The ACA’s premium tax credits have been discussed at length in the media. Although there’s still plenty of confusion about how the exchanges and premium subsidies will work, most people seem to be aware that subsidies will be available to help a lot of people pay their health insurance premiums.
But there’s another ACA-created health insurance subsidy that hasn’t received as much attention. While premium subsidies help pay the cost of the health insurance itself, cost-sharing subsidies are available to lower the out-of-pocket exposure for eligible enrollees.
Cost-sharing refers to the portion of a medical claim that the insured must pay, usually in the form of a deductible, coinsurance or copay (it does not include premiums, balance billing or expenses that are not covered by the insured’s policy). Plans in the exchanges are designated as Platinum, Gold, Silver, Bronze or catastrophic, depending on their actuarial value, or AV (a measure of the percentage of costs that the plan covers). And there are caps on the maximum out-of-pocket costs that any of the plans can impose.
In a nutshell…
The cost-sharing subsidies are designed to reduce the portion of a claim that an insured will have to pay, and like the premium subsidies, eligibility is based on income. Although premium subsidies can be applied to any of the “metal” plans within the exchange, cost-sharing subsidies are only available on Silver plans.
Although I go into detail in this article in terms of how the cost-sharing subsidies work, all you really need to know is that if your income is under 250 percent of poverty (EDIT, December 2014: for 2015, this is $29,175 for a single person and $59,625 for a family of four), you need to pay particular attention to the silver plans in the exchange. Any cost-sharing subsidies for which you’re eligible will be automatically built into the silver plans.
Two types of subsidies
The Affordable Care Act includes two different types of cost-sharing subsidies. In both cases, HHS will reimburse insurance carriers directly to reduce the insured’s cost-sharing, and unlike the premium subsidies, cost-sharing subsidies do not have to be reconciled when insureds file their taxes.
The first subsidy reduces the maximum out-of-pocket exposure on a Silver plan for households with incomes between 100 and 250 percent of federal poverty level. This subsidy was originally intended for enrollees with incomes up to 400 percent of poverty level, but HHS later ruled that the subsidy would end at 250 percent of poverty level (more details here, beginning with the highlighted subheading “C. Plan Variations”).
For 2014, the unsubsidized out-of-pocket maximum for an individual is $6,350 ($12,700 for a family). Enrollees who are eligible for cost-sharing subsidies can select Silver plans with lower out-of-pocket limits: For applicants with income between 100 and 200 percent of poverty level, the subsidized Silver plans have a maximum out of pocket of $2,250 ($4,500 for a family). Those with income between 200 and 250 percent of poverty level can select a Silver plan with a maximum out-of-pocket of $5,200 ($10,400 for a family). These plans only appear on the exchange websites for applicants who qualify for them (EDIT, December 2014: although the maximum out-of-pocket under the ACA has increased slightly for 2015, the maximum out-of-pocket under the cost-sharing subsidies has not. The numbers here are still accurate for 2015).
The second type of cost-sharing subsidy is also available to insureds with household incomes between 100 and 250 percent of FPL. These subsidies work by increasing the actuarial value (AV) of the plan. All Silver plans have an actuarial value of 70 percent. The plan designs vary and there are different ways that the AV can be calculated. But the basic idea is that a Silver plan will cover roughly 70 percent of medical bills – and the insured will cover 30 percent – until the out-of-pocket maximum is reached (at that point, the health plan starts paying 100 percent of covered costs).
For eligible enrollees, this second type of cost-sharing subsidy increases the AV of a Silver plan to between 73 percent and 94 percent.
Cutting through the confusion
There’s plenty of confusion around the cost-sharing subsidies. Some sources explain just one of the two subsidies, and many people are perplexed as to how both cost-sharing subsidies can both be used at the same time. A lot of this stems from confusion about how out-of-pocket maximums and actuarial value differ. To understand the cost-sharing subsidies, it helps to think of the subsidy that reduces out-of-pocket maximum as a safety net that’s there to catch you in a worst-case scenario. If you have a claim that’s large enough to cause you to reach your out-of-pocket maximum, that subsidy will make the burden easier to bear by reducing the maximum amount that you would have to pay.
A lot of people don’t meet their out-of-pocket maximum most years. But they may have several smaller expenses throughout the year, and the costs can still be difficult to manage. That’s where the AV-increasing cost-sharing subsidy comes in. It reduces the insured’s portion of expenses right from the start, even if the out-of-pocket maximum is not reached.
So instead of having to pay 30 percent of claims expenses, an insured with an income of 140 percent of FPL would only have to pay roughly 6 percent of expenses. For this person, the out-of-pocket maximum would also be reduced by almost 65 percent, thanks to the first cost-sharing subsidy. That subsidy would be beneficial if and when the claims exceeded $2,250. But the subsidy that increases AV is beneficial even in the case of less expensive claims.
Although eligibility for subsidies is based on other factors in addition to income, households with incomes up to 250 percent of FPL could be eligible for premium subsidies as well as both cost-sharing subsidies. This will go a long way towards making health insurance and health care more affordable and accessible.