The Inflation Reduction Act (IRA) was signed by President Biden on August 16, 2022 and extends the premium subsidies in the individual market as passed under the American Rescue Plan Act (ARPA) through calendar year 2025. Without the passage of IRA, the more generous ARPA tax credits would have expired after calendar year 2022. In this blog we discuss the projected impact of extending the ARPA tax credits permanently on enrollment and federal spending and implications for health plans.

Individual marketplace enrollment – short- and long-term impact estimates

The ARPA tax credits provide more generous premium tax credits for households with income below 400% of Federal Poverty Level (FPL) and provides tax credits capping premiums for a benchmark plan at 8.5% of income for households with income above 400% of FPL. In addition, the applicable percentage or maximum household contribution percentage are no longer indexed annually. For example, the applicable percentage under pre-APRA increased from 9.50% in 2014 to 9.78% in 2020 for households with income between 300% and 400% FPL.

The impact on enrollment in the individual market was significant during the 2022 open enrollment period, the first open enrollment period where the ARPA tax credits were available. About 14.5 million consumers selected a plan or were auto-enrolled, an increase of 2.5 million from the 2021 open enrollment. About 12.9 million of 2022 enrollees (about 89%) qualify for ARPA premium tax credits.

CBO’s estimated that with the ARPA premium tax credits only being available through 2022, the non-group marketplace enrollment would be 12 million in 2022 and then decline to about 10 million by 2024 due to the loss of more generous premium subsidies starting in 2023.

In a more recent analysis, CBO made a set of long-term projection (Figure 1) under the assumption that the ARPA tax credits are extended permanently. CBO estimates that individual coverage would be 4.3 million higher, on average, during the period from 2023 to 2032. This includes a 0.5 million decrease in individual coverage outside the Marketplace. Subsidized enrollment is estimated to increase by 5.2 million from the average baseline of about 11 million to an estimated 16.2 million. In addition, Medicaid enrollment would increase by 0.2 million. On the other hand, CBO estimates that enrollment in employer-based coverage would decrease by 2.3 million. While not stated, we presume the remaining difference represent a decrease in the number of uninsured of 2.2 million.

Income characteristics of the enrollees in the non-group marketplace

In Figure 2, we show that CBO estimates about 52% of new enrollees with individual Marketplace coverage would be below 400% of FPL, an additional 19% would have incomes between 400% and 499% of FPL, and the remaining 29% would have incomes above 500% FPL. This is different from the current income characteristics of Marketplace enrollees where about 90% have incomes at or below 400% of FPL and only 10% have income above 400% based on 2022 Open Enrollment report. It appears that CBO anticipates a significant proportion of high income enrollees shifting from employer-based coverage to the Marketplace over the long term, as employers change their decision to offer health insurance. CBO estimates an average annual tax benefit of $3,830 for those previously insured through employer-based coverage as Marketplace premium tax credit would be higher than the previous tax savings received under employer-based coverage. Based on the general assumption that morbidity is strongly associated with income, we expect that the morbidity of the individual ACA market will improve under this scenario. At the same time, we expect employer-based coverage would decline and that smaller employers and employers with a higher share of low-income employees will be the most likely to stop offering health coverage.

Federal spending on individual marketplace subsidies – long-term estimates

Per CBO’s estimate, the federal deficit would increase by $248 billion over the ten-year fiscal period 2023 to 2032, or roughly $24 billion per year, under the assumption that the ARPA tax credits would be extended through 2032 (Figure 3). The additional direct cost of the subsidies, $305.5 billion, would be offset by increases in revenue stemming from a shift in employees’ compensation from tax-favored health insurance to taxable wages, $57.6 billion. The total cost of the premium tax credits and related spending would be approximately $1.1 trillion for ten years or about $110 billion annually. This estimate is based on May 2022 CBO projection of 807 billion for Premium tax credits and related spending for 2023-2032 and estimated $305.5 billion increase in premium tax credits as outline by CBO letter to Senator Crapo.

Under the assumption that the average, subsidized enrollment in the Marketplace would be 16.2 million with an additional 1 million in a Basic Health Program and the ten-year premium tax credit cost is $1.11 trillion, the average tax credit per subsidized enrollee would be approximately $6,453 per year or $537 on a per member per month (PMPM) basis. This is similar to the tax credit per subsidized enrollee in the 2022 Open Enrollment report ($524 PMPM).

Long term consideration related to making ARPA tax credits permanent

• Higher enrollment in the individual Marketplace will increase and stabilize the revenue for health plans
• A greater share of higher income enrollees would be expected to improve the morbidity in the individual market and have a favorable impact on premium rates
• Employer-based coverage is expected to decline – with smaller employers and those with a higher proportion of lower income employers being most likely to no longer offer coverage