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The ACA’s cost-sharing subsidies

Cost-sharing subsidies reduce out-of-pocket spending on Silver plans. Despite lack of federal funding, these benefits remain available to eligible enrollees

The ACA’s premium tax credits have been discussed at length in the media. Of the more than 10.3 million people who had in-force coverage through the exchanges in 2017, 84 percent were receiving premium subsidies.

But there’s another ACA-created health insurance subsidy that 57 percent of exchange enrollees were receiving in 2017. While premium subsidies help pay the cost of the health insurance itself, cost-sharing reductions (CSR, also known as cost-sharing subsidies) are available to reduce the out-of-pocket exposure for eligible enrollees. As of 2017, there were nearly 5.9 million exchange enrollees receiving cost-sharing reductions.

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 2017. 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.

Unlike prior years, CSRs were in the media non-stop in 2017, due to President Trump’s ongoing threats to cut off funding, which he ultimately did in October 2017. But confusion about how CSR benefits work — and how they’re still available without federal funding — has remained. So 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 2018 effective dates, this is $30,150 for a single person and $61,500 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.

Although CSR benefits extend to people with income up to 250 percent of the poverty level, they’re strongest for people with income that doesn’t exceed 200 percent of the poverty level ($24,120 for a single individual in 2018, and $49,200 for a family of four). People with income between 200 and 250 percent of the poverty level will be eligible for CSR benefits on silver plans, but they may find that the relatively modest benefits aren’t worth the added cost of purchasing a silver plan instead of a lower-cost bronze plan (or they may find that a gold plan is available for roughly the same price as a silver plan, with better benefits, due to the way the cost of CSR has been added to silver plan premiums in most areas for 2018).

Who’s eligible?

The Affordable Care Act incorporated two different approaches to reducing cost-sharing for lower-income enrollees. Together, they’re called cost-sharing subsidies or cost-sharing reductions (CSR), and 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).

Until October 2017, HHS reimbursed insurance carriers directly to cover the cost of cost-sharing subsidies, and unlike the premium subsidies, cost-sharing subsidies do not have to be reconciled when insureds file their taxes. Cost-sharing subsidies are automatically incorporated into Silver plans when eligible enrollees shop for plans through the exchanges. Although the federal government is no longer reimbursing insurers for the cost of providing cost-sharing reductions (including the special cost-sharing reductions that are available for Native Americans), the availability of the benefits themselves has not changed. Anyone who is eligible for cost-sharing subsidies can still get them in 2018.

Lower out-of-pocket maximums

The first aspect of CSR 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 2018 coverage, the unsubsidized out-of-pocket maximum for an individual is $7,350 ($14,700 for a family). Enrollees who are eligible for cost-sharing subsidies can select Silver plans with lower out-of-pocket limits (see Table 13 on page 300 of the 2018 Benefit and Payment Parameters). For applicants with income between 100 and 200 percent of poverty level, the subsidized Silver plans have a maximum out-of-pocket of $2,450 ($4,900 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 $5,850 ($11,700 for a family). These plans only appear on the exchange websites for applicants who qualify for them.

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 aspect of cost-sharing subsidies works by increasing the actuarial value (AV) of the plan. Under the ACA, all Silver plans have an actuarial value of roughly 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 aspects of cost-sharing subsidies 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 reduction in 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, the cost-sharing subsidies 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 aspect of cost-sharing subsidies 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 2018 is also reduced by 67 percent (from the regular maximum out-of-pocket of $7,350 to the adjusted maximum out-of-pocket of $2,450, 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 $2,450. But the increased 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 now that the Trump Administration has cut off funding for CSR benefits?

There was legal uncertainty surrounding cost-sharing subsidies for the last few years, but it took on a new importance under the Trump Administration. In 2014, House Republicans (including Tom Price, who was then a U.S. Representative from Georgia, but left his seat to briefly lead HHS under the Trump Administration, before resigning in September 2017) 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 ironically, it became House v. Price once Tom Price took over as the HHS Secretary.

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 first several months of the Trump Administration, the lawsuit over cost-sharing subsidies was pended. But in October 2017, the Trump Administration announced that CSR funding would end immediately. That meant that insurers would not receive reimbursement from the federal government for CSR benefits provided in the final quarter of 2017 and beyond.

Trump’s announcement came after insurers had finalized their rates for 2018. But most insurers had already anticipated the elimination of CSR funding, and had priced their plans for 2018 accordingly. In most states where the assumption had been that CSR funding would continue, insurers scrambled to revise their premiums in October, adding the cost of CSR to the rates. Insurers in most states ultimately ended up adding the cost of CSR to their silver plan premiums for 2018 (the Kaiser Family Foundation had previously estimated that without cost-sharing reduction funding, rates on silver plans would increase by an additional 19 percent in 2018, on top of the rate increases that would have applied if CSR funding had continued).

With few exceptions, insurers generally opted to remain in the exchanges, despite the elimination of CSR funding (some insurers had opted earlier in 2017 to exit the exchanges for 2018, and the uncertainty over CSR funding was generally cited as a reason for the exits. But the official elimination of CSR funding did not result in an additional exodus of insurers from the exchanges).

Enrollees can still get CSR benefits, and premium subsidies are much larger than they would have been if CSR funding had continued

CSR benefits are still fully available to eligible enrollees for 2018 who picked silver plans, and Native American cost-sharing reduction benefits are available to Native American enrollees. In short, nothing has changed about eligibility for cost-sharing subsidies. But rather than the federal goverment directly reimbursing insurers for the cost of CSR, the cost has almost universally been added to premiums for 2018 (there are a few states that didn’t permit this, but they’re the exception to the rule). And in almost all cases, the cost of CSR was added only to silver plans — either all silver plans, or only to on-exchange silver plans. There are only a few states — Colorado, Indiana, Mississippi, and West Virginia — where the cost of CSR was spread across plans at all metal levels, rather than being concentrated on silver plan premiums.

The result of this spike in silver plan premiums is that premium subsidies are much larger for 2018 than they would otherwise have been. In many areas of the country, enrollees with modest incomes are eligible for free bronze plans (or even free gold plans, in some cases) after their premium subsidies are applied. People who don’t get premium subsidies (ie, a household of four with income above $98,400, after subtracting any contributions to pre-tax retirement plans and/or an HSA) have to pay the higher premiums, but in most states, this only applies if they select a silver plan. And in states where the cost of CSR was added only to on-exchange plans, lower-cost off-exchange silver plans were available to people in this situation (California led the way on this approach, but numerous other states also adopted it).

Enrollment in the exchanges for 2018 ended up being nearly as high as 2017’s, despite an open enrollment period that was half as long. And once open enrollment ends in the state-run exchanges, some of which are allowing enrollment through the end of 2018, the national total could end up very close to 2017’s. Although there was considerable consternation in 2017 that the elimination of CSR funding could result in a mass exodus of insurers from the exchanges and a destabilized individual market, that did not come to pass.

Because insurers and state regulators were anticipating the loss of CSR funding (or reacted swiftly after October 12 to account for the eliminated funding), the cost of CSR was adequately incorporated into the premiums insurers will collect in 2018. And because it was generally added to silver plan premiums, on which premium subsidies are based, premium subsidies for nearly everyone who is eligible for them (which is considerably larger than the number of people who get cost-sharing subsidies) will be much larger throughout 2018 than they would have been if the federal government had continued to fund CSR directly.

The overall result is that the federal government is really still funding CSR, via larger premium subsidies rather than direct reimbursement. And more people end up benefitting, since premium subsidies extend to households earning up to 400 percent of the poverty level, whereas CSR benefits stop at 250 percent of the poverty level.

There was some talk towards the end of 2017 about reviving the Alexander-Murry bill that would allocate federal funding for CSR, but this would no longer be as helpful as it would have been in mid-2017, as the CSR funding situation has been resolved in a way that ends up being more beneficial for exchange enrollees. In other words, most enrollees are better off with the federal government NOT funding CSR. And in most states, people who aren’t eligible for premium subsidies can generally pick an off-exchange plan or a non-silver plan in order to avoid paying the added cost to cover CSR; they’re not better off, but they’re also not any worse off.