President Trump rocked the health-care world late Thursday by finally following through on a threat to end billions of dollars in subsidy payments that are made to insurers to lower deductibles and out-of-pocket costs for lower-income Americans.
Trump cast his decision as one that would stop a costly federal outlay that he has described as an insurer bailout. “Massive subsidy payments to their [Democrats'] pet insurance companies has stopped,” he tweeted.
The decision triggered sharp condemnations from major players across the American health-care system. But while the payments to insurance companies do benefit lower-income Americans, taking these payments away will have some counterintuitive effects — and likely won't hurt the poorest the most.
Here's how the effects could play out:
1) Taxpayers will pay more when premiums go up.
When the reimbursements — worth roughly $10 billion next year — to health insurers go away, the actual health plans with lowered out-of-pocket costs for lower-income people won't. Insurers will still have to offer those plans with lower deductibles and co-pays to people who make up to 250 percent of the federal poverty level —$60,750 for a family of four in 2017.
To make up the difference, insurers will raise premiums. Many already factored this into their rate increases for next year. But as the premiums increase, so do the premium tax credits — the federal subsidies that help people afford their health insurance.
“The premiums are going to go up, the premium subsidies go up. They’re just paying out of their left pocket instead of their right pocket,” said David Windley, a managing director at Jefferies, an investment banking firm. “So it’s really kind of cutting off your nose to spite your face.”
Tax credits are pegged to income, so that people pay only a certain percentage of their income for their premiums, while the federal government pays the rest. That means people who benefit from cost-sharing reductions today will get bigger federal tax credits to pay for their monthly insurance costs, once those subsidies end.
“We think the federal government might end up paying more,” said Chet Burrell, president of CareFirst BlueCross BlueShield. “We’re already getting word from other analyses that this could increase federal outflows.”
The nonpartisan Congressional Budget Office forecast that ending cost-sharing reductions would increase the federal deficit by $194 billion over a decade, because the tax credit amounts would increase and because more people would receive them. The Kaiser Family Foundation found that premium tax credits would cost an additional $12.3 billion if cost-sharing reductions end next year.
“It is important to note that, contrary to the desired impact of reducing insurance premium costs, defunding of cost-sharing reductions will cause the federal government to spend more money through higher funding expenditure” of premium tax credits, Michael Neidorff, chief executive of insurer Centene said in a statement.
2) Lower-income Americans aren't really the ones at risk of paying more
Although the subsidies benefit lower-income Americans, they aren't the ones on the hook if premiums skyrocket. Because of how premium tax credits increase, it should largely be a wash for people who receive credits, health-policy experts said.
People who make between 250 and 400 percent of the federal poverty level could find themselves getting more generous tax credits, because those are pegged to the size of the silver plans, the most popular plans.
“Federal subsidies are not going away and, as a result of this action, will go up, resulting in lower-cost options for many consumers,” Greg Bury, a spokesman for the Midwest insurer Medica said in an email.
People who make too much money to qualify for premium tax credits are the ones who feel the most pain when premiums increase. But since some states specifically allowed insurers to increase premiums due to cost-sharing reduction uncertainty on silver plans instead of more broadly, this impact may be limited. The impacts will likely vary from state to state and insurer to insurer.
3) Ripple effects
The end of subsidies could affect large numbers of Americans if it pushes insurers that have been struggling with federal uncertainty to a tipping point, causing them to reevaluate whether they should offer plans in the individual market.
On Friday, many insurers said they were still committed to the market next year, but some signaled they could reevaluate. Molina Healthcare said it would “continue to evaluate our participation on a market-by-market basis” in a statement. Burrell indicated that CareFirst might reevaluate its plans this spring, as it sets rates for 2019.
“I think it will create a lot of uncertainty — and it’s a cumulative uncertainty created not only by this decision of this administration, but the executive order, the question of will Congress step in, what will the agencies do,” said Nicole Elliott, a partner at the law firm Holland and Knight.