Even as we write and you read, the Supreme Court in King v. Burwell is considering whether qualifying (often low income) individuals and families who have an opportunity to purchase healthcare coverage through the Affordable Care Act’s (“ACA’s”) federal exchange also have the right to federal premium subsidies/tax credits when determining the premium costs associated with the actual purchase of such coverage. While it is obvious that the King decision will be of great importance to those who need the discounts created by the subsidies/credits to make the cost of purchasing coverage on the federal exchange affordable, the King decision could also have a significant impact on those individuals and families who purchase insurance coverage outside of the federal exchange.
To stabilize premiums and encourage enrollment among the usually low-income, but young and healthy, individuals who would historically remain uninsured, the ACA provides for the “carrot” of tax credits to lower the cost of purchasing coverage on the exchanges. At the same time, the individual mandate serves as the “stick” by penalizing individuals who choose not to purchase coverage. In 2016, the penalties would be the greater of $695 per adult and $347 per child (up to a maximum of $2,085 per family) or 2.5 percent of income. Yet if the Supreme Court were to take away the carrot of tax credits, it would also be essentially taking away the stick of the individual mandate.
Without the tax credits, healthcare coverage would be “unaffordable,” and millions would be exempt from the individual mandate. Those exempt from the mandate would include the young and healthy who would likely forego purchasing health insurance coverage when faced with premium increases. As a 2014 RAND Corporation study predicted, eliminating both the ACA’s tax credits and the individual mandate would result in a near “death spiral,” with very sharp premium increases and drastic declines in individual market enrollment.
Moreover, the increases in premiums would likely affect both federal exchange enrollees and consumers in non-exchange plans that comply with ACA reforms. In its effort to stabilize premiums, the ACA mandates that insurers treat as a single risk pool, plans that are offered both inside and outside of an exchange.
As a result, a finding against the tax credits would mean that as premiums for coverage through the federal exchanges rise, premiums outside the exchanges would rise as well. This could make insurance “unaffordable” not only for low-income individuals who would have qualified for the tax credits, but also for those who have relied on the non-group market for insurance—the self-employed, individuals employed by small businesses that do not offer insurance coverage, early retirees, and those in-between jobs.
To illustrate the impact of the elimination of the tax credits on the consumer of health coverage on the federal exchange, here are some revealing statistics:
- Federal tax credits lowered the average monthly premium from $346 to $82 for over 85 percent of the 5.4 million people enrolled in the federal exchanges;
- For those at the lowest income level, the median direct premium payment would increase from 4.1 percent to 29.6 percent of income for single policies, and from 3.6 percent to 48.9 percent of income for family policies;
- Estimates range from 6 to 11 million Americans becoming uninsured as a result of eliminating the tax credits; and
- Of those who would become uninsured in 2016 without the tax credits, 61 percent are white, non-Hispanic; 62 percent live in the South; and 80 percent are employed in either part-time or full-time jobs not offering group coverage.
With the Supreme Court likely to issue its decision by late June, consumers could see tax credits disappear as soon as July or August. Since insurers typically cannot drop enrollees for non-payment of premiums for roughly 90 days, states that have opted out of creating their own exchanges would have only a few months to do so and keep tax credits flowing. Given the logistical and budgetary challenges of establishing an exchange, Congress would likely need to intervene if the Court finds against the government.
Some senior Republican senators intimated in a recent op-ed piece that Congress would likely step-in to offer temporary financial assistance to those who would lose the tax credits, but details on how long the aid would be available for or the amount were lacking.
The impact of eliminating tax credits has not only consumers concerned about their coverage, but also the healthcare providers who care for them. Stay tuned next week when our continuing series focuses on how the King decision may impact healthcare providers and suppliers.
 See 2014 Rand Corporation study here.