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How CSRs and Uncertainty Shape the Future of the Insurance Market

August 19, 2017

The battle over repealing and replacing the Patient Protection and Affordable Care Act has been one of the most central policy debates in the United States since the 2016 elections. After several months, the battle seemingly came to an end in a late night Senate vote that struck down Senate Republicans’ bill to repeal major provisions of the Affordable Care Act (ACA). However, within days, President Trump added another layer of uncertainty to the future of health insurance markets by threatening to stop payments to insurance companies that have helped ensure coverage of low-income Americans.

CSRs and the Affordable Care Act

Under the ACA, insurers must provide cost-sharing plans for consumers within 100 and 250% of the federal poverty line (FPL), in order to reduce out-of-pocket costs for deductibles and copays.

The “bailouts” to which President Trump referred in his Tweets are cost-sharing reduction (CSR) payments. When insurance companies lower costs for low-income consumers, they lose revenue. To offset this loss and incentivize insurers to continue providing coverage, the federal government pays CSRs directly to insurance companies on a monthly basis. The Congressional Budget Office has estimated that these subsidies will total approximately $7 billion for 2017. [2]

The issue of CSRs is uniquely controlled by the executive branch due to actions taken during the Obama administration. In 2014, House Republicans filed a lawsuit to prevent President Obama from paying CSR subsidies without Congressional approval. The administration filed an appeal that President Trump can now reverse. [3]

So, what happens if ends CSR payments to insurance companies?

Insurers

If insurers no longer are guaranteed CSR subsidies to offset the costs of providing insurance to low-income Americans, they face a loss of revenue. Rather than lose money, insurance companies have two major options: to exit the marketplace altogether or raise premiums.

This first option, to exit the marketplace, is already beginning to happen in certain states. In Iowa, two of the four insurers have chosen to exit the ACA marketplace. Two major insurance companies, Aetna and Humana, have chosen to not participate in the health exchange market at all in 2018. While not explicitly linking this decision to CSR payments, Aetna stated after leaving the Iowa marketplace that “financial risk and an uncertain outlook for the marketplace” motivated the decision. [4]

The other path insurers can take is to offset these losses by raising premiums. The Kaiser Family Foundation estimates that premiums would rise an average of 19% as a result of stalling CSR payments, with greater increases in states that chose to not expand Medicaid under the ACA. [2]

Image: How much premium prices are projected to cost should the government not provide CSR payments to insurance companies. Source: Kaiser Family Foundation.

Image: How much premium prices are projected to cost should the government not provide CSR payments to insurance companies. Source: Kaiser Family Foundation.

Uncertainty plays a large role in premium prices for 2018. For now, many insurers are assuming that CSR payments will continue, and pricing premiums as such. Joe Swedish, the CEO of Anthem, said in April that without certainty of 2018 CSR funding, the company would have to make adjustments such as “reducing service area participation, requesting additional rate increases, eliminating certain product offerings or exiting certain individual ACA-compliant markets altogether.” Since April, Anthem has exited Ohio and large portions of California as the issue of CSR payments has yet to be resolved. [5]

Federal government

Ending CSR payments would cut billions from the federal budget. However, under the Affordable Care Act, the federal government provides a tax credit for individuals between 100-400% of the FPL. Should CSR subsidies cease and premiums increase, the federal government stands to potentially lose billions as a result of increased tax subsidies. The Kaiser Family Foundation estimates the total cost of tax credits to increase by 23% under this policy, with a net increase of $2.3 billion in federal costs as a result of ending CSRs. [2]

Image: The impact on the federal budget if CSR payments cease to be paid. The increase in tax credits that would result from eliminating CSRs is higher than the money that would be saved from ending the payments themselves. Source: Kaiser Family Foundation.

Image: The impact on the federal budget if CSR payments cease to be paid. The increase in tax credits that would result from eliminating CSRs is higher than the money that would be saved from ending the payments themselves. Source: Kaiser Family Foundation.

Consumers

As previously mentioned, the ending of CSR payments could result in a sizeable increase in insurance premiums in the individual marketplace. Consumers above 400% of the FPL would be hit hardest by these premium increases, as they would not qualify for government subsidies to decrease their costs. Insurance consultant Robert Laszewski warned of “a horrific death spiral going on with the [non-subsidized] part of the market” as a result of rate hikes for consumers paying their full premiums. [6]

Furthermore, if insurers leave the market, there exists a risk of “bare counties” or monopolization of health insurance in counties with few or no options for healthcare providers. Already, there are counties in Tennessee where the exit of Humana has resulted in no insurers wanting to sell coverage for 2018. [7] Several counties across the country currently have only one provider in the ACA marketplace, and the threat of insurers leaving poses the risk of no carriers in certain areas.

Image: A map of the U.S. indicating counties with only one insurance carrier, and thus are most at risk if insurers leave the ACA marketplace. Source: The New York Times.

Image: A map of the U.S. indicating counties with only one insurance carrier, and thus are most at risk if insurers leave the ACA marketplace. Source: The New York Times.

The Policy Debate

President Trump has the power to end the Obama administration’s appeal and begin the process of ending CSR payments. However, a court ruling in early August gave attorneys general in 17 states and D.C. to continue the appeal. [8] Within the Republican party, there is additional unrest regarding the future of CSR payments. Senator Lamar Alexander (R-Tenn.), the chairman of the Senate health committee, aims to formally authorize CSR payments through the end of 2018. The National Governor’s Association, which currently has 34 Republican and 15 Democratic members, supported Senator Alexander’s motion, stating that CSRs are a “necessary step to stabilize the individual marketplaces.” However, Senator Ted Cruz (R-Tex.) has stated that he opposes such a deal, and that the Senate should instead continue working to repeal the Affordable Care Act. [9]

For now, the future of CSRs remains uncertain. However, with a September deadline for insurers to set rates and finalize coverage areas, this must be dealt with soon. Uncertainty in the insurance market has already damaged the country through insurers pulling out of certain counties and raising their premiums. It’s up to Congress and President Trump to act quickly and prevent further damage.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References

  [1] Jennifer Tolbert, “The Coverage Provisions in the Affordable Care Act: An Update,” Kaiser Family Foundation, March 2, 2015, http://www.kff.org/report-section/the-coverage-provisions-in-the-affordable-care-act-an-update-health-insurance-market-reforms/.

  [2] Larry Levitt, Cynthia Cox, and Gary Claxton, “The Effects of Ending the Affordable Care Act’s Cost-Sharing Reduction Payments,” Kaiser Family Foundation, April 25, 2017, http://www.kff.org/health-reform/issue-brief/the-effects-of-ending-the-affordable-care-acts-cost-sharing-reduction-payments/.

  [3] Michael Barbaro, “The Daily: The Other Major Threat to Obamacare,” The New York Times, August 3, 2017, https://www.nytimes.com/2017/08/03/podcasts/the-daily/other-obamacare-threat.html.

  [4] Dan Mangan, “Iowa Obamacare market gets second big hit as insurer Aetna says it will drop out in 2018,” CNBC, April 6, 2017, https://www.cnbc.com/2017/04/06/iowa-obamacare-market-gets-hit-as-aetna-says-it-will-drop-out-in-2018.html

  [5] Bob Bryan, “Insurance companies are freaking out about Trump’s Obamacare threats,” Business Insider, April 28, 2017, http://www.businessinsider.com/trump-obamacare-csr-payments-insurance-companies-2017-4.

  [6] Julie Rovner, “If The Individual Insurance Market Crashes, Can People Still Get Coverage?,” NPR, June 7, 2017. http://www.npr.org/sections/health-shots/2017/06/07/531885293/if-the-individual-insurance-market-crashes-can-people-still-get-coverage

  [7] Margot Sanger-Katz, “Bare Market: What Happens if Places Have No Obamacare Insurers,” The Upshot, April 18, 2017, https://www.nytimes.com/2017/04/18/upshot/bare-market-what-happens-if-places-have-no-obamacare-insurers.html.

  [8] Bob Bryan, “It just became harder for Trump to blow up Obamacare,” Business Insider, August 2, 2017, http://www.businessinsider.com/trump-obamacare-csr-payment-lawsuit-2017-8.

  [9] Louise Radnofsky and Michelle Hackman, “Health Insurer Payments in Crosshairs,” The Wall Street Journal, August 2, 2017, https://www.wsj.com/articles/health-insurer-payments-in-crosshairs-1501716413.

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