The American Rescue Plan Act (ARPA) passed Congress in March 2021, aiming to speed the recovery from the economic and health effects of the COVID-19 pandemic. One way ARPA aimed to do so was by enhancing health insurance coverage during the COVID-19 pandemic.
Those enhancements included increasing premium tax credits in the Affordable Care Act marketplaces:
- Removing the income limits on premium subsidies so that those whose premiums exceed 8.5% of their income are eligible
- Increasing the premium tax credits for low-income households.
ARPA temporarily put in place these increased subsidies for 2021 and 2022. When Congress passed and the President signed the Inflation Reduction Act (IRA) in 2022, it extended those enhancements for another three years through 2025.
Congress must decide whether to end or extend the premium tax credit enhancements. With that in mind, we thought we’d examine the impact of the premium tax credits.
Increased Enrollment
The ACA-created marketplaces enrolled their first members in 2014. Since then, enrollment has remained relatively consistent, with a low of around 8 million enrollees in the marketplaces’ first year to a high of 12.7 million in 2016. Most years, enrollment hovered between 11.4 million and 11.8 million.
In 2020 – before the enhanced ACA tax credits introduced by ARPA – enrollment stood at 11.4 million. It steadily increased to 12 million in 2021, 14.5 million in 2022, 16.4 million in 2023, before exploding to 21.4 million in 2024.
Part of that explosion was due to the expiration of another COVID-era policy that prohibited states from disenrolling Medicaid beneficiaries. In 2023, that policy ended, forcing many low-income households to seek insurance through the marketplaces.
According to a recent Urban Institute study, the enhanced premium tax credits will lead to 7.2 million people enrolling in a marketplace plan that includes a subsidy in 2025 compared to the original premium tax credits. They expect employer-sponsored coverage to decline by 4 million lives as well, as those with unaffordable employer-sponsored coverage find more affordable coverage in the marketplace, and small employers decide not to offer coverage because it serves as an attractive alternative.
Affordable Insurance
Enhanced premium tax credits drive down the cost of insurance for eligible individuals and families. According to the Center on Budget and Policy Priorities, the average enrollee saved nearly $700 in 2024 thanks to the enhancements. Monthly premiums were also 32% lower than before the enhanced rates took effect.
But the premium tax credit isn’t the only way the enhanced tax credits improve premium affordability. Indirectly, they can attract more healthy individuals to the marketplace plans. By attracting healthier individuals, tax credits lower the average health risk of the insurance pool, which can drive down premiums.
Reduced Uninsured Rates
As we saw earlier, the Urban Institute projects that more than 7 million people will enroll in a marketplace plan in 2025 compared to previous premium tax credit policies. That increased enrollment draws primarily from two groups – those enrolled in employer-sponsored plans and the uninsured.
The Urban Institute estimates that the enhanced ACA tax credits will reduce the uninsured by nearly 4 million, a 14% decrease compared to the original policy.
Costs
The enhanced premium tax credits aren’t without costs. According to a Congressional Budget Office (CBO) analysis, the federal government incurs outlays for premium tax credits and experiences revenue reductions too.
According to the CBO’s analysis, the outlays for premium tax credits will peak at 107 billion dollars in 2025 before dropping to 84 billion dollars in 2026. CBO’s analysis assumes about 5.6 million fewer enrollees in 2026 due to the expiration of the enhanced subsidies. Revenue reductions will peak at 24 billion in 2026 before declining to $15 billion in 2027.
The difference between 2025 – when enrollment should peak – and 2027 – when enrollment will decline due to the expiring enhanced tax credits – is about $28 billion.
The Future of Enhanced ACA Tax Credits
Will Congress act to extend or make permanent the enhanced tax credits? That likely hinges on the upcoming presidential election. Most pundits expect that if Republicans win, the enhanced tax credits will be allowed to expire. Meanwhile, making the tax subsidies permanent has been a talking point for President Biden. However, the continuation of the expanded tax credits likely relies on the composition of Congress, with a Republican-led Congress likely letting them expire and a Democrat-led Congress extending them.
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