Cost-Sharing Subsidy Update

by Christoper E. Condeluci, Principal and sole shareholder of CC Law & Policy PLLC in Washington, D.C.

President Trump Cancels the “Cost-Sharing” Reduction Subsidies

Thursday night, as the Nationals were choking in Game 5, President Trump announced that the Administration would stop making the cost-sharing reduction payments to those insurance carriers who are still selling health plans through the ACA Exchanges. Immediate reaction to news was negative. I recognize that I am in the minority when I say this, but I do NOT believe that the markets are going to go hay-wire on account of the decision to cancel the cost-sharing subsidies.
- Analysis: Look, I am by no means applauding the decision to cancel the cost-sharing subsidy payments. Due to the long-standing politicization of the issue, the decision is going to have a disruptive effect. I wouldn’t have recommended it.

But, when the dust settles, I do NOT believe that the most if not all of the insurance carriers who already committed to the ACA Exchanges for 2018 are going to exit. Furthermore, I do NOT think that consumers are going to be adversely affected. Instead, I believe consumers are going held harmless. Why? Because I believe the unfunded cost-sharing subsidy liabilities are going to be shifted to the “silver” Exchange plans (in the form of higher premiums), which at the end of the day, means the unfunded cost-sharing liabilities are going to borne by the government, not the consumer. In addition, premium increases are NOT likely to result for consumers purchasing off-Exchange plans or bronze, gold, or platinum plans sold through the Exchange. How do I come to these conclusions? Well, the California Exchange publicly announced that its insurance carriers will ONLY increase the premium rates for “silver” Exchange plans. And, the California Exchange went on to explain that based on its decision:

- - “Californians who do not get financial help and buy individual coverage directly from their health insurance company will not be charged the CSR surcharge.”
  - “In addition, Covered California consumers with Silver plans who do not receive financial help to pay their premium can also avoid paying the surcharge by switching to a different metal tier or buying near-identical Silver coverage directly from a health insurance company.”
  - “Most Covered California consumers who receive financial help in the form of an Advanced Premium Tax Credit, or subsidy, will not see a change in what they pay for their insurance in 2018 because of the surcharge, and many will actually end up paying less because their subsidy amount will increase more than the surcharge.” (see the attached media advisory for a full explanation)

While other States have yet to publicly announce how they are going to make their insurance carriers deal with the unfunded cost-sharing liabilities, there is ample evidence that most if not all States will choose to require their carriers to add a surcharge to “silver” Exchange plans ONLY, just like California did. The first piece of evidence comes from the NAIC meeting held during the first week of August in Philly. There was a considerable amount of discussion devoted to this “silver loading” practice, where a number of States explained that they would opt for the surcharge on “silver” Exchange plans ONLY. The second piece of evidence comes from the Congressional Budget Office (CBO), and CBO’s report analyzing the impact of a decision to cancel the cost-sharing subsidy payments. In its report, CBO assumed that State Insurance Commissioners would require their carriers to increase premiums on “silver” Exchange plans ONLY. Note, when CBO is developing a report, the agency does its “due diligence” and reaches out to States to directly to gauge how the States may react to a change in Federal policy. Why is this noteworthy? Because if CBO is assuming that all State Insurance Commissioners will require “silver loading,” there is reason to believe that CBO knows more than we do. Speaking of the CBO report on cancelling the cost-sharing subsidies, back in August – when the CBO report was released – I wrote up my reaction to the agency’s conclusions. Attached is my update from mid-August, and below is a re-post of one of the posts I wrote. After reading it, hopefully you understand that my opinion is NOT based on my own subjective thinking. Rather, my conclusions are based on CBO’s analysis, and my conclusions are bolstered the California Exchange and its explanation of how the “silver loading” approach will insulate Exchange plan holders, as well as consumers purchasing plans outside of the Exchange.

From My August Update: Ironically, Should Advocates of Increasing the ACA’s Premium Subsidies Be Okay With Cancelling the Cost-Sharing Subsidy Payments?

What I find most interesting about the CBO report is this: If you have been an advocate of increasing the premium subsidy amounts so as to help low- and middle-income people better afford health insurance, cancelling the cost-sharing subsidy payments actually HELPS these consumers. How? Well, because the ACA premium subsidy amounts are determined based on the cost of the second-lowest-cost “silver” Exchange plan, if you end up increasing the premiums for this plan, you correspondingly increase the premium subsidy amounts, thereby increasing the buying-power for Exchange plan holders.
- Analysis: Here is another important fact to understand about the structure of the ACA’s premium subsidies, and that is: A consumer is NOT bound to use their premium subsidy to purchase a “silver” Exchange plan. For example, a consumer can purchase a “bronze” Exchange plan if they want to. Or, they can purchase a “gold” or a “platinum” Exchange plan. In the case of a “bronze” plan, for example, the plan’s premiums are by definition lower than a “silver” plan. Which means that currently, if a consumer uses their premium subsidy based on the second-lowest-cost “silver” Exchange plan to purchase a “bronze” plan, the premium subsidy could cover 100% of the “bronze” plan’s premiums (essentially meaning the consumer is getting free health insurance). If a consumer wanted to purchase a “gold” or “platinum” plan, however, the premium subsidy would not go as far because premiums for these plans are currently higher than a “silver” plan. But, the premium subsidy would certainly defray much of the cost of the “gold” or “platinum” plan. Let’s apply this concept to the cancellation of the cost-sharing subsidies: CBO assumes that the ONLY Exchange plans that would see a 20% to 25% premium increase are the “silver” plans. In other words, CBO assumes that insurance carriers would NOT increase premiums for “bronze,” “gold,” and “platinum” Exchange plans (CBO thinks the Insurance Commissioners would not let carriers increase these premiums because these plans are not eligible for cost-sharing subsidies in the first place). So again, it logically follows that the premium subsidy amounts available to all Exchange planholders are going to be much, much higher than today (due to the premium increases for the “silver” plans). Which means, the premium subsidy amounts will go that much further for Exchange planholders. So much further that CBO believes that consumers could purchase a “gold” plan at no additional cost (i.e., the premium subsidy amounts could cover 100% of the “gold” plan’s premiums). This means that in the absence of the cost-sharing subsidies, Exchange planholders could purchase a higher actuarial value plan at little- or no-cost compared to today. Ironically, this should be viewed as a HUGE win by those ACA supporters who have continually argued that one way to fix the Exchange markets is by increasing the premium subsidies. These advocates have argued that Congress should – through legislative means – increase the premium subsidy amounts so low- to middle-income consumers can better afford more comprehensive coverage, like a “silver” or “gold” plan. And now, through an administrative action that ACA supporters have derided for months now, these advocates could arguably get the increase in the premium subsidies that they have long wanted. A crazy twist, isn’t it?? What else did CBO say? CBO said that the increases in the premium subsidy amounts for most low-income Exchange planholders should fully offset the loss of the cost-sharing subsidies. As result, CBO believes that these planholders would generally be held harmless. And in most cases – as discussed above – these planholders could switch to a more comprehensive “gold” plan, and purchase that plan for free. CBO also assumes that with the ability to purchase a “gold” plan at little- or no-cost, healthier people would enter the risk pool, which would have a beneficial impact on the premiums for “gold” plans (as well as the other metal-level plans). And lastly, CBO found that premiums would NOT go up for consumers who are NOT premium subsidy eligible (i.e., consumers above 400% of FPL), and older consumers who are premium subsidy-eligible would actually be better off. So maybe in the end, cancelling the cost-sharing subsidies is NOT so BAD. Fascinating!!

Executive Order Update

Executive Order Relating to “Association Health Plans” (AHPs) – Adequate or Inadequate Coverage? (no news story)

I apologize for being repetitive, as I devoted 3 full posts in my last update to the AHP issue. BUT, considering that almost every news article I read quoted industry stakeholders who – in my opinion – were misinformed about how fully-insured and self-insured AHPs will be regulated, I wanted to walk you through these issues once again, and push-back on suggestions that AHPs will offer inadequate coverage.
- Analysis: As I mentioned in my last update, the Obama Administration issued guidance in 2011 that essentially prohibited small employers from banding together to create a fully-insured “large group” health plan. This meant that the ACA’s “small group” market reforms applied to fully-insured AHP employer members with 50 or fewer employees. The only exception to the 2011 guidance is this: If the “group” of employers creating a fully-insured AHP is considered a “bona fide group or association of employers” as defined under ERISA, then the fully-insured AHP could still be treated as a “large group” health plan, meaning the ACA’s “small group” market reforms would NOT apply to the AHP coverage. The 2011 guidance does not apply to self-insured AHPs. However, ERISA’s definition of a “bona fide group or association of employers” is important because if a “group” of employers creating the self-insured AHP fails to meet this definition, ERISA’s preemption of State benefit mandates would not apply. Does the Executive Order direct HHS to undo the 2011 guidance? No. Instead, the Executive Order directs the DOL to expand on what it means to be a “bona fide group or association of employers” as defined under ERISA. As we will discuss more fully next week, any such expansion will make it easier for small employers to create a fully-insured “large group” plan, and also a self-insured AHP with ERISA’s preemption protections. As a result, a fully-insured “large group” or self-insured plan AHP would NOT be subject to the ACA’s “essential health benefits” (EHB) and “actuarial value” (AV) requirements. The AHP would also NOT be subject to the new adjusted community premium rating rules and the single-risk pool requirement. Why? Because the drafters of the ACA specifically decided against imposing these requirements on fully-insured “large group” and self-insured plans. Why? Because the ACA drafters felt that these plans covered benefits that were as good if not better than the Federal EHBs. The drafters also discovered that the typical group health plan was an 80% AV plan. And, the practice of “experience rating” to determine premium rates worked relatively well. Most of the recent news coverage goes on to say that fully-insured and self-insured AHPs are going to provide “junk insurance.” A number of so-called industry experts even suggested that these fully-insured and self-insured AHPs (1) can deny a person coverage if they have a pre-existing condition, (2) can refuse to cover preventive services, and (3) can avoid imposing annual and lifetime limits. False, false, and false. Let’s take a look at what’s actually happening:

- - First, as a “group health plan,” a fully-insured and self-insured AHP cannot deny a person who is eligible to participate in the plan health coverage if they have a pre-existing condition.
  - Second, a fully-insured and self-insured AHP cannot refuse to cover preventive services, rather, the AHP must provide free care for certain government-approved preventive services.
  - Third, a fully-insured and self-insured AHP cannot impose annual and lifetime limits on the Federal EHBs covered under the plan (note, the Federal EHB standard was not changed by the Executive Order).

Interestingly, all three of the above stated requirements came into the law under the ACA – fully effective in 2014 – which is why it was surprising to hear industry stakeholders get it wrong. As you may know, additional ACA group health plan requirements apply – most notably – coverage for adult children up to age 26, free access to emergency care, and the prohibition against rescinding coverage absent fraud.

AHPs Offering Adequate or Inadequate Coverage? (no news story)

The recently quoted stakeholders also overlook the consumer protections under HIPAA and ERISA.
- Analysis: Among other HIPAA requirements applicable to group health plans, premiums for a plan participant cannot be developed based on a person’s health condition. Instead, premiums are developed based on the “health claims experience” of the entire group. Importantly, sponsors of a fully-insured and self-insured group health plan charge every participant the same premium rate (so the young and healthy in the group subsidize the older and sicker). In addition under ERISA, there are specific notice and disclosure requirements, and also fiduciary responsibilities that apply, requiring the AHP and its employer members to act in the best interest of the participants. Participants also have a private right of action to sue the AHP or employers if there is wrong-doing. And, there are detailed rules governing how health claims are submitted, which were recently strengthened by the ACA by adding rigorous internal and external appeals processes. All serving as protections that are actually better than what you will find in the individual market. Will fully-insured and self-insured AHPs offer inadequate health coverage? In short, no. When it comes to benefits covered by a fully-insured AHP, the plan is subject to State benefit mandates. Most State benefit mandates are as good if not better than the Federal EHB standard. So, fully-insured AHPs are by definition required to provide adequate coverage. This is in addition to meeting all of the rules and requirements discussed above, which by definition include significant consumer protections. Same goes for a self-insured AHP. That is, self-insured AHPs must meet all of the same rules, requirements, and consumer protections discussed above. The only difference is that a self-insured AHP is not subject to State benefit mandates on account of ERISA preemption. However, it is likely that a self-insured AHP will cover 50 or more employee participants, which means the employer members would likely be subject to the ACA’s “employer mandate.” According to the employer mandate, the plan must be “affordable” and provide “minimum value” or the employer members will be subject to a penalty tax. To meet the “minimum value” test, the Obama Administration made sure that these plans must cover most of the Federal EHBs, including hospitalization and physician services.

Market Segmentation and AHPs (no news story)

This argument has some merit. I get it because if you have multiple markets, you are going to have multiple risk pools. And if you have multiple risk pools, one of the risk pools is going to suffer and end up with all of the bad health risks. If bad health risks dominate a particular market, that market probably won’t survive without government assistance.
- Analysis: When we were drafting the ACA, we endeavored to make the risk pools as large as we could make them. That is why you see a single-risk pool requirement in the “individual” market. We wanted to make sure every person purchasing an individual market plan was a part of the same risk pool, regardless whether the plan was purchased on-the-Exchange or off-the-Exchange. We knew that the bigger the risk pool, the easier it is to spread the bad health risks out over all of the lives in pool. We did the same thing in the “small group” market. That is, we created a single-risk pool where employees of those small employers contracting with a particular insurance carrier were pooled together in one, big pool. And it didn’t matter if the plans were purchased through the SHOP Exchange or outside of SHOP. Despite our best intentions, we all know by now that the current ACA individual markets are unbalanced markets. And note, they were unbalanced even before the Nov. 2016 elections. Unfortunately, the “small group” market is not much better. That is, the “small group” market remains a dysfunctional market. As a result, there is a good chunk of small employers who are sitting on the side-lines – and NOT sponsoring a “small group” plan. Same goes for younger and healthier people in the individual market – they are NOT buying an individual market plan, and thus, NOT entering the risk pool.

Will the Expansion of AHPs Really Result In Market Segmentation? (no news story)

Again, I get the argument that (1) if more AHPs are operating out there, small employers and certain individuals (should they be permitted to participate in an AHP) may opt to leave the “small group” and “individual” markets, and (2) if the health risks of the employees of these small employers and/or individuals are on the healthy side, such a move could (3) adversely affect the existing markets. BUT, this argument pre-supposes that there are healthy risks in the “small group” and “individual” markets.
- Analysis: When it comes to the “individual” market, I would submit that there are not many healthy risks. After all, we have verifiable data that bears this out. For example, only 28% of Exchange planholders are between 18 and 35. And, IRS data tells us that in 2014, 7.9 million taxpayers paid the “individual mandate” penalty tax and 12.4 million taxpayers claimed an exemption from the tax. HHS data goes on to tell us that 45% of the taxpayers (1) who paid a penalty or (2) who claimed an exemption were under age 35. That’s 9.1 million taxpayers who are young and arguably healthy. Admittedly, I don’t have the same data when it comes to the “small group” market. But, we do know that only about 50% of small employers are actually offering health coverage to their employees. So yes, when it comes to the “small group” market, I would agree that if a portion of the 50% of small employers who are currently offering health coverage decide to opt for AHP coverage, these health risks – if they were on the healthy side – would be shifting to a different risk pool, thereby adversely affecting those small employers remaining the “small group” market. BUT, there are 50% of small employers sitting on the side-lines. And I would submit that if these employers have an option to offer their employees health coverage through an AHP, these employers may decide to offer coverage for the first time. Which means that more people are getting some form of health insurance. That is a GOOD thing. You know who I would like to have a conversation with – Michael Kreidler, the Insurance Commissioner for the State of Washington. Why? Because – in my opinion – Washington State has the largest AHP market in the country. Both before the ACA, and after the ACA. You may ask, how can Washington State have an AHP market after the 2011 guidance I keep telling you about? In short, because an administrative law judge with Washington State’s “Office of the Insurance Commissioner” over-ruled Mr. Kreidler’s objections to AHPs, ruling that most – but not all – of the associations and “group health plan trusts” that were operating in the State pre-2011 met the definition of a “bona fide group or association of employers.” Not the definition under ERISA. But a State-developed definition, which at the end of the day, allowed a large population of small employers operating in Washington State to continue to offer coverage to their employees through some form of an AHP (which by the way is treated as a “large group” plan). Why is Washington State so interesting to me? Because – as far as I know – despite the more than 500,000 workers covered by some form of an AHP, Washington State’s “small group” market is not suffering. Admittedly, people who are closer to the State than I am may say that I am wrong. But, when was the last time you heard people in Washington State complaining about its “small group” market? Also, if AHPs were tanking the “small group” market in Washington, I think that the media would have written multiple articles panning last Thursday’s Executive Order by pointing to real-life examples of how AHPs can be detrimental to an insurance market. We have NOT seen those news articles. That is not to say these news stories won’t be coming. But, silence on the issue – to me – speaks volumes.

Allowing Employers of Any Size to Give Employees a Tax-Free Contribution to Purchase an “Individual” Market Plan

This is an issue that has been over-shadowed by the Executive Order’s direction on AHPs and short-term health plans, and more recently the cancellation of the cost-sharing subsidies. BUT, it is a noteworthy issue for both ACA supporters and employers.
- Analysis: Prior to the enactment of the ACA, the Treasury Department said that the practice of giving employees a tax-free contribution to purchase an “individual” market plan violated HIPAA. Why? Because Treasury held the position that this type of arrangement was a “group health plan,” and because HIPAA prohibits group health plan premiums from varying based on a person’s health condition. Remember, pre-ACA, most States allowed their carriers to develop individual market plan premiums based on a person’s health condition. Along comes that ACA, where the practice of developing individual market plan premiums based on a person’s health condition was outlawed. Most practitioners – including me – felt that now, employers could permissibly give their employees a tax-free contribution to purchase an individual market plan. Why? Because it appeared that this HIPAA problem went away. But, the Obama Administration still did NOT want employers engaging in this practice. So, in 2013, the previous Administration developed a “legal fiction” effectively prohibiting employers of any size from giving their employees a tax-free contribution to purchase an individual market plan. This “legal fiction” was first released as informal guidance, and later codified in regulations. At the end of 2015, Congress actually over-turned the Obama Administration’s guidance/regulations on this, but the legislation was limited to small employers. In other words, Congress passed legislation that allowed employers with fewer than 50 “full-time equivalent employees” (FTEs) to purchase an individual market plan with tax-free contributions funded through a Health Reimbursement Arrangement (HRA). Based on last Thursday’s Executive Order, it appears that the Trump Administration wants Treasury to rescind the previous Administration’s guidance/regulations in this area, allowing employers of ANY size to give their employees a tax-free contribution to purchase an individual market plan. If and when Treasury issues new guidance in this area, I would assume that certain conditions will be placed on engaging in this practice. For example, employers will likely have to give the same contribution amount to all similarly situated employees, and the employer cannot also sponsor a group health plan. The tax preference may also only be conditioned on the individual employee certifying that they actually purchased an ACA-compliant individual market plan. And lastly, there may be some sort of “affordability” test as a safe harbor so employers engaging in this practice can automatically comply with the “employer mandate,” provided the employer gives a big enough contribution to make coverage “affordable.” Will allowing employers of ANY size to give their employees a tax-free contribution to purchase an individual market plan disrupt the employer-sponsored market? My answer: NO. Why? Because one of the main reasons employers offer health coverage is to attract and retain talent. And, employers are going to want to offer health coverage that is more comprehensive than most if not all individual market plans can provide. Also, employers want to manage the health of their employees, and they feel they can do a better job at managing costs and the well-being of their employees than any insurance carrier can. However, there are certain industries – like low-income, high-turnover industries – where employees don’t place a great deal of value on health benefits. In these industries, it is likely that employers would opt to give their employees a tax-free contribution for the purchase of an individual market plan. Here, these employers still want to serve as the “financier” of their employees’ health coverage, but they don’t want to be in the business of sponsoring a group health plan (and being subject to all of the group health plan rules and requirements discussed above). With regard to the individual market, it is clear that enrollment will increase. In some cases, the influx of new lives into the individual market could help balance out the risk pool (because many of these low-income employees may be young and healthy). But on the other hand, some of these new lives could be on the less healthy side, which would just add to an already unbalanced market. Overall though, I can’t quite see why ACA supporters would be opposed to this practice, unless of course, employers start dumping all of their bad health risks into the individual market. But again, that is something I do not see happening. In the end, the individual market is going to have to improve if employers are going to be remotely comfortable with moving away from sponsoring a group health plan. And, unfortunately, there are NO positive signs that improvements are coming any time soon.