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How the Affordable Care Act Is About to Become More Expensive

Sunday November 10th, 2013   •   Posted by Craig Eyermann at 7:11am PST   •  

President Obama would appear to be on the verge of taking actions that will make his signature health insurance reform law much more expensive.

As it stands today, the Patient Protection and Affordable Care Act (aka “Obamacare”) makes health care insurance affordable by providing a tax credit subsidy for Americans who buy health insurance whose household incomes fall between 133% and 400% of the federal poverty level in states that have expanded their Medicaid programs, and between 100% and 400% in states that have not.

The chart below shows the income levels for 2014 that correspond to the eligibility for Obamacare’s tax credit subsidy according to the size of a household:


Philip Klein of the Washington Examiner reports that in 2010, the Congressional Budget Office estimated that as they stand today, Obamacare’s tax credit subsidy would cost $458 billion from 2014 through 2019, the first six years of the program. But back in 2009, when looking at capping the upper end of eligibility for the tax credit subsidy at 500% of the federal poverty limit, the CBO estimated the cost from 2014 through 2019 would be $1.2 trillion – nearly three times as costly. That very high cost had a lot to do with why the eligibility for the tax credit subsidy was cut back to be 400% of the federal poverty level in the bill that President Obama signed into law.

Sam Stein of the Huffington Post reports that President Obama, faced with a growing number of middle-class Americans who are angry that they are being forced out of the health insurance plans they chose for themselves, and who must now pay much higher premiums for the bloated coverage provisions of new policies required by the law, is now considering doing away with the law’s upper income limit for eligibility for the tax credit subsidy.

According to the administration source, the White House is “looking at an administrative fix for the population of people in the individual market who may have an increase in premiums, but don’t get subsidies.”

Such a fix would address the issue of “sticker shock” that has been popping up across the country, as individuals are losing their coverage and finding only higher-cost alternatives. Under the ACA, there are tax subsidies to help individuals and families with income between 133 percent and 400 percent above the poverty level purchase insurance. Those with incomes higher than 400 percent above poverty get no such assistance. The proposed administrative fix would address this group.

The action would require Congressional approval, and would substantially increase the cost of the law. Unless offset by spending reductions elsewhere in the budget, the U.S. government would be forced to borrow additional money to pay for the short-term benefit of raising or eliminating the income limit for eligibility for the subsidy, increasing the national debt by billions over the next 10 years.

On the plus side, the proposed change would eliminate one of the law’s major defects for U.S. households – the creation of a welfare trap for middle-class American households. Here, the Affordable Care Act creates a huge disincentive for Americans whose incomes place them near the tax credit subsidy eligibility income limits to earn higher household incomes if it puts them at risk of losing thousands of dollars worth of the subsidies to support their buying health insurance.

For example, a family of three with a household income of $78,120 could lose an estimated $5,300+ tax credit subsidy for buying health insurance if its modified adjusted gross income rose by just $1 above that $78,120 income level under the law as it stands today.

It’s that marginal tax rate effect that would subject such households at or near the subsidy’s income eligibility thresholds into a welfare trap, where the welfare benefits they get could be lost if they earn just a little extra income. In practice, the welfare trap may be a major reason why so many low-income earning households place such emphasis on activities like winning the lottery (or the similarly very low-odds-of-winning equivalents of professional sports or entertainment careers), because breaking out of the welfare trap requires that they earn enough income to more than compensate for the value of the welfare benefits they lose if they pursue a path that is more achievable through honest effort.

That problem didn’t exist for middle class Americans before Obamacare became law, and unfortunately, fixing just this aspect of the law won’t do enough to fix any of the thousand other problems that were built into the law by politicians who don’t care about the real needs of middle class Americans.

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November 2013