Supporting Insurance Affordability with State Marketplace Subsidies
Jason Levitis, Levitis Strategies and Sonia Pandit, State Health and Value Strategies
As states seek to make health insurance more affordable, they are increasingly looking to state-based subsidies to help Marketplace consumers pay for premiums, cost-sharing, or both. The Affordable Care Act (ACA) has made coverage affordable for millions of Americans, but there is broad recognition that the ACA’s subsidies are sometimes not sufficient. In the past two years, California, New Jersey, and Colorado have followed Massachusetts and Vermont in establishing state-based subsidies that supplement the ACA’s premium tax credit (PTC) and cost-sharing reductions (CSRs). This piece reviews key considerations for states exploring Marketplace insurance subsidies.
WHY STATES ARE CONSIDERING STATE-BASED SUBSIDIES
The ACA does not make coverage sufficiently affordable for some consumers. The PTC and CSRs make coverage affordable for millions of Americans, but they do not guarantee universal affordability. The PTC requires some of those receiving it to pay substantial amounts towards the premium; for example, a family of four with annual income of $80,000 must pay nearly $7,900 for a benchmark silver plan. The PTC also ends in a cliff at 400 percent of the federal poverty level (FPL), leaving an unsubsidized group without help regardless of the premium they face. CSRs are relatively generous between 100 and 200 percent of FPL (providing coverage with a 94 percent or 87 percent actuarial value (AV)) but much less generous between 200 percent and 250 percent of FPL (73 percent AV) and gone beyond 250 percent. This leaves many families facing deductibles and other cost-sharing large enough to make their coverage difficult to use. For example, in 2021 a family of three with income of $55,000 receives no cost-sharing assistance, despite an average family deductible of about $10,000 for federal Marketplace silver plans. Undocumented individuals and those caught in the so-called “family glitch” also face high costs since they are excluded from both subsidies. These gaps have been especially harmful to people of color and immigrant populations, who have much higher rates of uninsurance than other Americans.
State subsidies can supplement these federal subsidies to make both premiums and cost-sharing broadly affordable. New Jersey estimated that about 8 in 10 consumers purchasing coverage on Get Covered New Jersey would qualify for its new premium subsidy for 2021, contributing to a reduction in the average net premium for subsidy-eligible Marketplace enrollees of 29 percent compared to 2020.
State subsidies can help PTC-eligible consumers, who are missed by many other state tools. States have several options for making coverage more affordable for unsubsidized consumers. Reinsurance, lower-cost public options, individual mandates, and curbing sub-standard plans can all reduce list premiums, which helps this group. But since the PTC generally adjusts dollar-for-dollar with the list premium, these options alone do not lower net premiums for PTC-eligible consumers. To help the subsidized group, a state-based subsidy is the most – and perhaps the only – straightforward approach. This group is also more likely to be uninsured than those with higher incomes, so helping them is key to expanding coverage. More generally, state subsidies are extremely flexible, allowing assistance to be targeted by income, age, geography, or other factors, as discussed in greater detail below.
State subsidies can expand coverage, support the risk pool, and reduce premiums. Making health insurance more affordable has several benefits for consumers and the market overall. It expands coverage: research from Massachusetts shows that enrollment decisions are highly sensitive to affordability, and the Urban Institute has estimated that a range of options to make federal subsidies more generous would increase Marketplace enrollment by about 5 million people and reduce the number of uninsured by around 13 percent. Improving affordability also creates savings for current enrollees by reducing their out-of-pocket costs. And finally it attracts healthier consumers, which improves the risk pool and lowers unsubsidized (list) premiums – creating savings for unsubsidized individuals as well. The Urban Institute estimates that, by pulling in healthier consumers over time, a generous subsidy expansion would reduce list premiums by about 16 percent. State subsidies might not be as generous as Urban’s options, but the impact on coverage and premiums could still be substantial.
The experience of states with existing subsidies bears out these benefits. Massachusetts – with the most generous subsidies of any state – has long enjoyed the nation’s lowest uninsured rate and some of the lowest premiums: in 2017, 2018, and 2019, it had the second lowest premium for benchmark silver plans. The other state with long-standing subsidies – Vermont – has also consistently had among the nation’s lowest uninsured rates. And California has seen promising results from its new subsidy, with 2020 bringing a record low premium increase of 0.8 percent and the most new signups during open enrollment since 2016.
State subsidies can bring federal dollars into the state. To the extent they increase enrollment among state residents who are also eligible for federal subsidies, state subsidies increase take-up of federal subsidies in the state. This brings additional federal dollars to health care providers and licensed insurance carriers in the state, which in turn may increase state tax revenues. The PTC averages more than $5,000 for each enrollee receiving it. For a state that increased subsidized enrollment by 50,000 people, that could mean $250 million in additional federal funding.
DESIGN AND IMPLEMENTATION CONSIDERATIONS
The following considerations may be useful for states exploring how to design and implement a Marketplace subsidy. Figure 1 summarizes design parameters of the existing state subsidies.
Figure 1. Parameters of State Marketplace Subsidies
State-Based Marketplace – Offering a state subsidy generally requires operating a state-based marketplace (SBM) to determine eligibility and make upfront subsidy payments to carriers; every existing state subsidy works this way. Determining eligibility at enrollment is important for two reasons. First, it allows consumers to account for the subsidies in making enrollment decisions, which increases enrollment and helps them choose the best plan to suit their needs. Second, paying subsidies month-by-month addresses potential cash-flow issues consumers would face if they could claim a subsidy only on the back end. These are the same reasons that the ACA’s subsidies are granted by the Marketplace and paid out month-by-month. Healthcare.gov performs these tasks for the federal subsidies in states without an SBM, but it currently cannot do so for state subsidies.
Type of Subsidy – State subsidies can help pay for premiums, cost-sharing (deductibles and co-payments), or both. Massachusetts and Vermont have subsidies for both, while the more recent subsidies in California and New Jersey help with premiums only. Colorado is currently considering both options for its subsidy, which takes effect for plan year 2022. Each type of subsidy has important benefits. Premium subsidies may be easier for consumers to understand, which could translate into a larger impact on enrollment. Cost-sharing subsidies can address the strikingly large deductibles some Marketplace enrollees must pay, which may especially deter enrollment among healthier consumers who do not think they will see any payout. Both types have proven relatively straightforward to implement, even for a very small state like Vermont. Standing up a premium subsidy may pose somewhat greater challenges for Marketplace operations, while the work of a cost-sharing subsidy falls more heavily in plan management and on carriers.
Target Population – A key benefit of state subsidies is their flexibility in targeting eligibility to specific populations. The state subsidies in effect today are targeted primarily by income level, but targeting is also possible by age group, metal level, geography, and other factors.
Before considering where to target a subsidy, it may be helpful for a state to consider how much targeting is desired. The more funding that is available, the more people can get the subsidy while still providing a meaningful benefit. If spreading the available funding over a large segment of Marketplace enrollees would result in a subsidy of just a few dollars per month, tighter targeting may be warranted.
Targeting by Income. Most states focus on targeting by income level. There are several income ranges to consider. Massachusetts and Vermont both start with those who are APTC-eligible and then exclude those with incomes above 300 percent of FPL – thereby targeting help to those with the greatest financial need and most likely to be uninsured. The Massachusetts and California subsidies are both sufficient at very low incomes to zero out the premium contribution for a benchmark plan. This addresses the concern that even a small premium may deter those with the lowest incomes from enrolling or may cause them to leave money on the table by enrolling in a CSR-ineligible bronze plan. California and New Jersey’s subsidies extend to those at the upper ranges of APTC eligibility. This group is generally less likely to be uninsured (and of course has higher incomes) than those in the lower APTC range, but they may be a priority since they receive less APTC and little or no CSRs.
Finally, California’s subsidy alone extends eligibility to those with incomes above 400 percent of FPL (about $52,000 for a single person). This group has lower rates of uninsurance and less financial hardship but can still face unaffordable premiums – especially among older people – because they are ineligible for federal subsidies. These policy considerations aside, states should be aware that extending premium subsidies above 400 percent of FPL generally adds great operational complexity. Specifically, due to interactions with federal subsidies, such subsidies must generally be implemented as an advanceable tax credit with back-end reconciliation (like the PTC itself) rather than as a front-end-only subsidy like the ones in Massachusetts, Vermont, and New Jersey. Reconciliation comes with substantial operational cost and complexity for state agencies and consumers, as evidenced by the extensive regulations, tax forms, instructions, and publications that the IRS and California have published to implement their tax credits. Like other administrative complexity, such an approach may pose disproportionate challenges to historically disadvantaged populations, including people of color and those with limited English proficiency. There are also questions about whether a state subsidy at this higher income range might be included in income for federal income tax purposes, which would add additional complexity and potentially affect federal tax liability and eligibility for benefits like the earned income tax credit. Given these concerns, states that wish to provide relief above 400 percent of FPL might consider doing so through other means, such as a reinsurance program, which is straightforward to implement and can receive federal funding through a Section 1332 state innovation waiver. To provide assistance broadly, a reinsurance program can be implemented alongside a state subsidy, as in New Jersey and soon Colorado.
Regardless of the income range(s) chosen, states should consider phasing subsidies in and out gradually at the endpoints to avoid cliffs.
Targeting by Other Factors. States may consider factors beyond income for targeting eligibility. Maryland is currently exploring a “young adult” subsidy to help attract a group that is difficult to reach and could improve the risk pool. Initial actuarial modeling suggests that, by reducing premiums, such a subsidy could potentially reduce premium tax credit spending and thus qualify for federal funding under a Section 1332 waiver, as discussed further below. A young adult subsidy could also help rationalize premium variation overall given that unsubsidized premiums can currently vary 3:1 by age while subsidized premiums are not age-rated.
Another option is to target assistance to groups ineligible for ACA subsidies. Subsidy legislation enacted in Colorado takes this approach, setting aside funds for people with incomes up to 300 percent of FPL who do not receive the PTC, for example undocumented immigrants and those caught in the “family glitch.” Other options include limiting subsidies to silver plans (to discourage CSR-eligible individuals from leaving money on the table by purchasing a bronze plan), and targeting geographic areas with the highest cost.
Actuarial modeling can help to estimate the impact of different targeting options on coverage, premiums, and cost, as well as the impact on populations that have been disenfranchised.
Premium Subsidy Calculation – States have several options for calculating the amount of a premium subsidy. The PTC is calculated so as to set consumers’ expected contribution for a benchmark silver plan at a certain percentage of their income – the “applicable percentage.” The applicable percentage increases on a sliding scale as income increases – for 2021 it ranges from 2.07 percent to 9.83 percent. Vermont’s subsidy is calculated to reduce the applicable percentages across the board by 1.5 percentage points. This is a simple approach but also provides larger subsidies to higher-income individuals, since 1.5 percent of income is a larger amount at higher incomes. California’s subsidy is based on its own, lower schedule of applicable percentages, with the California subsidy filling in the difference between those percentages and the federal percentages. This approach can be tailored to spread assistance as desired. Massachusetts’s subsidy is based on a schedule of individual contributions related to the affordability standard under the state’s individual mandate. These contributions increase stepwise across income ranges, creating a pricing structure that is relatively easy for consumers to understand but also generosity cliffs that may distort consumer behavior. New Jersey’s subsidy is generally a flat amount that varies across certain FPL thresholds, subject to caps for consumers with little or no expected premium contribution. Providing a flat amount can be simple and also progressive, since it represents a larger share of income for low-income individuals.
Interactions with other programs – A state subsidy can be an important complement to other state-level programs. For example, when combined with a state individual mandate as in Massachusetts, California and New Jersey, a subsidy can mitigate concerns about requiring coverage when it is unaffordable, while the mandate both provides revenue to help fund the subsidy and reduces premiums, thereby lowering the subsidy’s cost to achieve the desired level of affordability. This combination has proven extraordinarily effective in Massachusetts, as noted above. A subsidy combined with a reinsurance program – as in New Jersey and Colorado – can address affordability across a broad range of incomes without the administrative complexity that comes with a subsidy available to those over 400 percent of FPL, as discussed above. A state subsidy could also be combined with a state public option, with the subsidy helping to make the public option affordable and the public option potentially reducing the cost of the subsidy – as is currently being considered in Washington and other states.
Financing Mechanism – Often the biggest challenge in enacting a state subsidy is paying for it. The state subsidies in place today use a variety of financing mechanisms. California’s program is financed in part by general revenue and in part by penalties from the state’s individual mandate. Massachusetts uses penalty revenue from its long-standing individual mandate, contributions from employers, and tobacco taxes. New Jersey and Colorado implemented state health insurer assessments following the repeal of the federal Section 9010 health insurer fee. An SBM may be able to set aside funding from its Marketplace user fee, especially if the user fee’s revenue base is expanded to a broader range of insurance products.
Federal waivers may also be an option. Massachusetts and Vermont receive federal funding to support their state subsidies through long-standing Section 1115 waivers. The Trump Administration sought to phase out waivers of this sort, and even before that, CMS had been tightening Section 1115 budget neutrality rules. Nonetheless, the option may be worth exploring with the new Administration.
Finally, Section 1332 state innovation waivers may provide a funding source in some cases. The challenge with Section 1332 waivers is that they must be deficit neutral to the federal government, while state subsidies typically (and importantly) increase federal spending by making federally subsidized coverage more affordable. That said, some subsidies may reduce federal spending. For example, as noted above, initial actuarial modeling performed for Maryland projects that a subsidy targeted to young adults could reduce federal spending by substantially reducing premiums and thus PTC amounts. Other such innovative structures could also be considered to make a Section 1332 waiver work with a state subsidy.
State Marketplace subsidies are a proven tool to make coverage more affordable, reduce uninsurance, and improve the risk pool. They are also highly flexible, allowing states to target hard-to-reach populations and tailor benefits to specific goals. The interaction of these policies with the federal landscape will require states to continually consider the best structure for their residents. As federal policy develops, state subsidies will continue to be a crucial tool to fill affordability gaps and build on the federal landscape.
 See, for example, footnote 7 from Council of Economic Advisors Issue Brief, “Understanding Recent Developments in the Individual Health Insurance Market,” January 2017, estimating that “claims costs for individuals who leave the market when premiums rise are around 73 percent of claims costs for enrollees who remain.”
 Personal communication with Urban Institute staff, January 28, 2021.
 Of the state subsidies in effect today, only Massachusetts’ is approximately as generous as the Urban options, and then only at incomes up to 300% of FPL. Other state subsidies are generally less generous.
 California’s 2021 premium and enrollment figures have also been promising and may be driven in part by events related to the pandemic.
 This figure is intended to very roughly approximate the potential impact of a state subsidy in a typical state. It is derived by first dividing Urban’s nationwide estimate of 5 million additional subsidized enrollees among the 50 states, and then halving the result to account for the likelihood that a state subsidy would be less generous than Urban’s options.
 The one exception is Minnesota’s subsidy, which was in effect in 2017 only. It was enacted shortly before the end of the open enrollment period – too late for Marketplace systems to be updated – and so was administered directly by carriers. It served as a stop-gap until the state’s reinsurance program took effect in 2018.
 To see why extending eligibility for a state premium subsidy above 400% of FPL generally requires the use of an advanceable, reconciled tax credit, consider a consumer who enrolls with projected income at 410% of FPL. Assuming the state subsidy is large enough to substantially smooth the PTC cliff at 400% of FPL, the consumer might receive thousands of dollars in upfront state subsidies. But now suppose the consumer’s income for year ends up a bit lower, at 390% of FPL. The consumer can now claim the PTC on their federal tax return. If the state credit is not repaid, this individual effectively receives a double credit. Such double payment would increase the cost and would likely raise concerns about fairness and program integrity.
 Many state programs – including the long-standing Marketplace subsidies in Massachusetts and Vermont – are excluded from federal income under the “general welfare doctrine.” Qualifying for the general welfare doctrine generally requires that eligibility for a program be based on need. There are no clear standards for what constitutes need.
 Both the ACA individual mandate and every mandate enacted by a state provides an exemption for those without access to affordable coverage. That said, some without access to affordable coverage may not be aware of the exemption or may nonetheless feel pressured to comply.
 Massachusetts’ 1115 waiver supports both its premium and cost-sharing subsidies, while Vermont’s supports only its premium waiver.