The voices of Urban Institute's researchers and staff
March 1, 2017

Under an ACA replacement, health insurance options for middle- and low-income people would shrink

March 2, 2017

Last Friday, a Republican-led replacement to the Affordable Care Act (ACA) leaked to the media. Unlike the ACA, the insurance tax credits in this bill do not vary with a person’s income and are not pegged to the cost of a particular plan. In the ACA, tax credits are larger for people with lower incomes, and additional subsidies are offered to those with lower incomes to lower the cost-sharing requirements of insurance plans, all of which cover essential health benefits.

The leaked GOP bill has a different proposed tax credit schedule, which would begin in the year 2020:

  • $2,000 for ages up to 29
  • $2,500 for ages 30 to 39
  • $3,000 for ages 40 to 49
  • $3,500 for ages 50 to 59
  • $4,000 for ages 60 and older

Building on our recent analysis of Health and Human Services secretary Tom Price’s Empowering Patients First bill, we used the same methodology to estimate the level of coverage affordable with the credits in this leaked bill and found that it would vary substantially with a person’s age. Under this approach, premiums would increase more with age than would the federal assistance to help pay for coverage, as is the case with the Empowering Patients First proposal.

The bill would allow insurers to set premiums for the oldest adults (64 years old) at least five times higher than premiums for the youngest adults (18 years old) for the same coverage, but the tax credits for the older adults would be only two times as large as those offered the youngest adults.

The generosity of coverage that could be purchased with the new tax credits therefore drops precipitously as people get older. Coverage affordability decreases as the likelihood of needing medical services increases with age.

What insurance plan could enrollees afford under the leaked ACA replacement?

To determine the effectiveness of these new tax credits, we also sought to determine a single hypothetical plan that all people ages 18 to 64 could purchase using no more than their proposed credit.

Using this standard and taking health care spending growth to 2020 into account, these credits could purchase a plan with an actuarial value (AV) of 34 percent, meaning the plan would reimburse 34 percent of health care costs incurred by enrollees on average. The enrollee would pay the remaining 66 percent of costs out of pocket, on average.  Older adults in their late 50s and early 60s could not purchase more generous coverage than this, using only their tax credits.

An illustrative insurance policy with an actuarial value of 34 percent would have a $15,000 deductible for single coverage, a $30,000 deductible for family coverage, and $25,000 single/$50,000 family out-of-pocket maximums. The policy would cover generic drugs only and would exclude outpatient mental health and substance use disorder services, physical therapy, occupational therapy, speech therapy, and rehabilitation services.

The 34 percent AV level is an upper-bound estimate, because it does not take into account that the bill would allow insurers to vary premiums for factors beyond age (e.g., gender, occupation, length of time covered). Furthermore, some people live in areas where health care costs (and premiums) are higher than in others (the premium estimates reflect national averages), and age bands could be set higher than a 5-to-1 difference in states that chose to allow that. People not maintaining continuous coverage could also face premiums up to 30 percent higher because of their health status.

The value of the tax credit would also erode; it would grow each year with general inflation plus 1 percent, but health insurance premiums tend to grow significantly faster than that. The leaked proposal would provide somewhat more generous tax credits than those in the earlier Empowering Patients First bill. But the amounts of the tax credits offered are still low compared with the average tax credits and cost-sharing subsidies provided to low-income people eligible for assistance under the ACA.

How does this compare with ACA coverage options?

Under the ACA, tax credits are tied to the premium of the second-lowest-cost 70 percent AV plan available to the recipient, and enrollees with income below 250 percent of the federal poverty level are eligible for higher-value plans: 94 percent AV, 87 percent AV, or 73 percent AV, depending on their income. All recipients must make contributions toward the cost of this coverage, but those contributions are limited to a percentage of their income that starts small (2.04 percent) and increases with income.

Even adding these contributions by low-income Marketplace enrollees to these calculations would not allow them to purchase coverage that would make their access to necessary care affordable or remotely approach the level of coverage for which they are eligible under the ACA. And those with income below the federal poverty level cannot be expected to make significant contributions to the costs of their care (they are covered by Medicaid under current law in most states, but the leaked proposal would repeal the ACA’s Medicaid expansion), so the credit alone would be what they had to spend for insurance under the proposed alternative.

While the leaked alternative approach would provide a new tax credit to higher-income people, it would significantly reduce the affordability of adequate coverage for those with modest income compared with today. The assistance offered under the alternatives is not tied to the cost of a particular health plan, and the assistance would not increase as fast as premiums would increase as people age or as fast as health care costs grow over time. Those who need significant amounts of care and who are not wealthy would have a harder time paying for it. 

Participants in the Medicare for All Rally in Los Angeles California on February 4, 2017. Organizers called for a single-payer system for Medicare. Photo by Ronen Tivony/NurPhoto via Getty Images.

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