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Expanded subsidies are essential to health reform

Issue Brief #261

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Read one-page summaries of state-level data for the 18 states where the average family would lose support for purchasing insurance if eligibility is lowered (PDF)Much of the current debate over health care reform has focused on reaching universal coverage and achieving overall health system cost control. Equally important, however, is providing affordable coverage, or subsidies, to those who cannot currently afford it. Many politicians have suggested trimming the subsidies offered to enrollees in the new national health insurance exchange as way to reduce the total price tag of the reform bill. While legislators should be mindful of the fiscal impact of the final bill, cutting subsidies any more is ill-advised and would ultimately undermine the goals of meaningful reform—to make health insurance and health care more, not less, affordable and accessible.

Current legislation in the House of Representatives would limit the maximum amount families under 400% of the federal poverty line could pay on insurance premiums. This maximum premium amount varies from 1.5% to 12% family income, depending on how much a household is above the poverty line. The fiscally conservative “Blue Dog” Democrats cut these rates, though not as much as they had originally intended. Members of the Senate Finance Committee have proposed reducing support even beyond these levels, limiting subsidies to families making 300% of the poverty line. Nationally, about 42 million individuals (or 14.3% of the population) are between 300-400% of the federal poverty line and thus stand to be affected by a cut in eligibility.

Reducing the eligibility for subsidies would force many middle-income families in the exchange to spend substantial portions—easily 15% to 20%—of their household income on premiums, placing them at risk for financial shock. Given that taxation of employer-sponsored health plans appears to have re-emerged as an option for financing health reform, expanded subsidies are also essential to ensure that reform does not burden middle-class households, a key promise of the Obama administration. In light of these concerns, this issue brief estimates the effect of lowering the cut-off for subsidies from 400% to 300% of the federal poverty line.

When premium subsidies are capped at 300% of the federal poverty line, the median family in 18 states would lose eligibility for support. The average subsidy that these families would lose would be $5,000. Families in five states would spend 19% or more of their household income on health insurance premiums. Because this analysis looks only at premiums and not total out-of-pocket spending on medical care, it understates the full burden that families in the exchange would assume without federal subsidies. When premium subsidies are capped at 400% of the federal poverty line (the cut-off proposed by the House bill), the median family of four in all but three states would receive some assistance. The average credit for eligible middle-income families would be about $6,273.

These results show that policy makers need to ensure subsidies are at least maintained, if not expanded, for households up to 400% of the federal poverty line so that insurance is truly affordable for all Americans in the new national health insurance exchange.

Subsidy eligibility analysis
Table 1 shows the proposed system for calculating premium subsidies in the House of Representatives reform legislation. Depending on where a household falls above the federal poverty line (FPL), it could pay between 1.5% and 12% of its adjusted gross income (AGI) on premiums. Families that earn below 133% of poverty would be covered by Medicaid. For example, a household that is 230% over the FPL would pay 7% of their income on premiums. The difference between this amount and the total premium would be covered by the subsidy (in this example $8,278).

[Table 1]

Table 2 shows the hypothetical family-plan premium in a new insurance exchange relative to median household income for a family of four in each state. We assume that the average premium for large employers (with over 1,000 workers) will be equivalent to average premiums in a new exchange. We then calculate how median adjusted gross family income compares to the FPL, and then whether or not the average family in each state would be eligible for premium subsidies at cut-offs of 300% and 400% of the FPL.

[Table 2]

With subsidies that end at 300% of the FPL, the average family of four in 36 states could spend over 12% of their income on premiums in the national exchange, and in seven states the average family would easily spend over 19% of their income. A family of four with the national median family income—$73,276—would find themselves without federal support, forced to spend 17% of their income on premiums.

When the subsidy cut-off is raised to 350% of the FPL, coverage increases dramatically, but the average family of four in 14 states would still not receive support and would spend at least 12% of their income on premiums, and the average family in nine states would spend at least 15%. The average family in Minnesota, Washington, Wyoming, and New York would all spend at least 17% of their income on premiums.

At a cutoff of 400% of the FPL—the level currently proposed in House legislation—most families making median household incomes would receive support, except for median families in three states. Families in Connecticut, Maryland, and New Jersey would spend over 14% of their income on premiums, since the median family income exceeds 400% of poverty in those states. Even with the 400% subsidies, median families in Rhode Island, Alaska, New Hampshire, and Massachusetts would still spend over 11% of their income on premiums.

Table 3 shows the number and share of people between the proposed poverty cut-offs of 300% and 400% of the FPL. Of all the states, Utah has the greatest share (17% of its population) and California has the greatest absolute number of residents (4,469,291) between the eligibility cutoffs.

[Table 3]

Data sources and full methodology
Average annual health insurance premiums are from the 2006 Medical Expenditure Panel Survey; we assume that premiums in the exchange are equivalent to the premiums of large employers (greater than 1,000 workers), Insurance Component; Median household income for a family of four is from the 2007 American Communities Survey; 2009 Federal Poverty Estimate guideline is from the U.S. Department of Labor; Number and share of individuals between poverty cut-offs from the U.S. Census Bureau; to convert from family income to AGI, we applied state level ratios of these provided by Bureau of Economic Analysis (“State-Level Wage AGI Gap for Tax Years 2000-2002,” Robert Brown and Ann Dunbar, U.S. Bureau of Economic Analysis, U.S. Department of Commerce. WP2008-03. July 2008.)

Read one-page summaries of state-level data for the 18 states where the ave
rage family would lose support for purchasing insurance if eligibility is lowered


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