On August 7, 2022, the U.S. Senate approved the Inflation Reduction Act (IRA), a sweeping $740 billion budget reconciliation package. The legislation—passed by a vote of 51 to 50 with Vice President Kamala Harris casting the tie-breaking vote—now heads to the U.S. House of Representatives, which is expected to consider the bill on August 12. Assuming passage by a majority of the House, President Biden is expected to sign the IRA into law.
Though far less ambitious than the Build Back Better Act passed by the House in 2021, the IRA includes significant investments in health care, climate change, and deficit reduction. Federal officials would, for the first time, be required to negotiate the prices of certain prescription drugs for the Medicare program. This is in addition to several other changes to Medicare prescription drug policies, such as a cap on overall out-of-pocket drug spending for seniors, a copay cap of $35 on insulin products for Medicare beneficiaries, and rebates if drug prices rise too quickly. (Those important changes will be explained in a separate article by Rachel Sachs.)
This article focuses on another key health care component of the IRA: the three-year extension of the most significant enhanced marketplace subsidies first adopted under the American Rescue Plan Act (ARPA). Regular readers know that the ARPA enhancements were temporary and scheduled to phase out at the end of 2022 unless extended by Congress. The IRA completes that task and extends these subsidies for an additional three years—for 2023, 2024, and 2025. This three-year extension will eventually lead to another cliff when the enhancements expire. But, for now, Congress has staved off significant premium shock for millions of people at a time of record-high enrollment in marketplace coverage and record-high inflation. This article summarizes these changes and what to expect after the IRA is enacted.
Many of the IRA’s changes are historic and will benefit millions of people. But the legislation does not do as much as many had hoped. It does not, for instance, close the Medicaid coverage gap in states that have not expanded Medicaid to 133 percent of the federal poverty level (FPL) under the ACA; fund state reinsurance and affordability programs for coverage through the marketplaces and the Basic Health Program; enhance Medicare benefits by adding coverage for vision, hearing, and dental services; or require Medicaid and CHIP to provide continuous eligibility for children, or full benefits for pregnant and post-partum women, for 12 months. These policies were reflected in prior iterations of the legislation but ultimately not included in the final bill.
How The IRA Extends ARPA Subsidies
The IRA extends ARPA’s two most significant subsidy enhancements, changes that have already contributed to record-high marketplace enrollment and a record-low uninsured rate of 8 percent in early 2022. Of the 5.2 million people that have gained coverage since 2020, nearly half—about 2 million adults—enrolled in marketplace coverage thanks in part to improved affordability under ARPA.
The IRA extends both enhanced subsidies through the end of 2025, meaning these PTCs will be in place for the 2023, 2024, and 2025 plan years. This part of the IRA—which spans just over one page in the more than 700-page legislation—makes no other substantive changes and is a straightforward extension of current policy, with an estimated price tag of about $64 billion.
Eliminating The Subsidy Cliff
ARPA expanded the availability of premium tax credits (PTCs) to millions more people by eliminating the Affordable Care Act’s (ACA’s) subsidy cliff at 400 percent FPL (about $52,000 for an individual or $106,000 for a family of four). Individuals and families above this income level were not previously eligible for PTCs, leaving many middle-income people—especially those who are older and live in rural areas—with extraordinarily high premiums.
Under ARPA, those whose income exceeds 400 percent FPL are eligible for PTCs if the cost of premiums exceeds 8.5 percent of their household income. This provision does not subsidize the richest people, whose premium burden generally does not exceed this threshold. This part of ARPA has had a significant impact: marketplace enrollment by middle-income consumers increased by 4 percentage points from 2021 to 2022, rising to a total of 1.1 million people. By extending this policy through the end of 2025, the IRA will ensure that middle-income people who purchase their own health insurance do not pay more than 8.5 percent of their income towards premiums alone.
Increasing Existing Subsidies
ARPA bolstered existing subsidies for those who already qualified under the ACA (i.e., those whose income is between 100 and 400 percent FPL). Prior to ARPA, individuals whose income was between 100 and 133 percent FPL had to contribute about 2 percent of their income towards premiums, while an individual whose income was between 300 and 400 percent FPL paid no more than 9.78 percent of their income towards premiums.
ARPA maintained the sliding scale nature of PTCs but reduced the premium percentage at all income levels (above 100 percent FPL). Those with incomes from 100 to 150 percent FPL became eligible for no-premium coverage (i.e., they contribute no income towards premiums for a silver benchmark plan). The premium contribution increased as income increases but was ultimately capped at no more than 8.5 percent of income for those with higher incomes.
This change significantly increased the generosity of PTCs because the federal government paid a greater proportion of premiums relative to the ACA. During the 2022 open enrollment period, HealthCare.gov consumers saved an average of $47 to $128 per month, and an estimated 28 percent of all enrollees selected coverage for $10 or less per month.
The IRA maintains these enhanced subsidies. This will help ensure that lower-income people can enroll in free or nearly-free silver plans and limit the out-of-pocket premiums that higher-income people pay. Consistent with ARPA, these levels will remain unindexed, meaning the percentages that consumers owe will not increase annually. As such, the percentages (e.g., 0 percent to 8.5 percent) will remain the same through December 31, 2025.
What Happens After Enactment?
Implementation should be seamless since Congress extended the ARPA subsidies without change. (If Congress were to have altered the percentages or reimposed the subsidy cliff, these changes would likely have been more challenging for marketplaces to implement.) Even so, and as discussed here and here, timing matters a great deal to ensuring that consumers are not confused, even with an extension of the ARPA subsidies.
Considerations For Rate Filings For 2023
One question is whether federal officials will delay the rate filing deadline for insurers in HealthCare.gov states—currently August 17—to give insurers more time to submit rates that reflect the IRA’s subsidy extension. Although not all states asked insurers to file two sets of rates (to reflect assumptions about the loss and continuation of ARPA subsidies), prudent insurers likely ran these calculations on their own.
Why might it be important to ensure that approved rates reflect the continuation of ARPA subsidies? Without ARPA subsidies, more people would face higher out-of-pocket premiums. Higher out-of-pocket premiums, in turn, would lead at least some marketplace enrollees—especially those without health needs—to disenroll in coverage, leaving a sicker marketplace risk pool. Insurers that assumed these circumstances would thus propose higher rates to reflect a costlier group of enrollees.
Indeed, the loss of ARPA subsidies was among the top factors driving rate increases for 2023. The American Academy of Actuaries noted that the expiration of ARPA subsidies was the “major driver leading to higher premiums” in the individual market. AHIP referred to the loss of subsidies as “the most significant factor impacting affordability of out-of-pocket premiums in plan year 2023.” And the Kaiser Family Foundation deemed this “the most significant potential policy change” while also noting that the insurers that quantified this impact in 2023 rate filings noted a neutral or only slight increase in costs.
All to say, insurers that assumed that the ARPA subsidies would expire may have set their rates higher than what will be true of the actual risk pool now that the IRA has extended the ARPA subsidies for three years. If we proceed with these rates, premiums will be higher than they should be—meaning higher federal outlays for premium tax credits and higher premiums for those who do not receive marketplace subsidies. All proposed rates are currently available here.
If federal officials do not delay the rate filing deadline (and instead allow insurers to proceed with rates as proposed), all would not be lost. Insurers that do not spend enough premium dollars on health care claims or quality improvement—because their rates were set too high—would have to rebate the difference to enrollees under the ACA’s medical loss ratio requirement. But this is a drawn-out process where consumers would not receive rebates for 2023 for some time. And current rebate levels of billions of dollars in recent years suggests that individual market premiums are already overpriced.
Considerations For Consumer Outreach For 2023
Rates are not the only issue ahead of the 2023 open enrollment period. Once rates are finalized, marketplaces use this information to identify a benchmark plan, calculate consumer subsidies, and send notices to consumers about redeterminations and renewals. Jason Levitis and Sabrina Corlette explained these operational issues in even more detail here.
Insurers are also required to notify enrollees about premium changes. Perhaps anticipating a renewal of ARPA subsidies and hoping to avoid consumer confusion, federal officials addressed this issue in June 2022 by providing insurers with flexibility regarding the information that must be included in renewal notices. In particular, the Centers for Medicare and Medicaid Services (CMS) allowed changes to the standard renewal notices that typically require insurers to inform consumers about their current and anticipated premium and PTCs for the next plan year.
CMS has long encouraged insurers to use the actual amounts of premium and PTCs, if known, for the next plan year. However, in the absence of actual amounts, insurers can provide estimates based on an enrollee’s current coverage. But this posed a particular problem for 2023: if the ARPA subsidies were to expire but the notices were based on subsidy data from 2022, consumers would be misinformed about their premium costs and liabilities for 2023. Recognizing this concern, CMS allowed insurers to use modified notices that do not reflect estimates of 2023 premiums. CMS also included contingency plans in case Congress did extend the ARPA subsidies—which now appears to be an accurate expectation.
With this forethought and the IRA’s extension of the ARPA subsidies, we have hopefully staved off significant consumer confusion ahead of the 2023 open enrollment period. The certainty of having the subsidies in place will also enable marketplaces, insurers, assisters, and federal and state officials to proceed full-steam ahead with outreach ahead of November 1.
Considerations For Other Related Policies
The continuation of ARPA’s enhanced subsidies has other downstream implications as well. First, it means continuation of a low-income special enrollment period (SEP) adopted by the Biden administration in 2021. This SEP enables individuals and dependents who are eligible for advance PTCs and whose household income is under 150 percent FPL (i.e., up to $32,580 for a family of three) to enroll in marketplace coverage on a monthly basis. But this policy is in effect only when this population qualifies for maximal advance PTCs (i.e., when Congress sets the taxpayer’s premium contribution to 0 percent). Since the IRA extends the ARPA framework, this will remain true through the end of 2025 and help ensure that low-income people can enroll in coverage throughout the year.
Second, the IRA’s continuation of ARPA could have implications for ongoing disputes over Georgia’s waiver under Section 1332 of the ACA. The history of this dispute (and the latest) is discussed in detail here, but state officials have long rebuffed CMS’s requests for additional analysis, asserting that these requests were improper because there has been no change in federal law for 2023. With the IRA poised to extend the ARPA subsidies through the end of 2025, CMS might renew its request for updated actuarial and economic analyses and would likely be on even firmer ground to do so since the change would directly overlap with the term of Georgia’s waiver.
Third, the IRA subsidies will be critical to helping the millions of people who are expected to lose Medicaid coverage at the end of the declared public health emergency successfully transition to marketplace coverage. Coverage losses could be significant as up to 15 million people transition away from Medicaid once states begin conducting eligibility redeterminations. While much work must be done to ensure that people are aware of and enroll in marketplace coverage, the extension of ARPA subsidies under the IRA will help ensure that many of those losing Medicaid coverage will be able to enroll in affordable private coverage through the marketplaces.
