Subsidies v. Tax Credits
As the Obamacare repeal/replacement/reform process has proceeded through both chambers of Congress this spring, and summer, I have noticed one significant change in the jargon being used to describe one aspect of the policies when they are discussed in the media. Namely, I have noticed that what were “subsidies” under the ACA are now being described as “refundable tax credits” in most of the discussions about the GOP bills.
It may be that this is just a different in terminology and means nothing, but one thing I am concerned about is that if the GOP passes a bill that retains at least some of the structure of the ACA, they will replace “subsidies” with “refundable tax credits” that will be implemented only once a year, as you file your taxes.
Why is this difference concerning me? Let’s talk about how subsidies work under Obamacare and how I fear these “discounts” will work under a GOP bill.
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Currently, if you need an ACA plan, this is what happens. You go to healthcare dot gov or your state exchange site, and you fill out an application for coverage. The application is short, but one of the things they do ask you about is your family size and income. Based on those answers, many ACA enrollees qualify for a subsidy to help them pay their premiums. And the way those subsidies work is that they are applied to the premium bill *immediately.*
So if you are approved for a $150 per month subsidy on your premium based on the income you report on your application, you will only pay $200 a month for a $350 a month plan, or $400 a month for a $550 a month plan, or whatever.
Whatever it is, you will get that subsidy *each month* on your premium bill. The policy I buy on the exchange costs about $320 a month. I don’t get a subsidy. Someone else my age who makes less money would get a subsidy for that same policy, so they might only pay $140 a month for the same exact policy I have. Or $80. Or maybe almost nothing. (The subsidies, theoretically, have no limit.)
But these subsidies, since they apply every month, make it more affordable for lots of people to buy policies because their monthly bills are lower. And remember — we want maximum enrollment in order for the exchanges to run well.
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What Ryan and the GOP are proposing is that we do away with these by-the-month subsidies and instead give people “refundable tax credits.” It’s possible he means something different by this, but I believe the word “refundable” gives away the game here.
And if I’m right, what it would mean is that anyone who wanted to buy my $320 policy — whether they are incredibly wealthy or work a minimum wage job — would have to pay the full $320 a month that I pay up front. No monthly subsidies for anyone.
Then, at the end of the year, they would get a credit on their taxes, which would be capped at $4000 per year.
That $4000 works out to $334 a month, which you may be thinking doesn’t sound too bad.
Well, the Republican plan *does not base those tax credits on income.* They base them on age. So 37-year-old me would get the same tax credit as a 37-year-old heart surgeon, who would get the same tax credit ($2500) as a 37-year-old fast food worker.
A 62 year old would get the maximum tax credit of $4000. However, the GOP plan changes the ACA rules to allow insurance companies to charge people in their 60s up to *five times as much* for their premiums than what they can charge younger people.
So I don’t know how much that slightly higher tax credit at the end of the year would really help, especially since that 62 year old would have to, again, pay their five-times-higher premium all year long before they’d get their credit.
