How Would Insurance Premium Subsidies Change Under the AHCA?

Both Laws Have Premium Subsidies, But They Differ Considerably

Older man in hospital bed with doctor
Hero Images/Getty Images

Back in January 2017, House Speaker Paul Ryan gave an interview in which he pointed out that the Republican health care proposal was going to have a "refundable tax credit"—a system which he said would be "better than the [ACA] subsidies."

Health policy experts were quick to point out that the ACA already uses refundable advanceable premium tax credits, which is exactly the same sort of subsidy mechanism that House Republicans included in their American Health Care Act (AHCA).

The AHCA passed the House on May 4, although it's expected that the Senate will come up with a different version of the bill, which would have to be reconciled with the House version.

The tax credits are one of the elements of the AHCA that the Senate might change. But let's take a look at the version of the AHCA that the House passed, and see how the tax credits would compare with the tax credits that people already get under the ACA.

What Does "Refundable Advanceable Tax Credit" Mean?

A refundable tax credit is one that you can receive in full even if it's more than the amount you owe in taxes (in comparison, non-refundable tax credits can be used to offset your tax liability, but you wouldn't get any additional amount of the tax credit above and beyond what you would otherwise owe in income tax). A refundable tax credit can offset what you owe in taxes, and if there's money left over, the IRS will send you the remaining tax credit.

Or if you're already owed a refund, the IRS will add the tax credit to your refund.

So for example, let's say Jane's total income tax bill is $1,500. Let's also say that she purchased her coverage through the exchange, but paid full price for her insurance all year, choosing to claim the premium subsidy (tax credit) on her tax return.

If it turns out that her premium tax credit is $2,000, the IRS will apply $1,500 of the tax credit towards her tax bill, and send her the other $500 as a refund check.

That's how the ACA tax credits work, and it's also how the AHCA tax credits would work.

An advanceable tax credit is one that you can receive in advance, before you file your tax return. If you're enrolled in a health insurance plan through the exchange and a premium tax credit is being paid on your behalf each month, you're benefitting from the fact that the ACA's premium tax credits are advanceable (almost 83 percent of people enrolled in exchange plans in 2017 are receiving advance premium tax credits, or APTC).

This is the only way that tax credits can realistically be used to make coverage more affordable, since people would otherwise struggle to pay full price for their coverage throughout the year and wait to claim their tax credits the following spring, on their tax returns.

Note that tax credits are different from tax deductions. A deduction allows you to subtract an amount from your taxable income, thus reducing the total tax amount that you owe. But a tax credit is subtracted directly from the total tax you owe.

Health insurance premiums can be deducted in some circumstances, but from the perspective of making health insurance more affordable, a $2,000 tax credit is much more valuable than a $2,000 tax deduction.

How Would AHCA Tax Credits Differ from ACA Tax Credits?

Let's first look at how ACA premium tax credits work:

ACA premium tax credits are available to people with household income between 100 percent and 400 percent of the poverty level (the lower threshold is 139 percent of poverty in the 31 states—and DC—where Medicaid has been expanded).

The premise behind the ACA premium tax credits is to equalize premiums for people earning the same income, regardless of how old they are or how much health insurance costs in their area.

And under the ACA, medical history isn't taken into consideration when determining an enrollee's premiums, so that's no longer a differentiating factor (it used to be, in most states, prior to 2014).

So under the ACA, premium tax credits are generally larger for older people (whose pre-subsidy premiums are higher), and for people who live in areas where insurance is more expensive.

For example, full-price premiums (ie, before any tax credits are applied) in Alaska are more than three times as high as they are in Utah. So the average premium tax credit in Alaska is $848/month, while the average premium tax credit in Utah is $200/month. That's because the whole point of the ACA subsidies is to equalize after-subsidy premiums across the whole country, ensuring that people who earn the same amount are paying the same amount in premiums (Alaska also has a higher poverty level, which effectively gives residents there a little extra help with their premiums).

But the ACA tax credits cut off altogether at 400 percent of the poverty level. The resulting subsidy cliff has led to unaffordable insurance premiums for middle-class families in some parts of the country. States can address this on their own (Minnesota did, earlier this year; Colorado considered a similar measure but it didn't pass), but the ACA itself does not address individual market coverage affordability for households with income above 400 percent of the poverty level (for perspective, that cutoff is $97,200 for a family of four in 2017).

Now let's take a look at how AHCA tax credits would work:

If the House version of the AHCA were to be enacted, the ACA structure would mostly remain in place in 2018 and 2019, with some adjustments. But premium tax credits would be available for use with off-exchange plans, excluding grandmothered, grandfathered, and short-term plans (for off-exchange plans, the tax credits would be refundable, but not advanceable; people would have to pay full price up front for their coverage—just as they do now for off-exchange plans—and could claim the tax credit on their tax returns).

After 2019, the AHCA shifts away from equalizing net premiums for people with equal income, and instead focuses on providing equal tax credits for enrollees who are the same age. That is a fundamental change in direction. Instead of a system where people pay an amount that is considered affordable based on their income, people would receive the same tax credit as anyone else in the same age bracket, regardless of income, up to the income cap for the AHCA tax credit. In other words, the "fairness" of the subsidies would be determined by the amount of the subsidy itself, rather than the financial need of the individual and the cost of coverage in each area.

The income cap for AHCA tax credits is much higher than the ACA's cap. AHCA tax credits would be fully available to single individuals with income up to $75,000, and married couples with income up to $150,000 (the credits would begin to phase out above those levels). For a single individual, $75,000 is 621 percent of the 2017 poverty level, so the tax credits under the AHCA would stretch much higher into the middle class and upper-middle class—especially considering the fact that the credits wouldn't entirely phase out for a 60-year-old until income reached $115,000 for a single individual (the upper limit for the phase-out would be $95,000 for a 29-year-old).

But the AHCA tax credits themselves would be, on average, smaller than the ACA's tax credits. A Kaiser Family Foundation analysis found that average tax credits would be 36 percent smaller under the AHCA.

The flat tax credits would look like this in 2020, and would be indexed for inflation in future years:

  • $2,000 per individual up to age 29
  • $2,500 per individual age 30-39
  • $3,000 per individual age 40-49
  • $3,500 per individual age 50-59
  • $4,000 per individual age 60+
  • Families will be eligible to claim the cumulative credits for up to the five oldest family members, with a cap of $14,000 per year.

These tax credits would continue to be available outside the exchange in 2020 and beyond, for plans that aren't grandmothered, grandfathered, or short-term (unless there's another extension, grandmothered plans will be gone by the end of 2018).

Who Wins, and Who Loses?

Obviously, the AHCA is beneficial to people with income above 400 percent of the poverty level, but under the AHCA's tax credit income cap. Those folks don't get any subsidy at all under the ACA, and would start to get one as of 2020 if the House version of the AHCA were to be enacted.

But there are very serious concerns about the affordability of coverage under the AHCA for low-income people, older people (whose overall premiums would be higher under the AHCA's age-banded premium ratio), and people who live in areas where health insurance is very expensive.

For those populations, the ACA tax credits smooth out the bumps. They're larger for people who would otherwise pay higher premiums, which includes people in high-cost areas and older people. And they're also larger for people with low incomes, making coverage more affordable as a percentage of their income.

Those protections would evaporate under the AHCA. The CBO report on the AHCA (published on May 24, nearly three weeks after the House voted on the bill) indicates that for a 64-year-old earning $26,500/year, annual net premiums would increase from $1,700 under the ACA, to $16,100 under the AHCA. That's in states that don't opt to waive ACA consumer protections; in states that do, the net premium would be a little lower—$13,600—but benefits would also be reduced and access to insurance would be limited for people with pre-existing conditions and a gap in coverage.

In general, the winners under the AHCA would be young people with higher-than-average incomes, particularly if they live in areas where health insurance is already fairly low-cost.

The losers would be older people, low-income people, and people in areas where health insurance is very expensive. 

Sources:

Center for Medicare and Medicaid Services, Extended Transition to Affordable Care Act-Compliant Policies, February 2017.

CMS.gov, 2017 Marketplace Open Enrollment Period Public Use Files

Jost T. Examining the House Republican ACA Repeal and Replace Legislation. March 7, 2017.

Kaiser Family Foundation, Premiums and Tax Credits Under the Affordable Care Act vs. the American Health Care Act: Interactive Map. April 27, 2017.

Kaiser Family Foundation, Summary of the American Health Care Act, May 2017.

Continue Reading