CBO’s Take on President Trump’s Proposal to End the Affordable Care Act’s (ACA) Cost Sharing Reductions
President Trump is considering ending federal ACA funding for cost sharing reductions. This ACA funding allows individuals with incomes up to 250% of the federal poverty level to reduce their copays and deductibles in the individual market. It costs about $7 billion annually and helps about 5.7 million Americans. He believes that if the funding was ended, the Health Insurance Exchanges would collapse and Democrats would agree to repeal and replace the Affordable Care Act.
The Congressional Budget Office (CBO) reviewed this option and concluded it would increase the federal deficit by $194 billion from 2017 through 2026, and increase silver plan premiums by 20-25% over the next two years. It would cause some insurers to drop from the market in a few rural areas for about two years then they would rejoin the Exchanges. Most individuals would be no worse off because their federal premium assistance would increase to offset the increase in their insurance premiums, assuring they could pay the same or less for the same level of coverage they enjoy today.
So President’s Trump’s proposal is classic “cutting off your nose to spite your face”. How does this all work?
The ACA helps low, moderate and middle-income consumers in two ways: premium assistance and cost sharing reductions. Premium assistance helps pay an individual’s monthly premiums. It is available to all purchasing individual insurance in the Exchanges provided their incomes are less than 400% of the federal poverty level. It is linked as a reference point to the premiums of the second lowest cost silver plan. Cost sharing reductions allow individuals with incomes of 250% of FPL or less to reduce their copays and deductibles if they buy silver plan coverage in the Exchanges. Silver plans cover 70% of the individuals’ expected medical costs; it’s like a plan with a 30% copay. For people with incomes up to 150% of FPL, they would have 94% of expected medical costs covered – i.e. a 6% copay. For people with incomes up to 200% of FPL, they would have 87% of medical costs reimbursed – i.e. a 13% copay. For people with incomes up to 250% of FPL, they would have 73% of medical costs reimbursed – i.e. a 27% copayment.
If the federal payments for cost sharing reductions are eliminated, then the health plans must still offer these discounts under the ACA, but they would need to raise their premiums to pay for it. CBO calculates they would need to raise silver plan premiums in the Exchanges by 20-25% over two years to compensate for the loss of the cost sharing reductions. When the premiums for the second lowest cost silver plans increase by 20-25%, the federal government through its premium assistance component of the ACA pays for the increase for all subscribers eligible for subsidies in the Exchanges. Those individuals who do not qualify for premium assistance would either buy outside the Exchanges at unchanged premiums or buy bronze or gold plans within the Exchanges, which now become a much more financially attractive option to them than the silver plans whose premiums have just inflated by 20-25%.
To summarize there is an unanticipated interplay between premium assistance and cost sharing reductions such that an increase in premiums for the reference plan (2nd lowest cost silver plan) has unexpected benefits in raising the extent of premium assistance for all other subsidized plans in the Exchanges. Or to put in nautical terms, a rising tide lifts all boats, but some more than others.
Prepared by: Lucien Wulsin