Options to Stabilize the Individual Market Can Reduce Federal Spending and Lower Premiums
Analysis Shows Failure to Fund Cost-Sharing Reduction Subsidies Would Raise Rates and Cost the Federal Government at Least $47 Billion Over the Next 10 Years
- Without direct federal funding of cost-sharing reduction (CSR) payments, premiums would rise 15–20 percent, leading to higher federal premium subsidy payments.
- Due to a requirement for carriers to build these payments into premiums, federal spending would increase by more than $47 billion over 10 years, while non-subsidized individuals would also face far higher premiums.
- Providing a temporary risk stabilization fund for 2018 and 2019 of $15 billion per year would promote carrier participation, lower premiums by 15 percent and only incur federal spending of $3–5 billion per year due to decreased subsidy spending.
SACRAMENTO, Calif. — Covered California on Friday shared with the Congressional Budget Office (CBO) an analysis that shows that a decision not to provide ongoing direct federal funding for cost-sharing reductions would have immediate and dramatic effects on rates, federal spending and the viability of exchanges across the nation.
“The impact of not providing direct federal funding of cost-sharing reductions is enormous, and not only puts the viability of the individual market in many states in peril, but would be a bad deal for the federal budget — costing more than $47 billion over the next 10 years,” said Peter V. Lee, executive director of Covered California.
“Without the direct federal support for cost-sharing reductions, some health plans will leave the individual market entirely, and those who stay will raise rates significantly,” Lee said. “While the market in California is likely to be relatively stable, for other states there is grave uncertainty. But what is certain is that not funding cost-sharing reductions would actually cost the federal government billions more because of the interplay between rising premiums and subsidies.”
Covered California’s analysis was conducted by Covered California Actuary John Bertko with assistance from UCLA economist Wes Yin. The analysis shows that the federal government would see increased costs of more than $47 billion over the next decade if funding for cost-sharing reductions were discontinued. The $47 billion is the net cost to the federal government after accounting for the $135 billion in savings from defunding funding CSRs. It reflects the difference between premium costs over 10 years of $788 billion if no CSRs are provided vs. $606 billion if CSRs remain in place.
Cost-sharing reductions are provided to help lower the cost of accessing health care for consumers with incomes below 250 percent of the federal poverty level for Silver Tier plans. The funding is provided directly to health insurers. If federal support for the program is discontinued, health plans would still be required to lower those costs at point of care, but they would take steps to make up for the lost funding by increasing premiums across the individual market.
“Without the direct funding of cost-sharing reductions, we estimate that health plans would increase premiums by 15 to 20 percent, which in turn would increase federal spending on premium subsidies by 30 percent,” Bertko said.
The communication to the Congressional Budget Office also included analysis showing that spending $15 billion to stabilize insurance markets now, in the form of reinsurance, would reduce premiums and thus reduce federal premium subsidies, meaning a net cost to the federal government of just $3–5 billion per year.
“Providing $15 billion in risk stabilization funding in the form of reinsurance would not only stabilize markets by keeping plans in markets they would otherwise exit, it would mean lower rates for all consumers in the individual market,” Lee said. “The impact of temporary risk stabilization funding would be to lower premiums in 2018 by about 15 percent. The actual cost in federal spending would be far lower than the benefit because of the reduced subsidy payments.”
“While the political debate continues over the future of health care in America, the sensible step in the short term — for both consumers and the federal budget — is to directly fund the cost-sharing reductions as complements to the tax subsidies and to provide funding to stabilize markets.”
Lee said that exchanges now have five years of operational experience, so they have unique insights into the interplay between rates and federal costs.
Covered California and other state exchanges will soon enter into rate negotiations for 2018. “Health plans need far more certainty than they have today to determine whether to participate and how to set their prices for 2018,” said Lee. “The window for action is closing, and if plans do not have a clear path forward by June of this year, next year could be a bad year for consumers and the federal budget.”
The analysis was shared in a letter sent Friday to Keith Hall, director of the Congressional Budget Office.
“We’re sharing this analysis with the CBO today and urging them to take an in-depth look at the way curtailing federal spending around the ACA in some areas could actually cost the federal government more,” Lee said. “It’s important for federal policy makers to understand the impact of short-term decisions, even as they weigh longer-term change.”
About Covered California
Covered California is the state’s health insurance marketplace, where Californians can find affordable, high-quality insurance from top insurance companies. Covered California is the only place where individuals who qualify can get financial assistance on a sliding scale to reduce premium costs. Consumers can then compare health insurance plans and choose the plan that works best for their health needs and budget. Depending on their income, some consumers may qualify for the low-cost or no-cost Medi-Cal program.
Covered California is an independent part of the state government whose job is to make the health insurance marketplace work for California’s consumers. It is overseen by a five-member board appointed by the governor and the legislature. For more information about Covered California, please visit www.CoveredCA.com.