A Sensible Solution: How The Affordable Care Act Can Insure More Young Invincibles
When President Joe Biden signed the American Rescue Plan Act (ARPA) into law, he set the stage to continue building upon and improving the Affordable Care Act (ACA). The ACA expanded access to comprehensive health coverage for millions and did away with health underwriting. But efforts to improve the ACA have been stalled for a decade by leaders in Congress reflexively hostile to the law.
A new Congress now has an opportunity to repair, reform, and reinforce the ACA, rather than debate “repeal and replace.” Amending landmark legislation is a common practice. The Voting Rights Act of 1965 was expanded twice within 10 years of passage; likewise, Social Security was broadened to include benefits for survivors and dependents. Amendments that would improve affordability, particularly for younger consumers critical to the ACA’s risk pools, have already been proposed and merit further consideration; they are discussed below.
The Problem: Affordability
Affordability remains a top concern for millions of consumers. The ACA set standards for “affordability,” but millions remain uninsured or underinsured due to high costs, even with subsidies potentially available. High deductibles and increases in consumer cost sharing have chipped away at the affordability of ACA-compliant plans. At the same time, the Trump administration promoted cheaper, non-ACA-compliant coverage. But these alternative forms of coverage may leave consumers with unexpected medical bills and drive up the cost of ACA-compliant coverage for others.
What policy makers thought to be “affordable” as defined in the ACA has been proven not to be affordable. The ARPA addresses this through an increase in advance premium tax credit (APTC) subsidies and other provisions. Unfortunately, the subsidies expire in two years, setting consumers up for an affordability cliff.
The Role Of Subsidies In Health Care
Before the ACA, health insurance subsidies took two forms: tax breaks to employers to provide coverage to their employees, and subsidized Medicaid coverage for consumers with low incomes. The ACA established new subsidies: APTC and cost-sharing reductions (CSRs) for people with low to middle incomes who lack access to affordable employer coverage. Congress established minimum coverage benefits with an accompanying subsidy structure—albeit a limited one—for certain consumers. The structure of the subsidy was based on modeled estimates of consumer behavior. With the experience of seven enrollment cycles, we can act on data rather than estimates. And data show that unaffordability is the top reason that uninsured adults do not purchase coverage.
There are several ways to make coverage offerings more affordable: adjusting age-rating bands, increasing APTCs, rebasing APTC to gold plans rather than silver, adjusting actuarial value, or reinstating a federal reinsurance program. The ARPA addressed this by making subsidies more generous for people of all incomes through 2022. No adult, regardless of income, will pay more than 8.5 percent of their earnings for benchmark silver plan premiums. Many will receive subsidies that cover their premiums in full.
A temporary, two-year increase may be needed as Americans make their way out of the economic devastation caused by the pandemic. But the need for increased subsidies will not disappear when the pandemic ends.
Changes to the subsidy structure can also incentivize enrollment for key groups of consumers, similar to subsidies encouraging use of renewable energy or energy-efficient vehicles. Young consumers are especially critical to maintaining a healthy risk pool and keeping premiums down. The ACA sought to contain the high costs of care for less healthy individuals by pooling them with the lower costs associated with younger, healthier consumers. This theory animated the individual mandate in the ACA, which was functionally repealed by Congress in 2017 when it zeroed out the penalty for failing to purchase health coverage.
The loss of the enforcement mechanism for the individual mandate—and the high uninsurance rates among young adults—highlight the need to consider the resulting impact on the risk pool and what tools remain to improve it. Recognizing that younger consumers generally have lower costs, it only follows that robust participation by young consumers can help reduce premiums. Yet, for many young consumers, the level of subsidy they can expect to receive has been too low to incentivize take-up.
Analysis Of APTC Structure And Variance By Age
APTCs reduce premiums for plans purchased through a Marketplace. The ACA established that everyone who’s household income is below 400 percent of the federal poverty level may be eligible for APTC subsidies. There is a common misconception that anyone below 400 percent of poverty is eligible for subsidies. But APTC eligibility is also dependent on a second factor, the “affordability threshold,” which represents the maximum percentage of an individual’s income that can be spent on premiums for the second-lowest-cost silver plan. For those who qualify, the size of the subsidy is tied directly to that affordability threshold as compared to the cost of the benchmark plan, or second-lowest-cost silver plan, in their area.
We analyzed APTC premium subsidies by consumer age and income using the Robert Wood Johnson Foundation’s HIX Compare database. To date, younger consumers have been far more likely to receive little or no assistance in the form of APTCs—perhaps explaining why this group remains one of the most uninsured.
A 27-year-old consumer earning $49,960 (400 percent of poverty in 2019) would have received no tax subsidy to assist in purchasing coverage in 2020 in 57 percent of rating areas nationwide. Although subsidies increase for consumers earning less, a consumer earning $37,470 (300 percent of poverty) would still have received no APTC tax subsidies in 14 percent of rating areas nationwide. Not until 255 percent of poverty would all 27-year-olds have received some level of subsidies no matter where they live; this tracks with Congress’s decision in the ACA to more robustly subsidize consumers earning below 250 percent of poverty. Note that Congress established an additional subsidy structure for consumers earning below 250 percent of poverty through CSR subsidies (see exhibit 1).
Exhibit 1: Monthly APTC subsidies for a 27-year-old consumer, by rating area, using 2020 premiums
Source: Authors’ analysis.
For a 50-year-old consumer, however, the picture is quite different. Because older consumers have higher premiums under the age-band rules established under the ACA, they have higher APTCs. At 400 percent of poverty, a 50-year-old would have received some level of subsidy in 99.6 percent of rating areas nationwide; in nearly 84.0 percent of rating areas, these subsidies would have exceeded $100 per month (see exhibit 2).
Exhibit 2: Monthly APTC subsidies for a 50-year-old consumer earning 400 percent of federal poverty level, by rating area, 2020
Source: Authors’ analysis.
Even with subsidies, coverage can be unaffordable for many, particularly younger consumers. For someone earning $50,000 per year before taxes, a monthly insurance premium of $407 is difficult to characterize as affordable.
In 2020, a 27-year-old at 400 percent of poverty would have received less than $25 in monthly APTC in nearly two-thirds of rating areas nationwide. This holds true in Tuscaloosa, Alabama, where they would have received $24.55 a month on a $431.72 premium; in the West Virginia northern panhandle, where they would have received $23.05 on a $430.22 premium; and in Winston-Salem, North Carolina, where, to help pay for a $404.77 premium, they would have received nothing at all.
In the same locations, however, a 50-year-old earning 400 percent of poverty would have received $328.57 on a $735.74 monthly premium in Tuscaloosa; in West Virginia, $326.01 on a $733.18 premium; and in Winston-Salem, $282.64 on $689.81 each month. The math pencils out to a monthly premium of $407.17 for the 50-year-old—the same net monthly premium as a 27-year-old, regardless of where a consumer lives or their age. Practically speaking, however, older consumers are more likely to need care and the coverage offered by comprehensive health insurance, and thus are more likely to buy coverage at high cost.
The unsubsidized premiums are drastically different for consumers ages 27 and 50 due to the variation allowed by the ACA’s age-rating bands: Insurers may charge older consumers up to three times more than they charge their younger counterparts. However, such premium differences ultimately do not carry over to the portion of premium that each is ultimately responsible for after subsidies, since as noted those subsidies are based on the difference between a benchmark plan and age-uniform percentage-of-income thresholds. The variance allowed by the age-rating bands applies to gross premiums and does not translate to premiums net of subsidies.
Thus, younger subsidized consumers do not see the lower premiums afforded them by age-rating bands. Accordingly, changing the APTC subsidy structure to be stratified by age would further align out-of-pocket premium costs with the age-rating bands established under the ACA, so that younger consumers do ultimately pay less for the same coverage as their older counterparts regardless of their income level, not just if they make too much to qualify for subsidies in the first place.
Current Policy Proposals’ Impact On APTCs
While the ARPA has set a new, temporary, threshold for the application of increased APTC subsidies, several bills in Congress would extend the changes brought about by the ARPA.
The Health Care Affordability Act of 2021 (H.R. 369), sponsored by Rep. Lauren Underwood (D-IL), largely aligns with the ARPA’s subsidy thresholds. It would rebase the affordability percentage for all income levels and set a ceiling on consumer premium expenditures of 8.5 percent of income. Similar legislation introduced by Sen. Jeanne Shaheen (D-NH), S. 499, would extend the increases in ARPA permanently while also adjusting actuarial value and rebasing the benchmark subsidy to gold.
Other legislation, such as H.R. 6545, the Health Insurance Marketplace Affordability Act (HIMAA), introduced by Rep. Stephanie Murphy (D-FL) in the 116th Congress, would establish a national age-rating curve to be applied to APTC subsidies. Still another, section 226 of H.R. 8527, the Fair Care Act introduced by Rep. Bruce Westerman (R-AR), would apply different affordability thresholds to different age brackets. Both would effectively apply age-rating bands to net premiums (after subsidization) rather than gross premiums—to ensure that younger, subsidized consumers feel the impact of the rating bands; however, the HIMAA would create a smoother subsidy curve as consumers move between age brackets.
If any of these bills were to become law, more of the “Young Invincibles” would be able to afford health insurance. The number of rating areas nationwide in which a 27-year-old at 400 percent of poverty receives no subsidies would be nearly cut in half—from 57 percent to 30 percent. At 300 percent of poverty, all consumers would receive some level of subsidy.
There may also be refinements to the ARPA’s subsidy structure worth considering for the longer term, such as tapering off the two-year subsidy for consumers earning above 400 percent of poverty to a maximum of 9.5 percent of income for people earning at or above 600 percent of poverty, or alternatively making subsidies even more generous for Marketplace consumers earning below 250 percent of poverty. As discussed above, Congress could also ensure the 3:1 age-rating bands apply after subsidies, rather than to gross premiums, to incentivize younger consumers to purchase coverage.
And finally, given the urgency of the pandemic, providing fully subsidized coverage for consumers up to 150 percent of poverty makes sense. But doing so in the long term might impact a state’s willingness to enact a full Medicaid expansion.
Affordability thresholds are an underused tool to reduce the ranks of the uninsured. Like any tool, they can be dialed up or down to meet the desired policy goals of improving affordability and limiting federal outlays. Subsidies can provide an incentive for certain consumers to purchase coverage, thereby improving the risk pool and lowering premiums for everyone. Given the absence of a tax penalty as a “stick” to encourage take-up, it may be worth instead considering additional subsidies as an incentive, particularly for younger consumers.
It is vitally important for the stability of the Marketplace that more consumers be able to afford coverage, even after we have recovered from the COVID-19 pandemic. Making coverage affordable for younger consumers is especially important to improving the risk pool and thereby helping to lower premiums for all.
The increased subsidies established under the ARPA are a positive development. They should serve as a model for refining the underlying subsidy structure of the ACA to assure affordability and promote a healthier, better-functioning risk pool.