Administration Does About-Face on Fate of ACA Cost-Sharing Subsidies

The administration’s Office of Management and Budget (OMB) released its report to Congress on Monday detailing the sequester’s impact on mandatory spending programs for Fiscal Year (FY) 2015, and it shows a notable about-face on the fate of the ACA’s cost-sharing subsidies. The OMB had previously indicated that they were subject to sequestration just last year.

The estimated $8 billion in cost-sharing subsidies scheduled to be paid to insurers in FY 2015 will therefore be spared the sequester’s roughly 7 percent haircut, as will the $156 billion projected to be spent over the following nine years.

Although not as central to the law as the premium subsidies (which are exempt from sequestration because they are structured as tax credits), the subsidies designed to reduce cost-sharing (co-pays, deductibles, out-of-pocket caps) for individuals with incomes between the federal poverty level (FPL) and 250 percent of the FPL are also an important component. Their newly determined exemption from sequestration, therefore, could be considered a big win for the law, particularly given some complications in how the sequester would be administered. Over the coming ten years, this exemption effectively translates to about $10 billion in restored cost-sharing subsidies.

It is unclear precisely what changed OMB's opinion, but it may be basing the exemption on the fact that the low-income cost-sharing subsidies for Medicare Part D are explicitly exempted from sequestration.

Importantly, this exemption slightly increases the percentage reduction that other mandatory programs will face, including two of the three R’s intended to protect insurers against adverse selection in the health exchanges – risk adjustment and reinsurance payments. Together, these two programs, which help plans that end up with higher-cost enrollees, are set to be cut by nearly a billion dollars in FY 2015 as a result of the sequester. For a full description of the functioning and purpose of these programs, you can read this fantastic primer from the Kaiser Family Foundation. Given fears about insurers ending up with sicker enrollees than they were expecting and subsequently increasing premiums going forward, the sequester cuts to reinsurance payments, in particular, may be concerning.

The sequester would also reduce funding for grants to help states run their ACA insurance exchanges, by $61 million in FY 2015.