A project of the Galen Institute

Exchanges & Premium Subsidies

One of the main features of ObamaCare is the creation of a new federally-financed health care entitlement that will subsidize the insurance premiums for low and moderate income Americans, beginning in 2014. The amount of the subsidy is inversely related to family income and will be a administered by new state-based ”exchanges” that will replace today’s small group and individual markets for health insurance.

Exchanges

ObamaCare creates new entities in every state through which individuals buying insurance on their own must purchase their government-approved insurance. In addition, many small businesses employees will get their insurance through the exchanges as well because their employers will not offer coverage to their workers under ObamaCare’s rules for employer participation (see “Employer Mandate”).

Premium Subsidies

Households with incomes below 400 percent and above 133 percent of the federal poverty line (FPL) who are enrolled in insurance plans offered through the exchanges are eligible for premium assistance financed by the federal government (Medicaid will cover families with incomes below 133 percent of FPL). In 2010, the FPL is $22,050 for family of four. The new law establishes a sliding scale of assistance based on limitations on required family contributions to the cost of coverage. For instance, at 150 percent of FPL in 2014, ObamaCare limits the amount that such households must contribute toward their health insurance premium to 4 percent of their annual income. At 400 percent of the FPL, households must contribute 9.5 percent of their income toward insurance premiums. Whatever portion of the total health insurance premium for their coverage is not paid by these households is covered by the new federal premium assistance program.

Estimated Federal Costs and the “Firewall”

The Congressional Budget Office (CBO) has estimated that this new premium assistance program will cost $113 billion annually by 2019, with premium assistance going to an additional 19 million Americans (the Medicaid expansion will add 16 million new people to the program at a cost of $97 billion in 2017).

This CBO estimate of the cost of premium assistance assumes that tens of millions of otherwise eligible households will not be eligible for this new entitlement because their employers will continue to offer them qualified coverage at their place of work. Under ObamaCare, if a low income household is offered qualified coverage by their employer, they are automatically ineligible for additional federal premium assistance (this is the so-called “firewall” rule aimed at creating a barrier against mass migration out of employer-sponsored insurance).

Former CBO Director Doug Holtz-Eakin has estimated that employers will have strong incentives to move as many as 35 million workers who will be eligible for premium assistance out of employer plans and into subsidized coverage provided through the exchanges because both the employers and the workers will be better off if they are able to access the large new federal subsidies available to exchange enrollees. Holtz-Eakin estimates that adding this many additional subsidized workers in the exchanges would add about $1 trillion over the next ten years to the cost projections provided by CBO.

Marriage Penalties

The new premium assistance program penalizes married couples. For instance, if two people each earn $30,000 annually, on their own, they would be judged to have incomes at about 300 percent of the FPL. But if that couple were to marry, their combined income would total $60,000, or about 500 percent of the FPL for a household with two people.

Work Incentives

The new premium assistance program provides powerful disincentives to work by imposing high implicit marginal tax rates on additional earned income. This occurs because large amounts of federal premium assistance is withdrawn at various points on the income scale. For example, a family of four earning just below $88,000, or 400 percent of the poverty level, will receive about $5,000 in annual subsidies to purchase insurance in 2016. Once that threshold is crossed, the subsidy immediately drops to zero. So for a family of four in that income range, a raise in wages would actually result in a significant reduction in take-home pay. The same disincentive applies at other points in the income scale, as premium assistance drops abruptly with small amounts of additional earned income. In fact, combined with explicit federal taxes (income and payroll taxes), the implicit tax associated with the withdrawal of premium assistance can push the effective marginal tax rates on earned income for many low and middle income households to well above 60 percent.

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