By Tom Miller and Grace-Marie Turner
One of the mechanisms through which the Affordable Care Act (ACA) expands access to health insurance is through tax subsidies provided to individuals to help offset the cost of health insurance. These subsidies are only available if people purchase highly-regulated and -mandated policies that are sold only through government-run insurance exchanges.
The law’s formula for determining the amount of these premium subsidies specifies that people are eligible for them if they are enrolled in qualified plans offered in “an Exchange established by the State under [section] 1311 of the Patient Protection and Affordable Care Act.” However, only 13 states are operating state-based exchanges this year. The rest are relying on exchanges created by the federal government. In 2012, the IRS wrote a rule that allows the subsidies to flow through the federal exchanges as well.
The Supreme Court has agreed to hear a case, King v Burwell, challenging the illegal IRS rule which, despite statutory language to the contrary, authorizes people to get subsidies in the federal exchanges. Petitioners argue that the law clearly restricts the subsidies to state exchanges; that this gives states an incentive to create their own exchanges; and that administrative agencies like the IRS cannot alter legislation without statutory authorization by Congress. Respondents say that “established by the State” is at worst a drafting error, not a reflection of legislators’ intent, and that Congress wanted subsidies to be available to citizens in all of the states.
The Supreme Court justices will hear oral arguments in the case on March 4, and the justices will privately cast their initial votes soon afterward on whether they believe the law allows the subsidies in the federal exchanges. If the justices decide that the IRS acted illegally in opening federal exchanges to subsidies, citizens in states that have defaulted to the federally-created exchanges soon would be ineligible for the subsidies. As a result, most would begin to face the full cost of the unsubsidized premiums on their policies and would be more likely to drop their health insurance coverage.
The Obama administration’s goal is to enroll 9.1 million people in health insurance this year in the 37 states where it is operating federally-facilitated exchanges. Because an estimated 87 percent of people enrolled are receiving taxpayer subsidies for their coverage, that means up to 7.9 million people could be impacted by the decision.
Many court watchers believe the King v Burwell decision could hinge on whether or not Congress has a viable plan to provide for alternative, if not continued, coverage for them.
Many leaders in Congress recognize the court needs to be reassured that legislators have a plan to address this issue. As a result, efforts are underway for Congress to develop legislation that would create a transition path to other types of subsidized coverage, particularly a safety net for lower-income individuals currently covered by policies in federal-exchange states. The legislation should not only take care of people who are at risk of losing their current coverage, but also use this as an opportunity to begin to move our system toward a more competitive market, centered around individual choice.
The congressional proposals for a short-term safety net and a longer term transition to better choices exist primarily in draft form so far. Most would aim to hold people in federal exchanges harmless going forward and provide an extension of their current coverage through the end of the current plan year. Returning power to the states to regulate their health insurance markets also is important so that people could choose health insurance plans approved by the states, rather than the highly-mandated and regulated policies available on and off the exchanges. Proposals also would remove mandates for individuals to purchase and employers to offer policies.
There is general agreement among most critics of the Affordable Care Act that its federal-exchange-based subsidies would have to be replaced to various degrees, but there are two primary schools of thought about how to deliver the subsidies in a different manner: Either through new and much-less-restrictive federal tax credits to individuals for purchasing insurance; or through allocations to the states to distribute through existing mechanisms, such as the Children’s Health Insurance Program.
The public relations wars over the pending Supreme Court decision already have begun: Families USA is leading the effort on the left and will try to show how many people would be harmed if the subsidies are struck down. Supporters of free-markets and limited government also are mounting a serious media outreach effort to show the harm that this law is doing, including the soaring cost of health insurance, the threat of mandate penalties, labor market disincentives, the disruptions in previous coverage, and patients’ reduced access to their preferred medical providers. Critics of the IRS rule and its federal exchange subsidies need to explain very clearly that Congress is ready and willing to act to help people who would lose their coverage if the Supreme Court decides not to allow subsidies in the federal exchanges.
The Consequences of Doing Nothing
Absent any further actions by Congress, here is an overview of the immediate effects of a decision in favor of the petitioners:
•People will lose federal premium assistance tax subsidies in exchanges not established by a state.
•The employer mandate cannot be enforced in federal exchange states, and
•Fewer Americans will be subject to the individual mandate.
Secondary, ripple effects involve:
•The effective reach of ACA’s federally-required insurance regulation is reduced.
•The level of continuing and subsequent insurer and enrollee participation in ACA exchanges declines.
•Future coverage in unsubsidized or less-subsidized federal exchanges will be repriced.
•The fiscal limits of the ACA’s risk corridor and reinsurance provisions will be reached sooner.
•States will face renewed pressure to expand Medicaid coverage more aggressively.
•Pro-ACA policymakers will explore new efforts to redefine and revise the parameters of “state-established” exchanges.
Subsidies: If the Supreme Court rules that the IRS acted illegally, the government’s authority to distribute tax subsidies through federal exchanges will end within a month, assuming no new action by Congress. States that created their own exchanges will be able to continue to operate and distribute subsidies, and other states may consider qualifying as a state exchange after a King ruling.
The federal exchanges, also called federally-facilitated marketplaces (FFMs), could continue to operate, but the expensive insurance sold there would be much less attractive to customers who are no longer receiving federal tax subsidies. Barring further congressional action shortly after a Court decision against the IRS rule, insurers would no longer benefit from those unauthorized tax subsidies for the rest of 2015 and beyond.
Employer mandate: In states that have not established their own state exchanges as specified under Section 1311 of the law, the federal government will effectively be unable to impose any employer-mandate penalties on employers in that state. That is because the penalties are only triggered in the event that an employer fails to comply with the mandate to provide qualified and affordable coverage and also has at least one of its employees lacking such coverage who subsequently receives federally-subsidized coverage through the exchange in that state. (Employers may violate the mandate either by not offering ANY qualified coverage to their workers, or by offering unaffordable policies to one or more of their employees. Qualified coverage involves the employer offering an insurance plan that provides at least minimum essential benefits and the employer also paying for at least 60 percent of the benefits covered by that plan. Unaffordable coverage involves policies in which premium expenses cost an employee more than 9.5 percent of his or her W-2 wage income.)
Individual mandate: Individuals in states without a section 1311 exchange also will face higher income thresholds before the individual mandate could apply to them. The individual mandate does not apply if available coverage costs more than 8 percent of one’s household income. The lack of subsidies will drive up the net cost of coverage. As a result, individuals in states that don’t establish exchanges will face higher income thresholds before the mandate can apply to them. If these subsidies are no longer available in a state after the King decision, the out-of-pocket premium costs for coverage become more expensive and less affordable for unsubsidized individuals. Therefore, they are less likely to bring those individuals within reach of the individual mandate penalties. So, a favorable ruling in King won’t totally eliminate the individual mandate, but it will exempt more lower-income Americans from its penalties.
There will be numerous indirect effects as well.
Participation by individuals, employers, and insurance companies:
Absent an enforceable employer mandate, along with a more limited individual mandate and less of a “captive” population in federal, unsubsidized exchanges, the ACA’s other insurance rules will be weakened as well. In states that don’t run exchanges, employers couldn’t be penalized any longer for offering non-qualified coverage. Fewer individuals have to, or will want to, buy ACA-prescribed coverage.
Without the federal exchange subsidies, more insurers will decide to drop out of participating in states with federal exchanges, and the insurers will face less attractive operating cost margins: They will have fewer enrollees, arguably skewed toward higher-risk patients who lack other coverage alternatives.
Risk payments: The business assumptions behind participating in federally-facilitated exchanges would change so much for insurance companies post-King that insurers’ losses in those states in subsequent months and years would increase and add to the claims against ACA’s risk corridor funds. This would accelerate pressure to resolve the issue of whether those risk corridor payments are meant to be budget neutral, that is, payments for losses can be no greater than payments collected from more profitable exchange insurers going forward.
Countermoves in this environment by state and federal officials wanting to keep the ACA coverage afloat are likely to include broader definitions of Medicaid coverage (with states agreeing to the ACA’s Medicaid expansion and possibly submitting waivers to cover people above the current 138 percent FPL ceilings authorized by the ACA). Officials also may get clever with the definition of a state-established exchange, for example by renting the federal exchange website mechanisms, contracting out to piggyback on other state exchanges, revising current regulations for what constitutes a section 1311 exchange, etc.
In summary, there will be costs and benefits that differ among various parties in the event of a Supreme Court decision against the IRS rule and current federal exchange tax subsidies. Members of Congress and state officials must not simply default into restoring the current law’s many costs and regulatory burdens. Instead, they need to prepare now to take advantage of the opportunities that will be available to them to improve our health sector and the choices of coverage available to consumers if the Supreme Court rules against subsidies on federal exchanges.
Miller is a resident fellow at the American Enterprise Institute. Turner is president of the Galen Institute.
Indiana Governor Mike Pence has won approval from the Obama administration for a Medicaid waiver that begins the transformation of the program toward a consumer-directed model.
Gov. Pence is building on the popular and successful Healthy Indiana Plan (HIP) created by former Governor Mitch Daniels in 2007.
Both of them pushed the envelope with Health and Human Services officials who were determined to perpetuate a hide-bound program that is ill-serving tens of millions of recipients while gobbling up state revenues. Gov. Pence and his staff worked directly with White House officials to overcome this inertia and set down some new markers for future reform.
Gov. Pence announced today that the administration has approved Healthy Indiana 2.0 that will require contributions from all able-bodied Hoosiers participating in the program. It also creates an Employer Benefit Link that provides a Medicaid contribution for recipients who are eligible and participating in employer-sponsored health insurance plans. In addition, recipients who do not make their required contributions toward their health benefits can be locked out of the program for six months. All recipients will be required to make a contribution toward their Medicaid benefits, even those who are at the lowest income eligibility levels.
While conservatives are sure to criticize this plan as an expansion of Medicaid, I see it as taking advantage of an opportunity to lay the groundwork for the kind of Medicaid reform that we must move toward in the future. It would not be possible to rip out this program root and branch and replace it with a consumer directed model. By winning approval of these changes through a Medicaid waiver, other governors have a much stronger platform to move toward other changes that will work for their states.
HIP creates a POWER Account that is jointly funded on a sliding scale by the recipient and the state. Recipients at 138% of poverty must contribute $54.86 a month for a family of four to participate, for example. Families at 100% of poverty have to contribute $39.75 a month. If they do not make their contribution, they face the lock out.
The $2,500 POWER Account gives people an incentive to monitor their spending for their routine medical expenses. There also are penalties for unnecessary visits to emergency rooms.
Absent Obamacare, many conservatives would praise this effort to make Medicaid look more like a Health Savings Account and catastrophic high-deductible coverage. This is an important start toward much-needed changes to this public program. By using the ObamaCare waiver option that the administration wanted, Gov. Pence has gained important and potentially transformative changes to Medicaid. This is a win.
Millions of Americans who received subsidized health insurance under ObamaCare will find a new wave of frustration this tax season.
After losing their health insurance because it was not ObamaCare compliant…after slogging through the healthcare.gov website to get enrolled in a new policy…after losing their doctors…after learning that they must pay thousands of dollars in deductibles before they can get medical care…now they must face the IRS.
By the end of the month, they should receive a form 1095-A that shows they had health insurance through federal or state exchanges. They will use the form to fill out an astonishingly complex Form 8962 to reconcile the subsidies they received with the income they earned in 2014.
If they received too much, they will have to pay back some or all of the subsidy. That could mean they receive a smaller – or no – tax refund. And for the privilege of this new interaction with the IRS, many will have to pay hundreds of dollars to hire a tax preparer to help them wade through these new ObamaCare tax forms.
Yes, ObamaCare is getting worse.
H&R Block HRB 0% estimates that up to half of Americans who received subsidies for health insurance under the ACA last year will owe the IRS money.
An estimated 87% of those who signed up for health insurance on the new exchanges got subsidies to reduce their health insurance premiums and sometimes their cost-sharing expenses. An assistant professor of health policy at Vanderbilt University, John Graves, calculates the average subsidy was $208 too high.
But these taxpayers face yet another cost. Many of them are accustomed to filing the simple 1040EZ tax form. No more. Most will have to retain tax preparers to help them fill out the new Form 8962. That could cost them several hundred dollars.
The form is used for taxpayers to prove that they and everyone in their family (including children) had health insurance every month of last year, what their incomes were, how much of a subsidy they received, whether they are married, single, legally separated, etc. The examples in the instructions are a window into the complexity of family arrangements in America and, still, people surely will come up with hundreds more permutations.
The instructions are mindboggling in their complexity. They take up 15 pages of fine print and will challenge the most seasoned tax preparer. A one-sentence example: “Column B. Enter on lines 12 through 23, column B, the amount of the monthly premium for the applicable SLCSP [second lowest cost silver plan] reported on Form 1095-A, lines 21 through 32, column B.”
It continues, “If during 2014, your coverage family changes and you did not notify the Marketplace, or no APTC [Advance payments of the premium tax credit] was paid, the premium for the applicable SLCSP reported on your form(s) 1095-A may not be accurate…” It then provides a handy link to another IRS document to explain what you should do if that happens. The instructions go on and on like that for 15 pages.
If taxpayers have to pay back some or all of the subsidy, the instructions explain a new layer of complexity: People who make less than 200% of poverty, or about $23,000 for an individual, will owe only $300, even if they received thousands of dollars more in subsidies. If you make up to the 400% of poverty, or $46,000, you could owe $1,250. If you earned $46,500, which is just over the limit to qualify for subsidies, you will have to pay it all back – likely several thousand dollars.
And if you didn’t have health insurance last year, you will have to pay a fine of $95 or 1% of your modified adjusted gross income. A couple making $65,000 would have to pay a fine of about $450, for example. The “tax penalties” increase this year and next.
Can it get any worse? Yes.
Nina Olson, an IRS watchdog, estimates that 47% of those calling the IRS for help in filling out their tax returns won’t get their calls answered during tax filing season. Those who do get through will wait an average of 34 minutes to talk to someone, she estimates.
Tax preparers calling the “priority service line” will have to wait an estimated 52 minutes to talk to an IRS expert. IRS Commissioner John Koskinen admitted, “We do as well as we can. And ‘as well as we can’ is still going to be miserable.”
The vast majority of Americans who did not receive ObamaCare subsidies for health insurance will simply have to check a box on their regular tax form attesting that they had health insurance. Employers and health insurance companies will be sending them a form 1095-B or 1095-C, which they will attach to their taxes as proof of coverage.
The individual mandate is one of the most detested provisions in the health law, and the first tax season when people must comply will create a new level of outrage about the law, its intrusiveness, and the hidden costs in fines and hidden taxes that millions of Americans will face.
By Tom Miller & Grace-Marie Turner
Tax subsidies are one of the mechanisms through which the Affordable Care Act expands access to health insurance. These subsidies are available only to those who purchase highly regulated policies through government-run exchanges, and are allocated on a monthly basis to insurance companies to offset the costs of premiums and sometimes out-of-pocket costs.
The law’s formula for determining the amount of these premium subsidies specifies that people are eligible for them if they are enrolled in qualified plans offered in “an Exchange established by the State under [section] 1311 of the Patient Protection and Affordable Care Act.” Only 13 states are operating such exchanges this year. The rest are relying on exchanges created by the federal government. But in 2012, the IRS wrote a rule that allows the subsidies to flow through the federal exchanges as well. About 6 million people were enrolled on the federally run exchanges after open enrollment closed for the 2014 plan year, about 85 percent of whom received the subsidies.
The Supreme Court has agreed to hear a case, King v. Burwell, challenging the IRS rule. Plaintiffs argue that the law clearly restricts the subsidies to state exchanges, that this gives states an incentive to create their own exchanges, and that administrative agencies like the IRS cannot alter legislation or spend taxpayer dollars without statutory authorization by Congress. Defendants say that “established by the State” is at worst a drafting error, not a reflection of legislators’ intent, and that Congress wanted subsidies to be available in all of the states.
Will Congress Act?
The Supreme Court justices will hear oral arguments in the case on March 4. If the justices decide that the IRS acted illegally, residents of as many as 37 states soon will become ineligible for the subsidies. As a result, most will begin to face the full cost of the unsubsidized premiums on their policies and will be more likely to drop their coverage.
Many court watchers believe the decision could hinge on whether Congress has a viable plan to provide for alternative, if not continued, coverage for these millions of people. As a result, efforts are underway to develop legislation to transition those on the federal exchanges — especially lower-income individuals — to other types of subsidized coverage. The legislation should not only take care of people who are at risk of losing their current coverage, but also take the opportunity to move our system toward a more competitive market, centered around individual choice.
The congressional proposals exist primarily in draft form so far. Most aim to hold people in federal exchanges harmless going forward, providing an extension of their current coverage through the end of the current plan year. Most also would give people a much greater range of health-insurance options, while removing federal regulations and mandates for individuals to purchase or for employers to offer policies.
There is general agreement that Congress will need to act to provide assistance to the roughly 5 million people who would lose their subsidies as a result of the court decision. There are two schools of thought about how to do this: either through new, less restrictive federal tax credits to individuals; or through allocations to the states to distribute through other mechanisms, such as those used for the Children’s Health Insurance Program.
The public-relations wars over the pending Supreme Court decision already have begun: Families USA is leading the effort on the left and will try to show how many people will be harmed if the subsidies are struck down. Supporters of free markets and limited government are mounting their own serious media-outreach effort to show the harm that this law is doing, emphasizing the soaring cost of health insurance, the threat of mandate penalties, the labor-market disincentives, the disruptions in previous coverage, and patients’ reduced access to their preferred medical providers. Critics of the IRS rule need to explain very clearly that Congress is ready and willing to act to take care of the people who will lose their coverage if the Supreme Court decides not to allow subsidies on the federal exchanges.
The Consequences of Doing Nothing
If the Supreme Court rules that the IRS acted illegally, the government’s authority to distribute tax subsidies through federal exchanges will end within a month, assuming no new action by Congress. These exchanges can continue to operate, but the expensive insurance sold there will be much less attractive to customers without tax subsidies. States that created their own exchanges will be able to continue to operate and distribute subsidies, and other states may consider qualifying as a state exchange after a King ruling.
In states that have not established their own exchanges, the federal government will effectively be unable to impose any employer-mandate penalties. That is because the penalties are triggered when someone without access to employer-based coverage receives subsidized coverage on an exchange.
The individual mandate will take a blow as well. The mandate does not apply if the lowest-priced coverage available costs more than 8 percent of one’s household income, and the lack of subsidies will drive up the net cost of coverage. So, individuals in states that don’t establish exchanges will face higher income thresholds before the mandate can apply to them.
There will be numerous indirect effects as well. With both the employer and individual mandates weakened, the ACA’s other insurance rules will be weakened too. In states that don’t run exchanges, employers won’t be penalized for offering non-qualified coverage, and fewer individuals will have to, or will want to, buy ACA-prescribed coverage.
Insurers on the federal exchanges, meanwhile, will have fewer enrollees, likely skewed toward higher-risk patients who lack other coverage options. Many insurers could drop out, and losses for those that remain will add to the claims against ACA’s “risk corridor” funds. This would accelerate pressure to resolve the issue of whether these payments are meant to be budget-neutral — that is, payments for losses can be no greater than payments collected from more profitable exchange insurers going forward..
Countermoves by state and federal officials wanting to keep ACA coverage afloat are likely to include changes to Medicaid coverage, with more states agreeing to the law’s Medicaid expansion and possibly seeking federal waivers to cover people above the current income ceiling (138 percent of the federal poverty level). Officials also may get clever with the definition of a state-established exchange, for example by renting the federal exchange website mechanisms, contracting out to piggyback on other state exchanges, revising federal regulations for what constitutes a section 1311 exchange, etc.
Members of Congress and state officials must not simply restore the current law’s many costs and regulatory burdens. Instead, they need to prepare now to take advantage of the opportunities that will be available to them to improve our health sector and the choices of coverage available to consumers if the Supreme Court rules against subsidies on federal exchanges.
Tom Miller is a resident fellow at the American Enterprise Institute. Grace-Marie Turner is president of the Galen Institute.
WHEN Karen Pineman of Manhattan received notice that her longtime health insurance policy didn’t comply with the Affordable Care Act’s requirements, she gamely set about shopping for a new policy through the public marketplace. After all, she’d supported President Obama and the act as a matter of principle.
Ms. Pineman, who is self-employed, accepted that she’d have to pay higher premiums for a plan with a narrower provider network and no out-of-network coverage. She accepted that she’d have to pay out of pocket to see her primary care physician, who didn’t participate. She even accepted having co-pays of nearly $1,800 to have a cast put on her ankle in an emergency room after she broke it while playing tennis.
•Avik Roy’s Transcending Obamacare reform proposal retains a number of core features of the Affordable Care Act, even while promising to modify them at the margins.
•Despite the plan’s initial aversion to political risk, Roy places several longshot bets on proposed policy reform results.
•The plan strives too narrowly to ensure that high-deductible health insurance will be the dominant (or, perhaps, exclusive) form of exchange-based coverage and neglects or avoids a number of other reform opportunities. It is also prone to overly optimistic fiscal projections, insufficient details, and ad hoc revisions that fail to hold together.
WASHINGTON — Obama administration officials and other supporters of the Affordable Care Act say they worry that the tax-filing season will generate new anger as uninsured consumers learn that they must pay tax penalties and as many people struggle with complex forms needed to justify tax credits they received in 2014 to pay for health insurance.
The White House has already granted some exemptions and is considering more to avoid a political firestorm.
Some 3 million to 6 million Americans will have to pay an Obamacare tax penalty for not having health insurance last year, Treasury officials said Wednesday. It’s the first time they have given estimates for how many people will be subject to a fine.
The penalty is $95, or 1% of income above a certain threshold (roughly $20,000 for a couple). So you could end up owing the IRS a lot of money.
A nonpartisan entity of the federal government has found that the Affordable Care Act will cost the government less than expected. However, the reduction in the law’s price tag comes among findings that millions of Americans could lose their employer-provided health insurance.
The Congressional Budget Office came out with a report yesterday revising the costs and budgetary effects of the Affordable Care Act, also known as Obamacare.
Stunning figure comes from Congressional Budget Office report that revised cost estimates for the next 10 years
Government will spend $1.993 TRILLION over a decade and take in $643 BILLION in new taxes, penalties and fees related to Obamacare
The $1.35 trillion net cost will result in ‘between 24 million and 27 million’ fewer Americans being uninsured – a $50,000 price tag per person at best
The law will still leave ‘between 29 million and 31 million’ nonelderly Americans without medical insurance
Numbers assume Obamacare insurance exchange enrollment will double between now and 2025