How Does the Federal Government Subsidize Healthcare Under the ACA — and What Does It Cost?
Last Updated December 6, 2024
In 2025, the expansions of the premium tax credit under the Affordable Care Act (ACA, also known as Obamacare) will expire, and lawmakers will have to decide whether to extend them. Here, we take a closer look at the coverage options and costs associated with ACA subsidies, and how they fit into overall healthcare spending.
The federal government subsidizes health insurance for over 150 million Americans through various programs and tax benefits. The Congressional Budget Office (CBO) reports that in 2023, those costs and subsidies added up to $1.6 trillion, net of offsetting receipts, mainly from Medicare and Medicaid. A small portion of that spending — $91 billion, or 6 percent — goes toward subsidies for health insurance purchased through marketplaces established under the ACA and related spending.
What Coverage Options Did the ACA Establish?
The ACA, which was signed into law in 2010, reshaped the healthcare landscape in the United States. Its primary aim was to extend healthcare coverage to millions of Americans. The ACA ushered in significant changes in how health insurance operates in the country, including provisions to protect those with pre-existing conditions, tax credits for small businesses to purchase coverage, and the introduction of marketplaces to purchase healthcare and the Basic Health Program (BHP) to expand options for health insurance coverage.
What Are Healthcare Marketplaces?
Healthcare marketplaces were created to facilitate the purchase of nongroup and small-group health insurance for eligible individuals, families, and small businesses. Tax credits and cost-sharing subsidies based on income are available for eligible individuals with the intent of making health insurance more affordable. Currently, 19 states operate their own marketplace, while the federal government facilitates the purchase of marketplace plans for the remainder of states on Healthcare.gov.
In addition to marketplace coverage, a state can adopt a Basic Health Program (BHP) for those who would typically oscillate between Medicaid and marketplace coverage because of fluctuations in income. Only three states have adopted the program: Minnesota, New York, which recently suspended its BHP, and Oregon, which implemented its program in the summer of 2024.
How Does the Federal Government Subsidize Health Plans in ACA Marketplaces?
The premium tax credit is a vehicle by which the federal government subsidizes the cost of healthcare for enrollees whose incomes fall between 100-400 percent of the federal poverty line (FPL). If the beneficiary’s income is less than 150 percent of the FPL, which in 2024 is $15,060 for an individual, then they automatically qualify for the maximum premium tax credit in all states. The higher the beneficiary’s income, the more the amount of the tax credit is reduced. Filing jointly or with dependents can also increase the amount of the credit. The ACA limited subsidies to those who make less than 400 percent of the FPL; however, the American Rescue Plan in 2021 temporarily (for two years) lifted the cap on income qualification and increased the credit amount by adjusting the percentage of annual income that eligible enrollees are required to contribute to the premium. The enhancements made in the American Rescue Plan were extended through 2025 by the Inflation Reduction Act.
In addition to the premium tax credit, the ACA created a separate subsidy for health insurance known as cost-sharing reductions to keep healthcare costs reasonable for those with modest incomes. What differentiates the two is that the premium tax credit subsidizes the cost of the insurance, while cost-sharing reduces out-of-pocket exposure for enrollees. As of early 2023, nearly half of all exchange enrollees received a cost-sharing reduction.
According to the Centers for Medicare and Medicaid Services (CMS), more than 21 million people enrolled in ACA plans offered via a marketplace for 2024, a 30 percent increase from a year prior; many of those enrollees would otherwise be uninsured. The average benchmark premium, which is the pre-tax credit amount used to determine subsidy applicability percentage, in 2024 was $477 per month. However, 91 percent of the 21 million people enrolled received a substantial subsidy on their plan, resulting in an average net monthly premium of $124 for all enrollees. Premium subsidies play a significant role in providing healthcare to those who would otherwise be unable to afford it. They are a contributing factor to the decline in the uninsured population of more than 10 million people over the past decade.
Are Premium Tax Credits from the ACA Driving Healthcare Costs?
CBO expects federal spending on healthcare to total $1.6 trillion this year and reach $2.8 trillion by 2034, net of offsetting receipts. Growth in such spending is significantly outpacing growth in the economy. In 1962, federal healthcare spending accounted for just 0.4 percent of GDP but is now projected to rise from 6 percent this year to 7 percent a decade from now.
However, according to CBO, premium tax credits are a relatively small and diminishing portion of federal spending on healthcare. Those credits and related spending accounted for about 6 percent of federal healthcare spending in 2023 ($91 billion); CBO projects that proportion to drop to about 5 percent in 2034 ($138 billion). By comparison, Medicare spending is projected to grow from 54 percent of federal healthcare spending in 2023 ($839 billion) to 62 percent in 2034 ($1.7 trillion), while Medicaid would fall from 39 percent ($616 billion) to 30 percent ($843 billion).
Conclusion
As Congress considers whether to continue the expansion of the premium tax credit beyond 2025, it is important to understand that spending in the context of other federal expenditures on healthcare. Healthcare spending in the United States is increasing, and many factors contribute to its growth, namely an aging population, the complexity of the system itself, and prices paid for hospital services and pharmaceuticals in commercial markets. Even if premium tax credits do not play an outsized role in our troubling fiscal imbalance, policymakers must consider the big picture and pursue policies to improve efficiency in all aspects of healthcare spending.
Photo by Joe Raedle/Getty Images
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