Cost-Sharing Subsidy, CBO and IRS Update
Cost-Sharing Subsidy Update
by Christoper E. Condeluci, Principal and sole shareholder of CC Law & Policy PLLC in Washington, D.C.
- I purposefully have not talked much about the controversy over the cost-sharing subsidies because – in my opinion – it is too difficult to predict whether the Trump Administration will continue to fund the subsidies. On the one hand, it appears that the President does NOT want to continue funding the cost-sharing subsidies. But on the other hand, it appears that senior White House officials and HHS Secretary Price believe the subsidies MUST continue to flow. In the end, who wins that battle? I don’t know.
- Analysis: In addition, it is difficult predict when and how this issue may be resolved in the courts. As you know, a District Court judge already said that the President can stop the cost-sharing subsidies absent an explicit appropriation from Congress. But, many legal scholars believe this ruling will be over-turned on appeal. A decision on whether to further delay consideration of the litigation must come on Aug. 20th. And even if there is another extension of a final ruling, it is unclear how the appeals court will treat the arguments advanced by a number of State Attorneys General who the court permitted to “intervene” in the litigation.Despite this difficulty to predict, I feel I can say this: If the Trump Administration chooses NOT to fund the cost-sharing subsidies, I believe the odds that a market stabilization package is enacted increases significantly (85% happening/15% not happening). Why? Because I believe the decision will put us closer to “crisis” territory, and Congress typically responds to a crisis in a bi-partisan way. Even if the Trump Administration decides to continue to funding the cost-sharing subsidies through say September or October, then I still think there is a chance that a market stabilization package with cost-sharing subsidy funding could be approved by Congress (51% happening/49% not happening). Yes, I am softening a bit on my pessimism from last week, but only as it relates to the cost-sharing funding, and possibly Stability Fund/reinsurance money.What might be included in said market stabilization package? As stated, an explicit appropriation for the cost-sharing subsidies. But for how long? Democrats want a mandatory appropriation (i.e., making it permanent). Republicans only want temporary funding. Who wins this battle? At this point, I am not sure, but I would guess Republicans. What else? Probably Federal money for reinsurance-type programs. But, Republicans will also want corresponding modifications to ACA Section 1332 to allow States to offer coverage that is something less than the Federal “essential health benefits” (EHBs). No way Democrats agree to this 1332 change. So who wins that battle? Probably Democrats. What else? Possibly changes to the “employer mandate.” Both Republicans and Democrats would support modifications to the “employer mandate,” so I don’t foresee controversy over this one. At this point, I do NOT see the medical device tax making it onto the market stabilization package, nor do I see the insurance carrier excise tax being repealed or delayed. But, what I could see is a modification to Section 1332 to allow States to share the savings produced by an 1115 Medicaid Waiver with a 1332 Waiver. While I believe HHS can already allow this “shared savings” through administrative guidance, specifying in statute that “shared savings” is must-do may be preferred by Congressional Republicans who fear that a future Administration may rescind the “shared savings” guidance.Note, yesterday, the Trump White House announced that the Administration WILL continue to fund the cost-sharing subsidies for the month of August. But, the White House stopped short of committing to funding the September payments. In my opinion, I think the White House agrees to fund the cost-sharing subsidies for September and maybe even October, which would give Congress time to approve an explicit appropriation for the cost-sharing subsidies, at least for the short-term. But, this assumes that Congress can agree on a package that would appropriate the money for the cost-sharing subsidies, which – as stated above – could happen, but it will be a YUGE battle for sure (with the possibility of it cratering in the end).
- Due to the uncertainty over whether the Trump Administration will fund the cost-sharing subsidies, most States are either giving their insurance carriers more time to file their premiums rates, or the States are allowing their carriers to file 2 different sets of rates (one set of rates assuming the subsidies will be funded, and a different set of rates assuming the subsidies will not be funded). To account for those carriers whose States are allowing them to increase their premiums on the assumption that the cost-sharing subsidies will NOT be paid, it appears HHS wants to give these carriers more time to file their premium rates. As a result, instead of requiring carriers that want to participate in the Federal Exchange to file their rates by Aug. 16th, HHS is now giving these carriers until Sept. 5th to file their rates.
- Analysis: In my opinion, pushing back the premium filing date to Sept. 5th was not the most noteworthy part of HHS’s guidance. Many analysts – including me – think that the changes made to the “risk adjustment” formula is a sign that the cost-sharing subsidies may NOT be paid by the Administration.Without getting too much into the weeds here, the guidance said: For purposes of determining how much money a carrier may receive as a “risk adjustment” payment (or how much the carrier has to pay to the government as a “risk adjustment” charge), if a carrier increases their premium rates based on the assumption that the cost-sharing subsidies will NOT be paid, HHS will NOT treat the plan as a “silver” Exchange plan, but rather, HHS will treat the plan as “platinum” Exchange plan. This is important because it will impact the formula used to determine the amount of the “risk adjustment” payments and charges, which could result in big swings for those carriers who have received “risk adjustment” payments for the past 2 years, where these carriers may now be required to pay a big “risk adjustment” charge to the government.The main reason why analysts – including me – think the guidance is a sign of forthcoming NON-payment of the cost-sharing subsidies is this: If the Administration was going to fund the cost-sharing subsidies, then this guidance would NOT be needed. After all, the carriers would NOT need to increase their premiums because they would know the cost-sharing money would be coming. BUT, because it appears that the Administration is anticipating a scenario where the unfunded cost-sharing liabilities WILL be loaded on to the premiums of a “silver” Exchange plan, it is almost as if the Administration is preemptively preparing for such a scenario.But as stated above, the Trump White House has committed to funding the cost-sharing subsidies for August. And, if the White House chooses to fund the subsidies for September and October, then – as stated – an argument can be made that the changes to the “risk adjustment” formula will be moot. Especially if Congress approves an appropriation for the cost-sharing subsidies by the end of September or October. As you can see, this guessing game does not lend itself to predictions that one can stand by. Which again, is why I have not opined on the cost-sharing subsidy controversy until now. And even now, it is still crazy hard to predict (not to mention confusing).
- On Tuesday, the Congressional Budget Office (CBO) issued a report analyzing the impact of the cancellation of the cost-sharing subsidy payments. By now, you have probably seen the headlines saying the following 2 things: Cancelling the cost-sharing subsidies would (1) Increase the deficit and (2) Increase premiums for “silver” Exchange plans. To be sure, both of these results are NOT good. BUT, you gotta love headlines. Because what they failed to mention is 2 other interactions that (1) Would actually benefit most if not all Exchange planholders and (2) Would reduce the uninsured rate. Show me a headline that proclaims these latter 2 points and I will buy you a beer. Although admittedly, some of the news stories did discuss these 2 interactions near the tail-end of the article.
- Analysis: Look, failing to appropriate the necessary funds for the cost-sharing subsidies – and cancelling the cost-sharing payments outright – would be BAD if you are a deficit hawk. That’s because CBO estimates that cancelling the cost-sharing subsidy payments would increase the deficit by $194 billion over 10 years.In addition, failing to appropriate the necessary funds – and cancelling the cost-sharing payments outright – would be BAD for consumers in the short-term. That’s because CBO estimates – that in 2018 and 2019 – some consumers would live in areas where no insurance carriers would be selling Exchange plans (i.e., there would be an increase in “bare markets” on account of this decision), and this would increase the uninsured rate by 1 million. Although by 2020, CBO estimates that MORE insurance carriers would participate in the Exchange markets, and the uninsured rate would actually be REDUCED relative to today (imagine that).So why the deficit increase? Well, CBO assumes that insurance carriers will add onto the premiums of “silver” Exchange plans the unfunded cost-sharing liabilities. CBO estimates that this load would amount to a 20% increase in 2018 and a 25% increase in 2020. As you have heard me explain in the past – regardless of the cause of premium increases – the ACA’s premium subsidies are structured in such a way where the consumer does NOT absorb premium increases. Rather, the Federal government absorbs the premium increases. Based on this structure, ACA supporters and the previous Administration rightly contended that Exchange planholders would NOT be adversely affected by the premium increases we saw in, for example, 2016 and 2017. Again, because those premium increases were absorbed by the government in the form of higher premium subsidy payments (i.e., higher government spending).So, it logically follows that in the absence of the cost-sharing subsidy payments – and the ensuing 20% to 25% premium load added to a “silver” Exchange plan – the premium subsidy amounts are going to be much, much higher than what they are today. And that means that government spending (in the form of the premium subsidies) is going to much, much higher relative to the government spending today.Are there other ways the deficit is increased? I am glad you asked. Interestingly, CBO also assumes that more people would be purchasing an Exchange plan. In other words, CBO thinks that cancelling the cost-sharing subsidy payments would actually REDUCE the uninsured rate (again, imagine that). CBO also expects more employers would drop their “group health plan,” so more people would shift to the individual market. What that all translates into is this: If you have more people purchasing an Exchange plan – and thus, accessing a premium subsidy – the Federal government is going to be spending more in the form of the premium subsidy payments. That increases the deficit too.
- 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 planholders.
- 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!!
- While I have opinions, I try NOT to be overly opinionated in my updates. Rather, I strive to being as objective as possible by looking at both sides of an issue. But, when it comes to claims that the Trump Administration is NOT enforcing the individual mandate penalty tax, I have an opinion. And, I have an even stronger opinion when I hear insurance carriers actually saying that one of the reasons why they are increasing premiums is because they fear the Trump Administration will NOT enforce the mandate.
- Analysis: Let me say this loud-and-clear so the carriers, the press, and ACA supporters get the message: The Trump Administration IS enforcing the individual mandate penalty tax the SAME EXACT way the Obama Administration enforced the individual mandate penalty tax. Period, end of story. There have been NO changes from how the Obama IRS has enforced the mandate in 2014 and 2015. And, if the GAO says differently, well then, I am going to have some choice words for the GAO. Because what I am hearing from the careers at IRS is that it is “business as usual” when it comes to enforcing the penalty tax.Let me take a brief moment to re-explain how the ACA drafters – of which I was one of them – structured the enforcement of the individual mandate penalty tax. For political reasons, the ACA drafters purposefully limited the IRS’s ability to enforce the penalty tax. For example, the IRS cannot garnish wages, cannot impose liens on property, and cannot seek criminal charges against those people who fail to pay the penalty tax. The ONLY mechanism through which the IRS can enforce the mandate is by sending a letter to a non-paying taxpayer, informing them that the IRS’s records show that (1) they did not obtain insurance, and therefore, (2) they likely owe the IRS a penalty tax. Importantly, the IRS inquiry ends there. So, for example, if a non-paying taxpayer chooses NOT to respond to the letter, NOTHING happens after that. The Obama IRS adhered to this enforcement regime. And the Trump IRS is adhering to this SAME EXACT enforcement regime. So, if the carriers, the press, and ACA supporters have problems with how the Trump Administration is enforcing the individual mandate, look no further than the statute, which the Obama IRS faithfully executed, AND which the Trump IRS is faithfully executing.Look, I am NOT trying to defend the Trump Administration here. I recognize that there were 2 announcements made by the Trump Administration – one this past January and another this past February – that injected a reasonable level of uncertainty over whether and how the Trump IRS was going to enforce the individual mandate. BUT, over the ensuing 6 months (March through August), the Trump IRS has in NO WAY changed the manner in which the agency has been enforcing the mandate since 2014.Now, when it comes to the cost-sharing subsidies, there is real uncertainty there, and I totally understand why carriers are increasing their premiums on account of this uncertainty (as discussed above). But, in my opinion, the same level of uncertainty is NOT present when talking about the individual mandate.Why I am making such a big deal about this issue? Because a number of insurance carriers have publicly said that the one of the reasons why they have increased their premiums for 2018 is because of they do not know whether the Trump IRS will continue to enforce the penalty tax. For example, Kaiser reported that these carriers increased their premiums by 9% to 20% for this reason. Are you kidding me?!? What a bunch of baloney.Make no mistake, I believe the Trump Administration has said and done a number of things that have contributed to the recent premium increases. And, I believe the ACA “repeal and replace” efforts have also added a layer of confusion in the marketplace and among consumers. BUT, enforcement of the individual mandate penalty tax in NO way should be used as scapegoat. I have already challenged the carriers to come up with an effective alternative to the individual mandate. I am still waiting (as are the policymakers on both sides of the aisle).Last comments: ACA supporters and the press are also contending that the Trump IRS is NOT enforcing the mandate. Over the past 8 months, we have seen countless news stories and bolded headlines saying things like: A Tax-Dodge, The Trump Administration Is Not Going to Tax You for Going Without Insurance. Does the press and/or the ACA supporters realize the impact these headlines are having on the American public?? These headlines lead a reasonable person to say: “Wow, if the Washington Post, or New York Times, or the USA Today is telling me that the individual mandate is NOT going to be enforced, why should I bother buying insurance and why should I bother paying the penalty to the IRS? Instead, I will just go without insurance, lie on my tax return, or just not bother paying the penalty. According to these news outlets, the IRS isn’t coming to get me.”What I find most interesting is this: ACA supporters, the press, and the carriers say that because the Trump IRS is NOT enforcing the mandate, this action will adversely affect the risk pool. But what these stakeholders don’t understand is that the continued barrage of public statements that the mandate is NOT being enforced is what is going to end up causing people to stay out of the risk pool. To me, it is a “self-fulfilling prophecy.” The negative expectation that people won’t enter the risk pool because of the non-enforcement of the mandate is ACTUALLY causing people to NOT enter the risk pool. This is all very sad to me.