Why the Subsidy Gap Isn’t Actually a Gap

A 26-year-old man who makes $36,000 a year in Philadelphia finds out that he is not eligible for a health insurance subsidy, and must pay his $205 monthly premium without any help.

This, despite the ACA’s subsidies for people earning up to 400% of poverty (about $46,000).

Has he fallen into the subsidy gap?

The latest talk about a subsidy gap into which some millennials are falling is mystifying to me. It seems to be a product of a misunderstanding about how the subsidies are calculated.

Let’s remember that the goal of the subsidies is to ensure that people earning between 100% and 400% of the federal poverty level (FPL) pay no more than a certain percentage of income on health insurance premiums.

This cap is set on a sliding scale, so that people on the higher end of the FPL scale are expected to pay a higher percentage.

The caps range from 2% for someone at poverty level up to 9.5% for someone earning between 300-400% of poverty level.  That’s how the Affordable Care Act defines “affordable.”

The amount of subsidy is based on the difference between that cap and the premiums for the second-cheapest silver plan on the market. The subsidies are not an entitlement for all people earning 100%-400% of FPL, nor should they be.

They kick in only when the premium for that silver plan exceeds the stated percentage of income.

Below that cap, the premiums are considered affordable and people are not eligible for subsidies. That’s not a gap; that’s the way the law is designed.

Let’s return to our friend in Philadelphia. His $205 premium is 6.8% of his income. If his premium were $285, he would reach his limit of 9.5% of income (and then become subsidy-eligible).

But he’d be paying  $80 more for insurance. And I doubt that’s an outcome anyone would wish for.

Janet Weiner, MPH (@weinerja) is  the associate director for health policy at the Leonard Davis Institute of Health Economics.

5 replies »

  1. I tried to sign up for healthcare. I make 12K a year. I didn’t qualify for the tax credit. My state isn’t expanding medicaid. The best plan I can get costs me 133 bucks a month (13.3% of my income). If I get hurt…the most I’ll pay is 6K out of pocket (half my annual salary).

    It’s an actual gap.

  2. It’s not a gap? What about those who are over 400% of poverty but just barely, thus not eligible for subsidy and who still want insurance even though they could have the penalty waived (not really compensation for not having insurance) and who end up paying a much higher percentage of their income for health insurance? I think that’s a gap. The math sucks, and there should have been a graduated plan for those between 9.5% and up.

  3. “I think that when people see a $4,000 annual premium buying a $5000 deductible health plan, their instinct says “ripoff.””

    Right on Bob. I think the ACA has skimmed off the cream, pre-exist, very low income/high subsidy, those who don’t know what a deductible is or are just in denial that it will need to be paid.

    The rest of us who kick tires and compare products see this for what this is. $63K is not a high income to be paying for insurance without subsidy.

  4. I have not followed all the data on ACA enrollment……..
    but my clear impression is that an awful lot of uninsured people are deciding that 9.5% of their income is NOT very affordable.

    Why is this?

    Well, I think that the 9.5% is calculated pretax, so the real hit is larger than 9.5%.

    Also, the plans available for 9.5% of income have much higher deductibles than I think the public was expecting.

    I have always believed that the public has an instinctive idea of the “right price” for anything. This may be a totally unscientific idea, but it is in the public mind nonetheless.

    I think that when people see a $4,000 annual premium buying a $5000 deductible health plan, their instinct says “ripoff.”

  5. Yes Janet, it’s easy (and fair) isn’t it.

    Those with a spouse enrolled in a company plan are not eligible at all for subsidy, no matter the company plan or their income. Those earning at and over about $63K do not get any subsidy, no matter their age and premium cost. The subsidies are not gradual but off-the-cliff. The subsidies don’t include co-pays and deductibles.

    Those with employer coverage pay no tax for the benefit no matter their income.

    Yes this is an entitlement, and it is being sold as an entitlement – “buy Obamacare and get a subsidy”.

    This note appears at the bottom of Healthcare.gov premium estimates no matter your income inputs:

    Eligible for help paying for coverage

    “This group is probably eligible for a premium tax credit.

    This means that you may get a tax credit to use toward the cost of paying for a private health plan that you purchase through the Marketplace.

    Note: this isn’t a final determination. You’ll need to submit a Marketplace application to get an actual eligibility statement.”