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Administration’s Decision to End Cost-Sharing Reduction Payments Will Lead to Substantial 2017 Losses for Health Plans

Summary

New analysis from Avalere finds that the administration's decision last week to end federal funding for the cost-sharing reduction (CSR) payments could lead to substantial losses for health plans-ranging from -$1.2M in North Dakota to -$200M in Florida through the end of 2017 (Figure 1).

States with the largest projected losses to health plans are Florida (-$200M), California (-$107M), Texas (-$98M), North Carolina (-$66M), Georgia (-$56M), and Virginia (-$34M). In total, health plans will lose more than $1B through the end of 2017 if Congress does not take action to reverse the administration’s executive order, according to the National Association of Insurance Commissioners.

The CSR payments were established by the Affordable Care Act (ACA) to help offset the cost of premiums and other out-of-pocket costs like co-payments, co-insurance, and deductibles for consumers with low to moderate incomes (for example, an individual with an income between roughly $12,000 and $30,000, or a family of four with a household income between $24,600 and $61,500) purchasing insurance through the exchanges.

“The administration’s decision to end the cost-sharing reduction payments will lead to substantial health plan losses through the end of 2017,” said Chris Sloan, senior manager at Avalere. “Health plans are stuck because they are required to keep selling more generous plans without the federal funding that pays for the cost of those enhanced benefits.”

Changes in federal funding

Under the Affordable Care Act (ACA), insurance companies offering plans in the exchanges are required to offer versions of their silver tier plans that have a higher actuarial value (i.e., plans that cover more of the consumer’s healthcare expenses). Individuals earning between 100 to 250% of federal poverty level (FPL) are eligible to purchase one of those enhanced plans but pay the same premium for the standard silver plan. The federal government then reimburses insurance companies for offering these more generous plans at no additional cost to the consumer.

“While many states and insurers had prepared for the possibility that CSR funding would be cut off in 2018, the immediate failure to pay subsidies leaves plans with no way out for 2017,” said Caroline Pearson, senior vice president at Avalere. “Plans can neither increase premiums nor exit the market at this late stage.”

While it is still unclear what impact this decision will have on the financial health of plans, the risk corridors program that ran from 2014-2016 under the ACA provides a useful proxy. The risk corridors program was created to funnel higher percentages of federal subsidies to health plans enrolling beneficiaries with more healthcare needs and costs. In 2014, the risk corridors program paid only 12.6% of total payments due to health plans (a shortfall of $2.5B), which had severe financial consequences. According to experts at Avalere, the lack of risk corridors payments was cited by many of the ACA’s Consumer Operated and Oriented Plan (CO-OPs) as the reason for their insolvency. While it is unclear whether this decision will have similar effects, it is certain that many health plans will face a substantial financial loss for the remainder of 2017.

Methodology

To conduct this analysis, Avalere calculated the weighted average CSR payment amount, across each of the three CSR variations, in each state using the most recent ASPE data on state-level CSR payment amounts from 2016. For state-run exchange states that did not provide that information, Avalere used the national average amounts. Avalere then multiplied the weighted average CSR payment amount by the total number of CSR enrollees for each state for the 2017 plan year as detailed in the June 2017 Effectuated Enrollment Snapshot.

Using the relative percentage of total CSR funding allocated to each state, Avalere distributed a conservative estimated projection of $1B remaining, based on the recent statement from NAIC on the remaining CSRs to be paid, owed to health plans for the remainder of the year by state.

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