and how a CHIP funding bill scores are very different calculations. To calculate the score of the KIDS Act, CBO looks at how much extending CHIP costs and how much extending CHIP saves. These calculations are all made relative to government spending overall (not just for CHIP), as reflected in CBO’s Budget and Economic Outlook. The budget and economic outlook show how much the federal government is projected to spend on CHIP but also on other health care programs like Medicaid and the ACA’s Marketplaces.

Turn now to the latest score for the KIDS Act, and look at the estimates for 2019 on the last page. You’ll see that under the KIDS Act, CHIP spending would increase by $9.9 billion but spending in Medicaid would decrease by $3.5 billion and spending in the ACA’s Marketplaces would decrease by $3 billion. This produces a net spending impact of $3.5 billion. Next, CBO looks at how revenues would change, showing an increase of $700 million, for an overall net change in the deficit of $2.7 billion in 2019. These calculations are repeated for each year over and summed over the 10-year budget window, resulting in a net change in the deficit of $800 million over 10 years.

Behind all these confusing numbers, there are children – children moving from one source of coverage to another, depending on what is available. As long as CHIP funding is sufficient to cover eligible children, parents will continue to seek it because it is high quality, affordable coverage for their kids. If CHIP funding is not available, parents will look elsewhere – some will find coverage through an employer, some will find coverage through Medicaid or the ACA’s Marketplaces, and some will go without coverage. The number of children in each group, and the relative cost per child to the federal government, is what is behind these CBO numbers. That is, more kids in CHIP means more spending on the CHIP line but also means less spending on the Medicaid and ACA Marketplace lines and more revenue. (The revenue piece is complicated, but suffice to say that CBO believes employers adjust their overall compensation mix to keep their costs stable, so having more CHIP coverage for employees’ children means that the overall compensation mix will include more taxable wages and less tax-free benefits, thus increasing federal revenue.)

Now to the question at hand, what changed between the earlier score of $8.2 billion and the new score of $800 million? CBO sites three main reasons, which can be summarized as Marketplace coverage is now a lot more expensive because of the Republican tax bill and new Marketplace regulations.

• Regulatory changes made Marketplace coverage more expensive for children beginning in 2018. Each year, the Administration proposes and finalizes regulations governing Marketplace premium rating rules. Beginning in 2018, a new regulation allows insurers to charge more for children’s coverage by creating single-year age bands beginning at age 15 (rather than one age band 0-20 years as before) and increasing the premium ratio for all children (from 0.635 for all children 0-20 years to 0.765-0.970 depending on the child’s age).
• Repealing the individual mandate made Marketplace coverage more expensive for everyone. The Republican tax bill passed at the end of December repealed the ACA’s individual mandate. CBO believes this will make Marketplace coverage significantly more expensive for the federal government because healthy people will forgo coverage, sick people will continue to buy coverage, and insurers will increase premiums accordingly, thus increasing the premium tax credits the federal government pays. Before the individual mandate was repealed, the relative cost to cover a child in CHIP was just below the cost to cover a child in the Marketplace, but now the delta is wider – Marketplace coverage is significantly more expensive than CHIP coverage.
• More children and parents would seek Marketplace coverage without CHIP. CBO also believes that repealing the individual mandate will result in 13 million more people – including parents – going uninsured. This is in part because they no longer face a penalty for not having coverage, but also because coverage will get more expensive and be unaffordable. While parents may be willing or forced to go without coverage for themselves because of the new tax law, parents are less likely to let their children go without coverage. So without new CHIP funding, parents will be looking to cover their children in the Marketplace and may end up enrolling themselves too, further increasing federal costs.

Overall, the KIDS Act would have the effect of shifting more children to CHIP and away from the Marketplaces. So as Marketplace coverage gets more expensive over time, the offsetting savings to continue CHIP grow and the net costs of extending it shrink. With a new score of just $800 million, and bipartisan, bicameral agreement on the policy, Congress has run out of excuses to delay funding CHIP any longer.