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The Hidden Obamacare Savings Millions Might Miss Out On

By Dan Caplinger – Sep 26, 2015 at 8:40AM

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Most people know about some of the Affordable Care Act's subsidies, but few know the whole story. Get it here.

Source: Nancy Pelosi, Flickr.

The Patient Protection and Affordable Care Act has made healthcare coverage affordable for many Americans who didn't have insurance before. Yet the legislation has many elements that are difficult for ordinary people to understand, and one of the most confusing elements of Obamacare has to do with the way in which it provides financial incentives for people to get the coverage they need. In particular, Obamacare actually has two different types of subsidies, and while one of those provisions has been in the spotlight for a long time, the other has largely hidden under the radar. As a result, millions of Americans are missing out on some of the benefits that Obamacare would provide. Let's discover more about this hidden Obamacare benefit and why it is that so many aren't taking advantage of it.

Obamacare offers two subsidies
Most people who have followed the Affordable Care Act are familiar with the premium subsidies that it offers low-income participants. With the provision having received Supreme Court review, these subsidies got national attention, and the way in which the premium subsidy works is readily apparent to participants from the moment they get coverage.

The way that premium subsidies work is pretty straightforward. Depending on your income, those who earn between 100% and 400% of the federal poverty level can qualify to receive subsidies. This provision is set up as a tax credit, but many insurance companies offer an advanced premium credit that they apply directly to reduce the up-front charges for participants. Moreover, participants can choose a variety of different plans from various coverage tiers and still qualify for the subsidy.

By contrast, the lesser-known way in which Obamacare participants can cut their healthcare expenses is through what's known as the cost-sharing reduction. Under this provision, Obamacare policyholders who earn between 100% and 250% of the federal poverty level can receive a different type of financial assistance. Specifically, this provision applies not to the premium cost but rather to the out-of-pocket costs under the policies themselves, including deductibles, copayments, and coinsurance amounts.

Confusion over cost-sharing reduction
There are several problems with the cost-sharing reduction. The most obvious is that the Affordable Care Act limits eligibility for cost-sharing reductions to those who sign up for silver-tier coverage. For those who seek to save the most possible on their premiums by choosing bronze-tier healthcare policies, the result is missing out on cost-sharing reductions entirely.

Yet even figuring out the value of cost-sharing reduction provisions can be difficult. In assessing how much a given person is eligible to receive, the federal government requires health insurance companies to create variants of silver-tier plans that affect how much of a policyholder's anticipated healthcare costs the policy will cover. For those who earn 100% to 150% of the poverty level, the coverage has to be adjusted to cover 94% of anticipated costs rather than the standard 70% for silver plans. Those who earn 150% to 200% of the poverty level get coverage for 87% of their costs, while those between 200% and 250% of the poverty level get a 73% coverage policy.

Exactly how companies implement these provisions is generally up to them. However, one limit is specifically set: Rather than the $6,600 limit for out-of-pocket costs for single coverage, cost-sharing reduction cuts the limit to $2,250 for those earning 100% to 200% of poverty level and $5,200 for those earning 200% to 250% of poverty level.

Beyond the out-of-pocket limit, the vagueness in implement cost-sharing reductions makes it very difficult for even the most sophisticated policyholders to compare policy options and find the best choices for their situations. Yet the savings can be substantial, with the typical savings amounting to hundreds or even thousands of dollars over the course of a year depending on income level. Those savings can more than offset the added costs of having a silver-tier plan compared to cheaper bronze-tier coverage.

Don't miss out
According to a study from the Robert Wood Johnson Foundation, nearly 14 million people are likely to become eligible for cost-sharing reduction subsidies by next year. Yet without the proper preparation, many of them could miss out on the savings they'd otherwise receive. It's critical that the government make greater efforts to explain the cost-sharing reduction mechanism in order to ensure that more participants get all the assistance they deserve under the Affordable Care Act.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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