Orlando Harmon
Health insurance is expensive and can be unaffordable for people with low to moderate incomes. In 2023, federal subsidies for health insurance were estimated to be $1.8 trillion, or 7.0% of the gross domestic product (GDP). These subsidies are provided by the federal or state governments to reduce or remove premium costs for those without an employer, Medicare, or Medicaid coverage. The Affordable Care Act (ACA) provides sliding-scale subsidies that lower premiums and insurers offer plans with reduced out-of-pocket (OOP) costs for eligible individuals. There are two types of financial assistance available to Marketplace enrollees: premium tax credits and cost-sharing reductions (CSRs).
| Characteristics | Values |
|---|---|
| Purpose | To reduce or remove health insurance premium costs for those without an employer, Medicare, or Medicaid coverage |
| Who provides it | Federal or state governments |
| Who is eligible | Lower-income individuals and families without employer-sponsored health insurance or ineligible for Medicare or Medicaid |
| Types | Premium tax credits, cost-sharing reductions, advanced premium tax credits |
| Amount | Estimated to be $1.8 trillion in 2023, projected to reach $3.3 trillion in 2033 |
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What You'll Learn
- Health insurance subsidies for lower-income individuals and families
- ACA subsidies for those without employer-sponsored health insurance
- Tax credits for small employers to offer staff health plans
- Federal subsidies for Medicare, Medicaid, and employment-based coverage
- Cost-sharing reductions (CSRs) to lower out-of-pocket expenses
Health insurance subsidies for lower-income individuals and families
Health insurance can be expensive and may be unaffordable for people with lower or moderate incomes. To address this, the Affordable Care Act (ACA) provides sliding-scale subsidies that lower premiums and insurers offer plans with reduced out-of-pocket (OOP) costs for eligible individuals. These subsidies are funded by the federal government, which is estimated to have spent $1.8 trillion on health insurance subsidies in 2023, projected to increase to $3.3 trillion in 2033.
There are two types of financial assistance available to eligible individuals and families: the premium tax credit and the cost-sharing reduction (CSR). The premium tax credit reduces monthly payments for insurance coverage, while the CSR reduces deductibles and other out-of-pocket costs for medical services. To receive either type of financial assistance, qualifying individuals and families must enrol in a plan offered through a health insurance marketplace.
Eligibility for these subsidies is based on income levels relative to the Federal Poverty Level (FPL). For 2025, individuals with an income of up to 150% FPL are not required to contribute to the premium of the "benchmark" plan, while those with an income of 400% FPL or above must contribute 8.5% of their household income. Individuals with an income above 400% FPL are ineligible for subsidies. The Federal poverty level also varies based on family size, with a single adult having a poverty level of $15,060 and a family of four at $31,200.
In addition to income requirements, eligibility criteria for these subsidies include US citizenship or legal residency, and not having access to employer-provided or government-provided insurance such as Medicare, Medicaid, or the Children's Health Insurance Program (CHIP). Lawfully present immigrants with an income below 100% FPL may also be eligible for tax subsidies through the Marketplace.
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ACA subsidies for those without employer-sponsored health insurance
The Affordable Care Act (ACA) provides subsidies to help lower the cost of insurance for eligible individuals and families who do not have access to affordable health insurance through their employer or another government program. These subsidies are available in the form of tax credits that reduce the cost of monthly premiums and out-of-pocket expenses for healthcare services.
To be eligible for ACA subsidies, individuals must meet certain criteria. Firstly, they should not have access to affordable employer-sponsored coverage or qualify for government programs like Medicare, Medicaid, or the Children's Health Insurance Program (CHIP). Secondly, they must meet the income requirements, generally falling between 100% and 400% of the federal poverty level (FPL). However, it is important to note that eligibility for Medicaid varies by state, and in states that have expanded Medicaid, adults with income up to 138% of FPL may be eligible for Medicaid instead of Marketplace subsidies.
The ACA offers two types of subsidies: Advanced Premium Tax Credits (APTCs) and Cost-Sharing Reductions (CSRs). APTCs help lower or eliminate monthly premiums, while CSRs reduce out-of-pocket costs such as deductibles, copays, and coinsurance. These subsidies are available to US citizens and lawfully present immigrants who meet the eligibility criteria.
The availability of ACA subsidies has made a significant impact on healthcare accessibility. As of early 2023, about 14.3 million people enrolled in health plans through the exchanges/marketplaces were receiving premium subsidies. The enhanced tax credits provided by the American Rescue Plan Act (ARPA) and extended by the Inflation Reduction Act have further increased enrollment, particularly among those with lower incomes.
It is important to note that when applying for ACA subsidies, individuals must provide necessary documentation, including information about their income, household size, and access to employer-sponsored insurance. The exchange will then calculate the subsidy amount based on these factors.
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Tax credits for small employers to offer staff health plans
Small businesses can benefit from tax credits when offering qualified health plans to their employees. This is known as the Small Business Health Care Tax Credit. To qualify for the tax credit, a small business must:
- Have fewer than 25 full-time equivalent (FTE) employees.
- Pay an average annual salary of less than $50,000 (adjusted for inflation).
- Contribute at least 50% of the premium cost of employee-only insurance coverage.
- Enroll in a Small Business Health Options Program (SHOP) plan.
The Small Business Health Care Tax Credit is designed to encourage small businesses to offer health insurance coverage to their employees. The amount of the credit is based on a sliding scale, with smaller employers receiving a larger credit. For example, a company with fewer than 10 employees and an average salary of $27,000 or less would receive the highest credit.
Even if a small business does not owe any taxes in a given year, they can still benefit from the credit by carrying it forward or backward to other tax years. Additionally, eligible small businesses can claim a business expense deduction for health insurance premium payments that exceed the total credit amount.
To claim the Small Business Health Care Tax Credit, employers must offer coverage through a SHOP Marketplace or meet specific requirements for relief. This requirement has been in place since 2014. Small employers can calculate their credit based on the number of full-time equivalent employees and average annual wages and premiums paid.
Overall, the Small Business Health Care Tax Credit provides a financial incentive for small businesses to offer health insurance coverage to their employees, making it more affordable for small businesses to provide this valuable benefit to their staff.
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Federal subsidies for Medicare, Medicaid, and employment-based coverage
The federal government subsidizes health insurance for most Americans through various programs and tax provisions. These subsidies are offered in four main ways:
Employment-based coverage
The federal government offers tax benefits for employment-based coverage to employers and employees. This is done by excluding amounts paid for health insurance premiums from income and payroll taxes. Employment-based coverage is the predominant source of health insurance, with most full-time workers and their dependents enrolled in such plans. Over the 2022–2032 period, subsidies for employment-based coverage are projected to grow at the highest rate, 6.8% per year.
Medicaid
The federal government provides about two-thirds of all funding for Medicaid, which, along with the Children's Health Insurance Program (CHIP), aims to insure people with low incomes and people with disabilities. In 2024, federal funding for Medicaid was $584 billion, and it is projected to increase to $627 billion by the end of the decade.
Medicare
The federal government pays for most of the cost of coverage through the Medicare program, which insures people 65 or older and people younger than 65 who have certain disabilities or end-stage renal disease. Medicare accounts for the largest share of total federal support for health programs and services. Over the next decade, federal subsidies for Medicare are projected to rise as a percentage of GDP.
Affordable Care Act (ACA) marketplaces
The federal government offers tax credits to eligible people who purchase nongroup coverage through the health insurance marketplaces established under the ACA. This includes the Basic Health Program, which states can establish under that law.
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Cost-sharing reductions (CSRs) to lower out-of-pocket expenses
Cost-sharing reductions (CSRs) are a provision of the Affordable Care Act (ACA) that lowers out-of-pocket costs for eligible enrollees who select Silver health insurance plans in the marketplace. These CSRs are sometimes referred to as "extra savings" or cost-sharing subsidies. By enrolling in a Silver plan, eligible individuals can benefit from reduced out-of-pocket expenses, including lower deductibles, copayments, and coinsurance.
The amount of savings on out-of-pocket costs depends on the specific income estimate. Individuals with lower incomes within the eligible range will save more on their medical expenses. For instance, a Silver plan with a deductible of $750 might require an individual to pay the full amount before the insurance company contributes. However, with a cost-sharing reduction, the deductible could be lowered to $300 or $500, depending on the income level.
Additionally, CSRs lead to a lower "out-of-pocket maximum," which is the total amount an individual would have to pay for covered medical services per year. Once this maximum is reached, the insurance plan typically covers 100% of all covered services. For example, a Silver plan with an out-of-pocket maximum of $5,000 could be reduced to $3,000 with a CSR.
It is important to note that CSRs are available to eligible enrollees with household incomes up to 250% of the federal poverty level (FPL). The lower income threshold for CSR eligibility is 100% of the poverty level in states that have not expanded Medicaid, and above 138% of FPL in states that have expanded Medicaid. Furthermore, CSRs work differently for American Indians and Alaskan Natives, who can receive CSRs with Bronze, Silver, Gold, or Platinum plans, and these benefits extend to households earning up to 300% of the poverty level.
Overall, cost-sharing reductions (CSRs) play a crucial role in the Affordable Care Act by making healthcare more affordable and accessible for eligible individuals and families with lower or moderate incomes. By reducing out-of-pocket expenses, CSRs help alleviate the financial burden associated with medical care and ensure that individuals can seek the treatment they need without incurring excessive costs.
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Frequently asked questions
A health insurance subsidy is a credit from the federal or state governments to help eligible individuals and business owners afford a health plan.
Health insurance subsidies help lower or eliminate the out-of-pocket cost of monthly premiums for health coverage. There are two types of financial assistance available: premium tax credits and cost-sharing reductions (CSRs).
Eligibility for health insurance subsidies varies depending on whether you are an individual or a small employer, where you shop for healthcare, and where you live. Individuals who do not have health coverage through an employer and are not eligible for Medicare or Medicaid may qualify for a health insurance subsidy.
In 2023, federal subsidies for health insurance were estimated to be $1.8 trillion, or 7.0% of the gross domestic product (GDP). Federal subsidies for health insurance are projected to total $25 trillion over the next 10 years.
