WHEN DEMOCRATS enacted the Affordable Care Act (ACA) in 2010, they wanted to limit costs to keep moderates on board. Hence the ACA, which gives subsidies to people who do not get health insurance from their employer to buy it on government-run exchanges, restricts its benefits to people who earn less than four times the federal poverty line. For an individual, that currently comes to $51,520 a year. But in the partisan donnybrook surrounding the bill’s passage, little attention was paid to the fact that the benefits cut off at the margin rather than sloping down. Policy wonks consider such “subsidy cliffs” risky: they can incentivise people to earn less in order to safeguard their benefits.
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Eleven years later, Democrats have a chance to fix the problem. A covid-19 relief bill which the House aims to vote on this week would increase the ACA’s subsidies and extend them to anyone who would otherwise have to spend more than 8.5% of their income to buy a benchmark plan. Smoothing out the cliff this way, says the Kaiser Family Foundation (KFF), a health think-tank, could help about 8m people.
The cliff is tallest for people aged 55-64, who face high premiums but are too young for Medicare (the universal health-insurance programme that kicks in at 65). Under the ACA’s rating system, a typical “silver plan” for a 60-year-old who earns $51,000 a year costs $417 a month with subsidies. If their income rises to $52,000 they lose the subsidies, so the cost jumps to $871 a month. Because many ACA beneficiaries are self-employed or part-timers, they have volatile incomes. Some accidentally exceed the eligibility limit and have to pay back thousands of dollars in credits.
All this undoubtedly leads some ACA beneficiaries to work less. Economists are unsure how many do so, but they agree that the cliff should be rubbled. “It’s one thing for the government to say if you lose income we’ll pay for it, but it’s another to say we’ll pay for you to destroy it,” says Casey Mulligan, a former chief economist of the Council of Economic Advisers under Donald Trump. Mr Mulligan’s research finds that other aspects of the ACA discourage work too, but other studies show that effect is small or negligible.
The House bill covers two years at an estimated cost of $34bn. In 2023 the subsidies cliff would return unless Congress ends it permanently. Besides fixing the cliff, the bill dramatically raises subsidies across the board. That would bring Obamacare closer to one of its original models: the Dutch system, where premiums are low ($160 a month for a good plan) partly because taxes cover most of the cost.
Some progressives argue that the ACA has not become more popular because it does too little for the middle class. The subsidy cliff seems to bear that out: the group hit hardest, older people in rural areas earning somewhat more than the median income, voted sharply against Democrats in 2016 and 2020. But Ron Kind, a Democratic member of the House’s health subcommittee whose Wisconsin district includes many such voters, calls that “a tenuous argument. It’s more about the culture war.” Democrats expect to pass the ACA reform along with the rest of their covid-19 relief, but they are not counting on Republican support. ■
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This article appeared in the United States section of the print edition under the headline “To smooth a cliff”
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