With the passage of the Inflation Reduction Act, the obvious talk of the nation has been the sweeping and historic changes to US energy and the environment. And rightfully so. But today let’s discuss the good news for Americans exploring healthcare insurance coverage options outside of workplace-sponsored plans.
The Inflation Reduction Act
The Inflation Reduction Act (IRA)—which now gives us another IRA acronym to deal with (although some circles in Ireland might lay initial claim to it)—is a major piece of legislation.
This historic bill, signed into law by President Biden on August 16, 2022, includes sizable investments in energy and climate change, with significant changes to corporate tax structures and the US healthcare system. Our beloved and renowned Chief Political Correspondent at CC Enterprises is on vacation this week, so we will conveniently sidestep the politics on this one.
The most prominent changes to the healthcare system includes a renewed effort to keep health insurance premiums low, as well as eventual cost reductions for prescription drugs. Oddly enough, this bill probably won’t have much or any impact on inflation. The exception perhaps is for prescription drug costs, which we will discuss below. But hey, we all know the importance of a good title.
Changes to Health Insurance Costs
As I explained in this post, the passage of the American Rescue Plan Act (ARPA) in the spring of 2021 altered the government subsidies provided by the Affordable Care Act of 2010 (ACA), also known as Obamacare. Hang with me here; we are headed to Acronym City.
At the time, the ARPA removed the dreaded healthcare “subsidy cliff.” Prior to the passage of the ARPA, enrollees with an income even a single dollar above 400% of the Federal Poverty Level (FPL) paid for expensive, unsubsidized healthcare plans. Conversely, those below the “cliff” enjoyed a tiered subsidy program and far more affordable monthly premiums.
A Subsidy Cliff Example
Prior to the ARPA, let’s suppose my wife and I wanted to enroll in a plan on the healthcare exchanges.
Scenario 1:
Income: 399% Federal Poverty Level (FPL is $17,421 for a family of 2 in 2021), or $69,506.
Monthly Premiums for a Silver Plan: $563
Scenario 2:
Income: 401% Federal Poverty Level, which is $69,858.
Monthly Premiums for a Silver Plan: $1,046
In these two scenarios, the only difference is a minor increase in total yearly income, $352 in this case. For earning just a few more dollars in a calendar year, the cost of healthcare premiums (not including any out-of-pocket expenses) nearly doubles from $6,756 per year to $12,552!
As you can imagine, prior to the (temporary) elimination of the subsidy cliff, enrollees had to very carefully weigh the value of additional income when enrolled in a healthcare exchange program.
The Value of the ARPA
The ARPA increased healthcare subsidies, even for those with incomes above the previous subsidy cliff. These additional subsidies had the effect of reducing the cost of monthly premiums for ACA plans. These cost reductions were most notable for the lowest income earners, those at about 150% FPL or below.
As a result of these changes, and somewhat notoriously, we were paid to have healthcare insurance. Actually, we still are. One can see in the chart below how a bronze plan can be obtained effectively for free for those earning up to ~$60,000 per year.
Unfortunately, these changes weren’t permanent. The ARPA only preserved these amendments though 2022. I mused then that it would be tough politics to take these changes away. As such, I’m pleased to report that 2021 amendments are now extended another three years, through 2025.
Changes to Prescription Drug Pricing with the Inflation Reduction Act
The IRA aims to make sweeping changes to the ballooning cost of Medicare prescription drugs. Many of these changes, however, won’t take effect until 2026 and will only affect adults age 65 and up. In essence, we can expect more affordable prescription drug charges for Medicare participants in the coming years. For more on this aspect of the bill, I found this article helpful.
The Bad News: Healthcare Inflation and the Problem with Temporary Extensions
According to Kff.org, the rising cost of healthcare and rising utilization is putting upward pressure on the costs of ACA healthcare plans. For now, the passage of the IRA and the extension of the ARPA changes will supersede market-driven cost increases. These relative salad days of healthcare milk and honey, however, may come to an end if these changes expire after 2025.
In early 2026, enrollees may experience a sharp increase in premium and out-of-pocket expenses, a double-whammy of market-driven cost increases and the elimination of extra government subsidies.
Enjoy the good days while we can, at least through 2025.
Inflation Reduction Act Bottom Line
- The Inflation Reduction Act eliminates the dreaded “subsidy cliff” through at least 2025. The tiered and more affordable subsidy program will no longer expire at the end of 2022.
- As of 2026, prescription drug prices for those on Medicare will become more affordable.
- If the healthcare premium cost reductions are not extended beyond 2025, both the rising cost of healthcare and rising utilization of health exchange programs could result in considerably higher costs to current and future enrollees.
- To calculate your health insurance premiums, check out this subsidy calculator.