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What are the Expanded Health Subsidies?
The recent event dominating national news is the Inflation Reduction Act, a large bill passed by the Senate over the past weekend. If it passes the House and is signed into law, this law will be one of the largest federal acts in climate policy while also instrumental in addressing tax and healthcare reform.
Among its healthcare provisions, the bill extends health insurance subsidies for American households paying for private insurance. The bill's changes to Medicare are getting a lot of coverage, but it's worthwhile to consider the impact of extending these subsidies and what it tells us about the burden healthcare spending poses to low and middle income Americans.
The Affordable Care Act (ACA, aka Obamacare) aimed to increase the number of Americans on health insurance. It did this through a variety of methods, such as expanding Medicaid coverage and mandating large employers to give health benefits.
Another way it sought to expand coverage was giving subsidies (assistance to reduce the cost of something) to low and middle middle income Americans to pay for private health insurance. This subsidy is given in the form of a tax credit.
The American Rescue Plan (ARP) in 2021 expanded the subsidies by giving larger tax credits. These expansions were set to expire in 2023. Simultaneously, analysts throughout the health industry predicted that premiums for private health insurance were expected to increase significantly for millions of Americans at the start of 2023.
Without subsidies and premiums expected to jump as much as 10% for millions of Americans on these subsidies, some families would have to start spending an additional several hundred dollars each month to keep health insurance against the backdrop of shaky consumer confidence and high inflation.
The Inflation Reduction Act addresses this concern by extending the subsidies through 2025 to give immediate aid to these households.
The Original ACA Subsidies
Public options for health insurance and coverage through employers have historically had better consistency in their quality and generally costed less than plans purchased "individually". For the millions of Americans who did not get coverage through expansions of Medicaid or health plans through employers, the ACA established public insurance marketplaces.
To be listed on a marketplace, health plans have to demonstrate to the government that they cover what's considered essential health benefits (EHBs). Within these marketplaces, health plans are categorized as bronze, silver, gold, platinum, and catastrophic depending on the amount that members have to pay in out-of-pocket costs. The regulation of these marketplaces also gives the federal government an easy way to compare health plans and understand what a "typical" health plan costs in a region of the US.
The ACA subsidies apply to low and middle income Americans buying health plans off these marketplaces. Specifically, this income group is households between 100-400% of the federal poverty level (FPL), which is a certain level of income used to assess eligibility for government programs and quickly classify households as low or middle income.
The FPL changes each year with inflation and accounts for factors like size of the household. For Americans in the contiguous 48 states and DC in 2022, the 100-400% range covers individuals earning between $13,590 and $54,360.
The ACA's subsidies attempt to reduce the share of income that a family must pay each month in private health insurance premiums. Remember, the premium is the amount that you must pay each month to the health insurer.
Remember how I mentioned that the marketplaces helped the feds understand "typical" health plan costs in an area? The ACA uses "benchmark" plans on the marketplace to set the subsidy amount that a household can get. The goal is to set the subsidy so that a household buying the benchmark plan does not have to pay more than a certain percentage of their annual income in monthly premiums. This percentage of income is the premium cap as a share of income, and before 2021, the premium caps for families between 100 and 400% of the FPL ranged from 2-10% of earnings.
For example, for a household at 150% of the FPL, the maximum subsidy would be the difference between the benchmark plan's monthly premium and 4.15% of the annual household income.
In 2019 for a family of four, 150% of the FPL is $37,650 in annual income. The subsidy would ensure that if the family purchased a benchmark plan, they would owe no more than $1,562 each month. If the benchmark plan has a $2,000 premium, then the family gets $438 in tax credits each month to help pay for any insurance plan on the marketplace.
ARP Subsidy Expansions
The COVID-19 pandemic initial economic shock jeopardized millions' abilities to afford health insurance. For those without insurance, the potential costs for hospitalization or even ongoing medications and treatments were worrisome. The ARP sought to expand marketplace subsidies to improve affordability of health insurance amidst a public health crisis.
The subsidy expansions significantly reduced the premium caps. At the bottom end of the 100-400% of the FPL, the premium cap is 0% as opposed to 2%, and the premium cap increases much less rapidly with higher incomes.
In the following chart, we see that without the ARP provisions, the premium cap as a share of income for a 27-year old making 40k a year is just under 10% while the ARP provisions reduce the cap to around 6%.
That is an extra $1,600 that the individual doesn't have to pay for health insurance each month.
The scope of these subsidies is also incredible. Of the 14.5 million Americans who have private health insurance purchased on insurance marketplaces, 13 million get these ACA subsidies. A lot of these are Americans working for small businesses which aren't mandated to cover employees like larger businesses.
These ARP subsidies were set to expire in 2023, reverting the premium caps to pre-2021 levels. Not only would this have led to less assistance to pay for health insurance for Americans, it would have also come at a time that premiums are expected to jump as much as 10% in 2023 for reasons ranging from normal healthcare spending trends and COVID-19 to inflation.
To address these concerns of sudden increases in the burden of health insurance costs, the Inflation Reduction Act extends the ARP subsidy expansions through 2025.
Budget estimates say that the cost of keeping these expanded subsidies will be far offset by changes to Medicare's prescription drug pricing model that will introduce cost savings, strengthened IRS enforcement, and higher corporate tax revenue.
What's the Issue
The last several months have been rather uncertain for Americans. Inflation and shaky consumer confidence conflict with reports of low unemployment. To put it simply, we don't really know how well the US economy will fare in the short-term.
The extensions of the ARP subsidies by the Inflation Reduction Act may be necessary to deliver financial aid to Americans who depend on the subsidies to afford health insurance.
However, if the bill becomes law and the subsidies are extended through 2025, what will happen then?
The use of these subsidies indicates that a great deal of Americans need help affording health insurance. It's not like small businesses can be expected to give coverage to employees like their larger counterparts. Many of these organizations would buckle from the weight of paying for employers' health plans if the employer mandate were expanded to all businesses.
There may not be the same inflationary pressures on the average American household, but the cost of healthcare is probably going to keep on increasing. A Penn Wharton budget estimate considered a scenario that the subsidy expansions would be permanent.
Even with such subsidy expansions made permanent, the predicted 10-year reduction in the federal budget goes from $248 to $89 billion dollars. The net savings are still significant, and it may be necessary to extend the subsidies beyond 2025. However, that is dozens of billions of dollars that could otherwise go to investment in technology, infrastructure, education, and other areas.
Aid is necessary right now to ensure Americans have an opportunity to get health coverage. However at the same time, we must aggressively take in the industry to identify where and why costs continue to balloon. Only after addressing the root cause of rising coverage costs can we unleash the true power of the billions poured into mediocre health coverage.