The Role of Affordable Care Act Premium Tax Credits in the Payer Industry

By Kelsey Waddill

January 24, 2023 - The Affordable Care Act marketplace premium tax credits were introduced in 2010 and continue to play an integral role in US health insurance.

A Google search on premium tax credits will demonstrate the concept’s intersectionality. Authoritative sites on the topic include the IRS and Healthcare.gov along with other tax and healthcare experts as well as state and federal government resources. Despite the complexity, premium tax credits have impacted enrollment, affordability, and access to care in the US.

Since the passage of the Affordable Care Act which instituted the credits, premium tax credits have played a key role in the US health insurance industry. A strong grasp of health insurance in the US requires understanding what premium tax credits are, how they function, the challenges surrounding them, and their overall impact.

What are premium tax credits, advance premium tax credits

In the most basic terms, the premium tax credit uses government dollars to lower premiums for individuals and families who lack other affordable coverage options.

“The premium tax credit—also known as PTC—is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace,” the IRS website explained.

There are two ways that consumers apply for premium tax credits. Eligible individuals can apply when they file their taxes or when they enroll in a health plan on the Affordable Care Act marketplace.

Eligibility for the premium tax credit relies on income status and household factors. The amount of a premium tax credit is calculated on a sliding scale based on income. The lower a person’s income, the larger her tax credit will be.

As of late December 2022, eligibility criteria for premium tax credits include:

someone in the family has at least one calendar month of Affordable Care Act marketplace coverage without access to more affordable private or public insurance coverage
meeting the income requirements
paying for at least one month of Affordable Care Act coverage by the due date of the return
not filing a married filing separately tax return, with certain exceptions
not being claimed as a dependent

If an individual applies for health insurance and a premium tax credit at any time other than when filing taxes, his eligibility is based on projections of income and household status and the amount is considered an advance premium tax credit (APTC). Occasionally, this is also referred to as an “advance payment of the premium tax credit”.

In the case of an APTC, a new enrollee on the Affordable Care Act Marketplace can have the Marketplace calculate an estimate of the credit. This is sent to the enrollee’s payer, resulting in a lower premium.

The premium tax credit is a refundable tax credit. A refundable tax credit means that the eligible taxpayer can receive a government refund to decrease their tax bill and that the taxpayer can receive a refund for any amount of the tax credit that exceeds the tax.

In the case of a premium tax credit, this means that individuals can put the credit—in part, in full, or not at all—toward their health insurance premiums and whatever they do not use will be returned to them in the form of a refund, according to the HealthCare.gov site.

Since eligibility for advanced premium tax credits hinges on projected income and household data, changes in any relevant factors—such as a divorce, change of address, or birth of a child—should be reported as soon as possible. If individuals fail to report the premium tax credit, they must go through a reconciliation process using an IRS form.

After the passage of the Affordable Care Act marketplace, another key legislative event that shaped premium tax credits was the passage of the American Rescue Plan Act (ARPA) in 2021. This law temporarily expanded premium tax credits in response to the coronavirus pandemic. The expansion boosted the dollar amount of premium tax credits and made them available to all income brackets.

The Inflation Reduction Act passed in August 2022 extended the ARPA expanded premium tax credits through 2025.

Premium tax credits versus cost-sharing reductions

In premium tax credits, the government covers some of an enrollee’s premium like a cost-sharing reduction mechanism. However, premium tax credits are not synonymous with cost-sharing reductions.

A 2023 Congressional Research Service report outlined the difference between cost-sharing reductions and premium tax credits.

“The ACA established two types of cost-sharing reductions (CSRs),” the report stated. “One type of subsidy reduces annual cost-sharing limits; the other directly reduces cost-sharing requirements (e.g., lowers a deductible). Individuals who are eligible for CSRs may receive both types.”

As another distinguishing factor, while any Affordable Care Act metal plan enrollee can receive a premium tax credit if they meet the eligibility requirements, cost-sharing reductions are restricted to enrollees in silver plans. Eligible individuals must also qualify for premium tax credits and must have incomes of 250 percent of the federal poverty level or less.

Additionally, cost-sharing reductions apply to annual cost-sharing limits, co-payments, coinsurance, and deductibles.

Challenges of the premium tax credit system

One of the key challenges plaguing the premium tax credit system is a lack of awareness among eligible Americans.

Many Americans eligible for advance premium tax credits on the Affordable Care Act marketplace did not get an advanced premium tax credit before the 2020 tax filing season, according to a study published in AJMC. Less than a quarter of the study participants planned to apply, even though nearly all the participants planned to file taxes in 2020 and had already done so in 2019.

Part-time workers, higher-income participants, and male respondents were more likely to apply for an advance premium tax credit. More than half of the study participants reported that they did not think they were eligible for advance premium tax credits (53.5 percent). Others did not know what the advance premium tax credit was (15.8 percent) or were uncertain about their eligibility (9.9 percent).

The lack of awareness among eligible enrollees indicates a need for better outreach regarding advance premium tax credit eligibility.

“Raising awareness and applying for the APTC could be accomplished through coupling the APTC application process with tax filing assistance programs, and this strategy may have a broader reach if embedded within naturalistic settings that families are likely to frequent, such as health and school settings,” the researchers suggested.

Some experts have argued that the premium tax credit system does not offer enrollees enough relief, an analysis from Brookings noted. While the ARPA’s expanded premium tax credits helped and the Inflation Reduction Act extended its influence, the law’s solution remains temporary and residents of certain states--like Wyoming and West Virginia--still face high costs on the Affordable Care Act.

The analysis recommended that states take action to supplement the economic relief from premium tax credits. For example, states can provide premium subsidies to specific enrollee populations. States may also bolster their cost-sharing reductions since enrollees’ Affordable Care Act out-of-pocket spending, excluding premiums, has been growing.

Impact of premium tax credits on cost, enrollment

The impact of the expanded premium tax credits can be seen both in the actual changes they instigated in US health insurance and in the potential costs of eliminating them.

The expanded premium tax credit system is recognized as a key factor behind the surge in 2022 Affordable Care Act enrollment. The 2022 plan year saw a record-breaking 5.8 million new enrollees join the Affordable Care Act marketplace. Additionally, the marketplace saw significant increases in enrollment among historically underserved populations.

The method also led to cost-savings for consumers by reducing premiums. During the 2021 special enrollment period, the Biden administration announced that expanded premium tax credits lowered average monthly premiums on the Affordable Care Act marketplace by over 25 percent.

The impending termination of the expanded premium tax credits in 2022 sparked multiple analyses of the expanded credits’ impact. Researchers found that eliminating the expanded premium tax credits could lead to health insurance coverage losses across the US.

Without expanded premium tax credits, Affordable Care Act marketplace enrollees’ premiums would rise, forcing a significant population of enrollees off the marketplace. Experts predicted that 3 million enrollees might become uninsured if Congress allowed the expanded premium tax credits to expire.

Without the expanded premium tax credits, the individual health insurance marketplace risk pool could have worsened. The exodus from the Affordable Care Act marketplace due to premium sticker shock along with Medicaid redeterminations could have left behind a less healthy population of enrollees. This, in turn, might have bumped premiums even higher.

State-based marketplace premiums could grow by 15 to 70 percent, depending on the state, if the premium tax credits expired.

While Congress decided to extend the duration of the expanded premium tax credits and potentially avert these downstream effects, the stark projections highlighted the credits’ broad impact.

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