ObamaCare bump doesn’t help those who need it

The March 2021 stimulus bill greatly expanded subsidies for ObamaCare health insurance plans.  But this increase in subsidies is due to expire at the end of 2022, and congressional Democrats have been looking to extend it as part of the proposed Build Back Better Act.

BBB advocates argue that renewing the hike in subsidies is necessary to maintain the basic affordability of health insurance to low-income, working adults. Yet, subsidized ObamaCare plans already cost enrollees much less than individuals typically contribute to employer-sponsored insurance, and the Affordable Care Act (ACA) specifically prohibits most workers with an offer of employer coverage from receiving them — excluding those who need help the most.

Subsidies that automatically increase in proportion to premiums have been shown to push up prices. Whatever the merits of the stimulus legislation, in terms of boosting aggregate demand, the case for extending its costly bump in subsidies into an era of inflation is therefore very weak. 

From 2014, the Affordable Care Act required health insurers to cover individuals with major pre-existing conditions on the same terms as those who signed up before they got sick. The upshot of this was that millions of healthy people stopped buying health insurance, and premiums on the individual market more than doubled from 2013 to 2017. Yet, the market was saved from complete collapse by the legislation’s establishment of federal subsidies for the purchase of insurance, which automatically expand to limit premiums and out-of-pocket costs as a share of income.  

To curb the fiscal cost of this provision, Congress had limited eligibility for ACA subsidies to households with incomes less than 4 times the Federal Poverty Level ($54,360 for an individual in 2022, and $111,000 for a household of four) who lacked an offer of “affordable” health insurance from their employer (defined as a premium less than 9.61 percent of household income). But higher earners remained fully exposed to soaring premiums — creating political anxiety for Democrats, who had been enthusiastic about the legislation.

Having recaptured Congress for the first time since the ACA’s implementation, Democrats used the March 2021 American Rescue Plan Act (ARPA) to eliminate the income cap on eligibility for subsidies. That stimulus bill also greatly expanded the magnitude of assistance. Whereas federal subsidies under the ACA would have paid 22 percent of the cost of insurance for a 28-year-old earning $40,000, under ARPA it would pay 61 percent. Individuals earning $20,000 had been required to contribute up to 4 percent of their income in premiums under the original ACA, but under ARPA the federal government would pick up the whole tab. 

To limit the scorable fiscal cost, ARPA’s subsidy hike was set to expire at the end of 2022.  Assessing the proposed Build Back Better Act, the Congressional Budget Office estimated that making it permanent would cost $220 billion over the first 10 years. The exclusion of those with an offer of “affordable” employer-sponsored insurance coverage is even more significant.

In 2020, only 18 million Americans received health insurance from the individual market, but 164 million were covered by their employers — only 5 million of whose plans exceeded the “affordability” threshold. While the tax subsidy for employer-sponsored insurance would be worth around $4,000 to a family of four with a household income of $80,000, those who lacked an offer of “affordable” coverage from their employers were entitled to around $9,000 in federal subsidies for the purchase of an ACA plan from the exchange. ARPA expanded this to around $12,000.

Without the exclusion of those who have an offer of employer-sponsored insurance, the fiscal cost would be astronomic. But further inflating subsidies for those on the individual market makes little sense.

According to the Medical Expenditure Panel Survey, in 2019 the median post-subsidy premium for a single adult earning between $12,500 and $25,000 was already much lower on the individual market ($858) than the average employee contribution to employer-sponsored insurance ($1,560). For those earning $37,500 to $50,000, the gap was less, but subsidized coverage on the individual market was still cheaper ($1,536 vs. $1,678).

ARPA’s bump in subsidies for ObamaCare plans is, therefore, not necessary to maintain the basic appeal of the individual market. Nor is a subsidy that excludes the workers who currently face the highest premiums a good way to make health insurance affordable for people who most need help.

In fact, it is likely to have the opposite effect. Subsidies that automatically increase with premiums tend to increase prices. Indeed, one study estimated that less than half of ACA subsidies are passed through to intended beneficiaries. By further expanding subsidies, such that the federal taxpayers will pay 100 percent of the premiums for anyone with an income less than $20,000, ARPA potentially makes this problem far worse — providing a bonanza for insurers to enroll individuals who never have had interest in purchasing or using health insurance, while further loosening the few remaining checks on the growth of health care costs.

Chris Pope is a senior fellow at the Manhattan Institute.