What would happen if the cost-sharing reduction payments established under section 1402 of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) to reduce out-of-pocket costs for ACA marketplace enrollees with lower incomes were eliminated? "Ceasing payments for the ACA’s cost-sharing reduction program could save $10 billion, but [would] cost an additional $12.3 billion in premium tax credits," in 2018 if insurers choose to continue offering plans in ACA marketplaces, according to a Kaiser Family Foundation (KFF) analysis of the financial effect of ending cost-sharing reduction payments to insurers.
The increase in spending. The analysis, published on April 25, 2017, concluded that ending the payments would result in an estimated net increase in 2018 of $2.3 billion or 23 percent in federal spending on marketplace subsidies and a net increase in federal costs of $31 billion when extrapolated to a 10 year budget window (2018 – 2027) using the Congressional Budget Office’s projections for cost-sharing reduction payments. KFF noted that it believes that the 23 percent increase in federal costs is an underestimate because it does not into account a number of factors that might drive premiums higher such as people not receiving cost-sharing reductions, people migrating out of silver plans, selective exits by insurers, and an increase in the number of people receiving tax credits.
Cost sharing reductions. The ACA established cost sharing reduction payments to reduce monthly insurance costs for individuals with incomes from 100 to 400 percent of the poverty level. ACA premium tax credits are tied to the premium for the second-lowest cost silver plan in each geographic area. Individuals who are eligible for premium tax credits based on their income also may be eligible for a reduction in their cost sharing if they enroll in a plan in the silver tier. Insurers must offer plans with reduced cost sharing to marketplace enrollees with incomes 100-250 percent of the poverty level, KFF explained.
Impact on insurers. The federal government pays insurance companies directly to compensate for the added cost to insurers of the reduced cost-sharing. According to KFF, the Congressional Budget Office (CBO) estimates the cost of these payments at $7 billion in fiscal year 2017, $10 billion in 2018, and $16 billion by 2027.
Changes to the silver plan premiums in ACA marketplaces would affect how much the government owes to eligible enrollees in tax credits. Increases in premiums for silver marketplace plans would increase the size of premium tax credits. The increased tax credits would completely cover the increased premium for subsidized enrollees covered through the benchmark plan and cushion the effect for enrollees signed up for more expensive silver plans, KFF said. It added, however, that "enrollees who apply their tax credits to other tiers of plans also would receive increased premium tax credits even though they do not qualify for reduced cost-sharing and the underlying premiums in their plans might not increase at all."
If the cost-sharing reduction payment ends, KFF predicted that insurers might leave the ACA marketplaces. If they remain in the marketplaces, they would need to raise premiums to offset the loss of the payments. The average ACA marketplace premium for silver plans would rise an average of 19 percent in 2018, KFF said. Further, "premium increases would be higher in states that have not expanded Medicaid . . . since there are a large number of marketplace enrollees in those states with incomes 100-138 percent of poverty who qualify for the largest cost-sharing reductions."
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