Understanding the ACA's Subsidy Cliff

Income just above 400% FPL can make coverage unaffordable

The ACA's subsidy cliff refers to the fact that premium subsidy eligibility—for people who buy their own health insurance in the exchange—ends abruptly at a household income of 400% of the poverty level. This means that a small increase in income can result in a drastic increase in a person's net health insurance premiums.

The subsidy cliff is most significant for older enrollees in areas where health insurance is particularly expensive, but it also exists for younger enrollees and in areas where coverage is less expensive.

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The Subsidy Cliff: An Example

In 2019, average individual market health insurance premiums—before any subsidies are applied—are most expensive in Wyoming and least expensive in Massachusetts. But Massachusetts is one of a handful of states where insurers cannot charge older adults three times as much as younger adults—in Massachusetts, it's limited to a 2-1 ratio instead of 3-1.

For more of an apples-to-apples comparison, we'll compare premiums in Wyoming with premiums in Rhode Island—which had the second-lowest average pre-subsidy premiums in 2019 and allows premiums for older adults to be up to three times as much as the premiums that are charged for younger adults.

We can use the marketplace plan browsing tools to see premiums (Wyoming uses HealthCare.gov; Rhode Island has a state-run marketplace). In both states, we'll look at 2019 premiums for a 25-year-old and a 62-year-old, and we'll calculate premiums based on the person having an income of $48,000 and $49,000. These amounts are just below and just above the upper threshold for subsidy eligibility, so the $48,000 income will allow the person to receive a premium subsidy, while the $49,000 income will not.

Cheyenne, Wyoming

  • 25-year-old earning $48,000: Cheapest plan is $186/month (after a $231/month premium subsidy is applied)
  • 25-year-old earning $49,000: Cheapest plan is $417/month (the person is not eligible for a subsidy)
  • 62-year-old earning $48,000: Cheapest plan is free (after a $1,395/month premium subsidy is applied).
  • 62-year-old earning $49,000: Cheapest plan is $1,194/month (the person is not eligible for a subsidy)

Note that in these examples, we're talking about the cheapest plan. But if we look instead at the benchmark silver plan, it will cost the same amount—$394/month—for both the 25-year-old and the 62-year-old in the scenario where they each earn $48,000 and are eligible for premium subsidies.

The whole point of the premium subsidy is to keep premiums at an affordable level relative to a person's income. So older people receive larger premium subsidies than younger people, and if two people live in the same area and have the same income, their after-subsidy premiums for the benchmark plan will be the same. This is the same all across the country.

Providence, Rhode Island

  • 25-year-old earning $48,000: Cheapest plan is $170/month (this person does not qualify for a subsidy because the premium for the benchmark plan meets the definition of affordable without any subsidy)
  • 25-year-old earning $49,000: Cheapest plan is $170/month (the person is not eligible for a subsidy)
  • 62-year-old earning $48,000: Cheapest plan is $126/month (after a $360/month premium subsidy is applied).
  • 62-year-old earning $49,000: Cheapest plan is $486/month (the person is not eligible for a subsidy)

For the 62-year-old who qualifies for a premium subsidy, the benchmark plan is about $395/month after the subsidy is applied. This is the same as the applicants in Cheyenne, because their incomes are the same. For the 25-year-old, the monthly premium for the benchmark plan is only $267, which is why this person doesn't qualify for a premium subsidy even with an income of $48,000—the full-price premium is already lower than the after-subsidy premium would be if this person were to receive a subsidy.

Big Impact of a Small Income Increase

The examples above illustrate how the subsidy cliff works, and how being older and/or living in an area where premiums are high will result in a more significant "cliff." For a young person in Providence, Rhode Island, there's no subsidy cliff at all, since premium subsidies phase out gradually before their income reaches 400% of the poverty level, and a person with income just below 400% of the poverty level isn't receiving a subsidy at all.

But on the other hand, an older person in Cheyenne, Wyoming will go from having access to a free plan (ie, with no premiums at all) to having to pay nearly $1,200/month for the cheapest available plan, with an income increase of $1,000/year. And that was just to make the example simple to follow—in reality, the boost in income can be much smaller; premium subsidies are available in 2019 for a single person with an income up to $48,560, but not for someone with an income above that level.

A Kaiser Family Foundation analysis found that the subsidy cliff is particularly significant in rural areas, with Wyoming and Nebraska among the least affordable places for an older person to purchase health insurance if their income is just a little above 400% of the poverty level.

In many rural areas of the country, a 60-year-old earning $50,000 will pay over 25% of their income for the cheapest available plan.

Avoiding the Subsidy Cliff

Depending on an applicant's age and location, there can be a drastic difference between qualifying for premium subsidies and not qualifying for premium subsidies. Having a household income that doesn't exceed 400% of the poverty level is the key to obtaining premium subsidies, so it's wise to understand how "household income" is calculated.

For most applicants, it's the same as their adjusted gross income, but there are things that some applicants will need to add back to AGI to get their ACA-specific household income. These include non-taxable Social Security income, tax-exempt interest, and, for Americans living abroad, foreign earned income and housing expenses.

Fortunately, contributions to pre-tax retirement accounts and/or health savings accounts will reduce your household income, and can help you avoid the subsidy cliff.

A Legislative Fix for the Subsidy Cliff?

Legislation to fix the subsidy cliff has been introduced several times over the years, most recently in the House of Representatives in 2019. The Protecting Preexisting Conditions and Making Health Care More Affordable Care Act of 2019 would eliminate the current income cap on subsidy eligibility and would cap applicants' net premiums at 8.5% of income. Applicants with higher incomes would still qualify for a premium subsidy if the full-price cost of the benchmark plan in their area would be more than 8.5% of their income without a subsidy.

Applicants with very high incomes wouldn't qualify for a subsidy, since the cost of coverage wouldn't amount to 8.5% of their income. But people with income a little higher than 400% of the poverty level would no longer be faced with the prospect of having to pay a quarter—or more—of their income for a high-deductible plan. During the 2016 presidential campaign, Hillary Clinton proposed a similar fix for the subsidy cliff.

There is currently considerable debate among Democratic lawmakers and presidential candidates regarding the path forward for health care reform: Should we build on the ACA or shift the focus towards some type of single-payer system? If there's consensus in terms of fixing the ACA, at least in the short-term, it's likely that addressing the subsidy cliff will be a priority. But the current political division in the federal government makes it unlikely that the subsidy cliff will be fixed in the immediate future.

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Article Sources
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  1. Centers for Medicare and Medicaid Services. 2019 Marketplace Open Enrollment Period Public Use Files. March 25, 2019.

  2. Norris L. Massachusetts health insurance marketplace: history and news of the state’s exchange. healthinsurance.org. March 12, 2020.

  3. Fehr, Rachel; Cox, Cynthia; Levitt, Larry. Kaiser Family Foundation. How Affordable are 2019 ACA Premiums for Middle-Income People? March 05, 2019

  4. Congress.gov. H.R.1884 - Protecting Pre-Existing Conditions and Making Health Care More Affordable Act of 2019. Introduced in the House March 26, 2019.

  5. Keith, Katie. House Democrats Introduce Bill To Strengthen The ACA. March 27, 2019.

  6. Eibner, Christine; Nowak, Sarah; Liu, Jodi. The Commonwealth Fund. Hillary Clinton's Health Care Reform Proposals: Anticipated Effects on Insurance Coverage, Out-of-Pocket Costs, and the Federal Deficit. September 23, 2016

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