A look at the impact of ACA subsidies for individuals

Wed, 11/12/2014 - 15:02

In 2014 residents across the United States will be required to purchase health insurance in one form or another or face tax penalties for not doing so. As part of the Affordable Care Act, subsidies have been created to help those with lower incomes purchase insurance on the state insurance exchanges. While all individuals with incomes of up to 400% of the Federal Poverty Level may qualify for these subsidies, how much of a subsidy they qualify for has been difficult to determine... Until now.

Individual subsidies are dependent upon the cost of insurance in an individual state. Finally with the release of the first batch of rate information from a few select states ValuePenguin has forecasts of the amount of subsidies for individual consumers. In our study we looked at the states of Ohio, Oregon, Connecticut, Colorado and the District of Columbia cut across ages 27, 35, 45 and 55 for a single individual.

(For a quick primer on how the subsidy calculations work, refer to our quick guide Understanding the ACA Subsidies. Most of our analysis below will involve the subsidy and premium calculations we elaborated on in that guide.)

The Benchmark Silver Plan

Using the data ValuePenguin gathered for our individual State Exchange Comparisons, we are finally able to get an idea of what the benchmark "Second Lowest Cost Silver Plan" will really cost in each state. Table 1 displays the premium for the second lowest silver plan by state.

Note: In 2014 some plans may not be available in all areas of a state, and rates will be vary slightly from county to county within an individual state.

State Age 27 Age 35 Age 45 Age 55
Ohio $228.51 $266.44 $314.85 $486.23
Oregon $167.68 $195.52 $231.04 $356.80
Connecticut $305.03 $355.68 $420.29 $649.06
Colorado $207.08 $241.47 $285.33 $440.65
Washington DC $180.80 $200.08 $293.54 $430.74

Table 1: Monthly Premium for the second lowest silver plan by state and age for an individual

Single Person Households

The quickest comparison for us to make is for the single person household. With only 3 variables, the age, income and location of the individual we can quickly figure out who will qualify for subsidies.

Annual Income Monthly Premium Cap
$22,980 (200% FPL) $121
$28,725 (250% FPL) $193
$34,470 (300% FPL) $273
$45,960 (400% FPL) $364

Table 2. Premium Cap for Second Lowest Cost Silver Plan by % of FPL for an Individual

The Young, Single and Lower Middle Class may not see much in subsidies

The success of the exchanges in the Affordable Care Act depends upon getting young healthy individuals to join the market to offset the costs of the older and sick who will now have coverage on the individual exchange. We've written at length regarding the impact of the ACA on higher stated premiums for the young. (Here and here) The argument has been made that despite the higher stated premiums on insurance policies for these "young invincibles" the impact of generous subsidies for those making up to 400% FPL will make the actual cost of insurance is much lower. How many young people will actually qualify for subsidies? Let's take a look.

State Age 27 Age 35 Age 45 Age 55
Ohio $36 $73 $122 $293
Oregon $0 $2 $38 $163
Connecticut $112 $162 $227 $456
Colorado $14 $48 $92 $248
Washington DC $0 $7 $101 $238

Table 3: Subsidies for someone earning $28,725 by state and age

As we can see from Table 1, the monthly benchmark premiums for someone age 27 in our five case study states range from $181 - $305, with four out of the five plans falling under $230 a month. Table 3 shows an individual's expected subsidy by simply taking the cost in Table 1 and subtract the Monthly Premium Cap in Table 2. In Washington DC and Oregon, a single individual making only $28,725 (250% FPL) would actually see no subsidy while the same person in Colorado would receive approximately $14 a month, and in Ohio $36. In the higher cost insurance state of Connecticut he would receive $112 dollars a month as a subsidy. 

While the insurance subsidies will definitely help younger individuals in higher insurance cost states such as Connecticut (and in all likelihood New York and Vermont who have even higher insurance premiums) our analysis shows that the impact of these subsidies on the young has been overstated. We certainly wouldn't consider someone making $28,725 affluent yet in many states younger individuals with that level of income would see 0 or minimal impact from subsidies. 

Helping the middle aged and older

On the other end of the spectrum and where subsidies really begin to have their impact is in the middle aged and older. At the age of 45, individuals in 4 out of 5 states will see the ACA subsidies limiting the costs of insurance for individuals earning up to $34,470 (300% FPL)  For even older individuals 55+ this impact is even more dramatic as there is some form of subsidy for  all individuals up to 400% FPL with the size of subsidy covering a sizeable portion of the stated premiums. With existing insurance premiums being closer to the future exchange premiums for the older demographic groups, the effect of the ACA subsidies will be to lower total insurance costs for people age 45 and older. 

Summary

The subsidies for the ACA will predominantly benefit older Americans as their higher current insurance costs and higher future insurance costs will more likely fall above the premium caps set up by the ACA. For younger individuals its a mixed bag. In the most expensive states where very restrictive age ratings have already produced high insurance costs for the young, these subsidies will help to reduce the total out of pocket costs for the young. 

In all other states however, the design of the subsidies along with the cost of insurance as indicated by our samples will impact a much smaller portion of the young. In these states for younger individuals with incomes over 250% of FPL the cost mitigation from the ACA subsidies will be minimal at best and certainly not offset the increased stated premiums from the insurers. For a better perspective, according to the 2011 data from the US Census Bureau the average person aged 25-34 possessing only a high School Degree earned $28,272 annually, with half of them earning over $25,234.