A Transformative Proposal for ACA Subsidies: A Shift Towards Small Business Equity and Efficiency

The Affordable Care Act (ACA) has undoubtedly made strides in improving access to health insurance across the United States. However, as we approach a critical juncture with the impending expiration of the Inflation Reduction Act (IRA) credits in 2025, there’s a growing need to address inefficiencies and challenges within the ACA subsidy system. I have presented a comprehensive proposal that seeks to enhance program integrity, reduce administrative burdens, and ensure financial stability for both consumers and the federal government.

Current Challenges in the ACA Subsidy System

The current ACA framework faces several pressing issues:

Expiration of Inflation Reduction Act Credits: The enhanced tax credits under the IRA, which have made premiums more affordable for millions, are set to expire in 2025. Without these credits, premiums will revert to higher levels, leading to an estimated 7 million people losing marketplace coverage and 4 million becoming uninsured altogether.
Reporting and Reconciliation Burden: Consumers are required to project their income for the upcoming year, which is reconciled with actual income during tax filing. This often leads to significant repayment obligations, exacerbating financial strain.
Income Misrepresentation: Studies suggest that up to 5 million enrollees may misrepresent income to qualify for higher subsidies, inflating federal costs and complicating reconciliation efforts.
Budget Discrepancies: The Department of the Treasury has reported discrepancies between projected and actual premium tax credit costs, with $54 billion in overspending in 2023 alone, highlighting inefficiencies in income projection reliance.

Department of Treasury actual versus projected Premium Tax Credits -- As reported in annual "Budget-in-Brief" from 2016 - 2025.

Key Elements of the Proposal

My proposal focuses on transitioning the ACA subsidy system from an IRS-administered tax credit framework to a Health and Human Services (HHS)-managed income-adjusted subsidy model, based on prior-year income. Here are the core components:

Legislative Amendments: Modify Section 36B of the Internal Revenue Code to transfer subsidy calculations to HHS, aligning with existing Medicare Advantage payment structures.
Prior-Year Income as the Standard: Utilize verified prior-year income data to determine subsidies, reducing opportunities for misrepresentation and reconciliation complexities.
Improved Program Integrity: By grounding subsidies in actual income data, the system minimizes fraud and ensures fair allocation.
Reduced Administrative Burdens: Shifting subsidy administration to HHS simplifies the process, enhancing transparency and mitigating budget discrepancies.
Enhanced Transparency: Require HHS to report true subsidy costs, providing clearer insights into federal expenditure.

Legislative and Regulatory Changes

The proposal outlines several legislative and regulatory adjustments:

Amend 26 CFR 1.36B to base tax credit calculations on prior-year income.
Update regulations under 45 CFR 155 to streamline income verification and appeals processes.
Adjust employer mandate provisions to align with retrospective income-based subsidies.
Revise Medical Loss Ratio (MLR) requirements to ensure insurers reconcile overpayments directly with HHS.

Benefits of the Proposal

Program Integrity: Eliminates income manipulation and ensures subsidies reflect true financial need.
Financial Stability: Provides predictable subsidies for consumers with fluctuating incomes and enhances federal cost control.
Cost Savings: Reduces the need for complex reconciliation processes, generating long-term administrative savings.
Increased Oversight: Empowers HHS to oversee and report subsidy costs accurately, addressing budgetary discrepancies.

A Call to Action

This proposal is not merely a critique of the current system but a roadmap for transformative change. By leveraging prior-year income data and shifting subsidy administration to HHS, we can foster equity, efficiency, and financial sustainability in the ACA framework.

The proposal’s success hinges on legislative support and a thorough analysis of its budgetary impacts. A Congressional Budget Office (CBO) score is recommended to evaluate its potential benefits and costs. This visionary approach could redefine the ACA subsidy landscape, ensuring robust support for millions of Americans navigating the complexities of health insurance.

For further details or inquiries, feel free to reach out to me at jbrooker+policy@pahealthadvocates.com. Together, we can work towards a more equitable and efficient health insurance subsidy system.