Q: Can you explain the ACA cost-sharing subsidy that increases a policy’s actuarial value?
A. Cost-sharing subsidies (otherwise known as cost-sharing reductions, or CSR for short) serve two purposes: They decrease the maximum out-of-pocket costs that the enrollee will have to pay during the year, and they increase the actuarial value (AV) of the policy. Actuarial value is used to measure the percentage of total medical costs that a plan will cover for an average population; the percentage that it covers for a specific individual will vary tremendously depending on how much health care the person needs during the year.
For eligible enrollees, the CSR benefits are automatically added to all of the available silver plans in the exchange. Cost-sharing subsidies are ONLY available on silver plans purchased in the exchange, and they are only available to enrollees with household incomes of up to 250 percent of the federal poverty level (FPL). This is in contrast to premium subsidies, which can be used to purchase any bronze, silver, gold, or platinum plan in the exchange, and are available to people earning up to 400 percent of the poverty level.
The unsubsidized AV of a Silver plan is roughly 70 percent (there’s a de minimus range that allows actual AV to vary a bit above or below that level, with a range of 66 to 72 percent). This means that the average insured pays roughly 30 percent of medical bills, and the insurance company pays roughly 70 percent. (again, this will vary significantly from one person another, based on how much medical care they need during the year) The cost-sharing subsidy increases the AV of a Silver plan to the following levels, depending on household income:
- Household income from 100 – 150% FPL = AV increased to 94%
- Household income from 151 – 200% FPL = AV increased to 87%
- Household income from 201 – 250% FPL = AV increased to 73%
This means that an eligible insured with a household income of 140 percent of FPL (about $17,864 for a single individual purchasing coverage for 2021) would only be responsible for an average of six percent of medical bills. This increase in AV is achieved by reducing the copays, deductible, and coinsurance that the enrollee has to pay, so that the insurance company covers more of the claims.
But again, this does not mean that the insurance company will cover 94 percent of a specific enrollee’s medical costs. The actual percentage they cover will vary significantly for each individual policy-holder, since a person with substantial medical bills will end up having the vast majority of her bills covered by the insurance plan (it will pay 100 percent of covered costs once she reaches her out-of-pocket maximum), whereas a person who needs very little care during the year would end up paying a larger percentage of her own costs, since she wouldn’t have met her out-of-pocket maximum.
The other provision of cost-sharing subsidies is to limit the total out-of-pocket exposure on silver plans, and it’s also automatically incorporated into all of the available silver plans in the exchange, if the applicant’s income is up to 250 percent of the federal poverty level (note that on the low end, subsidy eligibility starts at 100 percent of the poverty level in states that haven’t expanded Medicaid, and at 139 percent of the poverty level in states that have expanded Medicaid).
Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.