No doubt it will take some time to sort out how elements of the debt deal (formally “The Budget Control Act of 2011”) will all work. Delving into the details of how it affects subsidies in the Affordable Care Act (ACA) to make insurance more affordable helps to illustrate how complex this business can be.
Let’s start with a short primer on the ACA subsidies. Starting in 2014 people buying insurance on their own in health insurance exchanges will be helped in two ways:
1. Premium subsidies: Those with incomes between poverty and four times the poverty level ($44,000 for a single person and $89,000 for a family of four in 2011) are eligible for tax credits that reduce the premiums they have to pay. Our subsidy calculator illustrates what those tax credits and premium payments would be for people in different circumstances. The Congressional Budget Office projects that these tax credits would cost about $75 billion in 2016.
2. Cost-sharing subsidies: Those with incomes between poverty and 2.5 times the poverty level ($27,000 for a single person and $56,000 for a family of four) also are eligible for coverage that provides lower patient cost-sharing than the norm. CBO projects a cost of about $13 billion in 2016.
The cost-sharing subsidies are based on the idea of actuarial value. For example, a plan with an actuarial value of 70% – referred to as a “silver” plan in the ACA – means that for a standard population, the plan will pay 70% of their health care expenses, while the enrollees themselves will pay 30% through some combination of deductibles, copays, and coinsurance. The higher the actuarial value, the less patient cost-sharing the plan will have on average. Exchange enrollees with incomes up to 1.5 times the poverty level receive coverage with an actuarial value of 94%, those with incomes 1.5 to 2 times the poverty level receive coverage with a value of 87%, and those with incomes 2 to 2.5 times the poverty level can enroll in a plan with a 73% value. To make this tangible, we commissioned three actuarial and benefits consulting firms to estimate the deductibles and coinsurance that would meet these various actuarial value thresholds. The full details are here.
Now, how might the debt deal affect all of this? The so-called “Super Committee” required to report back by November could recommend any number of changes to these subsidies or other elements of the ACA. But if the committee deadlocks, then a series of automatic cuts are triggered. The premium subsidies are provided as refundable tax credits, and as a result are exempt from the automatic cuts (exemptions are based in part on budget legislation that predates the ACA). However, the cost-sharing subsidies are direct spending by the federal government and are thus subject to the budget reductions. (Other types of spending in the ACA could also be affected.)
How these cost-sharing subsidy reductions would actually filter through the system is complex and somewhat unclear. The ACA entitles low-income exchange enrollees to coverage with a higher actuarial value, and it requires participating health insurers to provide that coverage. The federal government then pays insurers directly for the extra costs associated with lower patient cost-sharing.
So, the direct effect of a triggered budget cut would be that low-income enrollees would still get improved coverage, but insurers would be paid less for providing that coverage. Insurers probably would try to recoup these losses by charging higher premiums (which would, in turn, also lead to higher federal tax credits). This might also make private plans reluctant to serve lower-income enrollees, and they could take steps to try to avoid that part of the market.
No budget reductions of the scale included in the debt deal are painless, and that will undoubtedly factor into the tradeoffs considered by the committee charged with developing an alternative deficit reduction plan. But, the ACA presents a particularly complicated case since federal and state policymakers are working out the delicate details of health reform implementation in the midst of this broader budget debate.