The Future of CSRs – A Tale Told in Tweets. In follow-up to our May 5, 2017 blog post, “ACA Cost-Sharing Reductions: An Uncertain Future,” on August 16, 2017, the Trump Administration made an announcement (Announcement) that it will continue to fund cost-sharing reduction (CSR) payments to insurers in accordance with the CSR provisions in the Affordable Care Act (ACA) for the month of August. The Announcement did not include any commitments to fund CSR payments in September or anytime thereafter.

Although stakeholders in the CSR debate – including healthcare insurance companies (Payors) that participate in the ACA exchanges and insureds who obtain health insurance coverage through the exchanges – gladly accepted the one-month reprieve from the threat of CSR de-funding, anxiety continues and will continue until the Trump Administration reveals its long-term policy regarding future funding of CSR payments on an ongoing basis.

While gazing into their crystal balls to assess the future of CSR payments, armchair pundits and their professional counterparts need to consider President Trump’s prior statements, stump speeches, and tweets that show his general disdain for the ACA and, more specifically, the ACA’s CSR payment provisions. In a July 29, 2017 tweet, President Trump wrote, “If a new HealthCare Bill is not approved quickly, BAILOUTS for Insurance Companies and BAILOUTS for Members of Congress will end very soon!”

The Congressional Budget Office’s Perspective. Given the timing of the Announcement – one day after the August 15, 2017 issuance of a Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) report (available here) (CBO Report) on the potential impact of defunding the CSR payment program – the Announcement’s publication caused significant reverberations amongst CSR stakeholders, news organizations that report on healthcare, and those who follow the ups-and-downs of the ACA debate.

In order to understand the Announcement’s reception and potential impacts on the U.S. healthcare system, a review of the CBO Report is essential.

CSRs – The What’s, Why’s and Wherefores. Under the ACA, Payors that participate in the ACA exchanges are required to offer four categories of health plans identified by metals – Platinum, Gold, Silver and Bronze. In the broadest of terms, each category of plan is differentiated by premium costs, coverage requirements, and other factors that make Platinum plans more desirable than Gold, Gold more desirable than Silver, and Silver more desirable than Bronze.   For example, of the four healthcare plan categories, Platinum plans provide their members with the highest monthly premiums, the broadest scope of coverage, and the lowest patient financial responsibility (copays and deductibles) amounts as compared to the premiums/coverage/patient financial responsibility amounts provided to Gold, Silver, and Bronze plan members. By corollary, it will come as no surprise that Bronze plans offer their members the lowest premiums, the least amount of coverage, and the highest patient financial responsibility amounts, than are offered to Premium, Gold, and Silver plan members.

Out of a concern that people seeking healthcare coverage on the exchanges would flock to the Bronze plans as the least expensive way to avoid the federal penalties for not having health coverage, the ACA includes provisions designed to entice people away from the comparatively poor coverage offered by Bronze plans and to the better coverage offered by Silver plans. To steer people away from the Bronze plans, the ACA requires that Payors offer discounted deductibles, copayments and coinsurance requirements to Silver plan enrollees who are eligible to receive such discounts under the ACA. The discounts – which are collectively defined as cost-sharing reductions (CSRs) – are designed to reduce the overall cost of healthcare for those Silver plan individual and family members whose income is at or below 250% of the Federal Poverty Limit (FPL) as set forth in the Federal Poverty Guidelines for the then-current federal fiscal year.

To insulate exchange-participating Payors from the costs of providing CSRs to Silver plan members – and to prevent such Payors from passing its CSR-related costs onto other members of other plans by raising premiums – the ACA obligates the federal government to reimburse Payors for the CSR-related costs incurred under their Silver plans.

In short, the CSRs are intended to (i) lower overall healthcare costs for qualified low income individuals and families who choose to enroll in a Silver plan; and (ii) increase the overall level and quality of coverage provided to the total population of insureds who access coverage through the ACA exchanges or elsewhere.

CSRs – An Illegal Subsidy? As has been widely publicized over the years, Republicans have generally opposed every aspect of the Affordable Care Act, including CSRs.  To that end, the House of Representatives sued in 2014 to stop the federal government from making CSR payments to Payors participating on the exchanges. According to the House’s complaint, the CSR payments are illegal because the ACA does not include any specific Congressional appropriation to fund the payments. Although the House prevailed at the federal district court level, the presiding judge stayed the decision pending the conclusion of the appeals process. As a result and as of this writing, the ACA’s CSR payment provisions remain in effect.

The Stresses and Strains of CSR Uncertainty.  As noted at the outset of this writing, although the President has signaled his disdain for CSR payments as an illegal giveaway to the insurance industry, the Administration has allowed CSR payments to limp along from one month to the next without providing any clarity as to the long-term prospects of future CSR payments in the short-term or the long-term.

As would be expected, the uncertainty around the future of CSR payments has created anxiety for Payors. If CSR payments are terminated during the remaining months of this calendar year, the Payors will be stuck bearing the extra costs of providing CSR benefits to their Silver plan enrollees for the rest of 2017 without receiving any reimbursement from the federal government to offset such costs. This would likely be tremendous burden on the Payors since each of them set their 2017 premiums without considering the overwhelming expense of providing CSR discounts without the financial assistance provided by CSR payments.

Further, Payors that participate in the ACA exchanges are required to file rates with state regulators for calendar year 2018 plans by September 6, 2017. Without any definitive CSR guidance in the offing, Payors are flying blind as to their anticipated 2018 expenses and, in turn, the 2018 rates that would need to be set to cover their anticipated 2018 expenses. Given the prevailing uncertainty in the Payor rate-setting process, and the larger concern voiced by the CSR stakeholders that uninformed Payors will be forced to set rates higher than they otherwise would have if they had known that CSR payments were going to be available – or not available, or partially available – during the 2018 plan year.  Although this problem has yet to be resolved, there is some speculation that state regulators in some states will allow Payors to submit two sets of rates—one set assuming continuation of CSR payments and one set assuming elimination of CSR payments.

It should be noted that the Trump administration is not the only voice in this matter. Congress can pass legislation to specifically appropriate money for the CSR payments at any time. But, of course, President Trump would be required to sign the appropriation bill into law or else Congress would have to override President Trump’s veto by a vote of 2/3rds in each of the House of Representatives and the Senate. There has been media speculation that Congress will take this matter up after it returns from recess in early September, though not in time to resolve whether CSR payments will continue prior to the rate submission deadline of September 6, 2017.

Key Takeaways of the Report. The CBO Report compares the anticipated effects of eliminating CSR payments to health insurance companies starting January 1, 2018 compared to what the CBO Report and this blog post refers to as the “baseline”—which is indefinite continuation of CSR payments as presently administered.

Following are the key takeaways in the CBO Report:

  • Effects on Market Stability

The CBO Report speculates that the elimination of CSR payments will lead to uncertainty in the insurance exchange marketplace regarding, among other points, effects on gross enrollments in exchange plans, enrollment mix, and appropriate pricing for plans.

As a result of the uncertainty, according to the CBO Report, Payor participation on the state insurance exchanges will diminish in 2018 and 2019. The CBO Report estimates that in 2018 and 2019, 5% of United States residents will live in areas that will have no insurers offering non-group plans on the insurance exchanges, compared to approximately 0.5% at baseline.

Despite the increase in areas without participating Payors on the health insurance exchanges, there is anticipated to be “sufficient demand for insurance by enough people, including people with low healthcare expenditures, for the markets to be stable in most areas.”

By 2020, however, the CBO Report estimates that this problem will be largely mitigated and people “in almost all areas” will have access to health insurance exchange plans.

The CBO Report notes that the timing of when a definitive determination is made known regarding whether federal CSR payments will continue in 2018 vis-à-vis the deadline for plans to submit rates to state insurance regulators for calendar year 2018, which is September 6, 2017, will likely effect participation by the health insurers on the exchanges in 2018.

  • Effects on Health Insurance Coverage

The CBO Report estimates that the elimination of CSR payments will result in an additional 1 million uninsured persons in 2018 compared to the baseline, driven by the anticipated reduction of Payors participating in the state health insurance exchanges in 2018 (as discussed above).

  • Effects on Gross Premiums Charged by Payors

Silver plan premiums that are currently discounted for qualifying enrollees as a result of the CSR payment program will, according to the CBO, increase as Payors take action to neutralize the resulting financial impact from the discontinuation of CSR payments. The CBO Report estimates that Silver plan premiums will rise approximately 20% in 2018 relative to the baseline and “rise slightly more” in later years.

As acknowledged by the CBO, the above estimate assumes that state insurance regulators will allow Payors to increase Silver plan premiums to the degree that the Payors would like in order to neutralize the loss of CSR payments. Given current and widespread concerns regarding the lack of Payor participation on the exchanges, the CBO has predicted that regulators will approve the increases in order to mollify the Payors and hopefully prevent additional Payors from leaving the exchanges.

  • Net Effects on Consumers

Despite the CBO prediction that premiums will increase, the CBO estimates that the cost to consumer for purchasing individual plans (as opposed to group plans) on the health insurance exchanges will remain generally steady compared to baseline. The CBO basis this prediction on the following:

(1) As reasoned by the CBO, enrollees who receive the reduced Silver plan premiums that are supported by the CSR payments (specifically enrollees who have income between 100% to 200% of the FPL) also qualify for tax credits to help offset health insurance premiums. The CBO Report concludes that the tax credits will effectively cancel out the increase in premiums for those persons, resulting in the net cost (after accounting for the tax credit) of premiums for the Silver plans to the persons who qualify for the tax credit to be unchanged; and

(2) If the Silver Plan premium costs increase disproportionately compared to the other metal plans, the CBO anticipates that persons who do not qualify for the tax credit will purchase a different metal category of health plan that hasn’t suffered a disproportionate increase in premium rates.

Notwithstanding the above, the CBO Report does not include any commentary on whether higher premium rates that are made lower through tax credits will be as well received by consumers as the consumers received lower/discounted premiums. According to many analysts, there is no reliable equivalency between these two approaches to lowering the out-of-pocket costs for consumers who select Silver Plan coverage.

As noted by the analysts, discounts through tax credits are not realized until the taxpayer files his or tax return and receives a tax refund – well after the higher premium has been paid. By comparison, up-front discounts resulting in lower premiums are realized instantaneous when the consumer pays his or her monthly premiums. Based upon the theory that delayed gratification is no gratification at all, some analysts have raised significant concerns that the tax-credit approach will not drive as many consumers to Silver Plans as the lower Silver Plan premium approach has done.

If the analysts’ misgivings regarding the ability of tax credits to sustain or grow Silver plan enrollment are proved to be valid, the CBO’s conclusion that the out-of-pocket costs for consumers who access individual coverage on the exchanges will remain steady will not be provided to be invalid.

  • Effects on the Federal Budget

The CBO Report estimates that the cost of the additional tax credits for those enrollees benefiting from the CSRs (which are only available for persons with up to 250% of the FPL) will be roughly equal to the savings for eliminating federal payments of the cost of the CSRs to the health insurer. Nevertheless, federal deficits will rise because a significant number of Silver plan enrollees who were not eligible for the CRO-driven discounts in the past, will be eligible for tax credits. In short, more tax credits means less tax revenue means greater deficits.

Finally, as included in the CBO Report, the CBO believes that the $7 billion increase in federal revenue that was to be realized from increased income tax collections and penalties for employers that do not offer health insurance will not materialize as hoped if the CSR payments are eliminated. According to the CBO Report, the anticipated increase in revenue will be offset by an anticipated net increase of $7 billion in federal expenses that, as described above, will result from the elimination of CSR payments.

The CBO Report includes estimates that federal deficits will increase by $194 billion from 2017 through 2026 (including $6 billion in 2018, $21 billion in 2020 and $26 billion in 2026) as a result of eliminating CSR federal payments to Payors.

Conclusion.  Although President Trump and members of his Administration have not been shy about their desires to repeal the Affordable Care Act or, at the very least, cripple it so it will collapse on its own accord, the CBO Report states that the termination of CSR payments may not be the body blow to the ACA that the President intends it to be. In the CBO Report, the CBO conjectures that the temporary negatives of market destabilization (lower enrollment through the exchanges, fewer Payors offering coverage on the exchanges, increases in out-of-pocket costs for enrollees, etc.) as caused by the elimination of CRO payments could, in the long run, yield to lower net costs for consumers and, in turn, a growing number of insureds under the ACA. In this way, the temporary pain caused by the elimination of the CSR payments may, in the long run, result in a stronger ACA.

Time will tell – at the very least on a month-to-month basis.