Improving the Affordability of the Affordable Care Act

Are Americans getting their money’s worth with the current subsidies allowed under the Affordable Care Act (ACA) in the employer and individual markets? Can subsidies more efficiently maximize coverage, minimize premiums, and hold costs in check?

Tax exemptions currently cost approximately $250 billion annually in lost tax revenue and have been criticized for favoring higher-earning Americans and giving preferential treatment to employer-sponsored insurance over individual insurance.

In Health Affairs, Evan A. Saltzman, a doctoral student in health care management and economics at the University of Pennsylvania’s Wharton School, and coauthors Christine Eibner, of the RAND Corporation, and Alain C. Enthoven, professor emeritus in the Graduate School of Business at Stanford University, analyzed 3 options for “leveling the financial playing field” between employer and individual health insurance markets.

“The subsidy structures for employer-sponsored insurance and the Marketplaces are very different,” the authors wrote. “Low-income individuals are eligible for the largest Marketplace subsidies, while subsidies for employer-sponsored insurance are largest for higher-income workers.”

They found that the best option would use the subsidy formula employed in the insurance marketplaces under the ACA for both the individual and employer-sponsored insurance markets—and additionally requires the subsidy to be at least $1250 without an upper income limit on subsidy eligibility imposed—which could expand insurance coverage and reduce individual market premiums relative to the ACA with no additional federal spending.

They also investigated replacing the employer coverage tax exclusion with an alternative that uses the progressivity of the tax code to allocate subsidies, and a third alternative that implements a flat tax credit. None of the models allowed individuals with incomes below poverty to receive subsidies.

The authors conclude that a flat tax credit that is neither progressive nor correlated with a premium leaves behind low-income and older people, and the current ACA subsidy approach insufficiently incentivizes younger and healthier people to enroll because its subsidies are highly progressive and linked to the premium.

The authors recommend a phase-in period of the new subsidy approach if undertaken to soften some of the potential shocks involved with implementation and provide time to make adjustments as needed.

“‘Leveling the playing field’ makes for a good sound bite, but it implies that someone’s subsidy level is going down,” the authors concluded. “Policy makers will need to address this political trade-off if constructive reforms are to be made.”