President Trump leveled a double-barreled blast at the Affordable Care Act Thursday. With an executive order, he instructed three federal agencies to find ways to undermine the act by allowing healthier customers to leave the ACA market. He also unilaterally ended the so-called cost sharing reduction payments for insurers, depriving the companies of billions in government reimbursements. This post covers the latter action. Read here for a post on the executive order.
President Trump late Thursday pulled the trigger on one of his long-standing threats against the Affordable Care Act, announcing that he would immediately end federal payments to insurers to cover deductibles and co-pays for low-income Americans.
Trump had been openly musing about reneging on the payments almost since his inauguration, but kept paying them while Republican efforts to repeal the act moved through Congress. Those efforts ended in failure last month. The cost-sharing reductions are expected to come to $7 billion this year, representing assistance for 7 million low-income buyers. Trump's action will cancel monthly payments due to insurers for October, November and December this year, or an estimated $1.75 billion.
Trump justified his action based on the wording of the provision for cost-reduction payments in the Affordable Care Act, which is currently under legal dispute in federal appeals court. The White House described the payments as a "bailout" of insurance companies. That's inaccurate: The payments are designed to cover insurance company obligations imposed by the law, on the clear understanding that they would be ultimately paid by the government.
Like so many administration policies, the cancellation of the payments appears to be the product of combined petulance and truculence. Trump reportedly has been seething at the failure of the ACA repeal effort; since then his administration has taken numerous steps to sabotage the Affordable Care Act administratively.
In a tweet issued from the White House in the early morning hours Friday, Trump described his latest action strictly in partisan terms. "The Democrats ObamaCare is imploding," he tweeted. "Massive subsidy payments to their pet insurance companies has stopped. Dems should call me to fix."
But Thursday's action could backfire. Its major negative impact is likely to be on the federal budget. The threat to insurance company finances ends this year, because many already have priced the loss of the cost-reduction payments into their premiums for next year. That means higher premiums for customers, but as many as 90% of buyers on the ACA exchanges are insulated at least partially from premium increases by government subsidies.
Those subsidies rise as premiums rise on benchmark silver plans—in fact, for some buyers, the subsidies might increase so much that they will be able to buy better ACA plans next year than they could this year. But the higher subsidies come out of the federal budget. The Congressional Budget Office calculated in August that because subsidies would be higher and more people would become eligible for them, canceling the payments would increase the federal deficit by $194 billion through 2026.
The insurance customers most exposed to cost increases from Trump's action are households earning more than 400% of the federal poverty line, or $98,400 for a family of four this year. They would have no relief from a premium spike.
The threat to cease the so-called cost-sharing reduction payments already had caused a spike in premiums in the individual health insurance market for next year. In California, for example, premiums were expected to rise by about 12.5% due to medical inflation and other efforts by Trump to undermine the individual insurance marketplace. The cutoff of cost-sharing payments will produce an additional 12.4% increase on silver-level health plans, the most popular. More than 80% of buyers through Covered California, the state's insurance exchange, receive premium subsidies.
The impact of canceling the cost sharing payments would be haphazard, the CBO found. Its analysts estimated that the withdrawal of insurers from the marketplace caused by disruption of the ACA risk pool could leave as many as 5% of the American population in areas that would have no insurers next year. Gross premiums—that is, before the premium subsidies are applied, would rise an average 20% next year and 25% by 2020. That prediction appears to have come true for 2018. About 1 million fewer Americans would be insured next year.
The CBO based its estimates on cancellation of the cost sharing payments as of the beginning of 2018. A mid-year cancellation this year, the analysts said, would have a more disruptive effect because insurers already had set their premiums for 2017, so they would face losses in the near term.
In the short term, the cutoff will allow health plans in many states to terminate their policies immediately, according to their contracts with the federal government. That could throw millions of American off insurance between now and the end of the year.
Still, the first concrete result of the cancellation is likely to be a blizzard of litigation. In August, 15 states and the District of Columbia won the right to defend the cost-sharing payments before the federal appeals court, based on the court's finding that they had "raised sufficient doubt concerning the adequacy of the [government's] representation of their interests."
Within minutes of the administration's announcement of the payment cancellation, California Attorney General Xavier Becerra announced he was preparing to go to court for an injunction against the move.
Insurers themselves have grounds to seek the withheld payments from the Court of Federal Claims. Many legal scholars believe their claims are sound. "We're about to see witness of the largest lawsuits, dollar-wise, in United States history," predicts Nicholas Bagley of the University of Michigan law school. "The question is...not whether the government will pay, but when."
The cost-sharing reductions cover subsidies offered to buyers in the individual market with incomes between 100% and 250% of the federal poverty limit. For a family of four, the eligible income range is $24,600 to $61,500 this year. These subsidies are in addition to the ACA's premium subsidies, which cover those with incomes up to 400% of the poverty level, or $98,400 for a family of four.
Unlike the premium subsidies, which technically are paid to the policyholders, the CSRs are advanced to the insurers based on the co-pays and deductibles they would otherwise charge. About half of all buyers of ACA plans are eligible for the CSR assistance, and about 90% receive premium subsidies.
Although the subsidies are authorized under the healthcare act, House Republicans filed a lawsuit in 2014 to block them, asserting that because the money hadn't been specifically appropriated in the law, paying the money is illegal. They won the first round in U.S. District Court last year, but the judge stayed her ruling pending an appeals court decision.
The Obama administration mounted a firm defense of the payments in court. Since the inauguration, the case has been placed on abeyance at 90-day intervals as Congress and the White House dithered over whether the subsidies should or would be paid.
The White House and Department of Health and Human Services said Thursday that they had concluded that the payments to insurers are illegal — although the Trump administration has been paying them so far this year. "We believe that the last Administration overstepped the legal boundaries drawn by our Constitution," Health and Human Services said in a written statement issued late Thursday. "Congress has not appropriated money for CSRs, and we will discontinue these payments immediately."
Attached to the statement was a legal opinion from Atty. Gen. Jeff Sessions stating that his agency would cease defending the payments in the appeals court.
A White House statement issued at about the same time placed an openly partisan spin on the decision: "The bailout of insurance companies through these unlawful payments is yet another example of how the previous administration abused taxpayer dollars and skirted the law to prop up a broken system."
But the combination of short-term and long-term costs means a generally higher bill for all Americans. "Taxpayers will have to pay increased premium subsidies at the front end," Bagley observed. "Then they'll also pay the cost-sharing money through litigation at the back end. It's a financial bath, and for no good reason other than sheer political cussedness."