Cost-Sharing Subsidy Update
Cost-Sharing Subsidy Update
by Christoper E. Condeluci, Principal and sole shareholder of CC Law & Policy PLLC in Washington, D.C.
- Avalere Health studied the impact of the decision to cancel the cost-sharing subsidy payments. Here is Avalere’s top-line statement: “New analysis from Avalere finds that nearly 98% of counties with Exchanges operated by HealthCare.gov will have free bronze plan options for low-income consumers aged 50 earning 150% of poverty or less ($18,090 for an individual or $36,900 for a family of four).” Avalere also said: “Avalere experts link the increased availability of free plan options to the Administration’s decision to end cost-sharing reduction (CSR) payments to insurers. This decision has led to substantially higher premium subsidies in 2018, as insurers increase premium levels to make up for the lack of CSR payments.”
- Analysis: Although I have been saying this since mid-August, I am pleased to see that Avalere actually quantified this for everyone. I continue to be captivated by the following question: How will Congressional Democrats and Republicans react to this revelation? As everyone knows, the decision to cancel the cost-sharing subsidy payments has long been cast as “the worst thing ever.” Intuitively, it made sense, right? Cancelling the payments would cause disruption, and that would be bad for the markets. BUT, the counter-intuitive result is that cancelling the payments will leave most low-income individuals better off. And, most other consumers purchasing off-Exchange plans will NOT see a premium increase. Now that this revelation is finally getting broadcasted to Congress and the public at large, there is no doubt that this will impact consumer-behavior, and for example, how Congressional Democrats and Republicans view the Alexander-Murray “market stabilization” package. Will this take the wind-out-of-the-sails of the push to fund the cost-sharing subsidies? Maybe not, because as I stated last week, the politics of funding the payments – and claiming that Congress “finally did something to reduce premiums” – are the optics that Republicans and Democrats will likely prefer (see my attached update). As I also stated last week, I think Congressional Democrats can extract A LOT from Republicans because Democrats know that – politically – Republicans need to fund the cost-sharing subsidy payments to counter the continued claims that Republicans are “sabotaging” the markets. Sure, if the Democrats “ask for the moon” in exchange for the cost-sharing subsidy funds – and when Republicans balk at their “asks” – Republicans will blame the Democrats for refusing to agree to fund the cost-sharing subsidies. But I believe the “blame” can be countered with the revelation that most consumers will be held harmless and/or be better off because of the decision to cancel the cost-sharing payments. Or, if Democrats don’t want to make too much of this point – because they don’t want the President to be viewed as doing something to improve the ACA, rather they want to continue arguing that the President is “sabotaging” the law – Democrats can simply say that it is the Republicans who are “playing politics,” and they are the ones who are NOT willing to come to a bi-partisan agreement to fund the cost-sharing payments. In my opinion, if you are a Congressional Republican, you’re darned-if-you-do-darned-if-you-don’t. What I mean here is: If Congressional Republicans DO fund the cost-sharing subsidies, conservative corners of the party will complain that Republicans are “bailing out the insurance companies.” This claim will have an impact in the upcoming Republican “primary” elections. If, however, Congressional Republicans do NOT fund the cost-sharing subsidies, well then, they are putting the ACA on a pathway to actually succeeding, which can also be used in a “primary” election against an incumbent Republican member. But note, any concerns over improving the ACA could be counter-acted by incumbent Republicans if they actually “repeal and replace” the ACA in the 1st Quarter of 2018 (ahead of the “primaries” and the 2018 mid-term elections), which Congressional Republicans will likely try to do if they can get Tax Reform done before the end of 2017. That is a BIG IF though.
Who Can Argue Against Free Health Coverage? Those Who Believe People Won’t Be Protected From High Out-of-Pocket Costs (no news story)
- An important point to make when talking about the impact of the decision to cancel the cost-sharing subsidies is this: It’s all fine and good that low-income individuals can get free health coverage, BUT a “bronze” plan has a really high deductible, and exposing low-income individuals to very high out-of-pocket costs negates the benefit of purchasing a plan for free. I agree that this is a problem. BUT, I believe we have to remember that SOME health coverage is better than NO health coverage. Also, we have to remember that – while Avalere did not quantify this – it is highly likely that most consumers will be able to purchase a “gold” plan at little to no additional cost (and therefore, in most cases, get better out-of-pocket protections than they had previously).
- Analysis: Let’s start with my SOME health coverage is better than NO health coverage point: It is important to understand that while low-income individuals are heavily subsidized under the ACA, the law was set up so people had at least some financial responsibility for paying for their own coverage – “skin in the game” the drafters called it. But for some low-income individuals, even this low-dollar financial responsibility is too great. As a result, these individuals may decide to go without coverage. That’s BAD. So, my argument is this: If health coverage is free, people are more likely to obtain that coverage. Which – in my opinion – is a GOOD thing, even if that coverage is not as ideal as some stakeholders would like the coverage to be. I know some would disagree with me though. There is another point to consider: Avalere quantified that in 18% of counties serviced by Healthcare.gov, low-income individuals could get free “silver” plans. And, in 10% of counties, low-income individuals could get free “gold” plans. As you know, “silver” and “gold” plans have lower deductibles, so at least those consumers located in these counties will get free coverage AND they would NOT be exposed to the same high out-of-pocket expenses as they would if they had purchased a free “bronze” plan. Also, while Avalere did not quantify this, it is important to understand that with the increased premium subsidy amounts, it is highly likely that most Exchange consumers – including low-income consumers – will be able to purchase a “gold” plan for the same percentage of their income as they used when purchasing a “silver” plan. In other words, the premium subsidy dollars will have greater purchasing power. And, for the same amount of money these consumers spent on a “silver” plan in 2017, they will able to – instead – purchase a “gold” plan in 2018. That means that those consumers who are NOT eligible for cost-sharing subsidies will have GREATER out-of-pocket protections than they had previously, at little or no additional cost. Admittedly, consumers with income between 150% and 200% of the Federal Poverty Level (FPL) would have greater out-of-pocket protections than a “silver” or “gold” plan if the cost-sharing subsidy payments were actually made (because the cost-sharing subsidies result in a plan with an 87% actuarial value (AV) for these consumers, and a “gold” plan is only an 80% AV and a “silver” plan is only a 70% AV). But – in my opinion – free coverage and solid out-of-pocket protections is noteworthy. I also agree that it will be challenging to explain to Exchange consumers that they should purchase a “gold” plan this year – instead of a “silver” plan – because they will have greater out-of-pocket protections at little to no additional cost. BUT, as more people in the media – and in the industry – talk about this phenomenon, I think people will catch on. Word spreads fast when there is a better deal out there.
Tax Reform Update
- Last Thursday, Congressional Republicans released their Tax Reform bill. As some health care industry stakeholders have said: What’s most interesting is what is NOT included in the bill.
- Analysis: By now, I am sure you have read news stories about the Tax Reform bill. In short, the legislation would reduce the corporate tax rate to 20%, lower the individual income tax rates for families making less than $1 million, double the standard deduction for all taxpayers (while also eliminating or modifying the itemized deductions), and also provide tax relief to some “pass-through” taxpayers. What’s NOT in the legislation? NONE of the ACA taxes are addressed in the Tax Reform bill. This includes NO Cadillac Tax repeal or delay. NO repeal or delay of the medical device tax or excise tax on insurers. NOTHING on the “employer mandate.” NOTHING on the “employer reporting” requirements. And currently, NOTHING on the “individual mandate.” As you have heard me explain before, Republican Leadership has consistently said that the ACA taxes would NOT be addressed in Tax Reform. Why? Because the Leaders believed – and continue to believe – that the ACA taxes should be addressed in a health care reform bill, not a Tax Reform bill. So that begs the question: If Republicans want to repeal the ACA taxes – but there is NO repeal of the ACA taxes in Tax Reform – are Republicans looking to undertake another health care reform exercise some time soon? My answer: Yes, I do think that Republicans will take another run at “repealing and replacing” the ACA. BUT, only if they can complete Tax Reform by the end of the year. As stated above, that is a BIG if (i.e., it’s not a 100% certainty that Republicans will be able to get Tax Reform done at all). But even if Republicans can get Tax Reform done by end of the year, I do NOT think that ALL of the ACA taxes will be repealed in any forthcoming health care reform exercise. Why? Because getting rid of ALL of the ACA taxes costs A TON of money. And, the only way I see Republicans coming up with the money to offset the revenue loss is by reducing spending. To reduce spending through a health care reform exercise – absent repeal of the “individual mandate” (which we will talk more about below) – the only places you can really go is Medicare and Medicaid. But doing anything to Medicare is more or less off-limits. And, we saw how things went when Republicans tried to reduce Medicaid spending. So, I don’t see it happenin.’ In my opinion, the ACA taxes will stay in the law for the foreseeable future. Now, it is likely that some of the ACA taxes will be modified. In other words, the ACA taxes will stay in the law, but for example, the “employer mandate” may be modified so as to only impact employers with 500 or more employees. Or, maybe the employer mandate penalties are waived for 2015, 2016, and 2017, and Congress continues to waive the penalties year-over-year in a “tax extender” bill. Speaking of “tax extenders,” I could very well see the delay of the Cadillac Tax becoming a “tax extender,” meaning the Cadillac Tax simply continues to be delayed year-over-year. Look, I support repealing the Cadillac Tax, but I believe the reality is that fully repealing the Tax costs way too much. Even if Republicans wanted to replace the Cadillac Tax with a “direct cap” on the exclusion, for political reasons, the direct cap would have to be set much higher than the Cadillac Tax’s current limits, which – at the end of the day – would result in revenue loss (at least in the short-term). Something Republicans currently cannot afford. The bottom-line is this: There are a lot of competing interests, and there is only so much money that can be used to pay for things. And when you CANNOT pay for things, parts of the law end up staying in the law despite strenuous support for changing the law. But if you CAN pay for things, change CAN happen. When it comes to Tax Reform, Republicans are scrounging for additional revenue and/or savings so they can not only provide meaningful tax relief, but so they can appease special interest groups that want to retain certain tax provisions, while also mitigating any adverse effects on those taxpayers who may end up as “losers.” That’s where repeal of the individual mandate penalty tax comes in…
- There was some speculation that repeal of the individual mandate penalty tax would be included in last Thursday’s Tax Reform blueprint. There was merit to this speculation. After all, prior to the release of the Tax Reform bill, Sen. Cotton (R-AR) and President Trump suggested that the individual mandate should be repealed through Tax Reform. More recently, Speaker Ryan indicated that repeal of the individual mandate was STILL on the table.
- Analysis: Sooo, despite the fact that repeal of the individual mandate was NOT initially included in the Tax Reform bill, repeal of the mandate could be added at some point. BUT, repeal could also stay out of the bill. It’s really a tough one to read at this stage in the process. Why would repeal of the individual mandate stay OUT of Tax Reform? Well for one, consistent with the continued statements that the ACA’s taxes should NOT be addressed in Tax Reform, Republican Leadership may stand strong and keep repeal of the mandate OUT. Also, there is concern that including repeal of the mandate in the Tax Reform bill will muck up Republicans’ chances of finally achieving their “once-in-a-lifetime” goal of reforming the Tax Code. In other words, many Republicans believe that getting Tax Reform done is going to be SUPER hard even if Republicans are ONLY dealing with tax issues. And, if you add to the mix a lighting-rod issue that is central to the ACA, you make it that much harder to get Tax Reform done. Republicans recognize that they CANNOT screw up on Tax Reform. It’s almost as if I can hear Eminem’s song “Lose Yourself” playing right now. Why would repeal of the individual mandate get pulled IN? Repealing the individual mandate results in significant savings to the Federal government in the form of lower spending on the premium subsidies. And many Republicans want those savings to, for example, provide bigger tax cuts for middle-income taxpayers, or to preserve certain itemized deductions like the State and Local Income Tax deduction or the mortgage interest deduction or the itemized deduction for medical expenses (which we will discuss more about below). The bottom-line is that repeal of the individual mandate represents a HUGE pot of money that may be too appealing to pass up. In addition, getting rid of the mandate allows Republicans to at least say that they repealed the most reviled aspect of the ACA (which will likely resonate with a majority of the American public). And, Republicans can also point to repeal of the mandate as proof that they have NOT given up on ACA repeal-replace (which will resonate with conservative corners of the party). BUT, if repeal of the individual mandate is indeed included in Tax Reform, that will have profound effects on any forthcoming ACA repeal-replace efforts. That’s because the significant savings generated from repeal of the mandate to, for example, spend on tax credits for health insurance or to offset the ACA taxes will be GONE. And as stated above, trying to “replace” portions of the ACA with reductions in Medicaid spending may prove very, very difficult.
How Will the Congressional Budget Office (CBO) “Score” Repeal of the Individual Mandate? (no news story)
- My answer: I do NOT think that CBO will “score” repeal of the mandate as causing 20+ million people to become uninsured. Nor do I even think that CBO will assume 14 million people will become uninsured. Why? Because if you look back at CBO’s analysis of previous ACA repeal-replace bills, while CBO assumed that about 14 million would be uninsured in the 1st year of repeal (because CBO assumed that people will choose NOT to obtain health insurance), CBO also assumed that this number would go down over the 10-year budget window because these people would end up getting employer coverage, or they would ultimately re-enter the individual market at some point.
- Analysis: Let me try to put this into perspective: CBO said that the House-passed ACA repeal-replace bill would result in 23 million uninsured people. Of this 23 million, CBO said that 14 million of them would lose their Medicaid coverage (on account of the Medicaid reforms included the underlying bill). That means if you do NOT have the Medicaid reforms – and instead – you only have repeal of the individual mandate, a strong argument can be made that you should only see 9 million uninsured over 10 years. Yes, CBO might say that some people on Medicaid won’t get Medicaid coverage because the individual mandate is gone, but that should be minimal. Also, CBO might say that some people will not re-enter the individual market because under the House-passed ACA repeal-replace bill, CBO assumed that health plans would be less comprehensive, and therefore, more affordable, which would attract more people into the market. Repeal of the individual mandate in isolation – through the Tax Reform bill – does NOT do anything to the current insurance regulations. Bottom-line: I do NOT think you will see 14 million uninsured, maybe more like 11 million (who – remember – are choosing NOT to obtain coverage, which I feel is different than people becoming uninsured (because they are not being forced off of coverage)). Last comment: There has been recent talk that the Trump Administration is readying an Executive Order to somehow gut the individual mandate. I am not buying that rumor. Why? Because if the Administration somehow neuters the mandate through administrative means, CBO will likely assume very little savings associated with full repeal of the mandate. Note, the main reason why repeal of the mandate is even being discussed is so Congressional Republicans can benefit from the significant savings repeal produces. I recognize that Republicans have a history of snatching-defeat-from-the-jaws-of-victory. But not this time.
- As stated above, the Tax Reform bill does eliminate the itemized deduction for medical expenses. Currently, there is only a small percentage of taxpayers who claim the itemized deduction for medical expenses. However, those taxpayers who do claim this itemized deduction are older individuals who have high out-of-pocket costs for health care services not covered by insurance or Medicare. Taxpayers with chronic conditions – which requires them to spend a lot of money on medical-related services not otherwise covered by insurance or a public health program – also claim this itemized deduction.
- Analysis: Why was the itemized deduction for medical expenses eliminated? Answer: The Tax Reform bill doubles the standard deduction, which effectively makes the standard deduction more valuable than the itemized deduction for most taxpayers. So – the idea goes – if the standard deduction is more valuable than the itemized deduction for most taxpayers, then it does NOT make sense to keep the itemized deductions around. This includes the itemized deduction for medical expenses. As a result, it got chopped. BUT, like most attempts to make big changes to the law, there are going to “winners” and “losers.” And while a large percentage of taxpayers are “winners” on account of the doubling of the standard deduction (which includes taxpayers who previously claimed the itemized deduction for medical expenses), there will still be a small percentage of taxpayers who have medical expenses that are so great that eliminating this itemized deduction will put them in the “loser” category. Unfortunately for Republican tax-writers, the “losers” are essentially some of the most vulnerable people out there (older individuals and/or people with chronic health conditions). So, as you would expect, interest groups like the AARP and patient groups are raising the alarm on this, and trying to mobilize political opposition to eliminating the itemized deduction for medical expenses. It’s unclear whether these interest groups will be successful. But, the fact that this tax change impacts older and sicker people, there is a heightened level of concern and sympathy for these taxpayers, which may – at the end of day – result in its preservation. Only time will tell.