The fog is still swirling around President Trump's assaults last week on the Affordable Care Act.
That's especially true of his cancellation of cost-sharing reduction payments to health insurers, possibly the most poorly understood subsidies of the ACA. Trump's lack of understanding of America's healthcare system appears to be almost infinite, so it's hardly surprising that he doesn't grasp the complexities of the cost-sharing reduction payments. But the misunderstandings extend to congressional Republicans, and even Democrats.
The truth is that Trump's action could lead to more Americans receiving subsidized health coverage. It could also produce a windfall for states including California. To understand how that could happen, one has to understand how these subsidies work.
A couple of preliminary points: They're not "bailouts" of insurance companies, as Trump described them. And the motion filed by California, 17 other states and the District of Columbia to block Trump's action should still go ahead, for reasons we'll get to in a moment.
Now for the gist. The Affordable Care Act provides two distinct subsidies for insurance buyers on the individual market. One reduces premiums for households with incomes between 100% and 400% of the federal poverty level, or up to $98,400 for a family of four this year. That subsidy is effectively paid directly to the buyer or taken off the top via a reduced premium. The cost-sharing reduction (CSR) reduces out-of-pocket expenses such as deductibles and co-pays for households with incomes up to 250% of the poverty level, or $61,500 for a family of four. The buyer sees only reduced out-of-pocket charges; the insurers are reimbursed separately by the government.
Those reimbursements were what Trump canceled, citing a federal court ruling from 2016 that they were illegal. But the judge in that court stayed her ruling until it could be reviewed by an appeals court. The Obama administration defended the payments in court and the appellate case was still ongoing last week, but the Trump administration said it would terminate its defense.
Trump's action will cause losses for insurers over the last three months of this year, because they based their premium rates on the assumption the CSR payments would be made. But as we've reported before, next year and subsequent years are a different story in many states.
Because the ACA requires insurers to grant the cost-sharing reductions to eligible buyers even if the insurers don't receive the federal reimbursements, they have only one real choice to make up the loss — raise premiums. Many have done so for 2018, anticipating Trump's attack. As many as 36 states permitted insurers to load all the necessary premium increase onto one category of health plan, the benchmark silver plan, the plan on which federal premium subsidies are calculated.
As those premiums rise, so do the subsidies. That's why the Congressional Budget Office reckoned that canceling the CSR reimbursements starting in 2018 would actually increase healthcare costs for the federal government by nearly $200 billion over 10 years.
In fact, Trump's action would lead to an increase in enrollments in ACA plans in many states, including California, where about 90% of enrollees pay subsidized premiums. Covered California, the state's Obamacare exchange, calculated in January that the reduction in net, or after-subsidy, premiums in gold, platinum and bronze plans resulting from the higher subsidies would lead to an enrollment increase of 20,000 people, or 1.4% in subsidized plans. That's good.
What's not so good is that the change would batter the unsubsidized population — those with income higher than 400% of the poverty level. Covered California reckoned that 6,000 unsubsidized enrollees would drop their coverage.
So what to do about them? That's where another wrinkle in the ACA could play a role. This is the 1332 waiver provision, which allows any state to seek permission from the federal government to fashion a home-grown version of the Affordable Care Act by waiving certain provisions. Under the law, the state would have to show that its version produces health plans that are just as comprehensive, affordable and broad as ACA-mandated plans, and that it won't increase the federal deficit. If the state passes these tests, then it's eligible to receive any excess premium and cost-sharing reduction payments it would have received without the waiver.
Covered California calculated that if the federal government had canceled CSR reimbursements in 2016, the state would have lost $750 million in those reimbursements — but premium subsidies would have increased by $976 million. As Steven Chen of Health Affairs noticed in August, that means California could pay the out-of-pocket cost reductions for its low-income residents and still have a windfall of $226 million it could use to reduce costs for unsubsidized residents or for any other purpose it sees fit.
Chen observes that, under the law, it would be difficult for the government to find grounds to deny California a 1332 waiver on these terms. "Given the cost-saving advantages of CSR payments," he adds, "it is puzzling that the Federal government would consider terminating this effective subsidy."
As we observed in August, misunderstandings about how the CSR payments work have an important political implication: Trump's action plays into Democratic hands, and undermines Republican positions on the Affordable Care Act. The GOP still doesn't get this. Over the weekend, Sen. Ron Johnson, R-Wisc., proposed a deal in which Democrats would get a restoration of CSR payments in return for fulfilling Trump's wish-list of extended terms for short-term health plans and expanding health savings accounts. (The former would undermine the health insurance market while exposing more Americans to junk insurance, and the latter is a handout to the wealthy.)
David Anderson of Duke put this succinctly Monday, writing, "CSR inertia favors Democratic policy preferences. Senator Johnson does not realize that the ground has shifted." Or, as we observed earlier, in responding to such proposals, Democrats should follow the lead of Michael Corleone: "My offer is this: nothing."
Does all this mean that California and the other states should drop their motion to save the CSR's? No, for several reasons. One is that Trump chose the worst possible moment to terminate the payments. By waiting nine months into the 2017 insurance year, he maximized the financial damage to the insurance market and gave insurers in many states the right to terminate their customers' coverage on the spot, without waiting for Jan. 1. He injected confusion into the market just two weeks ahead of the open enrollment period for 2018, which could discourage thousands of people from signing up for coverage they're legally entitled to (and legally required to carry). And he took a side in a legal dispute that is by no means settled.
No one should be misled into thinking that the ultimate benefits of canceling the CSRs — higher enrollments and higher subsidies — were part of Trump's master plan. He certainly didn't paint it that way, boasting that he was fostering the "imploding" of the "Democrats ObamaCare" by stopping "massive subsidy payments to their pet insurance companies," an utterly ignorant description of the CSR provision. None of the upsides of his ham-fisted policy-making will come about without massive disruption of the markets first, at great cost to ordinary citizens, followed by greater costs for taxpayers.
Trump's actions, the states' motion asserts, "is not based on a good-faith reading" of the Affordable Care Act. "Instead, it is part of a deliberate strategy to undermine the ACA's provisions for making health care more affordable and accessible." That's true, and Trump's method of killing the ACA by creating confusion and doubt is something that should be fought at every opportunity.
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