The ACA’s cost-sharing subsidies

The ACA’s premium tax credits have been discussed at length in the media. Of the 11.3 million people who had effectuated coverage through the exchanges as of early 2021, 86% qualified for premium subsidies.

But there’s another ACA-created health insurance subsidy, known as cost-sharing reductions (CSR, also called cost-sharing subsidies), that 48% of exchange enrollees were receiving as of early 2021. While premium subsidies help pay the cost of the health insurance itself, CSR benefits are available to reduce the out-of-pocket exposure for eligible enrollees.

Ever since the exchanges went live in the fall of 2013, cost-sharing subsidies have been much less well-understood than premium subsidies. Many people don’t know they exist, despite the fact that the federal government spent $7 billion on them in 2017 alone (this was the last year that the federal government funded the cost of CSR, which we’ll also discuss in a moment). This is partly because they don’t show up among the available plans for people who aren’t eligible for them, and also because people who enroll in CSR plans don’t always realize that the plan they’re getting is in fact heavily subsidized in order to make it better coverage.

Until late 2017, this subsidization was directly provided by the federal government; since then, the cost of CSR has been added to premiums in most states. This drives up the cost of coverage and thus results in larger premium subsidies, which continue to be directly provided by the federal government. So in a round-about way, the federal government is still subsidizing the cost of CSR.

Unlike prior years, CSRs were in the media non-stop in 2017, due to President Trump’s ongoing threats to cut off funding, which he ultimately did in October 2017. But confusion about how CSR benefits work—and how they’re still available without federal funding—has remained. So let’s take a look at what these subsidies are, and how they work.

What does cost-sharing mean?

Cost-sharing refers to the portion of a medical claim that the insured must pay, usually in the form of a deductible, coinsurance or copay (it does not include premiums, balance billing, or expenses that are not covered by the insured’s policy). Plans in the exchanges are designated as Platinum, Gold, Silver, Bronze, or catastrophic, depending on their actuarial value, or AV (a measure of the percentage of costs that the plan covers). And there are caps on the maximum out-of-pocket costs that any of the plans can impose.

In a nutshell…

The cost-sharing subsidies are designed to reduce the portion of a claim that an insured will have to pay, and like the premium subsidies, eligibility is based on household income (ACA-specific MAGI). Although premium subsidies can be applied to any of the “metal” plans within the exchange, cost-sharing subsidies are only available on Silver plans.

Although we’ll go into detail in this article in terms of how the cost-sharing subsidies work, all you really need to know is that if your MAGI is under 250% of the federal poverty level, and especially if it’s under 200% of the poverty level, you need to pay particular attention to the silver plans in the exchange—any cost-sharing subsidies for which you’re eligible will be automatically built into the silver plans.

For enrollments with 2022 effective dates, 250% of the poverty level is $32,200 for a single person and $66,250 for a family of four (note that the prior year’s poverty level numbers are used, and that the limits are higher in Alaska and Hawaii).

Although CSR benefits extend to people with MAGI up to 250% of the poverty level, they’re strongest for people with income that doesn’t exceed 200% of the poverty level (for 2022 coverage, that amounts to $25,760 for a single individual, and $53,000 for a family of four, in the continental U.S.).

People with MAGI between 200 and 250% of the poverty level are eligible for CSR benefits on silver plans, but they may find that the relatively modest benefits aren’t worth the added cost of purchasing a silver plan instead of a lower-cost bronze plan. Or they may find that a gold plan is available for roughly the same price as a silver plan, with better benefits, due to the way the cost of CSR is being added to silver plan premiums in most areas.

Who’s eligible, and did the American Rescue Plan affect CSR eligibility?

The Affordable Care Act introduced cost-sharing reductions (CSR) as a means of keeping health care costs (as opposed to just insurance premiums) affordable for people with modest incomes. CSR benefits are available to enrollees with MAGI between 100% and 250% of the federal poverty level (in states that have expanded Medicaid, which includes the majority of the country, enrollees are eligible for Medicaid with incomes up to 138% of the poverty level; cost-sharing subsidy eligibility starts above that point).

For coverage effective in 2022, 250% of FPL is equal to $32,200 for a single person, and $66,250 for a family of four. This chart shows the MAGI amounts that apply for other household sizes, and those numbers will apply for any plans with a 2022 effective date. For premium subsidies and CSR eligibility, the prior year’s poverty level numbers are always used, so 2021 poverty level numbers are used to calculate eligibility for financial assistance on 2022 health plans.

The American Rescue Plan (ARP) made significant changes to how premium subsidy eligibility and amounts are determined, but didn’t change the rules regarding cost-sharing reductions. It did, however, include a provision that allowed people who were receiving unemployment compensation in 2021 to enroll in a Silver plan with robust cost-sharing reductions. The Build Back Better Act called for that to be extended into 2022 as well (for people receiving unemployment compensation in 2022), but that legislation has stalled in the Senate.

Until October 2017, HHS reimbursed insurance carriers directly to cover the cost of cost-sharing subsidies, and unlike the premium subsidies, cost-sharing subsidies do not have to be reconciled when insureds file their taxes. Cost-sharing subsidies are automatically incorporated into Silver plans when eligible enrollees shop for plans through the exchanges. Although the federal government is no longer reimbursing insurers for the cost of providing cost-sharing reductions (including the special cost-sharing reductions that are available for Native Americans), the availability of the benefits themselves has not changed. Anyone who is eligible for cost-sharing subsidies can still receive them.

Lower out-of-pocket maximums

The first aspect of CSR reduces the maximum out-of-pocket exposure on a silver plan for households with incomes between 100 and 250% of the federal poverty level. This subsidy was originally intended for enrollees with incomes up to 400% of poverty level, but HHS later ruled that the subsidy would end at 250% of the poverty level.

For 2022 coverage, the unsubsidized out-of-pocket maximum for an individual is $8,700 ($17,400 for a family). But for enrollees who are CSR-eligible and who pick a silver plan, the maximum out-of-pocket is lower. (See Table 10 in the 2022 Benefit and Payment Parameters; details are also summarized here). These plans only appear on the exchange websites for applicants who qualify for them. For those who aren’t eligible for CSR, the silver plans will have their regular out-of-pocket maximums—ie, up to $8,700 for an individual in 2022):

• For applicants with MAGI between 100 and 200% of the poverty level, the maximum out-of-pocket is $2,900 for a single individual and $5,800 for a family. This represents a 67% reduction from the regular out-of-pocket cap.
• or applicants with MAGI between 200 and 250% of the poverty level, it’s $6,950 for a single individual and $13,900 for a family. This represents a 20% reduction from the regular out-of-pocket cap.

Note that higher out-of-pocket maximums—for all plans and for CSR plans—were initially proposed, but the methodology for calculating maximum out-of-pocket limits was changed in 2021, resulting in lower caps.

Increased actuarial value – aka, better benefits

The second aspect of cost-sharing subsidies works by increasing the actuarial value (AV) of the plan. Under the ACA (aka Obamacare), all Silver plans have an actuarial value of roughly 70%. The plan designs vary and there are different ways that the AV can be calculated. But the basic idea is that a Silver plan will cover roughly 70% of medical bills for the average enrollee. This includes enrollees with very high claims, since it’s averaged across the entire pool of insureds (ie, for insureds with low claims, the carrier will end up paying less than 70% of their costs, but for enrollees with very high claims, the insurer will end up paying much more than 70% of their total costs).

For eligible enrollees, this aspect of cost-sharing subsidies increases the AV of a Silver plan to between 73% and 94%.  AV is increased based on income. For enrollees with household MAGI between:

• 100% to 150% of FPL, AV is increased to 94% (better than a Platinum plan)
• 150% to 200% of FPL, AV is increased to 87% (nearly as good as a Platinum plan)
• 200% to 250% of FPL, AV is increased to 73% (better than the normal 70% for a regular Silver plan)

In addition, Native Americans with MAGI under 300% of the poverty level are eligible for plans with zero cost-sharing.

Cutting through the confusion

There’s plenty of confusion around the cost-sharing subsidies, a lot of which stems from misconceptions about how out-of-pocket maximums and actuarial value differ. To understand the cost-sharing subsidies, it helps to think of the reduction in out-of-pocket maximum as a safety net that’s there to catch you in a worst-case scenario. If you have a claim that’s large enough to cause you to reach your out-of-pocket maximum, the cost-sharing subsidies will make the burden easier to bear by reducing the maximum amount that you would have to pay.

A lot of people don’t meet their out-of-pocket maximum most years. But they may have several smaller expenses throughout the year, and the costs can still be difficult to manage. That’s where the AV-increasing aspect of cost-sharing subsidies comes in. It reduces the insured’s portion of expenses right from the start, even if the out-of-pocket maximum is not reached.

So an insured with a household MAGI of 140% of FPL who picks a Silver plan would end up with a policy that covers an average of 94% of costs (across all enrollees), instead of a policy that covers 70% of costs. For this person, the out-of-pocket maximum in 2022 is also reduced by 67% (from the regular maximum out-of-pocket of $8,700 to the adjusted maximum out-of-pocket of $2,900, keeping in mind that plans can offer out-of-pocket limits that are lower than those amounts). That aspect of the cost-sharing subsidies would be beneficial if and when the claims exceeded $2,900.

But the increased AV is beneficial even in the case of less expensive claims, as it keeps deductibles and copays lower than they would otherwise be.

Although eligibility for subsidies is based on other factors in addition to income, households with MAGI up to 250% of FPL are virtually always eligible for premium subsidies as well as both cost-sharing subsidies. This goes a long way towards making health insurance and health care more affordable and accessible.

What happened when the Trump administration cut off funding for CSR?

There was legal uncertainty surrounding cost-sharing subsidies starting in 2014, but it took on new importance under the Trump administration. In 2014, House Republicans (including Tom Price, who was then a U.S. Representative from Georgia, but left his seat to briefly lead HHS under the Trump Administration, before resigning in September 2017) brought a lawsuit against the Obama administration, alleging that billions of dollars in funding for the cost-sharing subsidies had never been allocated by Congress, and was thus being distributed illegally by HHS (Nicholas Bagley, University of Michigan Law School professor, explains that the lawsuit was not without merit).

In 2016, a district court judge sided with House Republicans, ruling that the cost-sharing subsidies were illegal and could not continue. The ruling was stayed, however, to allow the Obama administration to appeal, which they did. Throughout that process, cost-sharing reduction money continued to flow from HHS to health insurers across the country.

Once Trump won the presidency, the issue took on a new urgency, given the GOP’s efforts to eliminate the ACA. For the first several months of Trump’s presidency, the lawsuit over cost-sharing subsidies was pended. But in October 2017, the Trump administration announced that CSR funding would end immediately. That meant that insurers would not receive reimbursement from the federal government for CSR benefits provided in the final quarter of 2017 and beyond.

Trump’s announcement came after insurers had finalized their rates for 2018. But most insurers had already anticipated the elimination of CSR funding, and had priced their plans for 2018 accordingly, adding the cost of CSR to premiums. In most states where the assumption had been that CSR funding would continue, insurers scrambled to revise their 2018 premiums in October 2017 (just days before the start of open enrollment), adding the cost of CSR to the rates.

Insurers in most states ultimately ended up adding the cost of CSR to their silver plan premiums for 2018. The Kaiser Family Foundation had previously estimated that without cost-sharing reduction funding, rates on silver plans would increase by an additional 19% in 2018, on top of the rate increases that would have applied if CSR funding had continued.

With few exceptions, insurers generally opted to remain in the exchanges, despite the elimination of CSR funding. Some insurers had opted earlier in 2017 to exit the exchanges for 2018, and the uncertainty over CSR funding was generally cited as a reason for the exits. But the official elimination of CSR funding did not result in an additional exodus of insurers from the exchanges.

And because the cost of CSR has mostly been added to silver plan rates since 2018, premium subsidies are much larger than they were prior to 2018, and are disproportionately large compared with the cost of non-silver plans. For enrollees who received premium subsidies in 2021, the average subsidy amount (before the ARP boosted subsidies significantly) was $486/month; in 2017, it was $373/month. Not all of that increase is due to the handling of CSR costs, but a significant portion of it is.

The larger premium subsidies are beneficial to all enrollees who get premium subsidies—not just those who get CSR benefits. So in a round-about way, the federal government is still funding CSR. They’re just doing so via larger premium subsidies, instead of directly reimbursing insurers.

The Trump administration confirmed in June 2018 that insurers would continue to be allowed to add the cost of CSR to silver plan rates for 2019 coverage, and subsequently confirmed that this would be allowed in 2020 as well. The administration had been considering whether to change the rules in the future, casting some uncertainty on the future of “silver loading.” There had been some speculation that perhaps the Trump administration might ban silver loading (and instead require broad loading, with the cost of CSR added to premiums of all plans; the implications of mandating a broad load is discussed in more detail here), since silver loading results in more government spending on premium subsidies. But that never came to pass. So for now, including the 2022 plan year and the proposed rules for 2023, nothing has changed and silver loading continues to be the norm.

Silver loading is by far the dominant strategy being used by insurers across the country. In August 2018, HHS issued guidance on the issue, actively encouraging states to promote on-exchange-only silver loading. Quite a few states took that approach for 2018, but even more did so for 2019 (including North Dakota, Delaware, Vermont, and Colorado, where insurers weren’t allowed to silver load at all for 2018; West Virginia joined them for 2022, leaving only Indiana and Mississippi where a broad load approach is required).

In most states, the cost of CSR is added only to on-exchange Silver plans. Separate off-exchange-only silver plans are available in many areas, without the cost of CSR added to their premiums. This provides an alternative for people who want to buy a silver plan but who don’t qualify for premium subsidies, since they have to pay full-price for their plan and the option without the cost of CSR added to the premiums is more affordable. (But note that far fewer people are ineligible for premium subsidies for 2022, thanks to the ARP’s elimination of the “subsidy cliff.”) In addition, since the cost of CSR is then added to a smaller total number of plans (since it’s not added to the plans that are only sold outside the exchange), the additional amount that’s added to each plan is larger, resulting in even bigger premium subsidies for everyone who qualifies for premium subsidies.

Enrollees can still get CSR benefits, and premium subsidies are much larger than they would have been if CSR funding had continued

CSR benefits are still fully available to eligible enrollees who select silver plans, and Native American cost-sharing reduction benefits are available to Native American enrollees. In short, nothing has changed about eligibility for cost-sharing subsidies. But rather than the federal government directly reimbursing insurers for the cost of CSR, the cost is now almost universally being added to silver plan premiums.

Since premium subsidy amounts are based on the cost of silver plans (specifically, the benchmark silver plan in each area), premium subsidies are much larger than they would otherwise have been (as noted above, average subsidy amounts were about 30% larger in 2021 than they were in 2017; a significant portion of the increase is due to silver loading). Even before the American Rescue Plan made subsidies much more robust, enrollees with modest incomes in many parts of the country were eligible for free Bronze plans (or even free Gold plans, in some cases) after their premium subsidies are applied (with the American Rescue Plan in place, even more enrollees are eligible for free Bronze, Gold, or Silver plans).

According to a Kaiser Family Foundation analysis, there were already 4.5 million uninsured Americans who could get FREE bronze plans for 2021, after the premium subsidies were applied. That’s about 16% of the total uninsured population in the US. And again, the American Rescue Plan significantly increased the number of people eligible for a premium-free plan in 2021 and 2022, including premium-free Silver plans. After the ARP was implemented, an updated Kaiser Family Foundation analysis found that at least 6 million uninsured Americans were eligible for premium-free coverage in the marketplace (that number is likely a little lower for 2022, since the ARP provision that provided premium-free Silver plans to people receiving unemployment compensation in 2021 has not — yet — been extended for 2022).

Although deductibles are high on bronze plans, all plans include free preventive care, and coverage for non-preventive care with a high deductible is certainly better than no coverage at all. Keep in mind that insurance companies tend to have network negotiated rates that are far below the amounts that doctors and hospitals bill. If an in-network provider bills $2,000 and your insurer’s approved amount is $750, you only have to pay $750, even if you have a high deductible and are thus responsible for paying the full bill. This is an often-overlooked benefit of having health insurance, even if the deductible seems impossibly high.

It’s important to understand that many of those 6 million people might be better served by picking a Silver plan if they’re eligible for cost-sharing reductions, and the American Rescue Plan makes it much more realistic for them to do so. This is particularly true if their MAGI doesn’t exceed 200% of the poverty level ($25,760 for a single person in 2022), since the most robust CSR benefits are available below 200% of the poverty level. Yes, the Silver plan will have higher premiums, but it will also provide more robust coverage than a free Bronze plan. But if you’re uninsured and simply can’t afford the premium for a Silver plan, enrolling in a free Bronze plan is far preferable to remaining uninsured.

As with most things related to health insurance, there is a lot of variation from one state to another

DC, North Dakota, and Vermont didn’t permit insurers to add the cost of CSR to premiums for 2018, but Vermont and North Dakota both began to allow it for 2019. And in almost all cases, the cost of CSR was added only to silver plans—either all silver plans, or only to on-exchange silver plans—starting in 2018. There are only a few states—Colorado, Delaware, Indiana, Mississippi, and West Virginia—where the cost of CSR was spread across plans at all metal levels for 2018, rather than being concentrated on silver plan premiums.

For 2019, Delaware and Colorado switched to silver loading, although the other three states retained their broad-load approach and continued to use it for 2020 and 2021. As noted above, however, West Virginia joined the rest of the country in 2022, with a silver loading approach. Indiana and Mississippi continue to require a broad load approach.

There are other states—Georgia and Texas are examples—where regulators left the decision up to insurers in 2018 and continuing that same approach for 2019. But now that the benefit to consumers from silver loading are clear, insurers tend to silver load if regulators didn’t provide guidance one way or the other.

So by 2019, Indiana, Mississippi, and West Virginia were the only places where the cost of CSR was still being added to premiums for all plans at all metal levels (in DC, the cost of CSR is still not being added at all, but very few enrollees in DC receive CSR benefits, so the cost is negligible). So in those states, the disproportionately large premium subsidies (and the resulting very low-cost or free bronze plans) have not been available. But in much of the rest of the country, bargains abound. And again, West Virginia insurers are silver-loading the cost of CSR as of 2022, which helps to boost premium subsidies for all subsidy-eligible enrollees in the state.

As is always the case, however, the details vary considerably from one place to another. In much of Colorado, for example, premium subsidies were smaller in 2020 than they were in 2019. This is due to the state’s new reinsurance program that resulted in smaller overall premiums and thus smaller subsidies and larger after-subsidy premiums. And the increase in net premiums happened despite the fact that insurers in Colorado have added the cost of CSR to silver plan premiums.

What if you don’t qualify for premium subsidies?

People who don’t get premium subsidies have to pay the higher premiums that include the cost of CSR, but in most states, this only applies if they select a silver plan. (People who don’t get subsidies normally includes anyone with MAGI above 400% of the poverty level, after subtracting any contributions to pre-tax retirement plans and/or a health savings account, but for 2021 and 2022, premium subsidies are available at this income level if the benchmark plan would otherwise cost more than 8.5% of MAGI). And in states where the cost of CSR is added only to on-exchange plans, lower-cost off-exchange silver plans are available to people in this situation. California led the way on this approach, but numerous other states also adopted it.

It’s worth noting here that although adding the cost of CSR only to on-exchange silver plans does serve to protect consumers, it may have also placed some people with variable income in a tricky situation. Enrollees with MAGI above 400% of the poverty level (ie, normally not eligible for subsidies, although that’s not necessarily the case in 2021 and 2022) who want a silver plan will often find that they’re cheaper off-exchange, due to the cost of CSR being added to the on-exchange silver plans. But prior to 2020, if that person signed up for an off-exchange plan, they couldn’t switch to an on-exchange plan if their income dropped mid-year to a level that was subsidy-eligible (prior to 2020, a drop income was not a qualifying event if you were not already enrolled in a plan through the exchange).

For people who are self-employed, who have variable income, or who might simply lose their job or have their hours reduced mid-year, this presented a potential conundrum: Should you enroll in the lower-price off-exchange silver plan, knowing that if your income were to drop mid-year, you wouldn’t be able to get premium subsidies? Or should you enroll in the higher-price on-exchange plan, knowing that if your income were to drop during the year, you’d be able to start getting subsidies at that point (or claim them on your tax return)?

There was no easy answer to this, but it’s an issue that HHS addressed for 2020 and future years. Starting in 2020, people with off-exchange coverage (including those who take advantage of lower-cost silver plans outside the exchange) who experience an income change that makes them subsidy-eligible are allowed to switch to an on-exchange plan at that point.

Note that although HealthCare.gov planned to offer this special enrollment period starting in 2020, they made it optional for state-run exchanges—so there’s no guarantee that all of the state-run exchanges offer this special enrollment period. For reference, the details of this special enrollment period are outlined here.

Despite CSR defunding, the federal government is still picking up most of the tab via larger premium subsidies

Enrollment in the exchanges for 2018 ended up being nearly as high as 2017’s enrollment, despite an open enrollment period that was half as long. Although there was considerable consternation in 2017 that the elimination of CSR funding could result in a mass exodus of insurers from the exchanges and a destabilized individual market, that did not come to pass.

For 2019, there was an influx of insurers joining the exchanges in many states, and that trend continued for 2020, for 2021, and for 2022. And both exchange enrollment and overall average premiums remained very steady after CSR funding was eliminated, and hit an all-time record high in 2021, after the ARP was implemented.

Because insurers and state regulators were anticipating the loss of CSR funding (or reacted swiftly after it was officially eliminated), the cost of CSR has been adequately incorporated into the premiums insurers collect. And because it is generally added to silver plan premiums, on which premium subsidies are based, premium subsidies for nearly everyone who is eligible for them (which is considerably larger than the number of people who get cost-sharing subsidies) are much larger than they would have been if the federal government had continued to fund CSR directly.

The overall result is that the federal government is really still funding CSR, via larger premium subsidies rather than direct reimbursement. And more people end up benefiting, since premium subsidies extend to households earning up to 400% of the poverty level (or even higher, in 2021 and 2022), whereas CSR benefits stop at 250% of the poverty level.

There was some talk towards the end of 2017 about reviving the Alexander-Murry bill that would allocate federal funding for CSR, but this would no longer be as helpful as it would have been in mid-2017, as the CSR funding situation has been resolved in a way that ends up being more beneficial for exchange enrollees. In other words, most enrollees are better off with the federal government NOT funding CSR. And in most states, people who aren’t eligible for premium subsidies can generally pick an off-exchange plan or a non-silver plan in order to avoid paying the added cost to cover CSR; they’re not better off, but they’re also not any worse off.

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org.