What Are Cost-Sharing Reductions?

Cost-Sharing Reductions Make Health Care More Affordable

Cost-sharing reductions, often referred to as CSR or cost-sharing subsidies, are a provision in the Affordable Care Act (ACA) designed to make health care more affordable. Cost-sharing reductions improve the health plans that are available to eligible enrollees, making the coverage more robust and keeping out-of-pocket costs lower than they would otherwise be. The idea is to prevent people from being underinsured, which is what happens when a person's out-of-pocket exposure is unrealistically high relative to their income.

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Who Is Eligible for Cost Sharing Reductions?

Cost-sharing reductions are available to people who buy their own health insurance through the exchange, choose a silver plan, and have an income between 100% and 250% of the federal poverty level (the lower limit is 139% in states that have expanded Medicaid, since Medicaid is available to people with income below that level).

The federal poverty level changes each year, so the income limits for cost-sharing reductions also change from one year to the next. And just like premium subsidies, the numbers are based on the prior year's poverty level (this is because open enrollment happens in the fall, before the poverty level numbers for the coming year are published; those numbers are published in January, but the exchange continues to use the prior year's poverty level numbers until the next open enrollment period). For people enrolling in 2021 health coverage and living in the 48 contiguous states, 250% of the poverty level amounts to $31,900 for a single individual and $65,500 for a family of four (poverty levels are higher in Alaska and Hawaii, so people can earn more in those areas and still qualify for cost-sharing reductions).

In almost all states, children are eligible for Medicaid or the Children's Health Insurance Program (CHIP) with household income up to 200% of the poverty level, and eligibility extends well above that level in some states. So it's fairly uncommon for children to be covered on CSR plans, because CSR benefits (and premium subsidies) are not available to a person who is eligible for Medicaid or CHIP. Instead, it's more common for the adults in a household to qualify for CSR benefits while the children are eligible for Medicaid or CHIP instead.

Native Americans are eligible for additional cost-sharing reductions that eliminate their out-of-pocket costs altogether, as long as their household income doesn't exceed 300% of the poverty level.

The American Rescue Plan and Cost-Sharing Reductions

The American Rescue Plan, enacted in March 2021, makes self-purchased health insurance more affordable for millions of Americans. It eliminates the "subsidy cliff" for 2021 and 2022, and reduces the percentage of income that people have to pay for the benchmark plan. And although it doesn't change the benefits or general eligibility rules for cost-sharing reductions, it does ensure that anyone receiving unemployment compensation in 2021 can access full cost-sharing reductions as well as full premium subsidies. This is done by disregarding any income that would otherwise make the household ineligible for those benefits.

We'll discuss how cost-sharing reductions work in a moment, but the important point here is that if a person is receiving unemployment benefits at any time in 2021, they'll have an opportunity to enroll in a silver-level plan with no premium and with cost-sharing reductions that make the coverage itself better than a regular platinum plan (note that in most states, this benefit won't be available in the exchange until July 2021).

How Many People Get Cost-Sharing Reductions?

During the open enrollment period for 2021 coverage, just over 12 million people enrolled in health plans through the exchanges/marketplaces. And nearly 5.7 million of those enrollees selected plans that included cost-sharing reductions.

The number of people with cost-sharing reductions is expected to increase in 2021, due to the subsidy enhancements created by the American Rescue Plan, and the fact that there's a COVID/ARP-related enrollment window that continues through mid-August 2021 in most states. People are able to enroll in coverage or switch plans during this window even if they don't have a qualifying event. And the ARP's larger subsidies mean that some people who previously selected a bronze plan for 2021—despite being eligible for CSR—may find that they can now afford a silver plan instead, with built-in CSR benefits.

During the first several weeks of this special enrollment period in early 2021, the pace of enrollments in states that use HealthCare.gov was about 2.5 times the normal enrollment rate at that time of year (when a qualifying event would normally be necessary in order to enroll).

How Do Cost-Sharing Reductions Work?

Cost-sharing reductions essentially amount to a free upgrade on your health insurance. If you're eligible for cost-sharing reductions, the silver plan options available to you through the exchange will have built-in CSR benefits (if you're not CSR-eligible, you'll just see regular silver plans instead).

Health insurance plans sold in the exchanges are categorized by metal levels, with bronze, silver, and gold plans available (and in some areas, platinum plans). A plan's metal level is determined by the actuarial value (AV) it provides, which means the percentage of overall average costs that the plan will cover. Regular silver plans have an actuarial value of about 70%, which means that they'll cover an average of 70% of overall healthcare costs for a standard population (the percentage of health care costs that a plan covers for a specific individual will vary greatly, depending on the person's utilization of care).

But if you're eligible for CSR, the silver plans available to you will have actuarial values of 73%, 87%, or 94%, depending on how your household income compares with the federal poverty level (FPL):

  • Income between 100% and 150% of FPL: Silver plan AV equals 94%
  • Income between 150% and 200% of FPL: Silver plan AV equals 87%
  • Income between 200% and 250% of FPL: Silver plan AV equals 73%

As is the case for premium subsidy eligibility, CSR eligibility is based on an ACA-specific calculation of modified adjusted gross income (i.e., it's not the same as the regular modified adjusted gross income calculations you might be used to for other tax purposes).

For perspective, a gold plan has AV equal to roughly 80%, and a platinum plan has an AV equal to roughly 90%, although platinum plans aren't available in many areas. So applicants with household income up to 200% of the poverty level are able to enroll in silver plans that have built-in upgrades making them nearly as good as, or better than, a platinum plan.

Within the framework of the actuarial value requirements (which are determined via a detailed calculator established by the federal government) insurers have quite a bit of leeway in terms of how the plans are designed. So there will be considerable variation in plan specifics, even for plans at the same CSR level. It's common to see deductibles that range from $0 to $500 for the 94% AV level, although plans can certainly have deductibles above that level, depending on how the rest of the plan is designed in terms of copays and coinsurance. For the 73% AV level, plan designs aren't drastically different from regular silver plans, so it's common to see deductibles of $5,000 or more.

But CSR plans do have to cap maximum out-of-pocket at levels that are lower than the caps that apply to other plans. The ACA imposes a maximum out-of-pocket cap (for in-network essential health benefits) on all non-grandfathered, non-grandmothered plans. The cap is adjusted for inflation each year; in 2021, it's $8,550 for a single individual, and $17,100 for a family. But CSR plans are required to have lower out-of-pocket caps. Specifically, the maximum allowable out-of-pocket is reduced by 67% for enrollees with household income between 100% and 200% of the poverty level, and by 20% for enrollees with household income between 200% and 250% of the poverty level. In 2021, that amounts to the following out-of-pocket caps for silver plans:

  • Income between 100% and 200% of FPL: Maximum out-of-pocket is $2,850 for a single individual, and $5,700 for a family.
  • Income between 200% and 250% of FPL: Maximum out-of-pocket is $6,800 for a single individual, and $13,600 for a family.

The benefits of CSR are obviously much more significant for people with income up to 200% of the poverty level. Above that point—as long as household income doesn't exceed 250% of the poverty level—there are still CSR benefits available, but they're much weaker.

How Are Cost-Sharing Reductions Funded?

Cost-sharing reductions used to be funded by the federal government, which would reimburse health insurers for the cost of providing CSR benefits to eligible enrollees. But that changed in the fall of 2017 when the Trump administration stopped reimbursing insurers for the cost of CSR. This stemmed from a long-running lawsuit, brought by House Republicans in 2014 over the fact that the ACA did not specifically allocate CSR funding. A judge had sided with House Republicans in 2016, but the ruling had been stayed while it was appealed by the Obama administration, and the federal government continued to reimburse insurers for the cost of CSR.

But once the Trump administration halted that in October 2017, insurers and state regulators had to scramble to figure out what to do. Insurers were—and still are—legally required to provide CSR plans to all eligible enrollees, but they were no longer being reimbursed by the federal government. That meant the cost of CSR had to be added to health insurance premiums, just like any other cost that insurers have.

Since CSR benefits are only available on silver plans, most states allowed or directed insurers to add the cost of CSR only to silver plan premiums. This actually ended up making health coverage more affordable for the majority of exchange enrollees, because it increased the premiums for silver plans. Premium subsidies are based on the cost of the benchmark silver plan in each area, so higher premiums for silver plans resulted in larger premium subsidies. And those subsidies can be applied to plans at any metal level (CSR benefits are only available if you pick a silver plan, but premium subsidies can be used with bronze, silver, gold, or platinum plans).

In most states, the cost of CSR is not added to bronze and gold plans (or platinum plans, in the areas where they're available). So the larger premium subsidies—which are based on the higher silver plan premiums necessary to cover the costs that insurers incur under the CSR program—cover a larger portion of the premiums for plans at other metal levels. This has resulted in many people with low to moderate income being able to get free or nearly free bronze plans in recent years (and in some areas, lower-income enrollees can qualify for free or nearly-free gold plans as well).

And free plans are even more widely available in 2021 and 2022, thanks to the American Rescue Plan. This includes, for the first time, widespread access to premium-free silver plans that include built-in CSR benefits. The cost of CSR is still being added to silver plan rates in most states, and the American Rescue Plan reduces the percentage of income that people have to pay for a silver plan, resulting in even larger premium subsidies.

Do Cost-Sharing Reductions Get Reconciled on Tax Returns?

Unlike premium subsidies, cost-sharing reductions do not get reconciled on your tax return. Premium subsidies are a tax credit—albeit one that you can take in advance instead of having to wait to claim it on your tax return. That's why premium subsidies have to be reconciled when you file your taxes: If the premium subsidy that was sent to your insurance company on your behalf during the year was too big (based on your actual income for the year, as opposed to the projected income you estimated when you enrolled), you may have to pay back some or all of it to the IRS. And on the other hand, if the premium subsidy that was paid on your behalf was too small (because your income actually ended up being lower than you had projected), the IRS will give you the extra amount as a refund or subtract it from the amount of income tax you owe.

But cost-sharing reductions are different. They aren't a tax credit, and even when the federal government was reimbursing insurance companies directly to cover the cost of these benefits, there was no mechanism to have people pay back any of the cost if their actual income ended up being different from the income projection on which their CSR eligibility was based.

Should You Enroll in a Plan With Cost-Sharing Reductions?

If you're buying your own health insurance and your household income (as calculated under the ACA's rules) doesn't exceed 250% of the poverty level, all of the silver plans that are available to you will have CSR benefits built into them. This is based on your projected income for the year, which will require documentation when you actually enroll. As described above, there are three different levels of CSR benefits, depending on income.

You're not required to enroll in a plan with CSR benefits though. If you're CSR-eligible and you pick a silver plan, you'll automatically get the CSR benefits. But you can pick a bronze or gold plan instead (or a platinum plan, if they're available in your area), and forego the CSR benefits.

There's no right answer here—it all depends on your specific situation. Prior to the American Rescue Plan's subsidy enhancements, people eligible for strong CSR benefits often had a difficult choice to make: They were likely eligible for free or very low-cost bronze plans—with very high deductibles and out-of-pocket exposure—or they could pick a silver plan with built-in CSR benefits but a monthly premium that might have felt unaffordable.

Particularly if your income doesn't exceed 200% of the poverty level, the benefits offered by the silver plan are going to be much more robust. The deductible might be just a few hundred dollars, or even zero dollars, as opposed to several thousand dollars under the bronze plan. And the maximum out-of-pocket will be much smaller. But the difference in price between the bronze plans and the silver plans (after the premium subsidy was applied) was often substantial.

The American Rescue Plan has eliminated that tough choice for many people. Folks with income up to 150% of the poverty level can enroll in either of the two lowest-cost silver plans in their area (with built-in CSR benefits) without any premium at all. And people with income between 150% and 200% of the poverty level pay between 0% and 2% of their income for a silver plan (as opposed to roughly 4% to 6.5% of their income before the ARP was enacted). This makes it much easier to actually enroll in a silver plan if your income makes you eligible for strong CSR benefits.

But for some people, especially those who are eligible for only fairly week CSR benefits (income between 200% and 250% of the poverty level), there will continue to be a decision to make: Should you pay more on a monthly basis in trade for having much more manageable out-of-pocket costs if and when you have a claim? As with most things related to insurance, there's not a one-size-fits-all answer here. It depends on your health status, how you feel about managing risk, and your options for covering potential out-of-pocket costs. If you have money stashed away in a health savings account or other accessible assets, you might feel comfortable with a free or lower-cost bronze plan (and keep in mind that your assets aren't counted at all when your eligibility for premium subsidies and cost-sharing reductions is determined). But if you'd have a hard time coming up with the money to cover your out-of-pocket costs, it might make more sense to pay the monthly premiums for a silver plan that has lower out-of-pocket costs.

The best course of action is to actively compare all of the plans available to you. Consider what you'll pay each month (after your premium subsidy is applied) as well as how much you'll pay for various medical care—including office visits and other outpatient care, but also high-cost situations such as a hospital stay. Reach out for help from a navigator or exchange-certified broker if you're having trouble understanding the policies that are available to you. Once you have all of the information you need, make your decision based on what will work best for you. And know that if your income changes later in the year and makes you eligible for a different level of CSR benefits, you'll have an opportunity to switch plans at that point. So it's important to keep the exchange updated if your income changes during the year.

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