With the GOP tax-and-spending megabill enacted into law, the next politically charged health care debate is heating up. Congress must decide relatively soon whether to extend the enhanced premium credits for Affordable Care Act (ACA) coverage beyond the end of the calendar year. While Republicans have yet to reach a consensus, Democrats are already demanding a permanent extension as part of the continuing resolution negotiations as Congress works to avoid a government shutdown on October 1.
Neither of the main choices available to Congress—allowing the credits to expire with no transition, or approving a one-year extension—is terribly satisfying. If the credits expire, current modeling suggests that the average premium paid by consumers in the ACA exchanges will increase by 75 percent in 2026, which will lead some to drop their coverage and become uninsured. On the other hand, the longer the enhanced credits remain in place, the harder it will be to revert to the pre-2021 schedule. The Congressional Budget Office (CBO) estimates that an indefinite extension would cost $350 billion over the coming decade.
Providing more generous support for insurance enrollment is a politically convenient way to avoid the core problem, which is that health insurance is too expensive for many households to purchase coverage without assistance, or else its perceived value exceeds what they are willing to pay for it themselves (which increases the chances that taxpayers will end up subsidizing their consumption of medical services through other channels such as direct payments to hospitals for uncompensated care). In 2021, Democrats increased the generosity of the ACA’s subsidies for health insurance—called “premium credits”—because take-up of insurance was below what they had hoped would occur and was at risk of falling further due to job loss during the pandemic. As is often the case, a temporary entitlement expansion is now proving hard to roll back.
A more straightforward and fiscally sustainable solution to low take-up of insurance would be to lower overall health care costs, thereby bringing down health insurance premiums. But, as a political matter, it is much easier to increase government support for insurance enrollment than to impose more cost discipline on hospitals, doctors, and other providers of services.
It is not just the Democrats who avoid tackling costs; Republicans are reticent too. To break the cycle of reliance on ever-more generous public subsidies for insurance, Congress will need to become less risk-averse and consider reforms that disrupt that status quo. In particular, it should look at cost-cutting options that push providers of services to become more efficient and reward patients who are willing to opt for lower priced clinicians and facilities.
Enhanced vs. original credit schedules.
The ACA established a schedule of premium credits tied to household incomes. Under the original schedule, the eligible population was defined as people who lacked an offer of an affordable plan from an employer and had incomes between 133 and 400 percent of the federal poverty line (FPL). Individuals below 133 percent of the FPL were presumed to be covered by Medicaid. After the Supreme Court ruled in 2012 that the ACA’s Medicaid expansion was constitutional but voluntary—meaning Congress could not withhold funds from states that declined to participate in the expansion—eligibility for the credits started at 100 percent of the FPL in the non-expansion states (of which they are now 10).
During the debate over the ACA, the Obama administration and the Democratic majority in Congress assured voters the planned premium credits would be sufficient to ensure affordable health insurance for all Americans. But by 2021, the party was arguing that a substantial expansion of support was needed to sustain enrollment in view of the disruptions from the COVID-19 pandemic. That led to approval of a temporary enhanced credit schedule for 2021 and 2022 as part of a major budget reconciliation bill providing pandemic relief. In 2022, Democrats passed a second reconciliation bill that extended the enhanced credit schedule through 2025. Both measures passed with no Republican support.
The original ACA law established caps on the premiums owed by those eligible for coverage in the non-employer insurance market. Those near the poverty line could enroll in benchmark coverage without paying any premium, while those with higher incomes would pay more (those with incomes between 300 and 400 percent of the FPL paid no more than 9.78 percent of their incomes to enroll in a benchmark plan). Premium credits are calculated as the difference between the maximum premium owed by households and the total premium charged by a benchmark plan in the relevant market. Individuals are free to use their credits to enroll in any plan offered in the ACA marketplaces. If a plan charges a premium above the benchmark, the individual must pay the difference out-of-pocket.
As shown in the table below, the enhanced credit schedule is more generous than what was approved in 2010. Below 150 percent of the FPL, households would owe no premiums at all in 2026 for benchmark plans under the enhanced schedule, whereas their premiums would be capped at 4.19 percent of their incomes based on the original ACA law. At 200 percent of the FPL (or $31,300 for a single person in 2025), the premium is capped at 2 percent of income under the enhanced schedule. For a 50-year-old with such an income, the enhanced credit schedule provides an additional $1,440 annually compared to the original ACA law.
The enhanced credit schedule brought many additional higher-income households into the support program by capping their premium payments at 8.5 percent of their incomes. This cap applies above 400 percent of the FPL, with no upper income limit cutting off eligibility. The original schedule provided no subsidies above 400 percent of the FPL.
The generosity of the enhanced credits has been costly for the federal budget and not well-targeted to date. According to CBO, that would continue with a straight extension of the current enhanced credit schedule, with 31 percent of the added spending going to households with incomes above 400 percent of the FPL (or $128,600 for a family of four in 2025).
The enhanced credit’s design also incentivizes waste. With so many households eligible for free coverage, brokers have been encouraging sign-ups even among individuals who have access to other insurance options. The brokers and insurers are paid based on enrollees, which incentivizes enrollment when other options are available.
Subsidizing insurance enrollment can stabilize coverage for a time, but it does nothing to lower the overall cost of health care, and, in many cases, it can increase costs by encouraging consumption of low-value or care that could have been avoided with better prevention, which is part of the reason insurance is so expensive across all platforms. In 2024, the average cost of employer coverage for a family was $25,572.
Still, it is undeniable that the extension of more generous federal subsidies would stabilize insurance coverage in 2026, which is a rationale for continuation that is likely to resonate with many voters. CBO estimates continuing the enhanced credits permanently would lead to an additional 3.5 million individuals having insurance coverage in 2027 compared to a return to the original ACA credit schedule.
The reality is that health insurance is expensive and hard to finance for those with low to moderate incomes. The premium burden is high relative to the wages of many workers, which is one reason they have increasingly migrated toward subsidized coverage in the ACA exchanges.
The only way to avoid continually providing more generous support to those who would otherwise struggle to stay covered is to lower overall costs.
Congress has options.
A cost control agenda need not be assembled from scratch, nor does it need to focus strictly on the ACA market. Indeed, costs in the broader market are heavily influenced by the rules set for Medicare, which is the nation’s largest insurance plan. Changing how providers of services get paid by Medicare will often produce spillover effects in the rest of the market too, including within the ACA exchanges.
In recent years, outside advisory bodies such as the Medicare Payment Advisory Commission have recommended changes that could make a real difference in overall costs, both within Medicare and in the broader market, without undermining access to care for patients. These “on the shelf” ideas are already well understood in Congress. Two in particular stand out for the amount of savings they make possible and apply directly to Medicare:
- Site-neutral payments in Medicare. Currently, Medicare’s payment regulations allow hospitals to buy up outpatient sites and add to their revenue by charging a facility fee on top of the regular outpatient rate. Free-standing sites get paid less because they are not permitted to add a facility surcharge. This differential has rewarded consolidation in the industry at the expense of taxpayers. CBO estimates that a site-neutral policy, which eliminates the opportunity for a gratuitous facility fee, would produce at least $150 billion in savings over 10 years. Fixing the problem in Medicare also would have positive spillover effects in the private market by encouraging more competition and corresponding adjustments to the payments made by private insurers for the affected services.
- A risk adjustment correction in Medicare Advantage. Numerous independent studies have documented that Medicare Advantage (MA) plans are overpaid by the government in part because Medicare’s risk-adjustment system is open to manipulation. In effect, MA insurers inflate what they are paid by submitting data that overstates the health risks of their patients. Congress can fix this problem by requiring the Centers for Medicare and Medicaid Services to adjust what MA plans are paid to correct for the excesses of the existing risk adjustment model. A moderate recalibration would reduce future Medicare spending by at least $500 billion over a decade. There would also be positive spillover effects in the overall market because the insurers offering MA plans would be forced to tighten their cost controls to make up for lost income from Medicare, which would then lead to tighter cost controls in their other lines of business.
In addition to these traditional “budget-cutting” changes, Congress should consider reforms that are more innovative, because they are built on consumer incentives instead of tighter government-set payment rules. The expected cost savings from them is less certain, but the upside potential is also substantial. The first option would affect Medicare directly and the broader market indirectly, while the second could be written as a requirement that applies to the entire market, including the ACA plans, providers participating in Medicare, and employer-sponsored coverage.
- Incentivizing consumer enrollment in high-value accountable care organizations (ACOs). The ACA created ACOs to introduce a new pathway for cost control into Medicare that would be managed and run by hospitals and doctors instead of insurance companies. While some ACOs have shown they can deliver care at less cost than the traditional unmanaged Medicare program, the overall effect on Medicare spending has been modest, in part because beneficiaries are still mostly unaware that ACO plans even exist. One alternative for enhancing the role of ACOs would allow them to share some of the savings they achieve directly with beneficiaries who agree to enroll in them in much the same way MA plans do today. For instance, beneficiaries might pay a lower Medicare premium if they join an ACO that has a statistically proven track record of cost control combined with high-quality care. ACOs would then compete with each other and with MA plans for enrollment, which would open up new possibilities for competitive innovation and cost savings. As with the other changes recommended above, this reform would likely generate positive spillover effects in the broader market by encouraging high-value ACOs to offer their services outside of Medicare in the commercial market.
- Combining price transparency with consumer incentives. CMS has issued rules over the past decade that require providers of services and insurers to post their pricing online. While helpful and better than complete pricing opacity, consumers currently cannot use the information to easily shop and benefit from lower-priced services. The pricing is tied to the insurance industry’s traditional coding systems instead of understandable and discrete services as seen from a patient’s perspective. Moreover, lower pricing mostly benefits insurers, not consumers. Congress should require CMS to rewrite its transparency rules to force all providers to participate in a system of open and accessible pricing focused on consumer engagement. Further, insurance rules should allow consumers to keep a portion of the savings when opting for providers who charge less than what insurers have agreed to pay. These changes would incentivize entrepreneurial clinicians to offer lower pricing to attract more patients, which is what occurred when a large private insurance system implemented a similar pricing strategy.
Beyond the effort to improve overall cost discipline, there is discussion underway in Congress about amending the enhanced credit rules as written in 2021 to eliminate eligibility for the most well-off households (perhaps with incomes above 400 percent of the FPL) and to apply the Hyde amendment, which has been used for many years in other contexts to prohibit the use of federal funds for elective abortions. It is likely that these and perhaps other changes, such as allowing the credits to pay for insurance outside of the ACA exchanges, will be the minimum necessary to expand the political appeal of the credits beyond those already committed to extending them.
No quick fixes.
The problem of high and fast-rising costs did not emerge overnight and will not be addressed quickly or easily, which means the political challenge presented by the fast-approaching expiration of the enhanced credits cannot be avoided entirely by passing other reforms.
Regardless of what is decided about the credits, however, Congress should see the debate now unfolding as yet another signal that it needs to take controlling costs more seriously and on a sustained basis. High inflation in the health sector is creating heavy burdens for for the federal budget—and patients and taxpayers too.
