The Trump administration is expected to decide soon the fate of federal cost-sharing reduction (CSR) payments, threatening to halt billions of dollars in federal reimbursement given annually to qualified health plans on Affordable Care Act (ACA) exchanges for their lower-income enrollees. Recent political and legal developments aside (see story, p. 1), actuaries sum up the volatile situation like this: CSRs represent a significant portion of the costs that insurers pay, so if they were to lose that federal reimbursement it would be a significant hit to their bottom line.
Federal regulations compel plans to provide reduced cost-sharing — at no additional premium cost — for lower-income individuals enrolled in silver-level plans through the ACA marketplace. Exchange plans must ensure that an individual eligible for CSRs pays only the cost sharing required for the covered service; CMS, in turn, reimburses plans’ added expenses.
Dave Tuomala, vice president of actuarial consulting for Optum, a UnitedHealth Group subsidiary, notes that cost-sharing subsidies, by helping lower-income individuals participate in the exchange market, help to decrease risk since many of these enrollees tend to be healthy. But “people use benefits richer than the premium they’re paying for,” he says.
“Essentially, the premium is the silver premium, net of subsidy, but they’re getting a plan of much greater actuarial value than silver…and that has to be paid by somebody. And if the federal government won’t pay, it’s kind of a big number — and within ACA rating requirements, [plans] have to spread it across the pool.” Losing the “promised cost-sharing payment, even if it’s put into rates — in fragile markets, it’s just another reason for carriers” to exit, he says.
Jason Karcher, an actuary in the Milwaukee office of Milliman, Inc., explains: “The ACA requires issuers to offer substantial cost-sharing discounts to low-income members, and that’s separate from the government paying issuers back for these discounts. But the issuers have been told they’re going to get paid back [and so they] developed their premiums in 2017 assuming they’re going to get reimbursed for these discounts.”
“It is a substantial amount of money,” he adds. The Congressional Budget Office (CBO) estimates $7 billion in federal CSR payments to plans for 2017, though he says the total could end up “a little bit lower.”
“We only have 2014 and 2015 CSR numbers so far. For 2014, we know about $2.8 billion was paid in CSRs and for 2015, about $4.9 billion,” Karcher says. “We don’t know the number for 2016 yet and won’t know until MLR [i.e., plans’ medical loss ratio reporting] forms come out” in November. He says he has seen a projection of $5.7 billion in CSR payments for 2016, but notes this estimate, too, is an extrapolation based on CBO’s exchange enrollment projections and health plans’ financials.
Whatever the final payment amounts, CSRs are making a significant contribution to total plan revenue, Karcher tells AIS Health.
“For 2015, CSRs represented about 7% of all the revenue that was received by plans in the individual market,” he says. He describes this percentage as likely holding quite steady over the past few years, but explains it could increase as more individuals transition out of grandfathered plans and become eligible for cost-sharing subsidies. CSRs “might creep up to 10% of total plan revenue. It’s unlikely it would be greater than that barring significant changes in the overall individual market,” he says.
Typically, issuers in the individual market run a profit margin in the low single digits, Karcher says, but they ran at about a 2% loss for 2014 and 2015 across the market as a whole if they had been fully reimbursed under the federal risk-corridor program. Thus, he says, losing another 7% to 10% of revenue from CSRs “would affect issuers’ ability to stay in the individual market unless they charged more premium.”
CSR Pay Is ‘Straightforward’
Under what Karcher describes as a smooth process, plans get advance monthly CSR payments. Plans file preliminary premium rates for ACA exchanges in the subsequent year between late April and July. Once rates are finalized, CMS uses a formula to determine what portion of premiums a plan should expect as CSR subsidies.
“Compared to risk adjustment, CSR payments are pretty straightforward,” he says. “The issuer just has to track the person’s claims and what they paid in cost-sharing and what they would have paid without CSRs.”
CSR payment “is one of the most seamless processes” under the ACA, Karcher says. “It’s not like risk corridors, where the program should be paying insurers a lot of money but hasn’t because of revenue neutrality.” This refers to the budget deal in late 2014 limiting total risk-corridor payments to carriers to the amount paid into the pool. “It’s pretty predictable and it’s pretty straightforward, and the only reason it’s part of the discussion is *House v. Price *[a lawsuit that threatens to eliminate federal CSR payments]….There are no structural issues with it — aside from whether there’s an appropriation to pay for it.”
Here is how the CSR payment process works:
- Generally, the first of every month is the effective date for calculating plan enrollment for CSRs, though some enrollments from the previous month may be added for various reasons. Plans file monthly enrollment data, and HHS looks at every subsidized enrollee in the plan. Federal regulators review the amount of premium paid and the level of cost-sharing reduction (since there are three levels of subsidy for which people are eligible).
- Plans receive their monthly advance CSR payment around the 20th of every month. Regulations call for “a regular, advance payment,” and HHS has interpreted that to mean monthly payments, Karcher says.
- Every year by April 30, plans must submit CSR data for the previous calendar year to CMS to reconcile the amount of federal reimbursement provided. CMS calculates whether it will give more money to the plan — or possibly ask for money back — in the plan’s June payment to wrap up the prior plan year.
“I’ve seen issuers getting substantial payments, [while] others have to pay back a substantial amount,” Karcher says, “but in general, payments are fairly close to reconciled payments.”
In April 2016, CMS reviewed CSR payments covering 2014 and 2015 and plans got a single reconciliation payment for both years, Karcher notes. By April 30 of this year, plans had submitted data. Final federal payments covering 2016 went out to plans (or came in to CMS if plans owed money) as part of the June payment process.
CMS recently released its annual report detailing 2016 risk adjustment, reinsurance and risk corridor payments to exchange plans (HPW 7/17/17, p. 1).
By contrast, Karcher describes “a definite data shortage” on CSR payments. “The only real data we get on CSRs are from the [plans’ MLR] reports that come out annually in November,” he says. MLR reports specify amounts plans get in advance payments and amounts paid for reconciliation.
Karcher says it isn’t clear how abruptly federal CSR payments could be stopped, if that is the Trump administration’s decision. “At some point they can’t cancel the payment…because they’re already cutting the checks. The whole process starts now,” he said Aug. 1. “The wheels are rolling.”