A "Manchin trim" for the ARPA subsidy boosts to Obamacare?

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A high-end haircut for the ARPA subsidies?

It's been reported in the last week or two that Manchin may be open to negotiating a bill that would raise about $1 trillion in new revenue over ten years and devote about half of that to new spending. Yesterday, the Washington Post's Greg Sargent reported that $200 billion of that new spending may be allocated to extending the American Rescue Plan Act's increases in ACA marketplace subsidies (which expire at the end of 2022):

If around $300 billion of that [$500 billion in new spending] went to funding the transition to clean energy, through tax incentives and other means — a key part of BBB that Manchin appears open to — that would leave around $200 billion for expanded ACA subsidies.

Larry Levitt, executive vice president for health policy at the Kaiser Family Foundation, says it’s absolutely possible to fund the vast bulk of extended subsidies with that sum. The cost of extending all of them would be an estimated $220 billion, so getting that down to $200 billion, perhaps by shaving those subsidies for the highest-income people eligible, would be doable.

Welp. I have been assuming that with $500 billion over ten years reportedly on the table, a lot of competing priorities would be in the running. If $200 billion really does get allocated to extending the ARPA subsidies, then no problemo, as Larry Levitt suggests. But all these broad outlines (including the broadest, whether any deal gets done) are very uncertain, and I assume a smaller sum (if any) may be allocated to enhancing a version of the ARPA subsidy boosts. 

If the ARPA-level subsidies are reduced, they will almost certainly be trimmed at the high end -- both on the merits and because Manchin, who has a veto on any deal, seems to have demanded it. On June 22, Business Insider reported that Manchin

suggested that an extension of the program should be directed towards aiding lower-earning families. 

"The main thing here is the means-testing," he said in a brief interview on Wednesday evening. "We should be helping the people who really need it the most and are really having the hardest time."

Premium subsidies in the ACA marketplace are means-tested, of course: the lower your income, the less you pay. But ARPA, while reducing the percentage of household income required to buy a benchmark silver plan at every income level, removed the ACA's notorious income cap on subsidies, formerly 400% FPL, which in 2022 is $51,520 for an individual, $106,000 for a family of four. Now, no one pays more than 8.5% of income for a benchmark silver plan, no matter how high above the 400% FPL threshold their income may be.  

Removing the income cap on subsidies had a major impact -- materially, psychologically, and politically.  From the ACA marketplace's first days, Republicans flayed the program for leaving the modestly affluent with unaffordable premiums -- and this was a true rap, especially after major premium spikes in 2017 and 2018, in the wake of which off-exchange (unsubsidized) enrollment in ACA-compliant plans cratered from about 5 million in 2016 to about 2 million in 2019.  Coverage that in 2018 could cost a pair of 60-somethings with an income $68,000 more than $2,000 per month abrogated the Act's promise of Affordable Care for a small but significant subset of those lacking access to other affordable insurance. In Open Enrollment for 2022, the first (and perhaps only) OE with the income cap removed, on-exchange enrollment at incomes above 400% FPL surged by more than 35% to about 2 million. Total enrollment increased by 21% in 2022.

A top premium rate for enrollees of 8.5% of income for benchmark silver was first proposed in 2015 by Urban Institute scholars Linda Blumberg and John Holahan. The authors noted that enrollees with incomes in the 400-500% FPL range -- just above subsidy eligibility -- were paying the highest percentages of income for insurance and medical care:

The 8.5%-of-income top rate for a benchmark plan was adopted by Hillary Clinton in 2016, and in years following it made its way into various progressive proposals and Democratic bills. It's well-considered policy, and it's had an impact. But there's nothing magical about the 8.5% figure. Pre-ARPA, benchmark silver cost almost 10% of income at incomes above 300% FPL. That was suboptimal -- takeup of ACA marketplace enrollment was poor at higher subsidy-eligible incomes. But there is wiggle room at higher incomes.

On that front, I'd like to point something out about Modified Adjusted Gross Income (MAGI), the figure that determines income for ACA subsidy purposes (similar to the AGI familiar to most taxpayers).* For people with high incomes, there's often a wide spread between gross income and MAGI.  Self-employed high earners in particular have major resources for reducing MAGI. And people with high incomes who lack access to employer-sponsored health insurance -- those likely to look to the ACA marketplace for coverage -- are particularly likely to be self-employed. They're also likely to be older, as income rises with age. In the ACA marketplace, 28% of enrollees in 2022 were over age 55. That percentage is likely far higher among those with incomes over 400% FPL. Older enrollees may be more inclined to maximize deductions.

For people with a six-figure gross income, the chief vehicle for reducing MAGI is likely to be retirement contributions -- an above-the-line deduction. For self-employed people with an individual 401k, contribution limits are particularly generous, topping out at $67,500 for enrollees 50 and over. Also potentially important: contributions to a Health Savings Account, which can be as high as $7,300 for a couple this year. Finally, for those with any premium left to pay, there's the self-employed health insurance tax deduction, which (snake eating tail) takes premiums paid off of MAGI. In 2019, 3.7 million households took this deduction, and 58% of them had AGI over $75,000. 48% had incomes over $100,000.

Let's look at how these options might play out for a 60-something couple with a gross income of $129,000, which would be ten times the federal poverty level (1000% FPL) if it were also their MAGI. Mr. Aswan is a part-time per diem nurse (he's eased off after bearing the brunt of the first pandemic waves) and will earn $39,000 this year. His wife, Ms. Bhattacharya, will gross $90,000 as a self-employed IT consultant (actually she grosses $105,000, but writes off $15,000 in business expenses). The Bhattacharya-Aswans are nearing retirement, and so stuffing any income above their immediate expenses into their retirement accounts doesn't feel like delaying gratification very far. 

Ms. Bhattacharya doesn't earn enough to make the maximum contribution to her individual 401k, but the highest allowable contribution at her income level comes to about $42,000.  Mr. Aswan kicks in another $7,000 into an individual IRA he opened after leaving his full-time job. That knocks the couple's MAGI down to $80,000.

The couple's advanced age means that their unsubsidized premiums in the marketplace are twice as high as premiums for a pair of 40 year-olds, which also means that their subsidies are twice high, which in turn means that a low-cost bronze plan costs them very little, as higher benchmark premiums means bigger spread between the benchmark silver plan and cheaper plans. 

In fact, in many markets a bronze plan will cost this couple literally nothing if they choose an HSA-linked plan, open an HSA and contribute the $7,300 maximum. That deduction on top of Ms. Bhattacharya's 401k contribution reduces their MAGI to $72,700.  They're frugal -- they can live on that. And their MAGI is 56% of their gross income (less if Ms. Bhattacharya's declared business expenses are a touch imaginative).

A benchmark silver plan (the second cheapest silver plan in their area) would cost this pair about $515 per month. But multiple bronze plans - -including an HSA-linked plan -- are available for $0-20 per month. The catch is that this coverage is merely catastrophic: if it's an HSA plan, both deductible and out-of-pocket max will be just north of $7,000 for each of them. They may need that HSA, or significant cash on hand. But at their income level, they probably have that cash. 

I don't think that an income cap on subsidy eligibility should be restored.  A guarantee that at least minimally adequate insurance is available to all for a non-ruinous percentage of income is a fundamental ACA premise embedded in the Act's name, and one that was unfulfilled pre ARPA. But raising the maximum percentage of income required for a benchmark silver plan at high incomes would not be catastrophic. Another solution -- perhaps more neatly tailored -- would be to cap deductions allowed for MAGI to a fixed percentage of income. 

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*MAGI as defined for ACA purposes is "modified" from AGI mainly by including tax-exempt income (e.g., from bonds) and a few other sources not included in AGI, while excluding SSI income.

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