The ACA's Cost-Sharing Reductions (CSRs): A Primer

On October 13, the Trump Administration announced that it would no longer make cost-sharing reduction (CSR) payments as of October 18. Below is our primer of what that means for the budget, insurance enrollment, and premiums based on the Congressional Budget Office's August report.

As policymakers move on from the "repeal and replace" debate on the Affordable Care Act (ACA or "Obamacare"), one of the subjects that repeatedly comes up is the dilemma of how to handle cost-sharing reductions (CSRs). With the Trump Administration contemplating ending CSR payments as soon as the coming weeks, we have put together a primer on what CSRs are, what the problem is, how ending them affects the budget, and what it means for health reform going forward. Much of this information builds on the Congressional Budget Office's (CBO) recent report on what would happen if CSR payments ended.

What are CSRs?

Cost-sharing reductions (CSRs) are payments made directly to insurers to lower costs for low-income individuals who purchase silver plans, which cover 70 percent of expected health care costs (actuarial value, or AV). Specifically, they allow individuals with incomes below 250 percent of the federal poverty level to purchase silver plans on the ACA exchanges that have a higher AV – 73, 87, or 94 percent instead of 70 percent – with the CSRs going directly to insurers to defray the extra cost.

Essentially, CSRs are designed to be higher value plans that limit out-of-pocket costs for low-income individuals. Instead of subsidizing the individual directly to purchase the higher-value plans, the government pays insurers to lower deductibles and co-pays. The ACA also requires insurers to offer these plans as a condition of participating in the exchanges, regardless of whether the government makes the CSR payments.

What's the issue with CSRs?

An ongoing legal dispute between Congress and the Administration has put the fate of CSR payments into question. In 2014, the House of Representatives filed a lawsuit against the Obama Administration for making the payments, claiming that they were made illegally because Congress never formally appropriated them as it had done with premium subsidies and other portions of Obamacare that continue to be authorized. A district judge found in favor of the House, ruling that the payments were unauthorized, but the Obama Administration chose to appeal the decision. In the meantime, the court allowed the Administration to continue making the payments pending appeal.

After President Trump took office, it was uncertain whether the new administration would continue making the payments and defend the right to make the payments in court. President Trump himself has questioned whether the government should continue making the payments as a way to leverage changes to or repeal of the ACA, and the White House and Congressional Republicans have asked the court to postpone further proceedings to give them time to work out a solution. Congress could pass a bill that appropriates CSRs, which would remove any uncertainty over whether the authority to pay them exists or whether they ought to be paid at all, or Congress and the Trump Administration could choose to stop contesting the suit and end the payments.

Importantly, even if the Trump Administration decides to stop pursuing the appeal, it does not mean the case is necessarily over. In early August, the court decided that states could join the case on the Administration's side because they would be directly impacted by the possible ending of the payments; if the Administration stops appealing the decision, states can (and have indicated they will) continue the appeal.

Why is settling the CSR issue important?

If the Trump Administration decides to not make the CSR payments and Congress continues to not appropriate them, gross premiums will almost certainly increase and insurers' participation in the exchanges could come into question. Many insurers have said that without the CSR payments, they would be forced to raise premiums across the board to make up for the lost CSR revenue – in fact, some insurers are already factoring in the uncertainty surrounding whether the payments will continue to be made in their 2018 premium increases. This is partially because insurers have to offer the higher AV plans whether or not the federal government will reimburse them for the excess cost of reducing cost sharing for low-income individuals.

CBO estimates that if the CSR payments ended, gross premiums for silver plans, which subsidies are pegged to, would be 20 percent higher than projected in 2018 and 25 percent higher in 2020 and the years following. Because the net premiums that subsidy-eligible enrollees pay do not change with gross premium fluctuation, CBO estimates that individuals eligible for CSRs would pay roughly the same net premiums as currently projected. Those who are not eligible for subsidies would likely not experience much of a change either, though they would be less likely to purchase a silver plan via the exchanges because silver plan premiums would increase disproportionately compared to bronze and gold plans.

It is possible that insurers could also choose to leave the exchanges altogether – as some insurers have over the past few years – in order to not be liable for coverage that they potentially won't be reimbursed for. Some insurers have cited the uncertainty as the reason they are exiting the ACA exchanges. CBO estimates that about 5 percent of people would live in areas with no insurers offering exchange coverage in 2018 (compared to less than 0.5 percent of people in its baseline), but by 2020, more insurers would participate due to the uncertainty being resolved thus resulting in at least one insurer in each ACA exchange market.

What do CSRs mean for the budget?

CBO projects that CSRs will cost about $10 billion to $15 billion per year over the next decade. The first order effects of fully repealing CSRs would therefore be to reduce federal spending and deficits (excluding interest) by the same amount. Actual savings would probably be higher because of the lack of CSRs leading to fewer Obamacare enrollees, though the additional savings might be offset – at least in part – by higher premiums and/or more individuals enrolled in tax-preferred employer-sponsored health insurance.

Ending the CSR payments while leaving the requirement for insurance companies to offer 73-94 percent AV plans would have a very different outcome. In fact, according to CBO it would significantly increase federal costs.

If insurance companies were required to subsidize cost sharing for certain silver plan enrollees, they would respond by significantly increasing silver plan premiums. Because premium subsidies are meant to limit costs as a percentage of income and are linked to silver plans, this would lead to significantly higher federal subsidies along with significantly higher enrollment in the federal exchanges (mostly offset by lower employer coverage). The higher enrollment would come from the availability of more generous subsidies, which would allow individuals to purchase non-silver plans at rates that are comparably more attractive than under current policy because only silver plan premiums, not bronze and gold, would increase significantly.

According to CBO, individuals would receive premiums subsidies in 2026 that are between 25 and 50 percent larger than currently projected while over 3 million more people would be covered by the exchanges (and nearly 3 million fewer would have employer coverage, leading to a net effect of less than 1 million more having coverage).

As a result, CBO estimates nearly $365 billion more in premium subsidy costs through 2026. After accounting for various other interactions, it estimates that ending CSR payments would add $194 billion to deficits through 2026.

Source: Congressional Budget Office. Note that all costs and savings are compared to the March 2016 baseline.

What does this mean for health reform?

As Congress works to improve, reform, or replace Obamacare – including any efforts to further stabilize the individual insurance market – they should and likely will change the law to address the legal ambiguity surrounding CSRs and their payments. In this case, alleviating this uncertainty would be ideal because it drives up premium costs.

Congress already appears on this course. As an example, recent recommendations put forward by members of the bipartisan Problem Solvers Caucus would appropriate full funding for CSRs while also creating a stability fund, changing requirements of the employer mandate, giving states more flexibility in designing their insurance markets, repealing the medical device tax, and paying for all of these changes.

Of course, any new costs must be fully offset. Moreover, given the projected unsustainable growth in health spending, policymakers should be looking to enact new health savings on top of just paying for their changes.

Earlier this year, we identified four cost-saving ideas from the Better Care Reconciliation Act that should remain under consideration to help slow cost growth. We also offered a dozen ideas to improve the House-passed American Health Care Act, many of which could still be enacted and would still save money. Perhaps most importantly, we highlighted hundreds of billions of Medicare savings that would reduce costs without cutting benefits, instead focusing on changing patient and provider incentives to slow the growth of health care costs for everyone.

Policymakers should consider these ideas and others as they work to resolve the CSR payment issue and make other changes to the health care system.