Congress Acts to Change ACA Subsidy Structure

By Joe Touschner

We’re less than a year beyond the passage of the Affordable Care Act and still three full years from the implementation of state exchanges and their federal premium subsidies.  But already Congress has decided to make some significant changes to how the premium tax credits would work and, in the process, could establish a troubling precedent.   In looking for funds to keep Medicare’s physician reimbursements from declining (and to extend Transitional Medical Assistance and assistance for certain low-income seniors), Congress settled on a change to how the premium tax credits would be “reconciled” each year.  Each of these are pressing priorities that deserve funding, but taking the funds out of the ACA subsidies is bad choice.    

The Affordable Care Act provides “advanceable” tax credits to help people buy subsidized exchange coverage.  The law will provide people with credits that are available to help them pay their premiums throughout the year, rather than being delivered as a tax refund when they file their taxes.  But advanceable credits are tricky because all kinds of things can happen to people over the course of a year that affects their credit eligibility. People find or lose jobs, they get raises or face pay cuts, they get married or divorced, they have kids or their kids leave home.  Any of these changes can cause those who legitimately received an advance credit for part of the year to end up being ineligible when they file their annual tax return. For example, if someone started the year unemployed, she might be eligible for a substantial advance credit.  Finding a job later in the year would be a good thing, but might mean that the annual income she reports on her tax form indicates she makes too much for a credit. Paying back the value of the advanced credit that she legitimately received when unemployed –potentially hundreds or thousands of dollars — would likely be an unwelcome development for this newly-employed worker.  To address this problem, the ACA included protections that limited the repayment liability of taxpayers with annual income up to four times the federal poverty level.  Individuals below that threshold would owe no more than $250 and families no more than $400.

Now Congress has voted to roll back some of those protections and direct the savings to Medicare physicians and other areas.  A bill that has passed Congress, and is expected to be signed into law, would raise the maximum amount that taxpayers must repay when they file their taxes if it turns out they should have gotten a smaller credit.  Unlike in ACA, the amounts would be graduated with income — families with income at twice the poverty level would have to pay back up to $1,000 ($500 for individuals) while those with income 4.5 times the poverty level could owe up to $3,500 ($1,750 for individuals), with other steps in between.  Above five times the poverty level, taxpayers would be liable for the full amount of any excess credit they received.  While the sliding scale is more friendly to subsidy recipients than ACA’s single threshold, the overall maximum repayment liability is much higher, even for the lowest-income recipients.

In effect, this change would make subsidized exchange coverage less attractive to some individuals, since they may not want to risk having to pay back more of the tax credits if their income rises.  It saves the government money by reclaiming more of the funds that could flow to those whose eligibility for subsidies changes.  Those savings, though, would come from the pockets of those who needed help to afford health insurance, at least for part of the year.

More troubling than the change itself, perhaps, is the precedent it sets of the Affordable Care Act as a source for funding other priorities.  Before ACA is even fully implemented, this  means that Congress has already decided to reduce the total value of the subsidies to be paid under the law.  And it would mean some families would face unexpected tax liabilities when their income or family situation changes during the year.  Congress should refrain from viewing the ACA as an ATM for funding other parts of the budget, worthy though they might be.  It should also make sure families are treated fairly when they take advantage of the assistance offered under the Affordable Care Act.