President Trump’s decision to stop paying subsidies to insurance companies that cover many low-income Americans is his most overt action so far to undermine the Obamacare markets, which reopen for sign-ups on Nov. 1.
But the timing of the announcement, late Thursday night, means the ending of subsidies may be less disruptive than it might have been months ago, when he began threatening such action. It still could cause insurers to leave some Obamacare markets and places where customers have no insurance choice, but it probably won’t cause the widespread meltdown it might have, if it had happened earlier this year.
The subsidies help insurance companies provide discounts on deductibles and other cost-sharing for consumers, which they are required to do by law. When Congress wrote the Affordable Care Act, it made clear that insurers were entitled to the payments, but it failed to provide a clear funding mechanism. The uncertainty in the legislative language opened the way for a lawsuit, and now the president’s decision.
In theory, precipitously ending the payments could lead to catastrophic market failures. Insurers set prices for their insurance this year, assuming the payments would continue to be made, and have no ability to raise them midyear to cover their losses. But, because the president has repeatedly signaled that the payments might cease and we are nearing the end of 2017, many plans set their prices for next year’s products assuming the subsidies would not be paid.
A few months ago, we called those increased prices an uncertainty tax. The uncertainty is gone now. But the conservative planning of the insurance industry means that many insurers can afford to keep offering insurance, even after the president cuts off the funding. Plans that priced for the threat will take a small haircut this year, but they can still make money, even without the payments, next year.
The Congressional Budget Office offered an estimate about what would happen if the president stopped making the payments, and it’s instructive. It estimated that, in the short term, the decision would cause instability: 1 million additional people would become uninsured in 2018, prices for insurance would rise by 20 to 25 percent, and insurers would drop out of some parts of the country. But, in the long run, the budget office thought that health plans and state insurance regulators would hack their way around the problem, resulting in an uninsured rate that would be even lower than it is under current law. The catch: It would end up costing the government more money in subsidies that help lower-income people pay their premiums, about $6 billion this year and $26 billion by the end of a decade.