How New Health Insurance Subsidies Will Work

Beginning in 2014, enormous insurance premium subsidies and payment supports will be available under the Affordable Care Act (ACA) to millions of lower-income individuals and families. While Obamacare could always be overturned before then, the law has been upheld as constitutional by the U.S. Supreme Court. And short of historic landslide victories in this November's elections by the law's largely Republican opponents, changing major aspects of it will be difficult.

[See Seniors Win Big in Court's Obamacare Ruling.]

U.S. News spoke to officials in the U.S. Departments of Health and Human Services and Treasury, which have primary oversight of ACA tax and subsidy benefits. They are producing a growing mountain of rules to implement the law. Beyond ideological and financial disputes, the ACA is also an extraordinarily extensive and complex package.

The law's consumer subsidies--premium tax credits and help with out-of-pocket health expenses--will be available to people who cannot meet its individual mandate to have health insurance, meaning they are unable to find affordable coverage from employers or other private insurance plans. Instead, they will turn to the new state insurance exchanges that are scheduled to be created next year. The law says states can create their own exchanges or let the federal government do it for them. Many states, mostly those with Republican governors, are holding off on this decision until after the elections.

[See How the Health Insurance Mandate Penalty Will Work.]

Eligibility for supports will be determined by the relationship of individual or family gross income levels to the national federal poverty level (FPL). In 2012, the FPL is $11,170 for a one-person household and rises by $3,960 for each additional family member. For a four-person family, for example, the 2012 FPL is $23,050. It increases each year due to inflation so will be a bit higher in 2014.

Higher health taxes have gotten much of the attention in the debate over health reform. But the law also includes two types of extensive financial help for lower-income Americans. Under the ACA, individuals and families with incomes from 100 to 400 percent of the FLP will qualify for tax credits to reduce the premiums for health insurance purchased through the exchanges. In addition, incomes from 100 to 250 percent of the FPL also will qualify for help in paying out-of-pocket costs for the co-pays and deductibles not covered by their health insurance.

[See How Personal Health Reform Taxes Will Work.]

Both assistance programs are tied to the development of standardized healthcare policies. Modeled after the Massachusetts health reform law, these policies will be offered in four tiers--bronze, silver, gold, and platinum. To qualify for a tier, the private insurance companies developing these plans must promise they will cover specified percentages of the typical healthcare expenses for people covered by the plan. These "actuarial value" thresholds are 60 percent for bronze plans, 70 percent for silver, 80 percent for gold, and 90 percent for platinum.

The silver plans have a special role in the tax credits and payment subsidies. In a state insurance exchange, the second cheapest silver plan will become the benchmark for tax credits. (Using the cheapest plan might have led to insurers trying to game the system.) Because healthcare costs differ around the country, this benchmark premium will not be the same in every state.

However, the percentages of this premium that can be received as health insurance tax credits will be the same. They are based on a sliding scale of FPL percentages. People and families earning 133 percent of FPL, for example, will have to pay only 2 percent of their income toward the health insurance premium. They will receive the difference as a tax credit. The payment limit for those at 400 percent of FPL is much higher--9.5 percent of their income--so their tax credit will be smaller.

Here's the list of FPL percentages and sliding scales of income that people must pay toward their health insurance premiums:

Up to 133 percent of FPL: Payments are 2 percent of income.

133 percent up to 150 percent of FPL: Payments begin at 3.0 and rise to 4.0 percent of income.

150 percent to 200 percent of FPL: Payments begin at 4.0 percent and rise to 6.3 percent of income.

200 percent to 250 percent of FPL: Payments begin at 6.3 percent and rise to 8.05 percent of income.

250 percent to 300 percent of FPL: Payments begin at 8.05 percent and rise to 9.5 percent if income.

300 percent to 400 percent of FPL: Payments are 9.5 percent of income.

For example, say a family of four had income of $46,100, which is 200 percent of the FPL. Assume that the annual premium for their state exchange's benchmark silver insurance plan was $10,000 a year. This family would have to pay 6.3 percent of its income, or $2,904.30, of this premium and would receive a tax credit for the difference: $7,095.70.

While this tax credit is tied to a silver plan, the family is free to buy any plan in the exchange it can afford. Whatever the premium is for the plan, the family will be able to reduce its payment by the amount of its credit: $7,095.70. The only exception is that if it decides to buy a cheaper policy with total premiums of less than this amount, it will not get any money back.

To also qualify for out-of-pocket supports, individuals and families with incomes up to 250 percent of the FPL must buy a silver plan in their state exchange. If they do so, the very lowest-income group would pay only 6 percent of its out-of-pocket expenses and the supports would cover the remaining 94 percent. At the upper end of this scale, a family earning 250 percent of the FPL would pay up to 27 percent of its out-of-pocket expenses and the supports would cover the remaining 73 percent.

Combining the two benefits would produce an average subsidy of about $5,000 a year for individuals and families, according to estimates from the nonpartisan Congressional Budget Office. However, the benefits for low-income families, especially those with several children, will be much larger.

For the poorest Americans, the ACA greatly expanded access to Medicaid. However, the Supreme Court's ruling said states did not have to accept this provision of the law, and many states have said they oppose the expansion. In states that do decide not to expand their Medicaid rolls, it's not expected that many affected people will be able to afford health insurance through their state exchange.



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