BY JOSEPH ANTOS
The $1.4 trillion spending bill that will keep the federal government running for the next few months includes a curious provision that doubles down on a fundamental flaw of the Affordable Care Act (ACA). Section 609 of the legislation prevents the Health and Human Services Secretary from interfering (for one year) with “silver loading,” a practice that drives up the cost of health insurance and increases financial burdens on taxpayers and middle-class families.
This is the latest over-reaction to a minor mistake in the ACA that should have been easily resolved. The ACA requires insurers to provide cost-sharing reduction (CSR) subsidies to low-income families buying health coverage on the government’s insurance exchanges. Those subsidies reduce the amount that families with incomes between 100 and 250 percent of the federal poverty level have to pay out of pocket before their insurance coverage kicks in.
Republicans and Democrats disagree about whether the ACA appropriated funds to repay insurers for the CSR subsidies, which cost them $10 billion a year. The Obama administration made CSR payments, arguing that the ACA authorized the payments and effectively appropriated the funds. The Trump administration discontinued those payments in October 2017, stating that money had not been appropriated by Congress for this purpose and could not be legally spent. CSR payments have not resumed, awaiting congressional action that is not forthcoming.
The immediate response to halting CSR payments was predictable, and wrong. Advocates made hyperbolic claims that this action was sabotage that would destabilize the exchange market, “sow chaos in the health care system,” and force insurers to “flee the marketplaces.” Nothing of the sort has happened.
The average number of insurers participating in ACA exchanges did decline, from 4.3 per state in 2017 (before the suspension of CSR payments) to 3.5 per state in 2018. But the exchange market had been shaking out since 2015, when there were 6.0 insurers per state, and insurer participation has risen to 4.5 per state for 2020.
Premiums also rose, but not for the reasons assumed by many commentators. The average benchmark premium, tied to the second-lowest cost silver plan, increased from $359 per month in 2017 (before the suspension of CSR payments) to $481 per month in 2018. (Those amounts are the average unsubsidized premiums for a policy covering a 40-year-old individual.) But benchmark premiums had increased sharply from 2016 (when the average premium was $299) to 2017, and premiums have declined since 2018, dropping to $462 in 2020.
In other words, this supposed act of sabotage was largely ineffective. Those who were most irate about suspending CSR payments ignored both the structure of the ACA’s subsidies and the response private insurers would make to a serious threat to their bottom lines.
Insurers found the ACA loophole: Premium subsidies (administered through a tax credit) are tied to the cost of the benchmark plan. Increasing silver plan premiums also increases the tax credit, on a dollar-for-dollar basis. Exchange enrollees selecting the second-lowest cost silver plan would pay the same premium (net of subsidy) in 2018 as they did in 2017.
Not surprisingly, insurers changed their pricing strategy in response to the loss of CSR payments. Silver premiums rose sharply, while premiums for other “metal” levels ranging from bronze (where the insurer pays 60 percent of the average cost of care) to platinum (where the insurer pays 90 percent) increased less rapidly. Hence the term silver loading: silver plans bore higher premium increases than other plans, resulting in larger federal premium tax credits while minimizing enrollment losses.
Although the exchange market has accommodated the suspension of CSR payments and remains stable, silver loading is a poor substitute for sound federal policy. It is reasonable to provide additional resources to lower-income families who may not be able to pay high deductibles or other cost-sharing requirements of their health insurance. Imposing the requirement on exchange insurers to subsidize those families is one way to accomplish that goal, but the federal government should foot the bill for this decision.
Silver loading appears to have compensated insurers for the loss of CSR payments, but it distorts prices in the individual health insurance market and raises costs. The Congressional Budget Office estimates that appropriating CSR payments for 2019 through 2021 would reduce the budget deficit by $32 billion over the 2019-2027 period. Permanently appropriating CSR payments would reduce the deficit further.
People who are not eligible for premium tax credits and purchase their own coverage on the individual market are particularly hard hit by silver loading. A person making about $50,000, or slightly more than 4 times the poverty level (and consequently ineligible for the premium tax credit), would have paid over $5,700 in 2018 for exchange coverage — an increase of 33 percent from 2017. Similar large premium increases were seen in the off-exchange market. Total enrollment in the individual market dropped from 17.4 million in 2015 to 13.8 million in 2018, largely concentrated among those who did not qualify for premium tax credits. Consequently, much of the cost of silver loading is borne by lower middle-income families through higher premiums and lost coverage.
If silver loading increases federal spending, raises unsubsidized premiums, and forces families to drop coverage, why protect the practice? Advocates have come to realize that larger premium credits under silver loading gives enrollees eligible for the premium credit better plan choices — either access to zero-premium bronze coverage or gold plans that cost little more than silver plans. The decision to suspend CSR payments has led to an unexpected increase in the ACA’s generosity, but only for those who were already eligible for subsidies.
This complicates the politics surrounding silver loading. Legislation to appropriate CSR payments would be opposed by the same groups that were most critical of the Administration’s 2017 decision to suspend payments.
There is a reasonable solution. CSR payments should be formally appropriated, but only if insurers and state regulators halt silver loading. The amount of CSR payments should be reduced to account for remaining imbalances that disproportionately increase premiums paid by those who are not eligible for premium credits. This would shift exchange pricing to more accurately reflect the operating cost of the plans, promoting price competition that would result in more affordable coverage. The resulting budget savings could be used to provide more help to the lowest-income exchange enrollees and reduce taxpayer burdens.
The cascade of problems started by failing to appropriate CSR payments can be resolved. Rather than locking in a jury-rigged work-around, the next Congress should adopt reforms that promote efficiency and fairness in the individual insurance market.
The AHCA provided tax credits and incentives for everyone to enroll. The ACA has a convoluted subsidy formula that’s attached to Silver premiums, while half the market (CSR eligible) is locked into Silver plans as CSR benefits are limited there. Accordingly, insurers are hypercompetitive with Silver premiums which compresses premium subsidies. This means lower tax credits, higher net premiums, and fewer people enrolled. The simplistic Republican idea of tax credits doesn’t result in all of these crazy ACA dynamics which most actuaries and nobody in Washington, including the astute author of this article, fully understand.