ACA Premium Tax Credits CHRISTINE BRIERE, DEAN FURST, SARAH RUDASILL, NIKOLAI HLEBOWITSH.

ACA Premium Tax Credits

ACA Premium Tax CreditsCHRISTINE BRIERE, DEAN FURST, SARAH RUDASILL, NIKOLAI HLEBOWITSH

Affordable Care Act

(Healthcare.gov)

Health Insurance Marketplace

(Kaiser Family Foundation)3Process

Making Coverage Cheap

Making Coverage Cheap

What is a premium tax credit?Helps make purchasing health insurance coverage more affordable

If you get coverage through Health Marketplace, you are eligible

Reduced premiums or a larger tax return

Cost estimateYearly income:$20,000$40,000Estimated Financial help: $191 per month($2,290 per year)$0 per monthYour cost for a silver plan:$25 per month($302 per year)$216 per monthThe most you can spend on health care:2.01% of income9.56% of incomeWithout financial help:$216 per month$216 per month

(Kaiser Family Foundation)The Silver StandardACA caps the amount of your income you are expected to spend on health insurance

$400 Second Least Expensive Silver Plan$153/month tax credit subsidy$4000/month6.3% of income = $247Lets make an example to show the silver standard. Lets say you are in a family of four making about 48K/year, or about $4K/month which is 200% of the Federal Poverty Line. The Affordable Care Act mandates that your monthly premiums can not exceed 6.3% of your income at this level, or $247. To determine the amount of the subsidy, the government looks to the second least expensive silver plan, and for the sake of example, lets say this is $400. Because your family is only expected to pay $247/month, the amount of the tax credit is $153/month. This credit can be applied to ANY plan you choose, not just the silver plan.9Selection

**Numbers from Healthcare.govLets talk a little about selection of plans in the marketplaces. There are four types of plans available: bronze, silver, gold, and platinum. Plans within the bronze level typically cover 60% and leave the other 40% for the consumer. For silver, out of pocket costs are approximately 30%, for gold 20%, and for platinum only 10% out-of pocket. Here Ive drawn up an example situation taking prices from healthcare.gov. Now, there are a multitude of different plans within each category, but Ive selected a typical price among the group. So on the lower end in the bronze plans, premiums cost about $210/month for a single individual, and for some of the platinum plans, the premiums run closer to $380/month. As weve mentioned, for those who are within 100-400% of the Federal Poverty line, the government supplements the premium cost up until the second lowest silver plan. That credit, however, can be applied to any of the plans. For instance, lets say that the credit was equivalent to $93/month. A healthy 22 year old male might choose the bronze plan because his premiums would be the lowest and he doesnt expect to be taking many trips to the hospital. However, a 50 year old individual with many pre-existing conditions would rather pay higher premiums and lower out-of-pocket hospital bills. The WinnersLow-income individuals making 100% to 400% of the FPL

Scaled premiums based upon income70 to 94% of out-of-pocket expenditures are covered

Individuals with pre-existing conditions

No longer charged more

(Roy, 2015)

11Implications for DemandTax subsidy shifts the demand curve to the right

Increases quantity demanded of health insurance, as well as the price

More individuals will possess health insurance after subsidies

Empirical Evidence(Moriya and Simon, 2014)Analyzed impact of 65% federal health insurance premium subsidy during the Great RecessionSubsidy yielded a 15.2% increase in the continuation of employer coverage

Greater health insurance coverage results in:Greater health care usage in RAND Health Insurance Study (Manning et al., 1987)More hospitalizations (Hassan et al., 2013)

Greater Health Insurance UsageThe tax subsidies increase health insurance coverageMore generous coverage yields higher nominal demand curvesHealth care spending increases as a greater quantity of care is purchased at higher pricesIncreases ex-post moral hazard, which may be efficient or inefficient

Implications for the Risk PoolLow-income individuals and those with pre-existing conditions can now afford health insuranceStudies show that low-income individuals tend to have worse health outcomes and greater expected benefits than their counterparts (Konttinen, 2012)Result: riskier insurance pools with greater expected benefits but the inability to price based upon each individuals expected benefitPerhaps this could lead to a death spiral

A Case Study of Washington StateThe financial consequences of adverse selection1993: Washington State implements community-rated health insurance that must cover pre-existing conditionsResults: The pregnant mother problemLoss of healthy individuals (over 25% of the pool)Premiums increased by 78% within 3 years 30 insurers filed for bankruptcy or left the state

(Roy, 2012)

But have no fear! The Individual MandateAll individuals are required to purchase health insuranceMust purchase community-rated health insurance or pay a finePenalty of $695 per year up to three times that amount for a family or 2.5% of income2014 - $952015 - $3252016 - $695

Result:Relative risk of the pool decreasesPremiums dont rise quicklyNo death spiral emerges

(Healthcare.gov)

The LosersYoung, healthy individualsFrequently value insurance less than what they must pay in premiums

Employed individuals, especially those who receive benefits from employersSubsidize care for others through income taxesIneligible for tax credits in most cases

Potential Shortfalls

Difficulty Predicting IncomePossible adverse selection with multiple plans available- bad for insurersHow these premium subsidies fit into the overall population (i.e. Medicaid Gap subsidies affordable already?)

Difficulties predicting income80% take home subsidy in form of premium tax credit (Brecht, 2015)Paid directly to insurance company by government

Subsidy amount based off projected income and family sizeChanges in either means final tax credit could be differentResponsible for paying back some or all of your subsidy

Example

(Marketplace Matters: Tax Credits)Difficulties predicting incomeWhy is this a problem?Opportunity cost - extra papers to file, notify marketplaceGovernment trying to waive fees to provide reliefIRS announced relief efforts for low-income families with underestimated incomeIndividuals have to file the next year, include the excess payment to receive relief

Adverse selectionTop concern - younger and healthier stay away from ACA ExchangesAdverse selection death spiralHuge age skews in the percentages of individuals signed up for exchanges.

(Avik 2015)Cost to Insurers25% enrollment of 18-34 year olds - worst case scenarioOverall costs 2.4% higher than premiums (Roy, 2015)Most insurers operate at profit margins of 4-6% (Roy, 2015)

Adverse selectionWill it get better with time? Yespeople who needed coverage right away, most in need of someone to pay for immediate health-care needsdesigned to increase the cost of coverage for healthier and younger people in beginning, in order to make coverage a better deal for the sick.

How premiums fit into populationCongressional Budget Office - expected 8.5% increase from 2016-2018 (Pear et all., 2014)Encourages shopping around, a year after being accustomed with coverageAs many as 7M people may need to change plans to avoid paying more

Example40 year old in Nashville, TNGood health, considered low-risk individual (non-smoker)Paid $181/month for plan Will now expect to pay $220/month to keep same plan

How premiums fit into populationLowest premium plan - $191 (Pear et all., 2014) Deductible jumps from $2000 to $400025 more insurers participating next year (Pear et all., 2014)Consumers facing up to 40 possible plansUp 31 from previous year

King v. Burwell

Are states that have not established their own insurance exchanges eligible for Premium Tax Credits?

Requirement: an Exchange established by the StateHow many in the room have heard that there is currently a Supreme Court Case surrounding the premium tax credits? For those of you who have not heard, Ill try to boil it down into a simple question, and that is: are states that have not established their own insurance exchanges eligible for the premium tax credits that weve been talking about?Since the ACAs passage in 2010, weve all heard of numerous legal challenges to the law. This is the latest in the string. Oral arguments were heard on March 4th, and there has not been an official decision yet.

The plaintiff argues that the tax credit provision was created in order to induce states to create their own exchanges, but as we know, only 14 states plus the District of Columbia actually made their own exchanges. Just to give a brief background, Im going to pull up the quote from the statutory reference. In it, several times the phrase, an Exchange established by the State is made mention as a requirement for the subsidies. What is interesting is that the IRS interpreted this language to include both the state-based marketplaces AND the federally facilitated marketplaces. The plaintiffs argue that the IRS does not have the authority to allow these subsidies.But lets be honest, we arent here to get into the nitty gritty of the arguments. Lets as economists, look into the negative outcomes that could occur if the Supreme Court agreed with the plaintiff and removed subsidies from all of the states without exchanges30Potential Outcomes

In a recent research report it was suggested that dropping the subsidies would lead to.

Drop in enrollment by 70%47% spike in unsubsidized premiums(Salzman 2015)In a recent research report by RAND it was suggested that dropping the subsidies would lead to a 70% drop in enrollment, and a 47% spike in unsubsidized premiums. To put that in context, a 40 year-old non-smoker would pay an additional $1610 every year in premiums for his silver plan. Lets think about why this would happen. For one, an individual no longer receiving a subsidy would be equivalent to them having the price of the premiums increase. As we know, an increase in price generally leads to a decrease in quantity demanded, but the effect goes farther than this.31Potential Outcomes

Death spiralLets think about who would choose to leave. Well, it will be the people who are healthy and dont see the investment in health insurance as worth it with the higher premiums. So not only will prices increase, but they are likely to increase again because the people left in the pool are the higher risk individuals. This will increase the price and lead to something similar to the death spiral Dr. Dalton was referring to previously. Definitely not a good thing! Only time will tell what the Supreme Court decides.Questions?

BibliographyBrecht, Kira. "Recipients of Obamacare Subsidies Could Face Tax Surprise - US News." US News. US News Money, 10 Feb. 2015. Web. 08 Apr. 2015.Eibner, Christine, and Evan Saltzman, Assessing Alternative Modifications to the Affordable Care Act: Impact on Individual Market Premiums and Insurance Coverage, Santa Monica, Calif.: RAND Corporation, RR-708-DHHS, 2014. "Get 2015 Health Coverage Now. Health Insurance Marketplace. HealthCare.gov. Web. 13 Apr. 2015.Hassan, Andres, Johnatan Jimenez, and Ramiro Montoya. "The Impact of Subsidized Health Insurance on the Poor in Colombia: Evaluating the Case of Medelln."Applied Economics17.4 (2013): n. pag.SciELO. Web. 3 Apr. 2015. ."Health Insurance MarketplaceCalculator."Health Insurance Marketplace Calculator. Kaiser Family Foundation, n.d. Web. 13 Apr. 2015.Konttinen H et al. (2012) Socio-economic disparities in the consumption of vegetables, fruit and energy-dense foods: the role of motive priorities. Public Health Nutrition, Available on CJO2012 doi:10.1017/S1368980012003540.Marketplace Matters: Tax Credits.YouTube. N.p., 22 Oct. 2014. Web. 05 Apr. 2015.Moriya, Asako, and Kosali Simon. "Impact of Premium Subsidies on the Take-up of Health Insurance: Evidence from the 2009 American Recovery and Reinvestment Act (ARRA)."National Bureau of Economic Research Working Paper No. 20196(2014): n. pag.NBER. Web. 3 Apr. 2015. .Pear, Robert, Reed Abelson, and Agustin Armendariz. "Cost of Coverage Under Affordable Care Act to Increase in 2015." The New York Times. The New York Times, 14 Nov. 2014. Web. 08 Apr. 2015.Roy, Avik. "Adverse Selection: Obamacare Exchange Enrollment Skews Much Older Than U.S. Population; Cost Increases Likely." Forbes. Forbes Magazine, n.d. Web. 08 Apr. 2015.Roy, Avik. "Want to See a Health Insurance Death Spiral? Visit Washington State."Forbes Magazine. N.p., 30 Mar. 2012. Web. 12 Apr. 2015. .Salzman, Evan, and Christine Eibner.The Effect of Eliminating the Affordable Care Act's Tax Credits in Federally Facilitated Marketplaces. Rep. N.p.: RAND Corporation, 2015. Web."State Health Insurance Marketplace Types,2015."State Health Insurance Marketplace Types, 2015. Kaiser Family Foundation, n.d. Web. 13 Apr. 2015.