Sunday, May 30, 2021

Putting the "Affordable" in the Affordable Care Act: A role for the IRS

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 After the boost to ACA marketplace subsidies enacted as part of the American Rescue Plan Act (ARPA), the largest remaining bar to affordable coverage for all but undocumented Americans (who are barred from any government help for coverage) may be the affordability threshold for employer-sponsored insurance. It's ridiculously high. The IRS can provide some relief now, without portentous rulemaking.

The ACA defines employer-sponsored insurance (ESI) as affordable if a plan providing Minimum Essential Coverage (MEC) as defined by the ACA costs less than 9.5% of income. That baseline is adjusted annually to account for inflation in premiums in excess of inflation in the consumer price index and currently stands at 9.83% of income.  MEC is equivalent to bronze-level coverage in the ACA marketplace, which typically means a single-person deductible in the $7,000 range. Those for whom an employer's offer of insurance is deemed affordable are ineligible for ACA marketplace subsidies (though not ineligible for Medicaid). KFF estimates that 3.5 million uninsured people are in this category.

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The worst ravages of the employer affordability threshold stem from the so-called family glitch. As interpreted by the IRS in 2013, if single-person coverage offered by the employer is "affordable" but family coverage offered by the employer is not, the whole family is ineligible for marketplace subsidies (though the children are often eligible for CHIP). As a result, millions of Americans are insured through employer plans that cost more than 9.83% of income, and hundreds of thousands remain uninsured because the family finds the employer offer unaffordable. KFF estimates that 5.1 million people are in families affected by the glitch, and that 4.4 million of them are paying for family coverage and spending an average of 15.8% of income on it.

The affordability standard for ESI often provides poor options for individuals as well as families. I know a young man in New York whose small employer opted to the do the right thing and offer coverage through the SHOP marketplace for 2018. This person's income was around $24,000 or just under 200% of the Federal Poverty Level, qualifying him for New York's Essential Plan, which  provided coverage with minimal out-of-pocket costs for $20/month. (In other states, benchmark silver coverage at that income would have cost about $125/month, with deductibles averaging $800 that year and out-of-pocket maximums averaging $2000.) The employer would contribute $275/month toward premiums, which left the employee on the hook for $179/month for bronze coverage. That's "affordable" by ACA standards -- but inferior to the coverage on offer to a low-income employee in the marketplace, even before ARPA. 

On January 28, President Biden issued an executive order that directed all agencies to review regulations that impede ACA enrollment. This spring, reports surfaced that the administration is considering mending the family glitch by administrative rule. That would require issuing a proposed new rule, which would pass through a notice-and-comment period before a final rule is issued. Democrats in Congress may also fix the glitch via legislation, along with making the ARPA subsidy boosts permanent.

The IRS can immediately offer more limited relief from the affordability standard for ESI. Prior to ARPA's passage, the affordability standard in the marketplace matched the standard for ESI: at the highest subsidy-eligible income level (300-400% FPL), a benchmark silver plan in the marketplace could cost no more than 9.83% of income. ARPA removed the income cap on subsidy eligibility and provides that no one who lacks access to other affordable insurance will pay more than 8.5% for a benchmark silver plan in the marketplace.  The IRS may soon lower the affordability standard for ESI to 8.5% of income to match the new marketplace standard. That would allow some employees currently offered ESI to claim marketplace subsidies. It would also likely improve some employers' insurance offer, as employers that offer "unaffordable" insurance are charged a penalty for every employee who opts into the marketplace and claims a subsidy. 

At an income of $35,000/year, a premium that's 8.5% of income costs $466 less than a premium that's 9.83% of income. That's one more significant shave off the high cost of insurance for a significant slice of the population.

A consistent affordability standard would render ESI affordable only if the coverage on offer for 8.5% of income was equivalent to benchmark coverage in the marketplace -- that is, providing an actuarial value of 70% rather than the 60% current standard for MEC. A truly consistent standard would deem ESI affordable only if its value matched what's available to a subsidy-eligible enrollee in the marketplace  at that employee's income level -- which might be tantamount to letting anyone opt into the marketplace on a subsidized basis. But simply lowering the standard to 8.5% of income would provide not-negligible relief now. That would be one more small step toward making the Affordable Care Act live up to its name.

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