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A Closer Look at Those Cost-Sharing Subsidies in the Health Care Law

August 9, 2013 -- Cost-sharing subsidies in the health care law had barely been noticed in the run-up to full 2014 implementation of the overhaul — until Chairman Joe Pitts grilled Marilyn Tavenner about the issue at a House Energy and Commerce Committee just before the August recess began.

The Pennsylvania Republican wanted to know what plans the Centers for Medicare and Medicaid Services administrator had to alert the public that sequester provisions of the budget control law (PL 112-25) would reduce those subsidies. Tavenner replied that the issue was under discussion at the White House Office of Management and Budget.

It’s a pretty safe bet the public had no idea what those subsidies are.

Exactly what are they? Who gets them? And how much would they be cut by sequester provisions in fiscal 2014, which starts Oct. 1?

First, the cost-sharing subsidies are not the same thing as the health care law’s premium tax credits. The tax credits will help pay monthly premiums charged by plans in the new health insurance marketplaces, which open Oct. 1. The cost-sharing subsidies help pay for such out-of-pocket expenses as deductibles and copays and also are used to lower the total amount someone has to pay for health care in any given year.

Cost-sharing subsidies, unlike subsidies for premiums, are subject to cuts under the sequester provisions of the budget control law.
The premium tax credits will total $920 billion from fiscal 2014 through fiscal 2023, according to a May 2013 estimate by the Congressional Budget Office and the Joint Committee on Taxation.

Who gets these premium tax credits? People with incomes between 100 percent and 400 percent of the federal poverty level, whose employers don’t offer affordable coverage, who aren’t in Medicare or Medicaid, and who go to exchanges to buy coverage. (In states that expand Medicaid, the eligible income for subsidies would be between 138 percent and 400 percent of the federal poverty level.)

The total amount of money the health care law makes available for premium tax credits dwarfs the amount it provides cost-sharing subsidies. But the cost-sharing subsidies aren’t chump change. They’ll total $149 billion from fiscal 2014 to fiscal 2023. That’s 14 percent of the total exchange-related subsidies available under the health care law (PL 111-148, PL 111-152), according to a May 31 Congressional Research Service report. Those subsidies represent about 60 percent of the $1.8 billion in the gross cost of expanding coverage under the health care law.

Who gets the cost-sharing subsidies? They’ll go to a subset of the population eligible for the premium tax credits.

The aim of the cost-sharing subsidies is to reduce the out-of-pocket costs of those who are getting premium tax credits who are hit with heavy health expenditures. The lower the incomes of people in this group, the bigger the cost-sharing subsidy they will get.

Specifically, they’ll have a lower yearly out-of-pocket spending limit as a result of the cost-sharing subsidy. (The annual out-of-pocket spending limits for plans in the exchanges will vary depending on the plan—bronze, silver, gold, or platinum.)

To qualify for a cost-sharing subsidy, an enrollee must be in a silver plan. For those with incomes between 100 percent and 200 percent of the federal poverty level, the silver plan’s out-of-pocket spending limit will be two-thirds lower than the limit for those without a subsidy. Those with incomes between 201 percent and 300 percent of poverty will have out-of-pocket spending limits that are half the full amount. And for those with incomes between 301 percent and 400 percent of poverty, the out-of-pocket limit will be one-third lower, according to a Congressional Research Service (CRS) report issued July 31.

“In other words, greater reductions are provided to those with lower incomes,” the report notes. “In general, this cost-sharing assistance targets individuals and families who use a great deal of health care in a year and, therefore, would have high cost-sharing expenses.”

There’s another way in which the cost-sharing subsidies apply when it comes to people with incomes between 100 percent and 250 percent of poverty. “The practical effect of this cost-sharing assistance is to increase the actuarial value of the exchange plan in which the person is enrolled,” the July 31 CRS report notes. “Actuarial value” refers to the percentage of covered expenses the plan pays. So if a plan has an actuarial value of 60 percent, the plan pays 60 percent of those expenses and the enrollee pays 40 percent.

For those eligible for cost-sharing subsidies, the actuarial value of the plan for those with incomes between 100 percent and 150 percent of poverty is increased to 94 percent; between 151 percent and 200 percent of poverty it rises to 87 percent, and between 201 percent and 250 percent of poverty it increases to 73 percent. The silver plan has an actuarial value of 70 percent. So the cost-sharing subsidies mean that certain eligible applicants in silver plans have lower out-of-pocket spending limits and they also pay lower deductibles and co-payments.

Cost-sharing subsidies, unlike subsidies for premiums, are subject to cuts under the sequester provisions of the budget control law.

During the Aug. 1 hearing, Pitts wanted to know how projected fiscal 2014 sequester cuts in cost-sharing subsidies totaling 7.2 percent would be taken. According to Energy and Commerce Committee staff, Pitts wanted to know, for example, how the actuarial values would change with lower subsidies. Tavenner didn’t say.

According to committee staff, that means when people go to insurance exchanges, they may get incomplete information about the impact of the sequester on the subsidies they’ll get. If decisions on the impact of the sequester on cost-sharing subsidies aren’t made in time, presumably the information that exchange applicants get could be inaccurate.

But it may be that insurers won’t be able to pare back cost sharing to adjust for any reduction in subsidies resulting from the sequester.
At the hearing, Tavenner pledged to get back to Pitts after talking with OMB, and to continue providing information about implementation of the cost-sharing program. “I can commit to providing you information, of course that is our strong preference with the issue of sequestration go away entirely,” she added.

And she said she would provide additional information about the sequester and the cost-sharing subsidies prior to the beginning of open enrollment on Oct. 1.

A footnote in the May 31 CRS report says that sequestration does not change the requirement in the health care law that insurers limit consumer cost sharing.

“Insurers presumably will still have to provide required coverage to qualifying enrollees but they will not receive the full subsidy to cover their increased costs,” the footnote says.

However, an insurance industry official said that “this is all preliminary analysis by CRS, and the administration will need to provide specifics.”

John Reichard can be reached at [email protected].

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