ACA Federal Pay Cost-Sharing Analysis
Recent debate over federal payments to insurers under the (ACA) related to cost-sharing reductions for low-income enrollees in the ACA’s marketplaces is alive and well.
– The ACA requires insurers to offer plans with reduced patient cost-sharing (e.g., deductibles and co-pays) to marketplace enrollees with incomes 100-250% of the poverty level. The reduced cost-sharing is only available in silver-level plans, and the premiums are the same as standard silver plans.
– To compensate for the added cost to insurers of the reduced cost-sharing, the federal governments makes payments directly to insurance companies. The Congressional Budget Office (CBO) estimates the cost of these payments at $7 billion in fiscal year 2017, rising to $10 billion in 2018 and $16 billion by 2027.
In 2016, the U.S. House of Representatives sued the Secretary of the HHS Department, challenging the legality of making the cost-sharing reduction (CSR) payments without an explicit appropriation. A district court judge ruled in favor of the House, but the ruling was appealed by the Secretary and the payments were permitted to continue, pending the appeal. The case is currently in abeyance, with status reports required every three months, starting May 22, 2017.
If the CSR payments end – either through a court order or through a unilateral decision by the current Administration, assuming the payments are not explicitly authorized in an appropriation by Congress – insurers would face significant revenue shortfalls this year and next.
Many insurers might respond to ending subsidy payments by exiting the ACA marketplaces. But if insurers choose to remain in the marketplaces, they’d be forced to raise premiums to offset the loss of the payments.
Estimates indicate that insurers would need to raise silver premiums on average by 19% to compensate for the loss of CSR payments. The assumption is that insurers would only increase silver premiums (if allowed to do so by regulators), since those are the only plans where cost-sharing reductions are available.
The premium increases would be higher in states that have not expanded Medicaid (and lower in states that have), since there are a large number of marketplace enrollees in those states with incomes 100-138% of poverty who qualify for the largest cost-sharing reductions.
The Result: A significant amount of uncertainty for insurers in setting premiums to offset the cost of cost-sharing reductions. For example:
– They would need to anticipate what share of enrollees in silver plans would be receiving reduced cost-sharing and at what level.
– Under a worst case scenario – where only people eligible for sharing reductions enrolled in silver plans – the required premium increase would be higher than 19%, and many insurers might request bigger rate hikes.
While the federal government would save money by not making CSR payments, it would face increased costs for tax credits that subsidize premiums for marketplace enrollees with incomes 100-400% of the poverty level.
– The ACA’s premium tax credits are based on the premium for a benchmark plan in each area: the second-lowest-cost silver plan in the marketplace.
– The tax credit is calculated as the difference between the premium for that benchmark plan and a premium cap calculated as a percent of the enrollee’s household income (ranging from 2.04% at 100% of the poverty level to 9.69% at 400% of the poverty in 2017).
Any systematic increase in premiums for silver marketplace plans (including the benchmark plan) would increase the size of premium tax credits. The increased tax credits would completely cover the increased premium for subsidized enrollees on the benchmark plan and cushion the effect for enrollees signed up for more expensive silver plans.
Enrollees who apply their tax credits to other tiers of plans (i.e., bronze, gold, and platinum) would also receive increased premium tax credits even though they do not qualify for reduced cost-sharing and the underlying premiums in their plans might not increase at all.
Estimated increased costs to the federal government of higher premium tax credits would actually be 23% more than the savings from eliminating cost-sharing reduction payments. For fiscal year 2018, that would result in a net increase in federal costs of $2.3 billion. Extrapolating to the 10-year budget window (2018-2027) using CBO’s projection of CSR payments, the federal government would end up spending $31 billion more if the payments end.
Will Insurers Be Willing to Stay In The Market If CSR Payments Are Eliminated?
The resulting 23% increase in federal costs is underestimated. To the extent some people not receiving cost-sharing reductions migrate out of silver plans, the required premium increase to offset the loss of CSR payments would be higher.
Selective exits by insurers (among those offering lower cost plans) could also drive benchmark premiums higher. In addition, higher silver premiums would somewhat increase the number of people receiving tax credits since currently younger/higher-income people with incomes under 400% of the poverty level receive a tax credit of zero because their premium cap is lower than the premium for the second-lowest-cost silver plan.
It is unclear what will happen as Washington evaluates the best outcome for enrollees, insurers and the nation’s budget. The effort continues – watch here to track the progress. Call Us Today – 800 977-2976
Data Source: Health Reform-ACA’s Future