The ACA’s Basic Health Program Option: Federal Requirements and State Trade-Offs
Federal Funding of State BHPs
As noted earlier, the federal government pays 95% of what BHP enrollees would have received in marketplace subsidies, had the state not implemented BHP. To calculate that amount, the federal government puts each BHP enrollee into a federal payment cell, which is defined based on county of residence, income, and other consumer characteristics. Before the year begins, the federal government announces the per enrollee amount it will pay for BHP enrollees in each payment cell.When a state is about to start its BHP, the state projects quarterly enrollment levels in each cell. If those projections are deemed reasonable, CMS makes corresponding deposits into the state’s BHP Trust Fund. Once actual enrollment data become available, CMS adjusts payment amounts so that, over time, the funding received by a state reflects actual rather than projected enrollment within each federal payment cell.This section begins by explaining how federal payment cells are defined. It then touches on the timing for setting federal payment amounts. Finally, it uses one example to illustrate how CMS determines payment rates for each cell.
Federal payment cells
Each BHP enrollee falls within a “federal payment cell” that is defined by the following characteristics of its members:
- County of residence;
- Age range (0-20, 21-34, 35-44, 45-54, 45-54, or 55-64);
- Income range (0-50, 51-100, 101-138, 139-150, 151-175, or 176-200% FPL);
- Household size; and
- Coverage status (single BHP coverage, two-adult BHP coverage, etc.).
The timing for defining federal payments
As a general rule, the federal payment amounts for each cell—that is, the amount the federal government will pay for each BHP enrollee who fits within the cell—will be set prospectively, before the start of a BHP program year. The only uncertainty facing a state is thus the number of enrollees in each cell. This policy seeks to offer states fiscal predictability. If CMS changes its methodology for determining federal payment, those changes will be implemented only prospectively, for years after the change is made; they will not put into question funds already claimed by a state.
The precise methodology for calculating payments per cell may vary from year to year as CMS gathers experience with the operation of marketplaces and can better predict the subsidies that consumers would have received there. Proposed annual methodologies will be published in October, 15 months before the January start of the applicable BHP program year. The following February, 11 months before the BHP program year begins, annual methodologies will be finalized and federal payment amounts will be published, providing some lead time for state budget planning.
For 2015, the first year of potential BHP operation, the final payment methodology was published in early March, slightly later than is expected for future years. The timing of CMS publication of 2015 payment amounts will depend on various state choices, as explained in below. In the meantime, CMS will provide states with technical assistance to help project federal payment levels.
There are two exceptions to the general rule that federal payment amounts for each cell are not adjusted retrospectively. First, if a federal payment amount reflects an arithmetic error, the error will be corrected. Second, for 2015, a state can request a retrospective adjustment that, after the end of 2015, will change marketplace premiums to compensate for the impact of BHP on the risk level within the individual market. This option reflects unique circumstances. Marketplaces and BHPs have not operated before, which makes it impossible for CMS to prospectively adjust for this factor. Such retrospective, population-wide risk adjustments are only provided for in the 2015 payment methodology, and CMS has not announced whether or not they will be allowed in future years.
Determining the payment amount for each cell
The federal government pays the same amount for each BHP enrollee within a federal payment cell. That amount includes a premium tax credit (PTC) component plus a cost-sharing reduction (CSR) component. Those components equal 95% of what the average BHP beneficiary in the cell would have received in PTCs and CSRs, respectively, if the state had not implemented BHP and the beneficiary had enrolled in the second-lowest cost silver QHP rather than BHP.
Throughout the rest of this section, we will use an example payment cell to illustrate CMS’ calculations. The illustrative payment cell includes all BHP enrollees with the following characteristics:
- Residence in Peoria County, IL;
- Age 45-54;
- Income between 139 and 150% FPL, inclusive;
- One-person household size; and
- Enrollment in single BHP coverage.
The reference premium
The starting point for defining the federal payment is the reference premium—that is, the average premium that would have been charged by the second-lowest-cost silver plan in 2015 to non-smokers in the BHP beneficiary’s county and age range if the state had not established a BHP program. The average is calculated assuming that enrollees are evenly distributed by age within the payment cell. Premiums for non-smokers are used because PTCs are based on such premiums.
A BHP state makes two choices in deciding how CMS will determine its reference premiums in 2015:
- As its first choice, a state could either:
- Begin its calculations with actual marketplace premiums for the 2015 program year; or
- Begin its calculations with 2014 marketplace premiums, trended forward to 2015 based on expected national changes to marketplace premiums from 2014 to 2015. CMS projects that national marketplace premiums will rise 8.15%, reflecting increased private insurance costs and changes in the ACA’s transitional reinsurance program. To elect this second option, however, a state was required to inform CMS by May 15, 2014—a date that has now passed.
- For its second choice, a state can either:
- Submit a protocol proposing a method for adjusting marketplace premiums retrospectively, after the end of 2015, to compensate for the impact of BHP implementation on average risk levels in the 2015 individual market; or
- Not adjust marketplace premiums to reflect the impact of BHP implementation on average risk levels in the individual market.
In our example, we assume that Illinois chooses to use 2014 marketplace premiums trended forward to 2015 and not to adjust marketplace premiums to reflect the effect of BHP on insurance risk levels. Calculation of the reference premium thus begins with 2014 QHP premiums. In 2014, the second-lowest-cost silver QHP in Peoria County, Illinois, charges non-smoking adults age 45-54 an average of $345 a month for single coverage (Table 3). Increasing the $345 premium for 2014 by 8.15% yields a 2015 reference premium of $373.1
| Table 3. Monthly Premiums for Benchmark QHP in Peoria County, IL, for non-smoking, single adults ages 45-54, 2014 | |
| Age | Premium |
| 45 | $282 |
| 46 | $293 |
| 47 | $306 |
| 48 | $320 |
| 49 | $334 |
| 50 | $349 |
| 51 | $365 |
| 52 | $382 |
| 53 | $399 |
| 54 | $417 |
| Average 45-54 | $345 |
| Source: Premium quotes from Healthcare.gov as of March 30, 2014. Averages are calculated assuming an even age distribution, as described in March 2014 BHP federal payment notice. | |
Determining the PTC component
The next step is determining the percentage of household income QHP enrollees would spend on premiums for the “reference” or “benchmark” plan (that is, the second-lowest-cost silver QHP). For example, those percentages will be 3.0% at 133% FPL and 4.0% at 150% FPL in 2015, varying on a sliding scale between those “anchor points.” The average payment amount is then calculated for people in the federal payment cell, assuming an even distribution of households by FPL level. Subtracting that payment from the average reference premium yields an average PTC amount, approximating what consumers would have received in the marketplace.2 Note: the Internal Revenue Service recently released updated percentages for 2015, which are slightly higher than those used for 2014—for example, consumers at 133% FPL must pay 3.02% of income, rather than 3.0%, for benchmark coverage, and the contribution for those at 150% FPL has gone from 4.0% to 4.02% of income.3 For clarity’s sake, the body of this paper will continue to use the simpler percentages that applied in 2014.
Here is how that calculation works in our example. For one-person adult households between 139-150% FPL, the average enrollee share of the premium payment for a benchmark plan is $52, assuming the adults are evenly distributed by FPL level (Table 4). The resulting advance PTC for our group of middle-aged adults in Peoria County is $321. That is the difference between the reference premium of $373, which reflects the average cost of coverage based on the group’s age and geography, and the average payment amount for benchmark coverage of $52, which reflects their FPL and household size.
| Table 4. Monthly premium payments required for the benchmark plan from single adults who have various incomes as a percentage of FPL: 2015 | ||||
| FPL | Monthly Income | Monthly Payment | ||
| Share of Income | Dollars | |||
| 139% | $1,352 | 3.4% | $45 | |
| 140% | $1,362 | 3.4% | $46 | |
| 141% | $1,371 | 3.5% | $48 | |
| 142% | $1,381 | 3.5% | $49 | |
| 143% | $1,391 | 3.6% | $50 | |
| 144% | $1,400 | 3.6% | $51 | |
| 145% | $1,410 | 3.7% | $52 | |
| 146% | $1,420 | 3.8% | $53 | |
| 147% | $1,430 | 3.8% | $55 | |
| 148% | $1,439 | 3.9% | $56 | |
| 149% | $1,449 | 3.9% | $57 | |
| 150% | $1,459 | 4.0% | $58 | |
| Average, 139-150% FPL | $52 | |||
| Notes: Assumes 2014 FPL levels, which will apply during the start of open enrollment for 2015. Premium payment levels for benchmark coverage are calculated as described in March 2014 BHP federal payment notice (3% of household income at 133% FPL, 4% of household income at 150% FPL, with premium payments increased on an even linear scale between those income levels). Averages assume an even distribution of income among households within each payment cell, by FPL level, as described in CMS payment notice. | ||||
The PTC is then adjusted to reflect the average impact of income tax reconciliation, had BHP consumers claimed advance payment of tax credits in the marketplace. CMS estimates that, for the average BHP enrollee nationally, such reconciliation would reduce PTCs by 5.08%. (This finding reflects CMS’ assumption that BHP eligibility will not change at all during the year, regardless of actual income fluctuations.)
Finally, the resulting PTC amount is multiplied by 95% to determine the PTC component of the federal payment for each BHP enrollee in this cell.
In our example, making that 5.08% reduction to the $321 PTC amount yields $305. This is the estimated average amount that, after adjustment for tax reconciliation effects, individuals within this payment cell would have received in premium tax credits per month, if they had enrolled in QHPs rather than BHP in 2015. Illinois’s federal payment amount for this cell thus includes a PTC component equal to 95% of $305, or $290.4
Determining the CSR component
The value of the CSR in the marketplace equals the portion of the total EHB health care claims for BHP enrollees that is paid by the increase in actuarial value resulting from the CSR. The CSR component of the federal BHP payment is then set to equal 95% of the value of the CRS in the marketplace. We describe each of these steps below.
The calculation of CSR value begins with an estimation of the average EHB health care claims covered by a silver-level plan charging the reference premium. To exclude administrative and other non-claim costs, CMS estimates that 80% of the reference premium is used to pay BHP claims, so 20% is subtracted from the reference premium.
Consumers also share in paying EHB claims through deductibles, copayments, and other cost sharing. Silver-level plans have an actuarial value of 70%, which means that, for an average population, the plans pay 70% of all covered claims. To add the amount of claims paid by the plan and consumers, the adjusted reference premium (less the 20% reduction for non-claims costs) is then divided by 70%.
As noted earlier, the reference premium amount in the payment cell used in our example is $373 per month. Excluding the 20% of the premium related to administrative and other non-claim costs results in an average EHB claims amount of $298.40. To determine the total amount of all covered claims, including payments from both the plan and the consumer, we divide $298.40 by 70%, resulting in a total EHB claims amount of $426.29.
These claims estimates are based on the reference premium that is charged for non-smokers. However, CSRs, unlike PTCs, pay the costs of tobacco-related care. CMS therefore increases the claims amount to reflect both the percentage of BHP enrollees who use tobacco (as shown by data from the Centers for Disease Control and Prevention, taking into account age and state)5 and the estimated impact of tobacco use on health care costs (as shown by the difference between weighted average QHP benchmark premiums charged to tobacco users and non-users).6
For purposes of our example, let us assume that, for Illinois residents age 45-54, CMS sets this tobacco adjustment to require a 30% average increase in EHB claims above the amount for non-tobacco users. Adding 30% to $426.29 (that is, multiplying it by 1.3) results in a total average EHB claims amount of $554.17.
One final adjustment is made to reflect the increased utilization resulting from the reduced cost-sharing faced by BHP enrollees. The calculations above reflect utilization of silver-level coverage, with 70% actuarial value. However, the federal payment cell in our example consists of consumers with incomes between 139 and 150% FPL, who will receive CSRs that raise the actuarial value of their coverage to 94%. This will reduce their cost-sharing, which in turn will increase their utilization. CMS estimates that such increased utilization will increase total claims by an average of 12%. Accordingly, the claims cost estimate for silver coverage must be increased by 12%, to reflect induced utilization.
Increasing the total claims amount in our example by 12%, to account for induced utilization resulting from lower cost-sharing, raises the average EHB claims per consumer to $620.67.
As stated earlier, the value of the CSR component equals the increased share of health care claims paid by the federal government as a result of the CSR. The CSR increases the actuarial value of the reference plan by 24% for BHP enrollees with incomes at 133-150% FPL (AV = 94%) and by 17% for BHP enrollees with incomes at 150-200% FPL (AV = 87%). For those two groups the EHB claims costs estimates developed as described above are thus multiplied by 24% and 17%, respectively, to determine the CSR’s value, had BHP enrollees received QHP coverage in the marketplace.
Finally, the resulting estimate of CSR value is multiplied by 95% to determine the CSR component of the federal payment for each BHP enrollee in this cell.
Our example involves BHP enrollees at or below 150% FPL. Accordingly, CSRs in the marketplace would have increased actuarial value from 70% to 94%, paying 24% of total claims. The average EHB claims amount in the marketplace for consumers in this payment cell is $620.67 per month. The CSR’s value in the marketplace would thus be 24% of such claims, or $148.96 per month. The CSR component of the BHP payment is 95% of that CSR value, or $141.51 a month—$142, rounded off to the nearest dollar.
The total monthly federal BHP payment for each enrollee in this example payment cell equals the $290 PTC component plus the $142 CSR component, or $432.
| Calculating the Federal BHP Payment: A Recap |
Reference premium for 2015
Premium Tax Credit Component
Cost Sharing Reduction Component
Total Monthly Federal BHP Payment for Enrollees in Payment Cell
|