To make health care truly affordable, the Affordable Care Act (ACA) reduces both the cost of insurance premiums, and the out-of-pocket costs that lower-income enrollees pay for health care. People who purchase their own health plans through the marketplaces benefit not just from tax credits that lower the cost of their plans, they also benefit from reduced out-of-pocket costs (in the form of lower deductibles and copayments) if they earn 250 percent or less of the federal poverty level, or $29,700 for a single person. The cost reductions increase the closer people get to the poverty level, resulting in the lowest-income enrollees receiving what is essentially “platinum-plus” coverage for the same cost as a silver-level plan (see box). Over half of marketplace enrollees receive these cost-sharing reductions, and in some states the proportion is considerably higher.
Cost Exposure in Marketplace Plans
Insurance companies that sell plans inside or outside the marketplaces must offer them at four different levels of cost exposure, also known as actuarial values:
Insurers also are required to provide silver-level marketplace plans with reduced cost-sharing for people who have incomes between 100 percent and 250 percent of the federal poverty level. The lower one’s income, the higher the proportion of health care costs covered:
Thus, as Congress considers whether to repeal, replace, or repair the ACA, one of the looming issues is whether to continue funding this critical component. The ACA authorizes the federal government to reimburse insurers for these reductions in patient cost-sharing. However, a Republican-led Congress has never appropriated the funds needed to make these cost-sharing reduction (CSR) payments to insurers.
In order to keep insurers from leaving the marketplaces, the federal government has used other, nonearmarked funding sources for the past three years to make these CSR payments. Some members of Congress, however, believe that it is unlawful to make these payments without an official appropriation, and so have sued to stop the payments. A federal district court initially ruled in their favor, but has stayed the ruling, pending a decision by the Court of Appeals. So far, the Trump Administration and current congressional leaders have not declared whether they favor continuing or discontinuing these payments, so both sides have asked the court to pause the court case while they determine what they want to do.
If the current administration wanted to discontinue CSR payments immediately, it could simply stop defending the prior administration’s position in the pending lawsuit, essentially admitting defeat and allowing the district court’s decision to take effect. But Congress would then need to decide whether to appropriate the necessary funds. Therefore, it is critical to understand what the consequences would be if CSR payments were discontinued.
To do so, we analyzed federal rate filings by the 217 health insurers selling coverage through the ACA’s marketplaces in 2017 who projected their expected CSR payments.1 For the current year, insurers set their rates with the expectation that they would receive $7.35 billion in CSR payments from the federal government, a figure similar to what the Congressional Budget Office has estimated for 2016.2 This expected payment amounts to $64.79 per member per month, which is 14 percent of insurers’ total premium amount. Insurers set their premiums for 2017 with the expectation that they would earn a 7 percent profit overall (weighted by enrollment) (Exhibit 1). Thus, if the CSR payments cease and insurers are not allowed to adjust their premiums, they project a loss of 7 percent overall.
If CSR payments ceased, the financial consequences would vary considerably among insurers, depending on how much of their projected enrollment consists of people who are eligible for reduced cost-sharing. To determine this variation, we separated insurers into quartiles, based on projected CSR payments per member per month.3 In the top quartile, insurers project CSR payments of $165.22 per member per month (weighted by enrollment), which is 32 percent of their premiums. If those payments ceased without any adjustment in premiums, the top quartile projects changing from a 7 percent profit to a 25 percent loss, on average. In the bottom quartile, the impact would be more muted, but still substantial. The quarter of insurers least dependent on CSR payments still project that they will receive $13.05 per member per month, which is 3 percent of premium. Losing those payments would reduce their projected profit margin from 5 percent to 2 percent.
In many states, insurers have sustained losses in the ACA marketplaces in prior years, a result of both the highly competitive nature of the markets and the difficulty insurers initially had in making accurate projections of medical costs. This year, however, was expected to be a “catch-up” year in which larger premium increases were made to bring ACA insurers to profitability. If CSR payments were terminated, this market correction would not occur. Instead, insurers would suffer substantial losses, amounting to billions of dollars.
It is for this reason that most insurers insist they could not remain in the ACA marketplaces if CSR payments were discontinued. And, for those insurers who remain, substantial increases in premiums would be required, which would create additional risk of a premium “death spiral.” Therefore, congressional and administration leaders should carefully consider these financial consequences in deciding what position to take with regard to CSR payments, while they deliberate on whether to repeal, replace, or repair the ACA.
1 These filings are on a form known as the Uniform Rate Review Template (URRT), which is designed principally to show compliance with the ACA’s “single risk pool” requirement. This form reports most data elements for each plan, which we aggregate to the issuer level for all its “qualified health plans.” Administrative costs, however, are not reported on a plan level but are reported on an issuer level, so we impute them at the plan level based on the administrative cost load that each insurer reported for its overall ACA-compliant business. Plans sold through marketplaces are also sold outside of them, but the vast majority of subscribers enroll through the marketplaces since only they are eligible to receive ACA subsidies. For undetermined reasons, an additional 44 insurers who report selling marketplace policies did not project the amount of CSR payments they expected to receive.
2 The CBO estimated an increase to $9 billion for 2017, but that was based on a projection that marketplace enrollment would increase to 15 million people, which now does not appear to be likely.
3 The top quartile includes all insurers with projected CSR payments greater than $52 per member per month, while the bottom quartile includes insurers with projected CSR payments less than $21 per member per month. Within each group, mean values are weighted by enrollment.