Premium Tax Credit Increases Access to Care, But at What Cost?

The enhanced premium tax credit is fulfilling its goal of increasing access to health insurance coverage, heard the Senate Finance Committee, but it may be doing so by using taxpayer dollars to pay for low-value plans. Set to expire in just 15 months, lawmakers struggled to find common ground on the future of the enhanced credit at a September 17 hearing on the Inflation Reduction Act’s impacts on health care.

Chair Ron Wyden (D-OR) opened by noting that “working families who buy private health insurance are saving an average of $800 a year in lower premiums through enhanced tax credits.” He urged his colleagues to take action to avoid a “giant premium spike” next year when the enhanced credits now available to the middle class expire.

Meanwhile, Ranking member Mike Crapo (R-ID) contended that the “costly” enhanced credits use “taxpayer funds to camouflage the ongoing flaws in the individual health insurance market.”

Background.

Under Code Sec. 36B, individuals and families enrolling in Affordable Care Act (ACA) marketplace plans may be eligible to claim a premium tax credit. The refundable credit is calculated by taking the difference between the benchmark premium and the taxpayer’s maximum contribution based on their household income. Taxpayers also can receive monthly advance payments to coincide with their health insurance premium payments.

While the premium tax credit was initially only available to low-income taxpayers, the American Rescue Plan Act (PL 117-2) expanded the credit for the 2021 and 2022 tax years and the Inflation Reduction Act (PL 117-169) extended that expansion through 2025. Under the enhanced credit, taxpayers with incomes over 400% of the federal poverty line become eligible to claim a credit once they spend over 8.5% of their income on health insurance premiums.

President Biden’s Fiscal Year 2025 budget calls for making the enhanced credit permanent. The CBO and Joint Committee on Taxation put the cost of that proposal at $335 billion over the 2025-2034 period.

Increasing access to health insurance.

Jeanne Lambrew of the Century Foundation told the committee that between 2020 and 2023, the number of Black marketplace enrollees increased by 95%, while Latino enrollees increased by 103%. She cited an August 2024 Urban Institute study showing that these gains help to “remedy historical disparities in uninsured rates.” And the “gains for Black and Hispanic people would likely be reversed if the tax credit policy expires,” Lambrew concluded.

Senator George Helmy (D-NJ), noting that he represents “the most diverse state in the Union,” asked witnesses about the “economic viability that comes with long-term health care access.” Lambrew explained that “lacking health coverage is one of the major causes of health disparities by race and ethnicity,” but that the premium tax credit “increased choices” and “allowed those individuals and communities to come in and get covered.”

Helmy also pushed witnesses on how the making health care more accessible through the credit encourages “innovation and entrepreneurship.” To that, Lambrew cited 2021 data showing that “2.6 million or one-in-five marketplace enrollees was either a … small business owner or an entrepreneur.” Failing to extend the enhanced credit, she added, would “have a significant harm” for small businesses.

High cost for low-value plans.

Crapo asked hearing witness Theo Merkel, a fellow at the Paragon Health Institute and the Manhattan Institute, to elaborate on his conclusion that the enhanced premium credits “shield consumers from premium costs.” Crapo noted a narrowing of provider networks and decrease in actuarial plan value despite rapid increases to unsubsidized marketplace plan premiums between 2014 and 2023.

According to Merkel, the challenge with marketplace plans is “the underlying value of the plan, which nobody is willing to purchase without government assistance.” He suggested that rather than extending the enhanced premium credit, a better option is to “actually take a look at what is driving the low quality of the underlying plans.”

Merkel didn’t go as far as to suggest getting rid of the Affordable Care Act’s marketplace, rather he proposed “incremental approaches.” Among those are “taking a look at risk adjustment” which he said is “overcompensating for certain populations.” He also suggested “increasing the amount of people … in the individual market.” This could be achieved, said Merkel, with individual health reimbursement arrangements (HRAs) that would “allow employers to help fund people getting coverage in the individual market.”

For more on the premium tax credit, see Checkpoint’s Federal Tax Coordinator ¶ A-4240 et seq.