Thursday, May 15, 2014

Premium Increases and Obamacare Subsidies

In his Monday Think Tank post previewing political and policy battles over insurance premium increases, Drew Altman wrote that “85% of those who purchase insurance in the new marketplaces will get a government subsidy in the form of a tax credit to help defray the cost of the premium. That means that most people buying in the exchanges won’t pay much even if their premium cost goes up significantly” in 2015.

But in a few years, many exchange purchasers could face the full brunt of premium increases.

An obscure component of the Affordable Care Act, the secondary indexing provision, was added during the budget reconciliation process to help reduce the bill’s costs after the first 10 years. Wonky details can be found in a May 2011 Congressional Budget Office (CBO) analysis, but two points stand out:

One, if spending on exchange subsidies exceeds a defined percentage of gross domestic product, beginning in 2019 the subsidies will grow much more slowly in future years.

Two, since the 2012 Supreme Court decision made Medicaid expansion optional for states, the CBO projects more individuals will qualify for exchange subsidies—making it highly likely that overall spending on subsidies will exceed the GDP cap established in the health-care law, and triggering the secondary indexing starting in 2019.

The 2011 CBO analysis included a hypothetical example of the impact secondary indexing could have on federal insurance subsidies and premium increases: a 6 percent annual premium increase would require enrollees to pay 10.2% to 12% more for their health insurance because federal subsidies would rise only 2.7% to 5.5%.

In other words, a significant share of costs would shift from the federal government to individuals. That’s why the CBO previously called some of the law’s provisions “difficult to sustain for a long period.”

With such indexing looming in the not-too-distant future, there are two questions: whether this provision of the Affordable Care Act will be amended—and, if so, how: by raising taxes or cutting other programs to pay for this new spending, or by increasing the federal deficit substantially. Or whether the country would accept a new status quo in which the Affordable Care Act requires Americans to purchase increasingly unaffordable health insurance.

This post was originally published at the Wall Street Journal Think Tank blog.