ACA’s cost-sharing subsidies: Key takeaways
- CSR: The other ACA subsidy
- What does cost-sharing mean?
- CSR in a nutshell…
- Who’s eligible for cost-sharing subsidies?
- Lower out-of-pocket maximums
- Increased actuarial value = better benefits
- Cutting through the confusion
- What happened when the Trump Administration eliminated CSR funding?
- Subsidies are much larger, and millions of uninsured Americans can get free bronze plans due to the way the cost of CSR has been handled
- The impact of how CSR costs are being handled varies considerably from one state to another
- If you don’t qualify for premium subsidies, you can probably avoid paying the higher premiums that include the cost of CSR (and as of 2020, you’ll likely be able to avoid getting stuck off-exchange despite an income change mid-year).
The ACA’s premium tax credits have been discussed at length in the media. Of the more than 10.6 million people who had effectuated coverage through the exchanges as of early 2019, 87 percent qualified for premium subsidies.
But there’s another ACA-created health insurance subsidy that 52 percent of exchange enrollees are receiving in 2019. 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 early 2019, there were nearly 5.5 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 alone (this was the last year that the federal government funded the cost of CSR, which we’ll discuss in a moment). 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 in order to make it better coverage.
Until late 2017, this subsidization was directly provided by the federal government; since then, the cost of CSR has been added to premiums in most states, driving up the cost of coverage and thus resulting in larger premium subsidies, which continue to be directly provided by the federal government. So in a round-about way, the federal government is still subsidizing the cost of CSR.
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 (ACA-specific MAGI). 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 MAGI is under 250 percent of the FPL (Federal Poverty Level) (for enrollments with 2020 effective dates, this is $31,225 for a single person and $64,375 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 MAGI 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 (for 2020 coverage, that amounts to $24,980 for a single individual, and $51,500 for a family of four). People with MAGI between 200 and 250 percent of the poverty level are 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 is being added to silver plan premiums in most areas.
The Affordable Care Act introduced cost-sharing reductions (CSR) as a means of keeping health care costs (as opposed to just insurance premiums) affordable for people with modest incomes. CSR benefits are available to enrollees with MAGI 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).
For coverage effective in 2020, 250 percent of FPL is equal to $31,225 for a single person, and $64,375 for a family of four. This chart shows the MAGI amounts that apply for other household sizes, although it’s generally not updated for the coming year until very close to the start of open enrollment (until then, to see the income limits for CSR in 2020, you can use this chart of 2019 poverty level limits by family size and multiply each amount by 2.5 to get 250 percent of the poverty level). For premium subsidies and CSR eligibility, the prior year’s poverty level numbers are always used, so 2019 poverty level numbers will be used to calculate eligibility for financial assistance on 2020 health plans.
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 receive them in 2020.
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 the 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 the poverty level.
For 2020 coverage, the unsubsidized out-of-pocket maximum for an individual is $8,150 ($16,300 for a family). But for enrollees who are CSR-eligible and who pick a silver plan, the maximum out-of-pocket is lower. [See Table 9 in the 2020 Benefit and Payment Parameters. These plans only appear on the exchange websites for applicants who qualify for them. For those who aren’t eligible for CSR, the silver plans will have their regular out-of-pocket maximums—ie, up to $8,150 for an individual in 2020]:
- For applicants with MAGI between 100 and 200 percent of the poverty level, the maximum out-of-pocket is $2,700 for a single individual and $5,400 for a family. This represents a 67 percent reduction from the regular out-of-pocket cap.
- For applicants with MAGI between 200 and 250 percent of the poverty level, it’s $6,500 for a single individual and $13,000 for a family. This represents a 20 percent reduction from the regular out-of-pocket cap.
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 (aka Obamacare), 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 aspect 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 MAGI 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 MAGI 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 a household MAGI of 140 percent of FPL who picks a silver plan would end up with a policy that covers an average of 94 percent of costs (across all enrollees), instead of a policy that covers 70 percent of costs. For this person, the out-of-pocket maximum in 2020 is also reduced by 67 percent (from the regular maximum out-of-pocket of $8,150 to the adjusted maximum out-of-pocket of $2,700, 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 $2,700. 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 MAGI 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.
The Trump administration cut off funding for CSR. What now?
There was legal uncertainty surrounding cost-sharing subsidies starting in 2014, but it took on 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).
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 presidency, the issue took on a new urgency, given the GOP’s efforts to eliminate the ACA. For the first several months of Trump’s presidency, 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, adding the cost of CSR to premiums. In most states where the assumption had been that CSR funding would continue, insurers scrambled to revise their 2018 premiums in October 2017 (just days before the start of open enrollment), 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.
And because the cost of CSR has mostly been added to silver plan rates since 2018, premium subsidies are much larger than they were prior to 2018, and are disproportionately large compared with the cost of non-silver plans. For enrollees who receive premium subsidies in 2019, the average subsidy amount is $514/month; in 2017, it was $373/month. Not all of that increase is due to the handling of CSR costs, but a significant portion of it is. The increased premium subsidies are beneficial to all enrollees who get premium subsidies—not just those who get CSR benefits. So in a round-about way, the federal government is still funding CSR. They’re just doing so via larger premium subsidies, instead of directly reimbursing insurers.
The Trump administration confirmed in June 2018 that insurers would continue to be allowed to add the cost of CSR to silver plan rates for 2019 coverage, and subsequently confirmed that this would be allowed in 2020 as well. But the administration is considering whether to change the rules starting in 2021 or a later year, so the future of “silver loading” is uncertain. There has been some speculation that perhaps the Trump administration might ban silver loading (and instead require broad loading, with the cost of CSR added to premiums of all plans; the implications of mandating a broad load is discussed in more detail here), since silver loading results in more government spending on premium subsidies. But if a change like that is made, the earliest it could take effect would be 2021.
And for the time being, silver loading is by far the dominant strategy being used by insurers across the country. In August 2018, HHS issued guidance on the issue, actively encouraging states to promote on-exchange-only silver loading. Quite a few states took that approach for 2018, but even more did so for 2019 (including North Dakota, Delaware, Vermont, and Colorado, where insurers weren’t allowed to silver load at all for 2018). In most states, the cost of CSR was added to on-exchange silver plans for 2019. Separate off-exchange-only silver plans are available in many areas, without the cost of CSR added to their premiums. This provides an alternative for people who want to buy a silver plan but who don’t qualify for premium subsidies, since they have to pay full-price for their plan and the option without the cost of CSR added to the premiums is more affordable.
In addition, since the cost of CSR is added to a smaller total number of plans (since it’s not added to the plans that are only sold outside the exchange), the additional amount that’s added to each plan is larger, resulting in even bigger premium subsidies for everyone who qualifies for premium subsidies.
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 who select 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 government directly reimbursing insurers for the cost of CSR, the cost is now almost universally being added to silver plan premiums.
Since premium subsidy amounts are based on the cost of silver plans (specifically, the benchmark silver plan in each area), premium subsidies are much larger than they would otherwise have been (as noted above, average subsidy amounts are about 38 percent larger in 2019 than they were in 2017; that’s due partly to the overall rising cost of premiums, but a significant portion of the increase is due to silver loading). 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.
According to a Kaiser Family Foundation analysis, there were 4.2 million uninsured Americans who could get FREE bronze plans for 2019, after the premium subsidies were applied. That was 16 percent of the total uninsured population in the US, and 27 percent of the uninsured population if you don’t count undocumented immigrants (who aren’t eligible to buy coverage in the exchange at all, even at full price) and people who are eligible for Medicaid.
Yes, deductibles are high on bronze plans. But all plans include free preventive care, and coverage for non-preventive care with a high deductible is certainly better than no coverage at all. Keep in mind that insurance companies tend to have network negotiated rates that are far below the amounts that doctors and hospitals bill. If an in-network provider bills $2,000 and your insurer’s approved amount is $750, you only have to pay $750, even if you have a high deductible and are thus responsible for paying the full bill. This is an often overlooked benefit of having health insurance, even if the deductible seems impossibly high.
It’s important to understand that many of those 4.2 million people might be better served by picking a silver plan if they’re eligible for cost-sharing reductions. This is particularly true if their MAGI doesn’t exceed 200 percent of the poverty level (a little less than $25,000 for a single person), since the most robust CSR benefits are available below 200 percent of the poverty level. Yes, the silver plan will have higher premiums, but it will also provide more robust coverage than a free bronze plan. But if you’re uninsured and simply can’t afford the premium for a silver plan, enrolling in a free bronze plan is far preferable to remaining uninsured.
As with most things related to health insurance, there is lots of variation from one state to another
DC, North Dakota, and Vermont didn’t permit insurers to add the cost of CSR to premiums for 2018, but Vermont and North Dakota both began to allow it for 2019. 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—starting in 2018. There are only a few states—Colorado, Delaware, Indiana, Mississippi, and West Virginia—where the cost of CSR was spread across plans at all metal levels for 2018, rather than being concentrated on silver plan premiums. For 2019, Delaware and Colorado switched to silver loading, although the other three states retained their broad-load approach and are continuing to use it for 2020.
There are other states—Georgia and Texas are examples—where regulators left the decision up to insurers in 2018 and continuing that same approach for 2019. But now that the benefit to consumers from silver loading are clear, insurers tend to silver load if regulators didn’t provide guidance one way or the other.
So in 2019, Indiana, Mississippi, and West Virginia are the only places where the cost of CSR is still being added to premiums at all metal levels (in DC, the cost of CSR is still not being added at all, but very few enrollees in DC receive CSR benefits, so the cost is negligible). So in those states, the disproportionately large premium subsidies (and the resulting very low-cost or free bronze plans) are not available. But in much of the rest of the country, bargains abound.
As is always the case, however, the details vary considerably from one place to another. In Phoenix, Arizona, for example, premium subsidies are smaller in 2019 than they were in 2018, due to the influx of new insurers offering coverage and the resulting lower benchmark premium price. This is true despite the fact that insurers in Arizona have added the cost of CSR to silver plan premiums.
But in Cheyenne, Wyoming, a 45-year-old who earns $30,000 in 2019 can select from among three bronze plans that have $0 premiums (including one with an out-of-pocket maximum of $6,750, which is well below the allowable $7,900 cap for 2019). Or she could also choose a gold plan for just $52/month. These low-cost non-silver plans are a direct result of the cost of CSR being added to silver plan rates.
The Kaiser Family Foundation analysis of the uninsured population eligible to buy plans in the exchange (not counting undocumented immigrants and people who are eligible for Medicaid) found that there are eight states where at least 40 percent of those individuals were eligible for free bronze plans in 2019 (Delaware, Idaho, Iowa, Nebraska, Oklahoma, Utah, Wisconsin, and Wyoming).
What if you don’t qualify for premium subsidies?
People who don’t get premium subsidies (ie, a household of four with MAGI above $103,000 in 2020, after subtracting any contributions to pre-tax retirement plans and/or a health savings account) have to pay the higher premiums that include the cost of CSR, but in most states, this only applies if they select a silver plan. And in states where the cost of CSR is added only to on-exchange plans, lower-cost off-exchange silver plans are available to people in this situation. California led the way on this approach, but numerous other states also adopted it, and more are switching to this approach for 2019.
It’s worth noting here that although adding the cost of CSR only to on-exchange silver plans does serve to protect consumers, it may have also placed some people with variable income in a tricky situation. Enrollees with MAGI above 400 percent of the poverty level (ie, not eligible for subsidies) who want a silver plan will often find that they’re cheaper off-exchange, due to the cost of CSR being added to the on-exchange silver plans. But prior to 2020, if that person signed up for an off-exchange plan, they couldn’t switch to an on-exchange plan if their income dropped mid-year to a level that was subsidy-eligible (prior to 2020, a drop income is not a qualifying event if you’re not already enrolled in a plan through the exchange).
For people who are self-employed, who have variable income, or who might simply lose their job or have their hours reduced mid-year, this presented a potential conundrum: Should you enroll in the lower-price off-exchange silver plan, knowing that if your income drops mid-year, you wouldn’t be able to get premium subsidies? Or should you enroll in the higher-price on-exchange plan, knowing that if your income were to drop during the year, you’d be able to start getting subsidies at that point (or claim them on your tax return)?
There was no easy answer to this, but it’s an issue that HHS has addressed for 2020 and future years. Starting in 2020, people with off-exchange coverage (including those who take advantage of lower-cost silver plans outside the exchange) who experience an income change that makes them subsidy-eligible will be allowed to switch to an on-exchange plan at that point. Note that although HealthCare.gov plans to offer this special enrollment period starting in 2020, they’ve made it optional for state-run exchanges—so there’s no guarantee that all of the state-run exchanges will follow suit, although most are likely to do so.
Despite CSR defunding, the federal government is still picking up most of the tab via larger premium subsidies
Enrollment in the exchanges for 2018 ended up being nearly as high as 2017’s enrollment, despite an open enrollment period that was half as long. 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. For 2019, there was an influx of insurers joining the exchanges in many states (a trend that’s continuing for 2020), and exchange enrollment ended up only about 2.4 percent lower than it had been in 2018 (that’s nationwide, but the enrollment drop was concentrated in states that use the federally run exchange; states that run their own exchanges saw an uptick in enrollment in 2019).
Because insurers and state regulators were anticipating the loss of CSR funding (or reacted swiftly after it was officially eliminated), the cost of CSR has been adequately incorporated into the premiums insurers collect. And because it is 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) are much larger 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 benefiting, 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.
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.