Last Thursday night, Politico revealed that the Trump administration intended to cut off subsidies to insurers that provide coverage under the Affordable Care Act (ACA). These payments, known as cost-sharing reduction payments, or CSRs, are used to reduce copays and deductibles for low-income policyholders. Most health plans offered on the individual marketplace come with high deductibles that make it difficult for low-income people to afford medical expenses, even with insurance coverage. To address this issue, the ACA mandates insurers reduce the cost of out-of-pocket payments for people making less than 250 percent of the poverty line. In return, the ACA also requires the federal government to provide payments to insurers—around $7 billion last year—to offset the costs of lower copays and deductibles. Given that around seven million people qualify for CSRs, the payments lowered average out-of-pocket costs by $1,000 per person last year, providing a significant boost to healthcare access for low-income individuals.
Trump previously threatened to cut off funding for CSRs in July, and the status of the payments has long been in legal limbo since Congress declined to appropriate any money for the program. The Obama administration argued that language in pre-existing law could be interpreted to create a permanent allocation for CSR funding, prompting Congressional Republicans to file a lawsuit in November 2014 to halt the payments. The lawsuit was successful in district court, with Judge Rosemary Collyer ruling the cost-sharing payments unconstitutional. However, the district court stayed its injunction against the payments to allow the government to appeal. After the election, Congressional Republicans requested the case be delayed while they attempted to repeal and replace the Affordable Care Act. In the meantime, the administration continued to make monthly CSR payments to insurers, right up until last week.
While the legality of the CSR payment model is up for dispute, it is undeniable that the ACA entitled insurers in its marketplace to some kind of federal support. Insurers are likely to file suit before the Court of Federal Claims to recoup the money they are owed, a lawsuit that is overwhelmingly likely to be successful. If and when the insurers win their lawsuit, payment for the CSRs would come out of the Judgment Fund instead of through the congressional budgetary process, but ultimately the insurers will still get paid.
The problem is that the legal system moves glacially, and insurers may not actually win their lawsuit and get their payments for several years. In the interim, they will be legally obligated to continue to offer the discounted copays and deductibles, without the assistance of federal subsidies to reimburse the cost of doing so. Trump’s decision to end subsidy payments is unlikely to cause the ACA to collapse, but it does present a major threat to the future of the individual marketplace. To avoid enormous financial losses, insurers have two options: either hike premiums dramatically or simply withdraw from the ACA marketplace altogether.
Which choice insurers make will depend on the extent to which individual insurers have already priced in the cost of operating without CSR payments in their 2018 premiums. Uncertainty about the future of CSRs has led many insurers to preemptively increase premiums on the assumption that payments would be cut off in the near future, but the extent to which insurers have been allowed to do so varies widely from state to state. As insurers have already finalized their 2018 premiums, those that failed to anticipate the end of CSR payments will have to choose whether to suffer significant financial losses over the next year or exit the marketplace altogether. Given that open enrollment has not yet begun, insurers are still able to leave the marketplace for 2018, but the timing of the announcement means other insurers will be largely unable to step into the marketplace to replace those insurers that choose to depart. In those states that anticipated CSR cuts, the impacts on coverage are likely to be minimal; in the significant minority of states that failed to do so, the potential consequences are dire.
Current estimates suggest the immediate impacts on individuals are likely to be minimal. The Congressional Budget Office estimates that silver plan premiums will increase significantly, by around 20 percent. However, the value of the ACA’s premium tax credits (i.e., ACA subsidies offered to lower income enrollees) is directly linked to the cost of silver plans. While premiums will go up, the value of tax credits will increase as well, with the end result being that individuals who qualify for these subsidies will pay premiums similar to what they were paying beforehand. These tax credits are available for all individuals in the marketplace with incomes up to 400 percent of the federal poverty line. As a result, the Urban Institute estimates that eliminating CSR payments would actually reduce the number of uninsured individuals by around four hundred thousand, while the CBO finds that the total number of uninsured would increase by around a million 2018 before decreasing around a million below today’s number in 2020. Larger subsidies from the higher cost of the silver plans, the reasoning goes, would make gold and bronze plans more attractive to more people and lead to more people buying insurance on the individual marketplace. The CBO further suggests that most people would pay net premiums “similar to or less than what they would pay otherwise.”
The estimates from the Urban Institute and the Congressional Budget Office, however, rely on ideal conditions that do not exist in reality. Both studies assume that the cost of complying with CSR requirements will be priced entirely into the silver plans; as previously mentioned, how states have allowed insurers to build in anticipated costs from the loss of CSR payments has varied widely from state to state. In particular, some states have allowed for no CSR strategy, while others have spread the costs to all bands rather than just silver plans. In certain states, the increase in premiums will be matched perfectly by the tax credits, with costs borne by the federal government with no increase in net premiums for individuals. In other states, however, net premiums may rise significantly.
Furthermore, the Urban Institute study assumes that the policy shift would be announced at a time when insurers would be able to modify premiums to adapt to the new policy, rather than being forced to choose between taking losses and leaving the marketplace. The timing of the announcement, however, coming as it does after 2018 premiums were finalized but before open enrollment begins, feels almost deliberately calculated to encourage the maximum number of insurers to exit the marketplace—unlike in the Urban Institute’s estimate, there will almost certainly be significant exits. The CBO estimate is more cautious, but it still assumes that insurers that withdraw from the marketplace now would re-enter by 2020. Given the unreliability of the administration’s healthcare policy and the resulting uncertainty it has created for insurers, it is generous to assume that insurers will be eager to partner with the federal government.
The easiest solution to this crisis is for Congress to simply fund the subsidies. A bipartisan deal led by Sen. Patty Murray (D-WA) and Sen. Lamar Alexander (R-TN) aims to do just that. Trump, however, appears to be leaning against the deal, while House Speaker Paul Ryan has also announced his opposition. As a result of this political opposition, it does not appear a deal will pass any time soon.
The overall impact of the executive order remains uncertain and largely hinges on how insurers and states respond. Net premiums will almost certainly increase for individuals who buy their insurance on the individual marketplace and who do not receive any premium tax credits under the ACA, but the impacts on other groups are uncertain at this time. In particular, a lot depends on the timing of the inevitable insurer lawsuit—an injunction to keep the subsidies flowing would go a long way toward limiting the effects of the executive order. The biggest impacts will be felt in states where state governments failed to anticipate the withdrawal of CSR funding. As a result, premiums may increase significantly and there may be a significant insurer exodus from the individual marketplace. At the moment, every county has at least one insurer providing individual coverage through the marketplace. As a result of this move, hundreds of thousands of people will see their premiums increase dramatically, while millions more, especially in areas where only one insurer has signed up to sell coverage through the marketplace, may find that they no longer have any ACA options for 2018.
This article has been edited for clarity and conciseness. Image licensed under Creative Commons; original can be found here.