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The main goal of the Affordable Care Act (“Obamacare”) is to make healthcare more affordable, especially for Americans without employer-sponsored coverage. In order to make health insurance more affordable, the ACA implemented a number of individual-market reforms in 2014. Most significantly, the law offers financial support in the form of subsidies to help low- and middle-income Americans pay for healthcare plans. And, while most consumers think there’s just one kind of Obamacare subsidy, there are actually two types that help to reduce the costs for consumers.
People who are eligible for subsidized coverage generally earn too much money to qualify for Medicaid, but don’t make enough to afford most health insurance plans. The ACA introduced two distinct tax subsidies to make healthcare more affordable for these Americans: 1.) premium tax credits and 2.) cost-sharing reductions.
What Is a Tax Subsidy?
Much like a coupon or recurring discount, tax subsidies work to lower the cost of healthcare coverage. Consumers who qualify can apply premium tax credits toward the cost of their monthly premium. Cost-sharing reductions, the other subsidy created under the ACA, enable insurers to decrease out-of-pocket healthcare costs for individuals and families in the lowest income brackets.
Let’s take a closer look at how these tax subsidies work and who is eligible to receive them.
Premium Tax Credits (PTC)
If you purchase an insurance plan on the federal or state Obamacare exchanges and meet the criteria to receive a premium tax credit, your PTC will lower the premium amount you pay each month to maintain coverage. In other words, once you apply and are approved to receive a premium tax credit, your plan premium will be cheaper (instead of paying, say, $450 a month for coverage, your premium tax credit might reduce your monthly payment amount to $200).
The Lower Your Income, the Higher Your PTC Amount: Premium tax credits do not have a fixed value; the dollar amount of the credit you receive will vary, depending on variables like your annual income and household size. Because premium tax credits operate on a sliding scale, individuals with lower incomes receive a larger discount.
Premium Tax Credit Eligibility: Who Gets It?
Your premium tax credit eligibility will depend on:
- How your income compares to the Federal Poverty Level (FPL);
- Your family size; and
- How much health insurance costs where you live.
The main factor used to determine eligibility is your income. In general, the premium tax credit is available to taxpayers earning an annual income between 100 percent and 400 percent of the federal poverty level (FPL) for their household size. This means you can qualify for a subsidy if you make up to four times the Federal Poverty Level. This calculator tool on the Kaiser Family Foundation website can estimate whether or not you are eligible to receive subsidies on the Health Insurance Marketplace.
Per the chart below, if you’re an individual looking for coverage only for yourself, you must make between $12,060 (100 percent of the FPL for one person) and $48,240 (400 percent of the FPL for one person) to qualify for a premium tax credit.
HHS Poverty Guidelines for 2017
2017 Poverty Guidelines for the 48 Contiguous States and D.C.
|Persons in Family/Household||Poverty Guideline|
Cost-Sharing Reductions (CSRs)
Cost-sharing reductions — also called cost-sharing subsidies — function like a free upgrade for your health insurance plan. CSRs make healthcare coverage more affordable by reducing the cost of out-of-pocket healthcare expenses for people who buy a silver plan on the Affordable Care Act’s (ACA) Marketplace. These out-of-pocket expenses may include your plan’s deductible amount, copays or coinsurance you pay when you see a specialist, or copays for prescription medication. It’s important to note, though, that cost-sharing subsidies apply only to out-of-pocket costs which qualify as in-network services covered by your plan.
How Do Cost-Sharing Reductions Work?
If you qualify for cost-sharing reductions, you won’t pay as much to see a doctor, or when you fill your prescriptions at your local pharmacy. But, unlike premium tax credits, which are paid directly by the federal government to healthcare consumers, cost-sharing subsidies are paid by the federal government to your health insurance provider. Insurance providers, in turn, use those government funds to subsidize the cost of coverage for consumers.
With CSRs, health insurance providers receive funds from the federal government to cover some healthcare costs for qualified policyholders, and this makes healthcare coverage more affordable for those qualified policyholders. Essentially, the federal government reimburses insurance providers for offering subsidized coverage to consumers. In this way, CSRs operate slightly differently than premium tax credits; unlike premium tax credits, CSRs are not applied as a direct, government-to-consumer discount.
Know Your Metal Level
To understand how CSRs work, you must understand the way Marketplace healthcare plans are organized into four “tiered” metal levels: bronze, silver, gold, and platinum. Different metal levels correlate with how substantial a given plan’s coverage is–how much you’ll pay for care versus how much of the total cost your plan will cover.
Cost-sharing reductions are available (assuming you meet CSR eligibility criteria) to people enrolled in “Silver” plans sold on the federal and state Marketplaces, and only to people enrolled in “Silver” plans sold on the federal and state Marketplaces. In other words, for individuals or families eligible to receive cost-sharing reductions, purchasing a “bronze” plan may not be the cheapest option once the discount provided by CSRs is applied to their out-of-pocket costs. If you qualify for CSRs and buy a plan in a metal tier other than Silver, you will not receive this out-of-pocket financial assistance.
Determining Eligibility: Who Qualifies for Cost-Sharing Reductions?
Your eligibility to receive cost-sharing subsidies will depend on:
- How your income compares to the Federal Poverty Level (FPL).
- Your family size.
- Whether or not you are enrolled in a Marketplace “silver” plan.
Health insurance providers selling plans on the ACA Marketplace are required to reduce the cost-sharing responsibilities of silver plan policyholders earning between 100 percent and 250 percent of the federal poverty level. Cost-sharing subsidy amounts vary among different plans and providers; however, like premium tax credits, CSRs operate on a sliding scale, so those with lower incomes will be subject to lower out-of-pocket limits and cost-sharing responsibilities. Because of this 250 percent FPL cap, only the poorest Americans qualify for cost-sharing reductions.
Federal Poverty Levels for the 2017 Benefit Year (shown as percentage of FPL):
|Size of Household||138%||150%||200%||250%||300%||400%|
Cost-Sharing Reductions: An Uncertain Future
Background: In 2014, Republicans in the U.S. House of Representatives sued the Obama administration, alleging that allocating CSR funds to insurers was unlawful because Congress had not appropriated funds to pay for them. Then, on October 13, 2017, the Trump administration announced plans to end cost-sharing reduction payments to insurers.
The Gist: Trump’s move will not have a huge impact on consumer healthcare costs in 2018. Because many insurance providers anticipated that Trump would end CSR payments, providers in a number of states raised health insurance premiums accordingly, to help offset costs. That said, Trump’s actions will likely cause an increase in Marketplace plan costs in the long-run. Those in the lowest-income brackets will still receive their cost-sharing reductions in 2018, but beyond that, the future remains unclear.
How to Apply for Premium Tax Credits and Cost-Sharing Reductions
To receive a premium tax credit, you must purchase health insurance through your state or federal Marketplace. To obtain any subsidies you qualify for, you will have to estimate your annual income when you enroll in a Marketplace plan. Be mindful that you must buy a silver plan on the Marketplace to get the cost-sharing subsidy.
Taking the Next Steps
Do you know if you qualify for any Obamacare tax credits? If you do, but still can’t afford any of the Marketplace plans, there’s a chance that you may qualify for an Obamacare penalty exemption.
For More Reading:
- How Ending Obamacare Subsidies to Insurers Will Affect You
- Counties in the U.S. Where Obamacare Plans Have Become Too Unaffordable