Fixing the ACA’s Medicare Glitch

By Louise Norris and Andrew Sprung

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It's my pleasure to team up in this post with Louise Norris, a health insurance broker and ACA chronicler extraordinaire at healthinsurance.org and verywell.com. At those two sites, Louise has effectively created a constantly updated encyclopedia of the ACA, covering a host of enrollment situations, regulations, marketplace features, and histories of each state marketplace. She has done similar work about Medicare at Medicareresources.org.

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For most Americans, enrollment in Medicare is cause for celebration. At last: affordable, reliable insurance you can’t lose. Medicare enrollment can entail some complex determinations (do I qualify for any Medicare Savings Programs?) and decisions (Medigap or Medicare Advantage?) For many seniors, too, the burden of premiums and out-of-pocket expenses is heavy. Still, by American standards, Medicare is reliable and affordable.

For “near-elderly” couples (under age 65)  who are insured through the Health Insurance Marketplace established by the Affordable Care Act, however, the transition of the elder spouse into Medicare can bring sticker shock and extra expense. That’s because ACA premium subsidies are designed so that enrollees pay a fixed percentage of household income for the benchmark (second cheapest) silver plan in their area – and they pay the same percentage (reduced through 2022 by the American Rescue Plan enacted in March 2021) regardless of how many people need insurance. 

A couple that was paying 8% in premiums for a benchmark silver plan to cover both of them will still pay 8% of income when only one of them is covered in the marketplace. When one of them transitions to Medicare, they will pay the marketplace premium plus the Medicare premium. In the illustration below, they will pay somewhere between 11% and 14% of income in premiums to cover them both, depending on whether the Medicare enrollee opts to buy a Medigap policy.

That’s a hole in the ACA promise of “affordable” care. Below, we’ll consider a couple of simple legislative fixes. First, let’s get a concrete sense of how this coverage glitch plays out. 

Consider Leslie and Luis, who are 64 and 62, respectively. They live in Chicago and are both enrolled in a silver plan through the marketplace. They are self-employed and their combined household income (ACA-specific MAGI) is $65,000. For a household of two, that’s about 373% of the poverty level, which means that they’re paying about 7.83% of their income for the benchmark plan. That means they pay about $425/month and their premium tax credit pays $1,000/month.

Now let’s say they’re a year older, and Leslie has transitioned to Medicare. Luis is 63, and still needs marketplace insurance for another two years. They’ve continued to be self-employed, and their income is still about $65,000. 

Luis will still have to pay about $425/month for his coverage. They still earn about 373% of the poverty level for a household of two, so they still have to pay about 7.83% of that for the benchmark silver plan for Luis (there would normally be a bit of fluctuation from one year to the next due to changes in the poverty level and changes in a household’s income, but keeping everything the same helps to illustrate how this works).

But Leslie will also have to pay for her Medicare coverage. That could be well in excess of $300/month, depending on the coverage option she selects. But even with the lowest-cost option (ie, a Medicare Advantage plan that has no premium other than the Part B premium), she’ll be paying at least $170/month (if a plan with a “giveback” rebate is available in her area and meets her needs, she might be able to pay less than $170/month, but that’s the exception rather than the rule).

If Luis has the benchmark plan and Leslie pays $170/month for her Medicare coverage, they’ll be paying a combined $595/month in premiums, or 11% of their household income. And if Leslie opts for Medigap and Part D, with total Medicare premiums of perhaps $325/month, they’ll be paying nearly 14%* of their household income in premiums.

The ACA’s promise of making health coverage “affordable” to all according to a defined standard should not end when a family member reaches age 65 (or qualifies for Medicare at an earlier age because of disability). The percentage of income deemed affordable by ACA standards, which rises with income, should be sufficient to enable all household members to obtain coverage, regardless of whether all qualify for marketplace coverage.  

Possible solutions

Perhaps the simplest solution would be to simply add Luis’s Medicare premiums to Leslie’s premium subsidy.** Depending on Congress’s appetite for spending, the rebate could encompass the $170/month Part B premium; Part B plus the average Part D premium, amounting to about $200/month; or any Medicare premiums Luis documents, e.g., his Medicare Advantage premium or even a Medigap premium. As Medigap raises the actuarial value of Medicare far above that of benchmark silver coverage in the marketplace, however, it’s hard to imagine Congress ponying up for such “Cadillac” coverage.

If Congress were more inclined to adapt an ACA approach to the problem, the IRS has already created a solution for people who get married and thus go from a single to joint tax filing status that could be substantially replicated for couples who “lose” a marketplace enrollee to Medicare.  (Married couples are required to file jointly in order to get a premium tax credit in the marketplace.

For the year of marriage, there’s an alternative calculation that can be used to determine the premium tax credit amount for the months prior to and including the month of marriage. In cases where the combined household income would result in some or all of the premium tax credit having to be repaid, the IRS allows people in that situation to calculate their tax credit as a household of one (or the number of people in their household prior to the marriage), using half of the combined total household income.

What would it look like if a similar provision were to be implemented when one spouse transitions to Medicare, and allowed to remain in place until the second spouse is also eligible for Medicare? Let’s take a look at Luis and Leslie’s situation again, but base the premium tax credit for Luis on a household of one and an income of $32,500. Luis would now be eligible for a subsidy of $605/month, and his cost for the benchmark plan would be just $112/month (as always, there are also less expensive plans available, but we’re sticking with the benchmark here to compare apples to apples).

Combined with $170/month for Leslie’s coverage, they’d be paying a total of just over 5% of their household income for their marketplace and Medicare coverage. If Leslie’s coverage ended up being in the $325/month range, they’d still only be paying about 8% of their household income for their health coverage.

The temporary but significant increases in ACA marketplace premium subsidies created by the American Rescue Plan brought the ACA far closer than it had been to fulfilling the promise of “affordable” coverage inherent in the law’s name. Americans have responded, increasing enrollment by more than 20% during Open Enrollment for 2022. It’s incumbent on Democrats in Congress to extend those subsidies beyond 2022.  

At the same time, Congress should also be looking to plug the various holes that remain in the affordability promise, leaving various groups shut out of coverage that’s affordable by standards established by the ACA.  These include the family glitch, an IRS rule that denies marketplace subsidies for family coverage to people whose employers offer coverage that’s affordable for the individual (costing less than 9.8% of income) but not for the employee’s family, and the Medicaid cliff, appearing when  Medicaid enrollees who qualify by the ACA eligibility standard (income below 138% of the Federal Poverty Level) turn 65 and don’t qualify for Medicaid according to the more stringent standards in place for over-65 enrollees. The Medicare glitch discussed above makes for a trifecta.  At moderate cost, Congress can and should plug this affordability gap.

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* Certain medical expenses that exceed 7.5% of income, including health insurance premiums, can be deducted from your taxable income, if you itemize your deductions. Thanks to elder law attorney Lauren Marinaro for pointing that out. 

** Stan Dorn of Families USA pointed out to us in an email that this approach would “borrow a page from Medicaid’s medically needy eligibility category. There, people qualify for Medicaid by ‘spending down’ a certain amount of their income. So in this case, the consumer’s required payment for benchmark coverage would be reduced by the amount the family paid for Medicare premiums during the year.”

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