The ACA’s premium tax credits have been discussed at length in the media. Of the nearly 10 million people who had in-force coverage through the exchanges in mid-2015, almost 84 percent were receiving premium subsidies.
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 reductions (also known as cost-sharing subsidies) are available to reduce the out-of-pocket exposure for eligible enrollees. As of mid-2015, there were nearly 5.6 million exchange enrollees covered by plans that included cost-sharing subsidies.
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 2016 effective dates, this is $29,425 for a single person and $60,625 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.
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 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. 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 (more details here, beginning with the highlighted subheading “C. Plan Variations”).
For 2016, the unsubsidized out-of-pocket maximum for an individual is $6,850 ($13,700 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 $5,450 ($10,900 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 has remained the same as 2014 levels for enrollees with incomes between 100 and 200 percent of the poverty level. But it’s a little higher in 2016 for cost-sharing subsidy-eligible enrollees with incomes between 200 and 250 percent of the poverty level.
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 would also be reduced by 67 percent (from the regular maximum out-of-pocket of $6,850 to the adjusted maximum out-of-pocket of $2,250). That aspect of the cost-sharing subsidies 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 are typically 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.