The ACA, Subsidies, and the Rising Cost of Coverage

In past columns, I have discussed how the Affordable Care Act (ACA), commonly known as Obamacare, has contributed to rising medical costs and, in turn, higher premiums for individuals.

For self-employed individuals and others who do not have access to affordable group insurance, this has created a significant challenge. Let's take a closer look at how the system works.

First and foremost, it is important to understand the underlying mechanism. The ACA was designed to help people access affordable coverage. To accomplish this, a program was created using what are known as advanced premium tax credits. These credits are paid directly to the insurance company in advance to offset the cost of premiums.

At the end of the year, when your tax return is filed, the actual credit is reconciled. If you earned more than projected, you may have to repay a portion of the credit. If you earn less, you may receive an additional benefit. The key point is that the more income you earn, the less in advanced credits you receive. The idea is that those with higher incomes can afford to pay more. However, as premiums have increased, the size of these tax credits has grown as well.

When the ACA was originally implemented, individuals earning more than four times the federal poverty level were not eligible for subsidies. At that time, the average cost of an individual major medical plan in 2014 with a $2,500 deductible and a $3,500 out-of-pocket maximum was approximately $250 to $300 per month.

Today, a comparable plan typically has a deductible of $6,000 to $7,500 and an out-of-pocket maximum of $10,000. Premiums for these plans typically range from $550 to $650 per month without subsidies.

To put income thresholds into perspective, four times the federal poverty level in 2012 was approximately $44,600 for an individual. Today, that number is about $60,240. For a family of four, it has increased from $92,200 to roughly $124,800. While income thresholds have risen over time, the cost of coverage has increased at a much faster pace. Premiums have more than doubled, and out-of-pocket exposure has increased significantly.

At the same time, the cost of subsidizing coverage has grown substantially. Today, the federal government spends roughly $90 billion per year to support ACA marketplace coverage for approximately 24 million people. That equates to about $4,000 per person annually on average, and in many cases closer to $6,000 or more per enrollee, particularly for those receiving larger subsidies.

This brings us to the real issue, and it is not political. It comes down to two fundamental challenges: affordability and access to care. While politicians continue to ignore the corporate welfare for large insurance companies that the ACA is causing, the average person suffers. Even if your premiums are subsidized, many individuals still face significant financial exposure. The question becomes: how do you realistically manage a potential $10,000 out-of-pocket expense?

In my next column, I will explore alternative options that individuals, especially the self-employed and those without group insurance, can consider when the traditional system does not meet their needs.

Glen Riensche, CLU, RHU, REBC, LUTCF 402-202-2550 [email protected]