Federal Subsidies for Health Insurance Coverage for People Under Age 65: 2018 to 2028

The federal government subsidizes health insurance for most Americans through a variety of programs and tax provisions. In 2018, net subsidies for noninstitutionalized people under age 65 will total $685 billion, the Congressional Budget Office and the staff of the Joint Committee on Taxation (JCT) estimate. That amount includes the cost of preferential tax treatment for work-related insurance coverage, the cost of Medicaid and Medicare coverage for people under age 65, and government payments for other kinds of health insurance coverage—such as plans purchased through the marketplaces established under the Affordable Care Act (ACA).

This report describes the basis for CBO’s baseline projections of the federal costs for those subsidies under current law for the 2018–2028 period. Those projections of costs are built upon estimates of the number of people with health insurance of various kinds. During the coming year, CBO and JCT will use the projections presented here as the benchmark for assessing proposed legislation’s effects on the subsidies.

How Many People Under Age 65 Are Projected to Have Health Insurance?

According to CBO and JCT’s estimates, a monthly average of about 244 million noninstitutionalized civilians under age 65 will have health insurance in 2018. About two-thirds of the insured population under 65 will have coverage through an employer, and roughly a quarter will be enrolled in Medicaid or the Children’s Health Insurance Program (CHIP). A smaller number will have nongroup coverage, coverage provided by Medicare, or coverage obtained from various other sources. For example, about 4 percent, or 9 million people, are projected to obtain coverage through the marketplaces.

On average throughout the year, about 29 million people—11 percent of all noninstitutionalized civilians younger than 65—will be uninsured in 2018, CBO and JCT estimate (see figure below). Between 2018 and 2019, in the agencies’ projections, the number of uninsured people rises by 3 million, mainly because the penalty associated with the individual mandate will be eliminated and premiums in the nongroup market will be higher. The elimination of the penalty was enacted as part of Public Law 115-97 (originally called the Tax Cuts and Jobs Act and referred to as the 2017 tax act in this report).

From 2019 through 2028, the number of people with insurance coverage is projected to rise, from 241 million to 243 million, under current law. The number of uninsured people is also projected to grow, from 32 million to 35 million, increasing the share of the under-65 population without insurance to 13 percent.

How Large Are the Projected Federal Subsidies, Taxes, and Penalties Associated With Health Insurance?

The estimated $685 billion in net federal subsidies in 2018 for health insurance coverage for people under age 65 (reflecting the combined effects of subsidies and taxes and penalties) would equal 3.4 percent of gross domestic product (GDP). That amount is projected to rise at an average annual rate of about 6 percent between 2018 and 2028, reaching $1.2 trillion, or 3.9 percent of GDP, in 2028. The estimates of subsidies are intended to be in the middle of the distribution of potential outcomes but are uncertain.

For the 2019–2028 period, projected net subsidies amount to $9.3 trillion. Two types of costs account for most of that total:

• Federal spending for people under age 65 with full Medicaid and CHIP benefits (excluding people who reside in a nursing home or another institution) is projected to amount to $4.0 trillion. That amount includes $842 billion for people made eligible for Medicaid by the ACA and $143 billion for CHIP enrollees.
• Federal subsidies for work-related coverage for people under age 65, which stem mainly from the exclusion of most premiums for such coverage from income and payroll taxes, are projected to amount to $3.7 trillion.

Other subsidy costs are smaller:

• Medicare benefits for noninstitutionalized beneficiaries under age 65 (net of their payments for premiums and other offsetting receipts) are projected to amount to $1.0 trillion. Such spending is primarily for people who are disabled.
• Subsidies for coverage obtained through the marketplaces or through the Basic Health Program are estimated to total about $0.8 trillion.

In the agencies’ projections, the total cost of federal subsidies is offset to a small extent, $0.3 trillion, by taxes and penalties collected from health insurance providers, employers, and uninsured people.

How Stable Is the Nongroup Health Insurance Market Projected to Be?

The nongroup health insurance market is stable in most areas of the country over the next decade in CBO and JCT’s projections—but that stability may be fragile in some places. In 2018, insurers are offering coverage in all areas, but about one-quarter of enrollees have access to only one insurer’s plans. Stability would be threatened if more insurers exited markets with limited participation than entered them.

Although premiums have been increasing, most subsidized enrollees buying health insurance through the marketplaces are insulated from those increases. Out-of-pocket payments for premiums are based on a percentage of subsidized enrollees’ income; the federal government pays the difference between that percentage and the premium for the benchmark plan used as the basis for determining subsidies. Those subsidies are anticipated to result in demand for insurance by enough people, including people with low health care expenditures, for the number of insurers in the marketplaces to be stable in most areas.

How Rapidly Are Premiums in the Nongroup Health Insurance Market Projected to Grow?

In 2018, the average premium for a benchmark plan—the gross amount not including any premium tax credits—is about 34 percent higher than it was in 2017. By CBO and JCT’s estimates, in addition to rising health care costs per person, the increase was caused by three primary factors: First, insurers are no longer reimbursed for the costs of cost-sharing reductions (CSRs) through a direct payment; second, a larger percentage of the population lives in areas with only one insurer in the marketplace; and third, some insurers expected less enforcement of the individual mandate in 2018 (which would probably induce some healthier enrollees to leave the market).

CBO and JCT expect premiums for benchmark plans to increase by about 15 percent from 2018 to 2019, an increase that exceeds projected growth in overall spending for private health insurance. (That outcome includes the expected increase in nongroup premiums resulting from healthier people being less likely to obtain insurance after the elimination of the penalty related to the individual mandate.) The agencies expect premiums for benchmark plans to increase by an average of about 7 percent per year between 2019 and 2028.

Many people who enroll in coverage through the marketplaces receive federal subsidies in the form of premium tax credits, and the premiums they pay net of those tax credits are often substantially lower than the gross premiums. The net premiums those people face are projected to decline or to grow more slowly than the premiums in the nongroup market for people with higher income who are ineligible for subsidies.

How Do These Projections Compare With Previous Ones?

These projections update the preliminary projections of subsidies for insurance purchased through the marketplaces established under the ACA as well as revenues related to health insurance coverage for people under age 65 that were published in The Budget and Economic Outlook last month. Compared with those preliminary estimates, federal spending for subsidizing health insurance marketplaces is now projected to be $4 billion lower in 2018 and $6 billion lower over the 2019–2028 period, and federal revenues associated with marketplace subsidies, work-related coverage, the excise tax on high-premium insurance plans, and penalties imposed on employers and uninsured people are projected to be $1 billion higher in 2018 and $24 billion higher over the 2019–2028 period, on net.

CBO’s most recent report comparable to this one was published in September 2017. For 2027 (the last year covered by that report and this one), CBO and JCT’s projection of the number of people obtaining subsidized coverage through the marketplaces is now 3 million lower, and the projection of the number of uninsured people is now 5 million larger, than they were in that earlier report. The projection of net federal subsidies for health insurance from 2018 to 2027 is $481 billion (or 5 percent) lower. The largest contributors to that decrease are a $389 billion decline in projected subsidies for work-related coverage and a $202 billion decline in projected spending for Medicaid and CHIP.