Want to learn more about the rules around HSA eligibility, contributions and distributions? Check out the 2017 edition of our popular Health Savings Account GPS booklet. It’s bullet-point format helps you find the information that you’re looking for quickly.
“Because of the wording of the text of the ACA, it’s ambiguous as to whether CSR subsidies are an entitlement or a budget item that requires annual funding. The Obama administration requested funding in budget requests, which signals that the administration believed that the subsidies weren’t an entitlement and had to be a line item in the federal budget approved by Congress.”
By William G. (Bill) Stuart
Director of Strategy and Compliance
April 27, 2017
They remain one of the most misunderstood and confusing aspects of the Affordable Care Act. I’ve heard “experts” (including an attorney speaking to an industry group composed of potential clients) discuss key features of the ACA and completely misrepresent them.
They’re called Cost-Sharing Reduction subsidies, and they represent the “other” subsidies in the ACA. By the time you read this piece, you likely will have heard multiple references to this program, which is at the forefront of the latest GOP attempt to enact health care reform. To President Trump, they are the item that he can hold hostage to bring members of both parties to the bargaining table. To insurers making plans for 2018 participation in the individual markets, a future without them makes the economics of participating in the market even less appealing than three years of documented losses have.
Let’s review. The primary goal of the ACA was to expand affordable medical coverage to more Americans. In drafting the law, Democrats created two important taxpayer-funded subsidies – one well known and the other largely hidden in the shadows until now:
Advance Premium Tax Credits. Often referred to as premium subsidies, these subsidies are available to all Americans with incomes below 400% of the federal poverty level (a figure approaching $100,000 for a family of four). The text of the ACA provides that these individuals can apply these credits only to medical insurance plans that they purchase on public marketplaces (exchanges) established by states. The Obama administration promptly allowed eligible individuals to apply the credits to products purchases on state- or federally-facilitated exchanges. In the case of King v. Burwell, the Supreme Court decided in June 2015 that the credits could be purchased on any public exchange, regardless of whether the state (16 states plus the District of Columbia) or federal (34 states) government operated the exchange.
These credits are an important feature of the law. In 2017, about 83% of all individuals who enroll in coverage through public marketplaces receive some level of premium subsidy. Without these tax credits, few would be able to afford insurance. In that scenario, states’ nongroup markets would collapse overnight and provider systems would be overwhelmed with picking up the cost of uncompensated acute care as patients with no coverage seek services through hospital emergency rooms.
Since the Court’s ruling, no one has challenged the existence or legality of these credits. As the ACA is written, these credits are an entitlement. That status is important because the money is automatically available (like Social Security, traditional Medicare and Medicaid – the nation’s three largest entitlement programs). Because these credits are funded outside the federal budget process, Congress can’t threaten to cut or eliminate the credits as a means of weakening the ACA or forcing members to the bargaining table to repeal or reform the ACA.
Cost-Sharing Reduction subsidies. These subsidies are designed to help individuals with incomes at or below 250% of the federal poverty level who face high out-of-pocket costs on plans that they purchase through a public marketplace. These subsidies cover a portion of deductible and other out-of-pocket costs that patients incur when they access care through plans purchased in the public marketplaces. They are available only on Silver plans.
These subsidies reduce the actuarial value of the medical insurance. Actuarial value (AV) is a term used to describe the percentage of claims that are paid by an insurance plan after patients pay their out-of-pocket expenses. For example, Silver plans have an actuarial value of 70 (the actual range can be between 68 and 72), which means that a Silver plan pays, on average, 70% of the total cost of care in a given year. The patient is responsible for the remaining 30% (average) through out-of-pocket costs like deductibles, coinsurance and copays.
The CSR subsidies reduce the amount of the deductible or out-of-pocket maximum for which the patient is responsible. The amount of reduction is based on income ranges. The net effect of the CSR is that a family choosing a family plan (AV of about 70) may end up with a plan with an actuarial value of 80% to 90%. For the family, the subsidies shift the financial burden from them to someone else (currently taxpayers, but the burden may shift, as you’ll see).
These subsidies are paid directly to insurers who have sold policies to individuals who qualify for the subsidies because they are enrolled in coverage through a public marketplace and their income is less than 250% of the federal poverty level (FPL). IN 2017, the 250% figure includes individuals with incomes below $30,150, two-person families below $40,600 and four-person families below $61,500.
Because of the wording of the text of the ACA, it’s ambiguous as to whether CSR subsidies are an entitlement or a budget item that requires annual funding. The Obama administration requested funding in budget requests, which signals that the administration believed that the subsidies weren’t an entitlement and had to be a line item in the federal budget approved by Congress. When the Republican-led House of Representatives didn’t fund the request, President Obama paid the subsidies anyway using other funds appropriated by Congress for different purposes.
The Republicans sued the president in federal district court and won the case in May 2016. The presiding judge put her decision on hold, which meant that the administration could continue to pay the subsidies pending the outcome of an appeal. The Obama administration immediately appealed to the US Circuit Court of Appeals. The circuit court didn’t hear the case before President Obama left office, leaving the Republican (Trump) administration as the party appealing a decision in favor of a Republican Congress.
And although the president hasn’t committed to a position, his attorney general, the nation’s highest law-enforcement official, offered the opinion last week that the payments are unconstitutional. And Tom Price, MD, the secretary of health and human services, issued a statement supporting the district court decision last year while a member of Congress.
The ACA is the first major legislation in history passed by Congress without a single vote from the minority party. Like the Supreme Court’s 1973 decision legalizing voluntary abortion, it has polarized people of different political parties and philosophies who believe that a partisan solution had been forced on them. As is often the case when the population is nearly evenly divided on an issue, those holding the position that lost turn to the courts or the federal legislative or budget process an in attempt to regain ground or negate the earlier decision. And that’s precisely what’s happened with the ACA.
Now, President Trump threatened to use CSR subsidies as leverage to bring Democrats to the table to replace parts of the ACA through the reconciliation process,though earlier this week he switched gears and offered it as a tit-for-tat to secure a border wall.
Republicans weren’t able to unite their conservative and moderate wings to partially repeal and replace key provisions of the ACA with the American Health Care Act through the budget reconciliation process. Remember, reconciliation only a majority vote (not the usual 60-vote threshold) in the Senate. If Republicans can pick up some support for their reform bill – still a political long shot – they stand a better chance of passing the legislation even with some dissent within their ranks.
Here’s why this leverage is so effective: If the CSR subsidy program remains law, the subsidies must be extended to individuals who purchase Silver plans and qualify for CSR subsidies. If the federal government doesn’t pay insurers to reimburse the subsidies, the insurers themselves must absorb the premiums. It’s estimated that insurers received $7 billion in CSR subsidies in 2016. If they had to assume this responsibility, the cost would dwarf the annual losses that they experienced participating in the public marketplaces. And those non-CSR subsidy losses have already driven most large insurers to curtail dramatically their participation in the public marketplaces.
The remaining insurers offering plans in the public marketplaces are likely to end their participation and withdraw their products . . . unless state insurance regulators approve Silver plan premium increases (by an , according to Kaiser Family Foundation) to cover the cost of the CSRs. Since federal taxpayers subsidize premiums through the advance premium tax credits based on enrollees’ incomes, increasing premiums would raise the cost to the federal treasury of the primary ACA subsidy, the advance premium tax credits. And remember, these subsidies are an open-ended entitlement that Congress can’t change through the annual appropriation process.
It’s important for readers to take away these key points:
- The advance premium tax credits (premium subsidies) that are applied to the cost of premiums for individuals who earn 400% or less of the federal poverty limit are not at risk in this court case. Those subsidies continue as long as the ACA is in place because the clear language of the law classifies them as an entitlement outside the reach of the congressional budget process and the Supreme Court has validated that these subsidies are available to individuals enrolled in state- or federally-facilitated public marketplaces. The American Health Care Act also featured such subsidies, though it used a different formula that would change the eligibility criteria from income alone to a combination of age (primary component) and income.
- The subsidies that reduce the out-of-pocket financial responsibility for individuals who incur high medical costs are at risk in this case. If the district court decisions stands (either because Congress wins on appeal or the Trump administration doesn’t defend the Obama administration’s position before the federal courts), Congress can (curtail or eliminate those subsidies through the budget process.
- Eliminating the Cost-Share Reduction subsidies will have a cascading effect in the public marketplaces. Fewer insurers are likely to assume financial responsibility for the reduced patient cost-sharing and state regulators aren’t willing to grant insurers large premium increases to pay for these subsidies themselves.
- More broadly, Congress is finding it incredibly difficult to find a middle ground among those who want a heavily subsidized program with uniform national standards (Democrats), those want a heavily subsidized program with more power to states to meet their specific needs (most Republicans) and those who want to take a radically different approach from the past two or three generations and create a free market for medical insurance (free-market Republicans). The “most Republicans” coalition doesn’t have the votes to pass reform. It must attract some votes from one of the other two groups. And that’s proving to be very, very difficult.
What we’re reading
Another aspect of stabilizing individual insurance markets is to reduce the number of individuals who don’t want to purchase insurance until they are about to incur claims and only then apply for coverage. Officials are supposed to verify eligibility for an individual special enrollment period, but compliance has been lax. The Trump administration recently introduced new rules to tighten enrollment outside the annual open enrollment period.
It’s not too early to begin to speculate on the individual insurance markets in 2018, as insurers begin to submit proposals and file preliminary rates for participation next year. Don’t read a lot into how many insurers are applying to offer coverage in a particular state or county, as many are covering all bases and will re-evaluate their participation and premiums as they evaluate final 2016 and early 2017 utilization and see how Congress and the administration have altered the dynamic of the market. The actuarial firm Oliver Wyman gives us some early hints of things to come.