ACA Premium Tax Credits
CHRISTINE BRIERE, DEAN FURST, SARAH RUDASILL, NIKOLAI HLEBOWITSH
Affordable Care Act
(Healthcare.gov)
Health Insurance Marketplace
Employer
• Little choice
• Federally
subsidized
State-run
• 14 States
• Full autonomy
• Cost covered by
state
Federalfacilitated
• 27 states
• Also used for
Medicaid
• No state
autonomy
Federalsponsored
• Some cost
sharing
• More autonomy
• Operations
handled by
federal
government
• 9 states
(Kaiser Family Foundation)
Process
Mandate
coverage
Make
coverage
easy
Make
coverage
cheap
Making Coverage Cheap
Medicaid
Medicare
???
Affordable
care
Making Coverage Cheap
Medicaid
Tax
Credit
Medicare
Affordable
care
What is a premium tax credit?
1. Helps make purchasing health insurance coverage more affordable
2. If you get coverage through Health Marketplace, you are eligible
3. Reduced premiums or a larger tax return
Cost estimate
Yearly income:
$20,000
$40,000
Estimated Financial help:
$191 per month($2,290 per year)
$0 per month
Your cost for a silver plan:
$25 per month($302 per year)
$216 per month
The most you can spend on health
care:
2.01% of income
9.56% of income
Without financial help:
$216 per month
$216 per month
(Kaiser Family Foundation)
The Silver Standard
ACA caps the amount of your income you are expected to spend on health insurance
$400
Second
Least
Expensive
Silver Plan
$4000/month
6.3% of income
= $247
$153/month tax
credit subsidy
Selection
Silver
Gold
Platinum
• On average, 60% coverage
• 40% Out-of-Pocket
• On average, 70% coverage
• 30% Out-of-Pocket
• On average, 80% coverage
• 20% Out-of-Pocket
• On average, 90% coverage
• 10% Out-of-Pocket
• $210/month in premiums
• $2520/year in premiums
• $250/month in premiums
• $3000/year in premiums
• $310/month in premiums
• $3720/year in premiums
• 380/month in premiums
• $4560/year in premiums
Bronze
**Numbers from Healthcare.gov
The Winners
Low-income individuals making 100% to 400% of the FPL
 Scaled premiums based upon income
 70 to 94% of out-of-pocket expenditures are covered
Individuals with pre-existing conditions
 No longer charged more
(Roy, 2015)
Implications for Demand
Tax subsidy shifts the demand
curve to the right
Increases quantity demanded of
health insurance, as well as the
price
More individuals will possess
health insurance after subsidies
Empirical Evidence
(Moriya and Simon, 2014)
Analyzed impact of 65% federal health insurance premium subsidy during the Great
Recession
Subsidy yielded a 15.2% increase in the continuation of employer coverage
Greater health insurance coverage results in:
Greater health care usage in RAND Health Insurance Study (Manning et al., 1987)
More hospitalizations (Hassan et al., 2013)
Greater Health Insurance Usage
The tax subsidies increase health
insurance coverage
More generous coverage yields higher
nominal demand curves
Health care spending increases as a
greater quantity of care is purchased at
higher prices
Increases ex-post moral hazard, which
may be efficient or inefficient
Implications for the Risk Pool
Low-income individuals and those with pre-existing conditions can now afford health
insurance
Studies show that low-income individuals tend to have worse health outcomes and
greater expected benefits than their counterparts (Konttinen, 2012)
Result: riskier insurance pools with greater expected benefits but the inability to price
based upon each individual’s expected benefit
Perhaps this could lead to a death spiral…
A Case Study of Washington State
The financial consequences of adverse selection
1993: Washington State implements community-rated health insurance
that must cover pre-existing conditions
Results:
The pregnant mother problem
Loss of healthy individuals (over 25% of the pool)
Premiums increased by 78% within 3 years
30 insurers filed for bankruptcy or left the state
(Roy, 2012)
But have no fear!
The Individual Mandate
All individuals are required to purchase health insurance
Must purchase community-rated health insurance or pay a fine
Penalty of $695 per year up to three times that amount for a family or 2.5% of income
 2014 - $95
 2015 - $325
 2016 - $695
Result:
Relative risk of the pool decreases
Premiums don’t rise quickly
No death spiral emerges
(Healthcare.gov)
The Losers
Young, healthy individuals
Frequently value insurance less than what they must pay in premiums
Employed individuals, especially those who receive benefits
from employers
Subsidize care for others through income taxes
Ineligible for tax credits in most cases
Potential Shortfalls
● Difficulty Predicting Income
● Possible adverse selection with multiple plans available- bad for
insurers
● How these premium subsidies fit into the overall population (i.e.
Medicaid Gap subsidies affordable already?)
Difficulties predicting income
● 80% take home subsidy in form of premium tax credit (Brecht, 2015)
○ Paid directly to insurance company by government
● Subsidy amount based off projected income and family size
○ Changes in either means final tax credit could be different
■ Responsible for paying back some or all of your subsidy
Example
(Marketplace Matters: Tax Credits)
Difficulties predicting income
● Why is this a problem?
○ Opportunity cost - extra papers to file, notify marketplace
● Government trying to waive fees to provide relief
● IRS announced relief efforts for low-income families with
underestimated income
○ Individuals have to file the next year, include the excess
payment to receive relief
Adverse selection
● Top concern - younger and healthier stay away from ACA
Exchanges
● “Adverse selection death spiral”
● Huge age skews in the percentages of individuals signed up
for exchanges.
(Avik 2015)
Cost to Insurers
● 25% enrollment of 18-34 year olds - worst case scenario
● Overall costs 2.4% higher than premiums (Roy, 2015)
● Most insurers operate at profit margins of 4-6% (Roy, 2015)
Adverse selection
● Will it get better with time?
● Yes
○ people who needed coverage right away, most in need of
someone to pay for immediate health-care needs
○ “designed to increase the cost of coverage for healthier and
younger people in beginning, in order to make coverage a
better deal for the sick.”
How premiums fit into population
● Congressional Budget Office - expected 8.5% increase from
2016-2018 (Pear et all., 2014)
● Encourages shopping around, a year after being accustomed
with coverage
● As many as 7M people may need to change plans to avoid
paying more
Example
● 40 year old in Nashville, TN
○ Good health, considered low-risk individual (non-smoker)
○ Paid $181/month for plan
○ Will now expect to pay $220/month to keep same plan
How premiums fit into population
● Lowest premium plan - $191 (Pear et all., 2014)
○ Deductible jumps from $2000 to $4000
● 25 more insurers participating next year (Pear et all., 2014)
○ Consumers facing up to 40 possible plans
○ Up 31 from previous year
King v. Burwell
Are states that have not established their own insurance
exchanges eligible for Premium Tax Credits?
Requirement: “an Exchange established by the State”
Potential Outcomes
In a recent research report it was suggested that
dropping the subsidies would lead to….
1. Drop in enrollment by 70%
2. 47% spike in unsubsidized premiums
(Salzman 2015)
Potential Outcomes
Death spiral……
Questions?
Bibliography
Brecht, Kira. "Recipients of Obamacare Subsidies Could Face Tax Surprise - US News." US News. US News Money, 10 Feb. 2015. Web. 08 Apr. 2015.
Eibner, Christine, and Evan Saltzman, Assessing Alternative Modifications to the Affordable Care Act: Impact on Individual Market Premiums and Insurance Coverage, Santa
Monica, Calif.: RAND Corporation, RR-708-DHHS, 2014.
"Get 2015 Health Coverage Now. Health Insurance Marketplace.“ HealthCare.gov. Web. 13 Apr. 2015.
Hassan, Andres, Johnatan Jimenez, and Ramiro Montoya. "The Impact of Subsidized Health Insurance on the Poor in Colombia: Evaluating the Case of Medellín." Applied
Economics 17.4 (2013): n. pag. SciELO. Web. 3 Apr. 2015. <http://www.scielo.br/scielo.php?pid=S1413-80502013000400001&script=sci_arttext>.
"Health Insurance Marketplace Calculator." Health Insurance Marketplace Calculator. Kaiser Family Foundation, n.d. Web. 13 Apr. 2015.
Konttinen H et al. (2012) Socio-economic disparities in the consumption of vegetables, fruit and energy-dense foods: the role of motive priorities. Public Health Nutrition, Available
on CJO2012 doi:10.1017/S1368980012003540.
Marketplace Matters: Tax Credits. YouTube. N.p., 22 Oct. 2014. Web. 05 Apr. 2015.
Moriya, Asako, and Kosali Simon. "Impact of Premium Subsidies on the Take-up of Health Insurance: Evidence from the 2009 American Recovery and Reinvestment Act
(ARRA)." National Bureau of Economic Research Working Paper No. 20196 (2014): n. pag. NBER. Web. 3 Apr. 2015. <http://www.nber.org/papers/w20196>.
Pear, Robert, Reed Abelson, and Agustin Armendariz. "Cost of Coverage Under Affordable Care Act to Increase in 2015." The New York Times. The New York Times, 14 Nov.
2014. Web. 08 Apr. 2015.
Roy, Avik. "Adverse Selection: Obamacare Exchange Enrollment Skews Much Older Than U.S. Population; Cost Increases Likely." Forbes. Forbes Magazine, n.d. Web. 08 Apr.
2015.
Roy, Avik. "Want to See a Health Insurance Death Spiral? Visit Washington State." Forbes Magazine. N.p., 30 Mar. 2012. Web. 12 Apr. 2015.
<http://www.forbes.com/sites/theapothecary/2012/03/30/want-to-see-a-health-insurance-death-spiral-visit-washington-state/>.
Salzman, Evan, and Christine Eibner. The Effect of Eliminating the Affordable Care Act's Tax Credits in Federally Facilitated Marketplaces. Rep. N.p.: RAND Corporation, 2015.
Web.
"State Health Insurance Marketplace Types, 2015." State Health Insurance Marketplace Types, 2015. Kaiser Family Foundation, n.d. Web. 13 Apr. 2015.