Senator Warner (D-VA) released, at the end of January, the Health Care Improvement Act of 2021. HCIA-21 has several moving parts that seem to mostly conform to median Democratic positions and policy preferences. One of the big ones is removing the income cap for subsidy eligibility and also enriching the premium tax credits.
Capping health care costs on the ACA exchanges: The Health Care Improvement Act of 2021 will ensure no individual or family pays more than 8.5 percent of their total household income for their health insurance. Currently, no family making more than 400 percent of the federal poverty line ($51,040 for an individual in 2020) is eligible for premium assistance on the ACA exchanges. This provision – which is supported in President Biden’s American Rescue Plan – expands premium assistance to individuals making more than 400 percent of the federal poverty line and places a cap on insurance costs for all individuals and families on the ACA exchanges.
So what does this mean? I’m going to look at this from the LEVEL & SPREAD perspective I outlined earlier this week.
Right now under current law, households that earn over 400% FPL (~$51,000+ for a single individual) can not receive Premium Tax Credits (PTC). This makes the 400%+ FPL cohort premium level sensitive. They care very much about actual, gross premium as that is also their net premium. There are also some folks who earn under 400% FPL who are also level sensitive as the benchmark is so low that they are paying full premium, but this is a small cohort. Policies that reduce the gross premium level such as state Section 1332 reinsurance waivers, wrap-around subsidies with state funds, Farm Bureau “don’t call it insurance” plans, underwritten short-term limited duration plans and most of the public option variants are attractive to this group because it directly lowers what they pay every month.
Changing the applicable percentage of income to 8.5% instead of ~9.86% means that the few people who are currently subsidized but live in areas where the benchmark is too low to matter are far more likely to become spread sensitive. This is a small increase in their personal welfare and it is small population.
The big change is that a big chunk of the people who earn over 400% FPL become spread sensitive instead of level sensitive.
Most of the universe of households who currently earn over 400% FPL will become spread sensitive buyers. Households that earn mid to high six figures will still be level sensitive in this universe as 8.5% of 500K is $44,000 in premiums for the benchmark silver plan. That is plausible for a household of a pair of 64 year olds with three 17 year olds on their plan in the most expensive regions in the country but it is rare. Some people will always be level sensitive but expanding the income cap by either a discrete amount (say to 600% FPL) or eliminating it entirely dramatically reduces the size of this population.
Previous efforts to alleviate the economic pain of price level sensitive populations becomes an even greater give-away to the top 3% to 5% of the income distribution. Reinsurance waivers effectively move some subsidy revenue out of the current 100-400% population and distributes a mixture of federal subsidies and state funds to people earning over 400% FPL would, without any changes to state policies, merely be a transfer back to the federal treasury. States that want to think about enhanced affordability and have current reinsurance waivers would need to significantly rethink their current policy portfolios as reinsurance would not contribute to affordability for the population that currently benefits from reinsurance waivers.
Price linked subsidies do weird things. The biggest weird thing they do is make most people indifferent to price levels but sensitive to price spreads. That can be okay. But it is a deliberate trade-off that shapes all policy intentions and policy outcomes for as long as we keep the fundamental structure in place.
Price linked subsidies and removing the income capPost + Comments (14)
