- Issue: Affordability of health coverage is a growing challenge for Americans facing rising premiums, deductibles, and copayments. The Affordable Care Act’s tax credits make marketplace insurance more affordable for eligible lower-income individuals. However, individuals lose tax credits when their income exceeds 400 percent of the federal poverty level, creating a steep cliff.
- Goals: To analyze the effects of extending eligibility for tax credits to individuals with incomes above 400 percent of the federal poverty level.
- Methods: We used RAND’s COMPARE microsimulation model to examine changes in insurance coverage and health care spending.
- Key Findings and Conclusions: Extending tax-credit eligibility increases insurance enrollment by 1.2 million, at a total federal cost of $6.0 billion. Those who would benefit from the tax-credit extension are mostly middle-income adults ages 50 to 64. These new enrollees would be healthier than current enrollees their age, which would improve the risk pool and lower premiums. Eliminating the cliff at 400 percent of the federal poverty level is one policy option that may be considered to increase affordability of insurance.
The Affordable Care Act (ACA) has resulted in 20 million people gaining health insurance, but affordability of health coverage remains a problem for many people.1 For example, the number of insured people who reported difficulty paying for insurance premiums increased from 27 percent to 37 percent between 2015 and 2017, according to a Kaiser Family Foundation tracking poll.2 A majority of respondents identified “lowering the amount individuals pay for health care” as the top priority that President Donald Trump and Congress should focus on for health care.3
The ACA’s tax credits for individuals purchasing health insurance via the federal and state marketplaces are designed to make insurance more affordable for those with incomes between 100 percent and 400 percent of the federal poverty level (FPL) and no other affordable source of insurance. For the 2018 coverage year, 400 percent of FPL is $48,240 for an individual and $98,400 for a family of four.4 Eligible individuals who have incomes between 100 percent and 250 percent of FPL also can receive cost-sharing subsidies that help to lower out-of-pocket spending.
The tax-credit amount is the difference between the premium of a benchmark plan (the second-lowest-cost silver-tier plan available to the individual) and a required income contribution. In 2018, the income contributions will range from 2.01 percent of income for individuals earning between 100 percent and 133 percent of FPL to 9.56 percent for those between 300 percent and 400 percent of FPL.5
Thus, a single individual making $48,000 (just below 400% FPL) would have a required income contribution of $4,589 per year. For instance, if the benchmark plan had a $10,000 annual premium, then the maximum tax credit would be $5,411, which is the difference between the silver plan’s premium and the individual’s contribution (i.e., $10,000 – $4,589).
Current policy creates a steep cliff at 400 percent of FPL for some individuals because people with incomes above this threshold are ineligible for governmental financial assistance. Whether an individual faces a cliff and the size of that cliff depends on the cost of an individual’s premium. For instance, many younger people face premiums that cost less than the highest required income contribution (9.56% of income in 2018). The cliff does not affect them because they would not receive ACA credits anyway. In contrast, older individuals often face significant cliffs because they can be charged high premiums, up to three times what younger adults pay.6 These people might forfeit thousands in tax credits if their incomes rise a few hundred dollars above 400 percent of FPL. The small gain in income would be far outweighed by the large loss of tax credits.7
In this issue brief, we describe the effects of relaxing the ACA’s tax-credit eligibility threshold to eliminate the cliff in 2020. We modeled a scenario in which eligibility for tax credits is extended to individuals with incomes above 400 percent of FPL if they have no other affordable source of coverage. These individuals would have the same required income contribution — an estimated 9.95 percent by the year 20208 — as those with incomes between 300 and 400 percent of FPL. Although everyone with incomes above 400 percent of FPL could be eligible, the tax-credit amount goes to zero when 9.95 percent of income exceeds the benchmark premium.9
We conducted the analysis using the RAND COMPARE microsimulation model, which uses economic theory and data to analyze the impact of health policy changes on insurance coverage and health care spending. The model and methods are described in more detail in Appendix A.
Decreasing the Uninsured Rate
We found that relaxing the tax-credit eligibility threshold would increase the number of insured by approximately 1.2 million individuals in 2020 (Exhibit 1).10 The newly insured include approximately 900,000 individuals with incomes above 400 percent of FPL. It also would draw 200,000 individuals with incomes up to 400 percent of FPL into the individual market because of improvements in the risk pool, which we estimate will reduce premiums by 2.6 percent. In addition, approximately 400,000 previously insured individuals with incomes above 400 percent of FPL would newly receive a tax credit.
Improving Affordability for Older, Middle-Income Adults
Older adults are the most likely to newly receive a tax credit (Exhibit 2). Specifically, 96 percent of those newly receiving a tax credit are ages 50 to 64.11
These individuals tend to be healthier and less expensive than other enrollees of the same age, which helps explains why the risk pool improves. On average, 50-to-64-year-olds who would newly enroll because of the tax-credit extension would spend $3,700 less each year than similarly aged, lower-income individuals who would enroll under current law (Exhibit 3).12 Even though these individuals are older, their total premiums exceed the cost of their care, and they improve the individual market risk pool.
In addition, nearly all new tax-credit recipients would have incomes below 700 percent of FPL, with 61 percent falling in the above 400 percent to 500 percent of FPL range (Exhibit 4). Higher-income individuals are less likely to receive credits because, as income goes up, the required income contribution (9.95 percent of income) often exceeds the full cost of the premium. In Appendix B, we include case studies that illustrate the effect of the proposed tax-credit change for individuals at different age and income levels.
Increasing Federal Outlays
Extending tax credits to all incomes would cost the federal government $6.0 billion in 2020 (Exhibit 5). Of this, $3.6 billion would go toward tax credits for individuals who would have been uninsured if the tax credits were not extended. The average credit among people newly receiving the tax credit would be $3,030.
Tax credits for individuals who are insured under the ACA but were not previously receiving tax credits would cost $3.2 billion. The extension of tax credits for those already insured would provide some financial relief to individuals who are enrolled in marketplace plans but who may have difficulty paying their premiums and out-of-pocket costs.
The scenario would also reduce tax revenue. Because the expanded tax credits cause some people to become newly insured, they also lead to a $1.7 billion reduction in revenue from the ACA’s individual mandate.
Finally, because this proposal would improve the individual market risk pool, it would reduce the cost of providing premium tax credits to people at or below 400 percent of FPL who were already receiving them, offsetting the gross costs of expanding tax credits by $2.6 billion.
Policymakers have a variety of options for increasing the affordability of health insurance and the number insured, and the resources policymakers have to achieve those goals are likely limited. For those reasons, policymakers should consider how the cost, coverage gains, and affordability improvements of this option compare to those achieved under other potential approaches, some of which we have analyzed previously.13
Our analysis demonstrates that the extension of the ACA’s tax credits to all income levels is one option to provide some financial relief to middle-and upper-middle-income households. In particular, relaxing the eligibility threshold would increase affordability for older adults ages 50 to 64 who face high premiums.
1 N. Uberoi, K. Finegold, and E. Gee, Health Insurance Coverage and the Affordable Care Act, 2010–2016 (Office of the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services, March 3, 2016).
2 B. DiJulio, A. Kirzinger, B. Wu et al., Data Note: Americans’ Challenges with Health Care Costs (Henry J. Kaiser Family Foundation, March 2, 2017).
4U.S. Federal Poverty Guidelines Used to Determine Financial Eligibility for Certain Federal Programs (Office of the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services, n.d.).
5 Internal Revenue Service, 26 CFR 601.105: Examination of Returns and Claims for Refund, Credit or Abatement; Determination of Correct Tax Liability (IRS, 2017).
6 Under the ACA, older adults may be charged premiums up to three times the cost of premiums for younger adults. HR 3590, Patient Protection and Affordable Care Act.
8 The required contribution percentage is adjusted each year based on the excess of per enrollee employer-sponsored insurance premium growth over per capita personal income growth between the preceding calendar year and 2013.
9 We assumed that, like with the ACA, individuals with access to other insurance (e.g., Medicaid, Medicare) that is affordable are not eligible for the tax credits.
10 See Appendix A for enrollment changes by insurance type. The number of individuals with employer-sponsored insurance decreases by 100,000 and the change to Medicaid enrollment is less than 100,000.
12 See Appendix A for enrollment changes by insurance type. The number of individuals with employer-sponsored insurance decreases by 100,000 and the change to Medicaid enrollment is less than 100,000.