Nearly 12 years after enactment of the Affordable Care Act (ACA), substantial disparities in the cost of health insurance still exist. Some middle-income young workers without access to employer health insurance receive no premium subsidies and cannot afford state-exchange premium payments. Some low-income households with an offer of “affordable” employer-based health insurance are precluded from claiming the premium tax credit for state exchange insurance. This post discusses potential changes to ACA rules that would address these problems.
The Affordable Care Act (ACA) created state exchange health insurance markets for people without employer-based health insurance. The creation of a viable state-exchange market created an incentive for some firms to eliminate employer-based insurance.
The ACA maintained a dominant employer-based health insurance system through the inclusion of two rules.
The first rule described here disallows the premium tax credit for any person working at a firm that offers “affordable” employer-based health insurance. Affordable insurance was defined as self-only insurance costing less than 9.61% of household income.
The second rule, commonly called the employer mandate, described here, is a fine applied to large employers that do not provide affordable comprehensive insurance to 95 percent of full time employees.
These two rules have limited the size of state-exchange marketplaces. Currently, around 12 million people obtain their health insurance from state exchange compared to around 156 million people obtaining health insurance from their employer.
The American Rescue Plan (ARP) enacted by Congress and the Biden Administration includes provisionsmaking health insurance on state exchanges more affordable. The ARP increased the generosity of the premium tax credit for lower-income households, capped benefits at 8.5 percent of household income, and eliminated the rule denying any benefits to households with income exceeding 400 percent of the federal poverty line FPL.
These provisions of the ARP expire after 2022 unless extended by Congress. The Biden Administration has not altered the affordability rule, or the employer mandate and employers are still the source of health insurance for most working-age people and their dependents.
Analysis of Disparities in Health Insurance Premiums:
The existence of a large employer-based insurance market coupled with a fringe market for households without offers of employer-based insurance has caused disparities in health insurance premiums and outcomes.
State-exchange subsidies fail to assist young middle-income people seeking self-only coverage:
The premium tax credit provides a generous benefit to older households seeking expensive family-plan policies. However, the premium tax benefit often provides very little or even no assistance to young adults seeking self-only coverage.
The premium tax credit is not available to employees at firms offering employer-based insurance. Management of firms that decide to end offers of employer-based insurance to assist older workers seeking family coverage often substantially increase health insurance costs for young workers seeking self-only coverage.
The impact of the decision to offer employer-based coverage on two workers is illustrated with data from the Kaiser Family Foundation state exchange market-place calculator and data on the cost of employer-based coverage from the Kaiser Family Foundation annual survey.
- The KFF state exchange premium tax calculator reveals a 30-year-old individual making $80,000 per year seeking self-only coverage would pay $4,664 for health insurance on a state exchange. This worker would not receive any premium tax credit. The average annual premium paid by a worker with employer-based insurance with self-only coverage is $1,299.
- The KFF state-exchange premium tax calculator was used to find the premium and support provided to a family making $80,000 a year with two adults aged 50 and two children one age 12 and one age 15. The estimated financial help from the government in the form of a premium tax credit was $16,406 per year. The average cost to the family was $4,840 per year. The average cost to the worker for the family plan policy is $5,969 per year.
Many firms that offer employer-based health insurance subsidize all or part of the premium. The average subsidy in 2021 was $6,440 for single coverage and $16,253 for family coverage.
Small firms not subject to the employer mandate can avoid these costs by eliminating employer-based insurance. The decision to eliminate employer-based coverage helps older workers with families and creates additional costs for young adults seeking self-only coverage.
Health insurance issues for people who cannot afford their share of premiums of employer-based insurance:
Many people with an offer of employer-based insurance are ineligible for the premium tax subsidy for state exchange insurance even if the state exchange marketplace offers more affordable and more comprehensive health insurance options.
People with an offer of affordable health insurance from their employer are precluded from claiming the premium tax credit because of the affordability rule. The definition of affordable health insurance is based on the affordability of self-only health insurance leaves employer-based family coverage unaffordable for over 5 million families. These five million families are ineligible for premium tax credits but cannot afford a health insurance plan covering their entire family offered through their employer.
Many people believed the IRS incorrectly interpreted the affordability definition in the ACA because the original law contained an individual mandate. The repeal of the individual mandate may make this argument harder to make since people are no longer fined for lack of coverage.
The Biden Administration has not altered the employer mandate or the affordability rule. The definition of “affordable” in the affordability rule continues to be based on the cost of self-only insurance leaving around 5 million households unable to afford a family option.
The alteration of the affordability rule could cause some small firms to eliminate offers of employer-based insurance, could cause some large employers to pay fines under the employer mandate and could increase insurance costs for some firms.
The decision by the Biden Administration to leave the “affordability” rule and the employer mandate in place limited the impact of the more generous premium tax credit on the size of state exchange markets.
Reforms to health insurance markets designed to reduce the disparities in health insurance premiums:
Many disparities in health insurance premiums can be addressed by combining the employer and state exchange markets, by modifying the premium tax credit and through the creation of new low-cost but comprehensive health insurance options.
The proposed health insurance marketplace has the following rules.
- All employers would be allowed to purchase health insurance for their employees on state exchanges rather than sponsor an employer-based policy exclusively for their own employees.
- The employer subsidy for state exchange insurance would be a deductible business expense and would not be subject to personal income tax, as with the current treatment of employer expenditures on employee health insurance.
- Employees would be allowed to use the employer subsidy for the purchase of any health insurance plan on a state exchange.
- The state exchange would offer a public option or a new low-cost copper option.
- Large employers choosing the new premium subsidy would be required to provide a subsidy equal to 60 percent of the cost of the state-exchange policy for every full-time employee.
- Employers providing a subsidy on state exchanges would be required to provide the subsidy to all full-time workers.
- Firms could make tax free subsidies up to 100 percent of the cost of a gold plan on state exchanges.
- Self-employed people and people without an employer-based subsidy would receive a premium tax credit.
- The new premium subsidy would have a floor of 40 percent of the cost of a silver plan and a ceiling like the existing premium tax credit based on household income.
- The state exchange will offer a public option already offered in some states or a low-cost private option, patterned after the copper plans considered by Alexander and Murray.
Comments on the proposal:
Comment One: Businesses and workers could continue with employer-specific plans if insurance companies continue to provide the product. It is likely that workers and firms would prefer state-exchange subsidies because workers could choose any plan on the state exchange best meeting their needs.
Comment Two: Unions would negotiate the size of the health insurance premium and workers at firms with generous premium subsidy offers could purchase the most expensive state-exchange health plan.
Comment Three: The smallest permissible subsidy from employers and from the revised premium tax credit should be enough to cover the cost of the copper plan or the public option.
Comment Four: The floor of 40 percent of the cost of health insurance of a silver plan on the premium tax credit is less generous than the floor on employer-based insurance but it assures that a young adult seeking self-only coverage would obtain some support and does not dissuade companies from offering a more generous subsidy to attract talent in a competitive job market.
Comment Five: The public option proposed here is not free. The person could choose to spend its subsidy for a low-cost private or public option or could choose to purchase a more expensive private plan. The new system puts private insurance on a relatively even footing with the government option.
Comment Six: The new low-cost private and public options would be superior to short-term health plans that leave people with substantial financial exposure and do not protect people with pre-existing conditions.
Comment Seven: The existence of private high deductible health plans with tax-preferred health savings accounts could induce many households to select a private plan over the public option to take advantage of the tax savings from contributing to private health savings accounts. This tax savings would not be available for public insurance plans or for private comprehensive insurance plans.
Comment Eight: Some aspect of this proposal could be enacted through the tax reconciliation process by majority vote as described here.
Many disparities in health insurance outcomes could be resolved by having firms subsidize the purchase of state exchange health plans, through the modification of the existing premium tax credit and the creation of low-cost but comprehensive health public and private health insurance options.