Little noticed ACA provision has big implications for state health benefit exchange affordability
Individuals and families who purchase health coverage through state health benefit exchanges using advance tax credit subsidies under Section 1401 of the Patient Protection and Affordable Care Act will pay no more than 2 to 9.5 percent of their income towards premiums. Section 1401 delineates a sliding scale range of income maximums in six brackets and percentages for each level.
In 2015 and future years, however, those percentages could rise under a little noticed and discussed provision at Section 1401 amending Section 36B(b)(3)(A)(ii) of the Internal Revenue Code. It states the maximum income amounts “shall be adjusted to reflect the excess of the rate of premium growth for the preceding calendar year over the rate of income growth for the preceding calendar year.” Then for calendar years 2018 and beyond, should premium tax credits and cost sharing reductions reach .504 percent of the gross domestic product for the preceding calendar year, the maximum income amounts are subject to an additional bump.
In 2011, the Congressional Budget Office (CBO) interpreted the clause to mean that “the maximum percentages of income that enrollees at a given income level will have to pay will increase over time.” By how much, exactly? “CBO and JCT (Joint Committee on Taxation) interpret that adjustment (relative only to premiums) as being equal to the difference between (1) the percentage change in average premiums for private health insurance for the nonelderly nationwide between the prior year and the year before that and (2) the percentage change in average U.S. household income.” (Final U.S. Treasury Department Regulations issued in May 2012 governing the Premium Tax Credit are silent on the provision)
CBO explained the need for the adjustment mechanism as follows: “Because private health insurance premiums generally grow faster than income, the regular indexing provision will keep the share of the premium paid by an enrollee at a given income level and the government roughly constant from year to year.” A report issued last month by the Commonwealth Fund noted that between 2003 to 2011, premiums for family coverage increased 62 percent across states—rising far faster than income for the middle- and low-income families comprising the population expected to buy coverage through the exchanges.
In conclusion, this means if premiums continue to rise as most observers expect, those purchasing subsidized coverage through state benefit exchanges won’t be protected from those increases and will have to pay a larger share of their incomes toward premium rates. (I apologize for a previous post in 2012 that asserted otherwise) This has enormous implications for the exchanges since they must offer affordable coverage in order to attract and retain sufficiently large numbers of enrollees in order to restore a functional individual health insurance market.