Wednesday, October 18, 2017

Cost Sharing Reductions: It's Not Sabotage. It's Not a Bailout: Part 1

Congress and the media are hyperventilating over the Trump Administration announcement that they will end Cost Sharing Reductions (CSR). The result is news feeds full of over-exaggeration, misrepresentation, blatant lies, and name calling. One side of the political aisle calls it sabotage. The other says it's an insurer bailout. Reality is, it's neither.

Before I explain, let's first start by answering what is the cost sharing reduction (CSR) and how does it work? It's quite simple when it's not used as a political football. But, like everything in our political world, the more the bureauweenie can confuse the consumer, the more reliant the consumer becomes on the bureauweenie.

Obamacare has two methods of "financial assistance" written in to the law to help low income individuals. The first method is premium tax credits to help pay health insurance premiums. Those have been funded and have nothing to do with the second method, CSR's.

Under Obamacare, insurance companies are required to offer people making between 100% and 250% of the Federal Poverty Level Silver level insurance plans that have lower deductibles, copays, coinsurance and out-of-pocket-maximums than the standard Silver level plans. Pricing for these plans are equal to Silver level plans that don't include the CSR's. In exchange for offering these better benefits to low income individuals, Obamacare made a promise that they would refund insurers for the claims they incur between the better benefit Silver CSR options and the standard Silver plans.

Here's an example: three 42-year old's who live in the same zip code that purchase insurance through the exchange. Each has a different income. The first has an income of $19,500, the second has an income of $30,250 and the third an income of $55,000. The actual monthly cost of the lowest priced Silver plan is $248.57. It includes a deductible of $6,100, an out-of-pocket limit of $7,000 and has an office visit copay at $30.

The first person has an income below 250% of the poverty level and the other two don't. So, under Obamacare the first person is eligible for a premium tax credit (subsidy) AND a Silver plan that has better benefits (CSR). His benefits include a $1,100 deductible, an out-of-pocket limit of $2,000 and an office visit copay of $15.

The second person has an income just above 250% but below 400% of the poverty level. Under Obamacare he is eligible for a premium tax credit (subsidy) but not a Silver plan with CSR. He will pay less than the full premium price but have the standard plan with a $6,100 deductible.

The third person is over 400% of the poverty level. He pays full price for the standard insurance plan.

Now that we understand CSR's let's explain why it's not a bailout or sabotage.

It's Not a Bailout

When insurers price their plans they are based on the standard plan. This is where the $248.57 premium comes from. The insurance company math nerds (actuaries and underwriters) develop rates based off assumed risk. This risk does not include the difference between the standard plan benefits and the better plan benefits available to those between 100% and 250% of FPL. The Federal Government -through Obamacare - agreed to reimburse insurers for these claims that they have not financially accounted for.

The amount the insurer hasn't accounted for is the difference in deductible, copay, coinsurance, and maximum out-of-pocket the consumer is liable for. Let's assume all three guys from above have a claim for $25,000. The lowest income guy is only liable for a maximum of $2,000. The second and third guys would be liable for $7,000. Insurers priced for $7,000 out-of-pocket knowing that Obamacare promised to pay the difference in claims between the standard plan limit and the better benefit limit due to Cost Sharing Reductions. In this scenario the difference in the first guy's liability and the standard liability ($7,000-$2,000) would be submitted by the insurer to the Government for reimbursement. It's also important to note that if the first guy is healthy with no claims the Government doesn't pay the insurance company at all.

As you can see, this isn't a bailout to insurers. It's reimbursement for claims they incur that weren't factored in to insurer pricing. Under Obamacare the law states that CSR's are a financial obligation of the Federal Government to insurers. Failure to pay represents a default of our Government.

We explain how it's not "Sabotage" in Part 2.
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