How cost-sharing reductions work

How cost-sharing reductions work

While premium tax credits reduce the cost of a health insurance plan, cost-sharing reductions reduce the out-of-pocket exposure. Cost-sharing reductions are special subsidies that reduce the out-of-pocket maximums, deductibles, coinsurance, and copayments on Silver health insurance plans in the Marketplace.

How the cost-sharing reductions work

Cost-sharing reductions require the insurance company to increase the actuarial value of its standard Silver plans. Actuarial estimates the percentage of medical expenses a plan would cover for the average person. It can range from 0 percent (i.e., covers nothing) to 100 percent (i.e., covers everything).

As a plan’s actuarial value increases, its cost-sharing decreases. A higher actuarial value means some combination of lower out-pocket maximums, deductibles, coinsurance, and copayments.

Each insurance company participating in your state’s Marketplace must offer four versions[1] of its Silver plans. Don’t worry. When you’re shopping, you’ll only see the version that’s available to you based on your household income. The four versions of Silver plans are:

  • 70 percent version. (You’ll see this standard version if you’re not eligible for cost-sharing reductions.)
  • 73 percent version.
  • 87 percent version.
  • 94 percent version.

Each year, the government sets a cap on the out-of-pocket maximum for each version. See the chart below for the 2021 caps.

2021 out-of-pocket maximum caps for cost-sharing reductions

Note: Cost-sharing reductions are only available on Silver plans purchased in your state’s Marketplace.

Who’s eligible for cost-sharing reductions

The Marketplaces determines who is eligible for cost-sharing reductions based on household income. In general, cost-sharing reductions are available to households with incomes up to 250 percent of the federal poverty level (FPL).  In 2021, that’s roughly $65,000 per year for a family of four. 

The federal poverty level is set each year by Health and Human Services (HHS). Notice that the federal poverty level increases with household size.

2021 federal poverty level chart

To be eligible for cost-sharing reductions, you must meet several criteria:

  • You must purchase coverage through your state’s Marketplace.
  • You must meet the eligibility requirements for a premium tax credit.
  • You must have income equal to or below 250 percent of the federal poverty level.

The easiest way to see if you’re eligible for cost-sharing reductions is to create a “soft quote” for Marketplace coverage. Adjust your income higher and lower to see how your Silver plan options change. You can also use a special-purpose tool like our premium tax credit calculator, which also calculates your eligibility for cost-sharing reductions.

Notes

[1] Insurance companies must also create additional plan versions for federally recognized tribe members and Alaska Native Claims Settlement Act Corporation shareholders. If you're a member of one of these groups, you may qualify for additional cost-sharing reductions.

[2] Source: Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2021; Notice Requirement for Non-Federal Governmental Plans

[3] The original idea behind cost-sharing reductions was that insurers would front the money to fund these subsidies, and then the federal government would reimburse insurance companies for the cost. However, the Trump administration cut off federal funding for these cost-sharing reductions in 2017. To cover the cost of these subsidies going forward, insurers in most states add the cost to their other Marketplace plans in the form of higher premiums.

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