3 Facts About the Big ACA Subsidy That Might Vanish Now

Trump administration officials shook health insurers, and health care providers, late Thursday by announcing they will cut off Affordable Care Act cost-sharing reduction (CSR) subsidy program payments.

The $7 billion cost-sharing reduction subsidy program is helping 7 million ACA exchange plan users with income from 100% to 250% of the federal poverty level handle health plan deductibles, co-payments and coinsurance amounts for silver-level coverage. The money goes straight to the health insurers. The next payment, to insurers, was due next week.

Eric Hargan, the new acting secretary of the U.S. Department of Health and Human Services, and Seema Verma, the administrator of the Centers for Medicare and Medicaid Services, said in a memo that their legal advisors believe the government lacks a valid congressional appropriation to make program payments.

"In light of that opinion — and the absence of any other appropriation that could be used to fund CSR payments — CSR payments to issuers must stop immediately," Verma and Hargan said in the memo. "CSR payments are prohibited unless and until a valid appropriation exists."

Here's a look at three things agents, brokers and other financial professionals need to know about the CSR program, and about the possible effects of a mid-year termination of CSR payments.

1. Milliman analysts put out a great analysis of the cost-sharing reduction subsidy program in March.

The Obama administration tended to skimp on offering details about the operations of the CSR program.

About 58% of current Affordable Care Act exchange plan enrollees are using the subsidies to reduce their out-of-pocket health care costs, according to figures the government has published.

Analysts at Milliman, an actuarial consulting firm, provided some other CSR program details in March, by publishing a report on Affordable Care Act subsidy programs that includes data on how the CSR program and other subsidy programs worked in 2014 and 2015, and probably worked in 2016.

The biggest Affordable Care Act subsidy program is the advance premium tax credit program. That program helps exchange plan users with income from 100% to 400% of the federal poverty level pay their premiums.

HHS Secretary Eric Hargan (Photo: HHS)

Acting HHS Secretary Eric Hargan (Photo: HHS)

In the Milliman report, the analysts estimate that the premium subsidy accounted for about $5.7 billion, or 7%, of health coverage issuers' $80 billion in 2016 individual major medical coverage revenue.

Analysts at Oliver Wyman recently estimated that insurers will collect about $88 billion in individual major medical premium revenue this year. Insurers may have been expecting to get a total of about $6 billion to $7 billion in CSR payments from the federal government for 2017, or about $500 million in payments per month.

The CSR program has been paying exchange plan issuers an average of about $1,000 per month per enrollee eligible for the subsidy.

2. The friends and foes of the Affordable Care Act have been fighting over the legality of the cost-sharing reduction subsidy payments for years.

Insurers have known about Republicans' concerns about the legality of the cost-sharing reduction payment stream for years.

Democrats held so many seats in the House and the Senate when they worked on the Affordable Care Act that they were able to pass it with no Republican support.

Once they lost their "super majority" in the Senate, they were unable to win enough Republican support to pass any additional Affordable Care Act bills, aside from a few measures that happened to have strong Republican support.

Democrats included a permanent appropriation for the premium tax credit subsidy program in the legislation that created the Affordable Care Act. The Obama administration said that the cost-sharing reduction subsidy program was really part of the premium tax credit subsidy program, and that the permanent premium tax credit subsidy appropriation in the Affordable Care Act also covered the CSR payments.

Republicans have objected to the idea that the premium tax credit appropriation applies to the CSR subsidy program.

Members of the U.S. House authorized a lawsuit over the CSR appropriation issue in July 2014, and they sued in November 2014. A district court judge ruled in favor of the House in May 2016.

Obama administration officials were fighting the ruling.

When the Trump administration came in, its lawyers took steps to have the courts put off action on the matter.

Since at least as far back as July, the administration has left insurers uncertain as to whether it would make each month's scheduled CSR payments.

Crystal ball (Image: Thinkstock)

(Image: Thinkstock)

Health insurance company officials have talked openly about the possibility that subsidy payments could disappear in 2018, or even in the middle of this year.

Earlier this month, Dr. Rene Lerer, the president of GuideWell Mutual Holding Corp., the parent of Florida Blue, said at a conference organized by Standard & Poor's Global Ratings that he had no answer about how the Trump administration might handle CSR payments.

"We don't know if we'll get paid for the CSRs for October," Lerer said.

3. Predicting the effects of the subsidy payment termination announcement is complicated.

There are many reasons analyzing the effects of a sudden end of the CSR stream could be difficult.

One is that whether the Trump administration can really shut off the payment stream in midyear is unclear. A court could require the administration to keep up the payments, at least during a transitional period. In theory, Congress could also act to keep the payment stream in place.

A second source of uncertainty is whether the Trump administration will be comfortable with the effects of a CSR payment termination on managed Medicaid programs, private Medicare plan programs, on the group health market, and other markets and programs other than the individual major medical program.

The annual enrollment period for Medicare Advantage and Medicare Part D plans starts Sunday, for example. Insurers need payments from Medicare to make their Medicare plan operations work, but the Trump administration needs for private insurers to be cooperative, and solvent, for the Medicare Advantage and Medicare Part D programs to work as expected. All of the major Republican proposals for changing the Affordable Care Act debated in Congress this year have included provisions for continuing CSR payments, or equivalent subsidy program payments, at least until the end of 2019.

A third source of uncertainty is how well coverage issuers anticipated a possible CSR payment suspension. Mark Farrah Associates, for example, found that individual major medical issuers had an average ratio of claims to premium revenue of just 77% in the second quarter. The statutory minimum medical loss ratio for individual major medical is 80%. The low second-quarter MLR could be a sign that typical issuers built a CSR suspension cushion into their 2017 rates.

In the long run, if the Trump administration cuts off CSR payments for 2018, and insurers find ways to adjust rates to reflect that change, the effects of the change could be minimal. In theory, the Affordable Care Act premium tax credit subsidy would eliminate the effect of the change on actual out-of-pocket premium bills for most exchange plan users, and consumers who do not qualify for premium subsidies would be able to shift to bronze-level plans, gold-level plans, or off-exchange plans not directly affected by the elimination of the subsidy, according to an analysis Congressional Budget Office analysts released in August.

— Read 3 Weird Ways an ACA Subsidy Cut Could Help You on ThinkAdvisor.

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