Choices Facing the Senate: Offsetting the Cost of Coverage
- Since World War II, the federal government has given a tax preference to health insurance purchased through an employer but not for insurance people buy on their own.
- Obamacare makes the tax inequity worse by giving only some people subsidies to purchase certain types of health plans on the individual market.
- The American Health Care Act tries to remedy these issues by creating a new tax credit available to most people in the individual market, while also repealing some of Obamacare’s costly regulations.
Current policy treats similarly situated people very differently, depending on where they purchase health insurance. A long-standing goal for health care reform has been equalizing the tax treatment of health insurance. The aim is for the federal government to treat everyone the same regardless of where they buy their coverage. This policy change would help make health insurance more portable.
The unequal tax treatment of health insurance
For people who get health insurance through an employer in the large group market, every dollar spent on premiums is excluded from their federal income and payroll taxes. This is known as the “employer exclusion.” The tax exclusion is unlimited – any amount spent on premiums qualifies – giving employers an incentive to provide more generous health plans. This policy leads to overconsumption and overinsurance. In addition, the arrangement disconnects consumers from the dollars they spend on health care and therefore from the price of health care services.
People purchasing health insurance on their own in the individual market get no tax break except for Obamacare’s limited subsidies. They pay considerably more for health insurance because they purchase it with after-tax dollars.
This difference in the tax treatment of coverage also inhibits personal ownership and portability of health coverage. When people switch jobs, they also have to switch their coverage.
Obamacare makes two big changes to the tax treatment of health insurance. First, it gives subsidies that are limited to certain people purchasing on the exchanges in the individual market. Second, Obamacare caps the amount of health premiums that can be excluded from taxes – the so-called “Cadillac Tax.” This tax was to begin in 2018 but has been delayed until 2020. While capping the employer exclusion is good policy, Obamacare does it in a clumsy and punitive way.
Obamacare’s tax credits and subsidies
To help some people purchasing insurance on the individual market, Obamacare includes premium tax credits for exchange enrollees with incomes between 100 percent and 400 percent of the federal poverty level. In 2017, this range is $12,060 to $48,240 for a single person. For a family of four it is $24,600 to $98,400.
The credits are “advanceable” – they can go directly from the government to an insurer. The recipient does not have to wait until he files his taxes to claim the credit. They also are “refundable,” meaning he can collect the full credit even if he does not owe any income taxes.
The credit amount is pegged to the price of the second-lowest cost silver plan in a region – the benchmark plan. Recipients must spend a set percentage of their income on premiums before the subsidy kicks in. The thresholds are on a sliding scale, so the higher a person’s income, the higher the share of his income he must spend on premiums before the credits kick in to pay the rest.
In addition, Obamacare includes cost-sharing reduction subsidies. People between 100 percent and 250 percent of the federal poverty level get these additional subsidies to reduce their out-of-pocket expenses. A person must be enrolled in a silver plan to receive CSR payments.
Obamacare subsidies – both credits and CSRs – can be used only by people who purchase through the exchanges. As the exchanges collapse and options disappear, these subsidies may become harder for consumers to obtain.
In 2017, 10.1 million people who have selected plans on the exchanges are eligible for premium tax credits. About 70 percent of them are also eligible for CSR payments.
The Congressional Budget Office’s January 2017 projection estimated that Obamacare’s premium tax credits and cost-sharing subsidies would cost $919 billion from 2018-2027. It estimated that 20 million people would purchase coverage in the individual market in 2027 – 11 million people would get subsidies in the exchanges and 9 million people would not get subsidies.
tax credits under The American Health Care Act
The American Health Care Act would make significant changes to the tax treatment of insurance.
Changes and repeals Obamacare’s coverage subsidies. In 2018 and 2019, the bill would allow premium tax credits to be used for a wider range of options than are allowed under Obamacare, including catastrophic-only plans and qualified plans sold off the exchanges. This would allow recipients of Obamacare’s tax credits greater choice of insurers and types of health plans. The bill would also adjust how the Obamacare subsidies would be calculated for 2019. It would make them more generous for younger adults and require older adults to pay a greater share of their income on premiums before subsidies kick in. This would encourage young healthy people to sign up and help stabilize the markets. These changes would not affect people below 150 percent of the federal poverty level. Obamacare’s premium tax credits, cost-sharing reduction subsidies, and small business tax credits would be repealed in 2020.
Creates a new refundable tax credit for the purchase of health insurance. Beginning in 2020, the bill would create a new advanceable, refundable tax credit for people ineligible for coverage under a government program and are not offered insurance at work. To receive the credit, a person would have to be a citizen, “national”, or a “qualified alien” and could not be incarcerated.
The credit amounts would vary by age:
|Under Age 30||$2,000|
|Between 30 and 39||$2,500|
|Between 40 and 49||$3,000|
|Between 50 and 59||$3,500|
|Over Age 60||$4,000|
|Cap Per Family||$14,000|
|Starts Phasing Out – Individual||$75,000|
|Starts Phasing Out – Joint Filers||$150,000|
The credit would be capped at $14,000 per family, and it would be limited to the five oldest family members. It would grow at the rate of the consumer price index plus 1 percent. The credit would begin to phase out at incomes above $75,000 for an individual and $150,000 for joint filers. The phase-out would be gradual to prevent creating a disincentive to earn more. It would decrease by $100 for every $1,000 in extra income above the thresholds.
Knowing that the Senate may want to redesign the new tax credits, the House reduced the AHCA’s savings level to create spending room for the Senate to make changes to the new tax credit. CBO’s March 23 estimate of the bill projected this spending room to be about $90 billion over 10 years.
CBO projected the new credit would cost $357 billion from 2020 - 2026. It estimated enrollment in the individual market in 2026 would be reduced by 3 million compared to Obamacare.
KEY ISSUES FOR THE SENATE:
In designing federal assistance to help people offset the cost of purchasing health insurance, Senators will need to reach a consensus on several key issues, such as:
- how the new federal assistance will be structured
- who will be eligible to receive it
- how much it will be worth
These considerations must take into account the Senate’s Byrd rule, which restricts budget reconciliation bills.
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