In a new report released August 15, the federal Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) say that a policy of not funding cost sharing reductions (CSRs) would result in market uncertainty and higher federal outlays for premium tax credits. The report analyzes the effect of a hypothetical announcement by the end of August that the CSRs would not be funded beginning January 1, 2018.
CSRs are center stage in the question of overall market stability for the exchange marketplace and the overall individual market. The Trump Administration has been announcing on a month-to-month basis whether it will continue funding cost sharing reduction payments for each month of the 2017 benefit year, with the latest report on August 16 that the payments will continue through August.
About 125,000 people with income between 100 and 250 percent of the federal poverty level (FPL) in Wisconsin enrolled in exchange coverage currently qualify for these subsidies. The effect of defunding the cost sharing subsidies, however, does not fall only on these individuals. Rather, because insurers would still be required to pay for the cost sharing subsidies without federal funding, insurers have signaled they will either have to raise premiums or choose to exit the market. Thus, the immediate impact of the federal government withholding funding for CSRs is on the overall stability of the market which could jeopardize coverage for all exchange enrollees. This, in turn, has a broader impact on overall coverage expansion in Wisconsin.
In a statement released last week and ahead of the CBO report, WHA President/CEO Eric Borgerding raised serious concerns about the impact loss of the CSRs could have on coverage in Wisconsin. “Wisconsin’s uninsured rate has dropped 38 percent since 2013, and the insurance exchange has been an integral part of that reduction,” Borgerding said. “Wisconsin has much at stake in what comes next out of Washington, and something must come next. Inaction is not an option, nor is intentionally allowing failure of insurance markets an acceptable strategy or outcome.”
The latest CBO report says that insurers would likely raise premiums by an average of 20 percent if the CSRs are not funded, and the federal government will bear $194 million in increased costs as a result. The report attributes the increase to two factors: first, the amount of premium subsidies paid by the federal government will be higher, and second, more people will receive the subsidies.
Why will premium subsidies be higher?
Most state insurance regulators are asking insurers to load the cost increase for the CSRs onto the premium for the silver level plan in the exchange. The silver level plan is key to the amount of premium tax credit a person receives. The amount paid by the enrollee is generally set by the parameters of the Affordable Care Act (ACA) and depends on the person’s income. When the premiums for the second lowest cost silver plan go up, the amount of premium tax credit goes up, while the amount paid by the enrollee generally stays the same.
To help illustrate this, for a person with income just under $30,000 (equal to 250 percent FPL), the ACA sets the maximum amount the person will have to pay for the silver plan at 8.2 percent of their income, or $2,460 per year. If the premium for the second lowest cost silver plan in their area is, say, $3,500 per year, the tax credit is $840 ($3,500-2,460). If instead the premium for the second lowest cost silver plan in their area rises by 20 percent to $4,200, the tax credit goes up to $1,540.
The CBO says for most people eligible for the CSRs with income up to 200 percent FPL, the higher premium cost and thus higher premium subsidies paid by the federal government will generally offset the CSR payments the federal government otherwise would have made. However, for people at higher income levels, also subject to the premium increases, the increases in premium tax credits will exceed the CSR payments.
Why will more people be eligible for premium tax credits?
The CBO estimates that more people with income between 200 and 400 percent FPL will enroll in coverage in the exchange marketplace if CSRs are not funded and premiums for the silver plans increase. This is because as the tax credit increases, people at higher incomes will be able to buy plans for lower net premiums or even buy gold level plans with lower deductibles at the same price as they pay now for silver plans that have higher deductibles.
In the example above, the tax credit of $1,540 can be used to buy any plan on the exchange. Gold level plans generally have higher premiums but lower deductibles and lower copayments. As premiums in the silver plan increase, those premiums come closer to the premium for the gold level plan and, CBO projects, may even exceed the premium for the gold plan. If a person looking to buy coverage now receives a higher tax credit and can purchase a gold level plan for the same premium as they now pay for the silver plan, this is more attractive and may incent more people to buy coverage in the exchange. CBO estimates that more people would purchase plans in the exchange than would have otherwise and fewer people would purchase employment-based health insurance.
Effects on market stability
CBO also assumes more insurers will not participate in the exchange in the first few years of the policy, as a result of substantial uncertainty about the effects of the policy. As a result, CBO estimates that five percent of the population will live in areas that would have no insurers in the individual market in 2018. A recent analysis by WHA showed that, given all announcements to date about changes in insurer participation in the Wisconsin markets, Menominee County would have no insurer participating in the exchange in 2018, and 10 counties would have a choice of only one insurer. (See previous Valued Voice article
WHA continues to focus on ways to sustain coverage and maintain stability in our health care markets. “The CBO’s findings only serve to confirm WHA’s concerns and reinforce the need for Congress and the President to act,” Borgerding said.