The March 2021 stimulus bill significantly expanded subsidies for ObamaCare health insurance plans. But that increase in grants is due to expire at the end of 2022, and congressional Democrats have sought to extend it as part of the draft. Building back better.
BBB advocates argue that the renewal of the subsidy hike is necessary to maintain basic affordability of health insurance for low-income working adults. Yet subsidized ObamaCare plans already cost enrollees far less than individuals typically contribute to employer-sponsored insurance, and the Affordable Care Act (ACA) specifically prohibits most workers with an offer of coverage by the employer to receive them – excluding those most in need of assistance.
Subsidies that automatically increase with premiums have been shown to drive up prices. Whatever the merits of the stimulus legislation, in terms of stimulating aggregate demand, the case for extending the costly subsidy hike into an inflation era is therefore very weak.
Since 2014, the Affordable Care Act requires health insurers to cover people with major pre-existing conditions on the same terms as those who signed up before falling ill. The result was that millions of healthy people stopped buying health insurance and premiums in 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 extend to limit premiums and disbursements as as revenue share.
To limit the fiscal cost of this provision, Congress limited eligibility for ACA grants to households with incomes less than 4 times the Federal poverty level ($54,360 for an individual in 2022 and $111,000 for a four-person household) who lacked an offer of “affordable» their employer’s health insurance (defined as a premium less than 9.61% of household income). But high earners remained fully exposed to soaring bonuses, creating political anxiety among Democrats, who had been enthusiastic about the legislation.
After taking over Congress for the first time since implementing the ACA, Democrats used the March 2021 US Bailout Act (ARPA) to eliminate the income cap on grant eligibility. This stimulus bill also dramatically expanded the scale of assistance. While the federal grants under the ACA would have paid 22% of the cost of insurance for a 28-year-old earning $40,000, under ARPA they would pay 61%. People earning $20,000 had to contribute up to 4% of their income in bonuses under the original ACA, but under ARPA the federal government would take the entire tab.
To limit the significant fiscal cost, the ARPA grant hike was set to expire at the end of 2022. cost $220 billion over the first 10 years. Even more significant is the exclusion of those with an offer of “affordable” employer-sponsored insurance coverage.
In 2020only 18 million Americans received health insurance from the individual market, but 164 million were covered by their employers — only 5 million whose plans exceeded the “affordability” threshold. While the tax subsidy for employer-sponsored insurance was worth about $4,000 for a family of four with a household income of $80,000, those without an “affordable” coverage offer of their employer were entitled to about $9,000 in federal subsidies to purchase an ACA plan from the scholarship. ARPA extended this amount to approximately $12,000.
Without excluding those with an employer-sponsored insurance offer, the tax cost would be astronomical. But inflating subsidies further for those in the individual market makes little sense.
According to Medical Expenditure Panel Surveyin 2019 the median post-subsidy premium for a single earning adult between $12,500 and $25,000 was already much lower in the individual market ($858) than the average employee premium for employer-sponsored insurance ($1,560). For those earning between $37,500 and $50,000, the gap was smaller, but subsidized coverage in the individual market was still cheaper ($1,536 versus $1,678).
The increase in ARPA subsidies for ObamaCare plans is therefore not necessary to maintain the basic attractiveness of the individual market. A subsidy that excludes workers who currently face the highest premiums is also not a good way to make health insurance affordable for those who need help the most.
In fact, it is likely to have the opposite effect. Subsidies that automatically increase with premiums tend to increase prices. Indeed, a study estimate that less than half of ACA grants are passed on to intended beneficiaries. By further increasing subsidies, so that federal taxpayers pay 100% of premiums for anyone with an income below $20,000, ARPA potentially exacerbates this problem – giving insurers a boon to enroll people who have never had an interest in buying or using health insurance, while further relaxing the few remaining checks on the growth of healthcare costs.
Chris Pope is a Principal Investigator at the Manhattan Institute.