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CBO/JCT estimate effects of terminating insurer payments for ACA cost-sharing reductions

The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) have issued a report in which they estimate the effects on the federal budget, health insurance coverage, market stability, and premiums if payments for cost-sharing reductions (CSRs) would end after December 2017. Significantly, the report projects that premiums of silver plans purchased through the marketplaces would increase approximately 20% in 2018, and that, due to the interaction between CSRs and the premium tax credit under Code Sec. 36B , terminating CSR payments would increase the deficit by $194 billion over the 10-year budgetary window.

Background.. The Affordable Care Act (ACA) requires insurers to offer plans with reduced deductibles, copayments, and other means of cost sharing to some of the people who purchase plans through the marketplaces established by that legislation. The size of those CSRs depends on those people’s income. In turn, insurers receive federal payments arranged by the Secretary of Health and Human Services to cover the costs they incur because of that requirement.

In order to qualify for CSRs, most enrollees must purchase a silver plan through the nongroup insurance marketplace in their area, generally have income between 100% and 250% of the federal poverty level (FPL), receive premium tax credits toward the silver plan, and not be eligible for other types of coverage, such as employment-based coverage or Medicaid.

At the request of the House Democratic Leader and the House Democratic Whip, the CBO and the JCT (the agencies) have estimated the effects of terminating the payments to insurers for CSRs. In particular, the agencies analyzed what would happen under the following circumstances: by the end of this month, it is known that CSR payments will continue through December 2017 but not thereafter.

RIA observation: President Trump, frustrated by Republican lawmakers’ failure to make progress in repealing and replacing the ACA, has threatened to stop making the CSR payments.

For this analysis, the agencies measured the budgetary effects relative to CBO’s March 2016 baseline to produce estimates most comparable to those published earlier this year for legislation related to the budget reconciliation process for 2017.

Effects on market stability and premiums. CBO and JCT expect that insurers in some states would withdraw from or not enter the nongroup market because of substantial uncertainty about the effects of the policy on average health care costs for people purchasing plans. In the agencies’ estimation, under the policy, about 5% of people live in areas that would have no insurers in the nongroup market in 2018. By 2020, though, insurers would have observed the operation of markets in many areas under the policy, and CBO and JCT expect that more insurers would participate, so people in almost all areas would be able to buy nongroup insurance. The report noted, parenthetically, that if the timing was different, if CSR payments were stopped after premiums were finalized or were already being charged, CBO and JCT expect that additional insurers would exit the marketplaces in 2018 to reduce their financial losses.

Because they would still be required to bear the costs of CSRs even without payments from the government, participating insurers would raise premiums of silver plans to cover the costs. For single policyholders, gross premiums (that is, before premium tax credits are accounted for) for silver plans offered through the marketplaces would, on average, rise by about 20% in 2018 relative to the amount in CBO’s March 2016 baseline and rise slightly more in later years. Such premiums for other plans would rise a few percent during the next two years, on average, above the increases already projected in the baseline, in response to uncertainty among states and insurers about how to respond under the policy. In later years, the report anticipates, premiums for other plans would not generally rise above baseline projections because CSRs are not available for those plans.

When premiums for silver plans increase, tax credit amounts per person for purchasing insurance in the nongroup market would increase because the credits are directly linked to those premiums. According to CBO and JCT’s projections, many people eligible for the credits with income between 100% and 200% of the FPL—who, under the baseline, receive most of the CSRs paid—would use their increased tax credits to purchase the same silver plans with low cost sharing that they would purchase under the baseline, and they would pay net premiums (with the tax credits factored in) that were similar to what they would pay if the CSR payments were continued. Alternatively, they could buy insurance that covered less of their health care expenses, and in many of those cases, the tax credits would cover the premiums entirely. Because CBO and JCT anticipate that most insurance commissioners would eventually permit insurers to substantially increase the gross premiums for silver plans in the marketplaces and not to do so for other plans, almost all people at other income levels would then buy other plans. (Under the baseline, some of those people would buy silver plans, and some would buy other plans.)

Effects on the Federal budget and on health insurance coverage. Implementing the policy would increase the federal deficit, on net, by $194 billion from 2017 through 2026, CBO and JCT estimate. Total federal subsidies for health insurance in the nongroup market—in particular, the sum of the premium tax credits and the CSR payments—would increase for two reasons: the average amount of subsidy per person would be greater, and more people would receive subsidies in most years.

Because the tax credits would increase when premiums for silver plans rose, the agencies estimate that the average subsidy per person receiving premium tax credits to purchase nongroup health insurance would increase. Increases in those tax credits for people with income between 100% and 200% of the FPL would roughly offset the reductions in CSR payments. However, increases in premium tax credits for those with income between 200% and 400% of the FPL would substantially exceed the small reductions in CSR payments for this group.

By CBO and JCT’s estimates, the number of people receiving subsidies for nongroup health insurance would increase under the policy in most years. In particular, because tax credits would increase and gross premiums for plans other than silver plans in the marketplaces would not change substantially, many people with income between 200%  and 400% of the FPL would, compared with outcomes under the baseline, be able to pay lower net premiums for insurance that pays for the same share (or an even greater share) of covered benefits. As a result, more people would purchase plans in the marketplaces than would have otherwise and fewer people would purchase employment-based health insurance—reducing the number of uninsured people, on net, in most years.

Congressional Budget Office/Joint Committee on Taxation report, “The Effects of Terminating Payments for Cost-Sharing Reductions” (Aug. 15, 2017).