A Normal Guy Explains the AHCA: Tax Credits and Subsidies

In the next few posts of mine, I plan on taking the biggest issues of the new American Health Care Act and explaining them, hopefully, in a way that makes sense to most regular people.

Before I start, here are some definitions of words people throw around while talking about health care to sound smart but don’t really understand what they mean:

Subsidy: Upfront money provided to help keep cost of a good or service affordable/competitive

Tax Deduction: Amount of money that can be subtracted from a person’s taxable income to reduce tax liability.

Refundable Tax Credit: Unlike a tax deduction, a credit is a specific amount of money that can be used to directly offset someone’s tax liability. If the tax credit reduces a person’s tax liability past zero, the remainder gets paid out to them in their federal tax return.

Nonrefundable Tax Credit: Same as above except it cannot reduce tax liability past zero. So you don’t get any of the credit paid out in the form of a return.

Okay now that those are out of the way, here we go!

The new system of available tax credits for health insurance coverage purchased through nongroup marketplaces (like healthcare.gov) will dramatically change if the Republican American Health Care Act or ACHA (pronounced ah-cha, not really but that would be funny) is passed as is. This has nothing to do with individuals who have health insurance through their employer, just those who get coverage through marketplaces set up in the ACA. It should be noted that the changes won’t take effect until 2020…as in after the next presidential election. But delayed provisions aren’t just a Republican thing. There were a number of provisions within Obama’s ACA that were not implemented immediately; like that employers with more than fifty employees being required to provide health insurance or the individual mandate.

So what will the new system look like? Well to understand the ACHA system, you need to know what the current system is.

The ACA takes multiple factors into account when determining how much assistance is available for individuals buying health care through the marketplaces. Those factors are:

  • Age
  • Income
  • Cost of insurance relative to where you live in the country

The last one is the biggest advantage the current system has because it provides what they call a “cost-sharing subsidy” to help lower deductible and copayment prices. If you live in a rural area where the cost of insurance is a lot higher, the ACA offers you a higher amount of subsidies to combat that.

The ACHA tax credit system really only looks at two factors: age and income. The breakdown of available tax credits for those who participate in nongroup insurance marketplaces looks like this:

  • Under 30 years old: $2,000
  • 30-40 years old: $2,500
  • 40-50 years old: $3,000
  • 50-60 years old: $3,500
  • 60 and older: $4,000

These tax credits will be available for anyone who makes less than $75,000/year unlike the ACA where tax credits stop being offered past 400% of the federal poverty line (about $48,000/year). Obviously, this would benefit Americans who earn an income between those two levels because under the current system they get no help paying for health insurance. There was a lot of animosity in this income range towards the ACA because although they are making more than 400% the federal poverty line, I’m sure that they would not consider themselves rich or well-off.

A huge part of the new proposal would be the elimination of the cost-sharing subsidy program available to those who make between 100%-250% of the federal poverty line (about $12,000 to $30,000/year). Not only did this program use the local cost of insurance to calculate assistance, but it also provided the money upfront to help lower out-of-pocket costs. Tax credits are only available for refund once a year and therefore aren’t as helpful to lower-income Americans who must pay for insurance monthly.

Now one could look at the ACHA tax credit system as being more inclusive and fair, right? Older Americans get double the help to pay for insurance and the pool of people eligible is increased to an income cap of $75,000/year. On face value, that assessment is perfectly fine. What it doesn’t do is consider the reduction of help to lower-income people because of its blindness to local cost of coverage. To check out the differences in federal help, the nonpartisan Kaiser Family Foundation made a great interactive map found here. For instance, A 60 year old living in Los Angeles County with an income below $30,000/year will have their assistance reduced from $5,280 to $4,000 which is substantial but not debilitating. But someone of the same age and income living in rural Wayne County, Tennessee would get reduced from $16,230 to $4,000 because of local cost of insurance. Holy shit that is definitely not a fair system.

Also, an important provision within the Affordable Care Act was the establishment of a cap to how much more insurance companies could charge older Americans than younger ones. That ratio was set at 3:1. Previously, there was no cap to the increase. The ACHA would allow insurance companies charge older people as much as five times more than younger people. So although people over 60 years old are getting double the tax credits, their cost of coverage could be FIVES TIMES more which is also not fair.

What the new tax credit system does and does well is cut federal money spent on lower-income, older Americans. What else do these people have in common besides having their insurance drastically cut by the new health care bill? A majority of them voted for Donald Trump. The same man who famously said that his plan would cover everyone and be more affordable. Oops.

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