Ending Obamacare payments would actually cost the government billions of dollars

If President Donald Trump follows through on his threat to end some crucial Obamacare payments to health insurers, he could actually end up costing the federal government billions of dollars.

Trump has been making veiled threats against those subsidies, known as cost-sharing reductions, all month. They are payments that the federal government makes to health insurers because the plans are reducing out-of-pocket costs, such as deductibles and copays, for lower-income Americans who buy insurance through Obamacare.

But if Trump stopped the payments, the federal government could actually end up on the hook for quite a lot more — $2.3 billion more than if the payments were allowed to continue, according to a new analysis by the Kaiser Family Foundation.

That’s because under Obamacare, health plans are required to reduce out-of-pocket costs for lower-income Americans regardless of whether they are paid these subsidies by the federal government. So if the subsidies stopped, health plans would still have to offer very low deductibles and copays to those Americans anyway. They’d then have to increase their premiums to make up for the lost revenues, if they don’t pull out of the market altogether.

And because the federal government also provides tax credits through Obamacare to lower premiums for people buying their own insurance, the government would end up eating the cost of those increased premiums.

The math works out to a $2.3 billion increase in federal spending, according to the Kaiser Family Foundation’s estimates.

The cost-sharing reduction payments were challenged in court by House Republicans, who sued the Obama administration in 2014 for making the payments without congressional approval. Initially, they prevailed in court. (This explainer has much more details on the subsidy and the lawsuits.)

The lawsuit is under appeal. But now Trump’s administration must defend the subsidies. He could stop the lawsuit at any time by dropping the appeal — and is trying to leverage that position to force Democrats to either work with him on health care or provide government funding for his promised Mexican border wall. Democrats are so far refusing to engage with him.

Trump might do it anyway, because nixing these subsidies may be his best chance to undermine the law now that the GOP’s repeal-and-replace effort has stalled. It could also drive health plans out of the market, if they no longer consider the government a reliable partner.

That could lead Obamacare to implode — though the president risks taking the blame for it himself. Killing the subsidies is essentially Trump’s nuclear option.