What are Insurance Company Subsidies and Why all the Fuss

As I write this, there is breaking news suggesting that under the leadership of Senators Lamar Alexander (R- Tenn.) and Patty Murray (D- Wash.) a bipartisan agreement to stabilize the health insurance market was just reached. President Trump, in the Rose Garden this afternoon with Greek’s prime minister expressed what seems to be support for the arrangement.

The Senate Health, Education, Labor, and Pensions Committee has held hearings and meetings trying to reach an agreement to save the subsidies since early September. Their activity stopped during the last-gasp Graham-Cassidy bill to Repeal Obamacare but resumed with renewed urgency when President Trump signed an Executive Order stopping subsidy payments to insurance companies on October 11th.

All of this begs some questions: what are these subsidy payments? Why are they important? Why does the argument about the subsidies keep coming up? What happens next?

What Are the Subsidy Payments in Question?

Newly created “Marketplaces” (or “Exchanges”) where individuals could buy insurance under the Affordable Care Act is a crucial foundation of the Obamacare structure to get all Americans insured.

The policies in the Marketplaces all had to offer the same essential benefits under the law, had to be sold with easily understandable terms and at an affordable price. (Before the ACA, individuals trying to purchase insurance paid much more than policies offered groups such as through an employer.)

These new policies were not attractive to the insurance industry, as many of the people were being insured for the first time and others would have pre-existing conditions and health histories that made them a higher risk to insure.

Also, private insurance companies selling policies in the Marketplaces were asked to keep co-pays, deductibles, and other out-of-pocket expenses low, particularly for the lowest-income purchasers.

In return for their participation, the ACA provided “Cost-sharing subsidies” from the government back to the insurance companies to help defray the cost of making the Exchanges work.

As intended, these subsidies convinced private insurance companies to participate in the Obamacare Marketplaces. Coverage was available to the poorest and sickest people applying, and the companies did not raise premiums on everyone else to make up for their losses.

All of this is clearly stated in the law passed and signed by President Obama in March 2010. It was only after the midterm elections that the GOP controlled House of Representatives argued that the law did not include an explicit authorization allowing the Obama Administration to use Federal Treasury funds to reimburse insurance carriers.

In 2014, the House of Representatives brought a suit against the Obama Administration saying that the billions of dollars that were paid out as subsidies to insurance companies in the first years of Obamacare were unconstitutional. They won their case in a lower federal court in April 2016, but the execution of that decision was stayed pending an appeal.

The appeal of the case was filed in July 2016. Initially, the Obama Administration fought that Appeal; President Trump inherited it upon his inauguration in January.

Why Are the Subsidy Payments Important?

It is widely agreed that stopping the subsidies to the insurance industry will be  catastrophic to Obamacare. Insurance companies are expected to raise premiums significantly (which they have already done amidst the uncertainty about the subsidies these past months) or withdraw precipitously from the Marketplaces altogether- leaving no options to buy.

If the Marketplaces are empty of options, millions of Americans will be left without any low-cost policies to purchase, and the entire Obamacare framework will fall apart.

The net impact of insurance companies withdrawing- which the National Association of Insurance Commissioners made clear they will do if the subsidies are discontinued- is chaos in the insurance industry as millions lose their coverage. (This also has a predictable impact on hospitals, physicians, and other providers as well- as their patients will lose the ability to pay for care.)

The concern about an abrupt disruption in these subsidy payments is not limited to one side of the political spectrum. The day after President Trump signed his Executive Order 18 states and the District of Columbia filed a suit to stop the Order, including states currently run by Republican governors, such as New Mexico, Iowa, and Kentucky.

Concerns around an unstable insurance market– which would be the result if subsidies stop, include: 1) rising premiums on the remainder of insurance policies across the population, 2) counties that would be “bare” of options, and 3) the return of “junk insurance” which would not cover people with many catastrophic injuries, diagnoses, or even standard care such as maternity coverage.

These predictions underscore an essential point that is not often stated in the media- chaos in the insurance industry will not only affect the poorest in our country, but all of us.

Why Does the Argument Over Subsidies Keep Coming Up?

Subsidies to the insurance industry under Obamacare have been a political football since President Trump inherited them on January 20th. [For a long list of examples, including the role of the subsidies in threats to shut down the government in April, please see Fontenotes No 39.]

The Executive Order PResident Trump signed last week is believed to be in reaction to the failure of the GOP Senate to successfully pass “Repeal and Replace” legislation this summer.

But President Trump has not been universally against the subsidies these past ten months– if he was, he could have killed them- and Obamacare with them- by failing to pursue the Appeal of the lower court decision holding them unconstitutional last April.

Not only has the Trump Administration kept the appeal protecting Obamacare alive, but HHS also issued rules to help stabilize the insurance industry as recently as this Spring.

When he expressed what seemed to be support for an agreement to save the subsidies – and Obamacare (for at least the next two years)- that was not entirely inconsistent.

What Happens Next?

I do not pretend to be a person who can tell you what will happen next- but I also believe no one can.

At a minimum, the Senate would have to pass the bipartisan agreement announced today, which is a stretch. The House of Representatives would then also have to pass it- and that reopens political divides within the GOP that were on full display back when the House passed its Repeal and Replace legislation in May.

If Congress agrees to continue insurance subsidies to keep the Obamacare structure in place, President Trump will undoubtedly be asked by many (if not all) in his base to veto that bill.

Many things could happen to allow the subsidies to stop and uncertainty to rein across the insurance industry for the foreseeable future.

As I am writing this the ground for the bipartisan agreement is shifting. While editing for publication, President Trump recanted his support for the deal struck by Senators Alexander and Murray, and conservative members of Congress are setting stakes in the ground to stop it.

By the time you read this, the battle may already be lost. If the predicted chaos in the insurance industry results, at least this recording may help us all remember why.

Want to Know More?

An excellent resource from the Kaiser Foundation about these Risk Corridor Subsidies, as well as Risk Adjustment and Reinsurance, is available here.

Detailed analysis of the House of Representative’s suit regarding the Risk Corridor program, the government’s defense and the judge’s ruling is available on the Health Affairs blog here.