How to Make Ryancare Premiums Affordable for the Near-Elderly

The American Health Care Act—House Republicans’ legislation to repeal and replace the Affordable Care Act, otherwise known as Obamacare—contains many significant reforms. Perhaps the most politically sensitive of the AHCA’s reforms is its replacement of Obamacare’s insurance subsidies with a system of flat tax credits that, for the poor and the middle class, are the same regardless of income.

Based on an analysis that we have conducted at FREOPP, the AHCA’s approach, if left unchanged, would lead to significant spikes in net insurance premiums for lower-income participants in the individual insurance market, with particular problems for those in their fifties and sixties.

Four case studies, illustrated

The below charts illustrate the changes in net premiums under the AHCA vs. the ACA. The green line represents the AHCA’s net premiums. Where the green line is above the blue line, indicated by the shaded grey area, AHCA net premiums are higher. Where the blue line is higher, AHCA net premiums are lower.

For example: a 50-year-old childless adult making 200 percent of the Federal Poverty Level—$24,120—would face net annual premiums of $1,520, on average, under the ACA. Under the AHCA, she would see net annual premiums of $4,078, a difference of $2,855.

A 60-year-old childless adult with the same income would also experience net annual premiums of $1,520 under the ACA, but $9,080, on average, under the AHCA: a difference of $7,561.

For relatively younger individuals, the AHCA performs better.

A 40-year-old childless adult making $24,120 sees, again, $1,520 net premiums under the ACA, but $1,929 under the AHCA: a diference of $409. A 30-year-old childless adult would experience a net premium of $1,441, $79 lower than the ACA.

Fixing the AHCA with Section 202

Section 202 of the American Health Care Act contains a transitional schedule of tax credits that are both means-tested and age-adjusted.

This turns out to be the best way to lower net premiums for lower-income, near-elderly individuals, as illustrated by the dashed green line in the following four charts.

If the AHCA were amended to deploy the Section 202 tax credit schedule after 2020, instead of the flat schedule, 60, 50, 40, and 30-year-old childless adults making $24,120 would see net premiums that are competitive with the ACA: $2,002, $1,761, $1,520, and $1,278, respectively.

Because the Section 202 schedule phases out at 400 percent of the Federal Poverty Level, whereas AHCA’s flat tax credits do not, the flat credit does more to subisidize individuals in the upper-middle class. One way to rectify this imbalance is to include in the AHCA a long-held conservative idea: equalizing the tax treatment of employer-sponsored and individually-purchased health insurance.

A standard deduction of $10,200 for individually-purchased and employer-sponsored coverage would still provide a complete tax break to the vast majority of individuals with employer-based coverage. But the savings from “Cadillac” plans could be deployed to extend that tax break to those making more than 400 percent of FPL who are freelancers or independent contractors.

In the above charts, the impact of the standard deduction on net premiums is indicated by the dotted grey line. Adding a standard deduction to the AHCA would introduce a long-desired reform that makes health coverage significantly more affordable to those who would not otherwise participate in the means-tested tax credit schedule.

Additional considerations

Premiums under an AHCA amended in this way could go down even further if the bill’s regulatory reforms are successful at improving the risk pool in the individual market and attracting younger and healthier participants. This is important, as we project that if the ACA is unchanged, enrollment continue to degrade as premiums rise and healthier individuals leave the market.

A means-tested credit along the lines of Section 202 has one additional advantage over the method used currently in the AHCA: it does a better job of protecting those who live in high-cost states. There are significant variations in average premiums on a state-by-state basis, as the below chart illustrates.

In particular, states like Alaska, Nebraska, Arizona, North Carolina, Oklahoma, Wyoming, and Louisiana will be exposed to higher net premiums under a flat credit, because that credit doesn’t take cost variation into account. A means-tested credit where assistance kicks in above a certain percentage of household income, like the one contemplated in Section 202, addresses that issue.

Assumptions underlying our analysis

According to healthpocket.com, in 2017, the average annual ACA Silver premium was $4,379 for a 30-year-old, $4,929 for a 40-year-old, $6,889 for a 50-year-old and $10,464 for a 60-year-old. We used these figures as the foundation of our analysis.

We assumed that the AHCA’s reform of age-based community rating, moving from a 3:1 to a 5:1 ratio of insurance premiums for oldest vs. youngest participants, would reduce premiums by 10 percent for 30-year-olds, leave them unchanged for 40-year-olds, increased by 10 percent for 50-year-olds, and increased by 25 percent for 60-year-olds. As noted above, as the risk pool improves, premiums under the AHCA could decline, but we left such considerations out of our analysis.

For the standard deduction, our analysis assumes that the AHCA is amended to allow up to $10,200 in premiums to be deducted from gross income for a single filing individual. This level is identical to what the ACA’s “Cadillac tax” originally contemplated for 2018. By far, standardizing the deduction for health insurance has the greatest impact on those in the 25% tax bracket.

For reference, 2017 income tax brackets are: 10% for income below $9,325; 15% for income between $9,325 and $37,950; 25% for income between $37,950 and $91,900; 28% for income between $91,900 and $191,650; 33% for income between $191,650 and $416,700; 35% for income between $416,700 and $418,400; and 39.6% for income above $418,400.