The ACA’s Cost Sharing Reduction Program and the CBO Baseline

Section 1402 of the Patient Protection and Affordable Care Act (ACA) establishes a program that was intended to reduce out-of-pocket costs for low-income people purchasing qualified health plans as defined by the law.

The program is intended to work like this.... The Department of Health and Human Services (HHS) pays the administrator of a qualified health plan (i.e., insurance companies) some amount of money to cover what would otherwise be out-of-pocket costs for individuals who enroll in a silver plan from the exchanges established by the law. If they enroll in the gold or bronze plan there is no subsidy.  

Silver plans have an actuarial value of 70 percent. That means that the plan will cover about 70 percent of the covered health care costs for the typical enrollee. The plan enrollee has to cover the rest in the form of deductibles, copays, etc. However, section 1402 of the ACA says that if you enroll in a silver plan and have an income between the poverty line and 150 percent of the poverty line, HHS will cover 80 percent of the 30 percent of costs not covered by the plan (this would bring the total actuarial value of the plan up to 94 percent). Likewise, HHS will cover 57 percent of your remaining out of pocket costs if your income is between 151 and 200 percent of the poverty line, and 10 percent of remaining costs if your income is between 201 and 250 percent of the poverty line. 

Silver plans (specifically the second lowest cost silver plan) are also used to determine the benchmark premiums used in setting the value of the premium assistance tax credits. This part is important. You'll want to remember this later on in the post. 

However, there was a big omission in the drafting of section 1402. Specifically, the law tells HHS to make the payment, but it doesn't tell them where to get the money to make the payment. In other words, it provides a direction to pay but not a source of payment. According to Federal appropriations law, both are needed in order to have an appropriation (source: GAO "Red Book").

Therefore, another bill would have to provide the appropriation. And without an appropriation HHS shouldn't be making obligations and insurance companies cannot get paid. Doing so would be in violation of the Antideficiency Act and unconstitutional (agencies cannot spend money without an appropriation). This is the argument at the core of the House's lawsuit. And in October, HHS stopped making payments after a review of the program concluded that the House was right.   

The timing of the payments ending allowed insurers to adjust their rates for 2018 to account for the lost cost sharing reduction payments under section 1402. This had several effects on the insurance market. First, insurers increased premiums for silver plans to drive up the benchmark premiums used to set the value of the premium assistance tax credits. This resulted in a number of areas with $0 premiums available for all qualifying individuals with incomes less than four times the poverty line. Preliminary information suggests that the number of enrollees in subsidized plans didn't change much between 2017 and 2018 -- a factor likely driven by the new $0 premiums. 

The Congressional Budget Office (CBO) anticipated many of these changes last summer when they produced an estimate of the budgetary effects of eliminating the cost sharing reduction payments. At the time, CBO estimated that eliminating the cost sharing subsidies would increase the deficit by $201 billion over ten years. This is because premium tax credits would get about $365 billion more expensive while the cost sharing reductions would cost $118 billion. 

However, the Administration’s decision to stop making the cost sharing reduction payments doesn’t necessarily indicate whether CBO will now remove the cost sharing reductions from the baseline. If CBO believes that the law creates an entitlement to the cost sharing reductions (this is different from deciding whether there is an appropriation) it may keep the payments in the mandatory baseline. Therefore, if Congress appropriates money for the program at some point in the future they will not get “credit” for reducing the deficit. Rather, Congress would simply legalize what CBO believes would happen anyway. 

If instead CBO believes that the law does not entitle the insurers to the payments and they are removed from the mandatory baseline, a new appropriation would score on paper as reducing the deficit by hundreds of billions of dollars. CBO will likely be taking imput from the House and Senate Budget Committees in helping to make this determination

The answer to the question will be extremely relevant if Congress looks to attach a new appropriation for the cost sharing reductions to a budget deal to lift the Budget Control Act spending caps later this month.