Cost-sharing reductions (CSRs) are a provision in the Affordable Care Act that reduces out-of-pocket medical costs (ie, deductibles, coinsurance, copays) for eligible enrollees who select silver plans in the exchange.
CSR, sometimes known as cost-sharing subsidies, are available based on the applicant’s income, and reduce enrollees’ cost-sharing in two ways: They lower the plan’s out-of-pocket maximum, and they also increase the actuarial value (AV) of the plan, which is a measure of the percentage of average costs that the plan covers.
Read more about cost-sharing reductions.
Silver plans with built-in CSR will only appear on the exchange websites for applicants whose income makes them eligible for CSR benefits. And unlike health insurance premium subsidies, the cost-sharing subsidies are not a tax credit and do not need to be reconciled when the insureds file their taxes.
The federal government used to directly reimburse health insurance companies for the cost of cost-sharing reductions. That ended in the fall of 2017, but cost-sharing subsidies have continued to be available to eligible enrollees. To cover the cost, most insurers simply add the cost of CSR to silver plan premiums. This approach, known as “silver loading,” results in larger premium subsidies for everyone in the area, as premium subsidy amounts are based on the cost of the second-lowest-priced silver plan in each area. Here’s more information about everything that happened with cost-sharing subsidies in late 2017 and since then.
CSRs are available to people with household income up to 250 percent of the poverty level, and those enrollees are also eligible for premium subsidies, which extend up to 400 percent of the poverty level. (Premium subsidies can be applied to any metal level plan, but to get CSR, you have to pick a Silver plan). The lower income threshold for CSR (and premium subsidies) is 100 percent of the poverty level in states that have not expanded Medicaid, and 139 percent of the poverty level in states that have expanded Medicaid — if you’re eligible for Medicaid, you’re not eligible for any sort of subsidies in the exchange.
[For reference, here’s what those thresholds translate to in terms of dollar amounts for 2021 coverage, which is based on the 2020 poverty level numbers.]
CSRs lower out-of-pocket maximums …
CSR reduces the maximum out-of-pocket exposure on a Silver plan for households with eligible incomes.
For 2021 coverage, the unsubsidized maximum allowable out-of-pocket limit for an individual is $8,550 ($17,100 for a family). But enrollees who are eligible for cost-sharing subsidies are automatically given lower out-of-pocket limits (see Table 4 in the 2021 Benefit and Payment Parameters) as long as they select a silver plan in the exchange (for people who aren’t eligible for CSR, the silver plans displayed on the exchange website will have their regular out-of-pocket maximums, which can be up to $8,550 for an individual in 2021):
- For applicants with MAGI between 100 and 200 percent of the poverty level, the maximum out-of-pocket on a silver plan in 2021 is $2,850 for a single individual and $5,700 for a family (this amounts to a two-thirds reduction from the regular out-of-pocket maximum).
- For applicants with MAGI between 200 and 250 percent of the poverty level, the maximum out-of-pocket for silver plans in 2021 is $6,800 for a single individual and $13,600 for a family (this amounts to a 20 percent reduction from the regular out-of-pocket cap).
- In both cases, plans can be offered with even lower out-of-pocket limits, but cannot exceed those limits.
… and increase actuarial value – aka, better benefits
CSR also increases the actuarial value (AV) of the plan. 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.
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 across a standard population, the insureds pay roughly 30 percent of total medical bills, and the insurance company pays roughly 70 percent (again, this will vary significantly from one person another).
For eligible enrollees, cost-sharing subsidies increase the AV of a Silver plan to between 73 percent and 94 percent, depending on the enrollee’s income. For enrollees with household income from:
- 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.
An example of how it works
Thanks to CSR, an enrollee with an income of 140 percent of FPL (a little under $18,000 for a single person in 2021) would be eligible to enroll in a Silver plan that’s more robust than a platinum plan.
For this person, CSR benefits would reduce the maximum allowable out-of-pocket exposure in 2021 by about 67 percent (from the regular 2021 maximum out-of-pocket of $8,550 to the adjusted maximum out-of-pocket of $2,850 – keeping in mind that plans can offer out-of-pocket limits that are lower than those amounts).
The increase in AV — from about 70 percent to about 94 percent — 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.