November 2018 | Issue Brief Explaining Health Care Reform: Questions about Health Insurance Subsidies Health insurance can be expensive, and is therefore often out of reach for lower and moderate income families, particularly if they are not offered health benefits at work. To make coverage obtainable for families that otherwise could not afford it and to encourage broad participation in health insurance, the Affordable Care Act (ACA) includes provisions to lower premiums and out-of-pocket costs for people with low and modest incomes. The adequacy of this assistance will be a key determinant of how many people ultimately gain coverage and whether or not lower-income people will be able to use the health insurance they obtain. This brief provides an overview of the financial assistance provided under the ACA for people purchasing coverage on their own through health insurance Marketplaces (also called exchanges). Health Insurance Marketplace Subsidies The ACA offers subsidies to reduce monthly premiums and out-of-pocket costs in an effort to expand access to affordable health insurance for moderate and low-income people – particularly those without access to affordable coverage through their employer, Medicaid, or Medicare. There are two types of subsidies available to marketplace enrollees. The first type of assistance, called the premium tax credit, works to reduce enrollees’ monthly payments for insurance coverage. The second type of financial assistance, the cost-sharing subsidy, is designed to minimize enrollees’ out-of-pocket costs when they go to the doctor or have a hospital stay. In order to receive either type of financial assistance, qualifying individuals and families must enroll in a plan offered through a health insurance Marketplace. PREMIUM TAX CREDIT The premium tax credit reduces marketplace enrollees’ monthly payments for insurance plans purchased through the Marketplace. Health insurance plans offered through the Marketplace are standardized into four “metal” levels of coverage: bronze, silver, gold, and platinum. Bronze plans tend to have the lowest premiums but leave the enrollee subject to higher out-of-pocket costs when they receive health care services, while platinum plans tend to have the highest premiums but have very low out-of-pocket costs. The premium tax credit can be applied to any of these metal levels, but cannot be applied toward the purchase of catastrophic coverage. Catastrophic health plans typically have a lower monthly premium than other Qualified Health Plans in the Marketplace, but generally require beneficiaries to pay all of their medical costs until the deductible is met. To qualify for a catastrophic plan, an individual must either be under 30 years of age or eligible for a “hardship exemption.” Who is eligible for the premium tax credit? In order to receive the premium tax credit for coverage starting in 2019, a marketplace enrollee must meet the following criteria:  Have a household income from one to four times the Federal Poverty Level (FPL), which for the 2019 benefit year will be determined based on 2018 poverty guidelines (In 2019, the subsidy range in the continental U.S. is from $12,140 for an individual and $25,100 for a family of four at 100% FPL, to $48,560 for an individual and $100,400 for a family of four at 400% FPL.)  Not have access to affordable coverage through an employer (including a family member’s employer)  Not eligible for coverage through Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), or other forms of public assistance  Have U.S. citizenship or proof of legal residency (Lawfully present immigrants whose household income is below 100% FPL and are not otherwise eligible for Medicaid are eligible for tax subsidies through the Marketplace if they meet all other eligibility requirements.)  If married, must file taxes jointly in order to qualify For the purposes of the premium tax credit, household income is defined as the Modified Adjusted Gross Income (MAGI) of the taxpayer, spouse, and dependents. The MAGI calculation includes income sources such as wages, salary, foreign income, interest, dividends, and Social Security. Table 1: Premium Subsidy Ranges, by Income in 2018 and 2019 Income Range in Dollars Income Range in Dollars Income for the 2018 benefit year for the 2019 benefit year % Poverty Single Individual Family of Four Single Individual Family of Four Under 100% Less than $12,060 Less than $24,600 Less than $12,140 Less than $25,100 100% – 133% $12,060 – $16,040 $24,600 – $32,718 $12,140 – $16,146 $25,100 – $33,383 133% – 150% $16,040 – $18,090 $32,718 – $36,900 $16,146 – $18,210 $33,383 – $37,650 150% – 200% $18,090 – $24,120 $36,900 – $49,200 $18,210 – $24,280 $37,650 – $50,200 200% – 250% $24,120 – $30,150 $49,200 – $61,500 $24,280 – $30,350 $50,200 – $62,750 250% – 300% $30,150 – $36,180 $61,500 – $73,800 $30,350 – $36,420 $62,750 – $75,300 300% – 400% $36,180 – $48,240 $73,800 – $98,400 $36,420 – $48,560 $75,300 – $100,400 Over 400% More than $48,240 More than $98,400 Less than $12,140 More than $100,400 NOTES: Alaska and Hawaii have different poverty guidelines. Note that tax credits for the 2019 benefit year are calculated using 2018 federal poverty guidelines, while tax credits for the 2018 benefit year are calculated using 2017 federal poverty guidelines. SOURCE: Kaiser Family Foundation Employer coverage is considered affordable if the employee’s contribution is less than 9.86 percent of his or her household income (for the employee’s coverage only, not including the cost of adding family members). The employer’s coverage must also meet the “minimum value” standard, meaning that the Explaining Health Care Reform: Questions about Health Insurance Subsidies 2 plan has an actuarial value of at least 60 percent (equivalent to a bronze plan). In situations in which the employer’s plan fails to meet one or both of these requirements, the employee and their family may be eligible for subsidized coverage through the Marketplace if they meet the other criteria listed above. In states that decide to expand Medicaid, tax credit eligibility effectively ranges from 138% to 400% of the poverty level (because almost all people with incomes below 138% of poverty are eligible for Medicaid and therefore are not eligible for subsidized Marketplace coverage). In states that do not decide to expand Medicaid, tax credit eligibility ranges from 100% to 400% of poverty. Residents of these states who have incomes below 100% of poverty and who do not qualify for Medicaid under their state’s eligibility criteria are not eligible for the premium tax credit. The Kaiser Family Foundation estimates that 2.2 million Americans living in states that did not decide to expand Medicaid fall into this coverage gap. The ACA includes stipulations to offer tax credits and Medicaid coverage to eligible lawfully present immigrants. Like U.S. citizens, lawfully present immigrants are eligible for subsidized coverage in the marketplaces if they meet their state’s income eligibility rules. Lawfully present immigrants who meet the income eligibility rules for Medicaid in their state may be eligible for Medicaid, but, with the exception of pregnant women in certain states, are generally subject to a five-year waiting period before they can apply. Immigrants who would otherwise be eligible for Medicaid but have not yet completed their five-year waiting period may instead qualify for tax credits through the Marketplace. If an individual in this circumstance has an income below 100 percent of poverty, for the purposes of tax credit eligibility, his or her income will be treated as though it is equal to poverty (meaning that the enrollee would pay no more than 2.08% of income for a benchmark silver plan in 2019). Immigrants who are not lawfully present are ineligible to enroll in health insurance through the marketplace, receive tax credits through the marketplaces, or enroll in non-emergency Medicaid and CHIP. What amount of premium tax credit Table 2: Premium Cap, by Income in 2018 and 2019 is available to people? Premium Cap The premium tax credit works by setting Income Max % of income for 2nd lowest silver plan % Poverty a cap on the amount an individual or 2018 2019 family must spend on their monthly Under 100% No Cap No Cap payments for health insurance if they 100% – 133% 2.01% 2.08% enroll in a “benchmark” plan. The cap 133% – 150% 3.02% – 4.03% 3.11% – 4.15% depends on the family’s income, with 150% – 200% 4.03% – 6.34% 4.15% – 6.54% lower-income families having a lower cap and higher income families having 200% – 250% 6.34% – 8.10% 6.54% – 8.36% a higher cap (detailed in the table 250% – 300% 8.10% – 9.56% 8.36% – 9.86% below). 300% – 400% 9.56% 9.86% Over 400% No Cap No Cap The “benchmark” for determining the NOTES: Alaska and Hawaii have different poverty guidelines. Note amount of the subsidy is the second- that tax credits for the 2019 benefit year are calculated using 2018 lowest cost silver plan available to the federal poverty guidelines, while tax credits for the 2018 benefit year are calculated using 2017 federal poverty guidelines. individual or family through their state’s SOURCE: Kaiser Family Foundation Explaining Health Care Reform: Questions about Health Insurance Subsidies 3 Marketplace. If the cost of the enrollee’s benchmark silver plan exceeds their premium cap, then the federal government will pay any amount over the cap. The amount of the tax credit, therefore, is equal to the difference between the individual or family’s premium cap and the cost of the benchmark silver plan. As noted above, the premium tax credit can then be applied toward any other plan sold through the Marketplace (with the exception of catastrophic coverage). The amount of the tax credit remains the same, so a person who chooses to purchase a plan that is more expensive than the benchmark plan will have to pay the difference in cost. Conversely, a person who chooses a less expensive plan, such as a bronze plan, may end up paying as little as zero dollars per month for the premium. An example shows how the premium tax credits would work for an individual during the 2018 benefit year. Premium tax credits at 250% FPL in 2019  Pat is 30 years old and estimates her 2019 income will be 250% of poverty (about $30,350 per year)  Suppose the second-lowest cost silver plan available to Pat in the Marketplace is $500 per month  Under the ACA, with an income of $30,350 per year, Pat would have a cap of 8.36% of income for the second-lowest cost silver plan  This means that Pat would have to pay no more than $211 per month (8.36% of $30,350, divided by 12 months) to enroll in the second-lowest cost silver plan  The tax credit available to Pat would therefore be $289 per month ($500 premium minus $211 cap)  Pat can then apply this $289 per month discount toward the purchase of any bronze, silver, gold, or platinum Marketplace plan available The premium tax credit cannot be applied to the portion of a person’s premium that is for non-essential health benefits. For example, a plan may offer a dental or vision benefit that is not considered to be “essential” by the state or federal definition. In that case, the person would have to pay for a small portion of the premium without financial assistance. Similarly, if the person smokes cigarettes and is charged a higher premium for smoking, the premium tax credit is not applied to the portion of the premium that is the tobacco surcharge. How will premium tax credit be provided? To receive the premium tax credit, an individual or family must purchase insurance coverage through the Marketplace. When they apply for Marketplace coverage, enrollees will receive a subsidy determination, letting them know whether they are eligible for a premium tax credit and the amount they may receive. The person or family then has the option to receive the tax credit in advance, claim it later when they file their tax return, or some combination of the two options. Explaining Health Care Reform: Questions about Health Insurance Subsidies 4 The advanced payment option allows consumers to receive their tax credit at the time of purchase and choose how much advance credit payments to apply toward their premiums each month. If the enrollee chooses the advanced payment option, then the IRS will pay insurers directly such that the cost of the premium is reduced upfront. With this option, the enrollee would need to reconcile their premium tax credit at tax time the following year. (For people receiving an advanced payment of the premium tax credit in 2019, the reconciliation would occur when they file their 2019 tax return in 2020). If the individual or family had a significant change in their income from the time they first applied for Marketplace coverage, they may be asked to repay some or all of the tax credit; or conversely, they may be owed an additional amount when they do their taxes. The table below indicates the maximum repayment limits for an individual and family, which varies depending on income level. Table 3: Repayment Amounts under Current Law by Income Level for 2018 Income Maximum repayment amount Maximum repayment amount (% Federal Poverty Level) for a single individual for couples and families Less than 200% FPL $300 $600 200% - less than 300% FPL $775 $1,550 300% - less than 400% FPL $1,300 $2,600 400% FPL or greater Full Amount Full Amount SOURCE: Internal Revenue Service, Revenue Procedure 2017-58. Alternatively, an individual or family can opt to pay their entire premium costs each month and wait to receive their tax credit until they file their annual income tax return the following year. The premium tax credit is available to qualifying enrollees regardless of whether they have federal income tax liability, although an individual is required to file a tax return for a given benefit year in order to receive financial assistance. Cost-Sharing Subsidies In addition to the premium tax credit, the second form of financial assistance available to Marketplace enrollees is a cost-sharing subsidy. Cost-sharing subsidies work by reducing a person or family’s out-of- pocket cost when they use health care services, such as deductibles, copayments, and coinsurance. Unlike the premium tax credit (which can be applied toward any metal level of coverage), cost-sharing subsidies can only be applied toward a silver plan. In essence, the cost-sharing subsidy increases the actuarial value (protectiveness) of a silver plan, in some cases making it similar to a gold or platinum plan. Explaining Health Care Reform: Questions about Health Insurance Subsidies 5 Are cost-sharing subsidies still available for 2019? Yes. Cost-sharing subsidies are still available for eligible Marketplace enrollees. Although the federal government will no longer be reimbursing insurers for these subsidies, insurers are required by law to provide reduced cost sharing for lower-income enrollees. Who is eligible for the cost-sharing subsidy? People who are eligible to receive a premium tax credit and have household incomes from 100% to 250% of poverty are eligible for cost-sharing subsidies. (The cost-sharing subsidies are available only to the lowest-income Marketplace enrollees who meet all of the other criteria for receiving the premium tax credit). Again, the eligible individual or family must purchase a silver level plan in order to receive the cost-sharing subsidy. What amount of cost-sharing subsidies are available to people? The ACA sets maximum out-of-pocket (OOP) spending limits, but otherwise does not specify the combination of deductibles, copayments, and coinsurance that plans must use to meet the actuarial value requirements. For example, one insurer may choose to have a relatively high deductible but low copayments for office visits and other services, while another may choose a lower deductible but higher copayments or coinsurance for each service. Without the cost-sharing subsidy, the out-of-pocket maximum may be no more than $7,900 for an individual and $15,800 for two or more people in 2019. (This is the highest a plan may set the OOP max, but plans frequently come with a lower OOP max). With the cost-sharing reduction, the out-of-pocket maximum can be no higher than $2,600 to $6,300 for an individual, or $5,200 to $12,600 for a family in 2019, depending on income. The table below presents the reduced out-of-pocket maximums and increased actuarial values after cost-sharing subsidies are applied, within each income range. Table 4: Maximum Annual Limitation on Cost-Sharing Income OOP Max for Individual/Family Actuarial Value of a silver plan (% Federal Poverty Level) 2018 2019 Under 100% 70% $7,350 / $14,700 $7,900 / $15,800 100% –150% 94% $2,450 / $4,900 $2,600 / $5,200 150% – 200% 87% $2,450 / $4,900 $2,600 / $5,200 200% – 250% 73% $5,850 / $11,700 $6,300 / $12,600 Over 250% 70% $7,350 / $14,700 $7,900 / $15,800 SOURCE: “Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2019,” Federal Register 83 FR 16930 (April 17, 2018). Explaining Health Care Reform: Questions about Health Insurance Subsidies 6 Typically, silver plans have an actuarial value of 70%, meaning that on average the plan pays 70% of the cost of covered benefits for a standard population of enrollees, with the remaining 30% of total costs being covered by the enrollees in the form of deductibles, copayments, and coinsurance. By lowering an individual or family’s out-of-pocket costs, the cost-sharing subsidies increase the actuarial value of the silver plan (to 73, 87, or 94 percent depending on the enrollee’s income). How will cost-sharing subsidies be provided? When enrolling in a silver plan, an eligible enrollee is placed into a plan that has the cost-sharing subsidy automatically applied. This means that the silver plan they choose will already have a lowered out-of- pocket maximum than the same plan would in the absence of a cost-sharing subsidy. Unlike the premium tax credit, there is no option for cost-sharing subsidies to be paid to the enrollee. Conclusion In combination, the premium tax credit and cost-sharing reductions require health plans offering coverage to lower-income people in the exchange to increase the actuarial value of the coverage of the plans that they receive, and to do so in a way that caps enrollee out-of-pocket liability within the specified levels. Subsidies to make insurance more affordable and increase insurance coverage are a key element of the Affordable Care Act. Premium and cost-sharing subsidies of varying levels are available to individuals and families with low to moderate incomes, making coverage and care more affordable. These subsidies – which represent a substantial share of the federal cost of the ACA – provide assistance for low to moderate income families, enabling them to purchase coverage and gain better access to care. Explaining Health Care Reform: Questions about Health Insurance Subsidies 7