Expanding Obamacare subsidies under the Inflation Reduction Act will prevent premiums from rising more than 50% on average for 13 million people, but they also are likely to lead to more health-care inflation and fewer small businesses offering health insurance, according to health-care analysts.
The bill (H.R. 5376) passed Aug. 7 by the Senate—supported by President Joe Biden and likely to be passed this week by the House—extends the Affordable Care Act subsidies for three years. The enhanced subsidies were enacted under the American Rescue Plan Act in 2021, but are set to expire at the end of 2022. Without the subsidy extension, ACA premiums would rise an average of about 53% across the entire market, said Cynthia Cox, director of the Kaiser Family Foundation’s program on the ACA.
The subsidy expansion demonstrates a recurring quandary of the US health-care system: The subsidies help make marketplace plans more affordable, but they also enable the health-care industry to continue underlying price increases that have long grown faster than inflation while the government and taxpayers pick up the tab.
The expanded subsidies have contributed to record numbers of ACA enrollees, with more than 14.5 million choosing plans in 2022, according to KFF data. Roughly 13 million receive significant subsidies, Cox said. The Department of Health and Human Services says the average monthly premium fell 19% from $164 in 2021 to $133 in 2022 after the subsidies, technically called premium tax credits, were included.
The American Rescue Plan extended subsidies for the first time to households with incomes over 400% of the federal poverty level—$111,000 for a family of four in 2022—and it increased subsidies to people with incomes between 100% and 400% of the poverty level.
Helping Higher-Income Households
The Inflation Reduction Act would also extend the requirement that households don’t have to pay more than 8.5% of their income for the second lowest-cost silver tier marketplace plan to receive the subsidies, Cox said. That could benefit households with incomes of a couple of hundred thousand dollars a year in high-cost areas.
Silver tier plans pay an average of 70% of health-care costs.
Beyond that, subsidies would continue to be more generous for people making between one and four times the poverty level, Cox said. People with incomes between 100% and 150% of poverty level get free silver plans with large cost-sharing subsidies that cover 94% of costs, she said.
Only the lowest or second-lowest cost silver plans are eligible to get the benefit of the free plans and cost-sharing subsidies. That creates “a lot of incentive for insurers to be one of those lowest-cost silver premiums,” Cox said.
However, insurers may be “competing so much on price that they’re offering more narrow network plans, and that that might leave sicker people without as many options for specialists in their area,” she said.
The Congressional Budget Office recently estimated the cost of the expanded subsidies for similar legislation at $25 billion a year, Cox said.
Subsidies Called Inflationary
But Brian Blase, president of the Paragon Health Institute, a health policy research organization, said that “the most inflationary part of the Inflation Reduction Act is the enhanced Obamacare subsidies.”
He cited an Aug. 4 Congressional Budget Office letter to Sen. Lindsey Graham (R-S.C.), that said “Responsiveness to the enhancement of health insurance subsidies established by the Affordable Care Act is the most important factor boosting inflationary pressure” in the Inflation Reduction Act.
The subsidies make enrollees “less sensitive to the premium,” said Blase, who was a staffer on the White House’s National Economic Council under President Donald Trump. “Regardless of how much the premium is, that household only has to pay a set amount. Everything above that amount is picked up by the government, or taxpayers.”
Households only pay 15% of the cost of premiums on average with the enhanced subsidies, Blase said, citing a Department of Health and Human Services report. The report shows that consumers receive an average of $505 a month in premium tax credits in 2022. The average monthly premium before tax credits is $585 a month, it says.
The expanded subsidies “give insurers pricing power,” Blase said. “Insurers can price knowing that enrollees are not sensitive to the premiums, and that puts upward pressure on premiums and health-care prices,”
That will be less of a problem in more competitive markets, Blase said. But in many areas of the US, there are still only one or two insurers, he said.
Reductions in Uncompensated Care
The Affordable Care Act subsidies “would safeguard access to care for millions of individuals and families — a critically important outcome, given the ongoing threat of COVID-19 and emerging public health challenges, such as monkeypox,” Bruce Siegel, president and CEO of America’s Essential Hospitals, said in a statement.
More people will likely have health insurance than they would’ve if the subsidies lapsed, said Matthew Fiedler, a senior fellow at the USC-Brookings Schaeffer Initiative for Health Policy.
“I would expect hospitals to see nontrivial reductions in their uncompensated care burdens because more people will be covered,” Fiedler said.
Covered people may also seek care that they otherwise wouldn’t have, which would be “at least somewhat profitable for hospitals,” he said.
A Disincentive for Employers
Blase said having larger subsidies available to more people will lead some employers to drop health coverage.
Employers with fewer than 50 full-time employees aren’t penalized for not offering health insurance under the ACA. Those employers will reason that “I can increase wages, make my employees better off with the savings that I get from not offering health insurance, and my employees can then go qualify for a subsidy to purchase an exchange plan,” Blase said.
Employers are likely to figure the expansion will be permanent, he said.
A permanent expansion of the enhanced subsidies would result in a 2.3 million decrease in enrollment in employment-based coverage by 2032, according to a CBO estimate.