A Mathematical Flaw in the ACA

Your hard-earned dollars could fall over this cliff.

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The Affordable Care Act (ACA, often referred to as “Obamacare”) established a government-run marketplace for health insurance, to be used by those Americans who do not receive health insurance from an employer. The Act also provides for a Premium Tax Credit for lower and middle income taxpayers to help pay for health insurance. (Taxpayers near or below the Federal poverty line are offered Medicaid and cannot use the tax credit.)

The tax credit is designed so that taxpayers pay an increasing share of their health insurance premium as their income rises. When income exceeds four times the poverty line, the taxpayer is no longer eligible for the credit. Unfortunately, there is a serious mathematical flaw in the design of the credit for some taxpayers. (It should be noted that the tax credit computation is based on the cost of the “Second Lowest Cost Silver Plan” in each geographical market. Insurance premiums are also based on age, so everyone’s situation is different. The flaw described in this article may not apply to every taxpayer.)

The following chart shows the net insurance premium (after applying the tax credit) that would be paid by an example taxpayer, for the calendar year 2017, at various income levels. The red line in the chart, and the green entries in the table, show the annual insurance premium. The data was obtained from the government’s HealthCare.gov website, for a 58 year old resident of Champaign County, Illinois, buying the least expensive policy offered in that market. (For comparison, the blue line shows the amount of Federal income tax, assuming that the taxpayer takes the standard deduction; more about that later.)

acaFlaw-Chart

With an annual income of $20,000, the subscriber would pay almost nothing, as the tax credit would cover nearly the entire insurance premium. At an income of $40,000, the annual premium is $1855. And at an income of $50,000, the annual premium payment is $7466 because the taxpayer is no longer eligible for the tax credit.

That “cliff” in the chart indicates the serious flaw in Obamacare. With an income of $47,519, the premium is $2584. Add one more dollar of income, and the premium jumps to $7466 — an increase of over $4800!

As everyone knows, the income tax increases with income. But there is usually no scenario where a $100 raise would result in the tax bill increasing by more than $100. Unfortunately, if this taxpayer’s salary increases from $47,500 to $47,600 (a $100 raise), he will see an increase of over $4800 in the insurance bill. It would actually make sense for this worker to refuse the raise, or not take on extra hours in December, or not make those last couple of sales.

Because the prices are different from place to place, and also vary by age, I don’t know how many people could be affected by this problem. Still, I’m surprised I haven’t seen it mentioned in news reports more often. There are some avoidance strategies for people who could hit this cliff. For example, eligible contributions to an IRA account or a Health Savings Account can reduce a taxpayer’s Adjusted Gross Income. (This article discusses the cliff and some strategies for dealing with it.)

I can only assume that the designers of the Affordable Care Act didn’t intend to impose this cliff on us. However, it stands as another example of the unintended consequences often created by the political process.

September 21, 2017

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