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Explaining Health Care Reform: Questions About Health Insurance Subsidies

Health insurance can be expensive, and is therefore often out of reach for lower and moderate income families, particularly if they are not offered health benefits at work. To make coverage obtainable for families that otherwise could not afford it and to encourage broad participation in health insurance, the Affordable Care Act (ACA) includes provisions to lower premiums and out-of-pocket costs for people with low and modest incomes. The adequacy of this assistance will be a key determinant of how many people ultimately gain coverage and whether or not lower-income people will be able to use the health insurance they obtain.

This brief provides an overview of the financial assistance provided under the ACA for people purchasing coverage on their own through health insurance Marketplaces (also called exchanges).

Health Insurance Marketplace Subsidies

The ACA offers subsidies to reduce monthly premiums and out-of-pocket costs in an effort to expand access to affordable health insurance for moderate and low-income people – particularly those without access to affordable coverage through their employer, Medicaid, or Medicare.  There are two types of subsidies available to marketplace enrollees. The first type of assistance, called the premium tax credit, works to reduce enrollees’ monthly payments for insurance coverage. The second type of financial assistance, the cost-sharing subsidy, is designed to minimize enrollees’ out-of-pocket costs when they go to the doctor or have a hospital stay. In order to receive either type of financial assistance, qualifying individuals and families must enroll in a plan offered through a health insurance Marketplace.

Premium tax credit

The premium tax credit reduces marketplace enrollees’ monthly payments for insurance plans purchased through the Marketplace. Health insurance plans offered through the Marketplace are standardized into four “metal” levels of coverage: bronze, silver, gold, and platinum. Bronze plans tend to have the lowest premiums but leave the enrollee subject to higher out-of-pocket costs when they receive health care services, while platinum plans tend to have the highest premiums but have very low out-of-pocket costs. The premium tax credit can be applied to any of these metal levels, but cannot be applied toward the purchase of catastrophic coverage. Catastrophic health plans typically have a lower monthly premium than other Qualified Health Plans in the Marketplace, but generally require beneficiaries to pay all of their medical costs until the deductible is met. To qualify for a catastrophic plan, an individual must either be under 30 years of age or eligible for a “hardship exemption.”

Who is eligible for the premium tax credit?

In order to receive the premium tax credit for coverage starting in 2017, a marketplace enrollee must meet the following criteria:

  • Have a household income from one to four times the Federal Poverty Level (FPL), which for the 2017 benefit year will be determined based on 2016 poverty guidelines (In 2017, the subsidy range in the continental U.S. is from $11,880 for an individual and $24,300 for a family of four at 100% FPL, to $47,520 for an individual and $97,200 for a family of four at 400% FPL.)
  • Not have access to affordable coverage through an employer (including a family member’s employer)
  • Not eligible for coverage through Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), or other forms of public assistance
  • Have U.S. citizenship or proof of legal residency (Lawfully present immigrants whose household income is below 100% FPL and are not otherwise eligible for Medicaid are eligible for tax subsidies through the Marketplace if they meet all other eligibility requirements.)
  • If married, must file taxes jointly in order to qualify

For the purposes of the premium tax credit, household income is defined as the Modified Adjusted Gross Income (MAGI) of the taxpayer, spouse, and dependents. The MAGI calculation includes income sources such as wages, salary, foreign income, interest, dividends, and Social Security.

Table 1: Premium Subsidy Ranges, by Income in 2016 and 2017
Income

% Poverty

Income Range in Dollars for the 2016 benefit year Income Range in Dollars for the 2017 benefit year
Single Individual Family of Four Single Individual Family of Four
Under 100% Less than $11,770 Less than $24,250 Less than $11,880 Less than $24,300
100% – 133% $11,770 – $15,654 $24,250 – $32,253 $11,880 – $15,800 $24,300 – $32,319
133% – 150% $15,654 – $17,655 $32,253 – $36,375 $15,800 – $17,820 $32,319 – $36,450
150% – 200% $17,655 – $23,540 $36,375 – $48,500 $17,820 – $23,760 $36,450 – $48,600
200% – 250% $23,540 – $29,425 $48,500 – $60,625 $23,760 – $29,700 $48,600 – $60,750
250% – 300% $29,425 – $35,310 $60,625 – $72,750 $29,700 – $36,640 $60,750 – $72,900
300% – 400% $35,310 – $47,080 $72,750 – $97,000 $36,640 – $47,520 $72,900 – $97,200
Over 400% More than $47,080 More than $97,000 More than $47,520 More than $97,200
NOTES:  Alaska and Hawaii have different poverty guidelines. Note that tax credits for the 2017 benefit year are calculated using 2016 federal poverty guidelines, while tax credits for the 2016 benefit year are calculated using 2015 federal poverty guidelines.
SOURCE: Kaiser Family Foundation

Employer coverage is considered affordable if the employee’s contribution is less than 9.69 percent of his or her household income (for the employee’s coverage only, not including the cost of adding family members). The employer’s coverage must also meet the “minimum value” standard, meaning that the plan has an actuarial value of at least 60 percent (equivalent to a bronze plan). In situations in which the employer’s plan fails to meet one or both of these requirements, the employee and their family may be eligible for subsidized coverage through the Marketplace if they meet the other criteria listed above.

In states that decide to expand Medicaid, tax credit eligibility effectively ranges from 138% to 400% of the poverty level (because almost all people with incomes below 138% of poverty are eligible for Medicaid and therefore are not eligible for subsidized Marketplace coverage).  In states that do not decide to expand Medicaid, tax credit eligibility ranges from 100% to 400% of poverty.  Residents of these states who have incomes below 100% of poverty and who do not qualify for Medicaid under their state’s eligibility criteria are not eligible for the premium tax credit.  The Kaiser Family Foundation estimates that 3 million Americans living in states that did not decide to expand Medicaid fall into this coverage gap.

The ACA includes stipulations to offer tax credits and Medicaid coverage to eligible lawfully present immigrants.  Like U.S. citizens, lawfully present immigrants are eligible for subsidized coverage in the marketplaces if they meet their state’s income eligibility rules.  Lawfully present immigrants who meet the income eligibility rules for Medicaid in their state may be eligible for Medicaid, but, with the exception of pregnant women in certain states, are generally subject to a five-year waiting period before they can apply.  Immigrants who would otherwise be eligible for Medicaid but have not yet completed their five-year waiting period may instead qualify for tax credits through the Marketplace.  If an individual in this circumstance has an income below 100 percent of poverty, for the purposes of tax credit eligibility, his or her income will be treated as though it is equal to poverty (meaning that the enrollee would pay no more than 2.04% of income for a benchmark silver plan in 2017).   Immigrants who are not lawfully present are ineligible to enroll in health insurance through the marketplace, receive tax credits through the marketplaces, or enroll in non-emergency Medicaid and CHIP.

What amount of premium tax credit is available to people?

The premium tax credit works by setting a cap on the amount an individual or family must spend on their monthly payments for health insurance if they enroll in a “benchmark” plan.  The cap depends on the family’s income, with lower-income families having a lower cap and higher income families having a higher cap (detailed in the table below).

Table 2: Premium Cap, by Income in 2016 and 2017
Income

% Poverty

Premium Cap
max % of income for 2nd lowest silver plan
2016 2017
Under 100% No Cap No Cap
100% – 133% 2.03% 2.04%
133% – 150% 3.05% – 4.07% 3.06% – 4.08%
150% – 200% 4.07% – 6.41% 4.08% – 6.43%
200% – 250% 6.41% – 8.18% 6.43% – 8.21%
250% – 300% 8.18% – 9.66% 8.21% – 9.69%
300% – 400% 9.66% 9.69%
Over 400% No Cap No Cap
NOTES:  Alaska and Hawaii have different poverty guidelines. Note that tax credits for the 2017 benefit year are calculated using 2016 federal poverty guidelines, while tax credits for the 2016 benefit year are calculated using 2015 federal poverty guidelines.
SOURCE: Kaiser Family Foundation

The “benchmark” for determining the amount of the subsidy is the second-lowest cost silver plan available to the individual or family through their state’s Marketplace. If the cost of the enrollee’s benchmark silver plan exceeds their premium cap, then the federal government will pay any amount over the cap.  The amount of the tax credit, therefore, is equal to the difference between the individual or family’s premium cap and the cost of the benchmark silver plan.

As noted above, the premium tax credit can then be applied toward any other plan sold through the Marketplace (with the exception of catastrophic coverage).  The amount of the tax credit remains the same, so a person who chooses to purchase a plan that is more expensive than the benchmark plan will have to pay the difference in cost. Conversely, a person who chooses a less expensive plan, such as a bronze plan, may end up paying as little as zero dollars per month for the premium. An example shows how the premium tax credits would work for an individual during the 2017 benefit year.

Premium tax credits at 250% FPL in 2017

» Pat is 30 years old and estimates her 2017 income will be 250% of poverty (about $29,700 per year)

» Suppose the second-lowest cost silver plan available to Pat in the Marketplace is $280 per month

» Under the ACA, with an income of $29,700 per year, Pat would have a cap of 8.21% of income for the second-lowest cost silver plan

» This means that Pat would have to pay no more than $203 per month (8.21% times $29,700, divided by 12 months) to enroll in the second-lowest cost silver plan

» The tax credit available to Pat would therefore be $77 per month ($280 premium minus $203 cap)

» Pat can then apply this $77 per month discount toward the purchase of any bronze, silver, gold, or platinum Marketplace plan available

The premium tax credit cannot be applied to the portion of a person’s premium that is for non-essential health benefits. For example, a plan may offer a dental or vision benefit that is not considered to be “essential” by the state or federal definition. In that case, the person would have to pay for a small portion of the premium without financial assistance. Similarly, if the person smokes cigarettes and is charged a higher premium for smoking, the premium tax credit is not applied to the portion of the premium that is the tobacco surcharge.

How will premium tax credit be provided?

To receive the premium tax credit, an individual or family must purchase insurance coverage through the Marketplace. When they apply for Marketplace coverage, enrollees will receive a subsidy determination, letting them know whether they are eligible for a premium tax credit and the amount they may receive.  The person or family then has the option to receive the tax credit in advance, claim it later when they file their tax return, or some combination of the two options.

The advanced payment option allows consumers to receive their tax credit at the time of purchase and choose how much advance credit payments to apply toward their premiums each month.  If the enrollee chooses the advanced payment option, then the IRS will pay insurers directly such that the cost of the premium is reduced upfront.  With this option, the enrollee would need to reconcile their premium tax credit at tax time the following year. (For people receiving an advanced payment of the premium tax credit in 2016, the reconciliation would occur when they file their 2016 tax return in 2017). If the individual or family had a significant change in their income from the time they first applied for Marketplace coverage, they may be asked to repay some or all of the tax credit; or conversely, they may be owed an additional amount when they do their taxes. The table below indicates the maximum repayment limits for an individual and family, which varies depending on income level.

Table 3: Repayment Amounts under Current Law by Income Level for 2015
Income
(% Federal Poverty Level)
Maximum repayment amount
for a single individual
Maximum repayment amount
for couples and families
Less than 200% FPL $300 $600
200% – less than 300% FPL $750 $1,500
300% – less than 400% FPL $1,275 $2,550
400% FPL or greater Full Amount Full Amount
SOURCE: Internal Revenue Service, Revenue Procedure 2015-53.

Alternatively, an individual or family can opt to pay their entire premium costs each month and wait to receive their tax credit until they file their annual income tax return the following year.  The premium tax credit is available to qualifying enrollees regardless of whether they have federal income tax liability, although an individual is required to file a tax return for a given benefit year in order to receive financial assistance.

Cost-Sharing Subsidies

In addition to the premium tax credit, the second form of financial assistance available to Marketplace enrollees is a cost-sharing subsidy.  Cost-sharing subsidies work by reducing a person or family’s out-of-pocket cost when they use health care services, such as deductibles, copayments, and coinsurance.

Unlike the premium tax credit (which can be applied toward any metal level of coverage), cost-sharing subsidies can only be applied toward a silver plan.  In essence, the cost-sharing subsidy increases the actuarial value (protectiveness) of a silver plan, in some cases making it similar to a gold or platinum plan.

Who is eligible for the cost-sharing subsidy?

People who are eligible to receive a premium tax credit and have household incomes from 100% to 250% of poverty are eligible for cost-sharing subsidies. (The cost-sharing subsidies are available only to the lowest-income Marketplace enrollees who meet all of the other criteria for receiving the premium tax credit).  Again, the eligible individual or family must purchase a silver level plan in order to receive the cost-sharing subsidy.

What amount of cost-sharing subsidies are available to people?

The ACA sets maximum out-of-pocket (OOP) spending limits, but otherwise does not specify the combination of deductibles, copayments, and coinsurance that plans must use to meet the actuarial value requirements. For example, one insurer may choose to have a relatively high deductible but low copayments for office visits and other services, while another may choose a lower deductible but higher copayments or coinsurance for each service.

Without the cost-sharing subsidy, the out-of-pocket maximum may be no more than $7,150 for an individual and $14,300 for two or more people in 2017. (This is the highest a plan may set the OOP max, but plans frequently come with a lower OOP max). With the cost-sharing reduction, the out-of-pocket maximum can be no higher than $2,350 to $5,700 for an individual, or $4,700 to $11,400 for a family in 2017, depending on income. The table below presents the reduced out-of-pocket maximums and increased actuarial values after cost-sharing subsidies are applied, within each income range.

Table 4: Maximum Annual Limitation on Cost-Sharing
Income
(% Federal Poverty Level)
Actuarial Value of a silver plan OOP Max for Individual/Family
2016 2017
Under 100% 70% $6,850 / $13,700 $7,150 / $14,300
100% –150% 94% $2,250 / $4,500 $2,350 / $4,700
150% – 200% 87% $2,250 / $4,500 $2,350 / $4,700
200% – 250% 73% $5,450 / $10,900 $5,700 / $11,400
Over 250% 70% $6,850 / $13,700 $7,150 / $14,300
SOURCE: “Patient Protection and Affordable Care Act; HHS Notice of Benefit of Payment Parameters for 2017,” Federal Register 81, no. 45 (March 08, 2016): 12203.

Typically, silver plans have an actuarial value of 70%, meaning that on average the plan pays 70% of the cost of covered benefits for a standard population of enrollees, with the remaining 30% of total costs being covered by the enrollees in the form of deductibles, copayments, and coinsurance. By lowering an individual or family’s out-of-pocket costs, the cost-sharing subsidies increase the actuarial value of the silver plan (to 73, 87, or 94 percent depending on the enrollee’s income).

How will cost-sharing subsidies be provided?

When enrolling in a silver plan, an eligible enrollee is placed into a plan that has the cost-sharing subsidy automatically applied. This means that the silver plan they choose will already have a lowered out-of-pocket maximum than the same plan would in the absence of a cost-sharing subsidy.  The federal government pays cost-sharing subsidies directly to the insurer. (Unlike the premium tax credit, there is no option for cost-sharing subsidies to be paid to the enrollee).

Subsidies and the Federal Budget

In its most recent estimates, the Congressional Budget Office estimates that the subsidies will cost roughly $27 billion in 2016 (with an additional revenue reduction of $5 billion), and increase to $54 billion by 2020 (with an additional revenue reduction of $10 billion). Cost-sharing is projected to cost $7 billion in 2016, and $13 billion by 2020. The cost of the subsidies is a function of the number of people that are eligible for subsidies, and the price of the second-lowest silver plan in each area (which determines how generous the subsidies are).  Premiums have been lower than originally projected by CBO, helping to keep the cost of subsidies down for the federal government.  Because health insurance premiums have historically grown more rapidly than income, the ACA adjusts the percent of premium that people are required to pay to reflect the excess of the premium growth over the rate of income growth.

Conclusion

In combination, the premium tax credit and cost-sharing reductions require health plans offering coverage to lower-income people in the exchange to increase the actuarial value of the coverage of the plans that they receive, and to do so in a way that caps enrollee out-of-pocket liability within the specified levels.

Subsidies to make insurance more affordable and increase insurance coverage are a key element of the Affordable Care Act. Premium and cost-sharing subsidies of varying levels are available to individuals and families with low to moderate incomes, making coverage and care more affordable.  These subsidies – which represent a substantial share of the federal cost of the ACA – provide assistance for low to moderate income families, enabling them to purchase coverage and gain better access to care.

The Henry J. Kaiser Family Foundation Headquarters: 2400 Sand Hill Road, Menlo Park, CA 94025 | Phone 650-854-9400
Washington Offices and Barbara Jordan Conference Center: 1330 G Street, NW, Washington, DC 20005 | Phone 202-347-5270

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Filling the need for trusted information on national health issues, the Kaiser Family Foundation is a nonprofit organization based in Menlo Park, California.