Why California is adding a surcharge to healthcare premiums

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Myles Ma, CPFCSenior ReporterMyles Ma, CPFC, is a senior reporter and certified personal finance counselor at Policygenius, where he covers insurance and personal finance. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

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The health insurance exchange in California will require insurers to add a surcharge to certain policies in 2018. In an announcement Wednesday, Covered California blamed the federal government for not committing to funding cost-sharing reductions (CSRs), which help low-income healthcare enrollees cover co-pays and deductibles associated with certain on-exchange plans.

The surcharge will affect silver-level healthcare plans, which are the only ones eligible for the cost-sharing subsidies. Covered California expects most policyholders facing the surcharge won't pay more. That's because four out of five Silver policyholders get federal premium assistance, a tax credit separate from the CSRs that increases as their costs increase.

The average surcharge on rates is 12.4%, but it will vary for each insurance company. The surcharges range from 8% of premiums to 27%. Covered California had nearly 1.4 million enrollees as of March.

Those who don't get tax credits can buy almost identical coverage directly from a health insurance company, Covered California said. Buying the plan off-exchange lets you skip the surcharge, but if you qualify for the premium tax credit (meaning your income is between 100% and 400% of the federal poverty level), you have to buy a plan on-exchange to get it. About 65,000 Californians enrolled in Silver Plans don't get subsidies.

What are cost-sharing reductions?

The Affordable Care Act (ACA) requires insurers to offer plans with cost-sharing reductions to people with incomes at 100% to 250% of the poverty level. The reductions mean they pay less for deductibles and copays. The federal government pays insurers to make up for their reduced income on these plans.

The Congressional Budget Office estimates these payments cost $7 billion this year. President Donald Trump has threatened to end the payments, calling them a bailout for insurance companies. The surcharges in California are meant to cover insurers' potential losses if Trump pulls the plug.

California is expected to receive about $800 million in cost-sharing reduction payments in 2017.

"This enables Covered California and other marketplaces to provide coverage that truly matters and makes it more affordable for these consumers to see a doctor when they get sick or injured," said Peter V. Lee, executive director of Covered California.

A federal commitment to the cost-sharing payments would help lower premiums and stabilize markets, Lee said.

An uncertain market

Trump has repeatedly acted in other ways that undermine the ACA this year. The administration reduced the open enrollment period for the federal health exchanges from three months to 45 days. The signup period is now from Nov. 1 through Dec. 15. (Some states with their own exchanges have extended deadlines. Check out our state-by-state guide to open enrollment for more details.)

The administration also slashed the budget for advertising enrollment and for navigators who help people sign up. The advertising budget is going from $100 million to $10 million. A handful of outside groups are attempting to make up the difference with advertising campaigns of their own.

Despite the Trump administration's lack of support, the ACA is still effectively the law of the land and its individual mandate requires anyone who can afford health insurance, but goes without, to pay a penalty for each month they do so. Beyond that, if you don’t buy health insurance, you won’t have health insurance — which is a big risk to take, given how much medical care costs these days. You can find out more about how Obamacare works here.

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