If the Trump administration follows through on its threat to stop paying insurance companies a controversial set of subsidies established by the Affordable Care Act, the government will lose money rather than saving it, according to a new analysis by the Congressional Budget Office. And it will lose big. The CBO estimates that eliminating the subsidy, known as cost sharing reduction payments, would ultimately cost the government $194 billion over the 10 years beginning in 2017.
How is it possible that not paying a subsidy would cost the government money? It comes down the structure of the ACA, under which a complex web of tax revenues, subsidy payments to insurers, and tax credits for some consumers combine to limit health insurance premium cost to a certain percentage of a family’s income every year, if that family buys insurance on the individual markets and falls within the income brackets covered by the law.
The short explanation goes like this: The government requires companies selling insurance on the exchanges to offer policies that cover specific things, and to do so at a discount, meaning that what consumers are charged is, on average, lower than what the insurers would have to charge to make a profit.
The government makes the insurers whole, in part, through the CSR payments. However, it also helps low-income consumers purchase insurance by capping the amount they have to pay in premiums at a specific percentage of their income, and providing tax credits that make up the difference. It’s this part of the structure -- with the government making payments on both ends of the transaction to balance things out -- that’s important here.
The CBO found that if the government stops paying insurers the CSRs, then they will raise rates to make up for the difference. But the rates won’t simply go up by the amount of the payments that are being discontinued. The uncertainty and added risk that the elimination of CSR payments adds to the system means that rates will go up even more than that.
And, because the law still caps the premiums paid by millions of consumers at a percentage of their income, it’s the government -- or more accurately, the taxpayer -- that will end up footing the bill for the higher premiums.
The CBO’s analysis finds that savings from non-payment of the CSRs and the increased premium subsidies roughly net out for consumers earning between 100 and 200 percent of the federal poverty level. However, people above 200 percent of the poverty level are eligible for subsidies that get smaller as their incomes increase. The net cost of those subsidies would increase by $194 billion over a decade, CBO predicts.
The agency also found that the number of people living in parts of the country where no insurers are selling policies through the exchanges would surge briefly as companies adjusted to the new rules, but would return to current levels by 2020.
Premiums for the mid-range Silver plans sold through the exchanges would jump by 20 percent immediately, and 25 percent in the longer term.
The effect on the number of Americans with health insurance would be minimal, CBO determined. The change would drive down coverage temporarily, but the percentage of Americans with insurance would actually rise slightly after a few years.