How Expanding ACA Premium Tax Credits Could Effect ESI Coverage

Opponents of expanding the Affordable Care Act’s premium tax credit policy have argued that doing so would have a negative effect on employer-sponsored insurance, but recent research from the Urban Institute has suggested otherwise.

Families with incomes at 400 to 600 percent of the federal poverty level that lose their employer-sponsored health plans may find themselves in a challenging position. They do not qualify for Medicaid, but they also are ineligible for premium tax credits on the individual health insurance marketplace.

Urban Institute researchers modeled the outcomes of a hypothetical 2020 policy that would increase premium tax credits accessibility for incomes up to 400 percent of the federal poverty level to incomes up to 600 percent of the federal poverty level. The hypothetical law would adhere to the benchmark plan’s 2020 percentage-of-income limit of 9.78 percent.

Opponents of expanding premium tax credits to those with incomes up to 600 percent of the federal poverty level say that employers—particularly small business employers—would respond to such a policy by no longer offering employer-sponsored insurance altogether.

In such a scenario, some employees would then turn to the individual health insurance market, but others would become uninsured. This could potentially compound the uninsurance rate beyond its current state.

However, the data pointed to a different outcome.

The number of uninsured individuals would fall by 116,000 individuals or 0.4 percent under the expanded premium tax credit policy, the researchers found. Additionally, 48,000 individuals who are on health plans that do not comply with the Affordable Care Act would switch to compliant coverage.

In total, 164,000 more people would gain basic, essential coverage under the Affordable Care Act with compliant coverage. One million more individuals would be eligible to receive premium tax credits, an increase of 11 percent.

Public payers would remain relatively untouched by these changes.

Meanwhile, employer-sponsored insurance would drop by 0.1 percent. Around 50,000 workers would no longer have access to employer-sponsored health plans due to employers dropping the plan because of the changes on the Affordable Care Act marketplace. Approximately 15,000 would become uninsured.

The changes would cost the federal government an extra $4.0 billion.

As a result of expanding premium tax credits up to 600 percent of the federal poverty level, a family of two 45-year-olds living at slightly under 500 percent of the federal poverty level would pay $8,430 annually in premiums, instead of the $11,600 they would pay without the expanded policy.

Under current law, the same family might have to pay over $4,800 more per year if their income slightly increased past 400 percent of the federal poverty level—from $6,744 per year with the premium tax credit at 400 percent to $11,600 at 500 percent.

The premium assistance credit is not the same dollar amount for each income bracket. Far from it, the credit could amount to over $10,500 for those at 150 percent of the federal poverty level, more than $8,000 for those at 250 percent, and over $6,500 for those at 300 percent.

This shrinking percentage of income could help create an offramp from premium assistance tax credits to zero tax credits, as opposed to the current subsidy cliff.

The expanded premium tax credits could also help young, healthy employees who do not face high out-of-pocket healthcare costs.

The researchers found that the employer-sponsored health plan remained cheaper for higher-income individuals than an Affordable Care Act marketplace plan under the expanded premium tax credit policy, due to tax exclusions on employer-sponsored health plans.

“When workers receive health insurance through their jobs, the value of this benefit is not counted as income for tax purposes. Employer and, often, employee contributions to health insurance premiums are excluded from income when calculating income and payroll taxes owed,” the study explained.

That being said, the extent to which Affordable Care Act marketplace plans would be more expensive than employer-sponsored health plans—and, by extension, the extent to which employers would be incentivized to continue offering employer-sponsored health plans—depends upon the state’s policies around tax exclusion.

For example, using New Jersey’s tax rates, the researchers found that an Affordable Care Act marketplace plan for a family at 600 percent of the federal poverty level under the expanded policy would receive a $1,500 subsidy. Meanwhile, a similar family might receive a $7,300 subsidy for employer-sponsored insurance due to the tax exclusion.

“In addition to immediate effects on affordability and coverage, the policy may have longer-term effects that would promote competitiveness and stability in nongroup insurance markets,” the researchers added. "The number of people receiving premium tax credits through the Marketplace would increase notably by 1.0 million, or more than 10 percent. The larger market size might encourage insurers to newly enter the market, expand their existing participation to new rating areas, or increase plan offerings.”

The Biden administration appears to align with this policy. The president’s American Rescue Plan in response to the coronavirus pandemic includes a boost in premium tax credits on the Affordable Care Act marketplace.

Major payer organizations, including America’s Health Insurance Plans (AHIP) and the Blue Cross Blue Shield Association (BCBSA), recently supported a similar position. They released a statement that proposed enriching premium tax credits and cost-sharing reductions in order to reduce the family glitch and the subsidy cliff.