Six steps to understanding the significant benefits of Trump’s CSR system

President Trump’s decision last week to cut cost-sharing reduction payments (CSRs) has been widely panned by industry advocates concerned about the uncertainty the decision brings to the market.

They have good reason to be concerned. It is clear President Trump wants to do everything he can, either through executive order, administrative action, or support for legislation, to dismantle and repeal the ACA.  Trump has not demonstrated he understands how health care works, nor has he developed any coherent plan for replacing the ACA.  He appears to want to sow uncertainty rather than solve problems.

No objective observer should quarrel with that.

Likewise, if you take an objective view of this decision, I think there are a number of empirical benefits to the system, to insurance plans, and to consumers as a result of the policy (albeit undermined by the manner in which the process was rolled out).

First, let’s be clear about what the CSRs are.

CSRs are subsidies for out of pocket expenses related to receiving health care services.  The CSRs apply to beneficiaries between 100% and 250% of federal poverty (FPL), and only to those beneficiaries that select silver plans.  Put differently, the CSRs apply only in the event of utilization of benefits.  If you have a silver plan, and if you receive health care services, the CSR payments will help offset deductibles, co-pays, co-insurance, or other patient costs related to the receipt of such services.

As a result of those cost offsets, which go directly to health plans, health plans are able to offer lower premiums than would otherwise be possible for silver plan beneficiaries.  Because the CSRs don’t apply to bronze, gold, or platinum band plans, there should be no impact to premiums beyond the silver plans.

Second, let’s be clear about what the CSRs are not. 

They don’t subsidize the premiums folks pay for insurance.  The premiums are subsidized through premium supports that offset all plan premiums, regardless of metallic level for beneficiaries between 100% and 400% of FPL.

The amount of the premium supports vary essentially on two important elements. The first is they vary based on your income. As your income goes up, the amount of your subsidy goes down in a complicated model that says you cannot pay more than 9.5% (at 400% of FPL) of your income towards the premium.  The difference between your premium and your capped amount based on income is the subsidy.

The second element is the amount of the premium.  The subsidy is pegged to the second-lowest cost premium in the silver metallic band.  So, the difference between the capped amount you can pay, based on a share of your income, and the cost of the second-lowest cost silver plan, is the premium subsidy.

Third, CSRs have meant lower premiums for silver band insurance products.  

Because CSRs mean that insurers will get paid at least a portion of the cost that is the patient’s responsibility (something that is not always a given), they are able to reduce the premiums for silver plans by some measure.  This has at least been the case in the past under the CSR regime.

Because those CSRs are going away, future premiums will rise.  However, because we’re only talking about the silver plans, premium increases will only be borne by silver plans, not the bronze, gold or platinum plans.

Fourth, and this is really important: as future silver plan premium increases rise (and assuming incomes don’t rise rapidly also, a safe bet), then premium supports or subsidies should rise too.  

Recall item two above: subsidies for all plans are tied to the second-lowest cost silver plan. So, increases to silver plan premiums will result in greater subsides for all plans.

Those increased subsidies will be able to be applied to other plan bands, like bronze and gold, which are not facing significant premium increases as a result of this policy.

Fifth, because of a greater subsidy and the lower net-premium costs in gold and bronze as a result of this policy, more folks will likely become insured.  

Can you believe it?  As a result of Trump’s policy, greater premium subsidies will mean more folks are likely to get insured.  In fact, it’s likely that the increased subsidy means an increase in zero cost bronze plans and a substantial relative decrease in the cost of gold and platinum plans.

But, don’t take my word for it.  That’s the line of thinking from actuarial consultants Axene Health Partners.  Greg Fann of Axene Health Partners puts it this way in a piece he authored last week.

Overall, these dynamics should lower the uninsured rate as APTC eligible individuals have a larger price incentive to seek coverage and more individuals have free coverage options.

Sixth, don’t trust your gut on this one, the media, or President Trump. Trust math.

Now, I can understand this might fly in the face of some of what you’ve read about this, or your natural instincts on this policy discussion.

Lots of smart, reasonable stories pointed to challenges in the individual market as a result of this policy. But, articles which relied on the Congressional Budget Office report on this topic were somewhat selective in their reporting.

The CBO report does say that premiums in the silver band will increase in the next two year significantly, but that a primary problem is policy uncertainty rather than system instability.

CBO and JCT expect that insurers in some states would withdraw from or not enter the nongroup market because of substantial uncertainty about the effects of the policy on average health care costs for people purchasing plans.

However, even the CBO report says that, the next two years aside, as (hopefully) policy instability settles, the application of subsidies will actually help consumers.

Most people would pay net premiums (after accounting for premium tax credits) for nongroup insurance throughout the next decade that were similar to or less than what they would pay otherwise—although the share of people facing slight increases would be higher during the next two years;

The number of people uninsured would be slightly higher in 2018 but slightly lower starting in 2020.

Notably, the primary loser resulting from this policy decision is the federal budget deficit.

Implementing the policy would increase the federal deficit, on net, by $194 billion from 2017 through 2026, CBO and JCT estimate. Total federal subsidies for health insurance in the nongroup market—in particular, the sum of the premium tax credits and the CSR payments—would increase for two reasons: The average amount of subsidy per person would be greater, and more people would receive subsidies in most years.

Bottom line

Clearly, the politics of this are toxic.  And there are many reasons to be concerned that Trump’s decision is bad for the American health care system overall and over time.  It appears Trump’s intention was clearly to destabilize the individual market through this action and its timing.

However, notwithstanding the substantial turmoil resulting from how and when the Trump administration rolled this out, this decision on CSRs is likely to be a benefit to health plans, low income individual market beneficiaries, and arguably to the system overall.

It’s likely individual market consumers will benefit.  It’s likely health plans will benefit. And, it’s likely the deficit (and taxpayers) will suffer.