The new strategy being discussed involves Trump cutting off a key subsidy program designed to protect insurers and lower out-of-pocket costs for poor Americans. It’s believed that without this subsidy, insurers would flee Obamacare marketplaces, leaving millions without insurance.
How did we get here? Let me explain.
Subsidy 101: Premium vs. Cost-Sharing
Nested within the Affordable Care Act is language that outlines two subsidies designed to lower costs for Obamacare’s poorest customers and incentivize insurers to offer plans to these low-income individuals.
The most important thing to understand is that there are TWO critical subsidy programs.
The first is a Premium Subsidy:
- “Section 1401 provides that individuals with incomes under 400 percent of the federal poverty level ($94,200 for a family of four) who do not have access to “affordable” employer-based coverage and meet other relevant criteria are eligible to receive refundable tax credits for coverage purchased in the exchanges.” Source – Heritage Foundation.
- This subsidy is designed to encourage participation in the healthcare marketplace for individuals that could never afford the full monthly cost.
- If you’ve purchased health insurance through Healthcare.gov and only had to pay $50 a month instead of $200, this is where that money came from.
The second is a Cost-Sharing Subsidy:
- “Section 1402 provides cost-sharing subsidies to reduce maximum out-of-pocket (copayments, coinsurance, deductibles) expenses for households with incomes below four times the federal poverty level. Other language in Section 1402 directs cost-sharing subsidies to increase the actuarial value—the average amount of expected health expenses paid by insurance—for households with incomes below 250 percent of the poverty level.” Source – Heritage Foundation
- Because the newly insured poor can’t afford care outright, this subsidy is designed to help these individuals receive health insurance without leaving the insurance company totally on the hook for all expenses.
The nuclear option being proposed that has the potential to send insurance marketplaces into a tailspin has to do with the Cost-Sharing Subsidy.
These payments are made directly to insurance companies; making it more palatable for insurance companies to cover these poorer individuals. If the government didn’t contribute via these subsidies, the insurance company might decide it isn’t viable to offer plans to these individuals.
So, what kind of numbers are we talking about, and who is eligible for these subsidies?
According to the Centers for Medicare and Medicaid Services, around 5 million people (or 56% of consumers with paid coverage on the exchanges) were benefiting from Cost-Sharing Reductions as of December 2015.
Congress never appropriated funds to pay insurers for the Cost-Sharing Subsidy. In 2014, the House sued the Obama administration, claiming that while the law authorized the Cost-Sharing Subsidy, Congress never supplied the money to pay for it.
The Obama administration countered that the funds were available for other subsidies, i.e. the Premium Subsidy, and could be used in this case as well because it all goes toward reducing the cost of health-insurance premiums (which is the spirit of the law).
Last year, U.S. District Judge Rosemary Collyer ruled in favor of the House, agreeing that lumping payments to insurers for both subsidies was inappropriate.
The Obama administration immediately issued an appeal, which kept the subsidy alive and allowed payments to continue while the court continued proceedings. The case has been in limbo ever since.
Until, of course, now.
Negotiation Tactic or Nuclear Option?
With Obama gone and Trump in office, he can drop the appeal and put an end to Cost-Sharing subsidy payments to insurers.
It’s estimated that nearly $7 billion of subsidy money would disappear and insurers would be required to pay the bills of poor patients without any reimbursement.
Insurers have stated that without the subsidies, they would be forced to leave the Obamacare exchanges, leading to the collapse of health insurance marketplaces.
Trump has waived this action as a “negotiating tactic”, something to bring Democrats to the table to discuss healthcare reform, but as of now, Democrats are on record stating that they won’t negotiate on the subsidies.
This uncertainty is making a number of insurers very anxious and could impact their decision to stay in the Obamacare marketplaces. June 21st is the last day for insurers to decide whether to offer plans on the exchange. The clock is ticking for everyone involved, and we’ll be watching closely to see how things play out.