Sunday, December 22, 2013

The ACA's subsidy cliff for older buyers

The New York Times quite rightly highlights* the plight of older ACA exchange shoppers who fall over the "subsidy cliff"  -- that is, earn just enough to be ineligible for premium subsides but are subject to high premium prices because they're older.

The article's poster family is in the worst possible situation as far as the ACA is concerned: 50-something couple, two kids, no employer-based insurance, and an income just over the subsidy line. You could say they're not representative, because they're worst-placed -- but that, in a way, was the point. Winners and losers should not be separated by $1000 in annual income.

There is a serious flaw in the ACA subsidy formula. If you're young and single, subsidies taper gradually. If you're 50something, they fall to zero abruptly.  If you're fiftysomething with kids, they fall very abruptly. That's because premium prices (and thus subsidies) are higher for older adults, and subsidies (if you qualify) rise with each additional person covered by the plan. If there's three or four or five of you, and you don't qualify, you lose effectively three or four or five subsidies. It's primarily age that carves the cliff, though -- especially for two older adults.

If you're 27 and single and living in Essex County, NJ, premium subsidies taper quite gradually (though additional subsidies for out-of-pocket costs don't). The cheapest silver plan costs $260 per month unsubsidized. If your yearly income is $22k, your monthly subsidy is $152. At $27k, it's $91. At $32k, $27/month. At $34k, no subsidy. Fair enough. (All price quotes courtesy of ValuePenguin.)

If you're 55 and single, the cheapest silver plan, unsubsidized, is a bit more than double the premium for the 27 year-old -- $553 per month. That means the subsidies are much higher, because you're supposed to pay the same percentage of your income as a younger person -- if you qualify. Also, you qualify for subsidies at higher levels than the younger adult, because you're eligible if the plan costs more than 9.5% of your income. Hence, if your income is $32k, your subsidy is $317 per month, your monthly payment $236.  At $40k, the subsidy is $237. At $45k, $198.

If you earn $46k, however, your subsidy is zero.

The problem is exacerbated for a pair of 55 year-olds with a 23 year-old son or daughter. For them, the cheapest silver plan in New Jersey is $1,354 per month.  If the family income is $63k, the subsidy is $858, their monthly payment $496.  At $78k, the subsidy has dropped modestly, to $739. At $79k, it's -- zero.

A couple of caveats. First, there aren't too many couples with a MAGI of $79k and no access to employer-provided insurance. Second, if one of the earners is self-employed, and that person's business profit exceeds the premium cost, the whole premium is tax deductible -- which is a 25% subsidy at that income level, worth about $375 per month. [Update: for the non-self-employed, there's the medical expense deduction for all med expenses including insurance that exceed 10% of income.**]  Third, if the couple is really near the cliff, they can top up their retirement contribution (or boost the self-employed person's business expenses) to get in under the cap. In my example, an extra $1,000 contributed to an individual 401k, taking the family income down from $79k to $78k, is worth $8870 in premium subsidies.

One more caveat specific to the Times piece. First, their poster family, two 50somethings with two kids, are currently paying just $665 a month for a family plan. What kind of a plan is that? In 2013, the average employer-sponsored family plan cost $16,351, according to the Kaiser Family foundation.  Bare-bones plans for healthy families on the individual market may be somewhat lower, but this one sounds way low. I wonder what its limitations are.

All that said, the premium subsidy cliff is a serious flaw -- as are the hard break points for out-of-pocket cost subsidies. The rigidity is caused, it seems to me, by three constraints: 1) premiums are age-rated -- can be up to three times as much for older buyers; 2) subsidies limit premiums to a fixed percentage of income (which rises as income rises); and 3) there was political pressure to keep the total ACA tab under $1 trillion over ten years. A fix might entail removing the cap on subsidy eligibility, currently 400% of the federal poverty level, stipulating instead that no one should pay more than 9.5% of household income for a benchmark silver plan (an ACA plan would cost nowhere near that percentage for the truly wealthy). Such a fix would require either more money or less generous subsidies at some point further down the income scale.

But of course, Republicans won't allow any adjustments to make the law work better, whatever crocodile tears they cry for the relatively small subset of Americans whom the law hurts.

*"New Health Law Frustrates Many in Middle Class," by Katie Thomas, Reed Abelson, and Jo Craven McGinty, Dec. 20, 2013

** The self-employed can also take the medical expense deduction for medical expenses other than insurance, if those expenses exceed 10% of income. Given the ACA's out-of-pocket limits of $6350 for individuals and $12,700 for families, the value of this extra deduction strikes me as limited in most cases. But if you earn, say, $46,000 and incur $6,350 in expenses, it could be valuable -- especially if you add dental, or some out-of-network or other cost not covered by your insurance or its OOP limits.

Update: while considering a SEO trick, I googled "subsidy cliff," a term I thought I'd coined, and found an excellent article by ValuePenguin's Jonathan Wu laying out various scenarios where an extra dollar of MAGI costs an ACA shopper big bucks.  As noted above, it's ValuePenguin's excellent ACA shopping app that enabled me to scope out the scenarios outlined above.

Self-employed? That pre-ACA health insurance tax deduction is still there
Young, self-employed, and seeking insurance? See an accountant

1 comment:

  1. While most of the attention has been focused on the young and healthy and the mandate, as the NYT article and this blog post highlight, it's the nearly old who will pay dearly and whose support for ACA may be at risk. During the Congressional deliberations, the unstated justification for allowing age-rated premiums was that the nearly old would soon qualify for Medicare. I never understood that rationale. My recollection is that the Senate seriously considered allowing the nearly old to buy into Medicare, but opponents feared that would be a foot in the door for single payer and defeated it. What we are witnessing are the chickens coming home to roost: the effect of all those political compromises now becoming evident. And it's not just the subsidy cliff, it's the age-rated premiums, the prevalence of high deductible plans on the exchange, the proliferation of plans with little transparency as to their differences, etc. Should we have seen this coming? Maybe. I and many health care policy wonks were surprised when the Obama Administration decided not to adopt federal (uniform) standards for health insurance. But as I thought about that decision, what became clear is that Obama's primary concern for health care reform has always been (near) universal health insurance, achieved mostly by an expansion of Medicaid and by subsidies for health insurance for the formerly uninsured, which helps explain Obama's opposition to the mandate during the 2008 campaign and the hiccups during the implementation phase of ACA (including the decision not to adopt federal standards). The Supreme Court put up a road block to an expansion of Medicaid, but the Administration responded creatively by working with the states to extend insurance coverage for the poor via the exchange and other techniques, with the expectation that most states will eventually accept expanded Medicaid. Near universal health insurance is a reality and Obama has achieved his primary goal for health care reform. But I fear other goals, including some of mine, may be at risk.