If Donald Trump tries to go nuclear on Obamacare, the effort might just fizzle.
For what feels like eons now, the president has been publicly hinting that he might cut off important subsidies to insurers that keep the Affordable Care Act's exchanges up and running as intended. These funds, known as cost-sharing reduction payments, are worth billions to carriers, and it's been widely assumed that halting them would have a disastrous impact on the market, forcing insurers to either bail or drastically hike premiums (which is why health wonks dubbed it the “nuclear option”). Trump has tended to lash out and threaten the subsidies whenever he's felt frustrated with his inability to repeal Obamacare. Last month, after the Republican health push sputtered to an inglorious late-night end in the Senate, he tweeted that “BAILOUTS for Insurance Companies” would “end very soon” if Congress couldn't pass a bill.
After today, however, it might be time to stop worrying and learn to love Trump's bomb threats. According to the new analysis by the Congressional Budget Office, ending the cost-sharing subsidies would likely backfire badly for the administration, costing the federal government $194 billion over a decade without fatally undermining Obamacare's exchanges. In fact, the move could even allow some Americans to obtain insurance coverage for free while modestly reducing the number of uninsured by 1 million.
Let me repeat that. Trump's plot to critically sabotage the Affordable Care Act could actually lower the uninsured rate while blowing nearly $200 billion.
Now, before we get into the findings, here's a brief refresher on how the cost-sharing subsidies work, and why they're vulnerable. Under Obamacare, insurance companies are required to reduce out-of-pocket costs like co-pays and deductibles for low-income customers who buy silver plans through the law's online exchanges. (ACA plans come in three color tiers: gold, silver, and bronze.) In return, the government pays carriers money directly to cover the expense. However, last year a federal judge ruled that the payments were illegal, because Congress had never properly appropriated funding for them. The Trump administration is now debating whether to appeal that ruling.
Insurance companies are required to offer the reduced-cost silver plans whether or not the government compensates them, so if the subsidy money suddenly vanishes, they'll be on the hook for the difference. Of course, carriers could and would raise their premiums to make up the losses. But many analysts fear health plans would simply choose to exit the market, rather than deal with the additional chaos brought on by Trump's move.
The CBO thinks that, indeed, some insurers would decide to flee in that scenario. But it believes the damage to the market would be limited and temporary. In 2018, about 5 percent of Americans wouldn't have any insurers to buy individual coverage from. But within a couple years, carriers would figure out how to operate in the strange, new, subsidy-free landscape, and “people in almost all areas would be able to buy nongroup insurance.”
Killing the subsidies would also cause insurance premiums to rise. According to the CBO, the cost of a silver plan purchased through the exchange would likely jump 20 percent in 2018 compared with current law (the Kaiser Family Foundation came to the same conclusion back in April). The happy catch is that almost nobody, except for the government, would actualy have to pay much of the extra cost. Americans who earn less than 400 percent of the poverty line would still receive tax credits that cap their premium payments as a percentage of their income. So, a single person making $18,900 a year would end up paying $500 total for a silver plan, up from $450.
Meanwhile, the federal deficit would swell by $194 billion over a decade, since the government would be stuck subsidizing more expensive insurance.
What about the people who don't get subsidies? Many analysts and health care writers, myself included, have assumed that those upper-middle-class families would be the real victims in Trump's plot. However, the CBO thinks they might come out financially unscathed as well, because insurers are unlikely to raise prices on the health plans they sell to consumers outside of Obamacare's online marketplaces, which aren't affected by the cost sharing subsidies. Millions of Americans already buy their coverage either directly from an insurer or through a broker. If the prices on the exchanges shoot up as predicted, more of the unsubsidized population will likely foresake healthcare.gov and just call their carrier instead.
Now, here's where things get extra weird. If Trump kills the subsidies, it's possible that same insurance shoppers could actually end up with cheaper, or even free, coverage. The theory goes like this: With the subsidy payments gone, insurers won't hike premiums on all of their insurance offerings. Instead, they'll pile the cost onto the silver plans, in order to cover the cost of offering discounts on them to their low-income customers. Because Obamacare's tax credits are all pegged to the cost of silver coverage, their value will shoot up. In some cases, subsidies will more than cover the cost of a bronze plan. (The CBO isn't alone on this prediction, by the way; the consultants at Oliver Wyman made the same prediction in May.) And even people who aren't lucky enough to get insurance for nothing may be able to buy a gold plan for less than before. With subsidies shooting up, the CBO finally concludes that about a million more Americans will end up insured than if Trump hadn't tried to bring the market crashing down.
If the CBO is right, what it means is that Trump really does not have a nuclear option on Obamacare. He can try to gradually undermine it by choosing not to enforce the individual mandate, or scaling back the government's efforts to sign people up during open enrollment. But there isn't a button he can simply press to send the whole law into oblivion. This should come as a relief to Republicans and Democrats alike who feared Trump might attempt to sabotage the American health care system for political gain. Instead, they just have to worry he'll light $200 billion on fire out of spite.