MARCH 2017 Insight on the Issues Adequate Premium Tax Credits Are Vital to Maintain Access to Affordable Health Coverage for Older Adults Jane Sung, Lina Walker, and Olivia Dean AARP Public Policy Institute Over 3 million older adults ages 50–64 currently rely on tax credits under the Affordable Care Act (ACA) to purchase health insurance coverage in the nongroup (individual) health insurance market. These tax credits provide critical financial assistance for older adults with low- to moderate- incomes who do not have access to affordable health insurance through an employer or a public program. Replacing current-law tax credits with proposed “flat” tax credits adjusted for age would substantially reduce their value for lower-income older adults by as much as $5,900 for an individual and would put health insurance and care out of reach for many. CURRENT LAW PROVIDES CRITICAL PREMIUM TAX credit in advance to lower their up-front, out-of- CREDIT AND COST-SHARING ASSISTANCE pocket monthly premium payment. The tax credit Current law provides a tax credit for individuals is also refundable so that lower-income people with with incomes between 100 percent1 and 400 percent tax liability below the amount of the credit can of the federal poverty level (FPL; between $11,880 benefit. and $47,550 for 2017) who do not have access to Current law also provides additional financial affordable employer or government health coverage. assistance in the form of cost-sharing reductions This tax credit offsets some or all of the cost of for people with lower incomes (up to 250 percent health insurance premiums for coverage purchased of FPL, or $29,700 for 2017). These individuals have through Health Insurance Marketplaces. lower out-of-pocket maximums and reduced out-of- To ensure that premiums are affordable, the pocket expenses such as deductibles, coinsurance, size of the tax credit is determined based on the and copayments.4 individual’s income and the cost of a benchmark health insurance plan2 offered in each state PROPOSALS TO CHANGE CURRENT-LAW TAX CREDITS Marketplace. Thus, the value of the tax credit reflects the actual cost of the coverage.3 People can Although many tax credit replacement proposals choose to receive some or all of their premium tax lack key details (such as the size of the credit), all share common themes. Specifically, they would MARCH 2017 repeal the current-law premium tax credit and cost- they would receive under current law. In dollars, sharing subsidies and provide a new “flat” tax credit their tax credit would be between $2,200 and that, in some proposals, would be adjusted by age. $5,900 less under the AHCA. This paper focuses on the impact of two recent tax •• 50- to 64-year-olds earning $25,000 annually credit proposals: the Empower Patients First Act of would be eligible for tax credits that are on 2015 (H.R. 2300) and the American Health Care Act average 50 to 80 percent less than the amount (AHCA) of 2017,5 as introduced on March 6. they would receive under current law. In dollars, Both the AHCA and H.R. 2300 would repeal their tax credits would be between $850 and the ACA premium tax credits and create a new $4,500 less under the legislation. refundable flat tax credit that would adjust by age. •• 50- to 64-year-olds earning $45,000 annually The tax credit in the AHCA is proposed at $2,000 would see mixed impact. For example, 50-year- for under age 30, $2,500 for ages 30–39, $3,000 olds and 55-year-olds would be eligible for a for ages 40–49, $3,500 for ages 50–59, and $4,000 larger tax credit. Sixty- and 64-year-olds would be for ages 60 and older.6 The tax credits begin to eligible for a smaller tax credit. In dollars, their phase out for single individuals with income above tax credits would range from $1,800 more to $75,000 and for joint filers with income above $1,800 less under the legislation. $150,000. The tax credits are phased down by $100 for every $1,000 increase in income. Older Persons Face Larger Reductions in Premium The tax credit in H.R. 2300 was proposed at $900 Tax Credits for children under age 18, $1,200 for ages 18–34, Under a flat tax credit proposal such as the AHCA, $2,100 for ages 35–49, and $3,000 for ages 50 and people would face a much larger reduction in older. H.R. 2300 does not limit eligibility for the tax tax credits compared with current law as they credit by income. grew older, even with the adjustment for age called for in the legislation (table 1). This raises IMPACT OF REPLACING ACA TAX CREDITS AND significant affordability concerns, particularly REPEALING COST-SHARING ASSISTANCE ON LOW- because premiums already increase with age in the AND MODERATE-INCOME OLDER ADULTS nongroup market and would increase even more Less Premium Assistance for Low- to Moderate- under current proposals.7 Under the AHCA, the Income Older Adults following would occur: To illustrate the impact of the proposals, we calculated the difference in tax credits that older •• A 64-year-old earning $15,000 annually would adults would receive under both the AHCA and see a two-and-a-half-fold larger reduction in tax H.R. 2300 (table 1). We compared the average tax credits than a 50-year-old would. credit an individual would receive in 2017 for a •• A 64-year-old earning $25,000 annually would silver plan to the tax credit they would receive see a five-fold larger reduction in tax credits than under the proposal, if the new credits were a 50-year-old would. implemented in 2017. Below, we discuss the impact of tax credit changes in AHCA, which would •• A 64-year-old earning $45,000 annually would provide larger tax credits than H.R. 2300, but would see twice the reduction in tax credits than a still yield less premium assistance for most low- 60-year-old would. and moderate-income older adults (table 1) than under current law. Under the AHCA proposal, the Coverage for 3.2 Million Older Adults in Jeopardy following would occur: The lower tax credit amounts and the loss of ACA cost-sharing subsidies under both the AHCA and •• 50- to 64-year-olds earning $15,000 annually H.R. 2300 compared with current law mean older would be eligible for tax credits that are on adults with low- and moderate- incomes would average 40 to 60 percent less than the amount be less likely to be able to afford current levels of 2 MARCH 2017 TABLE 1 Comparison of Average Annual Tax Credits under Current Law and Proposed Tax Credits under H.R. 2300 and the AHCA Empowering Patients First Act of American Health Care Act of Current Law Income and 2015 (H.R. 2300) 2017 (AHCA) Age Average Tax Proposed Tax Difference from Proposed Tax Difference from Credit* Credit Current Law Credit Current Law $15,000 annual income Age 50 $5,742 $3,000 – $2,742 $3,500 – $2,242 Age 55 $7,246 $3,000 – $4,246 $3,500 – $3,746 Age 60 $8,885 $3,000 – $5,885 $4,000 – $4,885 Age 64 $9,854 $3,000 – $6,854 $4.000 – $5,854 $25,000 annual income Age 50 $4,348 $3,000 – $1,348 $3,500 – $848 Age 55 $5,852 $3,000 – $2,852 $3,500 – $2,352 Age 60 $7,491 $3,000 – $4,491 $4,000 – $3,491 Age 64 $8,459 $3,000 – $5,459 $4,000 – $4,459 $45,000 annual income Age 50 $1,688 $3,000 $1,312 $3,500 $1,812 Age 55 $3,192 $3,000 – $192 $3,500 $308 Age 60 $4,831 $3,000 – $1,831 $4,000 – $831 Age 64 $5,799 $3,000 – $2,799 $4,000 – $1,799 * Based on Silver Plan Source: Current-law tax credit estimates are from the Kaiser Family Foundation Health Insurance Marketplace Calculator (http:// kff.org/interactive/subsidy-calculator/) and are calculated for an individual for 2017. coverage. They would have to either forgo insurance ——In individual states, 50- to 64-year-olds coverage or purchase less expensive plans that receiving the premium tax credit under provide less coverage, leading to increases in the current law are estimated to comprise between numbers of uninsured8 and underinsured older 26 percent (Utah) and 49 percent (Iowa) of all adults, and a potential reversal of the coverage gains adults receiving tax credits (appendix 1). achieved by this age group since implementation of •• Of this group, approximately 1.4 million were the ACA.9 previously uninsured and gained insurance •• Over 3.2 million 50- to 64-year-olds currently coverage with the assistance of the premium tax receive the ACA premium tax credit and could credit.11 They are most at risk of being unable to be at risk of losing coverage if tax credits were afford insurance with the lower flat credit. substantially reduced.10 This age group represents •• Nearly 2.2 million 50- to 64-year-olds receive an estimated 38 percent of all adults currently cost-sharing reductions and would lose such enrolled in marketplaces with tax credits. assistance if these subsidies were eliminated.12 This age group represents an estimated 35 3 MARCH 2017 percent of all adults enrolled in marketplaces For illustrative purposes, a plan that covers 25 with cost-sharing reductions. percent of average costs would have a $25,000 deductible for individual coverage, a $25,000 out- Weaker Purchasing Power of-pocket maximum, and significant coverage Flat tax credit proposals would weaken purchasing limitations, such as no coverage for outpatient power of tax credits for lower- and moderate- mental health services, physical therapy, or income older adults compared with current law. rehabilitation services. A plan covering 47 percent The Urban Institute modeled the level of insurance of average costs would have a $6,850 deductible, coverage that consumers would be able to purchase $6,850 out-of-pocket maximum, and the same with tax credits proposed in H.R. 2300.13 The coverage limitations as above. study found that, because tax credits under H.R. The report also found that only 18- to 20-year-olds 2300 were more limited than those available under and 35- to 39-year-olds would be able to purchase current law, older adults would be able to afford coverage with all of the ACA’s essential health health insurance plans that provide only very benefits and an individual deductible under $7,000 limited coverage and that many would have to pay a with the proposed tax credits.18 significantly larger share of their health care costs.14 As a comparison, under the ACA, plans sold in the Eroding Value of Tax Credits nongroup and small group markets15 must cover Unlike the ACA tax credits, a flat tax credit adjusted at least 60 percent of average health care costs by age, such as those proposed in the AHCA and (actuarial value)16 for a Bronze Plan, 70 percent H.R. 2300, is not designed to keep up with actual of average health care costs for a Silver Plan, 80 costs of health insurance coverage. This increases the percent of average health care costs for a Gold Plan, likelihood that the value of the proposed tax credits, and 90 percent of average health care costs for a which already provide less value for older adults than Platinum Plan. For example, a person enrolled in a ACA tax credits, would erode further over time. Silver Plan would expect to pay about 30 percent of The proposed tax credits are fixed with an annual covered health care costs on average and the insurer adjustment tied to an external index, such as would pay 70 percent on average. The ACA also inflation (Consumer Price Index, or CPI), which requires that plans cover all categories of essential does not reflect actual health care cost increases health benefits defined in the law and include a and may not keep up with premium growth. For maximum cap on out-of-pocket costs for enrollees.17 instance, tax credits in H.R. 2300 are proposed to be The Urban Institute estimated the type of health indexed to the CPI and tax credits in the AHCA are plan that people of different ages would be able to proposed to be indexed to the CPI plus 1 percentage purchase with the tax credit proposed under H.R. point. This is a significant change from the ACA 2300. The study found that older adults would be tax credits, which are tied to the actual costs of able to afford a plan that covers only premiums in each market. Since the proposed tax credits are not tied to actual •• 25 percent of average health care costs for 61- to health insurance premiums, they may also be 64-year-olds, inadequate for people who live in geographic areas •• 34 percent of average health care costs for 56- to with higher health care costs.19 60-year-olds, Redistribution of Federal Resources from Lower- •• 41 percent of average health care costs for 53- to to Higher-Income Individuals 55-year-olds, and The ACA premium tax credits are adjusted by •• 47 percent of average health care costs for 50- to income, targeting federal resources to people who 52-year-olds. need it the most: those with annual incomes of up to 400 percent of FPL, which is $47,520 for an individual in 2017. The tax credits proposed in the 4 MARCH 2017 AHCA are not tied directly to income level but, combined impact of both the tax credit reductions as noted previously, they would be phased out for and the change in age-rating limits for the ages and single individuals starting at annual incomes of income levels specified are detailed in table 2. $75,000, up to incomes of $90,000 for younger Not illustrated in the table are other changes adults (under age 30) and $115,000 for older adults included in H.R. 2300 and other proposals that (ages 60 and older); and for joint filers starting could further increase costs for older adults. These at $150,000. H.R. 2300 and other proposals do changes include dropping protections that ensure not include any limit on incomes for people who tax credits are used to purchase comprehensive would receive the proposed tax credits, meaning policies (such as essential health benefit and related that wealthy individuals would receive the same actuarial value requirements) and discarding assistance as low-income individuals. out-of-pocket limit requirements. In combination, Along with other changes, proposals that do not target tax credit assistance to those who need it the TABLE 2 most, or phase out the tax credits at high levels of Illustrative Combined Effect of Age-Rating and income, raise concerns that federal funds would Tax Credit Changes on Premiums under the be redistributed away from high-need, lower- American Health Care Act of 2017 (AHCA)* for income individuals to higher-income individuals, the Same Coverage Level exacerbating the wealth gap and potentially worsening health disparities.20 Premium Increase Age/Income from Current Law** For Older Adults, Confluence of Other Changes Threaten the Affordability of Health Insurance 50 years old Coverage $15,000 $2,726 The flat tax credits are being proposed in $25,000 $1,332 combination with other significant proposed $45,000 –$1,329 changes in law that would negatively affect the ability of older adults, especially low- and moderate- 55 years old income older adults, to purchase coverage in the $15,000 $5,030 nongroup market. One such change would be to $25,000 $3,636 weaken or eliminate limits on age-rating for health $45,000 $975 insurance premiums, which would allow insurers to charge older adults higher premiums than is 60 years old allowed under current law.21 $15,000 $6,999 To illustrate the impact of the combined age-rating $25,000 $5,605 increase and tax credit changes on older adults, $45,000 $2,944 we computed the premiums they would pay (net 64 years old of tax credits) under current law at four ages (50-, $15,000 $8,394 55-, 60-, and 64-year-olds) and three income levels $25,000 $7,000 ($15,000, $25,000, and $45,000) for a silver plan. We compared those premiums to the premiums $45,000 $4,339 they would pay if they were to maintain the same *As introduced on March 6, 2017. coverage with 5:1 age rating and received the tax credits proposed under the AHCA, if the credits **Based on Silver Plan were implemented in 2017.22 Source: AARP Public Policy Institute analysis. Esti- As table 2 shows, these changes would have the mates do not include projected changes in enrollment effect of increasing premium costs for 50- to- or other changes in the legislation 64-year-olds by as much as $8,400 a year. The 5 MARCH 2017 the changes in age rating and tax credits, as ENDNOTES well as other potential provisions, would result 1 In states that expanded their Medicaid programs, tax credit eligibility begins at 138 percent of the federal poverty level. in significantly higher costs and less financial protection for many older adults.23 2 Under the ACA, tax credits are tied to a benchmark of the second-lowest-cost Silver Plan offered in the state. A Silver- DISCUSSION tier plan covers an actuarial value of 70 percent of covered ACA tax credits are critical to ensuring coverage for expenses on average. People who qualify for tax credits older adults and have contributed to a significant can choose to enroll in higher-metal-level plans with higher levels of coverage but would pay the difference in costs. improvement in the uninsured rate among this age group. Proposals to replace the ACA’s financial 3 The ACA includes provisions to increase the premium caps assistance with a new flat tax credit, even when to reflect high rates of premium growth. adjusted by age, raise significant concerns for older 4 Cost-sharing reductions are available to consumers who adults. enroll in Silver Plans through the Marketplace, and they effectively increase the value of the plan to be equivalent to Proposed replacement tax credits under H.R. more generous levels of coverage. 2300 and the AHCA would result in less financial 5 As introduced on March 6, 2017, by the US House of security and premium assistance for lower- and Representatives Committee on Ways and Means and moderate-income older adults over time. The Committee on Energy and Commerce. redistribution of funds from lower- to higher- 6 The credits are capped at a combined $14,000 per family. income older adults could worsen disparities in Eligibility for credits is phased out by $100 for every $1,000 access to health care. Although the ACA’s tax credits in income, beginning at incomes of $75,000 for individuals could be improved by proposals such as increasing or $150,000 for joint filers. generosity for individuals with moderate incomes, 7 Jane Sung and Olivia Dean, “Impact of Changing the Age in their current form they have provided a critical Rating Limit for Health Insurance Premiums,” Spotlight 23, source of financial assistance for those who need it AARP Public Policy Institute, Washington, DC, February 2017, most, and they should be maintained. http://www.aarp.org/ppi/info-2016/Impact-of-Changing- the-Age-Rating-Limit-for-Health-Insurance-Premiums.html. 8 Commonwealth Fund modeled a previous flat tax credit proposal and found uninsurance rates would significantly increase for adults ages 50-64. Evan Saltzman, Christine Eibner, “What Happens if the ACA’s Tax Credits Are Replaced with Premium Support, Blog Post, The Commonwealth Fund, November, 2015, Washington DC, http://www. commonwealthfund.org/publications/blog/2015/nov/what- happens-if-the-acas-tax-credits-are-replaced-with-premium- support 9 The uninsured rate for adults ages 50-64 has decreased from 13 percent in 2012 to 8 percent in 2016. See, Commonwealth Fund, “Exhibit 3,” in Biennial Health Insurance Survey 2016, Chartpack (Washington, D.C.: 2017), http://www. commonwealthfund.org/interactives-and-data/surveys/ biennial-health-insurance-surveys/2017/2016-biennial- health-insurance-survey 102017 Urban Institute Health Insurance Policy Simulation Model, data for 2016 enrollment. 11Jane Sung, Lynda Flowers, Olivia Dean, and Matthew Buettgens, “Who’s Gained Affordable Care Act Coverage with Financial Help?,” Fact Sheet 337, AARP Public Policy Institute, Washington, DC, January 2017, http://www.aarp. org/content/dam/aarp/ppi/2017-01/FINAL%20ACA%20 6 MARCH 2017 TAX%20CREDIT%20FACT%20SHEET%20FOR%20POSTING. 20Margot Sanger-Katz, “Republican Health Proposal Would pdf. Redirect Money from Poor to Rich,” New York Times, February 16, 2017, https://www.nytimes.com/2017/02/16/upshot/ 122017 Urban Institute Health Insurance Policy Simulation republican-health-proposal-would-redirect-money-from-poor- Model, data for 2016 enrollment. to-rich.html?_r=0. 13Linda Blumberg, “What Can Consumers Purchase with the 21Sung and Dean, “Impact of Changing the Age Rating Limit.” Age-Related Tax Credits in the Empowering Patients First Bill?,” Urban Institute, Washington, DC, March 2017, http:// 222017 premiums and subsidies under current law are from www.urban.org/research/publication/what-can-consumers- the Kaiser Family Foundation Health Insurance Marketplace purchase-age-related-tax-credits-empowering-patients-first- Calculator (http://kff.org/interactive/subsidy-calculator/). bill. Premiums under 5:1 were calculated by scaling up 3:1 premiums based on analysis by Joanne Fontana, Thomas 14The study also showed that purchasing power decreased Murawski, Sean Hilton, Milliman Research Report, “Impact with age within each of the legislation’s tax credit age of Changing ACA Age Rating Structure: An Analysis of brackets: 18–24, 35–49, and 50 and older. See Blumberg, Premiums and Enrollment by Age Band”, Milliman Research “What Can Consumers Purchase?” Report, January 2017, www.milliman.com/aarp 15These requirements do not apply to plans grandfathered in 23David Cutler, John Bertko, and Topher Spiro, “Study, ACA the ACA. Enrollees’ Costs Would Spike under Republican Plans,” 16Actuarial value is the percentage of total average health care Vox, February 24, 2017, http://www.vox.com/the-big- costs for covered benefits that the plan covers. idea/2017/2/24/14722152/obamacare-aca-health-care- costs-premiums-costs-increase. This study estimated that 17Under the ACA, the maximum out-of-pocket limit for a 2017 the combined effect of several proposed changes in H.R. Marketplace plan is $7,150 for individual coverage. 2300 would increase premiums and cost sharing for older 18Blumberg, “What Can Consumers Purchase?” adults ages 55–64 by $6,089 annually (from $4,078 to $10,167), and by $1,744 annually (from $3,101 to $4,846) 19Cynthia Cox, Gary Claxton, and Larry Levitt, “How Affordable for all ages. These changes include elimination of the ACA Care Act Repeal and Replace Plans Might Shift Health tax credits and cost-sharing reductions, adoption of a flat Insurance Tax Credits,” Kaiser Family Foundation, Washington, tax adjusted by age, and elimination of ACA essential health DC, March 1, 2017, http://kff.org/health-reform/issue-brief/ benefit requirements. how-affordable-care-act-repeal-and-replace-plans-might-shift- health-insurance-tax-credits/. 7 MARCH 2017 APPENDIX 1 Marketplace Enrollees with Premium Tax Credits in 2016 (Estimate) State % of Nonelderly Adults with Tax Credits Total 50- to 64-Year-Olds with Tax Credits Who Are Ages 50–64 Alabama 61,000 42% Alaska 7,000 43% Arizona 44,000 45% Arkansas 19,000 38% California 399,000 33% Colorado 28,000 40% Connecticut 28,000 41% Delaware 7,000 39% District of Columbia 1,000 35% Florida 454,000 37% Georgia 144,000 36% Hawaii 5,000 54% Idaho 25,000 36% Illinois 94,000 39% Indiana 39,000 42% Iowa 20,000 49% Kansas 26,000 37% Kentucky 23,000 47% Louisiana 29,000 47% Maine 28,000 46% Maryland 43,000 37% Massachusetts 42,000 37% Michigan 95,000 45% Minnesota 17,000 47% Mississippi 29,000 44% Missouri 81,000 37% Montana 10,000 49% Nebraska 23,000 36% Nevada 21,000 41% New Hampshire 12,000 43% New Jersey 74,000 40% New Mexico 13,000 40% New York 126,000 41% North Carolina 166,000 37% North Dakota 5,000 37% 8 Marketplace Enrollees with Premium Tax Credits in 2016 (Estimate) State % of Nonelderly Adults with Tax Credits Total 50- to 64-Year-Olds with Tax Credits Who Are Ages 50–64 Ohio 64,000 47% Oklahoma 39,000 39% Oregon 40,000 38% Pennsylvania 97,000 43% Rhode Island 10,000 37% South Carolina 62,000 41% South Dakota 8,000 48% Tennessee 68,000 42% Texas 313,000 38% Utah 17,000 26% Vermont 9,000 43% Virginia 101,000 35% Washington 54,000 40% West Virginia 13,000 43% Wisconsin 71,000 38% Wyoming 7,000 44% United States 3,208,000 38% Source: 2017 Urban Institute Health Insurance Policy Simulation Model, data for 2016 enrollment. Insight on the Issues 120, March 2017 © AARP PUBLIC POLICY INSTITUTE 601 E Street, NW Washington DC 20049 Follow us on Twitter @AARPpolicy on facebook.com/AARPpolicy www.aarp.org/ppi For more reports from the Public Policy Institute, visit http://www.aarp.org/ppi/. 9