Obamacare / ACA Cost Sharing Reductions

The Affordable Care Act / Obamacare makes health insurance affordable in two ways. The first is through advanced tax credit subsidies that reduce the premiums you pay for a particular plan based on your income level. While most media coverage is focused on these premiums, the out of pocket costs in terms of deductibles, copays, coinsurance and out of pocket maximums are just as important when it comes to the cost of your coverage.

The Affordable Care Act also makes plans more affordable by reducing these cost sharing mechanisms through cost sharing reduction subsidies. 

How Cost Sharing Reductions Work To Make Plans More Affordable

The Cost Sharing Reductions (CSR) reduce the amount that a consumer has to pay out of pocket for care, thereby making the insurance plans more affordable. Under Obamacare, those who qualify for these CSR discounts will see lower out of pocket costs associated when applying to Silver plans they are eligible for on the marketplaces. The copays, coinsurance and deductibles associated with these plans will be reduced, effectively making the insurance carriers share of financial responsibility higher than it would otherwise.

Who Qualifies For Cost Sharing Reductions?

While the tax credit subsidies are applicable to households making up to 400% of the federal poverty level (FPL), the CSR discounts are available only to households of up to 250% of the FPL. The amount of your discount will depend on which bucket your income places you in. The lower your income bucket the more of the expenses the insurance carrier will pick up through the plan, and the lower your out of pocket cost sharing fees. The Cost Sharing reductions increase the Actuarial Value of a health insurance plan, by forcing an insurer to pick up a higher proportion of the costs.

The AV of a plan is the percentage of total healthcare costs that a plan will end up covering on average. With an AV of 70%, a consumer enrolled in a Silver plan would be expected to pay on average 30% of the actual healthcare costs they incurred with the company picking up the rest. Since these Actuarial values are based upon the average enrollees, the actual percentages for any individual household will vary significantly based upon their total healthcare costs. In general the lower your expected healthcare costs the lower the AV value will be since you are responsible for the deductibles before the insurer picks up any part of the bill.

Out of Pocket Maximum Limits
Income as % of FPL Actuarial Value Individual Family
Up to 150% 94% $2,250 $4,500
151 - 200% 87% $2,250 $4,500
201 - 250% 73% $5,200 $10,400
Standard Silver 70% $6,350 $12,700

As you can see from the table the adjusted AV values of the Silver plans change dramatically depending where your income falls. The limits to the out of pocket maximums also mean that there are much lower hard caps when it comes to the amount you'll ever have to pay for healthcare through one of these plans. On the exchanges, those who qualify for CSR discounts will see that the Silver plans that are usually labeled with a CSR adjustment 73, 87 or 94 applied. For the sake of comparison the AV values of standard metal tier plans are Bronze: 60%, Silver 70%, Gold 80% and Platinum 90%. The Silver CSR 94 plans provide better cost sharing than the platinum plans you will find on the exchange for significantly less cost.

While consumers are free to acquire minimum essential coverage to fulfill the individual mandate through many other means, the Cost Sharing Reductions like the tax credits can only be acquired through the marketplaces. This can make the on-exchange plans a significantly better deal for consumers than even the employer sponsored plans once the cost sharing aspects are factored in.

Native American Cost Sharing Reductions

Members of Federally Recognized Indian tribes benefit from another set of cost sharing benefits. Those households who fall under one of these groups, qualify for zero cost sharing plans, as long as their household income is under 300% of the Federal Poverty Limit. These plans have no copays, deductibles or coinsurance when receiving care from an Indian healthcare provider or receiving any of the essential health benefits through the Marketplace. 

Cost Sharing Reductions Are For Silver Plans Only

If you qualify for Cost Sharing Reductions on the exchange, remember that they only apply to the Silver Metal Tier plans. While bronze plans will be cheaper when it comes to premiums, none of the CSR discounts will be applied to these plans on the exchange. This is important to consider while shopping on plans on the exchanges, since many of the marketplaces display plans in increasing order of premiums.

As one of only two factors when it comes to total cost of care, the bronze plans may appear to be the best deal, but can in reality be much more expensive once you consider your out of pocket costs. Bronze plans will typically have very high deductibles and out of pocket maximums, generally near the maximum legal limit of 6,600 for an individual in 2015. A CSR Silver plan will instead have much lower deductibles. 

An Illustrative Example: Why a More Expensive Silver Plan May Be Better Than a Cheap Bronze Plan

To illustrate lets look at an example for a 21 year old resident of Adams County, Ohio with an income of $17,000. The cheapest bronze level plan for this person the HealthSpanOne 6000 HSA would have a monthly premium of $27 ($324 annually)  and a deductible of $6,000. The cheapest silver level plan, the HealthSpanOne 3000 HSA costs $72 a month ($864 annually)  with a deductible and out of pocket maximum of $400 with CSR reductions applied.

As you can see from this example, while the Silver plan may cost about $600 dollars more over the course of a year in premiums, the most you would ever have to pay for healthcare in a year would be $1,224 (premiums + out of pocket maximum combined). With the bronze plan, the enrollee would be responsible $6,324 of premiums and fees before any coverage began kicking in. As illustrated by this example the Silver plan begins coming out ahead quite quickly if you have any healthcare costs whatsoever in a given year.

Shoppers that may qualify of cost sharing reductions should keep in mind the role out of pocket costs play in their total cost of coverage when selecting plans on the insurance exchanges. Focusing too much on premiums paid may lead you to selecting plans that are less than ideal by not taking advantage of these benefits.

Comments and Questions