The 2023-24 Budget

Assessment of Covered California
Budget Solution

This post provides background on various state and federal actions impacting premium subsidies for Covered California (California’s health benefit exchange) before providing an overview and assessment of the Governor’s proposed budget solution regarding the California Premium Subsidy program.

Background

Federal Patient Protection and Affordable Care Act (ACA) Substantially Changed Individual Health Insurance Market Landscape. The ACA—most of the provisions of which became effective in 2014—brought about significant changes to the way that health insurance coverage is provided in California. Notably, the ACA provided for the establishment of state health benefit exchanges, such as Covered California. The ACA also included provisions intended to encourage individuals to enroll in health coverage and improve affordability. Specifically, the ACA created subsidies that reduce monthly premium costs for most households that purchase health coverage through a health benefit exchange like Covered California. The extent of subsidies consumers can receive vary based on the health plan they choose and eligibility criteria such as household income. For example, households with incomes above 400 percent of the federal poverty threshold would not be eligible for the subsidies.

Various State and Federal Actions on Premium Subsidies Since ACA’s Enactment. As summarized in Figure 1, there have been various state and federal actions in recent years to increase the availability of premium subsidies beyond what was provided by the ACA. Both the state and federal subsidy programs have been designed to limit the amount households would need to pay toward premiums as a share of household income. In addition, the recent federal actions that have enhanced the level of federal premium subsidies have provided more extensive subsidies than the state’s programs. As a result, the federal subsidies have largely supplanted the state subsidies. We provide more details on the specific state and federal actions regarding premium subsidies, and the interactions between the state and federal subsidies, in the following paragraphs.

State Established Three-Year Premium Subsidy Program Beginning in 2020. The subsidy program was designed as a three-year program from 2020 through 2022 that was designed to further reduce premium costs for certain Covered California enrollees beyond the level of support received from the existing federal premium subsidies and expand eligibility to households making up to 600 percent of the federal poverty level. To support the state subsidy program, the Legislature approved $304 million General Fund annually between 2020 through 2022.

Enhanced Federal Premium Subsidies Approved for 2021 and 2022, Supplanting State Subsidies. The American Rescue Plan Act was passed by Congress in 2021 in response to COVID-19. A provision of this act temporarily enhanced federal support for premium subsidies for coverage purchased on health benefit exchanges in 2021 and 2022. (As we will note later, the enhanced federal premium subsidies were later extended through 2025). The enhanced federal premium subsidies substantially lowered the costs of premiums Californians need to pay for plans purchased through Covered California. The enhanced federal support effectively supplanted the state premium subsidies because it reduced premium costs as a percent of income below the thresholds established in the state program. This freed up General Fund resources that otherwise would have gone toward the state premium program. As part of the 2021‑22 budget package, Chapter 143 of 2021 (AB 133, Committee on Budget) moved $333.4 million of this freed-up General Fund to the Health Care Affordability Reserve Fund (HCARF) to support future affordability efforts in Covered California.

Legislature Approved Ongoing California Premium Subsidy Program Beginning in 2023. As part of the 2022‑23 budget package, the Legislature approved the California Premium Subsidy Program which was intended to partially replace the level of subsidies consumers received from the enhanced federal subsidies that, at the time, were set to expire at the end of 2022. The California Premium Subsidy Program would use funding from the HCARF in 2022‑23. Beginning in 2023‑24, the program would be supported on an ongoing basis with General Fund. In the event that the enhanced federal premium subsidies were extended, the budget package allowed for the funds to be used for an annual financial assistance program to further improve the affordability of coverage through Covered California for households with incomes at or below 600 percent of the federal poverty level. Aside from premium subsidies, the program could provide other forms of financial assistance, such as reducing deductibles or other out-of-pocket expenses consumers might incur when receiving health care services.

Enhanced Federal Premium Subsidies Extended Through 2025, Supplanting State Subsidies. Shortly after the state’s 2022‑23 Budget Act was enacted, Congress approved legislation that extended the enhanced federal premium subsidies through 2025. Because the enhanced federal support reduces premium costs as a percent of income below the thresholds established in the California Premium Subsidy Program, the extension of the enhanced federal premium subsidies temporarily supplant the state’s premium subsidies—freeing up the associated state funding.

Budget Proposal

Temporarily Shifts Reserve Fund Balance to General Fund and Delays General Fund Appropriation for California Premium Subsidy Program. The Governor proposes temporarily shifting the $334 million from the HCARF to the General Fund. The funds would be returned to the Reserve Fund in 2025‑26, once the enhanced federal support for premium subsidies expires. In addition, rather than providing $304 million General Fund annually beginning in 2023‑24 to support the California Premium Subsidy Program, the Governor’s budget proposes to delay providing ongoing General Fund for this purpose until 2026‑27 (after exhausting the balance in the HCARF in 2025‑26). The administration states that these funds are not needed while the enhanced federal premium subsidies are in place and that the proposal will help the state address its current budget condition. (We discuss the state’s overall budget condition in The 2023‑24 Budget: Overview of the Governor’s Budget.)

Assessment

No Direct Impact to Existing Level of Affordability for Covered California… Because the enhanced federal premium subsidies supplant the state’s premium subsidies, the Governor’s proposal will not impact existing levels of affordability for Covered California consumers. The state’s premium subsidy program would resume once the enhanced federal premium subsidies expire in December 2025—initially using funds returned to the HCARF, followed by General Fund in subsequent years.

…But Would Not Provide Funding for Additional Financial Assistance. While the proposal would not impact existing affordability, it would not provide funding for any additional financial assistance to Covered California consumers. We note that the 2022‑23 Budget Act provides provisions allowing the funding for the California Premium Subsidy Program to be used for such purposes in the event the enhanced federal subsidies were extended.

Issues for Consideration

Proposal Seems Reasonable, but Might Not Align With Legislative Priorities. Given the state’s budget condition in 2023‑24 and through the multiyear, we find that this proposal seems like a reasonable approach to helping resolve the budget shortfall without reducing existing levels of affordability assistance for Covered California consumers. However, we note that the 2022‑23 budget package included provisions to use the balance in the HCARF to provide additional financial assistance to Covered California consumers in the event the enhanced federal premium subsidies were extended beyond 2022. As such, the proposal does not appear to be consistent with past priorities of the Legislature. If, in contrast to the Governor, the Legislature chooses to maintain funding for the California Premium Subsidy Program, the state’s budget shortfall would increase and necessitate additional budget solutions in other areas of the budget to accommodate it.