Next Steps in Expanding Health Coverage and Affordability

Abstract

• Issue: The Inflation Reduction Act (IRA) extended American Rescue Plan Act (ARPA) premium subsidies, which increased the generosity of health insurance tax credits to people with incomes below 400 percent of the federal poverty level (FPL) and extended eligibility for these credits to people with higher incomes. Extension of these subsidies will keep 3.3 million people from becoming uninsured, and doing so is a foundational step for other reform policies.
• Goal: Analyze the impact of five policies for expanding coverage and affordability after the extension of ARPA subsidies. The five options include: 1) filling the Medicaid gap in nonexpansion states; 2) reducing the employer affordability threshold; 3) adding a $10 billion reinsurance fund; 4) increasing the federal Medicaid matching rate in expansion states; and 5) enhancing and funding marketplace cost-sharing subsidies.
• Methods: Assess coverage and cost impacts of each policy using the Urban Institute’s Health Insurance Policy Simulation Model.
• Key Findings and Conclusions: Together, the five policies would cover 3.7 million more people in 2023. The proposals with the greatest impacts on coverage would involve filling the Medicaid gap and improving cost-sharing subsidies. These two options also would add the most to costs. Over a 10-year period, these five policies would increase federal spending by $606 billion and add $575 billion to the federal deficit while providing millions of uninsured people with access to affordable coverage and improving affordability for millions who are already covered.

Introduction

Several proposals to reform the Affordable Care Act (ACA) were under consideration by the U.S. Congress as part of the Build Back Better Act (BBBA). Although this legislation did not pass, one provision was included in the Inflation Reduction Act (IRA): the extension of American Rescue Plan Act premium subsidies (scheduled to expire on January 1, 2023) through 2025. ARPA made premium subsidies, also known as premium tax credits, more generous for people with incomes below 400 percent of the federal poverty level (FPL) and extended eligibility to people with higher incomes, giving those people the option to purchase subsidized coverage through the marketplaces.

The Urban Institute has estimated that extending ARPA premiums subsidies will keep 3.3 million people from becoming uninsured.¹ It also will dramatically improve the affordability of health insurance premiums (Appendix Table 1).

In this brief, we examine the impact of five policy options that could continue to make coverage more accessible and affordable beyond the extension of ARPA subsidies.

Five Policies for Consideration

The first three options were included in the draft BBBA. The fourth and fifth options were not included in the BBBA but could further improve and expand coverage.

Option 1: Filling the Medicaid Gap in Nonexpansion States. This policy would make marketplace coverage available to low-income people excluded from marketplace premium subsidies in the 12 states that have not expanded Medicaid eligibility (Exhibit 1). In these states, the policy would “fill the gap” by providing access to premium subsidies for most individuals with incomes above traditional Medicaid eligibility levels and below 100 percent of poverty. For low-income people in nonexpansion states, the policy also would eliminate the employer coverage firewall that currently limits their access to premium subsidies if they can receive affordable insurance through their employer, and would increase the federal share of costs (FMAP) for Medicaid expansion adults in the other states.

Option 2: Reducing the Employer Affordability Threshold. This policy would improve access to marketplace coverage by lowering the threshold above which employer coverage is deemed unaffordable. Currently, the employee affordability threshold is 9.61 percent of income. Under this proposal, people whose premiums for employer coverage exceed 8.5 percent of income would be considered to have unaffordable coverage and could enroll in a marketplace plan.²

Option 3: Adding a $10 Billion Reinsurance Fund. This policy would fund reinsurance to pick up the cost of medical expenditures above a certain threshold, thus reducing risk for insurers and making nongroup insurance more affordable for people in all states who are ineligible for subsidies. Some states already provide reinsurance in partnership with the federal government under “innovation waivers” that allow them to modify parts of the ACA.³

Option 4: Increasing the Federal Medicaid Matching Rate in Expansion States. This policy would increase the federal Medicaid matching rate for the expansion population to 100 percent. Under the policy of filling the coverage gap (Option 1), the federal government pays 93 percent of the costs of covering the Medicaid expansion population in expansion states, but all the costs for that population in nonexpansion states, thus creating inequitable funding between states.

Option 5: Enhancing and Funding Marketplace Cost-Sharing Subsidies. The final policy would increase and expand cost-sharing subsidies, also known as cost-sharing reductions (CSRs), for subsidized ACA plans for low-income people. This policy would increase CSRs and tie premium tax credits, currently tied to silver-tier marketplace plans, to gold-tier plans. CSRs under this reform would be fully federally funded, which would reduce marketplace premiums because insurers currently pay for the CSRs and cover their costs by raising premiums on benchmark silver-tier plans. Federal funding for the CSRs would eliminate this practice, known as “silver loading.”

We analyzed the individual and cumulative impact of these proposals on coverage and costs, starting from the baseline assumption of extended ARPA premium subsidies under the IRA.

Coverage and Cost Implications for Five Reform Options

Option 1: Filling the Medicaid Gap in Nonexpansion States. The expansion of marketplace coverage would reduce the number of uninsured by 1.9 million in 2023 (Appendix Table 2). About 2.5 million additional people would receive marketplace subsidies.

The largest increases in the number of people covered under this reform would be among non-Hispanic whites, but non-Hispanic Black people would see the greatest percentage decrease in uninsurance. In the 12 nonexpansion states, uninsurance for non-Hispanic Black people would fall by 27 percent while reductions for other groups would range from 8 percent to 20 percent (data not shown; Appendix Table 3 presents uninsurance rates for all states in each option).

Filling the Medicaid gap in nonexpansion states would cost the federal government $27.0 billion in 2023, largely because of greater costs for marketplace subsidies. Households would save $5.2 billion because of access to subsidized coverage. Overall health spending would increase by $14.5 billion in 2023.

Option 2: Reducing the Employer Affordability Threshold. Lowering the employer affordability threshold to 8.5 percent would reduce the number of uninsured by 109,000 in 2023 (Appendix Table 4). Most people who would gain coverage would be those with incomes between 138 percent and 300 percent of poverty.

This policy would increase federal government spending by $2.4 billion in 2023, but some of this would be offset by $400 million in increased revenue because wages, which are taxable, would increase as employer health insurance premiums, which are generally not taxable, decrease. Households would see savings of $0.6 billion, and employers would spend $0.9 billion less on premiums because of lower levels of employer coverage.

Option 3: Adding a $10 Billion Reinsurance Fund. This policy would lower marketplace premiums and reduce the number of people uninsured by 198,000 in 2023 (Appendix Table 5).

Net federal government spending would increase by $1.1 billion in 2023. Because reinsurance would lower premiums, the federal cost of marketplace premium tax credits would fall by $7.5 billion, largely offsetting the $8.7 billion increase in spending for reinsurance.⁴ Households would see minor savings because premiums would fall for those with unsubsidized coverage, and a small number would leave employer insurance for less expensive nongroup plans. Because there would be fewer covered workers, employers would spend slightly less on premiums.

Option 4: Increasing the Federal Medicaid Matching Rate in Expansion States. This policy would shift about $7 billion in payments from states to the federal government but would not affect coverage nor increase overall spending on health nationwide in 2023 (Appendix Table 6).

Option 5: Enhancing and Funding Marketplace Cost-Sharing Subsidies. As seen in Appendix Table 7, the number of uninsured would fall by 1.5 million in 2023 under this policy. Employer coverage would drop by 810,000 as more people shift to marketplace plans. Two million more people would receive subsidies, and private nongroup coverage would increase by 2.3 million.

Federal government spending under this policy would be higher by $13.0 billion in 2023. Spending for cost-sharing subsidies would increase by $12.2 billion, but there would be only a small increase in federal funding of marketplace premium tax credits despite the new enrollment, because of the decline in premiums. Household spending would fall by $4.8 billion, while employer spending on premiums would drop by $4.5 billion.

Cumulative Impact on Coverage and Spending for 2023

Exhibit 2 shows the change in coverage and spending for each incremental reform. Together, the five policies would provide coverage for 3.7 million more people in 2023. Filling the Medicaid gap and improving cost-sharing subsidies would have the greatest impact on coverage. These two policies would also have the most significant effect on federal spending. If all five policies were enacted, federal spending would increase by $50.4 billion in 2023.

10-Year Estimates of Federal Spending and Impact on the Deficit

Exhibit 3 shows that over 10 years, the five policies combined would increase federal spending by $606 billion and add $575 billion to the federal deficit (Appendix Table 8). The changes to federal spending would be larger than the total effect on the deficit because several of the options would reduce the number of people enrolled in employer-sponsored insurance. As economic theory suggests, we assume that reduced employer premium spending would be passed back to workers in the form of higher wages. Because wages are taxable, whereas health insurance premiums generally are not, federal tax revenues would increase, offsetting a portion of new spending.

Conclusion

Of the five reform policies we examined in this brief, the proposals with the greatest impacts on coverage would involve filling the Medicaid gap (which would reduce the number of uninsured by 1.9 million) and improving cost-sharing subsidies (which would reduce the number of uninsured by 1.5 million) in 2023. Cumulatively, these five options would reduce the number of uninsured from 28.5 million to 24.8 million in 2023.

Enhancing cost-sharing subsidies and funding reinsurance would significantly improve affordability. Increasing the federal match rate would provide fiscal relief to expansion states and assure equity in federal funding across states. Lowering the employer affordability threshold would provide savings to some low-income workers.

During a 10-year period, each policy alone would have a relatively modest impact on the deficit. Filling the Medicaid gap and improving cost-sharing subsidies would be the costliest reforms. Cumulatively, these options would increase federal spending over 10 years by $606 billion and increase the federal deficit by $575 billion. In the months ahead, policymakers may decide that the value of providing affordable coverage to more people is worth investing in these policies.