The ACA’s premium tax credits have been discussed at length in the media. Of the more than 11 million people who had in-force coverage through the exchanges in March 2016, almost 85 percent were receiving premium subsidies. And of the 12.2 million people who selected exchange plans during the 2017 open enrollment period, 83 percent are receiving premium subsidies.
But there’s another ACA-created health insurance subsidy that 59 percent of HealthCare.gov enrollees are receiving in 2017. While premium subsidies help pay the cost of the health insurance itself, cost-sharing reductions (also known as cost-sharing subsidies) are available to reduce the out-of-pocket exposure for eligible enrollees. As of the end of the 2017 open enrollment period, there were 5.7 million HealthCare.gov enrollees receiving cost-sharing reductions (they’re available in state-run exchanges as well, but the official HHS enrollment report did not include data for cost-sharing reductions in states that run their own enrollment platforms).
Ever since the exchanges went live in the fall of 2013, cost-sharing subsidies have been much less well-understood than premium subsidies. Many people don’t know they exist, despite the fact that the federal government spent $7 billion on them in 2016. This is partly because they don’t show up among the available plans for people who aren’t eligible for them, and also because people who enroll in cost-sharing reduction plans don’t always realize that the plan they’re getting is in fact heavily subsidized by the federal government in order to make it better coverage.
That’s changed somewhat since the 2016 election, however. There’s an ongoing legal challenge regarding the cost-sharing reductions (details below), and it’s come to the forefront under the Trump Administration, putting cost-sharing reductions more in the spotlight than they were in previous years. But for now, let’s take a look at what these subsidies are, and how they work.
What does cost-sharing mean?
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 the federal poverty level (FPL; for enrollments with 2017 effective dates, this is $29,700 for a single person and $60,750 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.
The Affordable Care Act includes two different types of cost-sharing subsidies, both of which are available to enrollees with incomes between 100 percent and 250 percent of the federal poverty level (in states that have expanded Medicaid, enrollees are eligible for Medicaid with incomes up to 138 percent of the poverty level; cost-sharing subsidy eligibility starts above that point).
In both cases, HHS reimburses 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. Both subsidies are automatically incorporated into Silver plans when eligible enrollees shop for plans through the exchanges.
Lower out-of-pocket maximums
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.
For 2017 coverage, the unsubsidized out-of-pocket maximum for an individual is $7,150 ($14.300 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 $2,350 ($4,700 for a family). Those with income between 200 and 250 percent of the poverty level can select a Silver plan with a maximum out-of-pocket of $5,700 ($11,400 for a family). These plans only appear on the exchange websites for applicants who qualify for them.
For 2018 coverage, the maximum out-of-pocket exposure on cost-sharing reduction plans will increase again (see Table 13 on page 300). For applicants with income between 100 and 200 percent of poverty level, the subsidized Silver plans in 2018 will have a maximum out-of-pocket of $2,450 ($4,900 for a family). Enrollees with income between 200 and 250 percent of the poverty level will be able to select a Silver plan with a maximum out-of-pocket of $5,850 ($11,700 for a family).
Although the regular maximum out-of-pocket under the ACA increased for 2015 and again for 2016, the Silver plan maximum out-of-pocket for enrollees who qualify for cost-sharing subsidies remained the same as 2014 levels for enrollees with incomes between 100 and 200 percent of the poverty level. But it was a little higher in 2016 for cost-sharing subsidy-eligible enrollees with incomes between 200 and 250 percent of the poverty level. And it increased slightly for 2017, and again for 2018, across all income levels.
Increased Actuarial value – aka, better benefits
The second type of cost-sharing subsidy is also available to insureds with household incomes between 100 and 250 percent of FPL, and just like the reduction in out-of-pocket limits, it’s automatically incorporated into Silver plans for eligible enrollees.
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 for the average enrollee. This includes enrollees with very high claims, since it’s averaged across the entire pool of insureds (ie, for insureds with low claims, the carrier will end up paying less than 70 percent of their costs, but for enrollees with very high claims, the insurer will end up paying much more than 70 percent of their total 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. AV is increased based on income. For enrollees with household income between:
- 100% to 150% of FPL, AV is increased to 94% (better than a Platinum plan)
- 150% to 200% of FPL, AV is increased to 87% (nearly as good as a Platinum plan)
- 200% to 250% of FPL, AV is increased to 73% (better than the normal 70% for a regular Silver plan)
In addition, Native Americans with income under 300 percent of the poverty level are eligible for plans with zero cost-sharing.
Cutting through the confusion
There’s plenty of confusion around the cost-sharing subsidies, a lot of which stems from misconceptions 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 an insured with an income of 140 percent of FPL would end up with a plan that covers an average of 94 percent of costs (across all enrollees), instead of a plan that covers 70 percent of costs. For this person, the out-of-pocket maximum in 2017 is also reduced by 67 percent (from the regular maximum out-of-pocket of $7,150 to the adjusted maximum out-of-pocket of $2,350, keeping in mind that plans can offer out-of-pocket limits that are lower than those amounts). That aspect of the cost-sharing subsidies would be beneficial if and when the claims exceeded $2,350. 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 are virtually always eligible for premium subsidies as well as both cost-sharing subsidies. This goes a long way towards making health insurance and health care more affordable and accessible.
What’s happening with cost-sharing reductions under the Trump Administration?
There has been legal uncertainty surrounding the cost-sharing subsidies for the last few years, but it’s taken on a new importance under the Trump Administration. In 2014, House Republicans (including Tom Price, who is now the Secretary of HHS, but who was then a U.S. Representative from Georgia) brought a lawsuit against the Obama Administration, alleging that billions of dollars in funding for the cost-sharing subsidies had never been allocated by Congress, and was thus being distributed illegally by HHS (Nicholas Bagley, University of Michigan Law School professor, explains that the lawsuit was not without merit).
The lawsuit was originally called House v. Burwell (Sylvia Matthews Burwell was the Secretary of HHS at the time) but is ironically now called House v. Price.
In 2016, a district court judge sided with House Republicans, ruling that the cost-sharing subsidies were illegal and could not continue. The ruling was stayed, however, to allow the Obama Administration to appeal, which they did. Throughout that process, cost-sharing reduction money continued to flow from HHS to health insurers across the country.
Once Trump won the election, the issue took on a new urgency, given the GOP’s efforts to eliminate the ACA. For the time being, the lawsuit over cost-sharing subsidies has been put on pause, at the request of both parties (both of which are now Republican-led). The next update to the court is due on May 22.
In the meantime, there has been considerable uncertainty in terms of what happens next with the cost-sharing reductions. If the Trump Administration drops the appeal that the Obama Administration began, the 2016 ruling would stand, and cost-sharing subsidies would disappear, throwing insurance markets into disarray.
On the other hand, House Republicans could decide to drop their case, or Congress could simply opt to pass legislation appropriating funds for the cost-sharing reductions. Either of those options would stabilize the insurance markets and remove the looming specter of the House v. Price case, but they would require a degree of goodwill and cooperation that GOP lawmakers haven’t generally demonstrated with regards to shoring up the ACA.
And all of this is happening as the clock ticks down to the filing deadlines for 2018 plans. Insurers are currently developing rates and plans for 2018, and will file them in May and June. The more uncertainty that exists, the more likely they are to opt for exiting the exchanges (or individual market altogether) or dramatically higher premiums (the Kaiser Family Foundation estimates that without cost-sharing reduction funding, rates would increase by 19 percent in 2018. That does not include rate increases based on all of the normal factors).
As of April 2017, HHS was still noncommittal on the issue. They had said that they would continue to make cost-sharing reduction payments to insurers while the lawsuit is litigated, but later revised that to say that the Trump Administration is “currently deciding its position on this matter.” In short, the ongoing funding of cost-sharing reductions is still uncertain, and that uncertainty is likely to be making insurers skittish as they look toward 2018.