The Sequester’s Impact on Health Reform

The Murray-Ryan budget deal would mitigate some of the 2014 and 2015 sequester, but it actually still leaves the sequester’s cuts to mandatory programs entirely in place, including those to parts of the Affordable Care Act (ACA). While the subsidies to help people afford health insurance premiums at the core of the law are exempt from sequestration because they are structured as individual tax credits, little has been written about the other important aspects of the ACA that are still set to be sequestered.

This blog will focus on two of the most integral parts of the law that are likely affected: cost-sharing subsidies and reinsurance payments. Note, however, that the final determination of whether something is subject to sequestration or if a workaround exists is left to the administration’s Office of Management and Budget (OMB).

Cost-Sharing Subsidies

(2014 cost = $4 billion, 2014 sequester = $300 million, 2014-23 cost = $150 billion, 2014-23 sequester = $8.5 billion)

In addition to federal premium subsidies, the ACA also provides subsidies to reduce cost-sharing (copays, deductibles, out-of-pocket caps) for individuals with incomes between the federal poverty level (FPL) and 250% of the FPL. To qualify for federal cost-sharing assistance, an individual must enroll in a silver-level plan, which is intended to cover, on average, roughly 70 percent of an enrollee’s costs (in health care speak, a silver plan has an “actuarial value” of approximately 70 percent – note, however, that this is an average, so some pay more and some pay less). If your income is between 100% and 250% of FPL, federal subsidies paid directly to your insurer will lower the deductible, copays, and/or out-of-pocket expenses cap you face such that the actuarial value of the plan is increased as follows.

Cost-Sharing Subsidy Parameters
Income Level Actuarial Value
100-150% of FPL 94%
150-200% of FPL 87%
200-250% of FPL 73%

The Office of Management and Budget (OMB), in charge of administering sequestration, has stated that these subsidies will be cut by an estimated 7.2 percent in 2014. How these cuts will be carried out, however, is unclear. Because the subsidies are paid directly to the insurer, most – including the Congressional Research Service (CRS) – believe that insurers will receive less money from the federal government, but will still have to offer the same lower cost-sharing to enrollees, thus forcing insurers to swallow the additional costs or make them up elsewhere. From CRS:

The impact of sequestration is unclear. ACA entitles certain low-income exchange enrollees to coverage with reduced cost-sharing and requires the participating insurers to provide that coverage. Sequestration does not change that requirement. Insurers presumably will still have to provide required coverage to qualifying enrollees but they will not receive the full subsidy to cover their increased costs.

Given that the idea of an insurance exchange is for insurers to bid what they think their costs will be to cover an average enrollee plus a profit margin, this sequestration complicates that calculation and would likely lead insurers to increase premiums in order to at least partially offset the sequester loss (which would in turn increase the federal government’s cost for premium subsidies). Potentially more damaging, this could create an incentive not to be the low-bidder for Silver plans to avoid getting a disproportionate share of enrollees who are eligible for cost-sharing subsidies (who have to choose a Silver plan to get the subsidy and may be more likely to choose the least expensive offering).

Reinsurance Payments

(2014 cost = $10 billion, 2014 sequester = $720 million, 2014-23 cost = $20 billion, 2014-23 sequester = $1.5 billion)

The ACA’s Transitional Reinsurance Program is geared to help insurers manage the uncertainty inherent in setting premiums for the first few years when it’s very difficult to predict the risk profile of your enrollees. To protect plans that end up with a disproportionately high share of very sick enrollees, reinsurance payments will help cover the costs of very high-cost patients (see this good explainer from Sarah Kliff of the Washington Post for more info).

Particularly given the website’s rocky rollout and growing concerns about insurers ending up with a higher proportion of sick enrollees than they were expecting, the importance of the reinsurance program has gained attention. But, with the sequestration of mandatory programs still intact, these reinsurance payments are likely to be cut by over $700 million in 2014, around $400 million in 2015, and $250 million in 2016.

Notably, it is not as clear that these payments are subject to the sequester as they are not listed in OMB’s preview report. However, it is also unclear why they would be exempt since the reinsurance payments are a mandatory spending program and are not explicitly exempted by the Budget Control Act (BCA), the legislation that mandated the current sequester. Moreover, Medicare’s prescription drug benefit (Part D) includes a similar reinsurance program, which had to be explicitly exempted by law (see here, p. 17 of the pdf).

At the end of the day, though, the final decision rests with OMB and we will find out for sure in January when they issue their final sequestration report for FY 2014.