How does the government regulate private insurance costs?

National healthcare spending increased by 9.7% in 2020 – about double the increase from the year prior – according to the Centers for Medicare and Medicaid Services. One of the main sources of healthcare spending is the cost of health insurance.

About 54% of Americans get health insurance through their employers. Another 35% are on a government-provided plan such as Medicare or Medicaid. An additional 4% with insurance get it through the marketplace set up in the Affordable Care Act.

Nearly every one of the more than 14.5 million Americans with coverage through the marketplace is eligible to receive assistance with the cost of their plan.

The main way that people with marketplace plans receive assistance is through the advance premium tax credit program, which helps lower the monthly cost of an insurance plan. The government also provides cost-sharing reductions to some people with lower incomes. Cost-sharing reductions result in lower deductibles and copayments.

What is the premium tax credit and who is eligible?

Americans making less than the federal poverty level are typically eligible for a government insurance plan such as Medicaid. But the government also provides financial assistance to those making over that amount in the form of the premium tax credit program.

Created as part of the Affordable Care Act, the program^[1] provides financial assistance on the cost of premiums for those making more than 100% of the federal poverty level. About 13 million Americans received the tax credit in 2022, 5.3 million more people than in 2015.

The only way to receive the tax credit is by getting health insurance on the marketplace. Individuals claimed as dependents on someone else’s tax returns are not eligible.

The size of the credit depends primarily on household income and family size. The government estimates the cost of insurance minus how much it expects a household to contribute to the cost of the plan to determine the value of the credit^[2]. In 2022, the expected contribution ranges from 0% to 8.5% of household income.

A Congressional Research Service report uses the example of a single person living in Lebanon, Kansas, with a household income of $19,320. In the example, this person would contribute 0% of their income to their insurance premium.

Americans receiving this credit have the option of receiving a discounted monthly premium instead of having a tax reduction at the end of the tax year. This “advance payment” is calculated using income information from the person’s marketplace application.

The information provided through a person’s application may be different than the final income and household size that they report on their tax return. In this case, the person must resolve the difference between the amount of advance premium tax credits they received and what they are eligible for when they file taxes.

In the 2019 tax year, about 5 million tax returns had received the wrong amount of advance payments. About 2 million tax returns showed advanced payments that were less than what they were eligible for, so they received a rebate. About 3 million returns showed advanced payments that were greater than what they were eligible for, meaning they had to pay the difference back to the government.

How has eligibility for the tax credit changed over time?

Until 2021, the tax credit was only available to people with an income between 100% and 400% of the federal poverty level. A single person who made between $13,590 and $54,360 would fall in this range in 2022.

In 2021, the American Rescue Plan Act expanded the eligibility of premium tax credits for two years by removing the income limit. The Inflation Reduction Act extended this expansion through 2025. The bill includes $24 billion for the premium tax credit program to operate for these additional three years.

In 2022, the total number of Americans who received the tax credit increased by 28%. The number of people using the marketplace who had incomes over 400% of the poverty level more than doubled from the year prior.

What are cost-sharing reductions and who is eligible?

Cost-sharing reductions are available to people who are eligible for the premium tax credit but whose income falls between 100% and 250% of the federal poverty level. To receive the reductions, the eligible person must enroll in a “silver” marketplace plan^[3]. It’s possible for someone to receive a premium tax credit and cost-sharing reductions.

Unlike the tax credit, cost-sharing reductions are applied directly to the cost of the health insurance plan. This includes reductions in the annual deductible and on individual copayments for care. It also decreases the maximum annual out-of-pocket cost for care.

The size of the cost reduction depends on the annual household income, household size, and state of residence.

Using the example from the Congressional Research Service report, an individual living in Lebanon, Kansas, making $19,320, would not pay more than $2,900 in healthcare costs related to their marketplace plan.

Members of federally recognized tribes and people who are shareholders of the Alaska Native Claims Settlement Act Corporation are eligible for further cost-sharing reductions.

About 5.5 million Americans – 54.8% of people who used the marketplace – received cost-sharing reductions in 2022. About 65% of those who received cost-sharing reductions were given the maximum discount available.

For more information on how the government assists with healthcare coverage, read USAFacts’ analysis of prescription drug negotiation in the Medicare program.

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