How will the Inflation Reduction Act help marketplace enrollees?

After months of stalled progress, legislation that would extend the American Rescue Plan’s health insurance subsidy enhancements is back on the table in the U.S. Senate. That’s great news for the 13 million Americans who are eligible for premium tax credits (subsidies) that offset the cost of marketplace (exchange) health insurance.

The Inflation Reduction Act was announced in late July, and a vote in the Senate is expected next week. The legislation – which is both a climate and healthcare bill – addresses several pressing priorities, including a three-year extension of the subsidy enhancements delivered by the American Rescue Plan.

How would the Inflation Reduction Act affect marketplace subsidies?

If the Senate and House both pass the Inflation Reduction Act, the current marketplace subsidy structure will remain in place through the end of 2025, instead of expiring at the end of 2022. This would help marketplace shoppers in several ways:

The subsidy cliff would continue to not exist for the next three years, meaning that Americans with income above 400% of the federal poverty level (FPL) would still be potentially eligible for subsidies. Subsidy eligibility would depend on the percentage of income that a person would have to spend on the benchmark plan, and subsidies would be available – even with income above 400% of FPL – if the benchmark plan would otherwise be more than 8.5% of household income.
Subsidies would continue to be larger than they were pre-ARP. The size of the subsidies varies by income, age, and area, but they limit the after-subsidy cost of the benchmark plan to a pre-determined percentage of household income. That percentage of income is on a sliding scale, and the ARP reduced it to 0% – 8.5%. Under the ACA, it had been 2% – 9.5%, with small annual inflation adjustments. With the ARP in place, the 0% – 8.5% scale has been used for 2021 and 2022 health plans. And the Inflation Reduction Act would lock in that same scale through the end of 2025.
The ongoing marketplace special enrollment period for subsidy-eligible applicants with household income up to 150% of FPL would continue to be available through 2025. HHS has clarified that this enrollment opportunity is only available as long as benchmark plans are premium-free for buyers at this income level. If the ACA’s scale were to return, subsidy-eligible applicants at the lower end of the income scale would pay roughly 2% of their income for the benchmark plan. But with the ARP’s scale in place, these applicants pay 0% of their income for the benchmark plan. The Inflation Reduction Act would continue that for three more years, allowing the special enrollment opportunity to continue as well.

Full-price premiums will still change in 2023; across more than half the states so far, the overall proposed average rate increase is about 8% – much of which is not related to whether the ARP subsidies are extended. But most enrollees do not pay full price. In 2022, about 89% of marketplace enrollees receive premium subsidies. HHS estimates that 3 million people will lose their coverage altogether – while 10 million will see their subsidies decline or disappear – if the ARP subsidies are not extended under the Inflation Reduction Act.

To be clear, even if the Inflation Reduction Act is enacted, there will be fluctuations in subsidy amounts and after-subsidy premiums for renewing plans. This happens every year, depending on how much the benchmark premium changes (keeping in mind that the benchmark plan can be a different plan from one year to the next) and how much the cost of a particular plan changes.

But with the Inflation Reduction Act, overall affordability will remain the same as it is this year, as the benchmark plan would continue to cost the same percentage of income that people pay this year. (We do have to keep in mind that the benchmark plan can be a different plan from one year to the next, new plans might be available for the coming year, and rates for other plans relative to the benchmark plan can also change.)

Without the Inflation Reduction Act, coverage would become much less affordable in 2023. HHS calculations show that if the ARP subsidy enhancements hadn’t been in effect this year, the premiums that enrollees paid themselves – after subsidies were applied – would have been 53% higher in the 33 states that use HealthCare.gov. That’s the sort of scenario that millions of marketplace enrollees would see in 2023 without the Inflation Reduction Act.

What does the Inflation Reduction Act not do?

Although the Inflation Reduction Act is a dramatically scaled-back version of 2021’s Build Back Better Act (which passed the House but then stalled in the Senate), the bill’s extension of the current ARP subsidy enhancements is identical to the ARP subsidy enhancement extension that was in the Build Back Better Act.

But there were some additional Build Back Better Act subsidy provisions that are not included in the Inflation Reduction Act: The Inflation Reduction Act will not close the Medicaid coverage gap that still exists in 11 states. It will not reinstate the temporary unemployment-related subsidies that were available in 2021. And it will not change the way affordability is determined for employer-sponsored health coverage.

Will the Inflation Reduction Act pass?

Passage of the Inflation Reduction Act is not a sure thing. It needs the backing of all 50 members of the Senate’s Democratic Caucus in order to pass, and that’s not a given.

House Speaker Nancy Pelosi (D-CA) has said that the House will pass the measure if and when they receive it from the Senate. Although the margin isn’t quite as tight in the House, Democrats can lose at most four votes in order to pass the bill in that chamber.

What does the Inflation Reduction Act legislation mean for 2023 open enrollment?

Open enrollment for 2023 health coverage starts on November 1. If the Inflation Reduction Act is enacted this summer, consumers should expect to see the same general level of affordability for 2023 that they had in 2022.

But this always varies from one area to another depending on factors such as new insurers entering a market, or state reinsurance programs that bring down full-price rates and result in lower subsidies. Even with the Inflation Reduction Act in place, that sort of subsidy and premium fluctuation will still happen in some areas and for some plans.

If the Inflation Reduction Act does not pass, net premiums will increase sharply for most current enrollees when their coverage renews for 2023. Some enrollees will need to switch to lower-cost plans in order to keep their premiums affordable.

Regardless of whether the ARP subsidy enhancements continue into 2023 or expire at the end of 2022, it will be important to carefully consider all options during open enrollment. There will be shifting insurer participation in some areas, changing premiums, and new plan designs.

People who buy their own health insurance will need to consider all of the available plans and select the one that best fits their needs and budget. That may or may not be the same plan they had this year, regardless of what happens with the ARP subsidy enhancements.

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.