How The Sequester Could End Up Raising Americans’ Insurance Premiums Under Obamacare

CREDIT: Shutterstock

Budget sequestration is taking a toll on the most vulnerable Americans by slashing funding for Head Start, food assistance, domestic violence programs, and many other government services. But one largely overlooked consequence of the federal cuts is the fact that they may also raise insurance premiums under Obamacare.

On top of the premium tax credits that Obamacare provides to Americans making up to 400 percent of the Federal Poverty Level (FPL) who buy insurance through the marketplaces, the health law also contains provisions to help poorer Americans afford out-of-pocket costs such as deductibles and co-pays. Normally, a mid-level “Silver” plan on the marketplaces covers 70 percent of the policyholder’s medical costs. But if you make less than 250 percent FPL ($28,725 per year for individuals and $58,875 for a family of four), you’re eligible for so-called “cost-sharing” subsidies that limit your out-of-pocket expenses under the law.

For instance, a lower-income American making between 201 and 250 percent FPL would actually have 73 percent of their total costs covered by a Silver plan. That number rises to 87 percent of medical costs for those making 151-200 percent FPL and 94 percent for very poor Americans who earn between 100 and 150 percent FPL. In other words, the cost-sharing subsidies are a massive boost for sick and poor Americans who may not be able to pay very much for their health care out of their own pockets.

On Friday, health policy analyst Josh Fangmeier highlighted a White House Office of Management and Budget (OMB) report showing that the sequester undermines this very program. The line item reductions listed by the report include a nearly $4 billion overall cut to the cost-sharing subsidies, including a $286 million reduction in 2014 (the graphic has been edited to fit all relevant information):

cost sharing sequestration

CREDIT: White House Office of Management and Budget

It’s important to note that these subsidies are indirect in nature, since they don’t actually provide tax credit to consumers — rather, the subsidies are paid to the insurance companies themselves.

So what do the cuts mean for Obamacare? “The big losers there are going be the insurance companies. They may feel the need to raise premiums,” Washington and Lee University law professor and Affordable Care Act expert Tim Jost told ThinkProgress over the phone. “The insurers are required under the statute to reduce cost-sharing regardless, so they’re going to be stuck holding the bag on that one.”

Dr. Ezekiel Emanuel, chair of the Department of Medical Ethics and Health Policy at the University of Pennsylvania and senior fellow at the Center for American Progress, is also concerned that the budget cuts could spell higher premiums as insurance companies try to recoup their losses.

“A lot of the insurers priced their premiums based upon this cost-sharing supplement. And I think if this money doesn’t come through and they expect that patients won’t be able to pay that cost-sharing that they, as the insurers, are probably going to have to eat some of it at least, so I think they’re probably going to raise premiums,” he said in a phone interview. “Anything that creates uncertainty in the health insurance market in general raises premiums, and that’s the problem [with the sequester cuts].”

“We can say that there’s going to be some effect [on Obamacare premiums],” added Emanuel. How big of an effect? “That remains to be seen.”