Beware Obamacare’s ‘subsidy cliff’

How an extra $100 on one couple's paycheck could cost them $19,300 in Affordable Care Act premium subsidies for the year

For people who buy health insurance through the exchanges, the subsidy eligibility range extends up to 400 percent of federal poverty level (FPL). People with incomes above 400 percent of FPL are on their own when it comes to paying for health insurance, but the idea behind this threshold was that when incomes are above that level, health insurance is already affordable.

This is true for people whose income is well above 400 percent of FPL, but for some people who don’t qualify for subsidies, insurance can be very expensive. For people with income between 400 and 600 percent of the poverty level, and particularly for older enrollees in areas of the country where health insurance is most expensive, the “subsidy cliff” is very real.

Losing $19,300 in subsidies

Consider a couple, ages 60 and 63, living in the town of Rifle, in the Colorado mountains. Health insurance is expensive in all Colorado mountain towns. (Rifle is a regular town, not a resort community. The median household income is under $59,000, and the median home value is about $256,000 – far below the nearly $700,000 median home value in Aspen. In short, Rifle is not Aspen.)

For our Rifle couple, the second lowest-cost Silver plan available through the state-run exchange, Connect for Health Colorado, is $2,037 per month in 2016. If our Rifle couple earns $63,700 in 2016, they qualify for a subsidy of $1,609 per month. But if they earn $63,800, they get no subsidy at all. An increase of a $100 dollars in annual income results in the loss of more than $19,300 in subsidies for the year. 

(Note that the 2015 poverty level guidelines are used for coverage effective in 2016; when open enrollment begins in November 2016, for coverage effective in 2017, the exchanges will begin using the 2016 poverty guidelines to determine subsidy eligibility.)

If this couple earns $63,800 and they purchased the second lowest-cost Silver plan, they’ll pay $24,444 in premiums – which works out to just over 38 percent of their income. That’s not what most people would consider affordable, but since their income puts them slightly above 400 percent of FPL, they do not qualify for a subsidy, and must pay the full cost of coverage on their own.

Even the least expensive Bronze plan available to them in the exchange has a premium of $1,628 per month, which is still nearly 31 percent of their income (they would qualify for an exemption from the individual mandate, because the lowest priced plan available to them would cost more than 8.13 percent of their income. But that’s little comfort to people who want to purchase coverage.)

Of course, if that same couple were earning $143,000 per year (about 900 percent of poverty level), a $24,444 annual health insurance premium would be about 17 percent of their annual income, and the least expensive Bronze plan would be 13 percent of their income – still high by ACA standards, but much more manageable than 39 percent.

Losing $4,176 in subsidies

If the couple were younger – say 30 and 33 – but had the same $63,800 household income, their total premium would be $839 per month (15.8 percent of their income) for the second lowest-cost Silver plan. The least expensive Bronze plan would be $670 per month (12.6 percent of their income). If the younger couple’s income was $63,700 per year, their subsidy would be about $348 per month, bringing their cost for health insurance down to 9.66 percent of their income.

The younger couple would still face a subsidy cliff if their income increased from $63,700 to $63,800, and would lose their entire subsidy, just like the older couple. But it would be the loss of $4,176 in annual subsidies, rather than $19,300. Both couples face a “subsidy cliff” but it’s a much more substantial cliff for the older couple.

Although age is a significant factor for the subsidy cliff, location is just as important. If the younger couple were living at the foot of the mountains – in Denver instead of Rifle – their subsidy eligibility would end at about $62,900 in annual income, since premiums are significantly lower in Denver than they are in Rifle, and subsidy eligibility depends on the cost of the plans available to you. In Denver, with an income of $62,900/year, they would qualify for a subsidy of about one dollar per month.

In Denver, the younger couple’s subsidy would disappear altogether at around $63,000 in income. But in this case, a $100 increase in income means the loss of $12 per year in subsidies – not a cliff at all.

How steep is your cliff?

Essentially, the “subsidy cliff” is real – depending on your circumstances. For some people, the difference in subsidy between 400 percent and 405 percent of FPL (or a lower amount, depending on how much pre-subsidy premiums are relative to income) is just a few dollars. For others, it’s a significant amount of money.

It depends on where you live, since premiums fluctuate considerably based on location. It also depends on your age, since older people pay up to three times as much as younger people.

That means that even though their incomes might be identical, older applicants who earn more than 400 percent of FPL will pay a much larger percentage of their income for health insurance than younger applicants. (For incomes under 400 percent of FPL, the maximum amount that a person pays is capped as a standardized percentage of their income, regardless of their age, which is why older enrollees receive larger subsidies than younger enrollees).

You can play around with a subsidy calculator to see whether a small fluctuation in income significantly changes your subsidy amount. If you’re facing a subsidy cliff, you may want to talk with an accountant to see if there’s anything you can do to lower your modified adjusted gross income and avoid the cliff.

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