In October, President Donald Trump announced that his administration was ending cost-sharing subsidies to insurance companies that were designed to offset the cost of deductibles and copayments for low-income Americans. The subsidies had been paid on a month-to-month basis and many insurance companies had already raised premiums to compensate for the anticipated end to the subsidies for 2018. Insurance companies are required under the Affordable Care Act (ACA or Obamacare) to continue providing the discounts even though they will receive no funding from the federal government to offset these reductions to low-income customers.
Although many governors, insurance companies and consumers are concerned that cancellation of the CSR payments could lead to the destruction of the ACA, there are some unexpected benefits to ending CSR payments.
Two Types of Subsidies
Before explaining how the cancellation of CSR subsidies could actually benefit many Americans, it’s important to understand what exactly has been cancelled. Under the ACA, there are two subsidies on the individual market. The first reduces the cost of premiums for households whose income falls between 100 and 400 percent of the federal poverty level. It’s paid directly to the buyer of the insurance or deducted from monthly premium costs. This subsidy remains in place.
Cost-sharing reduction payments (CSRs) are the subsidies that have been eliminated. These subsidies reduce the cost of co-pays and deductibles (“cost-sharing” expenses) for households with incomes up to 250 percent of the poverty level. The CSR subsidies were eliminated based on a court ruling from 2016 that determined the subsidies were illegal (since they were not being appropriated properly by Congress). The Obama administration appealed the ruling, but the Trump administration has said they will cancel the appeal.
Note: These subsidies have not been eliminated for the consumer but only for the insurers. Cost-sharing reduction payments are paid to the insurer because insurance companies must, by law, offer CSRs to customers earning up to 250 percent of the poverty level. If you fall under this income classification, you will still benefit from the reduction in cost-sharing expenses, but your insurance company won’t get reimbursed from the government for lowering your costs.
Losses for Insurers
The elimination of CSR payments to insurers will mean losses for insurance companies that based 2017 premiums on the understanding that the subsidies would be in place throughout the year. Because the ACA requires insurance companies to provide cost-sharing reductions even if the federal government does not reimburse them for doing so, insurers will have to continue providing them to their policyholders.
In anticipation that the subsidies may not be renewed for next years, many insurance companies have already raised premium costs for 2018 to cover the loss of CSR reimbursements. At least 36 states permitted insurance companies to add premium increases onto the silver plan, the marketplace plan that the federal government uses to calculate subsidies. As the premiums on the silver plan rise, so do subsidies, which means the deduction is calculated on a higher premium cost so the premium cost seems lower for consumers.
Increase in Enrollments
Although insurance company losses are troubling, some experts say that cancellation of CSR subsidies may increase enrollment in ACA plans. In California alone, it’s estimated that cancellation of the CSR payments could result in an additional 20,000 people enrolling in ACA plans, an increase of 1.4 percent. A study conducted by Covered California found that premium tax credit subsidies would increase by one-third if the CSR subsidy was defunded, which could reduce the cost of bronze and gold plans.
For many customers this year, the negative aspect of the elimination of CSR subsidies is that premiums will rise, especially for people in the middle class who did not qualify for subsidies. However, another feature of the ACA is that there are limits on what percentage of your income must be paid in premiums. You’re exempted from the individual mandate to buy health insurance if the lowest-priced bronze plan in your area would cost more than 8.16 percent of your household income.
Because premiums will rise due to the cancellation of CSR subsidies, many middle-class families may now qualify for additional subsidies that could lower premiums. For example, if your household income is between 200 and 250 percent of the federal poverty level, your expected contribution toward health insurance is between 6.43 and 8.21 percent. So, if your household income is $23,760 per year, your premium cost must be lower than $1,528 per year. If your premium is $4,608, a subsidy is provided for the $3,080 difference, making your premium affordable. As a result, you may now be eligible for a subsidy when you weren’t in previous years.
There will still be consumers who will not qualify for subsidies even with the higher premiums. For those consumers, the higher costs could be substantial. There is still the chance that many middle-class families may opt to drop coverage completely due to significantly higher premium costs as a result of the cancellation of CSR subsidies. There are also people who believe that the individual mandate will no longer be enforced by the Trump administration so they will not be required to pay the IRS penalty for not having insurance.
Although an Executive Order was signed allowing the IRS and other governmental agencies to waive or be lenient with penalties assessed under the ACA, the mandate is still in place, and failure to have health insurance could result in a tax penalty at the end of the year.
Good News for Some
Some believe that President Trump is chipping away at the basic tenets of the ACA, eliminating subsidies and making small changes so that the healthcare law collapses. There are reports that some insurance companies may request to leave the exchange at the end of the year or will decide not to participate next year because of the elimination of CSR payments. There are definite downsides to CSR payments being eliminated. But for those who qualify for cost assistance on the marketplace, the elimination of CSR payments could grant access to better plans at lower rates than they expected.