The American Health Care Act (AHCA), which narrowly passed the House on May 4, aims to repeal many of the ACA provisions related to the individual insurance market. One of the more significant changes is the way premium subsidies would be determined. Under AHCA, subsidies would be provided in the form of fixed tax credits, with the amount of credit based on an individual’s age, not income, for anyone earning up to $75,000 per year.
According to analysis by Oliver Wyman’s Actuarial Practice, this change will translate to lower net premiums for most younger adults and significantly higher net premiums for lower-income older people. (The Congressional Budget Office Cost Estimate released March 13 also concluded that older people will face higher premiums.)
The Oliver Wyman analysis also finds that rural enrollees will generally pay higher net premiums than urban enrollees of the same age and income levels, as The Wall Street Journal reported in a March 13 article based on our work.
Note: The amended version of AHCA, which contains additional funds for high-risk pools and grants state's the ability to waive some insurance rules of the ACA, has not yet been scored by CBO. The below analysis is based on the original form of the bill.
Nonetheless, it is critical that all stakeholders understand how health reform may impact net premiums in their local geographies. Markets that face significant net-premium increases, as well as markets with a higher prevalence of lower-income, older, and less-healthy populations could potentially see an acceleration of adverse selection. That would have the potential to create unsustainable insurance pools and higher uncompensated care.
Here, Dianna K. Welch, FSA, MAAA, and Kurt Giesa, FSA, MAAA, of Oliver Wyman Actuarial Consulting provide more information on the premium analysis, including a detailed look at what the replacement plan means for individual health consumers in select markets.
Subsidies under ACA
Under the ACA, subsidies are calculated based on the net premium an individual is deemed to be able to afford based on their income. For example, someone whose 2017 income is 200 percent of federal poverty level (FPL) – that’s about $23,760 – is required to pay 6.43 percent of his or her income for 2017 coverage. That translates to $1,528 a year, regardless of a person’s age.
The amount of subsidy is the difference between the affordability amount and the premium for the second lowest-cost Silver plan available. For example, if the second lowest-cost Silver plan costs $2,000 a year, the difference between cost and affordability is $472, and the subsidy is about $40 per month.
People who face higher gross premiums, due to their age or due to living in a more expensive market, receive larger subsidies to get the net premium down to the level deemed affordable. If the second lowest-cost Silver plan in an expensive area of the country is $2,500, the difference between cost and affordability for someone earning 200 percent of FPL is $972, and the subsidy is about $81 a month.
Subsidies under AHCA
Under the AHCA, subsidies in 2020 will take the form of a fixed tax credit, and the formula for determining the amount of the credit is based solely on age for anyone earning up to $75,000, or about 600 percent of FPL. The amount a person will be required to pay out of pocket – the net premium – is calculated as the difference between the premium charged and the subsidy amount received.
The following tables summarize the amount (in percentage of income) people currently pay for health insurance under the ACA and how much people would receive in tax credits under the AHCA.