Estimating Federal Payments and Eligibility for Basic Health Programs: An Illustrative Example
How Federal BHP Payment Amounts are Determined
As noted earlier, the federal government pays 95 percent 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 geography, income, and other personal characteristics. A specified federal payment applies to each enrollee in the cell. The payment is based on a reference premium and it includes a PTC component as well as a CSR component. Each of these factors—the cell definition, the reference premium, the PTC component, and the CSR component—is discussed in turn, below.Note that this section describes the federal BHP payment methodology for 2015. CMS proposed the same methodology for 2016.1 That methodology has not been finalized for 2016, however, and it may change for 2017 and beyond.
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 percent FPL);
- Household size; and
- Coverage status (single BHP coverage, two-adult BHP coverage, etc.).
To determine both the PTC and CSR component of the federal payment for a BHP enrollee, the starting point is the reference premium. The reference premium 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. Averages within the age range are calculated based on an assumed even age distribution.
In most counties, the same QHPs are offered to all residents. If a single county is split between QHPs so that different silver plans have the second-lowest premium in different portions of the county, the portion with the most residents determines the reference premium that is used to calculate BHP payments for all county residents. Premiums for non-tobacco-users apply, since such premiums determine PTC amounts.
Generally, reference premiums for 2015 will be based on 2015 premiums, once they become known. However, a state seeking predictable federal payments before 2015 premiums were known had the option of instead using 2014 marketplace premiums, updated using a Premium Trend Factor (PTF). Such a state was required to inform CMS by May 15, 2014, that it chose this option. The PTF seeks to capture the likely increase in marketplace premiums from 2014 to 2015, based on nationally applicable trends. For 2015, CMS set the PTF as increasing premiums by 8.15%. This reflected two factors: the average increase in private insurance costs from 2014 to 2015 forecast by the CMS Office of the Actuary; and CMS’ estimates of the average impact on marketplace premiums of changes in the operation of the ACA’s transitional reinsurance program.2
Determining the premium tax credit component
Once the reference premium is established, calculating the average PTC for BHP enrollees within the federal payment cell begins by determining the percentage of household income devoted to premium payment for enrollees in the “reference” or “benchmark” plan (that is, the second-lowest-cost silver QHP). In 2015, those percentages will be 2.01% for those with incomes below 133% FPL, 3.02% at 133% FPL, 4.02% at 150% FPL, and 6.34% at 200% FPL, with percentages set on linear, sliding scales between the last three FPL “anchor points.” These percentages allow a calculation of the average (mean) payment amount, among households of a given size, for consumers within a particular federal payment cell enrolled in the benchmark plan, assuming an even distribution of households by FPL level. Subtracting that payment amount from the average reference premium for the payment cell yields an estimated average PTC.
That PTC must then be adjusted to reflect the average impact of income tax reconciliation, had BHP consumers claimed advance payment of tax credits (APTC) in the marketplace. To determine this Income Reconciliation Factor (IRF), CMS assumes that BHP eligibility will be continuous, based on household circumstances at the time of initial application, without adjustments to reflect mid-year income fluctuations. Modeling from the Department of the Treasury suggests that, across the entire caseload of BHP-eligible consumers, APTC amounts would be offset by a repayment to IRS that, on average, reduces such amounts by 5.08%. The PTC amount for each BHP payment cell is thus multiplied by an IRF of 94.92% for 2015. Finally, the resulting total is multiplied by 95% to determine the PTC component of the federal BHP payment.
Determining the cost-sharing reduction component
The value of the CSR component in the marketplace equals the total health care claims for essential health benefits (EHBs) paid by the increase in actuarial value resulting from the CSR. The first step in calculating this component is thus estimating the amount of total health care claims provided by the reference-premium plan.
Only some of the premium pays claims costs. To exclude administrative and other non-claims costs, the Factor for Removing Administrative Costs (FRAC) is set at 80%. Put differently, the federal payment methodology assumes that, on average, 80% of the reference premium is used to pay EHB claims. This is based on the approach taken by CMS in defining CSR advance payments for QHPs in 2015.
QHP enrollees will pay some EHB costs. With a silver-level plan, Actuarial Value (AV) is 70%, so consumers pay, on average, 30% of such claims costs. Accordingly, the total amount of EHB claims is the amount paid by the plan, divided by 70%. Put differently, it is the plan’s EHB claims amount (that is, the reference premium times 0.8) multiplied by 1.43, which is referred to as the AV factor.
Unlike PTCs, which reflect the premium charged to non-smokers in states that permit higher QHP premiums for tobacco users, CSRs include claim costs that result from tobacco use. Accordingly, the reference premium calculated as described above must be increased to reflect the average effect of tobacco use on BHP claims. Such a Tobacco Rating Adjustment Factor (TRAF) takes into account tobacco utilization levels by BHP enrollees, shown by state-specific data from the Centers for Disease Control and Prevention (CDC), which includes information about tobacco use rates by age.3 To estimate the average claims costs for tobacco use that are not included within the reference premiums charged to non-users, the TRAF also considers the weighted average difference, among benchmark plans, in premiums charged to tobacco users and non-users. For example, if in a particular state, benchmark plans charge 15 percent more, on average, for tobacco users than for non-users, and 10 percent of adults age 25-34 use tobacco, then the TRAF for BHP adults age 25-34 would increase EHB claims by .15 x .10 or .015.
If QHP enrollees with incomes at or below 200% FPL receive CSRs, they will pay less out-of-pocket for health care services. As a result, they will use more care, and their claims will increase. The Induced Utilization Factor (IUF) takes this effect into account. Based on CMS analysis, consumers who move from silver-level AV of 70% to either 87 or 94% AV—the two minimum AV levels BHP consumers would receive in the marketplace—increase average utilization by 12%. Accordingly, for BHP consumers, regardless of income, the IUF is 12% for 2015.
Taken together, these factors multiplied by the applicable reference premium determine the average claims costs that would have been incurred by BHP consumers, had they received CSRs in the marketplace. The value of the CSR in the marketplace would be the increased share of those claims paid by the federal government because of the CSR. For a consumer above 150% FPL, that share is 17% (that is, the difference between 87% AV provided by CSRs and the underlying 70% AV furnished by silver-level coverage). For a consumer below 150% FPL, it is 24% (the difference between 94% AV and 70% AV).
This penultimate factor—the Change in Actuarial Value—shows that income plays a much simpler role in determining the CSR component of federal BHP payments, compared to the PTC component. All that matters, for purposes of the CSR component, is whether the consumer’s income is above or below 150% FPL. Neither household size nor precise FPL level matters, once that basic threshold question is resolved.
The number that results from the above calculations shows the value of the CSR that BHP enrollees would have received in the marketplace. To determine the CSR component of the federal BHP payment, that number must be multiplied by 95%.