November 13, 2013

Mandatory SpendingOption 3

Function 550 - Health

Eliminate Exchange Subsidies for People With Income Over 300 Percent of the Federal Poverty Guidelines

(Billions of dollars) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2014-2023
Change in Mandatory Outlays 0 -6 -14 -18 -20 -21 -22 -23 -24 -25 -59 -173
Change in Revenues 0 -1 -5 -7 -8 -8 -8 -8 -9 -10 -21 -64
  Net Effect on the Deficit 0 -5 -9 -11 -12 -13 -14 -15 -15 -15 -37 -109

Sources: Congressional Budget Office; staff of the Joint Committee on Taxation.

Note: This option would take effect in January 2015.

Under current law, individuals and families will be able to purchase private health insurance coverage for 2014 and later years through the newly established health insurance exchanges. Certain participants in the exchanges will be eligible for federal subsidies, in the form of tax credits to cover a portion of their premiums and additional subsidies to reduce cost-sharing amounts (out-of-pocket payments under their insurance policies). To qualify for the tax credits, people generally must have household income between 100 percent and 400 percent of the federal poverty guidelines (commonly known as the federal poverty level, or FPL) and not have access to certain other sources of health insurance coverage (such as “affordable” coverage through an employer, as defined in the Affordable Care Act, or coverage from a government program, such as Medicaid or Medicare). To qualify for the cost-sharing subsidies, people must have household income below 250 percent of the FPL.

The size of the tax credit (or premium subsidy) that someone will receive will be based in part on the premium of the second-lowest-cost “silver” plan—a plan that pays about 70 percent of the costs of covered benefits—offered through the exchange in the person’s area. The premium subsidy is designed to keep the cost to an enrollee of that second-lowest-cost silver plan at or below a specified percentage of the enrollee’s income. For example, in 2014, the subsidy will be calculated so that people with income between 100 percent and 133 percent of the FPL will pay no more than 2 percent of their income to enroll in the second-lowest-cost silver plan; people with higher income will pay a larger share of their income, up to 9.5 percent for enrollees with income between 300 percent and 400 percent of the FPL. (The poverty guidelines vary by family size. In 2013, 300 percent to 400 percent of the FPL represents income of $34,470 to $45,960 for an individual, $46,530 to $62,040 for a family with two members, and $70,650 to $94,200 for a family with four members.)

This option would cap the income level at which premium subsidies were available in the exchanges at 300 percent of the FPL beginning in 2015. Accordingly, starting in that year, people with income between 300 percent and 400 percent of the FPL who bought insurance through the exchanges would no longer qualify for those subsidies. Eligibility for cost-sharing subsidies would remain capped at 250 percent of the FPL.

Under current law, roughly 1 million exchange enrollees in 2015 will have income between 300 percent and 400 percent of the FPL, according to estimates by the Congressional Budget Office and the staff of the Joint Committee on Taxation (JCT), and about 70 percent of them will receive premium subsidies. The remaining 30 percent are not expected to receive subsidies, either because the premium for the second-lowest-cost silver plan in their area will not exceed the percentage of their income specified in the Affordable Care Act or because they will not qualify for subsidies for other reasons. This option would have no direct effect on enrollees who would be unsubsidized under current law.

Lowering the income ceiling for premium subsidies to 300 percent of the poverty guidelines would reduce federal budget deficits by $109 billion between 2015 and 2023, CBO and JCT estimate. That budgetary impact would stem partly from the direct effect of not providing subsidies to people with income between 300 percent and 400 percent of the FPL and partly from a reduction in the number of people with income below that range who would obtain insurance (and subsidies) through the exchanges. Specifically, employers who are deciding whether to offer health insurance generally weigh the attractiveness to their workers of alternative sources of coverage, and a lower income ceiling for premium subsidies would make the exchanges less appealing for some workers. As a result, CBO and JCT expect that this option would increase the number of employers who offer health insurance to their workers, relative to the number expected to do so under current law, and thus would reduce the number of people at all income levels who would obtain insurance through the exchanges or other programs.

By CBO and JCT’s estimates, this option would increase the number of people covered by employment-based health insurance in years after 2015 by about 4 million. During those years, the option would reduce the number of people enrolled in exchange plans by about 3 million to 4 million, reduce the number of people enrolled in Medicaid or the Children’s Health Insurance Program (CHIP) by about half a million, and decrease the number of uninsured people by less than half a million. That slight decline in the number of people without insurance is the net effect of two factors: On the one hand, more employers would be likely to offer health insurance under this option, so some people who would otherwise be uninsured would have the chance to obtain employment-based coverage. On the other hand, some of the people with income between 300 percent and 400 percent of the FPL who would no longer get premium subsidies would become uninsured instead of enrolling in an unsubsidized plan.

The estimated $109 billion in savings from this option through 2023 is the net effect of a $173 billion reduction in outlays, largely stemming from a decrease in exchange subsidies, and a $64 billion reduction in revenues, mainly resulting from a decline in taxable income because of the increase in employment-based insurance coverage.

Exchange subsidies would be $182 billion lower between 2015 and 2023 under this option than under current law, CBO and JCT estimate. Although the premium subsidies are structured as refundable tax credits, in most cases the amounts of those credits will exceed the total amount of federal income tax that recipients owe, and the amounts above the tax owed by recipients are classified as outlays. The cost-sharing subsidies for enrollees in exchange plans are also categorized as outlays. The estimated $182 billion reduction in subsidies consists of a $161 billion decrease in outlays and a $21 billion increase in revenues.

Reductions in the number of people enrolled in Medicaid and CHIP and other small effects on spending would reduce federal outlays by a further $12 billion, on net.

Revenues would be lower under this option than under current law mainly because the increase in the number of people who would enroll in employment-based plans would cause a greater share of employees’ compensation to take the form of nontaxable health benefits rather than taxable wages and salaries, thereby lowering tax revenues. At the same time, because more employers would offer health insurance to their workers, payments of penalties by large employers that did not offer insurance would decrease; and because slightly fewer people would be uninsured, individuals’ payments of penalties for not having health insurance would also fall. Those declines in revenues would be partly offset by an increase in revenues from the reduction in exchange subsidies discussed above.

The main advantage of this option is that capping exchange subsidies at 300 percent of the FPL would reduce the deficit without increasing the number of people without health insurance. Because this option would lead to greater availability of employment-based health insurance, higher enrollment in such insurance among people in various income groups would more than offset the number of people with income between 300 percent and 400 percent of the FPL who would choose not to have insurance coverage if it was not subsidized.

One argument against this option is that most family policyholders who would lose exchange subsidies would receive smaller tax subsidies for obtaining employment-based health insurance instead. Employment-based insurance is excluded from income and payroll taxes, and the tax subsidy created by those exclusions increases with taxpayers’ marginal tax rates—and thus generally with taxpayers’ income. By contrast, premium subsidies in the exchanges decrease with income. CBO estimates that in 2015, a family of four with income equal to 350 percent of the FPL that was enrolled in a plan purchased through an exchange would receive an average premium subsidy of $7,000. If that family instead received a comparably priced health plan through a family member’s employer, the average tax subsidy would be worth roughly $5,500. (The premiums and benefits of employment-based insurance could differ, however, from those of insurance sold in the exchanges.)

Another argument against this option is that most people would face a substantial drop in premium subsidies at exactly 300 percent of the FPL. Under current law, a single policyholder enrolled in a second-lowest-cost silver plan costing $5,000 a year who sees his or her income rise from just below 400 percent of the FPL to just above that amount will lose an exchange subsidy of about $500. Under this option, by comparison, a single policyholder enrolled in a similar plan whose income rose from just below 300 percent of the FPL to just above that amount would lose a much larger exchange subsidy: about $1,600. That larger “cliff” would reduce the incentive for people with income near 300 percent of FPL to work more and would lead to greater efforts to reduce reported taxable income in other ways as well.

At the same time, exchange subsidies have their own disincentive effects: The fact that they are tied to a percentage of income creates an effective tax on additional income equal to the percentage threshold—9.5 percent in 2014 for people with income between 300 percent and 400 percent of the FPL. Eliminating exchange subsidies for that group would remove the current disincentive effects of the subsidies for those workers.